<PAGE> 1
As filed with the Securities and Exchange Commission on October 16, 1997
Registration No. 333-35721
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to
------------------
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------
FIRST BANKS AMERICA, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 6021 75-1604965
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
------------------
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
135 North Meramec
Clayton, Missouri 63105
(314) 854-4600
------------------
(Name, address, including zip code, and
telephone number, including area code,
of agent for service) Copies to:
<TABLE>
<S> <C> <C>
Allen H. Blake John S. Daniels, Esq. Kerry C. Smith, Esq.
First Banks America, Inc. 8117 Preston Road, Suite 800 Hovis, Smith et al.
11901 Olive Boulevard Dallas, Texas 75225 100 Pine Street
Creve Coeur, Missouri 63141 (214) 696-3200 San Francisco, California 94111
(314) 692-6317 (415) 421-9696
</TABLE>
------------------
Approximate date of proposed sale to the public: As soon as practicable
after the Effective Date of this Registration Statement
If the securities being registered on this Form are being offered in
connection with the formation of a holding company
and there is compliance with General Instruction G, check the
following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
effective registration statement: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
<TABLE>
CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------
<CAPTION>
Proposed maximum
Title of each class of Amount to be offering price per Proposed maximum Amount of
securities to be registered registered share aggregate offering price registration fee
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock ($.15 par
value per share) 456,187 shares <F1> $ N/A $3,260,637 <F2> $ 652.12 <F3>
--------------------------------------------------------------------------------------------------------------
<FN>
<F1> The maximum number of shares of registrant's common stock to be issued in
the merger described herein.
<F2> Estimated solely for purpose of calculating the registration fee. No
shares are offered hereunder for cash.
<F3> Registration fee is calculated pursuant to Rule 457(f) based on the book
value of the common stock and preferred stock of Surety Bank as of June 30,
1997, less the cash consideration to be paid by the registrant.
</TABLE>
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE> 2
SURETY BANK
116 Springstowne Center
Vallejo, California 94591
(707) 554-0390
October 20, 1997
Dear Shareholder:
You are cordially invited to attend a Special Meeting of the
Shareholders of Surety Bank ("Surety") which will be held on Wednesday,
November 19, 1997, at 5:00 p.m., local time, at the Bank's office, 116
Springstowne Center, Vallejo, California.
The purpose of the Special Meeting is for the holders of Surety's common
stock to consider and vote upon the Agreement and Plan of Reorganization
dated as of July 28, 1997 (the "Reorganization Agreement"), between Surety
and First Banks America, Inc., a Delaware corporation ("FBA"). The
Reorganization Agreement provides for the merger of Surety with and into an
interim bank organized as a wholly-owned subsidiary of FBA (the "Merger").
FBA is a bank holding company headquartered in Clayton, Missouri. Through its
wholly owned banking subsidiaries, FBA currently operates eight banking
offices in California and Texas.
If the Merger is approved and completed, holders of common stock and
preferred stock of Surety will be given the opportunity to make elections to
receive either common stock of FBA or cash in exchange for their shares. The
actual number of shares of FBA common stock will be determined based on a
formula set forth in the Reorganization Agreement, taking into consideration
the average closing prices of FBA common stock during a twenty day trading
period ending shortly prior to the Special Meeting and the total number of
shares of Surety common stock and Surety preferred stock outstanding. Based
on the closing price of FBA common stock on October 6, 1997, a holder of
Surety common stock would receive cash of $36.12 or 2.5879 shares of FBA
Common Stock for each share of Surety common stock. Using the same
assumption, a holder of Surety preferred stock would receive cash equal to
$30.73 or 2.2015 shares of FBA common stock for each share of Surety
preferred stock. The exact exchange ratios applicable to shares of FBA
common stock have not yet been determined and are likely to vary from those
used in the examples.
Additional information concerning the procedure for determining the
exchange ratio, the election procedures to be followed by shareholders of
Surety in selecting a form of consideration to be received, the allocation
system to be used with respect to oversubscriptions for cash or FBA common
stock, and other aspects of the proposal are contained in the Proxy
Statement-Prospectus. Each shareholder of Surety is urged to read the Proxy
Statement-Prospectus completely.
<PAGE> 3
The Board of Directors of Surety has carefully considered and approved
the Reorganization Agreement and believes that the Merger is in the best
interests of Surety and its shareholders. ACCORDINGLY, YOUR BOARD OF
DIRECTORS RECOMMENDS THAT HOLDERS OF SURETY COMMON STOCK VOTE FOR APPROVAL OF
THE REORGANIZATION AGREEMENT AND THE MERGER. Holders of preferred stock of
Surety are not entitled to vote at the Special Meeting, and no proxy is
requested with respect to shares of preferred stock.
YOUR VOTE IS IMPORTANT. All holders of Surety common stock are urged to
sign, date and mail the enclosed proxy card promptly in the postage-prepaid
envelope provided. If you attend the Special Meeting, you may revoke your
proxy and vote in person even if you have already mailed your proxy card.
On behalf of the Board of Directors, we wish to thank you for your
support.
Sincerely yours,
Albert M. Lavezzo
Chairman of the Board
John A. DiMichele
President and Chief Executive Officer
<PAGE> 4
SURETY BANK
116 Springstowne Center
Vallejo, California 94591
(707) 554-0390
NOTICE
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 19, 1997
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the
"Meeting") owning Common Stock of Surety Bank ("Surety") will be held at 116
Springstowne Center, Vallejo, California, on Wednesday, November 19, 1997 at
5:00 p.m. Pacific time, for the purpose of considering and voting upon:
1. A proposal to approve and adopt the Agreement and Plan of
Reorganization dated as of July 28, 1997 (the "Reorganization
Agreement") between First Banks America, Inc., a Delaware
corporation ("FBA"), and Surety, wherein each share of Surety's
common and preferred stock outstanding at the effective time of
the merger will be converted into the right to receive either
cash or shares of FBA common stock, all as more particularly
described in the accompanying Proxy Statement-Prospectus and the
Appendices thereto.
2. Such other matters as may properly come before the Meeting, or
any adjournments or postponements thereof.
A proxy card and a Proxy Statement-Prospectus for the Meeting are
enclosed. The Board of Directors is not aware of any other business to come
before the Meeting.
Any action may be taken on the foregoing proposal at the Meeting on the
date specified above or any adjournment or postponement thereof.
Shareholders of Surety common stock of record at the close of business on
October 1, 1997 are the only shareholders entitled to vote at the Meeting and
any adjournment or postponement thereof. The Board of Directors can
authorize any adjournment or postponement of the Meeting.
Any shareholders of Surety common stock who wish to perfect dissenters'
appraisal rights for their shares must comply with the requirements of
Chapter 13 of the California General Corporation Law ("CGCL"), which are set
forth in Appendix C to the accompanying Proxy Statement-Prospectus. See
Appendix C for the provisions of Chapter 13 of the CGCL. A shareholder's
failure to follow exactly the procedures specified will result in a loss of
dissenters' appraisal rights.
<PAGE> 5
The affirmative vote of the holders of a majority of the outstanding
shares of Surety common stock is required to approve the Reorganization
Agreement. You are requested to vote, sign and date the enclosed form of
proxy, which is solicited by the Board of Directors, and to mail it promptly
in the enclosed envelope. The proxy will not be used if you attend and vote
at the meeting in person.
By order of the Board of Directors
Jack Wilson
Secretary
Vallejo, California
October 20, 1997
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER
YOU PLAN TO BE PRESENT IN PERSON AT THE SPECIAL MEETING OR NOT, PLEASE
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT IN THE
SELF-ADDRESSED POSTAGE-PAID ENVELOPE. THE BOARD OF DIRECTORS OF SURETY
RECOMMENDS THAT THE COMMON SHAREHOLDERS VOTE TO APPROVE THE REORGANIZATION
AGREEMENT AND THE MERGER.
2
<PAGE> 6
PROXY STATEMENT PROSPECTUS
SURETY BANK FIRST BANKS AMERICA, INC.
116 Springstowne Center 135 North Meramec
Vallejo, California 94591 Clayton, Missouri 63105
(707) 554-0390 (314) 854-4600
456,187 SHARES OF COMMON STOCK
(PAR VALUE $.15 PER SHARE)
This Proxy Statement-Prospectus is being furnished to the holders of
common stock, par value $1.00 per share, of Surety Bank, a California banking
association ("Surety"), in connection with the solicitation of proxies by the
Board of Directors of Surety to be voted at the Special Meeting of Surety's
shareholders to be held at the Bank's office, 116 Springstowne Center,
Vallejo, California, at 5:00 p.m. (local time) on Wednesday, November 19,
1997, and at any adjournments thereof (the "Special Meeting").
This Proxy Statement-Prospectus relates to up to 456,187 shares of
common stock, par value $.15 per share ("FBA Common"), of First Banks
America, Inc., a Delaware corporation which is a registered bank holding
company ("FBA"), to be issued upon the merger (the "Merger") of Surety with
and into a California-chartered banking association organized as a
wholly-owned subsidiary of FBA, pursuant to an Agreement and Plan of
Reorganization dated as of July 28, 1997 (the "Reorganization Agreement").
In the Merger, each share of Surety's common stock, par value $1.00 per share
("Surety Common Stock"), and of its preferred stock, par value $1.00 per
share ("Surety Preferred Stock") outstanding at the effective time of the
Merger will be converted into the right to receive either cash or shares of
FBA Common. Holders of Surety Common Stock will be given the opportunity to
make an election to receive cash equal to $36.12 per share or a number of
shares of FBA Common determined pursuant to a formula. Shares of Surety
Preferred Stock, which are convertible into shares of Surety Common Stock,
will be treated as if they were converted into the appropriate number of
shares of Surety Common Stock and then converted in the same manner as the
existing Surety Common Stock; this has the effect of allowing holders of
shares of Surety Preferred Stock to elect to receive cash equal to $30.73 per
share of Surety Preferred Stock or a number of shares of FBA Common
determined pursuant to the formula applicable to Surety Common Stock.
The Reorganization Agreement provides that, unless the proportions are
adjusted, 51% of the aggregate Surety Common Stock (after giving effect to
the conversion of Surety Preferred Stock) will be converted to the right to
receive FBA Common, and 49% will be converted to the right to receive cash,
at the prices stated above. Assuming that the elections received from
shareholders are not in exact proportion to these amounts, an allocation
process will be used to apportion the consideration; however, if shareholders
of Surety in the aggregate elect to convert more than 51% of the aggregate
Surety Common Stock into FBA Common, FBA and Surety have reserved the right
to agree to increase the portion of the consideration to consist of FBA
3
<PAGE> 7
Common to equal up to 65% of the outstanding Surety Common Stock. There is
no obligation for them to do so.
As set forth in the Reorganization Agreement, the number of shares of
FBA Common to be issued for each share of Surety Common Stock that is
converted into shares of FBA Common will be calculated based on the average
price of FBA Common over a 20-day period ending on the Friday preceding the
Special Meeting. The resulting exchange ratio (the "Exchange Ratio") will
not be lower than 2.5879 and will not be higher than 3.5005 except in certain
circumstances more fully described herein. See "THE MERGER--Terms of the
Merger--Merger Consideration" for further discussion of the Exchange Ratio.
This Proxy Statement-Prospectus constitutes (1) the Proxy Statement of
Surety for the solicitation of proxies from the holders of Surety Common
Stock (the "Surety Common Shareholders") by the Board of Directors of Surety
to be voted at the Special Meeting to consider and vote upon the proposal to
approve the Reorganization Agreement and the Merger, and (2) the Prospectus
of FBA for the shares of FBA Common to be issued in the Merger. Consummation
of the Merger is subject to various conditions, including the approvals of
the holders of Surety Common Stock, the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"), the Federal Deposit Insurance
Corporation (the "FDIC") and the Commissioner of Financial Institutions of
the State of California (formerly known as the Superintendent of Banks) (the
"Commissioner"). The holders of Surety Preferred Stock are not entitled to
vote on the Merger, and their proxies are not solicited in this Proxy
Statement-Prospectus.
FBA Common is traded on the New York Stock Exchange; Surety Common Stock
and Surety Preferred Stock have not been traded in any recognized securities
market, although shares have been bought and sold from time to time in
privately negotiated transactions through local securities broker-dealers.
The closing price of one share of FBA Common on the New York Stock Exchange
(the "NYSE") was $13.00 on July 28, 1997 (the last day prior to the public
announcement of the Merger), and was $18.50 on October 6, 1997.
Subsequent to the execution of the Reorganization Agreement, FBA entered
into an agreement providing for the merger of First Commercial Bancorp, Inc.,
a Delaware corporation which is a bank holding company ("FCB"), with and into
FBA (the "FCB Merger"). Shareholders of FCB would receive an aggregate of
approximately 752,000 shares of FBA Common as consideration in the merger of
FCB into FBA, and FBA will also sell 804,000 shares of FBA Common to its
controlling shareholder, First Banks, Inc. in the transaction and thereby
reduce its outstanding debt by approximately $10 million. FBA has also
entered into an agreement to acquire Pacific Bay Bank, San Pablo, California,
for cash consideration of $4.2 million. Additional information regarding the
proposed acquisition of FCB, which is subject to the approval of the
shareholders of both FBA and FCB and the acquisition of Pacific Bay Bank,
subject to the approval of its shareholders, is contained in this Proxy
Statement-Prospectus.
2
<PAGE> 8
All information contained in this Proxy Statement-Prospectus with
respect to FBA has been supplied by FBA, and all information with respect to
Surety has been supplied by Surety.
The Proxy Statement-Prospectus is first being mailed to the holders of
Surety Common Stock on or about October 20, 1997.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR THE CALIFORNIA
DEPARTMENT OF FINANCIAL INSTITUTIONS, NOR HAS THE COMMISSION OR ANY STATE
SECURITIES COMMISSION OR THE CALIFORNIA DEPARTMENT OF FINANCIAL INSTITUTIONS,
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT-PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR
OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
No person is authorized to give any information or to make any
representation not contained in this Proxy Statement-Prospectus and, if given
or made, such information or representation should not be relied upon as
having been authorized. This Proxy Statement-Prospectus does not constitute
an offer to sell, or a solicitation of an offer to purchase, the securities
offered by this Proxy Statement-Prospectus or the solicitation of a proxy in
any jurisdiction in which, or to any person to whom, it would be unlawful to
make such offer or solicitation of an offer or proxy solicitation. Neither
the delivery of this Proxy Statement-Prospectus nor any distribution of the
securities to which it relates shall, under any circumstances, create an
implication that there has been no change in the affairs of FBA or Surety or
in the information set forth herein since the date of this Proxy
Statement-Prospectus.
The date of this Proxy Statement-Prospectus is October 20, 1997.
3
<PAGE> 9
<TABLE>
TABLE OF CONTENTS
<S> <C>
AVAILABLE INFORMATION 7
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE 7
SUMMARY 9
The Parties 9
The Special Meeting 10
Stock Held By Affiliates 10
The Merger 11
Dissenters' Rights 15
Market Prices and Dividends 15
Differences in Shareholders' Rights 17
Pending FBA Transactions 17
Summary of Comparative Per Share Data 18
RISK FACTORS 19
Control of FBA by First Banks, Inc. 19
Acquisition of FCB and Pacific Bay Bank by FBA 20
Profitability of FBA and FCB 20
Dividends 21
Public Market for FBA Common 21
Operating Requirements Associated with Geographic Dispersion 21
Dependence on Future Growth Through Acquisitions 22
INTRODUCTION 22
THE SPECIAL MEETING 23
Record Date; Vote Required 23
Holders of Surety Common Stock 24
Proxies; Revocation; Solicitation 25
SELECTED CONSOLIDATED FINANCIAL DATA OF SURETY BANK AND
SUBSIDIARY 27
SELECTED CONSOLIDATED FINANCIAL DATA OF FIRST BANKS AMERICA,
INC. AND SUBSIDIARIES 28
THE MERGER 29
Background and Reasons for the Transaction 29
Opinion of Surety's Financial Advisor 36
Terms of the Merger 39
Certain Federal Income Tax Consequences of the Merger 45
Resale of FBA Common 48
Regulatory Approvals 48
Charter and By-Laws of Surviving Bank 49
Dissenters' Rights 49
Management and Operations After the Merger 52
New York Stock Exchange Listing 52
Exchange of Surety Certificates 52
Accounting Treatment 53
4
<PAGE> 10
THE REORGANIZATION AGREEMENT 53
The Merger 53
Representations and Warranties of FBA and Surety 54
Conditions to Consummation of the Merger 55
Conduct of Surety's Business Pending the Merger 56
Additional Agreements 58
Termination; Damages 59
Amendment and Waiver 60
Expenses 60
THE STOCK OPTION AGREEMENT 60
Shares Subject to the Option 60
Exercise of the Option 60
Termination of the Option 62
INTERESTS OF CERTAIN PERSONS IN THE MERGER 62
Indemnification 62
Employment and Severance Arrangements 63
Continuing Services as Director 64
Options 64
BUSINESS OF FBA 65
Description of Business 65
Recent Developments 65
DESCRIPTION OF FBA CAPITAL STOCK 66
Common Stock 66
Class B Common Stock 66
Preferred Stock 67
FBA COMMON REGISTERED FOR RESALE 67
BUSINESS OF SURETY BANK 68
General 68
Market Areas 69
Lending Activities 69
Mortgage Banking Operations 69
Investment Portfolio 69
Deposits 70
Competition and Branch Banking 70
Supervision and Regulation 70
Properties 77
COMPARATIVE RIGHTS OF SHAREHOLDERS OF SURETY AND FBA 77
General 77
Assessability 78
Dividend Restrictions 79
Transferability of Stock 80
Voting Rights; Cumulative Voting 80
Size and Classification of the Board of Directors 81
Removal of Directors 81
5
<PAGE> 11
Filling Vacancies on the Board of Directors 82
Special Meeting of Shareholders; Action by Written Consent 83
Shareholder Vote for Mergers and Other Reorganizations 84
Liability of Directors for Breach of Fiduciary Duty 86
Indemnification of Directors and Officers 86
Dissenters' Rights 87
Summary 88
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF SURETY BANK 89
PRO FORMA FINANCIAL INFORMATION 111
OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE
SPECIAL MEETING 116
LEGAL MATTERS 116
EXPERTS 116
INDEX TO FINANCIAL STATEMENTS F-1
FINANCIAL STATEMENTS OF SURETY F-3
Agreement and Plan of Reorganization Appendix A-1
Stock Option Agreement Appendix A-2
Opinion of Financial Advisor Appendix B
Section 1300-1312 of the California General Corporation Law Appendix C
6
</TABLE>
<PAGE> 12
AVAILABLE INFORMATION
FBA is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"), relating to its business,
financial statements and other matters. The registration statement discussed
below and the exhibits thereto as well as reports, proxy statements and other
information filed by FBA may be inspected and copied at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the following regional offices: Chicago
Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511 and New York Regional Office, 7 World Trade Center, Suite 1300,
New York, New York 10048. Copies of such materials may be obtained from the
Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The SEC also maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants at http://www.sec.gov. FBA Common is listed on the New York
Stock Exchange ("NYSE") and reports, proxy statements and other information
concerning FBA are available for inspection at the offices of the NYSE, 20
Broad Street, New York, New York 10005.
FBA has filed with the SEC a registration statement on Form S-4 under
the Securities Act of 1933, as amended (the "Securities Act"), with respect
to the FBA Common to be issued in the Merger (the "Registration Statement").
As permitted by the rules and regulations of the SEC, this Proxy
Statement-Prospectus omits certain information, exhibits and undertakings
contained in the Registration Statement. For such information, reference is
made to the Registration Statement and the exhibits filed as a part thereof
or incorporated by reference therein.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are hereby incorporated by reference into and made a part of this
Proxy Statement-Prospectus the following documents filed by FBA with the SEC:
(1) the Annual Report on Form 10-K for the fiscal year ended December
31, 1996;
(2) the Quarterly Reports on Form 10-Q for the quarters ended March 31,
1997 and June 30, 1997; and
(3) the Current Report on Form 8-K filed on August 7, 1997.
The specified portions of the following documents of FBA previously
filed pursuant to the Exchange Act, copies of which are delivered together
with this Proxy Statement-Prospectus, are also incorporated by reference
herein. Such documents are being delivered with this Proxy
Statement-Prospectus, but the remainder of the 1996 Annual Report to
Stockholders, other than the
7
<PAGE> 13
specific portions specified below, is not incorporated by reference herein
and is not a part of this registration statement:
<TABLE>
<CAPTION>
Document Portion(s) Incorporated by Reference
-------- ------------------------------------
<S> <C>
1996 Annual Report to Stockholders (1) Selected Consolidated and Other Financial Data
(2) Quarterly Condensed Financial Data
(3) Management's Discussion and Analysis
Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997 All
Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 All
</TABLE>
Such incorporation by reference will not be deemed to specifically
incorporate by reference the information referred to in Item 402(a)(8) of
Regulation S-K. All documents filed by FBA pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this Proxy
Statement-Prospectus shall be deemed to be incorporated by reference into
this Proxy Statement-Prospectus and to be a part hereof from the respective
dates of filing of such documents.
Any statement contained in a document incorporated or deemed
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement-Prospectus to the extent that a
statement contained herein, or in any other subsequently filed document that
is also incorporated or deemed incorporated by reference herein, modifies or
supersedes such statement. Any such statement so modified or superseded
shall not be deemed to constitute a part of this Proxy Statement-Prospectus,
except as so modified or superseded.
This Proxy Statement-Prospectus incorporates documents by reference
which are not presented herein or delivered herewith. FBA hereby undertakes,
with respect to the documents listed above filed with the SEC, to provide
without charge to each person, including any beneficial owner to whom this
Proxy Statement-Prospectus has been delivered, upon the written or oral
request of such person, a copy of any or all of the documents referred to
above that have been or may be incorporated into this Proxy
Statement-Prospectus and deemed to be part hereof, other than exhibits to
such documents (unless such exhibits are specifically incorporated by
reference in such documents). Requests for documents filed by FBA should be
directed to Allen H. Blake, Secretary, FBA, 11901 Olive Boulevard, Creve
Coeur, Missouri 63141, telephone (314) 692-6317. In order to ensure timely
delivery of documents prior to the Special Meeting, any request should be
made by November 12, 1997.
8
<PAGE> 14
THIS PROXY STATEMENT-PROSPECTUS AND THE DOCUMENTS INCORPORATED BY
REFERENCE HEREIN CONTAIN CERTAIN FORWARD LOOKING STATEMENTS WITH RESPECT TO
THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF FBA AND THE
POTENTIAL EFFECTS OF THE MERGER. THESE FORWARD LOOKING STATEMENTS INVOLVE
CERTAIN RISKS AND UNCERTAINTIES. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY THE FORWARD LOOKING STATEMENTS
HEREIN INCLUDE GENERAL MARKET CONDITIONS AND THOSE WITH A SPECIFIC IMPACT ON
THE BANKING INDUSTRY, AS WELL AS THE SPECIFIC RISKS AND UNCERTAINTIES
IDENTIFIED IN THE SECTION OF THIS PROXY STATEMENT-PROSPECTUS ENTITLED "RISK
FACTORS."
SUMMARY
The following constitutes a brief summary, for the convenience of the
shareholders of Surety, of the information contained in this Proxy
Statement-Prospectus, including Appendices A, B and C hereto, relating to the
proposal to approve the Reorganization Agreement. The summary is necessarily
selective and is qualified in its entirety by the more extensive discussion
contained elsewhere in this Proxy Statement-Prospectus, by Appendices A, B
and C hereto and by the documents incorporated by reference herein. Surety
shareholders are encouraged to read carefully this Proxy
Statement-Prospectus, including the following Appendices:
<TABLE>
<S> <C>
Appendix A-1 Agreement and Plan of Reorganization
Appendix A-2 Stock Option Agreement
Appendix B Opinion of Baxter Fentriss and Company
(the financial advisor to the Board
of Directors of Surety)
Appendix C Sections 1300-1312 of the California
General Corporation Law (governing
the rights of dissenting shareholders
of Surety)
</TABLE>
The Parties
FBA
FBA is a Delaware corporation registered as a bank holding company, with
its principal executive offices at 135 North Meramec, Clayton, Missouri
(having recently relocated such offices from Houston, Texas). Through its
two wholly-owned subsidiary banks, BankTEXAS National Association
("BankTEXAS") and Sunrise Bank of California ("Sunrise"), FBA operates eight
banking offices located in Roseville and Rancho Cordova, California and
Houston, Dallas, Irving and McKinney, Texas. FBA's subsidiary banks offer a
broad range of commercial and personal banking services including
certificates of deposit, individual retirement and other time
9
<PAGE> 15
deposit accounts, checking and other demand deposit accounts, interest
checking accounts, savings accounts and money market accounts. Loans include
commercial and industrial, commercial and residential real estate, real
estate construction and development and consumer loans. Other financial
services include automatic teller machines, telephone banking, lockbox
deposits, cash management services, sweep accounts, credit-related insurance
and safe deposit boxes.
Surety
Surety is chartered by the Commissioner, with its principal executive
offices at 116 Springstowne Center, Vallejo, California. Surety operates
banking offices in Vallejo and Fairfield, California, where it provides
traditional banking services to its customers. As of June 30, 1997, Surety
had total assets of $72.7 million, total loans of $56 million, total deposits
of $66.6 million and $5 million shareholders' equity. A complete description
of Surety's business appears herein under the caption "BUSINESS OF SURETY
BANK."
The Special Meeting
Time, Date, Place and Purpose
The Special Meeting will be held on Wednesday, November 19 1997 at 5:00
p.m. (Pacific time), at 116 Springstowne Center, Vallejo, California, to
consider and vote upon a proposal to approve the Reorganization Agreement and
the transactions contemplated thereby.
Record Date; Vote Required
The record date for determining the Surety Common Shareholders entitled
to notice of and to vote at the Special Meeting is October 1, 1997 (the
"Record Date"). The presence, in person or by proxy, of the holders of at
least a majority of the total number of outstanding shares of Surety Common
Stock is necessary to constitute a quorum at the Special Meeting (holders of
Surety Preferred Stock are not entitled to vote at the Special Meeting or to
exercise rights as dissenting shareholders). The affirmative vote of the
holders of at least a majority of the shares of Surety Common Stock
outstanding and entitled to vote at the Special Meeting is necessary to
approve the Reorganization Agreement and the Merger.
Stock Held by Affiliates
The directors and executive officers of Surety and their affiliates
beneficially owned as of the Record Date 69,429 shares entitled to vote on
the Reorganization Agreement, representing 45.84% of the shares of Surety
Common Stock entitled to vote.
10
<PAGE> 16
The Merger
The Reorganization Agreement provides that, subject to the election and
allocation procedures described herein, each share of Surety Common Stock
outstanding at the time of the filing of a duly executed Agreement of Merger
with the offices of the Commissioner and the Secretary of State of the State
of California (the "Effective Time"), other than shares owned by Surety or
its subsidiaries and those with respect to which appraisal rights are
perfected, will be converted into either: (i) a number of shares of FBA
Common determined by the application of a formula (such number of shares of
FBA Common issuable in respect of each share of Surety Common Stock is
referred to in this Proxy Statement-Prospectus as the "Stock Consideration");
and/or (ii) cash equal to $36.12 per share, without interest (such cash
amount being referred to as the "Cash Consideration"). The formula for
determining the Stock Consideration is $38.12 divided by the average of the
closing prices per share of FBA Common as reported on the NYSE composite
transactions tape for the 20 consecutive days on which shares of FBA Common
are traded on the NYSE ending on the Friday prior to the date of the Special
Meeting as set forth herein (such average price is referred to in this Proxy
Statement-Prospectus as the "FBA Exchange Price"). The formula is subject to
limitations on the extent to which fluctuations in the market price of FBA
Common will change the Stock Consideration (such limitations are referred to
herein as the "Exchange Rate Collar"), which establishes both a minimum and a
maximum value on the FBA Exchange Price and a corresponding maximum and
minimum number on the Stock Consideration, subject to the right of the party
adversely affected by the operation of the Exchange Rate Collar to terminate
the Reorganization Agreement, unless the other party makes an acceptable
offer to revise the terms of the conversion of Surety Common Stock into FBA
Common. Additional information regarding the formula for determining the FBA
Exchange Price and the effects of the Exchange Rate Collar is contained in
the section of this Proxy Statement-Prospectus entitled "THE MERGER--Terms of
the Merger--Merger Consideration."
Unless increased by FBA with Surety's consent (see "THE MERGER--Terms
of the Merger--Allocation"), the aggregate number of shares of FBA Common to
be issued in the Merger (the "Stock Amount") will equal the number of shares
required by the application of the Exchange Ratio to be issued for 51% of the
total number of shares of Surety Common Stock outstanding at the Effective
Time; for this purpose, all shares of Surety Preferred Stock will be treated
as having been converted into the number of shares of Surety Common Stock
into which they are convertible by their terms. In the Reorganization
Agreement and in this Proxy Statement-Prospectus, the term "Total Surety
Common" is used to refer to the aggregate number of shares of Surety Common
Stock outstanding at the Effective Time if all outstanding shares of Surety
Preferred Stock were converted or deemed to be converted.
At the Effective Time, each outstanding share of Surety Preferred Stock
(other than any shares owned by Surety or its subsidiaries) will be deemed to
be converted into 0.8507 shares of Surety Common Stock (the number into which
it is convertible in accordance with the terms of the Surety Preferred
Stock). The holders of shares of Surety Preferred Stock will then receive
11
<PAGE> 17
the same consideration as they would receive if the shares were actually
converted, but without the necessity of complying with the requirements for
conversion as set forth in the terms of the Surety Preferred Stock. Holders
of Surety Preferred Stock should therefore review the preceding summary of
the manner in which shares of Surety Common Stock are to be converted and
sections referred to therein, the remaining sections of this Proxy
Statement-Prospectus discussing the manner of making elections and the
process to be followed in the allocation of consideration, in order to
determine the effect of such procedures on the consideration which they will
receive as a result of the Merger. See "THE MERGER--Terms of the
Merger--Election Procedures" and "THE MERGER-- Terms of the
Merger--Allocation."
Options on Surety Common Stock outstanding at the Effective Time will be
converted into options to purchase shares of FBA Common, in amounts and at
exercise prices adjusted to reflect the relative values of Surety Common
Stock and FBA Common reflected in the Exchange Ratio.
Election Procedures
Shortly after the Special Meeting (assuming that the Merger is approved
at the Special Meeting), the Exchange Agent will send to each record holder
of shares of Surety Common Stock and Surety Preferred Stock (collectively,
"Surety Shareholders") an election form ("Election Statement") and other
appropriate transmittal materials permitting such holder to elect to receive
Stock Consideration, Cash Consideration, a combination of Stock Consideration
and Cash Consideration or to make no election.
To make an effective election, a Surety Shareholder must submit a
properly completed Election Statement which is actually delivered to the
Exchange Agent at or prior to the Election Deadline (as defined below) in
accordance with the instructions on the Election Statement. An Election
Statement will be properly completed only if accompanied by certificates
representing all shares covered thereby, and all documentation required by
the Exchange Agent. The "Election Deadline" is 5:00 p.m., Eastern time, on
the fifteenth calendar day following, but not including, the date of mailing
of the Election Statement or such other date upon which FBA and Surety
mutually agree.
Allocation
Because the number of shares of FBA Common and the amount of cash to be
paid in the Merger will be fixed pursuant to the Reorganization Agreement,
the extent to which the elections made by Surety Shareholders will be
accommodated will depend on the number of Surety Shareholders who elect Cash
Consideration and Stock Consideration and the number who fail to make any
election. Accordingly, a Surety Shareholder who elects to receive all cash
or all FBA Common may instead receive partly the non-elected form of
consideration, and a Surety Shareholder who elects specific percentages of
FBA Common and cash may receive different percentages. If the elections by
Surety Shareholders result in an oversubscription for either Cash
12
<PAGE> 18
Consideration or Stock Consideration, procedures for allocation will be
followed by the Exchange Agent. See "THE MERGER--Terms of the
Merger--Allocation."
Conversion of Outstanding Surety Stock
At the Effective Time, Surety will be merged with and into
AcquisitionCo, a newly-formed interim bank organized by FBA and chartered by
the State of California. If the Merger is approved by the Surety Common
Shareholders and subject to the satisfaction or waiver of conditions in the
Reorganization Agreement, it is presently contemplated that the Merger will
occur in November or December, 1997. At the Effective Time, each outstanding
share of Surety Common Stock and Surety Preferred Stock (such shares are
sometimes referred to collectively as the "Surety Stock"), other than (i)
shares held in the treasury of Surety or by a subsidiary, if any, and (ii)
shares of Surety Common Stock as to which dissenters' rights are exercised
(see "THE MERGER--Dissenters' Rights"), if any, will be converted into and
represent the right to receive the appropriate merger consideration. As soon
as practicable following approval of the Merger by the Surety Common
Shareholders, each holder of Surety Common Stock and Surety Preferred Stock
will receive from the Exchange Agent, together with the Election Statement
and related information discussed above, a letter of transmittal and
instructions for exchanging certificates representing their Surety Common
Stock or Surety Preferred Stock ("Surety Certificates"). Surety Shareholders
should not attempt to make an election regarding consideration or surrender
their Surety Certificates until they receive these instructions from the
Exchange Agent. See "THE MERGER--Exchange of Surety Certificates."
Recommendation of the Board of Directors of Surety
The Board of Directors of Surety recommends that Surety Common
Shareholders vote to approve the Reorganization Agreement.
Opinion of Surety's Financial Advisor
The Board of Directors of Surety engaged Baxter Fentriss and Company,
Richmond, Virginia ("Baxter Fentriss") to render financial advisory services
in connection with the Board's consideration of the Merger. Pursuant to such
engagement, Baxter Fentriss has evaluated the financial terms of the Merger.
Baxter Fentriss has delivered to Surety an opinion dated July 28, 1997, (the
"Fairness Opinion") which was updated effective October 17, 1997, stating
that, as of such dates, based on the review and assumptions and subject to
the limitations described therein, the Merger is fair, from a financial point
of view, to Surety's shareholders. A copy of the Fairness Opinion is attached
as Appendix B to this Proxy Statement-Prospectus and should be read in its
entirety. See "THE MERGER--Opinion of Surety's Financial Advisor."
Accounting Treatment
It is anticipated that the Merger, when consummated, will be accounted
for using the purchase method of accounting. See "THE MERGER--Accounting
Treatment."
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<PAGE> 19
Federal Income Tax Consequences
FBA and Surety have received an opinion from FBA's special tax counsel,
Lewis, Rice & Fingersh, L.C., to the effect that, assuming the Merger is
completed as described herein and in the Reorganization Agreement and based
on certain customary representations referred to in the opinion, the Merger
will be treated for federal income tax purposes as a reorganization within
the meaning of Section 368 of the Internal Revenue Code of 1986, as amended
(the "Code"), and that no gain or loss will be recognized by FBA,
AcquisitionCo or Surety as a result of the Merger. That opinion also
describes certain federal income tax consequences to Surety Shareholders.
See "THE MERGER--Certain Federal Income Tax Consequences of the Merger."
Each Surety Shareholder is advised to consult a tax advisor as to the
specific tax consequences of the Merger.
Regulatory Approvals
Consummation of the Merger is subject to the prior approval of federal
and state banking regulatory authorities, and applications for approval have
been filed with the Federal Reserve Board, the FDIC and the Commissioner.
See "THE MERGER--Regulatory Approvals."
Conditions of the Merger
Consummation of the Merger is subject to the satisfaction of various
conditions including, among other things, the approval of the Reorganization
Agreement by the requisite vote of Surety's Common Shareholders, the number
of dissenting shares not exceeding ten percent (10%) of Surety Common Stock
outstanding on the Record Date, the receipt of all requisite regulatory
approvals and the expiration of any required waiting periods, and the receipt
by FBA and Surety of an opinion regarding certain federal income tax
consequences of the Merger. See "THE REORGANIZATION AGREEMENT--Conditions to
Consummation of the Merger-- Termination; Damages."
Interests of Certain Persons in the Merger
Directors and executive officers of Surety have interests in the Merger
that are in addition to their interests as shareholders of Surety. These
interests include: (1) indemnification of directors and officers of Surety
against certain claims that may arise after the Effective Time based on
services provided to Surety or any subsidiary of Surety prior to the
Effective Time; (2) FBA's covenant to use its best efforts to purchase
insurance, subject to a maximum premium, protecting Surety directors and
officers against such claims; (3) the assumption by FBA of Surety's
obligations under employment or severance agreements with four executive
officers of Surety; (4) FBA's agreement to cause one representative of Surety
to become a director of FBA, and two representatives to become directors of
AcquisitionCo.; (5) options held by four executive officers of Surety to
purchase Surety Common Stock, which are exercisable prior to the Effective
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<PAGE> 20
Time and which, if not so exercised, will be converted into options to
purchase FBA Common; and (6) Surety's President, John A. DiMichele, will
receive an incentive payment of $25,000 upon completion of the Merger. These
interests are described in more detail herein under "INTERESTS OF CERTAIN
PERSONS IN THE MERGER."
The Stock Option Agreement
Concurrently with the execution of the Reorganization Agreement, Surety
and FBA entered into a Stock Option Agreement whereby Surety granted to FBA
an option to purchase, for $28.00 per share, 19.99% of the outstanding Surety
Common Stock in certain circumstances (the "Stock Option"). Generally, the
Stock Option is exercisable if the Merger is not consummated and, in
connection therewith, a third party acts to make a significant investment in,
or to acquire control of, Surety.
The Stock Option could have the effect of discouraging persons who prior
to the Effective Time might be interested in acquiring all or a significant
interest in Surety from considering or proposing such an acquisition, even if
such persons were prepared to pay more consideration for Surety Stock than
the consideration payable by FBA under the Reorganization Agreement.
Dissenters' Rights
By complying with the specific procedures set forth in Section 1300 et
seq. of the California General Corporation Law, included as Appendix C
hereto, a holder of Surety Common Stock has the right to have the value of
the Surety Common Stock held by such Surety Shareholder appraised. See "THE
MERGER--Dissenters' Rights."
Market Prices and Dividends
FBA Common is listed and traded on the NYSE. Surety Common Stock and
Surety Preferred Stock are not traded on an established public trading
market. The following table presents for the periods indicated (rounded to
the nearest cent and adjusted for the 5% stock dividend paid on Surety Common
Stock in January, 1995), the high and low sale prices of a share of FBA
Common and the high and low sale prices known to Surety's management of a
share of
15
<PAGE> 21
Surety Common Stock. Neither FBA nor Surety paid any cash dividends on FBA
Common or Surety Common Stock, respectively, during the periods indicated.
<TABLE>
<CAPTION>
FBA COMMON SURETY COMMON STOCK
---------- -------------------
PERIOD HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
1997
First Quarter $12.75 $10.12 $19.00 $18.00
Second Quarter 13.37 12.37 18.00 17.00
Third Quarter
1996
First Quarter 12.75 9.62 18.00 18.00
Second Quarter 10.50 9.25 18.00 17.00
Third Quarter 10.37 9.37 18.00 17.50
Fourth Quarter 10.37 9.75 18.00 18.00
1995
First Quarter 18.75 12.19 17.15 16.20
Second Quarter 16.87 12.19 17.15 16.20
Third Quarter 16.87 10.87 18.00 18.00
Fourth Quarter 13.75 9.00 18.00 17.00
</TABLE>
The following table presents (rounded to the nearest cent) for July 28,
1997, the last full trading day prior to the public announcement of the
execution of the Reorganization Agreement, and as of October 6, 1997, the
closing price of a share of FBA Common, the last sale price known to the
Board of Directors of a share of Surety Common Stock as of each of the dates
indicated and the pro forma equivalent in FBA Common of a share of Surety
Common Stock computed by multiplying the last sale price of FBA Common on
each of the dates specified in the table by a hypothetical exchange ratio
that was fixed by assuming, for purposes of the criteria set forth in the
Reorganization Agreement (see "THE MERGER--Terms of the Merger--Merger
Consideration"), that the date set forth in the first column of the table was
the last day of the 20-day period during which the price of FBA Common is
considered in determining the Exchange Ratio and that the FBA Exchange Price
was the last sale price of FBA Common on the assumed date. The pro forma
equivalents set forth below are provided for illustration purposes only.
Neither pro
16
<PAGE> 22
forma equivalent is intended to represent the actual pro forma equivalent
that will be applicable to the Merger; such amount will not be calculable
until a date shortly before the Special Meeting.
<TABLE>
<CAPTION>
FBA Common Surety Pro Forma Exchange Ratio
Common Surety Equivalent
<S> <C> <C> <C> <C>
July 28, 1997 $13.00 $18.00 $38.12 2.9324
October 6, 1997 18.50 18.00 47.88 2.5879 <F1>
<FN>
- -------------------------------
<F1> The Exchange Ratio shown for October 6, 1997 reflects the application of
the Exchange Rate Collar.
</TABLE>
On the date the Exchange Ratio is fixed and on the dates certificates
representing shares of FBA Common ("FBA Certificates") are received by Surety
Shareholders entitled thereto, the price of a share of FBA Common, the Pro
Forma Surety Equivalent and the Exchange Ratio may differ from those set
forth in the foregoing table.
Differences in Shareholders' Rights
The rights of Surety shareholders, which are determined by California
law and the Articles of Association and By-Laws of Surety, differ from the
rights accorded FBA shareholders, which are determined by Delaware
corporation law and the Restated Certificate of Incorporation and By-Laws of
FBA. At the Effective Time, holders of Surety Common Stock and Surety
Preferred Stock (except those who receive solely Cash Consideration in the
Merger and those who perfect the right to dissent from the Merger) will
become shareholders of FBA, and their rights as shareholders of FBA will be
determined by Delaware law and by FBA's Restated Certificate of Incorporation
and By-Laws. See "COMPARATIVE RIGHTS OF SHAREHOLDERS OF SURETY AND FBA."
Pending FBA Transactions
On October 3, 1997 FBA and First Commercial Bancorp, Inc., a Delaware
corporation which is also a bank holding company ("FCB"), executed an
Agreement and Plan of Merger whereby FCB will be merged into FBA (the "FCB
Merger"). In the transaction, which is subject to the approval of the
shareholders of both FBA and FCB and necessary regulatory approvals, the
shareholders of FCB will receive 0.8888 shares of FBA Common for each share
of outstanding FCB common stock, or an aggregate of approximately 752,000
shares of FBA Common.
First Banks, Inc., a Missouri corporation ("First Banks") is the
controlling shareholder of both FBA and FCB. In connection with the FCB
Merger, First Banks will exchange approximately $10 million of its note
receivable (which had a principal balance of $14.5 million as of October 6,
1997) for 804,000 shares of FBA Common and will also exchange its convertible
debentures in FCB for comparable debentures in FBA. The FCB Merger is
discussed in more detail under the captions "BUSINESS OF FBA--Recent
Developments" and "PRO FORMA FINANCIAL DATA."
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<PAGE> 23
On September 22, 1997 FBA executed an agreement providing for the
acquisition of Pacific Bay Bank, a California banking association located in
San Pablo ("Pacific Bay Bank"). Pursuant to that agreement, FBA will acquire
Pacific Bay Bank, which had total assets of $38.7 million as of June 30,
1997, for aggregate cash consideration of $4.2 million. See "BUSINESS OF
FBA--Recent Developments."
Summary of Comparative Per Share Data
The following summary presents, for the periods indicated, selected
comparative per share data: (i) on a historical basis for both FBA and
Surety; (ii) on a pro forma combined basis for FBA, giving effect to the
Merger, assuming that the Merger had been effective at the beginning of all
periods presented; (iii) on a pro forma combined basis for FBA, assuming the
FCB Merger had been effective at the beginning of all periods presented; and
(iv) on a pro forma equivalent basis per common share for Surety, assuming
that the Merger and the FCB Merger had been effective at the beginning of all
periods presented. No cash dividends were paid by FBA, Surety or FCB during
the periods covered in the table. Such data are computed on a pro forma
equivalent basis with respect to a share of Surety Common Stock by
multiplying the pro forma combined amount (giving effect to both the Merger
and the FCB Merger) by certain assumed Exchange Ratios. As previously
described, the Exchange Ratio has not yet been fixed and will not be fixed
until a date shortly before the Special Meeting. When so fixed, the Exchange
Ratio may differ from any of the exchange ratios set forth below for
illustration purposes. See "THE MERGER--Terms of the Merger--Merger
Consideration." The pro forma consolidated statements of income do not give
effect to anticipated expenses and nonrecurring charges related to the Merger
and the estimated effect of revenue enhancements and expense savings
associated with consolidation of operations of FBA and Surety. See "SELECTED
CONSOLIDATED FINANCIAL DATA OF SURETY BANK AND SUBSIDIARY," "SELECTED
CONSOLIDATED FINANCIAL DATA OF FIRST BANKS AMERICA, INC. AND SUBSIDIARIES,"
"PRO FORMA FINANCIAL INFORMATION" and "FINANCIAL STATEMENTS OF SURETY."
18
<PAGE> 24
<TABLE>
<CAPTION>
Per common share
-----------------------------------------------------------------------------
Historical Exchange Ratio
------------------------------ ------------------------------------------
FBA and Surety FBA, FCB and Surety
-------------------- -------------------
Equivalent Equivalent
per Surety per Surety
FBA FCB Surety Combined shares Combined shares
--- --- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
For the six months ended June 30, 1997:
Earnings per common stock and
common stock equivalents $0.32 0.59 1.01 0.30 0.78 0.34 0.88
Book value per common stock
and common stock equivalents $9.46 8.22 25.56 9.68 25.04 10.40 26.78
===== ==== ===== ==== ===== ===== =====
For the year ended December 31, 1996:
Earnings per common stock and
common stock equivalents $0.40 0.77 0.63 0.20 0.51 0.06 0.16
Book value per common stock
and common stock equivalents $9.22 7.48 24.70 9.44 24.44 10.10 26.14
===== ==== ===== ==== ===== ===== =====
</TABLE>
RISK FACTORS
Surety Common Shareholders should carefully consider, together with the
other information contained and incorporated by reference in this Proxy
Statement-Prospectus, the following risk factors in evaluating FBA and its
business, determining their vote with respect to the Merger and making their
subsequent elections of the form of consideration which they choose to
receive. Surety Shareholders should note, in particular, that this Proxy
Statement-Prospectus contains forward-looking statements within the meaning
of Section 29A of the Securities Act and Section 21E of the Exchange Act, and
that actual results could differ materially from those contemplated by such
statements. The considerations listed below represent certain important
factors which FBA believes are specific to FBA and its business, as opposed
to general factors that may also affect the banking industry or the economy
as a whole and FBA's business indirectly. The considerations discussed
herein are not intended to represent a complete list of the general or
specific risks that may affect FBA and its business. It should be recognized
that other risks may be significant, presently or in the future, and the
risks set forth in this discussion may also affect FBA to a greater extent
than indicated.
CONTROL OF FBA BY FIRST BANKS, INC.
All of the Class B Common Stock of FBA ("Class B Common Stock"), which
represents approximately 69.7% of the total outstanding capital stock of FBA
as of the date of this Proxy Statement-Prospectus, is owned by First Banks, a
bank holding company headquartered in Missouri. The Class B Common Stock is
identical to FBA Common except that it is not registered with the SEC, is not
listed on any stock exchange, is transferable only in certain limited
circumstances and has less favorable dividend rights than FBA Common.
However, because the Class B Common Stock has identical voting rights to the
FBA Common, First Banks
19
<PAGE> 25
has effective control over the management and policies of FBA and the election
of most or all of the directors of FBA. Furthermore, executive officers of
First Banks have significant management responsibility for FBA's business
activities, and First Banks performs numerous management and other services for
FBA pursuant to contracts between the two companies. Holders of FBA Common who
are not satisfied with the policies and decisions made by the Board of
Directors and management of FBA would therefore have less of an opportunity to
change such policies through the exercise of voting rights than would
shareholders in a comparable corporation with no controlling shareholder.
The agreement by which First Banks became the majority shareholder of FBA
provides certain anti-dilutive rights which allow First Banks to acquire
additional shares of Class B Common Stock if its ownership is reduced below
55%. In that event, First Banks has the right to purchase sufficient
additional shares of Class B Common Stock to maintain 55% ownership, at
106.67% of the then current book value per share. This right will remain
effective until August 1999, after which a comparable right will exist to
maintain the same level of ownership by purchasing shares at 113% of then
current book value through August, 2000, when the purchase price would become
120% of current book value through February 2002. Thereafter, First Banks'
anti-dilutive right will lapse.
ACQUISITION OF FCB AND PACIFIC BAY BANK BY FBA
As discussed under the caption "BUSINESS OF FBA--Recent Developments,"
FBA and FCB have entered into an Agreement and Plan of Merger, pursuant to
which FCB will merge into FBA and FCB's bank subsidiary will merge into FBA's
California bank subsidiary, and FBA has also entered into an agreement to
acquire Pacific Bay Bank. Consummation of the FCB Merger is subject to
customary conditions, including the approval of the shareholders of both
companies and the receipt of all required regulatory approvals, and the FCB
Merger could not occur if any of such conditions were not satisfied;
similarly, the acquisition of Pacific Bay Bank is subject to customary
conditions including receipt of required regulatory approvals and the
approval of the Shareholders of Pacific Bay Bank. Because the potential
costs savings and efficiencies arising from the proximity of the markets
served by Sunrise, First Commercial Bank, Surety and Pacific Bay are a
significant reason for undertaking the proposed acquisition of Surety and the
FCB Merger, failure to consummate the FCB Merger could limit the ability of
FBA to realize all of the benefits anticipated from the acquisition of
Surety.
PROFITABILITY OF FBA AND FCB
Prior to the acquisition of control of FBA in 1994 and FCB in 1995, both
companies experienced several years of significant operating losses caused by
economic conditions in their respective markets, loan losses and asset
quality deterioration, high overhead and operational problems. These losses
continued to affect the results of operations for periods of time after
control was acquired by First Banks. Consequently, FBA's positive earnings
record has occurred only during the period from January 1996 through the
present, and FCB's positive earnings record has occurred only since April
1996. There can be no assurance that a recurrence
20
<PAGE> 26
of some or all of the problems which led to earlier losses, or other problems
not previously encountered, will not cause similar problems in the future, or
that FBA and FCB will be able to sustain the favorable recent earnings trends.
DIVIDENDS
As of December 1, 1994, FBA completed an accounting procedure referred to
as a "quasi-reorganization" in which its assets and liabilities were adjusted
to fair values, and stockholders' equity was adjusted to eliminate the
retained deficit which had accumulated during years of substantial operating
losses. However, FBA incurred a net loss of $3.82 million in 1995, thereby
creating a new deficit. For the year ended December 31, 1996 and the six
months ended June 30, 1997, FBA had net income of $1.57 million and $1.17
million, respectively, leaving an accumulated deficit of $1.08 million as of
June 30, 1997. FBA has no current plan to pay dividends, but it would be
precluded from doing so until it is able to eliminate the accumulated deficit
and generate additional amounts to enable it to pay dividends.
PUBLIC MARKET FOR FBA COMMON
FBA Common is listed and traded on the NYSE. However, the volume of
trading has generally been lower than for many other bank holding companies,
in part because almost 70% of its outstanding voting stock is owned by First
Banks and cannot be traded. Consequently, FBA Common may trade less
frequently and in smaller amounts than competing banks and holding companies,
at prices which do not reflect the valuations placed by the securities
markets on other comparable companies. Potential investors in other similar
banks or holding companies may associate an implicit "acquisition premium"
with those companies in determining the market prices of their stocks. The
presence of First Banks as FBA's majority shareholder could reduce the
attractiveness of FBA Common with respect to such a premium, as well as
making FBA more difficult to acquire than a company without a controlling
shareholder.
OPERATING REQUIREMENTS ASSOCIATED WITH GEOGRAPHIC DISPERSION
FBA currently owns BankTEXAS, a national bank with offices in Houston,
Dallas, Irving and McKinney, Texas, and Sunrise, a state-chartered bank with
offices in Roseville and Rancho Cordova, California. Because of the
geographic distance between these banks, various operating requirements are
placed on FBA's management which would not be present in other organizations
operating in contiguous markets. These include (i) the operation of data
processing and item processing functions at remote locations; (ii) the
control of correspondent accounts, reserve requirements and wire transfers,
particularly where differences in time zones are involved; (iii) providing
administrative support at significant distances, including accounting, human
resources, loan servicing, internal audit and credit review; and (iv)
establishing and monitoring compliance with corporate policies and
procedures.
21
<PAGE> 27
Although the assistance of First Banks in many of these functions
facilitates the management of these areas and reduces the cost burden which
might otherwise exist, the geographic distance adds to the cost of
management, and the additional costs could limit the profitability which
might otherwise be expected by investors in FBA.
DEPENDENCE ON FUTURE GROWTH THROUGH ACQUISITIONS
As discussed elsewhere in this Proxy Statement-Prospectus, the Board of
Directors and management of FBA believe that a business strategy of growth
through acquisitions is necessary in order for FBA to achieve the size
necessary to compete with larger competitors in the banking industry; see
"THE MERGER--Background and Reasons for the Transaction" for information
regarding the importance of acquisitions to FBA's growth. There are several
risks associated with such a strategy, including the following:
(1) There is a general trend toward consolidation among financial
institutions, and there are a large number of potential competitors for
acquisitions viewed favorably by FBA's management, including in some cases
much larger organizations with substantially more resources than FBA.
(2) The prices at which acquisitions may be made fluctuates with market
conditions, and there is no assurance that FBA will continue to identify
acquisition prospects at prices which its management and Board of Directors
believe are reasonable. To the extent that FBA is able to identify
acquisitions that may be made using FBA Common rather than cash, the
prospects for acquisitions without dilution of FBA's shareholders will also
depend to some extent on the market for FBA Common, which is beyond FBA's
control and may fluctuate over time.
(3) The managerial and operational requirements for completing
acquisitions and realizing the benefits therefrom can be burdensome and
time-consuming. While FBA takes such factors into consideration in
determining what acquisitions should be undertaken, and utilizes the
expertise of First Banks (which has effected a substantial number of
acquisitions of banks and thrift institutions in the past several years),
there is no assurance that FBA will realize the benefits of particular
acquisitions that it completes in a timely manner or without unanticipated
costs.
INTRODUCTION
This Proxy Statement-Prospectus is being furnished to Surety Common
Shareholders as of the Record Date in connection with the solicitation of
proxies by the Board of Directors of Surety to be voted at the Special
Meeting to be held on Wednesday, November 19, 1997 and any adjournments
thereof, at 116 Springstowne Center, Vallejo, California, at 5:00 p.m.
(Pacific time). The purpose of the Special Meeting is to consider and vote
upon a proposal to approve the Reorganization Agreement and the transactions
contemplated thereby.
22
<PAGE> 28
The Board of Directors of Surety has approved the Reorganization
Agreement and recommends that Surety Common Shareholders vote FOR its
approval.
The information contained herein with respect to FBA has been supplied by
FBA, and the information contained herein with respect to Surety has been
supplied by Surety.
THE SPECIAL MEETING
RECORD DATE; VOTE REQUIRED
The securities to be voted at the Special Meeting consist of shares of
Surety Common Stock, with each share entitling its owner to one vote on the
proposal brought before the Special Meeting. Surety had no other class of
voting securities outstanding at the close of business on the Record Date,
October 1, 1997. There were 202 record holders of Surety Common Stock and
148,560 shares of Surety Common Stock outstanding and eligible to be voted at
the Special Meeting as of the Record Date. It is anticipated that this Proxy
Statement-Prospectus, together with the enclosed proxy card, will be mailed
to shareholders on or about October 20, 1997.
The presence at the Special Meeting, in person or by proxy, of the
holders of a majority of the outstanding shares of Surety Common Stock will
constitute a quorum for the transaction of business. Under applicable law,
the approval of the Reorganization Agreement requires the affirmative vote of
the holders of a majority of the shares of Surety Common Stock outstanding
and entitled to vote at the Special Meeting; accordingly, the failure of any
holder to vote at the Special Meeting, in person or by proxy, will have the
same effect on the outcome of the vote as would a vote against the Merger.
Notwithstanding receipt of the requisite vote to approve the Reorganization
Agreement, should such vote be received, FBA has the right to refuse to
consummate the Merger if the number of shares as to which shareholders have
perfected the right to dissent ("Dissenting Shares") exceeds ten percent
(10%) of the Surety Common Stock outstanding on the Record Date. The Special
Meeting may be adjourned from time to time by Surety's Board of Directors or
vote of the holders of a majority of the Surety Common Stock present in
person or by proxy if necessary to obtain the votes necessary to approve the
Reorganization Agreement through further solicitation of proxies or
otherwise, or, if the number of shares of Surety Common Stock exceeds ten
percent (10%) of the outstanding Surety Common Stock, to conduct discussions
with dissenting shareholders. In the event the matter of adjournment is put
to the vote of those present at the Special Meeting either in person or by
proxy, proxies voting against the Reorganization Agreement will not be used
by the proxy holders to vote in favor of the adjournment pursuant to such
proxy holders' discretionary voting authority. The approval of the Merger
Agreement by Surety Common Shareholders is a condition to the consummation of
the Merger. See "THE REORGANIZATION AGREEMENT--Conditions to Consummation of
the Merger-- Termination; Damages."
Votes cast "for" and "against" the proposal will be tallied as indicated.
Abstentions will be treated as shares that are present and entitled to vote
for purposes of determining the presence of a quorum and will have the same
effect as a vote "against" the Reorganization Agreement.
23
<PAGE> 29
HOLDERS OF SURETY COMMON STOCK
The following table sets forth, as of the Record Date, the name and
address of each person known by the Surety Board of Directors to be the
beneficial owner of more than five percent of the outstanding shares of
Surety Common Stock, by each director and executive officer and by all
directors and executive officers as a group:
<TABLE>
<CAPTION>
Number of Shares and Percent of
Nature of Beneficial Class
Name of Beneficial Owner<F1> Ownership<F2><F3> (%)<F4>
- ---------------------------- -------------------- ----------
<S> <C> <C>
Linda Ann Adams 10,029 <F5> 6.62
Charles R. Balassi 2,975 <F6> 1.96
John A. DiMichele 3,795 <F7> 2.50
John B. Hussey 6,930 <F8> 4.57
Albert M. Lavezzo 13,715 <F9> 9.05
John F. Lavezzo 12,405 <F10> 8.19
Richard D. Puntillo 1,549 <F11> 1.02
Norman F. Seidenverg, M.D. 6,405 4.22
Fred K. Sibley 4,801 3.17
Jack Wilson 6,825 <F12> 4.50
All executive officers and
directors as a group (12 persons) 69,429 45.84
<FN>
- ---------------
<F1> The address for all of the persons listed in the table is c/o Surety Bank,
116 Springstowne Center, Vallejo, California 94591.
<F2> Includes shares owned directly and indirectly with other persons. Subject
to applicable community property laws and shared voting and investment power
with a spouse, the listed persons have sole voting and investment power with
respect to the shares listed, except as otherwise noted. Currently
exercisable stock options have been added to the shares shown as outstanding
for the purpose of calculating the percentage of common stock owned by each
person listed.
<F3> The numbers of shares of Surety Common Stock shown in the table do not
include shares of Surety Preferred Stock, which are not entitled to vote at
the Special Meeting. Each share of Surety Preferred Stock is convertible into
0.8507 shares of Surety Common Stock. The persons listed are the beneficial
owners of the following numbers of shares of Surety Preferred Stock as of the
date of this Proxy Statement-Prospectus: Linda Ann Adams--1,500; Charles R.
24
<PAGE> 30
Balassi--2,000; John A. DiMichele--500; John B. Hussey--2,500; Albert M.
Lavezzo--2,900; John F. Lavezzo--1,650; Richard D. Puntillo--1,000; Norman F.
Seidenverg, M.D.--1,000; Fred K. Sibley--1,000; Jack Wilson--1,450.
<F4> For purposes of the table, there are deemed to be 151,448 shares of Surety
Common Stock outstanding, including shares issuable upon exercise of vested
stock options.
<F5> Includes 2,464 shares held jointly.
<F6> Includes 115 shares owned by a minor child and a vested option to acquire
105 shares.
<F7> Includes an exercisable option to acquire 1,050 shares.
<F8> Includes 6,825 shares held as co-trustee of a living trust and an
exercisable option to acquire 105 shares.
<F9> Includes 10,992 shares held in a pension plan allowing the participant to
direct the voting of the shares and an exercisable option to acquire 105
shares.
<F10> Includes 2,100 shares held in personal individual retirement account, 921
shares owned by a corporation and an exercisable option to acquire 105
shares.
<F11> Includes an exercisable option to acquire 1,313 shares.
<F12> Includes 1,785 shares held as trustee and an exercisable option to acquire
105 shares.
</TABLE>
PROXIES; REVOCATION; SOLICITATION
The Board of Directors of Surety is soliciting the proxies of the holders
of Surety Common Stock to be voted at the Special Meeting in favor of the
approval of the Reorganization Agreement and the Merger. If the enclosed
form of proxy is properly executed and returned to Surety in time to be voted
at the Special Meeting, the shares of Surety Common Stock represented thereby
will be voted in accordance with the instructions marked thereon. Proxies
that are executed, but as to which no instructions have been marked, will be
voted FOR the approval of the Reorganization Agreement. Should any other
matter properly come before the Special Meeting, the persons named as proxies
in the accompanying proxy will have discretionary authority to vote on such
matters in accordance with their judgment. Although the Special Meeting may
be adjourned by a vote of Surety Common Shareholders present in person or by
proxy at the Special Meeting, proxies voting against the Reorganization
Agreement will not be used by the proxy holders to vote in favor of the
adjournment pursuant to such proxy holders' discretionary voting authority.
As of the time of the preparation of this Proxy Statement-Prospectus, the
Board of Directors does not know of any matter other than that referred to in
the Notice of Special Meeting of Shareholders to be presented for action at
the Special Meeting.
The cost of soliciting proxies will be borne by Surety. In addition to
use of the mails, proxies may be solicited personally or by telephone,
telecopier or telegraph by officers, directors or employees of Surety, who
will not be specially compensated for such solicitation activities.
Arrangements will also be made by Surety to reimburse brokerage houses and
other custodians,
25
<PAGE> 31
nominees and fiduciaries for their reasonable expenses incurred in forwarding
solicitation materials to the beneficial owners of shares held of record by
such persons.
A Surety Common Shareholder may revoke a proxy at any time prior to its
being voted by (1) delivering written notice of revocation to the President,
Surety Bank, 116 Springstowne Center, Vallejo, California, 94591, telephone:
(707) 554-0390; (2) executing a later-dated proxy and giving written notice
thereof to the Corporate Secretary of Surety; or (3) voting in person.
Unless previously revoked or otherwise instructed thereon, proxies will be
voted at the Special Meeting on the matter described above. If an owner
holding Surety Common Stock in street name wishes to vote such Surety Common
Stock at the Special Meeting, the owner must obtain from the nominee holding
the Surety Common Stock in street name a properly executed proxy identifying
the individual as a Surety Common Shareholder, authorizing the Surety Common
Shareholder to act on behalf of the nominee at the Special Meeting and
identifying the number of shares with respect to which the authorization is
granted.
26
<PAGE> 32
SELECTED CONSOLIDATED FINANCIAL DATA OF
SURETY BANK AND SUBSIDIARY
The selected consolidated financial data set forth below, insofar as it
relates to the five years ended December 31, 1996 is derived from the audited
consolidated financial statements of Surety Bank and subsidiary. The data for
the six month periods ended June 30, 1997 and 1996 has been derived from
unaudited interim financial statements. However, in the opinion of the
management of Surety, such unaudited interim statements include all
adjustments (consisting of normal recurring accruals) necessary to fairly
present the data for such periods. The results of operations for the six
month period ended June 30, 1997 are not necessarily indicative of results
that will be achieved for the full year. Such data is qualified by reference
to the consolidated financial statements included elsewhere in this Proxy
Statement-Prospectus and should be read in conjunction with such financial
statements and related notes thereto and "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SURETY BANK."
<TABLE>
<CAPTION>
Six months ended
June 30, Years ended December 31,
---------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(dollars expressed in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Interest income $ 2,667 2,479 5,131 4,683 4,585 4,792 5,174
Interest expense 1,237 1,143 2,367 2,257 1,811 2,136 2,471
-------- ------- ------- ------- ------- ------- -------
Net interest income 1,430 1,336 2,764 2,426 2,775 2,729 2,703
Provision for possible loan losses 65 90 325 130 55 50 54
-------- ------- ------- ------- ------- ------- -------
Net interest income after provision
for possible loan losses 1,365 1,246 2,439 2,296 2,720 2,606 2,649
Noninterest income 646 350 712 524 709 756 876
Noninterest expense 1,762 1,436 3,489 2,765 3,193 2,917 2,722
-------- ------- ------- ------- ------- ------- -------
Income (loss) before provision for
income taxes 249 160 (338) 54 236 445 803
Provision for income tax
expense (benefit) 94 64 (135) 18 75 192 382
-------- ------- ------- ------- ------- ------- -------
Net income (loss) $ 155 96 (203) 36 161 253 421
======== ======= ======= ======= ======= ======= =======
Dividends:
Preferred stock $ 29 30 60 61 47 51 67
Common stock -- -- -- 127 33 33 32
Ratio of total dividends declared
to net income (loss) 18.71% 31.25% (29.56)% 522.22% 49.69% 33.20% 23.52%
Per Share Data:
Earnings (loss) per common stock
and common stock equivalents, net
of preferred stock dividends $ 1.04 0.65 (1.78) (0.16) 0.78 1.44 2.64
Weighted average shares of common
stock outstanding 148,560 148,560 148,560 148,356 146,140 133,806 133,170
Balance Sheet Data (at period-end):
Investment securities $ 10,763 10,687 11,038 9,274 5,048 6,114 7,010
Loans, net of unearned discount 55,995 50,617 55,981 47,278 50,058 52,046 48,516
Total assets 72,738 66,344 72,056 63,407 60,434 75,238 62,636
Total deposits 66,584 60,164 64,369 57,570 53,950 69,441 55,166
Common stockholders' equity 3,797 3,908 3,669 3,971 3,935 3,944 3,718
Total stockholders' equity 5,018 5,129 4,890 5,192 5,156 5,058 4,832
Earnings Ratios:
Return on average total assets <F1> .43% .30% (.30)% .06% .23% .42% .68%
Return on average total
stockholders' equity <F1> 6.33 3.68 (3.96) .69 3.18 5.02 8.87
Asset Quality Ratios:
Allowance for possible loan losses
to loans 1.04 .92 1.05 .92 .64 .53 .46
Nonperforming loans to loans <F2> .69 1.84 1.36 1.45 .57 .83 2.11
Allowance for possible loan losses
to nonperforming loans <F2> 151.17 49.84 77.00 63.60 11.43 64.04 22.11
Nonperforming assets to loans and
foreclosed assets <F3> 1.47 1.96 2.40 1.45 .57 1.71 2.84
Net loan charge-offs to
average loans <F1> .25 .24 .34 .03 .02 -- .01
Capital Ratios:
Average total stockholders'
equity to average total assets 6.85 8.06 7.65 8.46 7.37 7.17 7.52
Total risk-based capital ratio 12.00 12.76 11.14 13.70 13.40 12.44 13.10
Leverage ratio 6.99 7.96 7.00 8.30 8.50 6.73 8.04
Ratio of earnings (loss) to combined
fixed charges and preferred
stock dividends <F4>:
Including interest on deposits 1.17 1.11 (.84) 1.00 1.10 1.18 1.28
Excluding interest on deposits 7.87 2.57 (2.13) .96 2.80 5.33 4.83
<FN>
- ----------------
<F1> Ratios for the six-month periods are annualized.
<F2> Nonperforming loans consist of nonaccrual loans and loans with
restructured terms.
<F3> Nonperforming assets consist of nonperforming loans and foreclosed
assets.
<F4> For purposes of calculating the ratio of earnings to combined fixed
charges and preferred stock dividends, earnings consist of income
before taxes plus interest expense and rent expense. Fixed charges
consist of interest expense and rent expense.
</TABLE>
27
<PAGE> 33
SELECTED CONSOLIDATED FINANCIAL DATA OF
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES
The selected consolidated financial data set forth below, insofar
as it relates to the five years ended December 31, 1996, is derived from the
audited consolidated financial statements of First Banks America, Inc. and
Subsidiaries. The data for the six month periods ended June 30, 1997 and
1996 has been derived from unaudited interim financial statements. However,
in the opinion of the management, such unaudited interim statements include
all adjustments (consisting of normal recurring accruals) necessary to fairly
present the data for such periods. The results of operations for the six
month period ended June 30, 1997 are not necessarily indicative of results
that will be achieved for the full year. Such data is qualified by reference
to the consolidated financial statements incorporated by reference and should
be read in conjunction with such financial statements and related notes
thereto and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF FBA," which is also incorporated herein by
reference.
<TABLE>
<CAPTION>
Six months ended
June 30, Year ended December 31,
------------------- -----------------------------------------------------
1997 <F5> 1996 1996 <F5> 1995 1994 1993 1992
--------- ---- --------- ---- ---- ---- ----
(dollars expressed in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Interest income $ 13,586 9,990 21,446 22,427 22,649 21,966 24,735
Interest expense 6,206 4,926 9,993 11,218 11,072 9,750 11,229
-------- ------- ------- ------- ------- ------- -------
Net interest income 7,380 5,064 11,453 11,209 11,577 12,216 13,506
Provision for possible loan losses 1,285 350 1,250 5,826 1,258 490 507
-------- ------- ------- ------- ------- ------- -------
Net interest income after provision
for possible loan losses 6,095 4,714 10,203 5,383 10,319 11,726 12,999
Noninterest income 1,478 874 1,848 (126) (4,511) 3,068 2,629
Noninterest expense 5,700 4,087 9,480 11,160 16,174 14,575 14,562
-------- ------- ------- ------- ------- ------- -------
Income (loss) before provision
(benefit) for income taxes
and extraordinary item 1,873 1,501 2,571 (5,903) (10,366) 219 1,066
Provision for income tax expense
(benefit) 700 602 1,002 (2,083) (9,461) -- 364
-------- ------- ------- ------- ------- ------- -------
Income (loss) before extraordinary
item 1,173 899 1,569 (3,820) (905) 219 702
Extraordinary tax benefit from net
operating loss carryforward -- -- -- -- -- -- 362
-------- ------- ------- ------- ------- ------- -------
Net income (loss) $ 1,173 899 1,569 (3,820) (905) 219 1,064
======== ======= ======= ======= ======= ======= =======
Dividends:
Common stock $ -- -- -- -- -- -- --
Ratio of total dividends declared
to net income --% --% --% --% --% --% --%
Per Share Data:
Earnings (loss) per common stock and
common stock equivalents
outstanding $ .32 .23 .40 (.94) (.38) .14 .69
Weighted average shares of common
stock and common stock equivalents
outstanding (in thousands) 3,644 3,990 3,915 4,052 2,397 1,544 1,541
Balance Sheet Data (at period end):
Investment securities $ 78,426 98,738 86,910 39,337 61,400 160,158 113,681
Loans, net of unearned discount 247,574 160,907 241,874 192,573 203,314 167,732 174,695
Total assets 373,592 287,554 375,182 296,583 331,790 368,608 322,769
Total deposits 312,819 245,462 319,806 249,263 241,570 242,897 270,730
Notes payable 14,500 -- 14,000 1,054 1,054 1,054 1,066
Total stockholders' equity 33,900 35,440 33,498 35,258 39,714 14,952 14,107
Earnings Ratios:
Return on average total assets <F1> .64% .61% .52% (1.20)% (.25)% .07% .34%
Return on average total stockholders'
equity <F1> 7.02 5.08 4.48 (10.10) (3.66) 1.49 7.90
Asset Quality Ratios:
Allowance for possible loan losses
to loans 2.52 2.56 2.54 2.71 1.36 1.57 1.74
Nonperforming loans to loans <F2> .81 .28 .87 .29 .14 .37 .82
Allowance for possible loan losses
to nonperforming loans <F2> 312.08 908.61 293.41 952.28 940.61 423.95 213.46
Nonperforming assets to loans and
foreclosed assets <F3> .96 .87 1.19 .81 .90 2.22 3.69
Net loan charge-offs to average
loans <F1> 1.01 1.64 1.44 1.63 .62 .52 1.06
Capital Ratios:
Average total stockholders' equity to
average total assets 9.06 12.01 11.62 11.88 6.80 4.40 4.28
Total risk-based capital ratio 7.53 14.18 7.64 11.69 17.50 8.47 8.16
Leverage ratio 5.18 8.61 5.31 8.38 11.97 4.27 4.32
Ratio of earnings (loss) to combined
fixed charges and preferred
stock dividends <F4>:
Including interest on deposits 1.29 1.30 1.25 .50 .11 1.02 1.09
Excluding interest on deposits 2.77 4.15 3.47 (1.09) (1.28) 1.08 1.53
<FN>
- ----------------
<F1> Ratios for the six-month periods are annualized.
<F2> Nonperforming loans consist of nonaccrual loans and loans with
restructured terms.
28
<PAGE> 34
<F3> Nonperforming assets consist of nonperforming loans and foreclosed
assets.
<F4> For purposes of calculating the ratio of earnings to combined fixed
charges and preferred stock dividends, earnings consist of income before
taxes plus interest expense and rent expense. Fixed charges consist of
interest expense and rent expense.
<F5> The 1997 and 1996 information includes the financial position and
results of operation of Sunrise Bank of California for the period
subsequent to its date of acquisition on November 1, 1996.
</TABLE>
29
<PAGE> 35
THE MERGER
The following information concerning the Merger, insofar as it relates to
matters contained in the Reorganization Agreement, is qualified in its
entirety by reference to the Reorganization Agreement, a copy of which is
attached hereto as Appendix A-1 and incorporated herein by reference.
The Reorganization Agreement provides for the merger of Surety with and
into AcquisitionCo, the surviving bank of the Merger (the "Surviving Bank").
Upon consummation of the Merger, each outstanding share of Surety Common
Stock, other than (i) shares of Surety Common Stock held in the treasury of
Surety or owned by a subsidiary of Surety, if any, and (ii) shares in respect
of which dissenters' rights are exercised (see "THE MERGER--Dissenters'
Rights") will be converted into and represent the right to receive the
appropriate merger consideration.
Upon the consummation of the Merger, Surety's assets and liabilities will
be transferred by operation of law to AcquisitionCo, a direct subsidiary of
FBA. The Reorganization Agreement contemplates that, as soon as practicable
after the Effective Time, the outstanding stock of AcquisitionCo will be
transferred by FBA to another FBA subsidiary, Sundowner Corporation.
AcquisitionCo and Sunrise will then merge. When the FCB Merger is
consummated, the operations of First Commercial Bank will also be combined
into FBA's California banking operations.
Background and Reasons for the Transaction
FBA. The Board of Directors and management of FBA believe that in the
current environment of rapid restructuring and consolidation in the banking
industry, in order for a financial institution to prosper it must achieve a
size sufficient to enable it to take advantage of many of the efficiencies
available to its larger competitors. Failure to achieve this would place it
at a competitive disadvantage relative to those larger competitors with
respect to its costs of operation which, over time, will be an increasingly
difficult obstacle to overcome. Furthermore, the Board of Directors and
management believe that internal growth alone cannot be sufficient to advance
FBA to the size which is necessary within an acceptable timeframe.
Consequently, they view an acquisition strategy as the only method of
achieving the growth rate required.
It was for these reasons that in 1994 FBA negotiated a private placement
of $30 million in Class B Common Stock with First Banks, which offered FBA
not only the capital needed to embark upon an acquisition strategy, but also
access through First Banks to many of the economies available to larger
financial institutions, thereby assisting it in reducing its cost structure.
Following the private placement, FBA began approaching other financial
institutions for possible acquisitions. Since FBA did not have a history of
profitable operations, it became apparent that at that time these companies
were not receptive to transactions involving FBA Common and that therefore
cash acquisitions would be the only short-term alternative. In addition, the
prices of acquisitions in Texas, and particularly in FBA's primary market
areas of Dallas and Houston, had escalated sharply. Cash acquisitions at
these prices would have caused
30
<PAGE> 36
substantial diminution in the economic benefits which FBA envisioned would be
available in its acquisition program.
Recognizing this, FBA expanded the primary area in which it approached
acquisition candidates, first to other areas of Texas, and by late 1995 to
California, where acquisition pricing was considerably more favorable. This
led to FBA's identification of, and subsequent decision to acquire, Sunrise,
in Roseville, an acquisition completed in October 1996. Although Sunrise
Bank is a significant distance from FBA's Texas operations, it is in close
proximity to FCB and its subsidiary First Commercial Bank, Sacramento, a
majority interest in which it had been acquired by First Banks in late 1995.
Furthermore, through California's agency regulations for financial
institutions under common control, FCB is allowed to service both loan and
deposit customers for Sunrise, as Sunrise is allowed to service customers for
FCB, thereby allowing each to expand the branch network available to its
customers to the eight branches operated by the two organizations combined.
In early 1997, special committees comprised of the independent directors
of FCB and FBA began evaluating a possible transaction in which FCB would be
merged into FBA, and concurrent with this transaction First Commercial Bank
and Sunrise would be merged. On July 23, 1997, FCB and FBA jointly announced
an agreement in principle for this merger. At the same time, it was
announced that, contingent upon the consummation of that merger, FCB had
agreed to exchange its branch office in Campbell, California for the Walnut
Creek branch office of First Bank & Trust, a wholly owned subsidiary of First
Banks based in Irvine. These transactions would result in a northern
California bank owned by FBA with approximately $260 million in assets,
comprised of eight branch offices located generally in a line of
approximately 100 miles between San Francisco, on the southwest, and
Sacramento and Roseville on the northeast.
Situated along the same line, between 30 and 45 miles from San Francisco
are the cities of Vallejo and Fairfield, in which Surety has its branch
offices. These offices are also within approximately 15 miles of FCB's
Concord office and the Walnut Creek office of First Bank & Trust which is to
be exchanged for FCB's Campbell office. Therefore, when the Chairman and
Chief Executive Officer of Sunrise met with the President and Chief Executive
Officer of Surety in February 1997, there appeared to be an opportunity to
enhance the value of the FBA's northern California banking franchise and
expand FBA's presence in those market areas. As a result of this
conversation, it was decided that further discussions and analysis between
the two organizations should occur.
Following this initial discussion, FBA obtained detailed financial, asset
quality and other information from Surety and prepared analyses of the
effects which a combination of the companies would have on future
profitability. In this process, FBA projected cost savings and efficiencies
which could be achieved by the combined entity but might not be available to
Surety as an independent bank. These included reductions in personnel and
related benefits, as well as the more effective utilization of personnel over
a larger asset base, the consolidation of administrative, operational, data
processing and accounting functions with those currently established for
Sunrise and FCB, and the operational economies which become available due
simply to the close geographic proximity of several branch offices.
31
<PAGE> 37
After conducting exploratory discussions with Surety's management, the
management of FBA concluded that the acquisition of Surety by FBA at a
reasonable price would be in the best interests of FBA and its shareholders.
This information was presented to the FBA Board of Directors on April 18,
1997, at which time, the Board authorized FBA management to pursue the
proposed transaction. FBA management then entered into negotiations with
Surety which led to the drafting of a Definitive Agreement. This Definitive
Agreement was presented to the FBA Board of Directors on July 18, 1997 and
approved.
In reaching its decision that the acquisition of Surety is in the best
interests of FBA and its shareholders, FBA's Board of Directors considered
several factors, including the following:
(i) the potential effect of incorporating Surety's financial condition,
results of operation and future prospects for growth into the FBA
organization;
(ii) the acquisition as a means for FBA to enter two growing markets
which are economically attractive as viable separate commercial
centers of activity as well as extensions of the San Francisco
metropolitan area;
(iii) benefits from the combination of the companies and the possible
economies which may be achieved in the consolidation process,
potentially including additional revenues and expense reductions
sufficient to enhance the overall shareholder value and earnings
per share for FBA shareholders, consistent with the objectives of
the acquisition strategy discussed above; and
(iv) the relationship of the amount and type of consideration to be paid
to Surety Shareholders in the transaction relative to other
similar transactions and to the economic effect on FBA's
shareholders.
The Board of Directors did not assign specific weights to any of the
above factors, and individual directors may have considered other factors in
analyzing the proposed transaction.
Surety. During the last several years, the Board of Directors and
management of Surety have observed the rapid changes and consolidation
occurring within the financial services industry with some ambivalence.
Although such trends can frequently create opportunities, they may also lead
to large, dominate competitors operating with the benefits of marketing
penetration and operating efficiencies generally not available to smaller
entities such as Surety. As the disparity increases between the larger
regional and national financial services providers and the smaller financial
institutions such as Surety, the ability of Surety to present to its
customers a complete array of services at competitive and cost-effective
prices, attract and retain talented officers and employees, and still provide
its shareholders with a reasonable return on their investment may diminish.
Consequently, the Board of Directors and management of Surety have
periodically considered various issues related to the competitive and
regulatory environments for financial institutions, the costs and
difficulties of raising capital and the expansion of operations under such
circumstances.
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It was in recognition of these factors that the Board of Directors
decided to convert Surety from a federal savings bank charter to a California
state chartered commercial bank in 1994. This conversion enabled Surety to
engage in a broader range of financial services, thereby allowing Surety to
better serve its customers and the Solano County community. At the same
time, conversion to a bank charter could enhance Surety's ability to
participate in the consolidation process by becoming an acquirer of other
financial institutions, merging with other similar institutions or being
acquired by larger institutions. However, the Board also recognized that
while this conversion of the legal form of doing business changed the laws
and regulations to which it was subject, the transition in the distribution
of the customer base, the composition of loans and deposits, the operations
and the perception of Surety in its markets would be a more difficult and
time-consuming process.
After the charter conversion, Surety focused on the transition of its
business to that of a commercial bank and on building its franchise in Solano
County. In 1996, an unsolicited expression of interest in acquiring Surety
was received from a northern California financial institution. Because a
properly structured transaction would have contributed to increased
shareholder value, the Board of Directors immediately began serious
consideration of this interest. The potential transaction involved an
exchange of the prospective acquirer's stock for that of Surety. However,
the liquidity and trading market of the acquirer's stock was limited, and it
was ultimately decided that a transaction which was acceptable to both
parties could not be negotiated. Discussions were mutually and amicably
terminated with no offer ever being presented for consideration by the Surety
Board of Directors.
Management and the Board of Directors then renewed their discussions
regarding Surety's business and the possible strategic alternatives available
to increase shareholder value, including continued independence and possible
combination with another banking institution, in light of the current banking
environment and the trend toward consolidation in the banking industry. The
Board focused on the reasons for the consolidation and the importance of
achieving certain institutional size in order to realize appropriate levels
of long-term profitability and quality of service and product delivery to
customers. In late 1996 and early 1997, various members of the Board of
Directors also engaged in informal discussions with other California
financial institutions seeking to determine the interest of potential
acquirers in the event Surety were to decide to seek a merger partner or
acquirer. These discussions included very preliminary and informal
discussions in early 1997 with a representative of FBA.
To assist it in evaluating the interest of potential acquirers, the
Surety Board of Directors determined that it should engage a financial
advisor. A committee of the Board composed of Albert M. Lavezzo, John A.
DiMichele and Fred K. Sibley (the "Special Committee") interviewed at least
three qualified financial advisors, from which they selected Baxter Fentriss.
Baxter Fentriss was selected, in part, because it had recently successfully
represented a selling northern California commercial bank and because it gave
Surety a national exposure to potential acquirers. On or about April, 1997,
Surety entered into an agreement appointing Baxter Fentriss as its financial
advisor with respect to mergers and acquisitions. This agreement provided
that Baxter Fentriss would (i) advise Surety generally concerning mergers,
acquisitions and restructuring; (ii) evaluate the financial and non-financial
terms of any offer and seek to improve such terms; (iii) advise and assist
Surety in acquisition negotiations relating to price, structure,
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terms and conditions with any potential acquirer; (iv) explore the interest
level of select merger partners; (v) provide an opinion to the Board of
Directors regarding the fairness of any transaction from a financial viewpoint
to the shareholders of Surety; (vi) communicate with any independent public
accountants, consultants, and tax and legal counsel on behalf of Surety; and
(vii) take such incidental or related actions on behalf of Surety as may be
appropriate.
Thereafter, Baxter Fentriss explored the market for potential acquirers
of Surety, but no direct discussions with other acquirers resulted from this
exploration. However, FBA continued to show interest and detailed
discussions and a mutual exchange of financial data occurred between Surety
and FBA in April 1997.
At the invitation of Surety's Board of Directors, FBA conducted its due
diligence review which was completed in April 1997. Following this, FBA
prepared and submitted to the Special Committee a proposal for a possible
transaction. The proposal contained three alternative transaction
structures: (i) an all cash transaction in which all of the outstanding
Surety Common Stock and Surety Preferred Stock would be converted into the
right to receive $33.00 and $28,07, respectively, in cash; (ii) an all-stock
transaction in which all of the outstanding Surety Common Stock and Surety
Preferred Stock would be converted into the right to receive 2.8515 shares
and 2.4258 shares of FBA Common, respectively; or (iii) a transaction in
which 51% of the outstanding Surety stock would be converted into the right
to receive 2.8515 shares of FBA Common per share of Surety Common Stock and
2.4258 shares of FBA Common per share of Surety Preferred Stock, with the
remaining 49% to receive $33.00 per share of Surety Common Stock or $28.07
cash per share of Surety Preferred Stock. In offering a higher price for the
stock component of the consideration than the cash component, FBA sought to
encourage the acceptance of its stock in the acquisition, and to offset any
concerns that Surety's Board might have about the liquidity of the market for
FBA Common. The requirement that at least 51% of Surety Stock be converted
into FBA Common, if that alternative was accepted, was viewed by FBA as
necessary for such a transaction to qualify as a tax-free reorganization.
FBA also disclosed to the Special Committee that it was exploring the
potential acquisition of FCB, since the existence of that transaction could
affect Surety's evaluation of FBA's alternative proposals.
The Special Committee presented this proposal to the Board of Directors
at its meeting on April 16, 1997, at which time it was decided that the
Special Committee, with the assistance of Baxter Fentriss, should conduct
further analysis and review of both FBA and its affiliate, FCB. Consequently,
the Special Committee collected additional data provided by FBA and FCB
including detailed asset quality reports, financial statements, projections
and analyses, and operational information. The Special Committee also
visited certain branch locations and conducted a review of certain loan
credit files and loan documentation.
Finally, on May 23, 1997, the Special Committee, with Mr. James Baxter of
Baxter Fentriss, met with Mr. James Dierberg, Chairman of the Board,
President and Chief Executive Officer of FBA, and Messrs, Donald Williams and
Allen Blake, directors of FBA, to discuss the strategies and prospects of
FBA, the structure of a combined FBA, FCB and Surety organization, and how
that might affect the market valuation of FBA Common. During the course of
that meeting, the Special Committee also expressed its disappointment with
the price of the original proposed transaction. After a lengthy discussion,
the representatives of FBA and the Special
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Committee agreed that the consideration in the proposed transaction be
increased to $36.12 per share of Surety Common Stock and $30.73 per share of
Surety Preferred Stock in cash, or $38.12 per common share and $32.43 per
preferred share in market value of FBA Common. It was further agreed that a
collar would be provided pursuant to which the change in the exchange rate of
Surety Stock into FBA Common would be limited to not more than 15% from that
calculated using the market value of FBA Common on the day preceding the
execution of a definitive agreement.
On June 25, 1997, the Special Committee presented the revised proposed
terms to the Board of Directors, at which representatives of Baxter Fentriss
were present. Representatives of Baxter Fentriss discussed with the Board
the various terms contained in the proposal, including the opportunity for
Surety Shareholders to elect either cash or FBA Common in the transaction,
the liquidity of FBA Common, its listing on the NYSE and the fairness of the
transaction price. After discussion, the directors authorized the Special
Committee to respond to FBA to express Surety's interest in proceeding with
discussions regarding a possible acquisition of Surety by FBA.
A special meeting of the Surety Board of Directors was held on July 22,
1997, at which representatives of Baxter Fentriss were present by telephone.
At this meeting, copies of the proposed Agreement and Plan of Reorganization
between Surety and FBA were distributed to the directors. Baxter Fentriss
presented an analysis which included fairness evaluation data concerning the
terms of the proposed transaction and the collar provisions. They
distributed various financial material relating to the proposed transaction
and summarized their analysis of comparable transactions peer group
performance data, and valuation analysis reports. Baxter Fentriss confirmed
to the directors their opinion that the proposed transaction was fair from a
financial point of view to the Surety Shareholders. The proposed agreement
was discussed in detail with the directors. The directors agreed that the
transaction contemplated by the proposed agreement would be in the best
interests of Surety Shareholders and, after further discussion, Surety's
Board approved the proposed agreement and authorized and directed Surety's
President to execute the agreement in substantially the form presented to the
Board of Directors.
Surety's Reasons for the Merger; Recommendation of the Board of Directors
Prior to authorizing Baxter Fentriss to initiate negotiations with
prospective merger candidates, the merits of Surety remaining a stand-alone
entity were evaluated by the Board of Directors. To assess those merits, the
Board reviewed Surety's 1997 Business Plan projection and updates, its actual
1996 operating results and its prospective earnings forecasts for 1997-1999.
That review by the Board led to the conclusion that Surety's earnings
performance, while indeed improving during the three-year period forecast,
would not, when compared to other opportunities, be at a level sufficient to
support a shareholder value comparable to that which could be obtained in the
marketplace through a sale of Surety.
After review and evaluation of these and other factors, it was the Board
of Directors' opinion that in the next several years there was substantial
doubt that Surety could produce shareholder value in excess of that
represented by the merger consideration offered by FBA, and that the Merger
Consideration was fair, from a financial point of view, to Surety
Shareholders.
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Accordingly, the Board of Directors believed and continues to believe that the
Merger is in the best interests of Surety Shareholders and has approved the
Reorganization Agreement with FBA and the transactions contemplated thereby.
THEREFORE, THE BOARD OF DIRECTORS OF SURETY RECOMMENDS THAT SURETY COMMON
SHAREHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE REORGANIZATION AGREEMENT.
In arriving at its decision to sell Surety and approve and recommend the
Reorganization Agreement, Surety's Board of Directors considered a number of
factors, including, but not limited to, the following:
(i) the general economic and competitive conditions of the market in
which Surety operates;
(ii) the volatility in levels of interest rates and the impact of such
changes on Surety's earnings performance and other prospects;
(iii) the financial resources of FBA and its subsidiaries and the
likelihood of receiving the requisite regulatory approvals in a
timely manner;
(iv) all of the terms of the Reorganization Agreement;
(v) all of the terms of the agreement by which FBA was granted the
Stock Option (the "Stock Option Agreement"), including the
exercise price, the number of shares subject to the option and
the circumstances under which the option can be exercised as
well as the effect of granting such option on an offer by a
third party to acquire Surety if any third party were
interested in making such an offer;
(vi) Surety Shareholders would be given a choice to elect to receive
FBA Common or cash;
(vii) Surety Shareholders would be receiving an opinion of legal counsel
that those Surety Shareholders receiving FBA Common would
receive the benefit of a tax-free transaction;
(viii) the liquidity and trading market for FBA Common, and that the FBA
Common to be received by Surety Shareholders is proposed for
listing on the NYSE;
(ix) the opinion of Baxter Fentriss, Surety's financial advisor, that
as of July 28, 1997, and as of October 17, 1997, the merger
consideration was fair, from a financial point of view, to the
holders of Surety Common Stock and Surety Preferred Stock,
considering current market values, book value, earnings per
share, and the prices and premiums paid in certain other
similar transactions, as well as the results from current and
previous marketing efforts. See "-- Opinion of Surety's
Financial Advisor;"
(x) the opinion of the Board of Directors that it was not likely that a
better deal could be obtained from another acquirer in the short
term, and that there could be no assurance that FBA would not
withdraw its proposal if Surety were to continue soliciting other
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potential acquirers, or that any other offers would be, in
fact, any better than FBA's offer;
(xi) the need of FBA for most of Surety's employees, and the minimal
impact of the Merger on Surety's employees;
(xii) the interests of executive officers and directors of Surety,
which are described in another section of this Proxy Statement
under "--INTERESTS OF CERTAIN PERSONS IN THE MERGER;" and
(xiii) the facts and circumstances set forth above entitled "Background
and Reasons for the Transaction."
In reaching its determination to approve and recommend the Merger,
Surety's Board of Directors did not assign any relative or specific weights
to the foregoing factors, and the individual directors may have given
different weights to different factors.
Opinion of Surety's Financial Advisor
Baxter Fentriss has delivered its written opinion to the Board of
Directors of Surety that, as of July 28, 1997, updated as of October 17,
1997, the consideration to be received in the Merger by the holders of Surety
Common Stock and Surety Preferred Stock is fair, from a financial point of
view, to such holders.
THE FULL TEXT OF THE FAIRNESS OPINION OF BAXTER FENTRISS, WHICH SETS
FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON THE REVIEW
UNDERTAKEN, IS ATTACHED HERETO AS APPENDIX "B." SURETY SHAREHOLDERS ARE
URGED TO READ THIS OPINION IN ITS ENTIRETY. THE FAIRNESS OPINION IS DIRECTED
ONLY TO THE CONSIDERATION TO BE RECEIVED IN THE MERGER BY THE HOLDERS OF
SURETY COMMON STOCK AND SURETY PREFERRED STOCK AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT
THE SPECIAL MEETING. THE SUMMARY OF THE FAIRNESS OPINION SET FORTH IN THIS
PROXY STATEMENT-PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
FULL TEXT OF SUCH OPINION.
In connection with its opinion, Baxter Fentriss discussed with the
managements of Surety and FBA their respective businesses and outlooks. No
limitations were imposed by Surety's Board of Directors upon Baxter Fentriss
with respect to the investigation made or procedures followed by it in
rendering its opinion. Baxter Fentriss' opinion is directed to Surety's
Board of Directors only, and is directed only to the fairness, from a
financial point of view, of the consideration to be received. It does not
address Surety's underlying business decision to effect the Merger, nor does
it constitute a recommendation to any Surety Shareholder as to how such
shareholder should vote with respect to the Merger or any other matter.
Baxter Fentriss' opinion was one of many factors taken into consideration
by Surety's Board of Directors in making its determination to approve the
Reorganization Agreement, and
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the receipt of an update of Baxter Fentriss' opinion as of the mailing date of
this Proxy Statement is a condition precedent to Surety's obligation to
consummate the Merger. The opinion of Baxter Fentriss does not address the
relative merits of the Merger as compared to any alternative business
strategies that might exist for Surety or the effect of any other business
combination in which Surety might engage.
Baxter Fentriss, as part of its investment banking business, is
continually engaged in the valuation of financial institutions and their
securities in connection with mergers and acquisitions and valuations for
estate, corporate and other purposes. Baxter Fentriss is a nationally
recognized advisor to firms in the financial services industry on mergers and
acquisitions. Among other reasons, Surety selected Baxter Fentriss as its
financial advisor because Baxter Fentriss is an investment banking firm
focusing on bank and thrift transactions, and because of the firm's extensive
experience and expertise in transactions similar to the proposed transaction.
Baxter Fentriss is not affiliated with FBA or Surety.
In connection with rendering its opinion to Surety's Board of Directors,
Baxter Fentriss performed a variety of financial analyses. In conducting its
analyses and arriving at its opinion as expressed herein, Baxter Fentriss
considered such financial and other factors as it deemed appropriate under
the circumstances including, among others, the following: (i) the historical
and current financial condition and results of operations of FBA and Surety
including interest income, interest expense, interest sensitivity,
noninterest income, noninterest expense, earnings, book value, return on
assets and equity, capitalization, the amount and type of non-performing
assets, the impact of holding certain non-earning real estate assets, the
reserve for loan losses and possible tax consequences resulting from the
transaction; (ii) the business prospects of FBA and Surety; (iii) the
economies of FBA's and Surety's respective market areas; (iv) the historical
and current market for FBA Common and Surety Common Stock; (v) the pro forma
effect of the FCB Merger; and (vi) the nature and terms of certain other
merger transactions that it believed to be relevant. Baxter Fentriss also
considered its assessment of general economic, market, financial and
regulatory conditions and trends, as well as its knowledge of the financial
institutions industry, its experience in connection with similar
transactions, its knowledge of securities valuation generally, and its
knowledge of merger transactions in California.
In connection with rendering its opinion, Baxter Fentriss reviewed (i)
the Reorganization Agreement and the Stock Option Agreement; (ii) drafts of
this Proxy Statement - Prospectus; (iii) the Annual Reports to shareholders,
including the audited financial statements of Surety for the years ended
December 31, 1994, 1995, and 1996, and unaudited financial data for the six
months ended June 30, 1997; (iv) the Annual Reports to shareholders,
including the audited financial statements of FBA for the years ended
December 31, 1994, 1995 and 1996, and unaudited financial data for the six
months ended June 30, 1997; (v) FBA's and FCB's Forms 10-K for the year ended
December 31, 1996; (vi) FBA and FCB pro forma, combined, unaudited, condensed
balance sheets as of June 30, 1997, and pro forma, combined, unaudited
statements of income for the years ended December 31, 1995 and 1996 and six
months ended June 30, 1997; (vii) pro forma, combined, unaudited, condensed
balance sheets as of June 30, 1997, as well as pro forma, combined, unaudited
statements of income for the year ended December 31, 1995 and 1996 and the
six months ended June 30, 1997; and (viii) certain additional financial and
operating information with respect to the business, operations and prospects
of FBA and Surety as it
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deemed appropriate. Baxter Fentriss also (a) held discussions with members of
the senior managements of FBA and Surety regarding the historical and current
business operations, financial condition and future prospects of their
respective companies; (b) reviewed the historical market prices and trading
activity for the common stock of Surety and FBA, (c) compared the results of
operations of Surety and FBA with those of certain banking companies that it
deemed to be relevant; (d) analyzed the pro-forma financial impact of the
Merger on FBA; (e) analyzed the pro forma financial impact of the Merger on
Surety; and (f) conducted such other studies, analyses, inquiries and
examinations as Baxter Fentriss deemed appropriate.
The preparation of a fairness opinion involves various determinations as
to the most appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to partial analysis or summary
description. Moreover, the evaluation of fairness, from a financial point of
view, of the merger consideration to holders of Surety Common Stock and
Surety Preferred Stock was to some extent a subjective one based on the
experience and judgment of Baxter Fentriss and not merely the result of
mathematical analysis of financial data. Accordingly, notwithstanding the
separate factors summarized below, Baxter Fentriss believes that its analyses
must be considered as a whole and that selecting portions of its analyses and
of the factors considered by it, without considering all analyses and
factors, could create an incomplete view of the evaluation process underlying
its opinion. The ranges of valuations resulting from any particular analysis
described below should not be taken to be Baxter Fentriss' view of the actual
value of Surety or FBA.
In performing its analyses, Baxter Fentriss made numerous assumptions
with respect to industry performance, business and economic conditions and
other matters, many of which are beyond the control of Surety or FBA. The
analyses performed by Baxter Fentriss are not necessarily indicative of
actual values or future results, which may be significantly more or less
favorable than suggested by such analyses. Additionally, analyses relating
to the values of businesses do not purport to be appraisals or to reflect the
prices at which businesses actually may be sold. In rendering its opinion,
Baxter Fentriss assumed that, in the course of obtaining the necessary
regulatory approvals for the Merger, no conditions will be imposed that will
have a material adverse effect on the contemplated benefits of the Merger, on
a pro-forma basis, to Surety or FBA.
The following is a summary of selected analyses performed by Baxter
Fentriss in connection with its opinion:
1. Stock Price History. Baxter Fentriss studied the history of the
trading prices and volume for Surety Common Stock and FBA Common and compared
that to publicly traded banks in California and Texas and to the price
offered by FBA.
2. Comparative Analysis. Baxter Fentriss compared the price to earnings
multiple, price to book multiple, premium to deposits ratio, and price to
assets ratio of the FBA offer with other comparable merger transactions in
California. The comparative multiples included both bank and thrift sales
during the last three years.
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3. Pro-Forma Impact. Baxter Fentriss considered the pro-forma impact of
the transaction and concluded the transaction should have a positive
long-term impact on FBA and Surety Shareholders who receive shares of FBA
Common.
4. Discounted Cash Flow Analysis. Baxter Fentriss performed a
discounted cash flow analysis to determine hypothetical present values for a
share of Surety Common Stock as a five and ten year investment. Under this
analysis, Baxter Fentriss considered various scenarios for the performance of
Surety Common Stock using (i) a range from 6% to 12% in the growth of
Surety's earnings and dividends and (ii) a range from 10 times to 20 times
earnings as the terminal value for Surety Common Stock. A range of discount
rates from 12% to 15% were applied to these alternative growth and terminal
value scenarios. These ranges of discount rates, growth alternatives, and
terminal values were chosen based upon what Baxter Fentriss, in its judgment,
considered to be appropriate taking into account, among other things,
Surety's past and current performance, the general level of inflation, rates
of return for fixed income and equity securities in the marketplace generally
and for companies with similar risk profiles. In most of the scenarios
considered, the present value of a share of Surety Common Stock was
calculated at less than that of the FBA offer. Thus, Baxter Fentriss'
discounted cash flow analysis indicated that Surety Shareholders would be in
a better financial position by receiving FBA Common and Cash Consideration
offered in the Merger than continuing to hold Surety Common Stock and/or
Surety Preferred Stock.
Using publicly available information on FBA and applying the capital
guidelines of banking regulators, Baxter Fentriss' analysis indicated that
the Merger would not seriously dilute the capital and earnings capacity of
FBA and would therefore likely not be opposed by the banking regulatory
agencies from a capital perspective. Further, Baxter Fentriss considered the
likely market overlap and the Federal Reserve Board guidelines with regard to
market concentration and did not believe there to be an issue with regard to
possible antitrust concerns.
Baxter Fentriss has relied, without any independent verification, upon
the accuracy and completeness of all financial and other information
reviewed. Baxter Fentriss has assumed that all estimates, including those as
to possible economies of scale, were reasonably prepared by management and
reflect their best current judgments. Baxter Fentriss did not make an
independent appraisal of the assets or liabilities of either Surety or FBA,
and has not been furnished such an appraisal.
No company or transaction used as a comparison in the above analysis is
identical to Surety, FBA, or the Merger. Accordingly, an analysis of the
results of the foregoing necessarily involves complex considerations and
judgments concerning differences in financial and operating characteristics
of the companies and other factors that could affect the publicly trading
value of the companies used for comparison in the above analysis.
Baxter Fentriss has been or will be paid (i) an advisory fee of $5,000;
(ii) a merger fee, based on successful completion of the Merger, equal to
1.50% of aggregate consideration received by Surety or the Surety
Shareholders; and (iii) reasonable out-of-pocket expenses for its services.
Surety has agreed to indemnify Baxter Fentriss against certain liabilities,
including certain liabilities under federal securities laws.
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Terms of the Merger
Merger Consideration
Surety Common Stock. The Reorganization Agreement provides that, at the
Effective Time and subject to the election and allocation procedures
described below, each share of Surety Common Stock outstanding at the
Effective Time (other than shares owned by Surety or its subsidiaries and
those with respect to which appraisal rights are perfected), will be
converted into either: (i) a number of shares of FBA Common determined by the
application of a formula described below (such number of shares of FBA Common
issuable in respect of each share of Surety Common Stock is referred to in
this Proxy Statement-Prospectus as the "Stock Consideration"); or (ii) cash
equal to $36.12 per share, without interest (such cash amount being referred
as the "Cash Consideration"). The actual Stock Consideration will be
obtained by dividing $38.12 by the FBA Exchange Price.
The application of this formula is limited by the Exchange Rate Collar,
which establishes both a minimum and a maximum value on the FBA Exchange
Price and a corresponding maximum and minimum number on the Stock
Consideration. The "Base Price" of FBA Common (the closing price on July 25,
the last trading day preceding the date of the Reorganization Agreement) was
$12.8125. If the FBA Exchange Price exceeds $14.73 (the "Ceiling") or is
less than $10.89 (the "Floor"), the Stock Consideration will be set at the
number for the Ceiling or the Floor, respectively, which would be produced by
the formula. If the actual Stock Consideration is set by virtue of the
Exchange Rate Collar at either the maximum or minimum (that is, if the
operation of the formula without consideration of the Exchange Rate Collar
would result in a higher or lower Stock Consideration), then the party
adversely affected by the operation of the Exchange Rate Collar will have the
right to terminate the Reorganization Agreement, unless the other party makes
an acceptable offer to revise the terms of the conversion of Surety Common
Stock into FBA Common. For example, if the FBA Exchange Price exceeds the
Ceiling and the resulting market value of the Stock Consideration is more
than that which would have resulted from the application of the formula for
determining the FBA Exchange Price, then FBA would have the right to
terminate the Reorganization Agreement unless Surety were to offer to revise
the manner in which the FBA Exchange Price is determined, and such offer were
accepted by FBA. Conversely, Surety would have the right to terminate the
Reorganization Agreement if the FBA Exchange Price is less than the Floor,
unless FBA were to make an acceptable offer to Surety. Neither party is
obligated to exercise these termination rights or to propose a revised method
of determining the FBA Exchange Price if the other party exercises the right
to terminate.
By way of example, the closing price for a share of FBA Common was $18.50
on October 6, 1997, a price higher than the Ceiling; if that were the FBA
Exchange Price, then the Stock Consideration would be 2.5879 shares ($14.73,
the Ceiling, times 2.5879 shares equals $38.12 per share). FBA has informed
Surety that it does not intend to exercise its right to terminate the
Reorganization Agreement or to seek to negotiate a different exchange ratio
even though, in light of recent prices of FBA Common, the Exchange Rate
Collar is likely to result in
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the issuance of more shares of FBA Common in the Merger than would be the case
if the Exchange Ratio were calculated without any limitation.
Under the Reorganization Agreement, the Stock Amount will equal the
number of shares required by the application of the Exchange Ratio to be
issued for 51% of the total number of shares of Surety Common Stock
outstanding at the Effective Time, unless FBA and Surety mutually agree to
increase that percentage to a level from 51% to 65%; for the purpose of
applying the applicable percentage, all shares of Surety Preferred Stock will
be treated as having been converted into the number of shares of Surety
Common Stock into which they are convertible by their terms. In the
Reorganization Agreement and in this Proxy Statement-Prospectus, the term
"Stock Conversion Number" refers to the number of shares of FBA Common to be
issued in exchange for 51% of the Total Surety Common.
Pursuant to the Reorganization Agreement, the aggregate cash payable by
FBA to Surety Common Shareholders will equal a fixed amount regardless of the
FBA Exchange Price (except for immaterial changes due to rounding) and will
vary only according to the Total Surety Common. For example, if the Total
Surety Common at the Effective Time is 200,495 shares, then the aggregate
cash payable by FBA to Surety Shareholders who are to receive cash will equal
approximately $3,548,521.
Because the aggregate number of shares of FBA Common and the aggregate
amount of cash to be exchanged in the Merger will be fixed under the election
and allocation procedures described herein, no assurance can be given that an
election by any given Surety Shareholder will be honored with respect to any
or all shares of Surety Stock held by such holder. Thus, holders may not
receive their requested form of consideration. See "-- Election Procedures"
and "-- Allocation."
The Reorganization Agreement provides that if FBA or Surety effects a
stock dividend, reclassification, recapitalization, stock split, reverse
stock split, exchange of shares or similar transaction after the date hereof
and before the Effective Time, the Stock Consideration, the Cash
Consideration and the Stock Amount will be appropriately adjusted.
Although the Stock Consideration will be based on the average of market
prices of FBA Common during the valuation period (i.e., the FBA Exchange
Price), the market price of FBA Common may fluctuate and, on the date of
receipt of shares of FBA Common by holders of Surety Common Stock, may be
more or less than the FBA Exchange Price. Surety Shareholders are urged to
obtain current market quotations for FBA Common in connection with voting
their shares and making elections during the election period to receive the
Stock Consideration or the Cash Consideration.
Each of the shares of Surety Stock held by Surety or any of its
subsidiaries will be cancelled and retired at the Effective Time, no
consideration will be issued in exchange therefor in the Merger, and such
shares will not be considered in the election and allocation process
described herein.
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No fractional shares of FBA Common will be issued to any Surety
Shareholder upon surrender of their certificates representing Surety Stock.
Each shareholder who would otherwise have been entitled to receive a fraction
of a share of FBA Common will receive, in lieu thereof, cash without interest
in an amount equal to such fraction of a share of FBA Common multiplied by
the closing price of one share of FBA Common at the close of business on the
trading day next preceding the Effective Time.
Surety Preferred Stock. At the Effective Time, each outstanding share of
Surety Preferred Stock (other than any shares owned by Surety or its
subsidiaries) will be deemed to be converted into 0.8507 shares of Surety
Common Stock (the number into which it is convertible in accordance with the
terms of the Surety Preferred Stock). The holders of shares of Surety
Preferred Stock will then receive the same consideration as they would
receive if the shares were actually converted, but without the necessity of
complying with the requirements for conversion as set forth in the terms of
the Surety Preferred Stock. Holders of Surety Preferred Stock should
therefore review the preceding discussion of the manner in which shares of
Surety Common Stock are to be converted and the sections of this Proxy
Statement-Prospectus discussing the manner of making elections and the
process to be followed by the Exchange Agent (expected to be Chase Mellon
Shareholder Services) in the allocation of consideration, in order to
determine the effect of such procedures on the consideration which they will
receive as a result of the Merger.
Election Procedures
Shortly after the Special Meeting (assuming that the Merger is approved
at the Special Meeting), the Exchange Agent will send to each Surety
Shareholder an Election Statement and other appropriate transmittal materials
permitting such holder (i) to elect to receive Stock Consideration in the
Merger with respect to all of such Surety Shareholder's shares ("Stock
Election Shares"); (ii) to elect to receive Cash Consideration in the Merger
with respect to all of such Surety Shareholder's shares ("Cash Election
Shares"); (iii) to elect a mixture of Cash Consideration and Stock
Consideration; or (iv) to indicate that such holder makes no election ("No
Election Shares"). Shares of Surety Common Stock and Surety Preferred Stock
which are not covered by an effective, properly completed Election Statement
will be deemed to be No Election Shares. Each holder of fewer than 200
shares of Surety Common Stock as of July 27, 1997 (after giving effect to the
deemed conversion of any shares of Surety Preferred Stock owned by such
holder) who elects to receive Stock Consideration or Cash Consideration in
the Merger will receive the form of consideration elected. The consideration
to be received by holders of 200 shares or more of Surety Common Stock is
subject to allocation depending primarily on the elections made by the other
Surety Shareholders.
Subject to possible adjustments as described herein, a fixed number of
shares of FBA Common will be issued in the Merger. Accordingly, there can be
no assurance that each Surety Shareholder will receive the form of
consideration that such holder elects with respect to any or all shares of
Surety Common Stock or Surety Preferred Stock held by such holder. If the
elections result in any oversubscription for either Stock Consideration or
Cash Consideration, the procedures for allocating FBA Common and cash,
described below under "--Allocation," will be followed by the Exchange Agent.
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To make an effective election, a Surety Shareholder must submit a
properly completed Election Statement which is actually delivered to the
Exchange Agent at or prior to the Election Deadline (as defined below) in
accordance with the instructions on the Election Statement. An Election
Statement will be properly completed only if accompanied by certificates
representing all shares covered thereby, and all documentation required by
the Exchange Agent. The Election Deadline is 5:00 p.m., Eastern time, on the
fifteenth calendar day following, but not including, the date of mailing of
the Election Statement or such other date upon which FBA and Surety mutually
agree.
Any Election Statement may be revoked or changed by written notice from
the person submitting such Election Statement to the Exchange Agent delivered
at or prior to the Election Deadline. In the event of revocation, the
certificate or certificates representing shares covered by any revoked
Election Statement will be returned to the person who submitted the Election
Statement upon written request to that effect from the holder. The Exchange
Agent will have reasonable discretion to determine when any election,
modification or revocation is received and whether any such election,
modification or revocation has been properly made, and such determination
will be final.
Allocation
Within five days after the Election Deadline, the Exchange Agent will be
required to make an allocation among holders of Surety Common Stock and
Surety Preferred Stock to receive Stock Consideration or Cash Consideration,
or a mixture of both forms of consideration, in the following manner:
(A) If the number of Stock Election Shares is less than 51% of the Total
Surety Common, then:
(i) all Stock Election Shares will be converted into the right to receive
FBA Common;
(ii) a sufficient number of No Election Shares will be converted into the
right to receive FBA Common so that the total number of shares
of FBA Common to be issued for such shares, added to the number
to be issued for Stock Election Shares, will equal the Stock
Conversion Number. If such total is less than the Stock
Conversion Number, then all of the No Election Shares will be
so converted, and the Exchange Agent will designate a
sufficient number of Cash Election Shares to be converted into
FBA Common so that the total number of shares of FBA Common to
be issued equals the Stock Conversion Number. For the purposes
of determining which Cash Election Shares are so designated
(such shares being referred to as the "Stock Designated
Shares"), the Exchange Agent will observe the following
requirements: (a) all outstanding shares of Surety Preferred
Stock will be treated as having been converted into the
appropriate number of shares of Surety Common Stock; (b) each
Surety Shareholder who was a record owner of fewer than 200
shares of Surety Common Stock on July 27, 1997 (after taking
into account all accounts for which such Shareholder was
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record owner and all Surety Preferred Stock of which such
Shareholder was record owner) shall receive exclusively the form of
consideration elected by such shareholder; (c) no shares of
Surety Common Stock owned by dissenting shareholders who have
submitted a demand for appraisal shall be Stock Designated
Shares; and (d) the appropriate number of Cash Election Shares
owned by all other Surety Shareholders will be selected as
Stock Designated Shares, in the same proportion as each Surety
Shareholder's Cash Election Shares bears to the total number of
Cash Election Shares eligible to be designated as Stock
Designated Shares; and
(iii) all remaining Cash Election Shares except those owned by dissenting
shareholders will be converted into the right to receive cash.
(B) If the number of Stock Election Shares is greater than 51% of the
Total Surety Common, then the following allocation process will be
used, unless FBA decides, with Surety's written consent, to instruct
the Exchange Agent that a higher percentage, up to 65%, may be
converted into FBA Common, as discussed further below:
(i) all Cash Election Shares and No Election Shares will be converted
into the right to receive cash;
(ii) the Exchange Agent will designate a sufficient number of Stock
Election Shares to be converted into Cash Consideration (the
"Cash Designated Shares") so that the total number of shares of
FBA Common to be issued equals the Stock Conversion Number,
subject to the same requirements as stated in paragraph (A)(ii)
above and designating an appropriate percentage of Cash
Designated Shares proportionately from the Stock Election Shares
owned by all Surety Shareholders except those excluded by virtue
of such requirements; and
(iii) all remaining Stock Election Shares will be converted into the
right to receive FBA Common.
The Reorganization Agreement provides that if the number of Stock
Election Shares exceeds 51% of the Total Surety Common, then FBA, with
Surety's written consent, may instruct the Exchange Agent to allow any number
of additional Stock Election Shares, up to but not exceeding 65% of the Total
Surety Common, to be converted into the right to receive shares of FBA
Common. If that occurs, all of the remaining shares (i.e., the Cash Election
Shares, the No Election Shares and the Stock Election Shares in excess of the
percentage agreed to) will be converted into the right to receive Cash
Consideration, subject to the same allocation procedures as described above
to determine the manner which a portion of the Stock Election Shares are
converted to Cash Consideration. It should be noted that neither FBA nor
Surety will be under any obligation to agree to increase the number of Stock
Election Shares to be converted into FBA Common to any level higher than the
Stock Conversion Number.
The selection process to be used by the Exchange Agent will consist of
such processes as will be mutually determined by FBA and Surety.
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Because the tax consequences of receiving cash or FBA Common will differ,
Surety Shareholders are urged to read carefully the information set forth
under the caption "-- Certain Federal Income Tax Consequences of the Merger."
Because the Stock Consideration can fluctuate in market value from the FBA
Exchange Price, the economic value per share received by Surety Shareholders
who receive Stock Consideration may, as of the date of receipt, be more or
less than the amount of Cash Consideration per share received by Surety
Shareholders who receive Cash Consideration.
The failure to submit timely a properly completed Election Statement will
result in a Surety Shareholder having no choice as to the receipt of FBA
Common or cash in the Merger. See "-- Election Procedures."
Certain Federal Income Tax Consequences of the Merger
The following is a summary description of the material federal income tax
consequences of the Merger. This summary is not a complete description of
all of the consequences of the Merger and, in particular, may not address
federal income tax considerations that may affect the treatment of a
shareholder that, at the Effective Time, already owns some FBA stock
(directly or indirectly through the stock ownership attribution rules of
Section 318 of the Code), is a foreign corporation, a tax exempt entity, or
an individual who acquired Surety Stock pursuant to an employee stock option,
or exercises some form of control over Surety. Each Surety Shareholder's
individual circumstances may affect the tax consequences of the Merger to
such shareholder. In addition, no information is provided herein with
respect to the tax consequences of the Merger under applicable foreign, state
or local laws. Consequently, each Surety Shareholder is advised to consult a
tax advisor as to the specific tax consequences of the Merger.
General. It is intended that the Merger qualify as a reorganization
under Section 368 of the Internal Revenue Code of 1986, as amended (the
"Code") and that the exchange by Surety Shareholders of their Surety Stock
for FBA Common or cash have the tax treatment set forth below.
Neither FBA nor Surety has requested or will request an advance ruling
from the Internal Revenue Service ("IRS") as to the tax consequences of the
Merger. FBA and Surety have received an opinion from Lewis, Rice & Fingersh,
St. Louis, Missouri, FBA's special tax counsel, that, assuming that the
Merger is completed as described herein and in the Reorganization Agreement
and based on certain customary representations referred to therein, the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368 of the Code and that no gain or loss will
be recognized by FBA, AcquisitionCo or Surety as a result of the Merger.
Based on such opinion, the material results will be as follows.
No gain or loss will be recognized by FBA, AcquisitionCo or Surety as a
result of the Merger.
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Receipt of FBA Common Only. A Surety Shareholder who receives solely FBA
Common (except for cash in lieu of fractional shares, discussed below) in
exchange for all shares of Surety Common Stock and Surety Preferred Stock
actually owned by such holder will not recognize any gain or loss upon such
exchange for federal income tax purposes. The tax basis of the FBA Common
received in such exchange will be equal (except for the basis attributable to
any fractional shares of FBA Common, discussed below) to the basis of the
Surety Common Stock and Surety Preferred Stock surrendered in exchange
therefor. Provided that the Surety Common Stock and Surety Preferred Stock
so surrendered was held as a capital asset at the time of the exchange, the
holding period of the FBA Common received will include the holding period of
shares of Surety Common Stock and Surety Preferred Stock surrendered.
Receipt of Cash Only. If a Surety Shareholder receives solely cash in
exchange for his Surety stock, such cash will be treated as received by him
as a distribution in redemption of the Surety stock. A Surety Shareholder
who receives solely Cash Consideration in exchange for all of his or her
shares of Surety Common Stock and Surety Preferred Stock and, as a result of
the Merger, holds no shares of FBA Common directly or indirectly through the
stock ownership attribution rules of Section 318 of the Code, should
recognize a gain or loss for federal income tax purposes equal to the
difference between the cash received and such holder's tax basis in the
Surety Common Stock and Surety Preferred Stock surrendered. Assuming such
Surety Shareholder, at the time of the exchange, held the Surety Common Stock
and Surety Preferred Stock as a capital asset, such gain or loss should be
capital gain or loss and, if so treated, will be long-term capital gain or
loss taxed at a maximum 20% rate if the holder's holding period at that time
is more than 18 months. If the Surety Common Stock and Surety Preferred
Stock are held more than 12 months but not more than 18 months, the capital
gain will be taxed at a maximum rate of 28%. Gain from the exchange of
Surety Common Stock and Surety Preferred Stock held for not more than 12
months will be taxed as ordinary income. The Code contains limitations on
the extent to which shareholders may deduct capital losses from ordinary
income.
Receipt of Part Cash, Part FBA Common. The Reorganization Agreement
provides that Surety Shareholders are entitled to elect to receive either FBA
Common, Cash Consideration, or a mixture, or to make no election; however, in
certain circumstances, a Surety Shareholder may receive both FBA Common and
Cash Consideration notwithstanding an election to receive solely one form of
consideration or the other. If a Surety Shareholder does receive in the
Merger both FBA Common and Cash Consideration, as discussed below, the
receipt of the Cash Consideration could be taxed as a dividend. A Surety
Shareholder's tax consequences will also depend on whether shares of Surety
stock were purchased at different times at different prices. While the
Surety Shareholder would not recognize gain or loss on the shares of Surety
stock exchanged for FBA Common and the basis would carry over, he or she
could recognize gain (but could not recognize loss), on the receipt of Cash
Consideration in exchange for other shares of Surety stock, but not in excess
of the amount of cash received. Such gain will be eligible for capital gains
treatment (assuming the shares are held as a capital asset by the
shareholder) unless such receipt of cash has the effect of a distribution of
a dividend as provided in Section 356 of the Code, in which case such gain
will be taxable as ordinary income. Any disallowed loss would be included in
the adjusted basis of the FBA Common. Such a Surety Shareholder is strongly
advised to consult his or her own tax advisor respecting the tax consequences
of the Merger.
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Possible Dividend Treatment. The constructive ownership rules of Section
318 of the Code are important in determining whether a Surety Shareholder who
receives a combination of FBA Common and cash in the Merger will receive
capital gain or ordinary dividend treatment of any gain recognized by that
shareholder. Those rules apply in certain specified circumstances to
attribute ownership of shares of a corporation from the shareholder actually
owning the shares, whether an individual, a trust, a partnership or a
corporation, to certain members of the individual's family or to certain
individuals, trusts, partnerships or corporations in which that shareholder
has an ownership or beneficial interest, or which have an ownership or
beneficial interest in that shareholder. A shareholder is also considered
under these rules to own any shares with respect to which that shareholder
holds exercisable options.
Except in the case of cash received in lieu of a fractional share,
discussed below, the determination of whether a cash payment received in the
Merger has the effect of the distribution of a dividend will be made by
comparing the proportionate interest of the shareholder after the Merger with
the proportionate interest the shareholder would have had if the shareholder
had received solely FBA Common. This comparison is made as though FBA had
issued in the Merger to such shareholder solely its FBA Common and, in a
hypothetical redemption, FBA had redeemed such portion of its FBA Common as
represented in value, at the time of the Merger, the amount of cash the
shareholder received. In making this comparison, the constructive ownership
rules of the Code apply. The amount of any such dividend, so determined, is
limited to that shareholder's ratable share of the accumulated earnings and
profits of Surety at the Effective Time.
Under IRS guidelines, a hypothetical redemption involving a minority FBA
shareholder whose relative stock interest in FBA is minimal, who exercises no
control over the affairs of FBA and who experiences a reduction in the
shareholder's proportionate stock interest will not receive dividend
treatment of the cash received in these circumstances, under the rules of
Section 302(b)(1) of the Code. Because the determination of whether a cash
payment will be treated as having the effect of the distribution of a
dividend generally will depend in part upon the facts and circumstances of
each holder of Surety Stock (for example, whether or not such shareholder
also owns any FBA stock), such shareholders are strongly advised to consult
their own tax advisors regarding the tax treatment of cash received in the
Merger.
Cash in Lieu of Fractional Shares. Surety Shareholders who hold Surety
Stock as a capital asset and who receive in the Merger, in exchange for such
stock, solely FBA Common and cash in lieu of a fractional share interest in
FBA Common will be treated as having received such fraction of a share of FBA
Common and then as having received cash in redemption by FBA of the
fractional share interest. Under IRS guidelines, since the cash is being
distributed in lieu of fractional shares solely for the purpose of saving FBA
the expense and inconvenience of issuing and transferring fractional shares,
and is not separately bargained-for consideration, the cash received will be
treated as having been received in part or full payment in exchange for the
fractional share of stock redeemed, and as capital gain or loss, not as a
dividend.
Exercise of Appraisal Rights. The transaction will be a taxable event
for holders of Surety Common Stock who perfect appraisal rights under
applicable law and receive solely cash
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in exchange for their shares. Such a shareholder will have the same tax
consequences as a Surety Shareholder who receives only Cash Consideration, as
discussed above.
Backup Withholding. Unless an exemption applies, the Exchange Agent will
be required to withhold, and will withhold, 31% of any cash payments to which
a shareholder or other payee is entitled pursuant to the Merger, unless the
shareholder or other payee provides his or her tax identification number
(Social Security Number or Employer Identification Number) and certifies that
such number is correct. Each Surety Shareholder and, if applicable, each
other payee is required to complete and sign the Substitute Form W-9 that
will be included as part of the transmittal letter to avoid backup
withholding (or W-8 if the shareholder is a nonresident alien or foreign
entity), unless an applicable exemption exists and is proved in a manner
satisfactory to FBA and the Exchange Agent.
The discussion set forth above is included for general information only.
It does not address the state, local or foreign tax aspects of the Merger.
The discussion is based on currently existing provisions of the Code,
existing and proposed Treasury regulations thereunder and current
administrative rulings and court decisions. All of the foregoing are subject
to change and any such change could affect the continuing validity of this
discussion. Since the federal income tax consequences of the Merger to
Surety Shareholders depend to a great extent on whether they receive FBA
Common or cash, it is important that each Surety Shareholder return the
election form so that it is received before the Election Deadline.
Resale of FBA Common
The shares of FBA Common into which shares of Surety Stock are converted
on the Effective Date will be freely transferable under the Securities Act
except for shares issued to any shareholder who may be deemed to be an
"affiliate" of Surety for purposes of Rule 145 under the Securities Act as of
the date of the Special Meeting. Affiliates may not sell their shares of FBA
Common acquired in connection with the Merger except pursuant to an effective
registration statement under the Securities Act covering such shares or in
compliance with Rule 145 under the Securities Act or another applicable
exemption from the registration requirements of the Securities Act. FBA has
agreed to register the stock of such affiliates for resale, and this Proxy
Statement-Prospectus also constitutes the prospectus for the resale of shares
held by such affiliates. Persons who may be deemed to be affiliates of
Surety generally include individuals or entities that control, are controlled
by or are under common control with Surety and include certain officers and
directors of Surety as well as principal shareholders of Surety. For
additional information regarding the potential resale of FBA Common by
affiliates of Surety, see "FBA COMMON REGISTERED FOR RESALE."
Regulatory Approvals
The Merger and the merger of Sunrise into AcquisitionCo (the "Subsequent
Bank Merger") are subject to, and conditioned upon, receipt of approvals from
the FDIC, the Commissioner and the Federal Reserve. Applications have been
submitted for each of such approvals.
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Under the Bank Merger Act (the "Merger Act"), an application to the FDIC
will be subject to a review which takes into consideration, among other
factors, the financial and managerial resources and future prospects of the
banks and the convenience and needs of the communities to be served. The
Merger Act prohibits the approval of a merger (i) if it would result in a
monopoly or be in furtherance of any combination or conspiracy to monopolize
or attempt to monopolize the business of banking in any part of the United
States or (ii) if its effect would be to lessen competition substantially in
any part of the country or tend to create a monopoly, or if it would in any
other manner be a restraint of trade, unless the FDIC finds that
anticompetitive effects of the Merger are clearly outweighed by the public
interest and probable effects of the transaction in meeting the convenience
and needs of the communities to be served. The FDIC has the authority to
disapprove an application if it concludes that the combined entity would have
an inadequate capital position or if the acquiring organization does not meet
the requirements of the Community Reinvestment Act, as amended. Under the
Merger Act, the Merger may not be consummated until the expiration of a
waiting period following FDIC approval, during which time the U. S.
Department of Justice has the right to challenge the Merger on antitrust
grounds. An application was filed with the FDIC pursuant to the Merger Act
on September 11, 1997.
An application for approval of the Merger and the Subsequent Bank Merger
must also be submitted to the Commissioner. The California Financial Code
provides that the Commissioner shall approve such an application unless he
finds that (i) the effect of the acquisition would be to substantially lessen
competition; (ii) the financial condition of the acquirer is such as might
jeopardize the financial stability of the acquired bank or prejudice the
interests of the depositors, creditors or shareholders of the acquired bank
or the acquirer; or (iii) the proposed acquisition is unfair, unjust or
inequitable to the acquired bank or the acquirer. The Commissioner may
impose such conditions as he deems reasonable, necessary or advisable in the
public interest. An application for approval of the Merger and the
Subsequent Bank Merger was filed with the Commissioner on September 11, 1997.
It is also necessary for FBA to obtain the approval or a waiver of
application by the Federal Reserve Board pursuant to the Bank Holding Company
Act, as amended (the "BHCA"). The standards for consideration of an
acquisition under the BHCA are substantially similar to those discussed above
under the Bank Merger Act and, if an application is filed or approved, there
is a 15 day waiting period after such approval before the transaction may be
consummated.
FBA anticipates that all of the necessary approvals will be granted
during the fourth quarter, but there is no assurance that such approval will
be forthcoming.
Charter and By-Laws of Surviving Bank
Pursuant to the Reorganization Agreement, the Articles of Incorporation
and By-Laws of AcquisitionCo, as in effect at the Effective Time, will be the
Articles of Incorporation and By-Laws of the Surviving Bank in the Merger
unless and until amended.
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Dissenters' Rights
Pursuant to Section 1300 of the California General Corporation Law
("CGCL"), any holder of Surety Common Stock who does not wish to accept the
consideration to be paid pursuant to the Reorganization Agreement may dissent
from the Merger and elect to have the fair market value of his or her shares
of Surety Common Stock (exclusive of any element of value arising from the
accomplishment or expectation of the Merger) judicially determined and paid
to him or her in cash, provided that he or she complies with the provisions
of Sections 1300 through 1312 of the CGCL.
The following is a brief summary of the statutory procedures to be
followed by a holder of Common Stock in order to dissent from the Merger and
perfect appraisal rights under the CGCL. This Summary is not intended to be
complete and is qualified in its entirety by reference to Sections 1300 to
1312 of the CGCL, the texts of which are attached as Appendix C to this
Prospectus-Proxy Statement.
If any holder of Surety Common Stock elects to exercise the right to
dissent from the Merger and demand appraisal, such shareholder must:
(i) deliver a written demand for appraisal of his or her shares to
Surety not later than the date of the Special Meeting (this
written demand for appraisal must be in addition to and
separate from any proxy or vote against the Reorganization
Agreement; neither voting against, abstaining from voting nor
failing to vote on the Reorganization Agreement will constitute
a demand for appraisal within the meaning of Section 1300); and
(ii) vote against the Merger in person or by proxy (the return of a
signed proxy which does not specify a vote against approval and
adoption of the Reorganization Agreement will constitute a waiver
of the shareholder's right of appraisal and nullify any
previously filed written demand for appraisal); and
(iii) within 30 days of the mailing of a notice to Surety Common
Shareholders of the approval of the Merger, submit the
certificates evidencing such dissenting shares to Surety to be
stamped or endorsed with a statement that the shares are
Dissenting Shares.
If a Surety Common Shareholder fails to comply with any of these
requirements and the Merger becomes effective, he or she will be entitled to
receive the consideration provided in the Reorganization Agreement but will
have no appraisal rights with respect to his or her shares of Surety Common
Stock.
All written demands for appraisal should be addressed to: President,
Surety Bank, 116 Springstowne Center, Vallejo, California 94591, before the
taking of the vote at the Special Meeting, and should be executed by or on
behalf of the holder of record. Such demand must reasonably inform Surety of
the identity of the shareholder, identify the number of shares held of record
by the shareholder making the demand and contain a statement of what such
shareholder claims to be the fair market value of those shares as of the day
before the announcement of the Merger.
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To be effective, a demand for appraisal must be executed by or for the
shareholder of record who held such shares on the date of making such demand,
and who continuously holds such shares through the time the certificates for
such shares are submitted to Surety for endorsement as Dissenting Shares,
fully and correctly, as such shareholder's name appears on his or her stock
certificate(s) and cannot be made by the beneficial owner if he or she does
not also hold the shares of record. The beneficial owner must, in such case,
have the registered owner submit the required demand in respect of such
shares.
If Surety Common Stock is owned of record in a fiduciary capacity, such
as by a trustee, guardian or custodian, execution of a demand for appraisal
should be made in such capacity. If Surety Common Stock is owned of record by
more than one person, as in a joint tenancy or tenancy in common, such demand
must be executed by or for all joint owners. An authorized agent, including
one of two or more joint owners, may execute the demand for appraisal for a
shareholder of record; however, the agent must identify the record owner or
owners and expressly disclose the fact that, in executing the demand, he or
she is acting as agent for the record owner. A record owner, such as a
broker, who holds Surety Common Stock as a nominee for others may exercise
his or her right of appraisal with respect to the shares held for one or more
beneficial owners, while not exercising such right for other beneficial
owners. In such case, the written demand should set forth the number of
shares as to which the record owner dissents. Where no number of shares is
expressly mentioned, the demand will be presumed to cover all shares of
Surety Common Stock in the name of such record owner.
If the Merger is approved by the Surety Common Shareholders, Surety or
its successor will give written notice that the Merger has been approved
within ten days after the Special Meeting to each Surety Common Shareholder
who filed a written demand for appraisal and voted against the Merger. Any
Surety Common Shareholder entitled to appraisal rights must, in order to
perfect such rights, within 30 days after the date of mailing of the notice,
submit the certificates representing any shares to which the demand relates.
If Surety or its successor and a dissenting shareholder agree that the
shares are Dissenting Shares and agree upon the price of the shares, the
dissenting shareholder is entitled to the agreed price with interest thereon
at the legal rate from the date of their agreement. Subject to applicable
legal limits on distributions to shareholders, payment of the fair market
value of Dissenting Shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or contractual
conditions to the Merger are satisfied, whichever is later, subject to
surrender of the certificates therefor.
If Surety or its successor denies that the shares are Dissenting Shares
or fails to agree with a shareholder on the fair market value of the shares,
then the Surety Common Shareholder demanding purchase of such shares as
Dissenting Shares may, within six months after the date on which written
notice of shareholder was mailed to the shareholder, but not thereafter, file
a complaint in the Superior Court of the proper county, praying the court to
determine whether the shares are Dissenting Shares or the fair market value
of the Dissenting Shares, or both, or may intervene in any action pending on
such a complaint.
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Inasmuch as Surety and its successor have no obligation to file such a
petition, the failure of a shareholder to do so within the period specified
could nullify such shareholder's previous written demand for appraisal. In
any event, at any time with the written consent of Surety or its successor,
any shareholder who has demanded appraisal has the right to withdraw the
demand and to accept payment of the consideration payable pursuant to the
Merger.
After determination of the shareholders entitled to an appraisal, the
Superior Court will appraise (or commission the appraisal of) the shares of
Surety Common Stock, determining their fair market value exclusive of any
element of value arising from the accomplishment or expectation of the
Merger. When the value is so determined, the court will direct the payment by
Surety or its successor of such value, with interest thereon at the legal
rate from the date judgment is entered, to the shareholders entitled to
receive the same, upon proper surrender of the certificates representing such
Surety Common Stock. In determining the fair market value, the Superior Court
will take into account all factors the court considers relevant.
Section 1300 provides that fair market value is to be determined as of
the day before the first announcement of the Merger and is to exclude "any
appreciation or depreciation in consequence of the proposed action." Surety
Common Shareholders considering seeking appraisal should bear in mind that
the fair market value of their shares determined under Section 1300 could be
more than, the same as or less than the consideration payable pursuant to the
Reorganization Agreement, and that an opinion of an investment banking firm
as to the fairness of the Merger does not constitute an opinion as to fair
market value under Section 1300.
Costs of the appraisal proceeding may be assessed against the parties
thereto (i.e., Surety or its successor and the shareholders participating in
the appraisal proceeding) by the court as it deems equitable in the
circumstances. However, Surety or its successor shall pay the costs,
including, at the discretion of the court, attorneys and witness fees and
interest if the value of the award exceeds the consideration payable pursuant
to the Reorganization Agreement by more than 25%. However, if no petition
for appraisal is filed within six months of the date the notice of approval
of the Merger is mailed to dissenting shareholders, or if such shareholder
delivers a written withdrawal of his or her demand for an appraisal and an
acceptance of the merger consideration with the written approval of Surety or
its successor, then the right of such shareholder to an appraisal will cease.
Notwithstanding the foregoing, no appraisal proceeding in the Superior Court
will be dismissed as to any shareholder without the approval of the Court,
and such approval may be conditioned upon such terms as the court deems just.
FAILURE TO COMPLY WITH THE PROCEDURES SET FORTH IN THE APPLICABLE
STATUTES WILL CAUSE THE SHAREHOLDER TO LOSE HIS OR HER RIGHTS. CONSEQUENTLY,
ANY SHAREHOLDER WHO DESIRES TO EXERCISE DISSENTERS' RIGHTS SHOULD CONSIDER
CONSULTING WITH A LEGAL ADVISOR.
There is no right to dissent from the Merger with respect to Surety
Preferred Stock.
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Management and Operations After the Merger
The Reorganization Agreement provides that the directors and officers of
AcquisitionCo immediately prior to the Effective Time will continue to be the
directors and officers, respectively, of the Surviving Corporation.
New York Stock Exchange Listing
FBA Common is listed and trades on the NYSE, and FBA has agreed in the
Reorganization Agreement to use its best efforts to cause the shares of FBA
Common to be issued in the Merger to be listed on the NYSE.
Exchange of Surety Certificates
Prior to the Effective Time, FBA will appoint Chase Mellon Shareholder
Services, or another entity to which Surety has no reasonable objection, as
the Exchange Agent. A letter of transmittal and other appropriate and
customary exchange materials will be mailed by the Exchange Agent to each
holder of record of Surety Stock for use in exchanging Surety Certificates
for FBA Certificates. No transfer of Surety Stock will be effected on the
stock transfer books of Surety at and after the Effective Time.
To effect a proper surrender and exchange of Surety Certificates, the
Surety Certificates must be surrendered to the Exchange Agent with properly
executed and completed letters of transmittal. The Exchange Agent will have
reasonable discretion to determine whether letters of transmittal have been
properly completed and executed and to disregard immaterial defects.
Neither certificates for fractions of shares of FBA Common nor scrip
certificates for such fractions will be issued, and holders of Surety
Certificates who would otherwise be entitled to receive fractions of shares
of FBA Common will not have the rights with respect to such fractions of
shares, but will receive in lieu thereof cash in an amount equal to such
fraction multiplied by the FBA Exchange Price. If more than one Surety
Certificate is surrendered for the account of the same Surety Shareholder,
the number of full shares of FBA Common for which FBA Certificates will be
issued will be computed on the basis of the aggregate number of shares of
Surety Stock represented by the Surety Certificates so surrendered.
Surety shareholders should not surrender their Surety Certificates for
exchange until a letter of transmittal, instructions and other exchange
materials are received from the Exchange Agent. However, Surety Shareholders
may wish to notify Surety prior to the receipt of such materials if their
Surety Certificates are lost, stolen, destroyed or not properly registered,
in order to begin the process of obtaining replacement Surety Certificates.
Accounting Treatment
The Merger will be accounted for by FBA under the purchase method of
accounting. Under this method of accounting, the purchase price will be
allocated to assets acquired and liabilities assumed based on their estimated
fair values at the Effective Time. Income of the combined company will not
include income (or loss) of Surety prior to the Effective Time.
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THE REORGANIZATION AGREEMENT
The following is a summary of the material provisions of the
Reorganization Agreement, which is attached as Appendix A-1 to this Proxy
Statement-Prospectus and is incorporated herein by reference. The summary is
qualified in its entirety by reference to the Reorganization Agreement.
The Merger
The Reorganization Agreement provides that, following the approval of the
Merger by Surety Common Shareholders, the grant of all necessary regulatory
approvals and the satisfaction or waiver of the other conditions to the
Merger, Surety will be merged with and into a wholly-owned subsidiary of FBA.
The Merger will become effective at the Effective Time, and the capital stock
of Surety will be converted into FBA Common or will be exchanged for cash, as
discussed elsewhere in this Proxy Statement-Prospectus. See "THE
MERGER--Terms of the Merger--Merger Consideration" and "--Exchange of Surety
Certificates."
Representations and Warranties of FBA And Surety
Representations and Warranties of FBA. The Reorganization Agreement
contains representations and warranties of FBA made to Surety generally
including, but not limited to: (i) FBA's organization, standing and similar
corporate matters; (ii) the execution, delivery and enforceability of the
Reorganization Agreement and the Stock Option Agreement; (iii) the delivery
to Surety of certain of FBA's financial statements; (iv) the material
accuracy, as of the date of mailing to Surety Common Shareholders, of
information provided by FBA in connection with this Proxy
Statement-Prospectus, and the material compliance with law of the form of
documents which FBA is responsible for filing with any governmental entity in
connection with the Merger; (v) the due authorization, valid issuance and
other attributes of the FBA Common to be issued in the Merger; (vi) the
absence of any fact known to FBA, and of any action taken by FBA and its
subsidiaries, which would prevent the Merger from qualifying as a
reorganization under Section 368 of the Code or which would materially impede
or delay any required regulatory approval; (vii) the incurrence by FBA of any
fees for brokers or finders in connection with the Merger and related
transactions; (viii) the adequacy of FBA's allowance for loan losses; (ix)
except as disclosed in FBA's financial statements or incurred in the ordinary
course of business consistent with past practice, the absence since March 31,
1997 of liabilities material to FBA, and the absence of changes or other
events involving a material adverse change in the financial condition, the
results of operations or the business or prospects of FBA; (x) the absence of
potentially material litigation against FBA and its subsidiaries except as
disclosed to Surety; and (xi) the nature and status of any loans, contracts
and other arrangements with any of FBA's officers, directors or employees or
any of their related interests.
Representations and Warranties of Surety. The Reorganization Agreement
contains representations and warranties of Surety made to FBA generally
including, but not limited to: (i) Surety's organization, standing and
similar corporate matters; (ii) the execution, delivery and
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enforceability of the Reorganization Agreement and the Stock Option Agreement;
(iii) the delivery to FBA of certain of Surety's financial statements; (iv)
the material accuracy, as of the date of mailing to Surety Common
Shareholders, of information provided by Surety in connection with this Proxy
Statement-Prospectus, and the material compliance with law of the form of
documents which Surety is responsible for filing with any governmental entity
in connection with the Merger; (v) the absence of any fact known to Surety,
and of any action taken by Surety and its subsidiaries, which would prevent
the Merger from qualifying as a reorganization under Section 368 of the Code
or which would materially impede or delay any required regulatory approval;
(vi) the incurrence by Surety of any fees for brokers or finders in
connection with the Merger and related transactions; (vii) the adequacy of
Surety's allowance for loan losses; (viii) except as disclosed in Surety's
financial statements or incurred in the ordinary course of business
consistent with past practice, the absence since March 31, 1997 of
liabilities material to Surety, and the absence of changes or other events
involving a material adverse change in the financial condition, the results
of operations or the business or prospects of Surety; (ix) the absence of
potentially material litigation against Surety and its subsidiaries except as
disclosed to FBA; (x) identification of all of its subsidiaries; (xi) the
absence of any regulatory actions against Surety or any of its subsidiaries;
(xii) identification of all of its properties, contracts, employee benefit
plans and other agreements meeting certain criteria specified in the
Reorganization Agreement; (xiii) proper accounting for the securities in
Surety's investment portfolio; (xiv) the status of the loans in Surety's loan
portfolio and the documentation relating thereto; (xv) the status of its
employee benefit plans under applicable laws and regulations; (xvi) legal
title to its properties and the existence and nature of insurance relating
thereto; (xvii) the status under environmental laws and regulations of
properties now or previously owned, leased or operated by Surety and its
subsidiaries; and (xviii) the nature and status of any loans, contracts and
other arrangements with any of Surety's officers, directors or employees or
any of their related interests.
Conditions to Consummation of the Merger
Conditions to Each Party's Obligation to Effect the Merger. Each of
FBA's and Surety's obligations to effect the Merger are subject to various
conditions (which may be waived), including, in addition to other customary
closing conditions, the following:
(i) the Surety Common Shareholders shall have approved the Merger by
the vote required by applicable corporate law;
(ii) all necessary governmental approvals for the Merger shall have been
obtained, and any waiting periods imposed by any applicable law
or regulation shall have expired;
(iii) the Registration Statement shall have been declared effective and
shall not be subject to a stop order;
(iv) there shall not be any injunction or restraining order preventing
the consummation of the Merger in effect nor shall any proceeding
by any governmental entity seeking the same be pending, nor shall
the Merger be illegal under any applicable law; and
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(v) FBA and Surety shall have received the opinion of Lewis, Rice &
Fingersh, special tax counsel to FBA, to the effect that the
Merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368 of the Code and
that no gain or loss will be recognized by FBA, AcquisitionCo or
Surety as a result of the Merger.
Conditions to the Obligations of Surety to Effect the Merger. The
obligations of Surety to effect the Merger are subject to the fulfillment or
waiver prior to the Effective Time of the following additional conditions:
(i) as of the Closing Date of the Merger, the representations and
warranties of FBA set forth in the Reorganization Agreement shall
be true in all material respects, and the financial statements of
FBA delivered pursuant to the Reorganization Agreement shall not
be inaccurate in any material respect;
(ii) FBA shall have performed in all material respects its obligations
under the Reorganization Agreement; and
(iii) Surety shall have received certain documents required to be
delivered by FBA, including certificates relating to the legal
status of FBA and AcquisitionCo and a legal opinion from counsel
to FBA.
Conditions to the Obligations of FBA to Effect the Merger. The
obligations of FBA to effect the Merger are subject to the fulfillment or
waiver at or prior to the Effective Time of the following additional
conditions:
(i) as of the Closing Date of the Merger, the representations and
warranties of Surety set forth in the Reorganization Agreement
shall be true in all material respects, and the financial
statements of Surety delivered pursuant to the Reorganization
Agreement shall not be inaccurate in any material respect;
(ii) Surety shall have performed in all material respects its
obligations under the Reorganization Agreement;
(iii) FBA shall have received certain documents required to be delivered
by Surety, including certificates relating to the legal status of
Surety and a legal opinion from counsel to Surety;
(iv) FBA shall have received certain environmental reports required to be
delivered by Surety and shall have been satisfied with same; and
(v) Surety Common Shareholders owning no more than ten percent of the
outstanding Surety Common Stock shall have perfected the right to
dissent from the Merger.
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Conduct of Surety's Business Pending the Merger
Pursuant to the terms of the Reorganization Agreement, Surety is required
to conduct its business only in the ordinary and usual course consistent with
past practices. Furthermore, the Reorganization Agreement contains certain
specific restrictions upon the conduct of Surety's business pending the
Merger. In particular, the Reorganization Agreement provides that Surety will
not: (i) declare or pay any dividend or make any other distribution to
shareholders, whether in cash, stock or other property, except for scheduled
dividends on the Surety Preferred Stock; (ii) issue any common stock or other
capital stock or any options, warrants, or other rights to subscribe for or
purchase common stock or any other capital stock or any securities
convertible into or exchangeable for any capital stock (except pursuant to
the valid exercise of outstanding stock options to purchase Surety Common
Stock); (iii) directly or indirectly redeem, purchase or otherwise acquire
any capital stock of Surety or any subsidiary; (iv) effect a
reclassification, recapitalization, split-up, exchange of shares,
readjustment or other similar change in or to any capital stock, or otherwise
reorganize or recapitalize; or (v) change its articles of incorporation or
bylaws.
The Reorganization Agreement further provides that without the prior
written consent of FBA, which shall not be unreasonably withheld, Surety will
not: (i) grant any increase (other than ordinary and normal increases
consistent with past practices) in the compensation payable or to become
payable to officers or employees, grant any stock options or, except as
required by law, adopt or make any change in any employee benefit plan,
agreement, payment or arrangement made to, for or with any such officers or
employees; (ii) borrow or agree to borrow any amount of funds except in the
ordinary course of business, or directly or indirectly guarantee or agree to
guarantee any obligations of others; (iii) make or commit to make any new
loan or letter of credit or any new or additional discretionary advance under
any existing line of credit, in principal amounts in excess of $250,000 or
that would increase the aggregate credit outstanding to any one borrower (or
group of affiliated borrowers) to more than $500,000 (excluding for this
purpose any accrued interest or overdrafts), (iv) purchase or otherwise
acquire any investment security for its own account having an average
remaining life to maturity greater than three years or any asset-backed
securities other than those issued or guaranteed by the Federal National
Mortgage Association or the Federal Home Loan Mortgage Corporation; (v) enter
into any agreement, contract or commitment having a term in excess of three
months other than letters of credit, loan agreements, deposit agreements, and
other lending, credit and deposit agreements and documents made in the
ordinary course of business; (vi) except in the ordinary course of business,
place on any of its assets or properties any mortgage, pledge, lien, charge,
or other encumbrance; (vii) except in the ordinary course of business, cancel
or accelerate any material indebtedness owing to Surety or any claims which
Surety may possess, or waive any material rights of substantial value; (viii)
sell or otherwise dispose of any real property or any material amount of any
tangible or intangible personal property, other than properties acquired in
foreclosure or otherwise in the ordinary collection of indebtedness to
Surety; (ix) foreclose upon or otherwise take title to or possession or
control of any real property (other than single family, non-agricultural
residential property of one acre or less) without first obtaining a phase one
environmental report thereon which indicates that the property is free of
pollutants, contaminants or hazardous or toxic waste materials; (x) commit
any act or fail to do any act which will cause a breach of any agreement,
contract or commitment and which will have a material adverse effect on
Surety's business, financial condition or earnings; (xi) violate any law,
statute, rule, governmental regulation or order, which violation might have a
material adverse effect on
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Surety's business, financial condition, or earnings; (xii) purchase any real
or personal property or make any other capital expenditure where the amount
paid or committed therefor is in excess of $25,000; or (xiii) increase or
decrease the rate of interest paid on time deposits or on certificates of
deposit, except in a manner consistent with past practices.
The Reorganization Agreement also prohibits Surety from soliciting or
encouraging any person or entity in connection with any proposal for the
acquisition of all or any substantial portion of Surety's business or assets
or shares of Surety Common Stock or other securities or, unless its Board of
Directors shall have received written legal advice to the effect that the
directors have a fiduciary duty under applicable law to do so, holding
discussions or negotiations with, or providing information to, or entering
into any agreement to merge or consolidate with, or sell a significant
portion of its assets or those of any subsidiary to, any person or entity.
Surety is also required to use its best efforts to perform and fulfill all
conditions and obligations on its part to be performed or fulfilled under the
Reorganization Agreement and to effect the Merger in accordance with the
terms and provisions thereof. The Reorganization Agreement requires Surety to
furnish to FBA in a timely manner all information, data and documents
requested by FBA as may be required to obtain any necessary regulatory or
other approvals of the Merger and to deliver to FBA monthly unaudited
consolidated balance sheets and profit and loss statements prepared for
Surety's internal use, Surety's Report of Condition and Income for each
quarterly period completed prior to the closing date, and all other financial
reports or statements submitted to regulatory authorities.
The Reorganization Agreement also requires Surety to deliver to FBA a
report of phase one environmental investigation on all real property owned,
leased or operated by Surety as of July 28, 1997, and within 10 days after
the acquisition or lease of any real property acquired or leased by Surety
after such date, subject to certain limitations. If required by the phase one
investigation in FBA's reasonable opinion, Surety is required to provide to
FBA a report of a phase two investigation on properties requiring such
additional study. The Reorganization Agreement provides that FBA will have 15
business days from the receipt of any such phase two investigation report to
notify Surety of any objection to the contents of such report. If the costs
of taking all remedial and corrective actions and measures required by
applicable law or recommended or suggested by such report or reports, or
prudent in light of serious life, health or safety concerns, in the
aggregate, exceeds $200,000 as reasonably estimated by an environmental
expert retained for such purpose by FBA and reasonably acceptable to Surety,
or if the costs of such actions and measures cannot be so reasonably
estimated to be $200,000 or less with a reasonable degree of certainty, then
FBA will have the right pursuant to the Reorganization Agreement for a period
of ten business days following receipt of such estimate or indication that
the costs of such actions and measures cannot be so reasonably estimated, to
terminate the Reorganization Agreement. Surety submitted the required phase
one environmental investigation reports.
Additional Agreements
Additional Covenants of FBA and Surety. The Reorganization Agreement
contains additional covenants of each of FBA and Surety to, among other
things: (i) allow the other party reasonable access to its books, records and
properties; (ii) cooperate with one another and use their best efforts to
obtain required regulatory approvals of the Merger; (iii) consult with one
another as to
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the form of any press release or other public disclosures related to the
Merger; (iv) promptly notify the other party in the event of any breach of the
Reorganization Agreement and use its best efforts to prevent or remedy such a
breach; (v) perform and fulfill its obligations under the Reorganization
Agreement; and (vi) maintain the confidentiality of information received from
the other party and to cooperate in the development and distribution of public
disclosures regarding the Merger.
Additional Covenants of Surety. The Reorganization Agreement contains
additional covenants of Surety, among other things:
(i) to cooperate in the preparation and filing of the
Registration Statement and in calling and holding the Special
Meeting; and
(ii) to obtain any necessary consents for the Merger under
applicable leases, licenses, contracts and other instruments.
Additional Covenants of FBA. The Reorganization Agreement contains
additional covenants of FBA following the Effective Time, among other things:
(i) to indemnify, defend and hold harmless the present and former
officers, directors, employees and agents of Surety and its
subsidiaries for all losses, expenses, claims, damages or
liabilities arising out of actions or omissions occurring at or
prior to the Effective Time to the full extent permitted by law
and under Surety's Articles of Incorporation and to maintain in
effect (subject to certain limitations and exceptions) directors'
and officers' liability insurance maintained by Surety prior to
the Reorganization Agreement, covering claims arising from events
which occurred before the Effective Time (see "INTERESTS OF
CERTAIN PERSONS IN THE MERGER");
(ii) to provide to employees of Surety who are retained following the
Closing Date the opportunity to participate in employee benefit,
welfare and related plans and programs of FBA's subsidiaries to
the extent eligible or, if required by a plan, to the extent
selected, and to credit past service for their employment with
Surety if relevant to the applicable plan or program; and
(iii) to take necessary action so that one person designated by Surety's
Board of Directors will be a director of FBA and two persons so
designated will be directors of the successor bank to Surety.
Termination; Damages
Termination. The Reorganization Agreement may be terminated at any time
prior to the closing date, either before or after approval by Surety
shareholders, by the mutual consent of the parties; or by either FBA or
Surety at any time if the other party materially breaches any of its
representations, warranties and agreements made under the Reorganization
Agreement and the breach is not cured within 30 days after written notice has
been provided to the breaching party,
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the conditions to the obligations of a party are not satisfied or waived
prior to the Closing Date and if the applicable 30 day cure period has
lapsed, after written notice has been provided by such party to the other
party; or the Effective Time has not occurred prior to February 28, 1998.
In addition, the Reorganization Agreement will be deemed to have
terminated if regulatory approval of the Merger has been finally denied. FBA
may also terminate the Reorganization Agreement within ten days after FBA's
receipt of the environmental report(s) required to be delivered by Surety to
FBA which indicate that the cost of corrective or remedial action will be
more than $200,000 or if such report(s) indicate that such costs cannot be
reasonably estimated to be $200,000 or less, or Surety becomes a party to or
subject to any new or amended written agreement, memorandum, cease and desist
order seeking or imposing civil money penalties or other written regulatory
enforcement action or formal legal proceeding of any federal or state
regulatory authority.
Finally, the Reorganization Agreement may be terminated by FBA or Surety
in certain circumstances related to fluctuations in the market price of FBA
Common. See the discussion of such termination rights under the caption
"THE MERGER--Terms of the Merger--Merger Consideration."
Damages. The Reorganization Agreement provides that a party breaching
any of its provisions may be liable to the other party for damages, which
would be measured by the out-of-pocket expenses of the non-breaching party
incurred in connection with the Reorganization Agreement, including any fees
paid to third parties. The amount of such damages are limited by the
Reorganization Agreement to a maximum of $100,000.
Amendment and Waiver
The Reorganization Agreement may be amended at any time by action
authorized by the respective Boards of Directors of FBA and Surety, and each
party may extend the time for performance of the obligations of the other
party, waive inaccuracies in representations and warranties and waive
compliance with any agreements or conditions contained in the Reorganization
Agreement.
Expenses
Whether or not the Merger is consummated, all costs and expenses incurred
in connection with the Reorganization Agreement and the transactions
contemplated thereby will be paid by the party incurring such expense, except
as otherwise provided with respect to damages recoverable by a party due to a
breach of the Reorganization Agreement by the other party. See "--
Additional Agreements -- Termination; Damages."
THE STOCK OPTION AGREEMENT
The following is a summary of the material provisions of the Stock Option
Agreement, which is attached as Appendix A-2 to this Proxy Statement-
Prospectus and is incorporated herein
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by reference. This summary is qualified in its entirety by reference to the
Stock Option Agreement.
Shares Subject to the Option
The Stock Option Agreement provides for the purchase by FBA of up to
19.99% of the outstanding Surety Common Stock (the "Option Shares") at an
exercise price of $28.00 per share, payable in cash. The number of Option
Shares will be increased to the extent that Surety issues additional shares
of Surety Common Stock (otherwise than pursuant to an exercise of the Stock
Option) so that the number of Option Shares will continue to equal 19.99% of
the then issued and outstanding shares of Surety Common Stock. The number of
Option Shares and the applicable exercise price per Option Share also will be
appropriately adjusted in the event of any stock dividend, split-up, merger,
recapitalization, combination, subdivision, conversion, exchange of shares,
or similar event relating to Surety.
The Stock Option Agreement provides that, if Surety enters into a merger,
consolidation or other similar transaction, FBA has the right to require that
the Stock Option be converted into a comparable option of the acquiring or
surviving entity of the transaction.
Neither FBA nor Surety may assign any of its respective rights and
obligations under the Stock Option Agreement or the Stock Option to any other
person without the other party's written consent, except that FBA may
transfer its rights to any affiliate, and if a "Triggering Event" (as defined
below) occurs prior to termination of the Stock Option, FBA may assign in
whole or in part its rights and obligations thereunder.
Exercise of the Option
FBA or any other holder of the Stock Option may exercise the Stock
Option, in whole or in part, subject to any regulatory approval which may be
required at the time of exercise, at any time after the occurrence of a
"Triggering Event" prior to termination of the Stock Option.
"Triggering Event" means any of the following events:
(i) either (A) the public disclosure by any person or group of persons,
other than FBA or any affiliate of FBA, of an offer or proposal
to acquire 25% or more of the outstanding Surety Common Stock or
to acquire, merge or consolidate with Surety or to purchase all
or substantially all of Surety's assets (unless such offer or
proposal has been publicly withdrawn ten or more days prior to
the Special Meeting), or (B) any person shall have filed a notice
or application to acquire Surety Common Stock or control of
Surety, and such notice or application shall have been disclosed
publicly or to the shareholders of Surety prior to the date of
the Special Meeting, and any of the following shall occur:
(I) the failure of the shareholders of Surety to approve the
Merger;
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(II) the failure of Surety to hold the Special Meeting in
compliance with the Reorganization Agreement; or
(III) the failure by Surety's Board of Directors to make the
recommendation that the Surety Common Shareholders approve
the Merger, or the withdrawal or modification of such
recommendation in a manner adverse to FBA;
(ii) any person or group of persons acting in concert (other than FBA or
any affiliate of FBA) shall acquire or have the contractual right
to acquire or vote 25% or more of the outstanding Surety Common
Stock;
(iii) the expiration of the fifth day preceding the scheduled expiration
date of a tender or exchange offer by any person or group of
persons (other than FBA or any affiliate of FBA) to purchase or
acquire securities of Surety if (A) upon consummation of such
offer, such person or group of persons would own, control or have
the contractual right to acquire or vote 25% or more of the
outstanding Surety Common Stock (before giving effect to the
exercise of the Stock Option), (B) such person or group has
received any required regulatory approval to consummate such
purchase and (C) such offer shall not be subject to any financing
condition, or any applicable financing condition shall have been
satisfied or waived;
(iv) upon Surety's entering into any agreement or understanding, without
the prior written approval of FBA, with a person or group of
persons contemplating such person's or group's acquiring, merging
or consolidating with Surety or purchasing all or substantially
all of Surety's assets; or
(v) the willful breach by Surety of any provision of the Reorganization
Agreement, in anticipation of engaging in a transaction of the
type referred to in subsections (ii), (iii) or (iv) hereof, such
that FBA would have the right to terminate the Reorganization
Agreement because of such breach.
Termination of the Option
The Stock Option terminates by the terms of the Stock Option Agreement
(i) immediately before the Effective Time of the Merger, (ii) upon
termination of the Reorganization Agreement in accordance with the terms
thereof prior to the occurrence of a Triggering Event, or (iii) three years
after the Option first becomes exercisable.
FBA has the right to require that Surety include the Option Shares in any
public offering of its securities and in any underwriting in connection
therewith, subject to customary limitations.
The Stock Option could have the effect of discouraging persons who prior
to the Effective Time might be interested in acquiring all or a significant
interest in Surety from considering or proposing such an acquisition, even if
such persons were prepared to pay more consideration per
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share for Surety Common Stock than the consideration per share payable under
the Reorganization Agreement.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Directors and executive officers of Surety have interests in the Merger
that are in addition to their interests as Surety shareholders. These
interests are described in more detail below.
Indemnification
In the Reorganization Agreement, AcquisitionCo has agreed that it and any
successors will indemnify, and advance expenses in matters that may be
subject to indemnification, to persons who served as directors and officers
of Surety or any subsidiary of Surety on or before the Effective Time with
respect to liabilities and claims (and related expenses) made against them
resulting from their service as such prior to the Effective Time, in
accordance with and subject to the provisions of the Surety Articles of
Incorporation and By-Laws in effect on the date the Reorganization Agreement
was executed.
In the Reorganization Agreement, AcquisitionCo also agreed to purchase
insurance in the form of an extension of Surety's existing policy to the
persons who served as directors or officers of Surety or any subsidiary of
Surety on or before the Effective Time, generally covering liabilities,
claims and related expenses made against them resulting from their service as
such prior to the Effective Time; this obligation is subject to a limitation
that the costs of providing such coverage will not exceed $30,000.
Employment and Severance Arrangements
Four officers of Surety are parties to agreements and arrangements with
Surety providing for severance benefits which will be triggered by the
Merger. The specific terms of the severance arrangements applicable to the
four officers--John A. DiMichele, Surety's President and Chief Executive
Officer; Christopher A. Olson, Senior Vice President and Senior Lending
Officer; Mark S. Day, Chief Financial Officer; and Sheila Moran, Audit
Officer, are discussed below.
Surety's agreement with Mr. DiMichele provides that, in the event that
he is terminated from his position by Surety without cause, or in connection
with a change of control, he will be entitled to certain severance benefits.
If the termination is without cause but unrelated to a change of control, Mr.
DiMichele would be entitled to receive the equivalent of his salary for 12
months following termination, paid in 12 equal monthly installments. (As of
the date of this Proxy Statement-Prospectus, Mr. DiMichele's monthly salary
was $8,583.) In the event of a change of control, including the Merger, the
amount of severance to which he may become entitled will vary depending on
events occurring following the transaction. If his position is eliminated or
if he voluntarily chooses not to continue employment with the successor to
Surety, Mr. DiMichele would be entitled to receive the equivalent of his
salary for 24 months following
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termination, paid in 24 equal monthly installments. If Mr. DiMichele chooses
to accept employment which is offered by the successor bank, then he would
continue to have the option of receiving severance, in the form of 12 months
salary, for the first 18 months following the change of control transaction.
At the end of the 18 month period, he would no longer be eligible for any
severance arising from his agreement with Surety, although he and the
successor bank could choose to enter into a severance or employment
agreement. The agreement with Mr. DiMichele further provides (i) that he is
to receive a cash incentive payment of $25,000 upon completion of a
successful sale or merger, and (ii) if Mr. DiMichele is offered employment
with the successor bank to Surety at a salary comparable to that which he now
receives, he will be prohibited from organizing a competing bank or
soliciting customers of Surety and its successor in Solano County, California
for 90 days following the consummation of the change of control transaction.
Mr. Olson was first employed by Surety in March 1997. The agreement
entered into by Mr. Olson and Surety provides that, if he is not offered
employment by the successor bank or elects not to accept such employment, he
would be entitled to be paid an amount equal to the sum of (i) three months
salary plus (ii) for each month of his employment at Surety prior to a change
of control, up to 12 months, an additional two weeks' pay at his regular
salary . He would also receive a pro-rated bonus if earned under the terms
of a bonus plan applicable to senior officers of Surety. As of the date of
this Proxy Statement-Prospectus, Mr. Olson's salary was $6,875 per month.
Mr. Day and Ms. Moran have agreements with Surety pursuant to which, if
they are not offered a position by the successor bank at salaries comparable
to those now in effect, they will become entitled to nine months' salary.
Their monthly salaries as of the date of this Proxy Statement-Prospectus were
$5,150 and $3,991, respectively.
FBA is not obligated to offer employment after the Merger to any officer
or other employee of Surety.
Continuing Services as Director
The Reorganization Agreement provides that, in the absence of objection
by regulatory authorities, FBA's Board of Directors would take the actions
necessary in order that, immediately following the Merger, one person
designated by the Board of Directors of Surety will be appointed or elected
to the Board of FBA, and two persons selected by Surety's Board of Directors
will become directors of AcquisitionCo and the surviving bank in the
Subsequent Bank Merger. Surety's Board of Directors has designated Albert M.
Lavezzo, the Chairman of the Board of Directors of Surety, to be a director
of FBA and Mr. Lavezzo and Mr. Sibley to be directors of the successor bank
after the Merger.
FBA's policy for 1998 and subsequent years is to pay to its directors who
are not officers or employees of FBA and have no affiliation with First Banks
("Unaffiliated Directors") a fee for each meeting of the Board of Directors
attended of $2,000 and a fee of $500 for each committee meeting attended.
The Unaffiliated Directors also participate in the 1993 Directors' Stock Bonus
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Plan (the "Stock Plan"), which provides for an annual grant of 500
shares of FBA Common to each Unaffiliated Director. The Stock Plan is
scheduled to expire July 1, 2001. Mr. Lavezzo will be eligible to receive
the same compensation as other unaffiliated directors of FBA when he becomes
a director. In addition, Messrs Lavezzo and Sibley, as Unaffiliated
Directors of the successor bank, will each receive a fee of $1,500 for each
quarterly meeting of the bank's Board of Directors.
Mr. Lavezzo is the President of the law firm of Favaro, Lavezzo, Gill,
Caretti & Heppell, P.C., a Solano County law firm with offices in Vallejo,
California. In 1996 Surety paid $5,390 in legal fees to the law offices of
Favaro, Lavezzo, Gill, Caretti & Heppell, P.C., of which Mr. Lavezzo has been
a principal for more than five years. As a Director of Surety and as
Chairman of the Board, Mr. Lavezzo is paid a monthly fee of $1,000 for
attending monthly board meetings, for serving as a member of all committees
of the Board of Directors, for attending Community Reinvestment Act meetings,
and for participating in numerous community events.
Options
Messrs. DiMichele, Olson, Day and Ms. Moran have been granted options by
Surety to purchase 5,250, 2,500, 500 and 400 shares, respectively, of Surety
Common Stock pursuant to the Tandem Stock Option Plan (the "Plan"). The
terms of the Plan provide that all outstanding options become immediately
exercisable by the holder thereof in the event of certain categories of
transactions, including the Merger. Accordingly, they will each have the
right to acquire shares of Surety Common Stock at the exercise prices of
$17.10 (Messrs. DiMichele and Day and Ms. Moran) or $18.00 (Mr. Olson), and
to realize the difference between such exercise prices and the amount of
merger consideration into which the shares will be converted in the Merger.
Alternatively, they would have the right to exchange the options for
comparable options exercisable for shares of FBA Common, subject to
adjustments in the number of shares and the exercise prices giving effect to
the Exchange Ratio.
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BUSINESS OF FBA
Description of Business
FBA, a bank holding company, was organized as a Delaware corporation in
1978 and was known as BancTEXAS Group Inc. until the corporate name changed
in 1995. FBA's executive office was recently relocated from Houston, Texas
to 135 North Meramec, Clayton, Missouri. The principal function of FBA is to
assist the management of its two banking subsidiaries, which operate under
the day-to-day management of their own officers with guidance from FBA.
At June 30, 1997, FBA had approximately $373.6 million in total assets,
$241.3 million in total loans net of unearned discount, $312.8 million in
total deposits and $33.9 million in total stockholders' equity.
Through eight banking locations in Roseville and Rancho Cordova,
California, and Houston, Dallas, Irving and McKinney, Texas, FBA's subsidiary
banks offer a broad range of commercial and personal banking services
including certificates of deposit, individual retirement and other time
deposit accounts, checking and other demand deposit accounts, interest
checking accounts, savings accounts and money market accounts. Loans include
commercial and industrial, commercial and residential real estate, real
estate construction and development and consumer loans. Other financial
services include automatic teller machines, telephone banking, lockbox
deposits, cash management services, savings accounts, credit-related
insurance and safe deposit boxes.
FBA and its subsidiary banks purchase certain services and supplies,
including data processing services, internal auditing, loan review, income
tax preparation and assistance, accounting, asset/liability and investment
services, loan servicing and other management and administrative services,
through FBA's majority stockholder, First Banks. Additional information
regarding FBA, including descriptions of its management and Board of
Directors and the identification of certain beneficial owners of FBA Common
and Class B Common Stock, the compensation of its executive officers and the
payment to First Banks for services provided to FBA pursuant to management
and other contracts, is set forth in FBA's Annual Report on Form 10-K for the
year ended December 31, 1996, and is incorporated herein by reference.
Recent Developments
On October 3, 1997 FBA entered into an Agreement and Plan of Merger with
FCB (the "FCB Agreement"), a bank holding company in Sacramento, California
which operates one commercial bank, First Commercial Bank. In the "FCB
Merger," FBA is to issue an aggregate of approximately 752,000 shares of FBA
Common in exchange for all of the outstanding shares of common stock of FCB.
Consummation of the FCB Agreement is subject to the approval of the
shareholders of both FCB and FBA as well as other customary conditions,
including the approval of bank regulatory authorities. Subject to the
satisfaction of all of the necessary conditions, it is currently anticipated
that the FCB Merger will occur in the fourth quarter of 1997.
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Control of FCB is owned by First Banks, which is also the controlling
shareholder of FBA. Because of the relationship among FBA, First Banks and
FCB, the determination to enter into the transaction and the terms of the FCB
Agreement were determined by Special Committees of the Boards of Directors of
both FBA and FCB, each composed solely of non-employee directors who are not
affiliated with First Banks.
Because of the effect of the FCB Merger on the operations of FBA, this
Proxy Statement-Prospectus contains pro forma financial information
reflecting the effect of the FCB Merger, as well as the effect of the
proposed merger with Surety, prepared in accordance with generally accepted
accounting principles to reflect such matters. See "PRO FORMA FINANCIAL
INFORMATION."
On September 22, 1997 FBA executed an agreement providing for the
acquisition of Pacific Bay Bank. The agreement provides that FBA will
acquire Pacific Bay Bank, which had total assets of $38.7 million as of June
30, 1997, for aggregate cash consideration of $4.2 million. Subject to the
approval of regulatory authorities and the shareholders of Pacific Bay Bank
and the satisfaction of other customary conditions, FBA anticipates that the
acquisition will occur by the first quarter of 1998.
DESCRIPTION OF FBA CAPITAL STOCK
FBA is presently authorized by its Certificate of Incorporation to issue
three classes of capital stock: FBA Common, Class B Common Stock and
preferred stock. The following description of the three classes of stock
does not purport to be complete and is subject in all respects to the
applicable provisions of Delaware law and FBA's Restated Certificate of
Incorporation.
Common Stock
The Certificate of Incorporation of FBA authorizes the issuance of up to
6,666,666 shares of FBA Common. The holders of FBA Common are entitled to
one vote for each share with respect to all matters voted upon by
shareholders, including the election of directors, and are entitled to
receive dividends when, as and if declared by the FBA Board of Directors out
of funds legally available therefor. No preemptive rights attach to the
ownership of shares of FBA Common, and no personal liability is imposed on
the holder thereof under Delaware law. Chase Mellon Shareholder Services is
the transfer agent and registrar for the FBA Common. As of October 6, 1997
1,060,709 shares of FBA Common were outstanding.
Class B Common Stock
FBA's Certificate of Incorporation authorizes the issuance of up to
4,000,000 shares of Class B common stock ("Class B Stock"). As of October 6,
1997 2,500,000 shares were outstanding. In 1994 FBA sold 2,500,000 shares of
Class B Stock to First Banks in a private placement in exchange for $30
million cash. As a result of this transaction, First Banks became the owner
of approximately 65% of the then outstanding voting stock of FBA, which
includes the Class B Common Stock and FBA Common. The two classes of stock
are generally equivalent
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with regard to voting and other rights, except that the Class B Stock is not
registered with the SEC, not listed on any exchange and, with limited
exceptions, it is not transferable, other than to an affiliate of First
Banks. In the event FBA were to commence the payment of dividends to its
shareholders, the Class B Stock would receive dividends only to the extent
that dividends on FBA Common exceed $.45 per share annually. First Banks has
the contractual right to purchase additional shares of Class B Stock if a
sufficient number of additional shares of FBA Common are issued to cause
First Banks' voting power to fall below 55%, at prices to be determined based
on a formula related to the book value per share of common stock. Each share
of Class B Stock issued in 1994 is convertible into one share of FBA Common
at any time after August 31, 1999 at the option of First Banks.
Preferred Stock
FBA's Certificate of Incorporation authorizes the issuance of up to
3,000,000 shares of preferred stock, $1.00 par value per share. The Board of
Directors of FBA is authorized to establish one or more series of such stock
and to fix the voting powers, designations, preferences and the rights,
qualifications, limitations or restrictions of each series authorized. No
shares of preferred stock were outstanding as of the date of this Proxy
Statement-Prospectus, nor have any series been authorized for issuance by the
Board of Directors.
FBA COMMON REGISTERED FOR RESALE
As noted elsewhere in this Proxy Statement-Prospectus, FBA agreed in the
Reorganization Agreement to register for resale the shares of FBA Common to
be received by affiliates of Surety so that such shares can be sold after the
Merger if such affiliates desire to do so. The persons listed in the table
below are presumed to be affiliates of Surety. However, the number of shares
of FBA Common which they may receive (as well as the number to be received by
all other Surety Shareholders who do not receive exclusively Cash
Consideration) cannot be determined until the Surety Shareholders have
submitted Election Statements to the Exchange Agent indicating the form of
consideration they prefer to receive and the merger consideration has been
allocated in accordance with the Reorganization Agreement. See "THE
MERGER--Terms of the Merger; --Election Procedures; and --Allocation."
In order to prepare the following table, it has been assumed that: (i)
all of the listed persons will elect to receive FBA Common for all of their
shares of Surety Stock; (ii) the aggregate elections by all Surety
Shareholders will be such that 51% of the Total Surety Common elect FBA
Common, and 49% elect Cash Consideration (in which case each Surety
Shareholder would receive the form of consideration elected); and (iii) the
Exchange Ratio will be 2.5879, based on the FBA Exchange Price in excess of
$14.73, the maximum exchange price. However, it is not known whether the
named persons will elect FBA Common, and it is very doubtful that elections
in that exact proportion will be made. Furthermore, the market price of FBA
Common may fluctuate
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prior to the time the FBA Exchange Price is set. It is therefore unlikely
that the numbers of shares to be reoffered by the listed persons will equal
those shown in the table.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF FBA PERCENTAGE OF
COMMON TO BE RECEIVED OUTSTANDING FBA
NAME AND REOFFERED COMMON
---- ------------- ------
<S> <C> <C>
Linda Ann Adams 29,256 2.75%
Charles R. Balassi 12,101 1.14
John A. DiMichele 10,920 1.03
John B. Hussey 23,436 2.21
Albert M. Lavezzo 41,877 3.94
John F. Lavezzo 35,733 3.36
Richard D. Puntillo 6,208 <F*>
Norman F. Seidenverg, M.D. 18,775 1.77
Fred K. Sibley 14,624 1.38
Jack Wilson 20,853 1.96
<FN>
<F*> Represents less than 1%
</TABLE>
BUSINESS OF SURETY BANK
General
Surety was initially organized as a federal mutual savings and loan
association. In 1984 Surety converted from mutual form to a federal stock
savings bank. In 1994 Surety converted to, and now is, a state chartered
non-member bank headquartered in Vallejo, California. At June 30, 1997,
Surety had $72.7 million in total assets, $56.0 million in total loans, $66.6
million in total deposits, and $5.0 million in total shareholders' equity.
Surety operates from two branch locations.
Through the two branches, Surety offers commercial and personal banking
services, including certificate of deposit accounts, individual retirement
and other time deposit accounts, checking and other demand deposit accounts,
interest checking accounts, savings accounts, and money market accounts.
Loans include commercial, Small Business Administration, real estate
construction and development, commercial and residential real estate,
consumer and installment loans. Other financial services include mortgage
banking, credit-related insurance, automatic teller machines and safe deposit
boxes.
A description of the business of Surety during the past year is
included under "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF SURETY BANK" (abbreviated in the remainder of
this section of the Proxy Statement-Prospectus as "MANAGEMENT'S DISCUSSION
AND ANALYSIS").
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Market Areas
Surety's primary market areas are the metropolitan areas of Vallejo and
Fairfield, California. The following table lists the deposits by branch as
of June 30, 1997:
<TABLE>
<CAPTION>
Total Deposits Deposits as a
(in millions) Percent of Total
------------- ----------------
<S> <C> <C>
Vallejo $ 53.9 80.93%
Fairfield 12.7 19.07
------ ------
Total Deposits $ 66.6 100.00%
====== ======
</TABLE>
Lending Activities
Lending activities are conducted pursuant to a written loan policy which
has been adopted by Surety. Each loan officer has a defined lending authority
and loans made by each officer must be reviewed by the loan committee or the
Board of Directors of Surety, depending upon the amount of the loan request.
Loans generally are limited to borrowers residing or doing business in the
immediate market areas of Surety. Surety's policy is to meet the quality loan
demand and credit needs of its local community before it considers the purchase
area.
Surety offers commercial, real estate construction and development,
commercial and residential real estate, consumer and installment loans.
Additional information regarding Surety's loan portfolio is included under
"MANAGEMENT'S DISCUSSION AND ANALYSIS--Loans and Allowance for Possible Loan
Losses."
Mortgage Banking Operations
Surety provides mortgage banking services, including the origination and
purchase of residential mortgage loan products for resale in the secondary
mortgage market. See "MANAGEMENT'S DISCUSSION AND ANALYSIS--Mortgage Banking
Activities," for further discussion of the mortgage banking activities.
Investment Portfolio
Surety has established a written investment policy which is reviewed
annually. The investment policy identifies investment criteria and states
specific objectives in terms of risk, interest rate sensitivity and
liquidity. The investment policy directs the management to consider, among
other criteria, the quality, term and marketability of the securities
acquired for their respective investment portfolios. Surety does not engage
in the practice of trading securities for the purpose of generating portfolio
gains. The investment portfolio composition is included in Note 2 to the
accompanying consolidated financial statements. See also "MANAGEMENT'S
DISCUSSION AND ANALYSIS--Investment Securities."
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Deposits
Surety's deposits consist principally of core deposits from the local
market areas. Surety does not accept brokered deposits. A table summarizing
the distribution of Surety's deposit accounts and the weighted average
nominal interest rates on each category of deposits for the three years
ending December 31, 1996, 1995 and 1994, and the six months ended June 30,
1997 and 1996 is included under "MANAGEMENT'S DISCUSSION AND
ANALYSIS--Deposits."
Competition and Branch Banking
The activities in which Surety engages are highly competitive. Those
activities and the geographic market served involve primarily competition
with other banks, some of which are affiliated with large bank holding
companies. Competition among financial institutions is based upon interest
rates offered on deposit accounts, interest rates charged on loans and other
credit and service charges, the quality of services rendered, the convenience
of banking facilities and, in the case of loans to large commercial
borrowers, relative lending limits.
In addition to competing with other banks within their primary service
areas, Surety also competes with other financial intermediaries, such as
thrifts, credit unions, industrial loan associations, securities firms,
insurance companies, small loan companies, finance companies, mortgage
companies, real estate investment trusts, certain governmental agencies,
credit organizations and other enterprises. Additional competition for
depositors' funds comes from United States Government securities, private
issuers of debt obligations and suppliers of other investment alternatives
for depositors. Many of Surety's non-bank competitors are not subject to the
same extensive federal regulations that govern state-chartered banks. Such
non-bank competitors may, as a result, have certain advantages over Surety in
providing some services.
The trend in California has been for multi-bank holding companies to
acquire independent banks in communities throughout the State. Surety
believes it will continue to face competition in the acquisition of such
banks and thrifts from bank holding companies based in the State and from
bank holding companies based in other states under interstate banking laws.
Many of the financial institutions with which Surety competes are larger than
Surety and have substantially greater resources available for making
acquisitions.
Subject to regulatory approval, commercial banks situated in California
are permitted to establish branches throughout the State, thereby creating
the potential for additional competition in Surety's service areas.
Supervision and Regulation--General
General. Surety is extensively regulated under federal and state law.
These laws and regulations are intended to protect depositors, not
shareholders. To the extent that the following information describes
statutory or regulatory provisions, it is qualified in its entirety by
reference to the particular statutory and regulatory provisions. Any change
in applicable laws or regulations may have a material effect on the business
and prospects of Surety. The operations of Surety may be affected by
legislative changes and by the policies of various regulatory
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authorities. Surety is unable to predict the nature or the extent of the
effects on its business and earnings that fiscal or monetary policies,
economic controls or new federal or state legislation may have in the future.
Surety, as a California state-licensed bank, is subject to regulation,
supervision and periodic examination by the Department of Financial
Institutions of the State of California (the "Financial Institutions
Department") and the FDIC. Surety is not a member of the Federal Reserve
System, but is nevertheless subject to certain regulations of the Federal
Reserve Board. Surety's deposits are insured by the FDIC to the maximum
amount permitted by law, which is currently $100,000 per depositor in most
cases.
Recent and Pending Legislation. The enactment of the legislation
described below has significantly affected the banking industry generally and
will have an ongoing effect in the future.
Financial Institutions Reform, Recovery, and Enforcement Act of 1989.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") reorganized and reformed the regulatory structure applicable to
financial institutions generally. Among other things, FIRREA enhanced the
supervisory and enforcement powers for the federal bank regulatory agencies;
required insured financial institutions to guaranty repayment of losses
incurred by the FDIC in connection with the failure of an affiliated
financial institution; required financial institutions to provide their
primary federal regulator with notice, under certain circumstances, of
changes in senior management and broadened authority for bank holding
companies to acquire savings institutions.
Under FIRREA, federal bank regulators were granted expanded enforcement
authority over "institution-affiliated parties" (i.e., officers, directors,
controlling stockholders, as well as attorneys, appraisers or accountants who
knowingly or recklessly participate in wrongful action likely to have an
adverse effect on an insured institution). Federal banking regulators have
greater flexibility to bring enforcement actions against insured institutions
and institution-affiliated parties, including cease and desist orders,
prohibition orders, civil money penalties, termination of insurance and the
imposition of operating restrictions and capital plan requirements. In
general, these enforcement actions may be initiated for violations of laws
and regulations and unsafe or unsound practices. Since the enactment of
FIRREA, the federal bank regulators have significantly increased the use of
written agreements to correct compliance deficiencies with respect to
applicable laws and regulations and to ensure safe and sound practices.
Violations of such written agreements are grounds for initiation of
cease-and-desist proceedings. FIRREA granted the FDIC back-up enforcement
authority to recommend enforcement action to an appropriate federal banking
agency and to bring such enforcement action against a financial institution
or an institution-affiliated party if such federal banking agency fails to
follow the FDIC's recommendation. In addition, FIRREA requires, except under
certain circumstances, public disclosure of final enforcement actions by the
federal banking agencies.
FIRREA also established a cross guarantee provision ("Cross Guarantee")
pursuant to which the FDIC may recover from a depository institution losses
that the FDIC incurs in providing assistance to, or paying off the depositors
of, any of such depository institution's
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affiliated insured banks or thrifts. The Cross Guarantee thus enables the FDIC
to assess a holding company's healthy Bank Insurance Fund ("BIF") members and
Savings Association Insurance Fund ("SAIF") members for the losses of any of
such holding company's failed BIF and SAIF members. Cross Guarantee
liabilities are generally superior in priority to obligations of the
depository institution to its stockholders due solely to their status as
stockholders and obligations to other affiliates. Cross Guarantee liabilities
are generally subordinated to deposit liabilities, secured obligations or any
other general or senior liabilities, and any obligations subordinate to
depositors or other general creditors.
FIRREA requires a financial institution or holding company thereof to
give 30 days' prior written notice to its primary federal regulator of any
proposed director or senior executive officer if the institution has been
chartered or has undergone a change in control within the preceding two years
or is not in compliance with the minimum capital requirements or otherwise is
in troubled condition, giving the regulator the opportunity to disapprove any
such appointment. The federal banking agencies have adopted rules to
implement the foregoing provisions that broadly define "senior executive
officer" to include the president, chief financial officer, chief lending
officer, chief investment officer, general counsel, or their functional
equivalents, or any individual who exercises significant influence over, or
participates in, major policy making decisions without regard to title,
salary or compensation. The term "senior executive officer" also includes
any employee of another entity hired to perform the functions of positions
listed above. The term "troubled condition" with respect to a financial
institution means an institution: (i) that has received a composite rating of
4 or 5 (i.e., one of the two lowest examination ratings) in its most recent
examination; (ii) that is the subject of a capital directive or formal
enforcement action or proceeding or written agreement entered into with the
federal banking agency relating to safety or soundness or financial
viability; or (iii) that is informed in writing by such agency that it has
been deemed to be in troubled condition.
The Federal Deposit Insurance Corporation Improvement Act of 1991. The
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was
adopted to recapitalize the BIF and impose certain supervisory and regulatory
reforms on insured depository institutions. In general, FDICIA includes
provisions, that among others: (i) increased the FDIC's line of credit with
the U.S. Treasury in order to provide the FDIC with additional funds to cover
the losses of federally insured banks; (ii) reformed the deposit insurance
system, including the implementation of risk-based deposit insurance
premiums; (iii) established a format for closer monitoring of financial
institutions to enable prompt corrective action by banking regulators when a
financial institution begins to experience financial difficulty; (iv)
established five capital levels for financial institutions ("well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized") that would impose more
scrutiny and restrictions on less capitalized institutions; (v) required the
banking regulators to set operational and managerial standards for all
insured depository institutions and their holding companies, including limits
on excessive compensation to executive officers, directors, employees and
principal stockholders, and establish standards for loans secured by real
estate; (vi) adopted certain accounting reforms and require annual on-site
examinations of federally insured institutions, including the ability to
require independent audits of banks and thrifts; (vii) revised risk-based
capital standards to ensure that they (a) take adequate account of
interest-rate changes, concentration of credit risk and the risks of
nontraditional activities, and (b) reflect the
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actual performance and expected risk of loss of multi-family mortgages; and
(viii) restricted state-chartered banks from engaging in activities not
permitted for national banks unless they are adequately capitalized and have
FDIC approval. Further, FDICIA permits the FDIC to make special assessments on
insured depository institutions, in amounts determined by the FDIC to be
necessary to give it adequate assessment income to repay amounts borrowed from
the U.S. Treasury and other sources or for any other purpose the FDIC deems
necessary. FDICIA also grants authority to the FDIC to establish semiannual
assessment rates on BIF and SAIF member banks so as to maintain these funds at
the designated reserve ratios.
As noted above, FDICIA authorizes and, under certain circumstances,
requires the federal banking agencies to take certain actions against
institutions that fail to meet certain capital-based requirements. Under
FDICIA, the federal banking agencies are required to establish five levels of
insured depository institutions based on leverage limit and risk-based
capital requirements established for institutions subject to their
jurisdiction, plus, in their discretion, individual additional capital
requirements for such institutions. Under the final rules that have been
adopted by each of the federal banking agencies, an institution will be
designated: (i) well-capitalized if the institution has a total risk-based
capital ratio of 10% or greater, a core risk-based capital ratio of 6% or
greater, and a leverage ratio of 5% or greater, and the institution is not
subject to an order, written agreement, capital directive, or prompt
corrective action directive to meet and maintain a specific capital level for
any capital measure; (ii) adequately capitalized if the institution has a
total risk-based capital ratio of 8% or greater, a core risk-based capital
ratio of 4% or greater, and a leverage ratio of 4% or greater (or a leverage
ratio of 3% or greater if the institution is rated composite 1 in its most
recent report of examination); (iii) undercapitalized if the institution has
a total risk-based capital ratio that is less than 8%, a core risk-based
capital ratio that is less than 4%, or a leverage ratio that is less than 4%
(or a leverage ratio that is less than 3% if the institution is rated
composite 1 in its most recent report of examination); (iv) significantly
undercapitalized if the institution has a total risk-based capital ratio that
is less than 6%, a core risk-based capital ratio that is less than 3%, or a
leverage ratio that is less than 3%; and (v) critically undercapitalized if
the institution has a ratio of tangible equity to total assets that is equal
to or less than 2%.
Undercapitalized institutions are required to submit capital restoration
plans to the appropriate federal banking agency and are subject to certain
operational restrictions. Moreover, companies controlling an
undercapitalized institution are required to guarantee the subsidiary
institution's compliance with the capital restoration plan subject to an
aggregate limitation of the lesser of 5% of the institution's assets or the
amount of the capital deficiency when the institution first failed to meet
the plan.
Significantly or critically undercapitalized institutions and
undercapitalized institutions that fail to submit or comply with acceptable
capital restoration plans will be subject to regulatory sanctions. A forced
sale of shares or merger, restriction on affiliate transactions and
restrictions on rates paid on deposits are required to be imposed by the
banking agency unless it is determined that they would not further capital
improvement. FDICIA generally requires the appointment of a conservator or
receiver within 90 days after an institution becomes critically
undercapitalized. The federal banking agencies have adopted uniform
procedures for the issuance of directives by the appropriate federal banking
agency. Under these procedures, an institution
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will generally be provided advance notice when the appropriate federal banking
agency proposes to impose one or more of the sanctions set forth above. These
procedures provide an opportunity for the institution to respond to the
proposed agency action or, where circumstances warrant immediate agency
action, an opportunity for administrative review of the agency's action.
As described in Note 10 to the accompanying consolidated financial
statements, Surety was "well-capitalized" as of June 30, 1997 and December
31, 1996.
In addition to the aforementioned minimum capital requirements, the
California Financial Code requires the Financial Institutions Department to
order any bank whose contributed capital is impaired to correct such
impairment within 60 days of the date of the order. According to the
California Financial Code, the contributed capital of a bank, defined as all
stockholders' equity other than retained earnings, is deemed to be impaired
whenever such bank has deficit retained earnings in an amount exceeding 40%
of such contributed capital.
Pursuant to FDICIA, the FRB and the other federal banking agencies
adopted real estate lending guidelines pursuant to which each insured
depository institution is required to adopt and maintain written real estate
lending policies in conformity with the prescribed guidelines. Under these
guidelines, each institution is expected to set loan to value ratios not
exceeding the supervisory limits set forth in the guidelines. A loan to
value ratio is generally defined as the total loan amount divided by the
appraised value of the property at the time the loan is originated. The
guidelines require that the institution's real estate policy also require
proper loan documentation, and that it establish prudent underwriting
standards.
FDICIA also contained the Truth in Savings Act, which requires clear and
uniform disclosure of the rates of interest payable on deposit accounts by
depository institutions and the fees assessable against deposit accounts, so
that consumers can make a meaningful comparison between the competing claims
of financial institutions with regard to deposit accounts and products.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. In
1994 Congress enacted the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act"). Beginning in September 1995,
bank holding companies have the right to expand, by acquiring existing banks,
into all states, even those which had theretofore restricted entry. The
legislation also provides that, subject to future action by individual
states, a holding company will have the right, commencing in 1997, to convert
the banks which its owns in different states to branches of a single bank. A
state is permitted to "opt out" of the law which will permit conversion of
separate banks to branches, but is not permitted to "opt out" of the law
allowing bank holding companies from other states to enter the state. The
federal legislation also establishes limits on acquisitions by large banking
organizations, providing that no acquisition may be undertaken if it would
result in the organization having deposits exceeding either 10% of all bank
deposits in the United States or 30% of the bank deposits in the state in
which the acquisition would occur.
Economic Growth and Regulatory Paperwork Reduction Act of 1996. The
Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("EGRPRA") was
signed into law on September 30, 1996. EGRPRA streamlined the non-banking
activities application process for
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well-capitalized and well-managed bank holding companies. Under EGRPRA,
qualified bank holding companies may commence a regulatory approved
non-banking acquisition or share purchase, assuming the size of the
acquisition does not exceed 10% of risk-weighted assets of the acquiring bank
holding company and the consideration does not exceed 15% of Tier I capital.
The foregoing prior notice requirement also applies to commencing non-banking
activity de novo which has been previously approved by order of the FRB, but
has not yet been implemented by regulations. EGRPRA also provides for the
recapitalization of the SAIF in order to bring it into parity with BIF.
Pending Legislation. Because of concerns relating to competitiveness
and the safety and soundness of the banking industry, Congress is considering
a number of wide-ranging proposals for altering the structure, regulation and
competitive relationships of financial institutions in the United States.
Among such bills are proposals to merge the BIF and the SAIF insurance funds,
to eliminate the federal thrift charter, to alter the statutory separation of
commercial and investment banking and to further expand the powers of banks,
bank holding companies and competitors of banks. It cannot be predicted
whether or in what form any of these proposals will be adopted or the extent
to which Surety's business may be affected thereby.
Supervision and Regulation--Banks
Insurance of Accounts. The FDIC provides insurance, through the SAIF
and the SAIF, to depository institutions to a maximum of $100,000 for each
insured depositor. Surety's deposits consist solely of SAIF deposits.
Through December 31, 1992, all FDIC-insured institutions, whether members of
the BIF, the SAIF or both, paid the same premium (23 cents per $100 of
domestic deposits) under a flat-rate system mandated by law. FDICIA required
the FDIC to raise the reserves of the BIF and the SAIF, implement a
risk-related premium system and adopt a long-term schedule for recapitalizing
the BIF. Effective January 1, 1993, the FDIC amended its regulations
regarding insurance premiums to provide that a bank or thrift would pay an
insurance assessment within a range of 23 cents to 31 cents per $100 of
domestic deposits, depending on its risk classification.
The FDIC adopted an amendment to the BIF risk-based assessment schedule
which effectively eliminated deposit insurance assessments for most
commercial banks and other depository institutions with deposits insured by
the BIF, while maintaining the assessment rate for SAIF-insured institutions
in even the lowest risk-based premium category at 23 cents for each $100 of
assessable deposits. Following the enactment of EGRPRA and as part of the
recapitalization of the SAIF, the overall assessment rate for 1997 was
revised to equal 1.29 cents and 6.44 cents for each $100 of assessable
deposits of the BIF and SAIF, respectively.
Regulations Governing Capital Adequacy. The federal bank regulatory
agencies use capital adequacy guidelines in their examination and regulation
of banks. If the capital falls below the minimum levels established by these
guidelines, a bank may be denied approval to acquire other banks or establish
additional nonbank businesses or to open facilities.
The FDIC adopted risk-based capital guidelines for banks. The
risk-based capital guidelines are designed to make regulatory capital
requirements more sensitive to differences in
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risk profile among banks, to account for off-balance sheet exposure and to
minimize disincentives for holding liquid assets. Assets and off-balance
sheet items are assigned to broad risk categories, each with appropriate
weights. The resulting capital ratios represent capital as a percentage of
total risk-weighted assets and off-balance sheet items. Under these
guidelines, all banks must maintain a minimum risk-based total capital ratio
equal to 8% of which at least 4% must be Tier 1 capital. Pursuant to FDICIA,
banking regulators are to revise the risk-based capital standards to take into
account interest rate risk, concentration of credit risk and the risks of
nontraditional activities and multi-family mortgages.
As previously discussed, Surety was "well capitalized" at June 30, 1997
and December 31, 1996. See Note 10 to the accompanying consolidated
financial statements. Management of Surety believes that the risk-weighting
of assets and the risk-based capital guidelines do not have a material
adverse impact on Surety's operations.
Community Reinvestment Act. The Community Reinvestment Act of 1977
("CRA") requires that, in connection with examinations of financial
institutions within their jurisdiction, the federal banking regulators must
evaluate the record of the financial institutions in meeting the credit needs
of their local communities, including low and moderate income neighborhoods,
consistent with the safe and sound operation of those banks. These factors
are also considered in evaluating mergers, acquisitions and applications to
open a branch or facility.
Regulations Governing Extensions of Credit. Surety is subject to
certain restrictions imposed by the Federal Reserve Act on extensions of
credit to executive officers, directors, principal stockholders or any
related interest of such persons. Extensions of credit: (i) must be made on
substantially the same terms, including interest-rates and collateral as, and
following credit underwriting procedures that are not less stringent than,
those prevailing at the time for comparable transactions with persons not
covered above and who are not employees; and (ii) must not involve more than
the normal risk of repayment or present other unfavorable features. Banks
are also subject to certain lending limits and restrictions on overdrafts to
such persons. A violation of these restrictions may result in the assessment
of substantial civil monetary penalties on a bank or any officer, director,
employee, agent or other person participating in the conduct of the affairs
of the bank or the imposition of a cease and desist order.
Reserve Requirements. The FRB requires all depository institutions to
maintain reserves against their transaction accounts and non-personal time
deposits. Reserves of 3% must be maintained against total transaction
accounts of $51.9 million or less (subject to adjustment by the FRB), and an
additional reserve of 10% (subject to adjustment by the FRB to a level
between 8% and 14%) must be maintained against that portion of total
transaction accounts in excess of $51.9 million. The balances maintained to
meet the reserve requirements imposed by the FRB may be used to satisfy
liquidity requirements.
Institutions are authorized to borrow from the Federal Reserve Bank
"discount window," but FRB regulations require institutions to exhaust other
reasonable alternative sources of funds before using this borrowing
authority.
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Dividends. The shareholders of Surety are entitled to receive dividends
when and as declared by its Board of Directors, out of funds legally
available, subject to the dividends preference, if any, on preferred shares
that are outstanding. Dividends payable by Surety are further restricted
under California law to the lesser of Surety's retained earnings, or its net
income for the latest three fiscal years, less the amount of any
distributions made during that period, or, with the approval of the Financial
Institutions Department, to the greatest of Surety's retained earnings, its
net income for its last fiscal year or the net income for its current fiscal
year. In addition, the FDIC has indicated that it would generally be
considered to be an unsafe and unsound banking practice for banks to pay
dividends except out of current earnings.
Usury Laws. The maximum legal rate of interest which Surety charges on
a particular loan depends on a variety of factors such as the type of
borrower, the purpose of the loan, the amount of the loan and the date the
loan is made. There are several state and federal statutes which set maximum
legal rates of interest for various kinds of loans. If a loan qualifies
under more than one statute, a bank may often charge the highest rate for
which the loan is eligible.
Monetary Policy and Economic Control. The commercial banking business
in which Surety engages is affected not only by general economic conditions,
but also by the monetary policies of the FRB. Changes in the discount rate
on member bank borrowing, availability of borrowing at the "discount window,"
open market operations, the imposition of changes in reserve requirements
against member banks deposits and assets of foreign branches, and the
imposition of and changes in reserve requirements against certain borrowings
by banks and their affiliates are some of the instruments of monetary policy
available to the FRB. These monetary policies are used in varying
combinations to influence overall growth and distributions of bank loans,
investments and deposits, and this use may affect interest rates charged on
loans or paid on deposits. The monetary policies of the FRB have had a
significant effect on the operating results of commercial banks and are
expected to do so in the future. The monetary policies of the FRB are
influenced by various factors, including inflation, unemployment, short-term
and long-term changes in the international trade balance and in the fiscal
policies of the U.S. Government. Future monetary policies and the effect of
such policies on Surety's future business and earnings cannot be predicted.
Properties
Surety's administrative offices are located in a building owned by and
serving as headquarters of Surety located at 116 Springstowne Center,
Vallejo, California. Surety operates two branches which are both owned. The
following table shows the addresses of the locations used by Surety and the
approximate square footage of office space occupied at each location:
<TABLE>
<CAPTION>
Description Address Square Footage
----------- ------- --------------
<S> <C> <C>
Headquarters and Branch 116 Springstowne Center
Vallejo, California 94591 14,800
Branch 2407 Waterman Boulevard
Fairfield, California 94533 4,716
</TABLE>
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COMPARATIVE RIGHTS OF SHAREHOLDERS OF SURETY AND FBA
General
FBA is a Delaware corporation subject to the provisions of the Delaware
General Corporation Law ("DGCL"), its Restated Certificate of Incorporation
(the "FBA Certificate") and its Amended and Restated By-Laws (the "FBA
By-Laws"). Surety is a California banking association subject to the
provisions of the California General Corporation Law ("CGCL"), the California
Financial Code ("CFC"), its Certificate and Articles of Incorporation, as
amended (the "Surety Articles") and its By-Laws, as amended (the "Surety
By-Laws"). Those shareholders of Surety who receive FBA Common pursuant to
the Merger will become shareholders of FBA and their rights as shareholders
will then be governed by the DGCL, the FBA Certificate and the FBA By-Laws.
The FBA Certificate authorizes the issuance by the Board of Directors,
without shareholder approval, of up to 3,000,000 shares of preferred stock,
par value $1.00 per share, in one or more series. Subject to applicable
limitations, the Board of Directors is authorized to determine the relative
voting powers, designations and preferences and the rights, qualifications,
limitations or restrictions for each series of preferred stock that may be
issued. Such rights and preferences could adversely affect the rights of
holders of the FBA Common. At the present time, no shares of preferred stock
of FBA are outstanding and no series have been authorized for issuance. The
possible effect of any such issuance upon the rights of the holders of FBA
Common is not discussed herein.
Under applicable regulatory policies, holding companies of federally
insured financial institutions such as FBA are required to serve as a "source
of strength" for their insured subsidiaries. This could result in FBA being
required by regulatory order or directive to contribute additional capital to
its bank subsidiaries, to guarantee certain obligations of such subsidiaries
or to take other actions for the benefit of such subsidiaries requiring the
investment or holding of its capital or resources. Such a regulatory order
or directive could have an adverse impact upon the FBA Common. Financial
institutions which are under the common control of a holding company (such as
FBA and First Banks) are also subject to assessment if one of the controlled
institutions fails and the FDIC incurs losses therefrom; see "BUSINESS OF
SURETY BANK--Supervision and Regulation--General" for a description of such
"cross guarantee" liability. No order or directive is in effect or
threatened with regard to FBA under the "source of strength" or "cross
guarantee" policies.
The following is a summary of the material differences between the
rights of holders of Surety Common Stock and the rights of holders of FBA
Common. This summary is not intended to be complete and is qualified in its
entirety by reference to the applicable provisions of the DGCL, the FBA
Certificate, the FBA By-Laws, the CGCL, the CFC, the Surety Articles and the
Surety By-Laws.
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Assessability
FBA. Pursuant to the FBA Certificate, shares of FBA Common which have
been issued and for which the consideration has been paid and delivered to
FBA are deemed to be fully paid stock and are not liable to any further call
or assessment.
Surety. Surety Common Stock is subject to assessment pursuant to the
Surety Articles and the provisions of the CFC, which provide that when the
contributed capital of a bank is "impaired" (when the retained earnings
deficit is in excess of 40% of contributed capital), the Commissioner shall
order the bank to correct such impairment within 60 days of the date of the
order. If the impairment of contributed capital is not otherwise corrected,
the board of the bank is required to levy and collect an assessment on its
outstanding common shares pursuant to the CGCL.
Pursuant to the CGCL, if a shareholder has not paid the amount of the
assessment by the date on which the assessment becomes delinquent, the
shareholder may avoid sale or forfeiture of said shares, prior to the date of
sale, by paying the amount of the assessment, together with a penalty of 5%
of such amount. If an assessment remains unpaid, the assessed shares may be
sold by, or forfeited to, the bank in satisfaction of the assessment and
penalties thereon. The shareholders are not subject to personal liability
for payment of such an assessment. Unless an amendment to the articles of
incorporation is adopted by unanimous consent of the shareholders and noted
on the face of the stock certificates, the only remedy of the bank for the
collection of any such assessment is the sale of the shares as described
above or, in the event no such sale can be consummated, forfeiture of such
shares.
Dividend Restrictions
FBA. The FBA Certificate provides that dividends upon the capital stock
of FBA, subject to any resolutions providing for any series of stock, may be
declared by the Board of Directors and paid in cash, in property or in shares
of capital stock of FBA. The DGCL further provides that the directors of a
corporation, subject to any restrictions contained in its certificate of
incorporation, may declare and pay dividends upon the shares of its capital
stock either (a) out of its surplus, as defined in the DGCL; or (b) if there
is no surplus, then out of its net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year. If, however, the
capital of the corporation has been diminished to an amount less than the
aggregate amount of the capital represented by the issued and outstanding
stock having a preference upon the distribution of assets, no dividends may
be declared out of net profits. See "RISK FACTORS--Dividends" for
information regarding current limitations on FBA's ability to pay dividends.
The FBA Certificate provides that holders of FBA Common and FBA Class B
Stock shall participate equally in any dividends, except that (a) the holders
of FBA Class B Stock shall participate equally with respect to cash dividends
only if and to the extent such cash dividends exceed $0.45 per share on the
FBA Common per calendar year; and (b) dividends payable on shares of FBA
Common shall be paid only on shares of FBA Common and dividends payable on
shares of FBA Class B Stock shall by paid only on shares of FBA Class B
Stock. In the event that any shares of preferred stock are hereafter issued
by FBA, the right of the holders of FBA Common and FBA Class B Stock may be
restricted. "See RISK FACTORS--Dividends" for information regarding current
limitations on FBA's ability to pay dividends.
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Surety. Because Surety is a state-chartered bank, its ability to pay
dividends or make distributions to its shareholders is subject to
restrictions set forth in the CFC. The CFC provides that a bank may not make
any distribution to its shareholders in an amount which equals the lesser of
(a) the retained earnings of the bank; or (b) the net income of the bank for
its last three fiscal years, less the amount of any distributions made by the
bank to its shareholders during such period. However, a bank may, with the
prior approval of the Commissioner make a distribution to its shareholders in
an amount not exceeding the greatest of (a) its retained earnings; (b) its
net income for the last fiscal year; or (c) its net income for its current
fiscal year. In the event that the Commissioner determines that the
shareholders' equity of a bank is inadequate or that the making by the bank
of a distribution to its shareholders would be unsafe or unsound, the
Commissioner may order the bank to refrain from making any distributions.
The right of the holders of Surety Common Stock to receive dividends is
further restricted by the Surety Articles which provide, in part, that no
dividends may be paid upon the Surety Common Stock unless full dividends on
all outstanding shares of Surety Preferred Stock have been, or
contemporaneously are, paid or declared and set aside for payment.
Transferability of Stock
FBA. FBA Common is listed and traded on the NYSE. FBA has agreed in
the Reorganization Agreement to use its best efforts to cause the shares of
FBA Common to be issued in the Merger to listed on the NYSE. The shares of
FBA Common into which shares of Surety Common Stock are converted on the
Effective Date will be freely transferable under the Securities Act except
for shares issued to any shareholder who may be deemed to be an "affiliate"
of Surety for purposes of Rule 145 under the Securities Act. See "Resale of
FBA Common."
Surety. Surety Common Stock is not traded on an established trading
market and it is not anticipated that a broader market for the Surety Common
Stock will be developed or maintained. The lack of such a market may make it
difficult for holders of Surety Common Stock to sell their shares and may
adversely effect the price obtained by them in any such sale.
Voting Rights; Cumulative Voting
FBA. Unless otherwise required by law or the FBA Certificate, holders
of shares of FBA Common vote together with holders of FBA Class B Stock, as
a single class, on all matters submitted to a vote of shareholders, with each
share being entitled to one vote per share. Pursuant to the FBA Certificate,
in all elections for directors of FBA, each holder of FBA Common and FBA
Class B Stock has the right to cumulate his votes by casting as many votes in
the aggregate as shall equal the number of voting shares held by such
shareholder in FBA, multiplied by the number of directors to be elected.
Such votes may be cast for one candidate or distributed among two or more
candidates.
The FBA Certificate provides that none of the provisions therein
affecting the powers, preferences, rights, qualifications, limitations or
restrictions of the FBA Class B Stock may be
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amended or repealed without the affirmative vote of the holders of a majority
of the shares of the FBA Common then outstanding, voting as a separate class.
Surety. Except as otherwise required by law or the Surety Articles,
the holders of the Surety Common Stock have exclusive voting rights and
powers, with each share of Surety Common Stock being entitled to one vote per
share. In the event, however, that six semi-annual dividends upon the issued
and outstanding shares of Surety Preferred Stock are not paid, the holders of
the Surety Preferred Stock, as a class, have the right to elect the smallest
number of directors which will constitute 49% of the authorized number of
directors; provided, that if the dividend in any semi-annual period was
earned but was not declared and paid because regulatory approval of the
dividend payment was required and was not granted, such semi-annual period is
not counted for purposes of determining whether or not six or more
semi-annual dividends have been paid. In addition, the holders of the Surety
Preferred Stock have the right to approve, by majority vote, certain actions
of Surety which could adversely affect their rights as holders of Surety
Preferred Stock.
Similarly to FBA, the shareholders of Surety have the right to cumulate
their votes in elections for directors. However, the CGCL and the Surety
By-Laws provide that no shareholder shall be entitled to so cumulate unless
the names of the candidates have been placed in nomination prior to the
voting and the shareholder has given notice at the meeting prior to the
voting of the intention of the shareholder to cumulate his or her votes.
Size and Classification of the Board of Directors
FBA. Pursuant to the DGCL and the FBA Certificate, the number of
directors is fixed in the FBA By-Laws as six; provided, however, that the
number of directors which constitutes the whole Board may be fixed from time
to time by resolution of the Board of Directors (but may not be less than
three) and, provided further, that there shall be added to such number of
directors as so fixed any number of directors who are elected solely by the
holders of any class of stock of FBA pursuant to the terms of the constituent
instrument establishing such shares. The DGCL permits the directors to be
divided into one, two or three classes, although FBA has not adopted such a
provision at the present time.
In the Reorganization Agreement, FBA has agreed to cause one person
designated by Surety's Board of Directors to be named as a director of FBA;
see "INTERESTS OF CERTAIN PERSONS IN THE MERGER--Continuing Service as
Director."
Surety. The Surety Articles and the Surety By-Laws provide that the
authorized number of directors is not less than seven nor more than 13.
Pursuant to the CGCL, the Surety By-Laws further provide that the exact
number of directors, within the limits specified, is to be fixed and
determined from time to time by resolution of a majority of the full Board or
by resolution of a majority of the shareholders. Surety is not eligible
under the provisions of the CGCL to adopt provisions which would divide its
Board of Directors into two or three classes.
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Removal of Directors
FBA. Pursuant to the DGCL, with certain exceptions, any director or the
entire Board of Directors may be removed, with or without cause, by the
holders of a majority of the shares then entitled to vote at an election of
directors. If less than the entire Board is to be removed and the
corporation has cumulative voting (as does FBA), no director may be removed
without cause if the votes cast against his removal would be sufficient to
elect him if then cumulatively voted at an election of the entire Board of
Directors. The FBA By-Laws further provide that notice of the intention to
act upon the removal of a director or directors must be given in the notice
calling such meeting.
Surety. Pursuant to the CGCL and the Surety By-Laws, any or all of
the directors may be removed from office without cause by a vote of
shareholders holding a majority of the outstanding shares entitled to vote at
an election of directors; however, unless the entire Board of Directors is
removed, an individual director may not be removed if the votes cast against
removal, or not consenting in writing to such removal, would be sufficient to
elect such director if voted cumulatively at an election at which the same
total number of votes were cast (or, if such action is taken by written
consent, all shares entitled to vote were voted) and the entire number of
directors authorized at the time of the director's most recent election were
then being elected. The CGCL further provides that a director may also be
removed for fraudulent or dishonest acts or gross abuse of authority or
discretion by the California Superior Court of the proper county at the suit
of shareholders holding at least 10% of the outstanding shares.
Filling Vacancies on the Board of Directors
FBA. Under the FBA By-Laws, if any vacancy occurs on the Board of
Directors or the number of directors is increased, a majority of the
remaining or existing directors, though less than a quorum, may choose a
successor or successors or fill the new directorships. Each director shall
hold office for the unexpired term in respect to which such vacancy occurred
or, in the case or a new directorship or directorships, until the next annual
meeting of shareholders.
Pursuant to the DGCL, however, if at the time of filling any vacancy or
newly created directorship, the directors then in office constitute less than
a majority of the entire Board of Directors (as constituted immediately prior
to any such increase), the Delaware Court of Chancery may, upon application
of shareholders holding at least 10% of the outstanding shares entitled to
vote for such directors, order an election to be held to fill any such
vacancies or newly created directorships or to replace the directors chosen
by the directors then in office.
Surety. The Surety By-Laws provide that, except for a vacancy
created by the removal of a director, vacancies on the Board of Directors may
be filled by a majority of the remaining directors although less than a
quorum, or by a sole remaining director. The shareholders may elect a
director at any time to fill any vacancy not filled by the directors. Any
such election by written consent other than to fill a vacancy created by
removal requires the consent of a majority of the outstanding shares entitled
to vote. Each director elected shall hold office until his successor is
elected at an annual or special meeting of shareholders. Pursuant to the
CGCL, vacancies occurring on the Board of Directors by reason of removal may
be filled only by the affirmative vote of a majority of the shares entitled
to vote at a meeting at which a quorum is present, or by the written consent
of the shareholders.
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In addition, the CGCL provides that if, after the filling of any vacancy
by the directors, the directors then if office who have been elected by the
shareholders shall constitute less than a majority of the directors then in
office (a) any holder or holders of an aggregate of 5% or more of the total
number of shares at the time outstanding having the right to vote for such
directors may call a special meeting of shareholders; or (b) the California
Superior Court of the proper county shall, upon application of such
shareholder or shareholders, summarily order a special meeting of
shareholders to be held to elect the entire Board of Directors.
Special Meetings of Shareholders; Action by Written Consent
FBA. The FBA By-Laws provide that special meetings of the shareholders,
for any purpose or purposes, may be called by the Chairman of the Board, the
President, a majority of the Board of Directors or the holders of not less
than 50% of the outstanding shares entitled to vote at the meeting.
The FBA By-Laws further provide that any action required to be, or which
may be, taken at any annual or special meeting of shareholders may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would
be necessary to authorize or take such action at a meeting at which all
shares entitled to vote thereon were present and voted. Prompt notice of the
taking of the corporate action without a meeting by less than unanimous
consent must be given to those shareholders who did not consent in writing.
Surety. The CGCL and the Surety By-Laws provide that special
meetings of shareholders, for any purpose or purposes whatsoever, may be
called at any time by the Board of Directors, the Chairman of the Board, the
President or by holders of shares entitled to cast not less than 10% of the
votes at the meeting.
The CGCL and the Surety By-Laws further provide for written consents by
the shareholders and prompt notice of actions taken without unanimous consent
as specified above with respect to FBA, except that unanimous written consent
is required for elections of directors to non-vacant positions. A
shareholder who gives written consent may revoke the consent under specified
circumstances.
Shareholder Inspection Rights; Shareholder Lists
FBA. The DGCL provides that any shareholder of record has the right to
inspect for any "proper purpose" the stock ledger of the corporation, a list
of its shareholders and its other books and records. A "proper purpose" is
defined to mean a purpose reasonably related to such person's interest as a
shareholder.
The DGCL and the FBA By-Laws further provide that, at least ten days
before each meeting of shareholders, a complete shareholder list shall be
prepared and be open to examination of any shareholder for any purpose
germane to the meeting.
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<PAGE> 91
Surety. The CGCL and the Surety By-Laws provide that the accounting
books and records and minutes of proceedings of the shareholders and the
Board and committees of the Board shall be open to inspection upon written
demand of any shareholder for a purpose reasonably related to such holder's
interests as a shareholder.
The CGCL and the Surety By-Laws further provide an absolute right of
inspection of the shareholder list to any shareholder holding 5% of more of
the outstanding voting shares. The record of shareholders is also open to
inspection by any shareholder upon written demand for a purpose reasonably
related to such holder's interest as a shareholder.
Amendment of Governing Documents
FBA. Under the DGCL, the FBA Certificate may be amended if such
amendment is approved by the Board of Directors, a majority of the
outstanding stock entitled to vote thereon and a majority of the outstanding
stock of each class entitled to vote thereon, unless the certificate of
incorporation requires the vote of a greater proportion of the outstanding
stock or any class thereof. Pursuant to the foregoing, the affirmative vote
of 75% of the capital stock of FBA entitled to vote in elections of
directors, voting as a single class, is required to amend, alter, change or
repeal any of the supermajority voting provisions described in "Shareholder
Vote for Mergers and Other Reorganizations" below.
The FBA Certificate further provides that none of the provisions thereof
affecting the FBA Class B Stock may be amended or repealed unless, in
addition to any other vote required by law or the Certificate of
Incorporation, such amendment is approved by the affirmative vote of the
holders of a majority of the shares of the FBA Common then outstanding,
voting as a separate class.
Pursuant to the FBA Certificate, the Board of Directors has the power
to make, alter or repeal the By-Laws only with the prior approval of the
holders of a majority of the shares of FBA Class B Stock, subject to such
restrictions as may be imposed by the shareholders in the By-Laws.
The FBA By-Laws provide that they may be altered, amended or repealed or
new By-Laws adopted by either (a) the affirmative vote of the holders of a
majority of the shares entitled to vote at a meeting at which a quorum is
present; or (b) with the affirmative vote of the holders of a majority of the
shares of FBA Class B Stock, by the affirmative vote of a majority of the
whole Board of Directors.
Surety. The Surety Articles provide that as long as any shares of the
Surety Preferred Stock are outstanding, Surety shall not, among other things,
(a) amend or repeal any provision of, or add any provision to, the Surety
Articles if such action would adversely affect the Surety Preferred Stock; or
(b) make any provision in the Surety Articles or Surety By-Laws fixing
special qualifications of persons who may be holders of the Surety Preferred
Stock or any restrictions upon the right to transfer or hypothecate the
Surety Preferred Stock, except as may be required by federal law.
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<PAGE> 92
The Surety By-Laws provide that new By-Laws may be adopted or the
By-Laws may be amended or repealed by the affirmative vote or written consent
of a majority of the outstanding shares entitled to vote. Subject to such
right of shareholders, the By-Laws further provide that they may be adopted,
amended or repealed by the Board of Directors, other than a Bylaw fixing or
changing the authorized number of directors.
Shareholder Vote For Mergers and Other Reorganizations
FBA. The FBA Certificate provides that whenever under the laws of the
State of Delaware a vote of shareholders is required to approve or authorize
any of the transactions set forth below, then, the affirmative vote or
consent of 75% of the capital stock of FBA entitled to vote in elections of
directors, voting as a single class, is required to authorize or approve such
transactions if the other party to the transaction owns at least 5% of the
--
total outstanding shares of stock of FBA entitled to vote in elections of
directors:
(a) a merger or consolidation with or into any other corporation; or
(b) any sale, lease or exchange of all or substantially all of the
property and assets of FBA to any other corporation, person or
other entity; or
(c) any purchase or lease of all or substantially all of the assets of
any corporation, person or other entity by FBA; or
(d) any combination of the outstanding shares of Common Stock of FBA
into a smaller number of shares.
The FBA Certificate further provides an exemption from the supermajority
voting provisions described above in connection with (i) any merger or
similar transaction with any corporation if the Board of Directors of FBA has
approved a memorandum of understanding with such other corporation prior to
the time that such other corporation became a 5% shareholder; or (ii) any
merger or consolidation of FBA with, or any sale or lease to FBA or any
subsidiary of any assets of, or any sale or lease by FBA or any subsidiary of
any assets to, any corporation of which a majority of the outstanding shares
of all classes of stock entitled to vote in elections of directors of such
corporation is owned by FBA and its subsidiaries.
The FBA Certificate further provides that, except as otherwise described
above or required by statute, an agreement of merger or consolidation may be
approved by a majority vote of the issued and outstanding shares.
The DGCL generally provides that, unless required by the certificate of
incorporation of the surviving corporation, no vote of shareholders of the
surviving corporation is necessary to authorize a merger if (a) the merger
agreement does not amend in any respect the certificate of incorporation of
the surviving corporation; (b) each share of stock of the surviving
corporation outstanding immediately prior to the merger is to be an identical
outstanding or treasury share of the surviving corporation after the merger;
and (c) the authorized unissued shares or the treasury shares of common stock
of the surviving corporation to be issued or delivered under the plan of
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<PAGE> 93
merger do not exceed 20% of the shares of common stock of the surviving
corporation outstanding immediately prior to the merger.
Surety. In addition to the shareholder vote required by Delaware law,
the CGCL provides for a shareholder vote (a) of an acquiring corporation in
either a share-for-share exchange or a sale-of-assets reorganization; and (b)
of a parent corporation (even though it is not a "constituent corporation")
whose equity securities are being issued in connection with a corporate
reorganization such as a triangular merger. With certain exceptions, the
CGCL also requires a class vote when a shareholder vote is required in
connection with these transactions. California law contains an exception to
its voting requirements for reorganizations where shareholder control is not
diluted by more than one-sixth as a result of the reorganization.
Liability of Directors for Breach of Fiduciary Duty
FBA. The FBA Certificate provides that, to the fullest extent permitted
by the DGCL, no director shall be personally liable to FBA or any shareholder
for monetary damages for breach of fiduciary duty. The FBA Certificate does
not, however, limit or eliminate liability arising from or based upon (a) any
breach by a director of his duty of loyalty to FBA or its shareholders; (b)
acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law; (c) certain acts specified in the DGCL, which
imposes liability on all directors, except absent or dissenting directors,
under whose administration there occurs a willful or negligent violation of
certain provisions of the DGCL regarding payment of dividends, stock
purchases or stock redemptions; or (d) any transactions from which a
director derived an improper personal benefit.
Surety. The Surety Articles provide that the liability of directors
for monetary damages is eliminated to the fullest extent permissible under
California law. Pursuant to the CGCL, such provision may not eliminate or
limit the liability of directors with respect to (a) acts or omissions that
involve intentional misconduct or a knowing and culpable violation of law;
(b) acts or omissions that a director believes to be contrary to the best
interests of the corporation or its shareholders or that involve the absence
of good faith on the part of the director; (c) any transaction from which a
director derived an improper personal benefit; (d) acts or omissions that
show a reckless disregard for the duty of the director to the corporation or
its shareholders in circumstances in which the director was aware, or should
have been aware, in the ordinary course of performing his duties, of a risk
of serious injury to the corporation or its shareholders; (e) acts or
omissions that constitute an unexcused pattern of inattention that amounts to
an abdication of the duty of the director to the corporation or its
shareholders; (f) any transaction between the corporation and (i) a director,
or (ii) an entity in which the director has a material financial interest,
that violates specified provisions of the CGCL; or (g) any distributions to
shareholders or the making of any loans or guaranties to officers or
directors that violate specified provisions of the CGCL.
Indemnification of Directors and Officers
FBA. Pursuant to the authority granted in the DGCL, the FBA By-Laws
provide that FBA shall indemnify directors, officers, employees and agents of
FBA, or any such person who
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serves or served in any such capacity with any other corporation or enterprise
at the request of FBA, against expenses and other amounts actually and
reasonably incurred by him if he acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of FBA, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. In specified circumstances, the By-Laws
further provide for indemnification by FBA of the parties specified above in
connection with actions or suits by or in the right of the corporation to
procure a judgment in its favor. Indemnification under the FBA By-Laws, unless
ordered by a court, may be made only upon a determination by the Board of
Directors or shareholders that indemnification is proper because the person
has met the applicable standard of conduct. Expenses incurred in defending any
such actions, suits or proceedings may be advanced by the corporation as
authorized by the Board of Directors.
Surety. Pursuant to the Surety Articles, Surety is authorized to
provide, through bylaw provisions, agreements or otherwise, indemnification
of its directors, officers, employees and agents in excess of the
indemnification otherwise permitted by Section 317 of the CGCL, subject only
to the limitations on excess indemnification set forth in the CGCL with
respect to actions for breach of duty to the corporation and its
shareholders, as further described in "Liability of Directors for Breach of
Fiduciary Duty" above. In addition, the CGCL prohibits indemnification under
the circumstances specified in Section 317.
The Surety By-Laws further provide that Surety shall provide
indemnification to the parties and in the circumstances generally described
above with respect to FBA, to the fullest extent permitted by California law
and the Surety Articles. However, indemnification of a director or officer
is not required (a) if the corporation is prohibited by applicable law from
paying an indemnity; (b) with respect to expenses of defense or
investigation, if the expenses were or are incurred without the consent of
Surety; (c) for which final payment is actually made to the director or
officer under an insurance policy maintained by Surety, except in respect of
any excess beyond the amount of the payment under the policy; (d) for which
payment is actually made to the director or officer under an indemnity by
Surety otherwise than pursuant to the Surety By-Laws, except in respect of
any excess beyond the amount of payment under that indemnity; (e) based upon
or attributable to the director or officer gaining in fact any personal
profit or advantage to which not legally entitled; (f) for an accounting of
profits made from the purchase or sale of securities pursuant to applicable
law; or (g) based upon acts or omissions involving intentional misconduct or
a knowing and culpable violation of law.
Pursuant to the CGCL, the determination of whether or not a party
seeking indemnification has met the applicable standard of conduct may be
made by the directors, the shareholders, the court or, if a quorum of
disinterested directors is not obtainable, by independent legal counsel.
Dissenters' Rights
FBA. Pursuant to the DGCL, a dissenting shareholder of a corporation
participating in a merger or consolidation may, as specified in such statute,
be entitled to receive cash in the amount of the fair value of his shares (as
determined by an agreement with the corporation or by a court), in lieu of
the consideration he would otherwise receive under the terms of the
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<PAGE> 95
transaction. Unless the certificate of incorporation provides otherwise, the
DGCL does not generally require such dissenters' rights of appraisal with
respect to a merger or consolidation of a corporation, the shares of which
are listed on a national securities exchange, designated as a national market
system security by NASDAQ or held of record by more than 2,000 shareholders,
if such shareholders receive stock of the surviving corporation or of such a
listed or widely held corporation. Dissenters' rights are also unavailable in
Delaware to the shareholders of a corporation surviving a merger if no vote
of such shareholders is required. The DGCL generally does not require class
voting, except where the transaction involves an amendment to the certificate
of incorporation that affects a class of shares adversely.
Surety. Pursuant to the CGCL, a dissenting shareholder of a
corporation participating in a reorganization (including a merger
reorganization, an exchange reorganization or a sale-of-assets
reorganization, as defined in the CGCL) may, as specified in such statute,
also be entitled to receive cash in the amount of the fair market value of
his shares in lieu of the consideration he would otherwise receive under the
terms of the transaction. The CGCL generally does not require such
dissenters' rights of appraisal with respect to shares which are listed on a
national securities exchange or on the list of OTC margin stocks issued by
the Board of Governors of the Federal Reserve System, unless (a) there exists
any restriction on transfer imposed by the corporation or by law or
regulation; or (b) there have been demands for payment filed with respect to
5% or more of the outstanding shares of that class. Subject to the
provisions of the CGCL, holders of Surety Common Stock are entitled to
dissenters' rights in connection with the Merger. For a more complete
description of such rights, see "THE MERGER--Dissenters' Rights."
Summary
Although certain of the specific differences between the voting and
other rights of the holders of Surety Common Stock and FBA Common are
discussed above, the foregoing summary is not intended to be a complete
statement of the comparative rights of such shareholders under California and
Delaware law, or the rights of such persons under the respective charters and
By-Laws of Surety and FBA. The identification of certain specific
differences is not intended to indicate that other differences do not exist.
The foregoing summary is qualified in its entirety by reference to the
statutes and documents referred to therein.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF SURETY BANK
This Management's Discussion and Analysis contains forward-looking
statements within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act. Actual results could differ materially from
those projected in such forward-looking statements as a result of, among
other things, the factors set forth in the section entitled "Risk Factors."
General
Surety was originally organized in 1980 as a federally-chartered mutual
savings and loan association headquartered in Vallejo, California. In 1993,
the Board of Directors determined that the strategic direction which it
envisioned for Surety was somewhat limited by the regulatory structure
applied to savings banks and could be more readily accomplished by conversion
to a commercial bank charter. As a result, on November 1, 1994, Surety was
converted to a California state-chartered, non-member commercial bank.
While this change of corporate structure was occurring, Surety began a
more pervasive change of its business and operations to those normally
associated with a commercial bank. This included expanding its product lines
for both loans and deposits, establishing a commercial business development
function, enhancing its internal operations, lending and loan administrative
functions and restructuring the composition of its assets and liabilities.
Although most of this transitional process is now complete, its effects have
been evident throughout the period from 1994 to June 30, 1997 and are
apparent in the accompanying financial statements.
In addition, Surety's Board of Directors took certain measures intended
to focus Surety on what it considered its "core" business. In 1994, Surety
sold its branch offices in Middletown and Calistoga to allow it to redirect
its resources to its two primary market areas - Vallejo and Fairfield. In
1995, Surety relocated its Fairfield branch to a new office offering better
access to its customer base and its target business market. And in 1996,
Surety established a wholesale and retail real estate mortgage lending
operation, and sold its check cashing operations.
To accomplish this, Surety dedicated substantial financial and
organizational resources. The effects of this, combined with the one-time
charge for recapitalization of the SAIF in 1996, have been minimal net growth
in assets and little net income for the three years ended December 31, 1996.
These changes have now positioned Surety to be a competitive factor in its
market areas.
At June 30, 1997, Surety had $72.7 million in total assets; $56.0
million in total loans, net of unearned discount; $66.6 million in total
deposits; and $5.0 million in total stockholders' equity. For the six months
ended June 30, 1997, Surety's net income was $155,000, compared to $96,000
for the comparable period in 1996. For the year ended December 31, 1996,
Surety incurred a net loss of $204,000 compared to net income of $36,000 and
$161,000 for the years ended December 31, 1995 and 1994, respectively.
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<PAGE> 97
Surety has two banking locations in Vallejo and Fairfield, California.
Surety offers a broad range of commercial and personal banking services,
including certificates of deposit, individual retirement and other time
deposit accounts, checking and other demand deposit accounts, interest
checking accounts, savings accounts and money market accounts. Loans include
commercial, Small Business Administration ("SBA"), commercial and residential
real estate, real estate construction and development and consumer loans.
Other financial services include mortgage banking, automatic teller machines
and safe deposit boxes.
Financial Condition and Average Balances
Surety's total average assets were $71.5 million and $64.7 million for
the six month periods ended June 30, 1997 and 1996, respectively, in
comparison to $67.5 million, $61.7 million and $68.6 million for the years
ended December 31, 1996, 1995 and 1994, respectively.
Total average assets increased by $4.0 million to $71.5 million for the
six months June 30, 1997, from $67.5 million for the year ended December 31,
1996. As more fully described under "-Mortgage Banking Activities," the
increase is primarily attributable to loans held for sale, which increased to
$7.3 million for the six months ended June 30, 1997 from $3.0 for the year
ended December 31, 1996. For the six months ended June 30, 1997, average
stockholders' equity decreased by $300,000 to $4.9 million from $5.2 million
for the year ended December 31, 1996. The decrease reflects the effect of
the net loss incurred in 1996 on the average balances as well as the payment
of preferred stock dividends and the net change in the unrealized loss on the
available-for-sale investment securities.
For the year ended December 31, 1996, total average assets increased by
$5.8 million as compared to the year ended December 31, 1995. The increase
is primarily attributable to loans held for sale and investment securities
which increased by $3.0 million and $3.6 million, respectively, for 1996 in
comparison to 1995. The increase in average earning assets was funded by
deposits which increased by $6.1 million to $61.3 million from $55.2 million
for the years ended December 31, 1996 and 1995, respectively. The increase
in the loans held for sale is consistent with Surety's strategic objective to
develop both a retail and wholesale mortgage banking operation. The funds
generated from the growth in the deposit portfolio, net of funds required to
support loan growth, were invested in the available-for-sale investment
security portfolio. Average stockholders' equity decreased by $50,000 to
$5.16 million from $5.21 million for the years ended December 31, 1996 and
1995, respectively, reflecting the net loss for 1996, the payment of
preferred stock dividends and the net change in the unrealized loss on
available-for-sale investment securities.
For the year ended December 31, 1995, total average assets decreased
$6.9 million as compared to the year ended December 31, 1994. The decrease
is primarily attributable to the sale of Surety's Middletown and Calistoga
branches on August 28, 1994. The branch sales included $12.9 million in
deposits and $6.0 million in loans. The sale of deposits, net of loans, was
funded by Surety from available cash which was generated from sales and
maturities of available-for-sale investment securities. Accordingly, the
average investment security portfolio decreased by $4.6 million to $7.1
million from $11.7 million for the years ended December 31, 1995 and 1994,
respectively. These reductions in assets during 1995
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were partially offset by the continued growth of the residential loan
portfolio, funded by deposit growth in Surety's remaining two branches.
Average stockholders' equity increased by $150,000 to $5.21 million from $5.06
million for the years ended December 31, 1995 and 1994, respectively. The
increase is attributable to net income for 1995 and 1994 and the net
unrealized gain on available-for-sale investment securities, partially offset
by the payment of preferred stock dividends.
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<TABLE>
The following table sets forth certain information relating to
Surety's average balance sheet, and reflects the average yield earned on
interest-earning assets, the average cost of interest-bearing liabilities
and the resulting net interest income for the periods indicated:
<CAPTION>
Six months ended June 30,
---------------------------------------------------------------------
1997 1996
------------------------------- --------------------------------
Interest Interest
Average income/ Yield/ Average income/ Yield/
ASSETS balance expense rate balance expense rate
- ------ ------- ------- ---- ------- ------- ----
(dollars expressed in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans <F1> <F2> $54,894 2,308 8.48% $49,841 2,152 8.68%
Investment securities 11,107 341 6.19 9,879 302 6.15
Federal funds sold 743 18 4.89 883 25 5.69
------- ----- ------- -----
Total interest-earning assets 66,744 2,667 8.06 60,603 2,479 8.23
----- -----
Nonearning assets 4,728 4,132
------- -------
Total assets $71,472 $64,735
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Interest-bearing liabilities:
Interest-bearing demand deposits $10,133 51 1.01% $ 8,244 41 1.00%
Savings deposits 18,924 346 3.69 18,191 336 3.71
Time deposits of $100 or more 9,967 271 5.48 7,638 208 5.48
Other time deposits 21,878 566 5.22 21,145 552 5.25
------- ----- ------- -----
Total interest-bearing deposits 60,902 1,234 4.09 55,218 1,137 4.14
Other borrowings. 136 3 4.45 181 6 6.67
------- ----- ------- -----
Total interest-bearing liabilities 61,038 1,237 4.09 55,399 1,143 4.15
----- -----
Noninterest-bearing liabilities:
Demand deposits 4,940 3,743
Other liabilities 599 375
------- -------
Total liabilities 66,577 59,517
Stockholders' equity 4,895 5,218
------- -------
Total liabilities and stockholders'
equity $71,472 $64,735
======= =======
Net interest income 1,430 1,336
===== =====
Net interest margin 4.32% 4.43%
==== ====
<FN>
- ------------------------
<F1> For purposes of these computations, nonaccrual loans are included in the average loan amounts.
<F2> Interest income on loans includes loan fees.
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<PAGE> 100
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------
1996 1995
------------------------------- --------------------------------
Interest Interest
Average income/ Yield/ Average income/ Yield/
ASSETS balance expense rate balance expense rate
- ------ ------- ------- ---- ------- ------- ----
(dollars expressed in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans <F1> <F2> $51,339 4,428 8.63% $49,612 4,140 8.34%
Investment securities 10,710 647 6.04 7,092 446 6.29
Federal funds sold 1,035 56 5.41 1,780 97 5.45
------- ----- ------- -----
Total interest-earning assets 63,084 5,131 8.13 58,484 4,683 8.01
----- -----
Nonearning assets 4,414 3,173
------- -------
Total assets $67,498 $61,657
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Interest-bearing liabilities:
Interest-bearing demand deposits $ 8,788 90 1.02% $ 7,268 85 1.17%
Savings deposits 18,747 704 3.76 17,687 718 4.06
Time deposits of $100 or more 8,437 462 5.48 5,599 318 5.68
Other time deposits 21,342 1,103 5.17 21,191 1,099 5.19
------- ----- ------- -----
Total interest-bearing deposits 57,314 2,359 4.12 51,745 2,220 4.29
Other borrowings. 116 8 6.90 562 37 6.58
------- ----- ------- -----
Total interest-bearing liabilities 57,430 2,367 4.12 52,307 2,257 4.31
----- -----
Noninterest-bearing liabilities:
Demand deposits 3,995 3,466
Other liabilities 909 666
------- -------
Total liabilities 62,334 56,439
Stockholders' equity 5,164 5,213
------- -------
Total liabilities and stockholders'
equity $67,498 $61,652
======= =======
Net interest income 2,764 2,426
===== =====
Net interest margin 4.38% 4.15%
==== ====
<CAPTION>
Year ended December 31,
-------------------------------
1994
-------------------------------
Interest
Average income/ Yield/
ASSETS balance expense rate
- ------ ------- ------- ----
(dollars expressed in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans <F1> <F2> $50,772 3,969 7.82%
Investment securities 11,652 559 4.80
Federal funds sold 1,555 57 3.67
------- -----
Total interest-earning assets 63,979 4,585 7.17
-----
Nonearning assets 4,664
-------
Total assets $68,643
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Interest-bearing liabilities:
Interest-bearing demand deposits $ 9,980 126 1.26%
Savings deposits 17,301 430 2.49
Time deposits of $100 or more 8,025 247 3.08
Other time deposits 22,991 1,001 4.35
------- -----
Total interest-bearing deposits 58,297 1,804 3.09
Other borrowings. 118 6 5.08
------- -----
Total interest-bearing liabilities 58,415 1,810 3.10
-----
Noninterest-bearing liabilities:
Demand deposits 3,698
Other liabilities 1,469
-------
Total liabilities 63,582
Stockholders' equity 5,061
-------
Total liabilities and stockholders'
equity $68,643
=======
Net interest income 2,775
=====
Net interest margin 4.34%
====
<FN>
- ------------------------
<F1> For purposes of these computations, nonaccrual loans are included in the average loan amounts.
<F2> Interest income on loans includes loan fees.
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<PAGE> 101
The following table indicates the changes in interest income and
interest expense which are attributable to changes in average volume and
changes in average rates, in comparison with the same period in the preceding
year. The change in interest due to the combined rate/volume variance has
been allocated to rate and volume changes in proportion to the dollar amounts
of the change in each.
</TABLE>
<TABLE>
<CAPTION>
Increase (decrease) attributable to change in:
-------------------------------------------------------------------------------------
June 30, 1997 compared December 31, 1996 compared December 31, 1995 compared
to June 30, 1996 to December 31, 1995 to December 31, 1994
-------------------------- -------------------------- ---------------------------
Net Net Net
Volume Rate Change Volume Rate Change Volume Rate Change
------ ---- ------ ------ ---- ------ ------ ---- ------
(dollars expressed in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans <F1> <F2> $202 (46) 156 144 144 288 (90) 261 171
Investment securities 37 2 39 218 (17) 201 (550) 437 (113)
Federal funds sold (4) (3) (7) (40) (1) (41) 9 31 40
---- --- --- --- --- --- ---- ---- ----
Total interest income 235 (47) 188 322 126 448 (631) 729 98
---- --- --- --- --- --- ---- ---- ----
Interest paid on:
Interest-bearing demand deposits 10 -- 10 13 (8) 5 (32) (9) (41)
Savings deposits 12 (2) 10 60 (74) (14) 10 278 288
Time deposits of $100 or more 63 -- 63 155 (11) 144 (40) 111 71
Other time deposits 17 (3) 14 8 (4) 4 (66) 164 98
Other borrowings (1) (2) (3) (31) 2 (29) 29 2 31
---- --- --- --- --- --- ---- ---- ----
Total interest expense 101 (7) 94 205 (95) 110 (99) 546 447
---- --- --- --- --- --- ---- ---- ----
Net interest income $134 (40) 94 117 221 338 (532) (183) (349)
==== === === === === === ==== ==== ====
<FN>
- ---------------
<F1> For purposes of these computations, nonaccrual loans are included in the
average loan amounts.
<F2> Interest income on loans includes loan fees.
</TABLE>
Net Interest Income
Surety's primary source of earnings is its net interest income, which is
the difference between the interest earned on its earning assets and the
interest paid on its interest-bearing liabilities. Net interest income
increased to $1.43 million for the six months ended June 30, 1997, from $1.34
million for the same period in 1996. For the years ended December 31, 1996,
1995 and 1994, net interest income was $2.76 million, $2.43 million and $2.78
million, respectively. The fluctuations in net interest income during these
periods reflect the changes in the amount of average earning assets and
interest-bearing liabilities, as well as the change in the composition of
loans and deposits related to Surety's transition to a commercial banking
orientation.
The increases in net interest income for the six months ended June 30,
1997 and for the year ended December 31, 1996 of $90,000 and $330,000,
respectively, in comparison to the same periods in 1996, are attributable to
the growth within the loan portfolio. See "-Financial Condition and Average
Balances and Loans and Allowance for Possible Loan Losses" for additional
discussion regarding the growth and diversification of the loan portfolio.
For the year ended December 31, 1995, net interest income decreased by
$350,000 in comparison to 1994. The decrease is primarily attributable to
the reduction in net interest earning assets resulting from the sale of
Surety's Middletown and Calistoga branches. See "-Financial Condition and
Average Balances."
Mortgage Banking Activities
Through 1994, the mortgage banking activities of Surety consisted of the
origination, purchase and servicing of residential mortgage loans.
Generally, Surety would sell its
96
<PAGE> 102
production of residential mortgage loans in the secondary loan market.
Servicing rights were generally retained for conforming fixed rate loans.
During 1995, Surety discontinued the origination and purchase of
residential mortgage loans within the mortgage banking operation. In the
third quarter of 1996, Surety commenced, on both a retail and a wholesale
mortgage banking basis, the origination and purchase of residential mortgage
loans. Loans originated and purchased under this program are sold servicing
released under the terms of the sales commitments obtained by Surety prior to
its funding of the loan.
Mortgage loans serviced for investors were $29.2 million and $31.7
million at June 30, 1997 and 1996, and $29.6 million, $31.5 million and $32.5
million at December 31, 1996, 1995 and 1994, respectively. Loan servicing
fees were $56,000 and $57,000 for the six month periods ended June 30, 1997
and 1996, and $133,000, $131,000 and $83,000 for the years ended December 31,
1996, 1995 and 1994, respectively. The gain on sale of residential loans
originated and purchased for sale totaled $286,000 for the six months ended
June 30, 1997, compared to $42,000, $2,000 and $80,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. There were no gains on sales
of residential loans for the six months ended June 30, 1996.
Comparison of Results of Operations for the six month periods ended June 30,
1997 and 1996
Net Income. Net income for the six months ended June 30, 1997 was
$155,000 in comparison to net income of $96,000 for the same period in 1996.
As more fully discussed below, the operating results for 1996 reflect a
higher provision for possible loan losses in comparison to 1997. As
previously discussed, net interest income was $1.43 million, or 4.32% of
average earning assets, for 1997, compared to $1.34 million, or 4.43% of
average earning assets, for 1996.
Provision for Possible Loan Losses. The provision for possible loan
losses was $65,000 and $90,000 for the six month periods ended June 30, 1997
and 1996, respectively. Net loan charge-offs were $69,000 and $61,000 for
the six month periods ended June 30, 1997 and 1996, respectively. The
allowance for possible loan losses was $582,000, or 1.04% of total loans, net
of unearned discount, at June 30, 1997, compared to $586,000, or 1.05% of
total loans, net of unearned discount, at December 31, 1996.
Loans which were either 90 days or more past due and still accruing
interest or on nonaccrual status decreased to $506,000 at June 30, 1997, from
$990,000 at December 31, 1996, representing .90% and 1.77% of total loans,
net of unearned discount, at those dates. Loans which were between 30 and 89
days past due were $1.02 million, or 1.82% of total loans, net of unearned
discount, at June 30, 1997 compared to $379,000, or .68% of total loans, net
of unearned discount, at December 31, 1996.
The decrease in the provision for possible loan losses to $65,000 from
$90,000 for the six months ended June 30, 1997 and 1996, respectively,
reflects the decrease in nonperforming loans and Surety management's
evaluation of the quality of the loans in the portfolio. See "-Loans and
Allowance for Possible Loan Losses."
97
<PAGE> 103
Noninterest Income and Expense. The following table summarizes
noninterest income and noninterest expense for the six month periods ended
June 30, 1997 and 1996.
<TABLE>
<CAPTION>
Six months ended June 30, Increase (Decrease)
------------------------- -------------------
1997 1996 Amount Percent
---- ---- ------ -------
(dollars expressed in thousands)
<S> <C> <C> <C> <C>
Noninterest income:
Service charges on deposit accounts $ 141 113 28 25%
Loan servicing income, net 56 57 (1) (2)
Gain on sale of loans:
Residential loans 286 -- 286 --
SBA loans 32 32 -- --
Other income 131 148 (17) (11)
------ ----- ---
Total noninterest income $ 646 350 296 85%
====== ===== === ===
Noninterest expense:
Salaries and employee benefits $ 888 672 216 32%
Occupancy, net of rental income 52 72 (20) (28)
Furniture and equipment 143 86 57 66
FDIC premiums 21 65 (44) (68)
Postage, printing and supplies 82 68 14 21
Legal, examination and professional fees 61 53 8 15
Data processing 98 132 (34) (26)
Communications 55 36 19 53
Losses and expenses on foreclosed property, net 29 3 26 867
Other 333 249 84 34
------ ----- ---
Total noninterest expense $1,762 1,436 326 23%
====== ===== === ===
</TABLE>
Noninterest Income. Noninterest income was $646,000 for the six month
period ended June 30, 1997, in comparison to $350,000 for the same period in
1996
Service charges on deposit accounts increased by $28,000 to $141,000
from $113,000 for the six month periods ended June 30, 1997 and 1996,
respectively. The increase is primarily attributable to an increase in the
number of demand deposit accounts subject to service charges.
Loan servicing fees decreased to $56,000 from $57,000 for the six month
periods ended June 30, 1997 and 1996, respectively. While the loan servicing
fee income is comparable for the six month periods ended June 30, 1997 and
1996, Surety expects the level of loan servicing fee income to decrease as
the existing portfolio of loans serviced for investors declines. In
addition, and as discussed under "-Mortgage Banking Activities," current
mortgage banking loan production is being sold on a servicing released basis.
Associated with the activity of originating and purchasing loans to be
sold into the secondary market are the realized gains, net of losses incurred
during the period prior to sale. The gain on sales of residential loans, net
of losses, was $286,000 for the six months ended June 30, 1997. As discussed
under "-Mortgage Banking Activities," these activities were initiated during
the third quarter of 1996.
The gain on sale of loans also includes $32,000 for the six month
periods ended June 30, 1997 and 1996 relating to the sale of SBA loans.
Surety originates loans under an SBA program and sells the guaranteed portion
of each loan to a third party while retaining the unguaranteed portion for
its portfolio. Gains on these loans are earned through the collection of a
premium over the adjusted carrying value of the related loan.
98
<PAGE> 104
Noninterest Expense. Noninterest expense increased by $320,000 to $1.76
million from $1.44 million for the six month periods ended June 30, 1997 and
1996, respectively. The increase, as more fully discussed below, is
primarily attributable to the formation of the retail and wholesale mortgage
banking operation during 1996.
Salaries and employee benefits increased by $216,000 to $888,000 from
$672,000 for the six month periods ending June 30, 1997 and 1996,
respectively. The increase is primarily attributable to the mortgage banking
operation as previously discussed under "-Mortgage Banking Activities."
Furniture and equipment expense increased by $57,000 to $143,000 from
$86,000 for the six month periods ending June 30, 1997 and 1996,
respectively. The increase is attributable to additional furniture and
equipment requirements necessary to support the mortgage banking operation.
Offsetting the increase in noninterest expense was a decrease in Federal
Deposit Insurance Corporation (FDIC) premiums of $44,000 to $21,000 from
$65,000 for the six month periods ending June 30, 1997 and 1996,
respectively, as a result of the reduction in the assessment rate charged on
deposits insured by the SAIF of the FDIC. The reduction in the assessment
rate was effective upon the recapitalization of the SAIF, accomplished by a
one-time special deposit insurance charge assessed to all financial
institutions with deposits insured by the SAIF. Surety's one-time charge
totaled $351,000 and was reflected in the operating results during the third
quarter of 1996.
In addition, data processing expense decreased by $34,000 to $98,000
from $132,000 for the six month periods ended June 30, 1997 and 1996,
respectively. The decrease is primarily attributable to the additional costs
incurred during 1996 in connection with the data processing conversion to a
new service provider.
Other expense increased by $84,000 to $333,000 from $249,000 for the six
month periods ended June 30, 1997 and 1996, respectively, primarily from the
retail and wholesale mortgage banking operation initiated during 1996.
Comparison of Results of Operations for 1996 and 1995
Net Income (Loss). The net loss for the year ended December 31, 1996
was $204,000 in comparison to net income of $36,000 for the same period in
1995. As more fully discussed below, the operating results for 1996 reflect
a higher provision for possible loan losses in comparison to 1995 and the
one-time special SAIF assessment. As previously discussed, net interest
income was $2.76 million, or 4.38% of average earning assets, for 1996,
compared to $2.43 million, or 4.15% of average earning assets, for 1995.
Provision for Possible Loan Losses. The provision for possible loan
losses was $325,000 and $130,000 for the years ended December 31, 1996 and
1995, respectively. Net loan charge-offs were $174,000 and $16,000 for the
years ended December 31, 1996 and 1995, respectively. The allowance for
possible loan losses was $586,000, or 1.05% of total loans, net of unearned
discount, at December 31, 1996, compared to $435,000, or .92% of total loans,
net of unearned discount, at December 31, 1995.
99
<PAGE> 105
Loans which were either 90 days or more past due and still accruing
interest or on nonaccrual status totaled $990,000 and $684,000 at December
31, 1996 and 1995, respectively, representing 1.77% and 1.45% of total loans,
net of unearned discount, at those dates. Loans which were between 30 and 89
days past due were $379,000, or .68% of total loans, net of unearned
discount, at December 31, 1996 compared to $443,000, or .94% of total loans,
net of unearned discount, at December 31, 1995.
The provision for possible loan losses increased to $325,000 from
$130,000 for the years ended December 31, 1996 and 1995, respectively. The
increase is attributable to the increase in nonperforming loans, in loans
over 90 days past due and still accruing and in net loan charge-offs, as well
as the effect on overall credit risk of the gradual change in the composition
of the loan portfolio from one primarily focused on residential real estate
loans to a more diversified portfolio mix. In addition, the provision for
possible loan losses reflects Surety management's evaluation of the quality
of the loans in the portfolio. See "-Loans and Allowance for Possible Loan
Losses."
Noninterest Income and Expense. The following table summarizes
noninterest income and noninterest expense for the years ended December 31,
1996 and 1995.
<TABLE>
<CAPTION>
Increase (Decrease)
-------------------
1996 1995 Amount Percent
---- ---- ------ -------
(dollars expressed in thousands)
<S> <C> <C> <C> <C>
Noninterest income:
Service charges on deposit accounts $ 291 258 33 13%
Loan servicing income, net 133 131 2 2
Gain on sale of loans:
Residential loans 42 2 40 --
SBA loans 71 88 (17) (19)
Other income 175 94 81 86
Loss on sales of securities, net -- (49) 49 --
------ ----- --- ---
Total noninterest income $ 712 524 188 36
====== ===== === ===
Noninterest expense:
Salaries and employee benefits $1,474 1,301 173 13%
Occupancy, net of rental income 148 72 76 106
Furniture and equipment 188 220 (32) (15)
FDIC premiums 449 122 327 268
Postage, printing and supplies 125 167 (42) (25)
Legal, examination and professional fees 97 103 (6) (6)
Data processing 283 239 44 18
Communications 77 55 22 40
Losses and expenses on foreclosed property, net 113 -- 113 --
Other 535 486 49 10
------ ----- --- ---
Total noninterest expense $3,489 2,765 724 26
====== ===== === ===
</TABLE>
Noninterest Income. Noninterest income was $712,000 for the year ended
December 31, 1996, in comparison to $524,000 for the same period in 1995.
Noninterest income consists primarily of service charges on deposit accounts
and mortgage banking related income.
Service charges on deposit accounts increased by $33,000 to $291,000
from $258,000 for the years ended December 31, 1996 and 1995, respectively.
The increase is primarily attributed to growth in demand deposit accounts
subject to service charges.
As more fully described under "-Mortgage Banking Activities" and
"Comparison of Results of Operations for the six month periods ended June 30,
1997 and 1996," the loan
100
<PAGE> 106
servicing income, net and the gain on sale of loans is primarily attributable
to the mortgage banking activities of Surety.
Other income increased by $81,000 to $175,000 from $94,000 for the years
ended December 31, 1996 and 1995, respectively. The increase is primarily
attributable to income earned under a real estate exchange agreement of
$42,000. See "-Notes 5 and 17 to the accompanying consolidated financial
statements." In addition, the increase reflects the continued growth in
revenues generated from alternative investment services.
Noninterest Expense. Noninterest expense increased by $720,000 to $3.49
million from $2.77 million for the years ended December 31, 1996 and 1995,
respectively. The increase, as more fully discussed below, is primarily
attributable to salaries and employee benefits, to the cost of relocating the
Fairfield office and the related rental expense, to the one-time SAIF
assessment and to losses and expenses on foreclosed property, net.
Salaries and employee benefits increased by $170,000 to $1.47 million
from $1.30 million for the years ended December 31, 1996 and 1995,
respectively. The increase is primarily attributable to the mortgage banking
activities of Surety which were initiated during 1996. See "-Mortgage
Banking Activities."
Occupancy expense, net of rental income, increased by $76,000 to
$148,000 from $72,000 for the years ended December 31, 1996 and 1995,
respectively. This increase is attributable to additional expenses
associated with relocating the Fairfield branch.
FDIC premiums increased by $327,000 to $449,000 from $122,000 for the
years ended December 31, 1996 and 1995, respectively. The increase is
attributable to a one-time special deposit insurance charge assessed to all
financial institutions with deposits insured by the SAIF to recapitalize the
SAIF of the FDIC. Surety's one-time charge totaled $351,000 and was
reflected in the operating results during the third quarter of 1996.
Data processing expense increased by $44,000 to $283,000 from $239,000
for the years ended December 31, 1996 and 1995, respectively. The increase
is attributable to the conversion expenses incurred in connection with
transferring Surety's data processing to a new service provider. The
transfer was effectuated to facilitate the alignment of Surety's operations
to its strategic objectives.
Losses and expenses on foreclosed property were $113,000 for the year
ended December 31, 1996. This total is comprised of $53,000 in write-downs,
to reflect the current fair value, and $60,000 in other carrying costs of
foreclosed properties. During 1996, Surety foreclosed on several residential
real estate properties which resulted in a balance of $599,000 at December
31, 1996. There were no losses and expenses on foreclosed property for the
year ended December 31, 1995.
Other expense increased by $49,000 to $535,000 from $486,000 for the
years ended December 31, 1996 and 1995, respectively. The increase is
primarily attributable to the additional expenses of the mortgage banking
operation which was initiated during 1996.
101
<PAGE> 107
Comparison of Results of Operations for 1995 and 1994
Net Income. The net income for the year ended December 31, 1995 was
$36,000 in comparison to $161,000 for the same period in 1994. As previously
discussed, net interest income decreased to $2.43 million, or 4.15% of
average earning assets, for 1995, from $2.77 million, or 4.34% of average
earning assets, for 1994. As more fully discussed below, the operating
results for 1995 reflect a decrease in the gain on sale of loans and other
assets and an increase in the provision for loan losses.
Provision for Possible Loan Losses. The provision for possible loan
losses was $130,000 and $55,000 for the years ended December 31, 1995 and
1994, respectively. Net loan charge-offs were $16,000 and $10,000 for the
years ended December 31, 1995 and 1994, respectively. The allowance for
possible loan losses was $435,000, or .92% of total loans, net of unearned
discount, at December 31, 1995, compared to $321,000, or .64% of total loans,
net of unearned discount, at December 31, 1994.
Loans which were either 90 days or more past due and still accruing
interest or on nonaccrual status totaled $684,000 and $337,000 at December
31, 1995 and 1994, respectively, representing 1.45% and .67% of total loans,
net of unearned discount, at those dates. Loans which were between 30 and 89
days past due were $443,000, or .94% of total loans, net of unearned
discount, at December 31, 1995 compared to $478,000, or .95% of total loans,
net of unearned discount, at December 31, 1994.
The provision for possible loan losses increased to $130,000 from
$55,000 for the years ended December 31, 1995 and 1994, respectively. The
increase is primarily attributable to the increase in nonperforming loans and
Surety management's evaluation of the quality of the loans in portfolio. See
"-Loans and Allowance for Possible Loan Losses."
102
<PAGE> 108
Noninterest Income and Expense. The following table summarizes
noninterest income and noninterest expense for the years ended December 31,
1995 and 1994.
<TABLE>
<CAPTION>
Increase (Decrease)
-------------------
1995 1994 Amount Percent
---- ---- ------ -------
(dollars expressed in thousands)
<S> <C> <C>
Noninterest income: <C> <C>
Service charges on deposit accounts
and customer service fees $ 258 325 (67) (21)%
Loan servicing income, net 131 83 48 58
Gain on sale of loans:
Residential loans 2 80 (78) (98)
SBA loans 88 82 6 7
Other income 94 86 8 9
Loss on sales of securities, net (49) -- (49) --
Gain on sale of branches -- 53 (53) (100)
------ ----- ---- ----
Total noninterest income $ 524 709 (185) (26)
====== ===== ==== ====
Noninterest expense:
Salaries and employee benefits $1,301 1,442 (141) (100)%
Occupancy, net of rental income 72 191 (119) (62)
Furniture and equipment 220 140 80 57
FDIC premiums 122 154 (32) (21)
Postage, printing and supplies 167 145 22 15
Legal, examination and
professional fees 103 270 (167) 62
Data processing 239 276 (37) (13)
Communications 55 52 3 6
Losses and expenses on foreclosed property, net -- 22 (22) (100)
Other 486 501 (15) (3)
------ ----- ---- ----
Total noninterest expense $2,765 3,193 (428) (13)%
====== ===== ==== ====
</TABLE>
Noninterest Income. Noninterest income was $524,000 for the year ended
December 31, 1995, in comparison to the $709,000 for 1994. The decrease is
primarily attributable to the decrease in the gain on sale of loans, the gain
realized upon the sale of two branches in 1994, as more fully described under
"-Financial Condition and Average Balance" and the loss on sale of securities
in 1995.
Service charges on deposit accounts decreased by $67,000 to $258,000
from $325,000 for the years ended December 31, 1995 and 1994, respectively.
The decrease is primarily attributable to the sale of the two branches on
August 28, 1994.
Loan servicing income increased to $131,000 from $83,000 for the years
ended December 31, 1995 and 1994, respectively. The increase is attributable
to the growth in the portfolio of loans serviced for investors during 1994,
including the loan servicing rights retained on the loans sold with the two
branches in 1994.
Gain on sale of loans decreased by $72,000 to $90,000 from $162,000 for
the years ended December 31, 1995 and 1994, respectively. As more fully
described under "-Mortgage Banking Activities," during 1994, Surety
discontinued its originating and purchasing of residential mortgage loans for
sale in the secondary market with servicing rights retained. The gain on
sale of loans for 1995 attributable to the sale of the guaranteed portion of
SBA loans was $88,000. This compares to a gain on sale of the guaranteed
portion of SBA loans of $82,000 for the year ended December 31, 1994.
103
<PAGE> 109
Noninterest Expense. Noninterest expense decreased by $420,000 to $2.77
million from $3.19 million for the years ended December 31, 1995 and 1994,
respectively. The decrease primarily reflects the expenses associated with
the two bank branches which were sold in 1994 and the reduction of expenses
related to the origination and purchase of mortgage loans which was
discontinued in 1994. See "Note 14 to the accompanying consolidated
financial statements."
These factors are evident in salaries and employee benefits which
decreased by $140,000 to $1.30 million from $1.44 million for the years ended
December 31, 1995 and 1994, respectively, and in occupancy, net of rental
income, which decreased by $119,000 to $72,000 from $191,000 for the years
ended December 31, 1995 and 1994, respectively. In addition, Surety closed a
leased loan production office in June 1995.
Legal, examination and professional fees decreased by $167,000 to
$103,000 from $270,000 for the years ended December 31, 1995 and 1994,
respectively. The decrease is attributable to additional costs associated
with Surety's charter conversion to a state-chartered commercial bank from a
federally-chartered thrift, and the sale of the two branches in 1994.
Loans and Allowance for Possible Loan Losses
Interest earned on the loan portfolio is the primary source of income
for Surety. Loans, net of unearned discount, represent 77.0% of total assets
at June 30, 1997, compared to 77.7% and 74.6% of total assets as of December
31, 1996 and 1995, respectively. As of June 30, 1997 and December 31, 1996,
total loans, net of unearned discount, were $56.0 million. As summarized in
the composition of the loan portfolio table, the primary fluctuation in the
loan portfolio is the increase in loans held for sale. As more fully
described under "-Mortgage Banking Activities," during 1996, Surety
commenced, on both a retail and a wholesale mortgage banking basis, the
origination and purchase of residential mortgage loans which are sold in the
secondary market on a servicing released basis.
Commercial loans, including the unguaranteed portion of SBA loans, are
originated primarily on the strength of the borrowers' general credit
standing and ability to generate repayment cash flows from income sources
even though such loans may also be secured by real estate or other assets.
Real estate construction and development loans represent interim financing
secured by real estate under construction. Real estate mortgage loans
consist primarily of loans secured by single-family owner-occupied properties
and various types of commercial properties whereby the income from the
property is the intended source of repayment. Consumer and installment loans
are loans to individuals and consist primarily of loans secured by
automobiles. Loans held for sale are residential real estate mortgage loans
originated and purchased for sale to third party investors.
Commercial lending is focused principally on small to middle-market
companies. Retail lending is focused principally on residential loans,
including home equity loans, automobile financing and other consumer
financing needs arising out of Surety's branch banking locations.
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<PAGE> 110
The following table shows the composition of the loan portfolio by major
category and the percent of each category to the total portfolio as of the
dates presented:
<TABLE>
<CAPTION>
June 30, December 31,
--------------------- ------------------------------------------
1997 1996 1995
--------------------- ------------------ ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(dollars expressed in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 4,755 8.49% $ 4,156 7.42% $ 1,826 3.86%
Real estate construction and development 2,966 5.30 4,286 7.66 3,968 8.39
Real estate mortgage, net of unearned discount:
Residential real estate 28,247 50.45 29,675 53.01 28,590 60.47
Commercial and other 12,111 21.63 11,935 21.32 11,621 24.58
Consumer and installment 730 1.30 771 1.38 924 1.96
Other 495 0.88 695 1.24 349 0.74
------- ------ ------- ------ ------- ------
Total loans, net of unearned discount and
excluding loans held for sale 49,304 88.05 51,518 92.03 47,278 100.00
Residential real estate loans held for sale 6,691 11.95 4,463 7.97 -- --
------- ------ ------- ------ ------- ------
Total loans, net of deferred loan fees $55,995 100.00% $55,981 100.00% $47,278 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
Loans at December 31, 1996 mature as follows:
<TABLE>
<CAPTION>
Over one year
through five years Over five years
------------------ ------------------
One year Fixed Floating Fixed Floating
or less rate rate rate rate Total
-------- ----- -------- ----- -------- -----
(dollars expressed in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 985 156 1,655 69 1,291 4,156
Real estate construction and development 4,286 -- -- -- -- 4,286
Real estate mortgage, net of unearned
discount 2,714 838 8,327 1,441 28,290 41,610
Consumer and installment 176 590 5 -- -- 771
Other 527 168 -- -- -- 695
Loans held for sale -- -- -- 4,267 196 4,463
------ ----- ----- ----- ------ ------
Total loans, net of unearned discount $8,688 1,752 9,987 5,777 29,777 55,981
====== ===== ===== ===== ====== ======
</TABLE>
105
<PAGE> 111
The following table is a summary of loan loss experience for the six
month periods ended June 30, 1997 and 1996 and for the years ended December
31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
June 30, December 31,
------------------ ----------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(dollars expressed in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 586 435 435 321 276
------- ------ ------ ------ ------
Loans charged off:
Commercial 35 10 10 -- --
Real estate mortgage 30 50 182 22 --
Consumer and installment 4 1 1 -- 10
------- ------ ------ ------ ------
Total loans charged-off 69 61 193 22 10
------- ------ ------ ------ ------
Recoveries of loans previously charged off:
Real estate mortgage -- -- 19 5 --
Consumer and installment -- -- -- 1 --
------- ------ ------ ------ ------
Total recoveries of loans previously
charged off -- -- 19 6 --
------- ------ ------ ------ ------
Net loans charged-off 69 61 174 16 10
------- ------ ------ ------ ------
Provision for possible loan losses 65 90 325 130 55
------- ------ ------ ------ ------
Balance at end of year $ 582 464 586 435 321
======= ====== ====== ====== ======
Loans outstanding:
Average $54,894 49,841 51,339 49,612 50,772
End of period 55,995 50,617 55,981 47,278 50,058
======= ====== ====== ====== ======
Ratio of allowance for possible
loan losses to loans outstanding:
Average 1.06% .93% 1.14% .88% .63%
End of period 1.04 .92 1.05 .92 .64
Ratio of net charge-offs to average
loans outstanding <F1> .25 .24 .34 .03 .02
======= ====== ====== ====== ======
Allocation of allowance for possible
loan losses at end of period:
Commercial $ 71 52 63 32 20
Real estate construction and development 59 42 55 45 38
Real estate mortgage 362 310 380 288 220
Consumer and installment 15 18 22 21 17
Other 12 8 14 12 1
Unallocated 63 34 52 37 25
------- ------ ------ ------ ------
Total $ 582 464 586 435 321
======= ====== ====== ====== ======
Percent of categories to loans,
net of unearned discount:
Commercial 8.49% 6.68% 7.42% 3.86% 3.49%
Real estate construction and development 5.30 6.22 7.66 8.39 7.87
Real estate mortgage 72.08 83.72 74.33 85.05 86.93
Consumer and installment 1.30 2.05 1.38 1.96 1.61
Other .88 1.33 1.24 .74 .10
Loans held for sale 11.95 -- 7.97 -- --
------- ------ ------ ------ ------
Total 100.00% 100.00% 100.00% 100.00% 100.00%
======= ====== ====== ====== ======
<FN>
- ---------------------
<F1> The ratios for the six month periods are annualized.
</TABLE>
106
<PAGE> 112
Nonperforming assets include nonaccrual loans and foreclosed property.
The following table presents the categories of nonperforming assets as of the
dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
---------------- ----------------
1997 1996 1996 1995
---- ---- ---- ----
(dollars expressed in thousands)
<S> <C> <C> <C> <C>
Nonperforming loans $ 385 931 761 684
Foreclosed property, net 440 60 599 --
------- ------ ------ ------
Total nonperforming assets $ 825 991 1,360 684
======= ====== ====== ======
Loans, net of unearned discount $55,995 50,617 55,981 47,278
======= ====== ====== ======
Loans past due:
Over 30 days to 90 days $ 1,020 784 379 443
Over 90 days and still accruing 121 231 229 --
------- ------ ------ ------
Total past-due loans $ 1,141 1,015 608 443
======= ====== ====== ======
Allowance for possible loan losses to loans 1.04% .92% 1.05% .92%
Nonperforming loans to loans .69 1.84 1.36 1.45
Allowance for possible loan losses
to nonperforming loans 151.17 49.84 77.00 63.60
Nonperforming assets to loans
and foreclosed assets 1.46 1.96 2.40 1.45
======= ====== ====== ======
</TABLE>
As of June 30, 1997, December 31, 1996 and 1995, there were no loans
that were identified by management as having potential credit problems or
doubts of the borrowers' ability to comply with the present loan repayment
terms that have not been included in the aforementioned table of
nonperforming assets.
The allowance for possible loan losses is based on past loan loss
experience, management's evaluation of the quality of the loans in the
portfolio and the anticipated effect of national and local economic
conditions relative to the ability of loan customers to repay. The provision
for possible loan losses is management's estimate of the amount necessary to
maintain the allowance at a level consistent with this evaluation. As
adjustments to the allowance for possible loan losses are considered
necessary, they are reflected in the consolidated statements of operations.
Surety does not lend funds for foreign loans. Additionally, Surety
does not have any concentrations of loans exceeding 10% of total loans which
are not otherwise disclosed in the loan portfolio composition table and Note 3
to the accompanying consolidated financial statements. Surety does not have
any amount of interest-bearing assets which would have been included in
nonaccrual, past due or restructured loans if such assets were loans.
Investment Securities
Surety classifies the securities within its investment portfolio as held
to maturity or available for sale. Surety does not engage in the trading of
investment securities. As more fully described in Notes 1 and 2 of the
accompanying consolidated financial statements, during 1995 management
conducted a review of its investment portfolio and practices. As a result of
the review, it was decided to reclassify the remaining securities within the
held-to-maturity portfolio to available for sale. There were no investment
securities categorized as held to maturity at June 30, 1997 and December 31,
1996 and 1995.
107
<PAGE> 113
The following table shows the composition of the investment security
portfolio, at amortized cost, by major category as of the dates presented:
<TABLE>
<CAPTION>
June 30, December 31,
-------- ----------------
1997 1996 1995
-------- ---- ----
(dollars expressed in thousands)
<S> <C> <C> <C>
U.S. treasuries $ 997 996 499
U.S. government agencies and corporations:
Mortgage backed 161 439 929
Other 9,179 9,193 7,400
Federal Home Loan Bank Stock 458 445 420
------- ------ -----
Total investment securities $10,795 11,073 9,248
======= ====== =====
</TABLE>
DEPOSITS
Deposits are the primary source of funds for the Surety. Surety
deposits consist principally of core deposits from its local market areas.
The following table sets forth the distribution of Surety's deposit accounts
at the dates indicated and the weighted average nominal interest rates on
each category of deposit:
<TABLE>
<CAPTION>
December 31,
June 30, --------------------------------------------------------
1997 1996 1995
------------------------ -------------------------- ------------------------
Percent Percent Percent
of of of
Amount deposits Rate Amount deposits Rate Amount deposits Rate
------ -------- ---- ------ -------- ---- ------ -------- ----
(dollars expressed in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposits $ 4,559 6.85% --% $ 4,284 6.66% -- % $ 4,679 8.13% --%
Interest-bearing demand deposits 10,652 16.00 1.01 9,746 15.14 1.02 7,453 12.95 1.17
Savings deposits 19,608 29.45 3.69 18,925 29.40 3.76 17,545 30.48 4.06
Time deposits of $100,000
or more 10,244 15.39 5.48 9,808 15.24 5.48 6,992 12.14 5.68
Other time deposits 21,521 32.31 5.22 21,606 33.56 5.17 20,901 36.30 5.19
------- ------ ------- ------ ------- ------
Total deposits $66,584 100.00% 4.09 $64,369 100.00% 4.12 $57,570 100.00% 4.29
======= ====== ==== ======= ====== ==== ======= ====== ====
</TABLE>
<TABLE>
The following table presents the maturity structure of certificates of
deposit of $100,000 or more at June 30, 1997 and December 31, 1996 and 1995:
<CAPTION>
June 30, December 31,
-------- -------------------
1997 1996 1995
---- ---- ----
(dollars expressed in thousands)
<S> <C> <C> <C>
3 months or less $ 6,074 5,787 4,125
Over 3 through 12 months 3,292 3,138 2,238
Over 12 months 878 883 629
------- ----- -----
Total $10,244 9,808 6,992
======= ===== =====
</TABLE>
Interest Rate Risk Management
In financial institutions, the maintenance of a satisfactory level of
net interest income is a primary factor in achieving acceptable income
levels. However, the maturity and repricing characteristics of the
institution's loan and investment portfolios, relative to those within its
deposit structure, may differ significantly. Furthermore, the ability of
borrowers to repay loans and depositors to withdraw funds prior to stated
maturity dates introduces divergent option characteristics which operate
primarily as interest rates change. This causes various elements of the
institution's balance sheet to react in different manners and at different
times
108
<PAGE> 114
relative to changes in interest rates, thereby leading to increases or
decreases in net interest income over time. Depending upon the nature and
velocity of interest rate movements and their effect on the specific
components of the institution's balance sheet, the effects on net interest
income can be substantial. Consequently, a fundamental requirement in
managing a financial institution is establishing effective control of the
exposure of the institution to changes in interest rates.
Surety manages its interest rate risk by: (1) maintaining an Asset
Liability Committee (ALCO) responsible to Surety's Board of Directors to
review the overall interest rate risk management activity and approve actions
taken to reduce risk; (2) maintaining an effective monitoring mechanism to
determine Surety's exposure to changes in interest rates; and (3)
coordinating the lending, investing and deposit-generating functions to
control the assumption of interest rate risk. The objective of these
procedures is to limit the adverse impact which changes in interest rates may
have on net interest income.
The following table presents the projected maturities and periods to
repricing of Surety's rate sensitive assets and liabilities as of December
31, 1996, adjusted to account for anticipated prepayments:
<TABLE>
<CAPTION>
Over three Over six
Three through through Over one Over
months twelve twelve through five
or less months months five years years Total
------- ------ ------ ---------- ----- -----
(dollars expressed in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans<F1> $32,315 8,722 1,220 7,173 6,565 55,995
Investment securities 1,210 2,029 1,000 6,468 56 10,763
------- ------ ------ ------ ----- ------
Total interest-earning assets 33,525 10,751 2,220 13,641 6,621 66,758
------- ------ ------ ------ ----- ------
Interest-bearing liabilities:
Interest-bearing demand accounts -- -- -- 9,746 -- 9,746
Money market demand accounts 10,133 1,047 -- 775 -- 11,955
Savings accounts -- 167 -- 6,803 -- 6,970
Time deposits 6,511 9,606 10,959 4,338 -- 31,414
Other borrowed funds 2,135 -- -- -- -- 2,135
------- ------ ------ ------ ----- ------
Total interest-bearing liabilities 18,779 10,820 10,959 21,662 -- 62,220
------- ------ ------ ------ ----- ------
Interest-sensitivity gap:
Periodic $14,746 (69) (8,739) (8,021) 6,621 4,538
======
Cumulative 14,746 14,677 5,938 (2,083) 4,538
======= ====== ====== ====== =====
Ratio of interest-sensitive assets
to interest-sensitive liabilities:
Periodic 1.79 .99 .20 .63 -- 1.07
====
Cumulative 1.79 1.50 1.15 .97 1.07
==== ==== ==== === ====
<FN>
- ----------------------
<F1> Loans presented net of unearned discount
</TABLE>
Management makes certain assumptions in preparing the table above.
These assumptions include: Loans will repay at historic repayment speeds;
mortgage-backed securities, included in investment securities, will repay at
projected repayment speeds; interest-bearing demand accounts and savings
accounts are interest-sensitive at a rate of 25% and 50%, respectively, of
the remaining balance for each period presented; and fixed maturity deposits
will not be withdrawn prior to maturity.
109
<PAGE> 115
Surety's asset-sensitive position on a cumulative basis through the
twelve-month time horizon decreased by $3.24 million to $5.93 million, or
8.24% of total assets at December 31, 1996, from $9.17 million, or 14.47% of
total assets at December 31, 1995. The decrease is attributable to an
increase in the money market demand deposits and time deposits maturing
within one year.
The interest-sensitivity position is one of several measurements of the
impact of interest rate changes on net interest income. Its usefulness in
assessing the effect of potential changes in net interest income varies with
the constant change in the composition of Surety's assets and liabilities.
Capital
Dividends. Upon declaration by the Board of Directors, all
stockholders of record will be entitled to receive dividends. The California
Financial Code restricts the total dividend payment of any bank in any
calendar year to the lesser of (1) the bank's retained earnings or (2) the
bank's net income for its last three fiscal years, less distributions made to
stockholders during the same three-year period without receiving prior
permission of the California State Banking Department. At June 30, 1997 and
December 31, 1996, there were no retained earnings free of such restrictions.
Surety applied for and received permission to declare and pay its semi-annual
preferred stock cash dividend of $29,000. The dividend was paid on July 25,
1997.
Convertible Preferred Stock - Series A. During 1990, Surety issued
61,050 shares of Convertible Preferred stock - Series A with a redemption
value of $20 per share plus any accrued and unpaid dividends.
Dividends on the preferred stock, which are not cumulative, are to be
declared semiannually by the Board of Directors of Surety. Dividends are
payable semiannually, on July 31 and January 31 of each year, at an annual
rate equal to the average of the six most recent monthly Federal Home Loan
Bank Eleventh District Cost of Funds Indices released prior to the dividend
declaration date. The annual dividend rates were 4.81% and 4.98% for the six
months ended June 30, 1997 and 1996, respectively, and 4.91%, 4.96% and 3.83%
for the years ended December 31, 1996, 1995 and 1994, respectively. The
preferred stock, which has limited voting rights, is entitled to a
liquidation preference of $20.00 per share plus accrued and unpaid dividends
and is senior to all other equity securities of Surety with respect to
dividends and rights to payment on liquidation. The preferred stock is
redeemable at the option of Surety, subject to regulatory approval, at $20.00
per share plus accrued and unpaid dividends. The preferred stock is
convertible anytime, at the option of the holders, into the common stock of
Surety at a conversion price, subject to adjustment under certain conditions,
of $23.51 per share at June 30, 1997 and December 31, 1996, respectively.
Regulatory Capital. Surety is subject to certain regulatory capital
requirements administered by the FDIC. As more fully described in Note 10 to
the accompanying consolidated financial statements, failure to meet these
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulatory agencies that, if undertaken,
could have a direct material effect on the Bank's financial statements.
110
<PAGE> 116
Management believes that Surety met all its capital adequacy
requirements as of June, 30, 1997. In addition, the most recent notification
from the FDIC, as of December 31, 1996, categorized Surety as well
capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized, Surety must maintain minimum total
risk-based, Tier I risk-based and Tier I leverage ratios of 10%, 6% and 5%,
respectively.
At June 30, 1997 and December 31, 1996, Surety's capital ratios were as
follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Total risk based capital ratio 12.00% 11.14%
Tier I risk based capital ratio 10.75 9.96
Leverage ratio 6.99 7.00
</TABLE>
Liquidity
The liquidity of Surety is the ability to maintain a cash flow which is
adequate to fund operations and meet obligations and other commitments on a
timely basis. Surety receives funds for liquidity from customer deposits,
loan payments, maturities of loans and investments, sales of investments and
earnings. In addition, Surety may avail itself of more volatile sources of
funds through the issuance of certificates of deposit in denominations of
$100,000 or more, federal funds borrowed, advances from the Federal Home Loan
Bank and securities sold under agreements to repurchase. The aggregate funds
acquired from these more volatile sources were $10.2 million, $11.9 million
and $7.0 million at June 30, 1997, December 31, 1996 and 1995, respectively.
Management believes the available liquidity and operating results of
Surety will be sufficient to provide funds to meet Surety`s operating
requirements.
Effects of Inflation
Financial institutions are less affected by inflation than other types
of companies. Financial institutions make relatively few significant asset
acquisitions which are directly affected by changing prices. Instead, the
assets and liabilities are primarily monetary in nature. Consequently,
interest rates are more significant to the performance of financial
institutions than the effect of general inflation levels. While a
relationship exists between the inflation rate and interest rates, Surety
believes this is generally manageable through its asset/liability management
program.
Effects of New Accounting Standards
Surety adopted the provisions of SFAS 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities (SFAS 125)
prospectively on January 1, 1997. SFAS 125 established accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities.
The standards established by SFAS 125 are based on consistent
applications of a financial-components approach that focuses on control.
Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities
it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. SFAS 125
provides consistent standards for
111
<PAGE> 117
distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings.
The implementation of SFAS 125 did not have a material effect on the
consolidated financial position or results of operation of Surety.
In February 1997, the FASB issued SFAS 128, Earnings Per Share (SFAS
128). SFAS 128 supersedes Accounting Principles Board Opinion No. 15,
Earnings Per Share (APB 15) and specifies the computation, presentation, and
disclosure requirements for earnings per share (EPS) for entities with
publicly held common stock or potential common stock. SFAS 128 was issued to
simplify the computation of EPS and to make the U.S. standard more compatible
with the EPS standards of other countries and that of the International
Accounting Standards Committee. It replaces the presentation of primary EPS
with a presentation of basic EPS and fully diluted EPS with diluted EPS.
SFAS 128 also requires dual presentation of basic and diluted EPS on the face
of the income statement for all entities with complex capital structures, and
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
Basic EPS, unlike primary 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 and converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the entity.
Diluted EPS is computed similarly to fully diluted EPS under APB 15.
SFAS 128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997. Earlier application is not
permitted. After adoption, all prior-period EPS data presented shall be
restated to conform with SFAS 128.
Surety does not believe the implementation of SFAS 128 will have a
material effect on its financial condition or results of operation.
In February 1997, the FASB issued SFAS 129, Disclosure of Information
about Capital Structure (SFAS 129). SFAS 129 establishes standards for
disclosing information about an entity's capital structure. It applies to
all entities. SFAS 129 continues the previous requirements to disclose
certain information about an entity's capital structure found in APB 10,
Omnibus Opinion-1966, APB 15 and SFAS 47, Disclosure of Long-Term
Obligations, for entities that were subject to the requirements of those
standards. SFAS 129 eliminates the exemption of nonpublic entities from
certain disclosure requirements of APB 15 as provided by SFAS 21, Suspension
of the Reporting of Earnings Per Share and Segment Information by Nonpublic
Enterprises. It supersedes specific disclosure requirements of APB 10, APB
15 and SFAS 47 and consolidates them in SFAS 129 for ease of retrieval and
for greater visibility to nonpublic entities.
SFAS 129 is effective for financial statements for periods ending after
December 15, 1997. Surety does not believe the implementation of SFAS 129
will have a material effect on its disclosure requirements.
112
<PAGE> 118
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined condensed balance sheet as of
June 30, 1997 and unaudited pro forma combined condensed statements of income
for the six months ended June 30, 1997 and 1996, and for the year ended
December 31, 1996, have been prepared to reflect the effects on the
historical results of FBA of the proposed acquisitions of FCB and Surety.
The unaudited pro forma combined condensed balance sheet has been prepared as
if the acquisitions occurred on June 30, 1997. The unaudited proforma
combined condensed statements of income have been prepared assuming the
acquisitions occurred on January 1, 1996. The pro forma financial
information set forth below is unaudited and not necessarily indicative of
the results that will occur in the future.
<TABLE>
Unaudited Pro Forma Combined Balance Sheet
<CAPTION>
June 30, 1997
---------------------------------------------------------------------------------------
Pro Forma Pro Forma Pro Forma Pro Forma
FBA FCB Adjustments Combined Surety Adjustments Combined<F1>
--- --- ----------- -------- ------ ----------- ------------
(dollars expressed in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
------
Cash and cash equivalents:
Cash and due from banks $ 16,340 8,676 -- 25,016 2,267 -- 27,283
Interest bearing deposits 433 -- -- 433 -- -- 433
Federal funds sold 8,400 11,000 -- 19,400 975 -- 20,375
-------- ------- ------- ------- ------ ------ -------
Total cash and cash equivalents 25,173 19,676 -- 44,849 3,242 -- 48,091
-------- ------- ------- ------- ------ ------ -------
Investment securities - available for
sale, at fair value 78,426 41,266 -- 119,692 10,763 -- 130,455
Loans:
Commercial and financial 52,928 35,230 -- 88,158 5,250 -- 93,408
Real estate construction and
development 46,542 21,376 -- 67,918 2,966 -- 70,884
Real estate mortgage 61,110 36,155 -- 97,265 40,592 -- 137,857
Consumer and installment 88,275 7,052 -- 95,327 730 -- 96,057
Loans held for sale -- -- -- -- 6,691 -- 6,691
-------- ------- ------- ------- ------ ------ -------
Total loans 248,855 99,813 -- 348,668 56,229 -- 404,897
Unearned discount (1,281) (428) -- (1,709) (234) -- (1,943)
Allowance for possible loan losses (6,251) (4,860) -- (11,111) (582) -- (11,693)
-------- ------- ------- ------- ------ ------ -------
Net loans 241,323 94,525 -- 335,848 55,413 -- 391,261
-------- ------- ------- ------- ------ ------ -------
Bank premises and equipment, net 6,254 1,791 8,045 2,385 200 <F7> 10,630
Intangibles associated with the
purchase of subsidiaries 3,184 -- 1,697 <F2> 4,881 -- 2,415 <F7> 7,296
Accrued interest receivable 2,347 1,195 -- 3,542 492 -- 4,034
Other real estate owned 374 145 -- 519 181 -- 700
Deferred tax assets 15,316 171 -- 15,487 -- 156 <F7> 15,643
Other assets 1,195 446 -- 1,641 262 210 <F7> 2,113
-------- ------- ------- ------- ------ ------ -------
Total assets $373,592 159,215 1,697 534,504 72,738 2,981 610,223
======== ======= ======= ======= ====== ====== =======
Liabilities
-----------
Deposits:
Demand:
Noninterest bearing deposits $ 56,295 27,055 -- 83,350 4,559 -- 87,909
Interest bearing deposits 48,107 15,652 -- 63,759 10,652 -- 74,411
Savings 69,454 31,678 -- 101,132 19,608 -- 120,740
Time deposits:
Time deposits of $100 or more 29,137 10,593 -- 39,370 10,244 -- 49,974
Other time deposits 109,826 56,647 -- 166,473 21,521 -- 187,994
-------- ------- ------- ------- ------ ------ -------
Total deposits 312,819 141,625 -- 454,444 66,584 -- 521,028
Note payable to First Banks 14,500 -- (10,000)<F3> 4,500 -- 3,548 <F8> 8,048
12% convertible debentures -- 6,500 -- 6,500 -- -- 6,500
Other borrowings 6,097 598 -- 6,695 -- -- 6,695
Deferred tax liabilities 1,431 50 -- 1,481 235 164 <F7> 1,880
Accrued expenses and other
liabilities 4,845 3,488 -- 8,333 903 389 <F7> 9,625
-------- ------- ------- ------- ------ ------ -------
Total liabilities 339,692 152,261 (10,000) 481,953 67,722 4,101 553,776
-------- ------- ------- ------- ------ ------ -------
Stockholders' Equity
--------------------
Convertible preferred stock -- -- -- -- 61 (61)<F7><F8> --
Common stock:
Common stock 212 1,058 (824)<F2><F3> 446 149 (104)<F7><F8> 491
Class B common stock 375 -- 375 -- -- 375
Capital surplus 37,755 5,275 12,792 <F2><F3> 55,822 2,541 1,310 <F7><F8> 59,673
Retained earnings (1,078) 570 (220)<F2><F3> (728) 2,286 (2,286)<F7><F8> (728)
Treasury stock (3,365) -- -- (3,365) -- -- (3,365)
Net fair value adjustment for
securities available for sale 1 51 (51)<F2> 1 (21) 21 <F7> 1
-------- ------- ------- ------- ------ ------ -------
Total stockholders' equity 33,900 6,954 11,697 52,551 5,018 (1,120) 56,447
-------- ------- ------- ------- ------ ------ -------
Total liabilities and
stockholders' equity $373,592 159,215 1,697 534,504 72,738 2,981 610,223
======== ======= ======= ======= ====== ====== =======
See notes to pro forma combined condensed financial statements.
</TABLE>
113
<PAGE> 119
<TABLE>
Unaudited Pro Forma Combined Condensed Statement of Income
<CAPTION>
For the six months ended June 30, 1997
-----------------------------------------------------------------------------
Pro Forma Pro Forma Pro Forma Pro Forma
FBA FCB Adjustments Combined Surety Adjustments Combined<F1>
--- --- ----------- -------- ------ ----------- ------------
(dollars expressed in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $10,634 4,700 -- 15,334 2,308 -- 17,642
Interest on investment securities 2,593 1,206 -- 3,799 341 -- 4,140
Interest on federal funds sold 359 328 -- 687 18 -- 705
------- ----- ---- ------ ----- ---- ------
Total interest income 13,586 6,234 -- 19,820 2,667 -- 22,487
------- ----- ---- ------ ----- ---- ------
Interest expense:
Interest on deposits 5,472 2,408 -- 7,880 1,234 -- 9,114
Note payable and other borrowings 734 454 (403)<F6> 785 3 143 <F9> 931
------- ----- ---- ------ ----- ---- ------
Total interest expense 6,206 2,862 (403) 8,665 1,237 143 10,045
------- ----- ---- ------ ----- ---- ------
Net interest income 7,380 3,372 403 11,155 1,430 (143) 12,442
Provision for possible loan losses 1,285 -- -- 1,285 65 -- 1,350
------- ----- ---- ------ ----- ---- ------
Net interest income after provision
for possible loan losses 6,095 3,372 403 9,870 1,365 (143) 11,092
------- ----- ---- ------ ----- ---- ------
Noninterest income:
Service charges on deposit accounts
and customer service fees 811 338 -- 1,149 141 -- 1,290
Other income 667 77 -- 744 505 (10)<F9> 1,239
------- ----- ---- ------ ----- ---- ------
Total noninterest income 1,478 415 -- 1,893 646 (10) 2,529
------- ----- ---- ------ ----- ---- ------
Noninterest expense:
Salary and employee benefits 2,095 1,024 -- 3,119 888 -- 4,007
Occupancy, net of rental income 766 329 -- 1,095 52 -- 1,147
Furniture and equipment 381 175 -- 556 143 -- 699
Legal, examination and professional
fees 991 170 -- 1,161 61 -- 1,222
Data processing fees 386 181 -- 567 98 -- 665
Losses and expenses on foreclosed
real estate, net of gains (256) 37 -- (219) 29 -- (190)
Other noninterest expense 1,337 931 87 <F6> 2,355 491 80 <F9> 2,926
------- ----- ---- ------ ----- ---- ------
Total noninterest expense 5,700 2,847 87 8,634 1,762 80 10,476
------- ----- ---- ------ ----- ---- ------
Income before provision for income
tax expense 1,873 940 316 3,129 249 (233) 3,145
Provision for income tax expense 700 370 161 <F6> 1,231 94 (61) 1,264
------- ----- ---- ------ ----- ---- ------
Net income $ 1,173 570 155 1,898 155 (172) 1,881
======= ===== ==== ====== ===== ==== ======
Weighted average common stock and
common stock equivalents outstanding
(in thousands) 3,644 -- -- 5,200 -- -- 5,515 <F10>
Earnings per common stock and
common stock equivalents outstanding $ 0.32 -- -- 0.37 -- -- 0.34 <F10>
See notes to pro forma combined condensed financial statements.
</TABLE>
114
<PAGE> 120
<TABLE>
Unaudited Pro Forma Combined Condensed Statement of Income
<CAPTION>
For the six months ended June 30, 1996
-----------------------------------------------------------------------------
Pro Forma Pro Forma Pro Forma Pro Forma
FBA FCB Adjustments Combined Surety Adjustments Combined<F1>
--- --- ----------- -------- ------ ----------- ------------
(dollars expressed in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $7,629 3,933 -- 11,562 2,152 -- 13,714
Interest on investment securities 1,243 1,668 -- 2,911 302 -- 3,213
Interest on federal funds sold 1,118 264 -- 1,392 25 -- 1,407
------ ------ --- ------ ----- ---- ------
Total interest income 9,990 5,865 15,855 2,479 18,334
------ ------ --- ------ ----- ---- ------
Interest expense:
Interest on deposits 4,589 2,429 -- 7,018 1,137 -- 8,155
Note payable and other borrowings 337 452 -- 789 6 143 <F9> 938
------ ------ --- ------ ----- ---- ------
Total interest expense 4,926 2,881 -- 7,807 1,143 143 9,093
------ ------ --- ------ ----- ---- ------
Net interest income 5,064 2,984 -- 8,048 1,336 (143) 9,241
Provision for possible loan losses 350 1,050 -- 1,400 90 -- 1,490
------ ------ --- ------ ----- ---- ------
Net interest income after provision
for possible loan losses 4,714 1,934 -- 6,648 1,246 (143) 7,751
------ ------ --- ------ ----- ---- ------
Noninterest income:
Service charges on deposit accounts
and customer service fees 737 404 -- 1,141 113 -- 1,254
Other income 137 85 -- 222 237 (10)<F9> 449
------ ------ --- ------ ----- ---- ------
Total noninterest income 874 489 -- 1,363 350 (10) 1,703
------ ------ --- ------ ----- ---- ------
Noninterest expense:
Salary and employee benefits 1,386 1,234 -- 2,620 672 -- 3,292
Occupancy, net of rental income 401 485 -- 886 72 -- 958
Furniture and equipment 304 232 -- 536 86 -- 622
Legal, examination and professional
fees 561 305 -- 866 53 -- 919
Other noninterest expense 1,435 1,892 87 <F6> 3,414 553 80 <F9> 4,047
------ ------ --- ------ ----- ---- ------
Total noninterest expense 4,087 4,148 87 8,322 1,436 80 9,838
------ ------ --- ------ ----- ---- ------
Income before provision for income
tax expense 1,501 (1,725) (87) (311) 160 (233) (384)
Provision for income tax expense 602 (580) -- 22 64 (61)<F9> 25
------ ------ --- ------ ----- ---- ------
Net income $ 899 (1,145) (87) (333) 96 (172) (409)
====== ====== === ====== ===== ==== ======
Weighted average common stock and
common stock equivalents outstanding
(in thousands) 3,990 -- -- 5,546 -- -- 5,859 <F10>
Earnings per common stock and
common stock equivalents outstanding $ 0.23 -- -- (0.06) -- -- (0.07)<F10>
See notes to pro forma combined condensed financial statements.
</TABLE>
115
<PAGE> 121
<TABLE>
Unaudited Pro Forma Combined Condensed Statement of Income
<CAPTION>
For the year ended December 31, 1996
-----------------------------------------------------------------------------
Pro Forma Pro Forma Pro Forma Pro Forma
FBA FCB Adjustments Combined Surety Adjustments Combined<F1>
--- --- ----------- -------- ------ ----------- ------------
(dollars expressed in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $16,494 8,643 -- 25,137 4,428 -- 29,565
Interest on investment securities 3,519 2,738 -- 6,257 647 -- 6,904
Interest on federal funds sold 1,433 555 -- 1,988 56 -- 2,044
------- ------ ---- ------ ----- ---- ------
Total interest income 21,446 11,936 -- 33,382 5,131 -- 38,513
------- ------ ---- ------ ----- ---- ------
Interest expense:
Interest on deposits 9,301 4,635 -- 13,936 2,359 -- 16,295
Note payable and other borrowings 692 905 (134)<F6> 1,463 8 285 <F9> 1,756
------- ------ ---- ------ ----- ---- ------
Total interest expense 9,993 5,540 (134) 15,399 2,367 285 18,051
------- ------ ---- ------ ----- ---- ------
Net interest income 11,453 6,396 134 17,983 2,764 -- 20,462
Provision for possible loan losses 1,250 1,155 -- 2,405 325 (285) 2,730
------- ------ ---- ------ ----- ---- ------
Net interest income after provision
for possible loan losses 10,203 5,241 134 15,578 2,439 (285) 17,732
------- ------ ---- ------ ----- ---- ------
Noninterest income:
Service charges on deposit accounts
and customer service fees 1,507 751 -- 2,258 291 -- 2,549
Other income 341 986 -- 1,327 421 (21)<F9> 1,727
------- ------ ---- ------ ----- ---- ------
Total noninterest income 1,848 1,737 -- 3,585 712 (21) 4,276
------- ------ ---- ------ ----- ---- ------
Noninterest expense:
Salary and employee benefits 3,072 2,177 -- 5,249 1,474 -- 6,723
Occupancy, net of rental income 951 881 -- 1,832 148 -- 1,980
Furniture and equipment 613 390 -- 1,003 188 -- 1,191
Postage printing and supplies 267 477 -- 744 125 -- 869
Legal, examination and professional
fees 1,276 1,501 -- 2,777 97 -- 2,874
Data processing fees 334 401 -- 735 283 -- 1,018
Communications 421 202 -- 623 77 -- 700
Other noninterest expense 2,546 2,051 175 4,772 1,097 160 <F9> 6,029
------- ------ ---- ------ ----- ---- ------
Total noninterest expense 9,480 8,080 175 17,735 3,489 160 21,384
------- ------ ---- ------ ----- ---- ------
Income before provision for income
tax expense 2,571 (1,102) (41) 1,428 (338) (466) 624
Provision for income tax expense 1,002 (532) 54 <F6> 524 (135) (122) 266
------- ------ ---- ------ ----- ---- ------
Net income $ 1,569 (570) (95) 904 (203) (344) 358
======= ====== ==== ====== ===== ==== ======
Weighted average common stock and
common stock equivalents outstanding
(in thousands) 3,915 -- -- 5,471 -- -- 5,784 <F10>
Earnings per common stock and
common stock equivalents outstanding $ 0.40 -- -- 0.17 -- -- 0.06 <F10>
See notes to pro forma combined condensed financial statements.
</TABLE>
Notes to Pro Forma Combined Condensed Financial Statements
(1) The unaudited pro forma combined condensed balance sheet has been
prepared based on the historical financial statements of FBA, FCB and Surety
as if the proposed transactions had occurred on June 30, 1997. The unaudited
pro forma combined condensed statements of income for the six months ended
June 30, 1997 and 1996, and for the year ended December 31, 1996, set forth
the results of operations as if the proposed transactions had occurred as of
January 1, 1996. Intercompany balances between FBA, FCB and Surety are not
material and have not been eliminated.
Merger of FBA / FCB:
- --------------------
(2) The application of the purchase method of accounting gives rise to
purchase adjustments to reflect the fair value of assets acquired and
liabilities assumed. Additions to intangibles associated with the purchase
subsidiaries include $1.7 million in goodwill generated by the transaction
between FBA and FCB. This amount includes $880,000 which represents the
difference between the purchase price of the minority shareholders'
interest in the net assets of FCB as of June 30, 1997 of $3.04 million and
the estimated market value of that interest. In addition, this amount
includes $820,000, which represents the excess cost of the net assets of FCB
under the common control of First Banks, the majority shareholder of FBA and
FCB. First Banks' interest in FCB is accounted for by FBA at First Banks'
historical cost.
116
<PAGE> 122
(3) Stockholders' equity has been adjusted for the following to reflect the
merger of FBA and FCB:
(a) The assumed issuance of approximately 752,038 shares of FBA
Common and the elimination of FCB's $6.95 million in equity, as
the FCB shares are exchanged for FBA Common.
(b) The issuance of 804,000 shares of FBA Common in exchange for a
$10.0 million reduction in FBA's note payable to First Banks.
(c) Adjustments to stockholders' equity also reflect the application
of the purchase method of accounting.
(4) In a related transaction, FCB will exchange its Campbell, California
office, with approximately $14.8 million in deposits, for an office in Walnut
Creek, California, with approximately $15.1 million in deposits, operated by
First Bank & Trust, a wholly owned subsidiary of First Banks. The branch
exchange will provide for a payment equal to the net difference between the
fair market values of the two branch offices, based on the values of the
assets and liabilities exchanged by the two parties. This transaction is not
reflected in the pro forma combined condensed financial statements as the
operating results of the branches are similar and would not have a material
impact on the pro forma combined condensed financial statements.
(5) On November 1, 1996, FBA completed its acquisition of Sunrise Bancorp,
a California corporation (Sunrise), and its wholly owned subsidiary, Sunrise
Bank of California. At the time of the transaction, Sunrise had $110.8
million in total assets, cash and cash equivalents and investment securities
of $45.5 million; $61.1 million in loans, net of unearned discount; and $91.1
million in total deposits. The pro forma combined condensed balance sheet
at June 30, 1997, and the pro forma combined condensed statement of income
for the six months then ended, reflect the assets and liabilities of Sunrise,
as well as the results of operations during the period. The results of
operations of Sunrise are not included in the pro forma combined condensed
statements of income for the six months ended June 30, 1996 and for the year
ended December 31, 1996 due to the fact the historical results of operations
for these periods are not representative of normal operating results since
its acquisition by FBA.
(6) Adjustments to the pro forma combined condensed statements of income
include the amortization of goodwill generated by the proposed transaction as
discussed in footnote (2), amortized over a fifteen year period using the
straight line method.
During 1997 and 1996, the average prime rate of interest was
approximately 8.375% and 8.27%, respectively. The prime rate is used in the
unaudited combined condensed pro forma statements of income to calculate the
reduction in external financing associated with the exchange of FBA Common
for $10.0 million of the note payable to First Banks. The external financing
carries an interest rate equal to 25 basis points below the prime rate.
No adjustments have been made for any operational synergies that may
occur as a result of the proposed transaction.
Acquisition of Surety:
- ----------------------
(7) Adjustments to intangibles associated with the purchase subsidiaries
include $2.40 million in goodwill generated by the transaction between FBA
and Surety, representing the difference between the purchase price of $7.45
million and the fair value of the net assets acquired. The fair value of net
assets acquired reflects increases of $200,000 and $210,000 relating to bank
premises and purchased mortgage servicing rights, respectively, offset by the
accrual of $389,000 in estimated acquisition costs. The deferred tax effects
of these adjustments were recorded using an effective tax rate of 40%.
(8) Adjustments to stockholders' equity to reflect the merger of FBA and
Surety include the assumed issuance of approximately 299,836 shares of FBA
Common with a value of $3.89 million, and the elimination of $5.02 million in
equity as the Surety shares are exchanged for FBA Common and cash. The
amount of FBA Common to be issued is based on the assumption that the
purchase price at June 30, 1997 would have been $7.45 million, $3.55 million
of which has been distributed in cash funded through an advance on FBA's note
payable with First Banks.
Adjustments to stockholders' equity also reflect the application of the
purchase method of accounting.
(9) Adjustments to the pro forma combined condensed statements of income
include the amortization of goodwill generated by the proposed transaction,
amortized over a fifteen year period using the straight line method.
During 1997 and 1996, the average prime rate of interest was
approximately 8.375% and 8.27%, respectively. The prime rate is used in the
unaudited combined condensed pro forma statements of income to calculate the
amount of interest expense which would have been paid on the external
financing required to fund the cash portion of the Surety acquisition. The
external financing carries an interest rate equal to 25 basis points below
the prime rate.
No adjustments have been made for any operational synergies that may
occur as a result of the proposed transactions.
Earnings Per Share:
- -------------------
(10) Pro forma earnings per share for the year ended December 31, 1996 were
calculated based upon FBA's weighted average shares outstanding plus 752,038
shares assumed to be issued in the proposed merger of FBA and FCB, 804,000
shares assumed to be issued in exchange for $10.0 million of the note payable
to First Banks, 299,836 shares assumed to be issued in the proposed
transaction between FBA and Surety, and options to purchase Surety common
stock totaling 13,462 which will be exchanged for equivalent options to
purchase FBA Common.
Pro forma earnings per share for the six months ended June 30, 1997 and
1996 were calculated based upon FBA's weighted average shares outstanding
plus 752,038 shares assumed to be issued in the proposed merger of FBA and
FCB, 804,000 shares assumed to be issued in exchange for $10.0 million of the
note payable to First Banks, 299,836 shares assumed to be issued in the
proposed transaction between FBA and Surety, and 15,063 and 13,188 shares,
respectively, of options to purchase Surety Common Stock which will be
exchanged for equivalent options to purchase FBA Common.
117
<PAGE> 123
OTHER MATTERS THAT MAY PROPERLY COME
BEFORE THE SPECIAL MEETING
The Board of Directors of Surety knows of no business that will be
presented for consideration at the Special Meeting, other than that stated in
the Notice of Special Meeting of Shareholders and this Proxy
Statement--Prospectus. Should any other matter properly come before the
Special Meeting or any adjournments thereof, it is intended that proxies will
be voted on such matters in accordance with the judgment of the person or
persons exercising the proxies, acting by a plurality of those present.
Although the Special Meeting may be adjourned, proxies voting against the
Reorganization Agreement may not be used by the proxy holders to vote in
favor of the adjournment pursuant to such proxyholders' discretionary voting
authority.
LEGAL MATTERS
The legality of the FBA Common offered hereby will be passed upon for
FBA by John S. Daniels, Attorney at Law, Dallas, Texas.
EXPERTS
The consolidated financial statements of FBA and subsidiaries as of
December 31, 1996 and 1995 and for each of the years in the three-year period
ended December 31, 1996, included in FBA's Annual Report on Form 10-K,
incorporated by reference herein and in the Registration Statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, are incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Surety Bank and subsidiary as
of December 31, 1996 and 1995 and for each of the years in the two-year
period ended December 31, 1996, have been included herein and in the
Registration Statement in reliance upon the report of Perry-Smith & Co.,
independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
118
<PAGE> 124
<TABLE>
INDEX TO FINANCIAL STATEMENTS
<S> <C>
Independent Auditor's Report dated March 13, 1997 F-2
Consolidated Balance Sheet as of December 31, 1996 and 1995 and as of
June 30, 1997 F-3
Consolidated Statement of Operations for the years ended December 31, 1996
and 1995 and for the six months ended June 30, 1997 and 1996 F-4
Consolidated Statement of Stockholders' Equity for the years ended December
31, 1996 and 1995 and for the six months ended June 30, 1997 F-5
Consolidated Statement of Cash Flows for the years ended December 31, 1996
and 1995 and for the six months ended June 30, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE> 125
INDEPENDENT AUDITOR'S REPORT
Perry-Smith & Co.
Certified Public Accountants
The Stockholders and
Board of Directors
Surety Bank and Subsidiary
We have audited the accompanying consolidated balance sheet of Surety
Bank and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows
for the years 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 1996 and 1995 consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of Surety Bank and subsidiary as of December 31, 1996 and
1995, and the consolidated results of their operations and their consolidated
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/Perry-Smith & Co.
----------------------------
Certified Public Accountants
Sacramento, California
March 13, 1997
F-2
<PAGE> 126
<TABLE>
SURETY BANK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<CAPTION>
June 30, December 31,
ASSETS 1997 1996 1995
----------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
Cash and due from banks $ 2,266,670 2,320,960 3,617,995
Federal funds sold 975,000 -- 500,000
Available-for-sale investment securities (Note 2) 10,762,560 11,037,600 9,274,100
Loans held for sale 6,691,421 4,463,060 --
Loans, less allowance for loan losses of $582,121
at June 30, 1997, $585,765 in 1996
and $434,653 in 1995 (Note 3) 48,722,340 50,931,790 46,843,242
Bank premises and equipment, net (Note 4) 2,384,872 1,466,170 1,444,829
Note receivable (Notes 5 and 16) -- 895,000 852,503
Accrued interest receivable and other assets 935,016 941,191 874,732
----------- ---------- ----------
Total assets $72,737,879 72,055,771 63,407,401
=========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 4,559,049 4,284,334 4,679,640
Interest bearing (Note 6) 62,025,010 60,084,630 52,890,562
----------- ---------- ----------
Total deposits 66,584,059 64,368,964 57,570,202
----------- ---------- ----------
Other borrowed funds (Note 7) -- 2,135,000 --
Accrued interest payable and other liabilities (Note 8) 1,137,456 661,517 644,711
----------- ---------- ----------
Total liabilities 67,721,515 67,165,481 58,214,913
----------- ---------- ----------
Commitments and contingencies (Note 9)
Stockholders' equity (Notes 2 and 10):
Convertible preferred stock - Series A, $1 par value, $20
per share redemption value; authorized - 2,000,000
shares, issued and outstanding - 61,050 shares 61,050 61,050 61,050
Common stock, $1 par value; authorized - 2,000,000
shares; issued and outstanding - 148,560 shares 148,560 148,560 148,560
Additional paid-in capital 2,541,550 2,541,550 2,541,550
Retained earnings 2,286,486 2,160,783 2,424,630
Unrealized (loss) gain on available-for-sale investment
securities, net of taxes (21,282) (21,653) 16,698
----------- ---------- ----------
Total stockholders' equity 5,016,364 4,890,290 5,192,488
----------- ---------- ----------
Total liabilities and stockholders' equity $72,737,879 72,055,771 63,407,401
=========== ========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-3
<PAGE> 127
<TABLE>
SURETY BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<CAPTION>
Six months ended
June 30, Years ended December 31,
1997 1996 1996 1995
---------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $2,308,066 2,152,191 4,427,675 4,139,521
Interest on investment securities and
Federal funds sold 358,452 326,645 703,539 543,556
---------- --------- --------- ---------
Total interest income 2,666,518 2,478,836 5,131,214 4,683,077
---------- --------- --------- ---------
Interest expense:
Interest on deposits (Note 6) 1,233,628 1,136,500 2,359,139 2,219,923
Interest on other borrowed funds (Note 7) 3,359 6,136 8,535 37,047
---------- --------- --------- ---------
Total interest expense 1,236,987 1,142,636 2,367,674 2,256,970
---------- --------- --------- ---------
Net interest income 1,429,531 1,336,200 2,763,540 2,426,107
Provision for loan losses (Note 3) 65,000 90,000 325,000 130,234
---------- --------- --------- ---------
Net interest income after provision
for loan losses 1,364,531 1,246,200 2,438,540 2,295,873
---------- --------- --------- ---------
Noninterest income:
Service charges 140,826 113,138 291,237 257,830
Gain on sale of loans 318,379 32,338 112,393 90,297
Loan servicing income 55,799 56,912 133,243 130,932
Loss on sale of investment securities (Note 2) -- -- -- (49,344)
Other income 130,989 148,012 174,785 93,802
---------- --------- --------- ---------
Total noninterest income 645,993 350,400 711,658 523,517
---------- --------- --------- ---------
Other expenses:
Salaries and employee benefits (Notes 3 and 12) 887,614 671,518 1,473,969 1,301,066
Occupancy and furniture and equipment 194,929 158,000 336,012 292,072
One-time SAIF assessment (Note 15) -- -- 350,624 --
Other expense (Note 11) 678,651 606,634 1,328,466 1,172,109
---------- --------- --------- ---------
Total other expenses 1,761,194 1,436,152 3,489,071 2,765,247
---------- --------- --------- ---------
Income (loss) before income taxes 249,330 160,448 (338,873) 54,143
Income tax expense (benefit) (Note 8) 94,500 64,000 (135,000) 18,000
---------- --------- --------- ---------
Net income (loss) $ 154,830 96,448 (203,873) 36,143
========== ========= ========= =========
Earnings (loss) per share of common stock
and common stock equivalents (net of
preferred stock dividends) $ 1.01 .63 (1.78) (.16)
========== ========= ========= =========
Weighted average number of shares
outstanding 153,697 152,684 148,560 148,356
========== ========= ========= =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-4
<PAGE> 128
<TABLE>
SURETY BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the two years ended December 31, 1996 and 1995 and
six months ended June 30, 1997
<CAPTION>
Unrealized
(Loss) Gain
Convertible on Available-
Preferred Stock Common Stock Additional For-Sale
--------------- ------------ Paid-In Retained Investment
Shares Amount Shares Amount Capital Earnings Securities Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1995 61,050 $61,050 139,070 $139,070 2,396,146 2,576,435 (16,212) 5,156,489
Stock options exercised (Note 10) -- -- 2,450 2,450 25,724 -- -- 28,174
Common stock dividend - 5% -- -- 7,040 7,040 119,680 (127,368) -- (648)
Preferred stock cash dividend-
$.9923 per share -- -- -- -- -- (60,580) -- (60,580)
Net change in unrealized (loss) gain
on available-for-sale investment
securities, net of taxes (Note 2) -- -- -- -- -- -- 32,910 32,910
Net income -- -- -- -- -- 36,143 -- 36,143
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 61,050 61,050 148,560 148,560 2,541,550 2,424,630 16,698 5,192,488
Preferred stock cash dividend -
$.9816 per share -- -- -- -- -- (59,974) -- (59,974)
Net change in unrealized gain (loss)
on available-for-sale investment
securities, net of taxes (Note 2) -- -- -- -- -- -- (38,351) (38,351)
Net loss -- -- -- -- -- (203,873) -- (203,873)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 61,050 61,050 148,560 148,560 2,541,550 2,160,783 (21,653) 4,890,290
Preferred stock cash dividend -
$.4771 per share (unaudited) -- -- -- -- -- (29,127) -- (29,127)
Net change in unrealized (loss) gain
on available-for-sale investment
securities, net of taxes (unaudited) -- -- -- -- -- -- 371 371
Net income (unaudited) -- -- -- -- -- 154,830 -- 154,830
- ------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 1997 (unaudited) 61,050 $61,050 148,560 $148,560 2,541,550 2,286,486 (21,282) 5,016,364
==============================================================================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-5
<PAGE> 129
<TABLE>
SURETY BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
Six months ended Years ended
June 30, December 31,
1997 1996 1996 1995
----------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 154,830 96,448 (203,873) 36,143
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Provision for loan losses 65,000 90,000 325,000 130,234
Deferred loan origination fees and costs, net (28,854) (72,907) (134,825) (58,924)
Depreciation and amortization 67,287 74,578 190,175 129,832
Accretion of discount on note receivable -- -- (42,497) (6,137)
Loss on sale of investment securities and other real estate -- -- -- 68,048
Provision for other real estate losses 17,212 -- 53,000 --
Increase in loans held for sale (2,228,361) -- (4,463,060) --
Dividends on Federal Home Loan Bank stock (13,700) (11,200) (24,500) (20,400)
Loss on disposition of leasehold improvements and equipment -- -- -- 30,919
(Increase) decrease in accrued interest receivable and
other assets (169,318) (243,208) 168,991 (76,220)
Increase (decrease) in accrued interest payable and
other liabilities 473,203 (171,941) 166,713 (24,889)
Deferred taxes -- -- (120,000) (15,000)
----------- ---------- ---------- ----------
Net cash (used in) provided by operating activities (1,662,701) (238,230) (4,084,876) 193,606
----------- ---------- ---------- ----------
Cash flows from investing activities:
Proceeds from calls and maturities of available-for-sale
investment securities 1,750,633 3,200,000 5,878,806 2,000,000
Proceeds from sales of available-for-sale investment securities -- -- -- 2,299,353
Purchases of available-for-sale investment securities (1,474,815) (4,998,906) (7,979,564) (8,900,000)
Proceeds from principal repayments of available-for-sale
investment securities 56,731 222,661 311,736 46,680
Proceeds from principal repayments of held-to-maturity
investment securities -- -- -- 345,313
Net decrease (increase) in loans 2,036,504 (3,291,778) (4,667,749) 2,822,497
Increase in note receivable -- -- -- (846,366)
Purchases of equipment (87,609) (116,823) (200,980) (194,894)
Proceeds from sale of equipment -- -- 13,385 2,800
Proceeds from sale of other real estate, net 251,000 60,000 60,000 166,719
Net cash provided by (used in) investing activities 2,532,443 (4,924,846) (6,584,366) (2,257,898)
----------- ---------- ---------- ----------
Cash flows from financing activities:
Net increase in demand, interest bearing and
savings deposits 1,863,245 844,532 3,278,162 2,472,929
Net increase in time deposits 351,850 1,931,274 3,520,600 1,146,902
Net (decrease) increase in other borrowed funds (2,135,000) 650,000 2,135,000 (700,000)
Proceeds from exercised stock options -- -- -- 28,174
Payments of cash dividends (29,127) (30,588) (61,555) (60,580)
----------- ---------- ---------- ----------
Net cash provided by financing activities 50,968 3,395,218 8,872,207 2,887,425
----------- ---------- ---------- ----------
Increase (decrease) in cash and cash equivalents 920,710 (1,767,859) (1,797,035) 823,133
Cash and cash equivalents at beginning of period 2,320,960 4,117,995 4,117,995 3,294,862
----------- ---------- ---------- ----------
Cash and cash equivalents at end of period $ 3,241,670 2,350,136 2,320,960 4,117,995
=========== ========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest expense $ 1,236,218 1,138,445 2,237,371 2,218,063
Income taxes $ 50,000 7,750 15,500 189,500
Non-cash investing activities:
Real estate acquired through foreclosure $ 136,800 83,235 541,650 --
Net change in unrealized gain (loss) on available-for-sale
investment securities $ 3,107 (180,809) (60,991) 50,231
Other non-cash transactions:
Agreement of building in satisfaction of note receivable -
dissolution of exchange agreement $ 895,000 -- -- --
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-6
<PAGE> 130
SURETY BANK AND SUBSIDIARIES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Surety Bank (formerly Surety Federal Savings Bank) is a state-chartered
commercial bank subject to supervision by the State Banking Department. The
Bank's Board of Directors approved a resolution to convert from a
federally-chartered savings bank in May 1993 and the conversion was
consummated on November 1, 1994.
The accounting and reporting policies of Surety Bank and its subsidiary
conform with generally accepted accounting principles and prevailing
practices within the banking industry.
Certain reclassifications have been made to prior year's balances to
conform to classifications used in 1996.
Principles of Consolidation
The consolidated financial statements include the accounts of the Bank
and its wholly owned subsidiary, Pacific Northwest Financial Corporation of
California ("PNFC"). PNFC operated a check cashing service whose assets were
sold on December 31, 1996 and acts as a trustee for the Bank's loans. All
material intercompany balances and transactions have been eliminated in
consolidation.
Investment Securities
Investments are classified into the following categories:
* Available-for-sale-securities, reported at fair value, with
unrealized gains and losses excluded from earnings and
reported, net of taxes, as a separate component of
stockholders' equity.
* Held-to-maturity securities, which management has the positive
intent and ability to hold, reported at amortized cost,
adjusted for the accretion of discounts and amortization of
premiums.
Management determines the appropriate classification of its investments
at the time of purchase and may only change the classification in certain
limited circumstances. However, the Financial Accounting Standards Board
issued a Special Report on November 15, 1995 allowing a one-time reassessment
of the appropriateness of the classifications of all securities held at that
time. As a result, securities were transferred during 1995 from the
held-to-maturity category without calling into question management's intent
to hold other securities in that category to maturity. In addition, any
transfers between categories are accounted for at fair value.
F-7
<PAGE> 131
Gains or losses on the sale of securities are computed using the
specific identification method. Interest earned on investment securities is
reported in interest income, net of applicable adjustments for accretion of
discounts and amortization of premiums. In addition, unrealized losses that
are other than temporary are recognized in earnings for all investments.
Loans Held for Sale
Loans held for sale consist of mortgage and Small Business
Administration (SBA) guaranteed loans and are carried at the lower of cost or
market value. Loans held for sale subsequently transferred to the loan
portfolio are transferred at the lower of cost or market value at the date of
transfer. Any difference between the carrying amount of the loan and its
outstanding principal balance is recognized as an adjustment to yield by the
interest method. Unrealized losses on loans held for sale are included in
other expenses. Realized gains or losses are determined on the specific
identification method and are reflected in noninterest income or expense.
Sales and Servicing of SBA Loans
The guaranteed portion of certain SBA loans are sold to third parties
with the Bank retaining the unguaranteed portions. The Bank generally
receives a premium in excess of the adjusted carrying value of the loan at
the time of sale. The Bank may be required to refund a portion of this
premium if the borrower defaults or repays the loan within ninety days of the
settlement date. However, there were no sales of loans subject to these
recourse provisions at December 31, 1996 or 1995. In addition, the Bank
receives a fee to service the loan represented by the difference between the
rate paid by the borrower to the Bank and the rate paid by the Bank to the
purchaser. Any excess of this fee over the normal cost of servicing the loan
is recorded as additional gain (excess servicing fees).
The Bank's investment in SBA loans is allocated between the retained
portion of the loan, the excess servicing fee, and the sold portion of the
loan based on their relative fair values on the date the loan is sold. The
gain on the sold portion of the loan is recognized as income at the time of
sale. The carrying value of the retained portion of the loan is discounted
based on the estimated value of a comparable non-guaranteed loan. On the
balance sheet, the excess servicing fee is included in accrued interest
receivable and other assets and is amortized over the estimated life of the
related loan. Significant future prepayments of these loans will result in
the recognition of additional amortization of related excess servicing fees.
Loans
Loans are stated at principal balances outstanding, except for loans
transferred from loans held for sale which are carried at the lower of
principal balance or market value at the date of transfer, adjusted for
accretion of discounts. Interest is accrued daily based upon outstanding
loan balances. However, when, in the opinion of management, loans are
F-8
<PAGE> 132
considered to be impaired and the future collectibility of interest and
principal is in serious doubt, loans are placed on nonaccrual status and the
accrual of interest income is suspended. Any interest accrued but unpaid is
charged against income. Payments received are applied to reduce principal to
the extent necessary to ensure collection. Subsequent payments on these
loans, or payments received on nonaccrual loans for which the ultimate
collectibility of principal is not in doubt, are applied first to earned but
unpaid interest and then to principal.
An impaired loan is measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical matter, at the loan's observable market price or the fair value of
collateral if the loan is collateral dependent. A loan is considered
impaired when, based on current information and events, it is probable that
the Bank will be unable to collect all amounts due (including both principal
and interest) in accordance with the contractual terms of the loan agreement.
Substantially all loan origination fees, commitment fees, direct loan
origination costs and purchase premiums and discounts on loans are deferred
and recognized as an adjustment of yield, to be amortized to interest income
over the contractual term of the loan. The unamortized balance of deferred
fees and costs is reported as a component of net loans.
Loans Serviced for Others
Loans with unpaid balances of approximately $29,627,000 and $31,449,000
were being serviced for others at December 31, 1996 and 1995, respectively.
Allowance for Loan Losses
The allowance for loan losses is maintained to provide for losses
related to impaired loans and other losses that can be expected to occur in
the normal course of business. The determination of the allowance is based
on estimates made by management, to include consideration of the character of
the loan portfolio, specifically identified problem loans, potential losses
inherent in the portfolio taken as a whole and economic conditions in the
Bank's service area. These estimates are particularly susceptible to changes
in the economic environment and market conditions. The allowance is
established through a provision for loan losses which is charged to expense.
Other Real Estate
Other real estate includes real estate acquired in full or partial
settlement of loan obligations. When property is acquired, any excess of the
Bank's recorded investment in the loan balance and accrued interest income
over the estimated fair market value of the property is charged against the
allowance for loan losses. A valuation allowance for losses on other real
estate is maintained to provide for temporary declines in value. The
allowance is established through a provision for losses on other real estate
which is included in other expenses.
F-9
<PAGE> 133
Subsequent gains or losses on sales or writedowns resulting from permanent
impairments are recorded in other income or expense as incurred. On the
balance sheet, other real estate is included in accrued interest receivable
and other assets.
Bank Premises and Equipment
Bank premises and equipment are carried at cost. Depreciation is
determined using the straight-line method over the useful lives of the
related assets. The useful life of bank premises is estimated to be thirty
years. The useful lives of improvements to bank premises, furniture,
fixtures and equipment are estimated to be two to twenty years. When assets
are sold or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is
recognized in income for the period. The cost of maintenance and repairs is
charged to expense as incurred.
Income Taxes
Deferred tax assets and liabilities are recognized for the tax
consequences of temporary differences between the financial statement and tax
basis of existing assets and liabilities. On the balance sheet, net deferred
tax liabilities are included in accrued interest payable and other
liabilities.
Cash Equivalents
For the purpose of the statement of cash flows, the Bank considers cash
and due from banks and Federal funds sold to be cash equivalents. Generally,
Federal funds are sold for one day periods.
Earnings Per Share
Earnings per common and common equivalent share is based upon the
weighted average number of common and common equivalent shares outstanding
during the year after giving effect to the reduction of earnings by the
dividends declared on the Series A Convertible Preferred Stock. Primary and
fully diluted earnings per share are the same for the years ended December
31, 1996 and 1995.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
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 these estimates.
F-10
<PAGE> 134
New Financial Accounting Standards
In June 1996, the Financial Accounting Standards Board issued SFAS 125,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. Under the provisions of SFAS 125, an entity
recognizes the financial and servicing assets it controls and the liabilities
it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. In addition,
this Statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
This Statement is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996 and is
to be applied prospectively. However, implementation of certain aspects of
this Statement was subsequently delayed for one year with the issuance of
SFAS 127 in December 1996. Management does not believe that the adoption of
SFAS 125 will have a significant impact on its financial position and results
of operations when implemented.
In October 1995, the Financial Accounting Standards Board issued SFAS
123, Accounting for Stock-Based Compensation, which is effective for
transactions entered into after December 15, 1995. This Statement
establishes a fair value based method of accounting for stock-based
compensation and encourages, but does not require, companies to record
compensation cost. However, if compensation cost is material to the
financial statements and not recorded, pro-forma net income and earnings per
share must be disclosed as if the fair value method had been applied. The
Bank has chosen to continue to account for stock-based compensation under the
intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, Accounting for Stock issued to Employees. Accordingly, compensation cost
for stock options is measured as the excess, if any, of the quoted market
price of the Bank's stock at the date of the grant over the exercise price.
Compensation cost related to options granted during 1996 and 1995 was
determined by management to be immaterial for disclosure purposes.
2. INVESTMENT SECURITIES
There were no investment securities categorized as held-to-maturity at
December 31, 1996 and 1995. The amortized cost and estimated market value of
available-for-sale investment securities at December 31, 1996 and 1995
consisted of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
1996
- ------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 996,145 5,855 -- 1,002,000
U.S. Government agencies 9,192,713 5,113 (52,826) 9,145,000
U.S. Government guaranteed mortgage-
related securities 439,495 6,505 -- 446,000
Federal Home Loan Bank stock 444,600 -- -- 444,600
- ------------------------------------------------------------------------------------------------------------------------
$11,072,953 17,473 (52,826) 11,037,600
========================================================================================================================
</TABLE>
F-11
<PAGE> 135
Net unrealized losses on available-for-sale investment securities
totaling $35,353 were recorded, net of $13,700 in tax benefits, as a separate
component of stockholders' equity at December 31, 1996. There were no sales
of available-for-sale investment securities for the year ended December 31,
1996.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
1995
- ------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 499,406 3,594 -- 503,000
U.S. Government agencies 7,400,000 4,500 (1,500) 7,403,000
U.S. Government guaranteed mortgage-
related securities 928,956 19,044 -- 948,000
Federal Home Loan Bank stock 420,100 -- -- 420,100
- ------------------------------------------------------------------------------------------------------------------------
$9,248,462 27,138 (1,500) 9,274,100
========================================================================================================================
</TABLE>
Net unrealized gains on available-for-sale investment securities
totaling $25,638 were recorded, net of $8,940 in tax liabilities, as a
separate component of stockholders' equity at December 31, 1995. Proceeds
and gross realized losses from the sale of available-for-sale investment
securities for the year ended December 31, 1995 totaled $2,299,353 and
$49,344, respectively.
On November 15, 1995, certain securities were transferred from the
held-to-maturity category to the available-for-sale category in accordance
with the provisions of the Special Report issued by the Financial Accounting
Standards Board (Note 1). The market value and amortized cost of the
transferred securities on the date of the transfer were $3,292,000 and
$3,323,034, respectively. Accordingly, a net unrealized loss of $31,034 was
recorded, net of $10,800 in tax benefits, as a separate component of
stockholders' equity. There were no sales or other transfers of
held-to-maturity investment securities during the years ended December 31,
1996 and 1995.
The amortized cost and estimated market value of investment securities
at December 31, 1996 by contractual maturity are shown below. Expected
maturities will differ from
F-12
<PAGE> 136
contractual maturities because the issuers of the securities may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Estimated
Amortized Market
Cost Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Within one year $ 2,495,408 2,495,000
After one year through 5 years 7,693,450 7,652,000
- ------------------------------------------------------------------------------------------------------------
$10,188,858 10,147,000
- ------------------------------------------------------------------------------------------------------------
Investment securities not due at a single maturity date:
U.S. Government guaranteed mortgage-related
securities 439,495 446,000
Federal Home Loan Bank stock 444,600 444,600
- ------------------------------------------------------------------------------------------------------------
884,095 890,600
- ------------------------------------------------------------------------------------------------------------
$11,072,953 11,037,600
============================================================================================================
</TABLE>
Investment securities with amortized costs totaling $1,496,145 and
$999,406 and market values totaling $1,500,000 and $1,003,000 were pledged to
secure public deposits at December 31, 1996 and 1995, respectively.
3. LOANS
Outstanding loans are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
December 31,
- ------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial $ 4,156,325 1,825,652
Real estate-mortgage 41,778,215 40,515,120
Real estate-construction 4,285,665 3,968,273
Consumer 771,409 923,687
Other 695,241 349,288
- ------------------------------------------------------------------------------------------------------------
51,686,855 47,582,020
Deferred loan fees (169,300) (304,125)
Allowance for loan losses (585,765) (434,653)
- ------------------------------------------------------------------------------------------------------------
$50,931,790 46,843,242
============================================================================================================
</TABLE>
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Year ended December 31,
- ------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year $ 434,653 321,223
Provision charged to operations 325,000 130,234
Losses charged to allowance (192,867) (22,849)
Loan loss recoveries 18,979 6,045
- ------------------------------------------------------------------------------------------------------------
Balance, end of year $ 585,765 434,653
============================================================================================================
</TABLE>
The Bank had no impaired loans during the years ended December 31, 1996
and 1995.
F-13
<PAGE> 137
At December 31, 1996 and 1995, nonaccrual loans totaled $760,909 and
$684,478, respectively. Interest foregone on these loans totaled $69,233 and
$31,692 for the years ended December 31, 1996 and 1995, respectively.
Salaries and employee benefits totaling $195,370 and $46,325 have been
deferred as loan origination costs for the years ended December 31, 1996 and
1995, respectively.
4. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
December 31,
- ------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 400,000 400,000
Bank premises 1,247,801 1,240,920
Furniture, fixtures and equipment 969,235 795,251
- ------------------------------------------------------------------------------------------------------------
2,617,036 2,436,171
Less accumulated depreciation (1,150,866) (991,342)
- ------------------------------------------------------------------------------------------------------------
$ 1,466,170 1,444,829
============================================================================================================
</TABLE>
Depreciation and amortization included in occupancy expense totaled
$166,254 and $127,753 for the years ended December 31, 1996 and 1995,
respectively.
5. NOTES RECEIVABLE
On November 22, 1995, the Bank entered into an exchange agreement with
Exchange Holding Corporation (Exchange)in order to facilitate the sale of a
building in Vallejo currently owned by the Bank. Exchange purchased another
building to be used as the Bank's Fairfield branch facility. The Bank
intends to execute a tax deferred exchange as soon as a buyer for the Vallejo
building is located, which will result in the Bank's ownership of the
Fairfield facility. The Bank financed the purchase of the Fairfield facility
by Exchange through a discounted note receivable in the amount of $858,640,
collateralized by the building, bearing an imputed interest rate of 5.27%.
Interest income of $42,497 and $6,137 for the years ended December 31, 1996
and 1995, respectively, is included in other income. Under the terms of the
agreement, Exchange has the option to transfer ownership of the Fairfield
facility to the Bank if the transaction is not completed within a specified
period, and, accordingly, the note receivable would be canceled or extended.
The exchange agreement was subsequently rescinded on January 1, 1997 as
discussed in Note 17.
F-14
<PAGE> 138
6. INTEREST-BEARING DEPOSITS
Interest bearing deposits consisted of the following:
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Savings $ 6,970,166 6,754,240
Money market 11,955,272 10,790,502
NOW accounts 9,745,667 7,452,895
Time, $100,000 or more 9,807,649 6,991,841
Other time 21,605,876 20,901,084
- ------------------------------------------------------------------------------------------------------------
$60,084,630 52,890,562
============================================================================================================
</TABLE>
Interest expense recognized on interest-bearing deposits consisted of
the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Year ended December 31,
- ------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Savings $ 193,657 183,653
Money market 510,303 534,248
NOW accounts 90,330 84,909
Time, $100,000 or more 462,115 317,719
Other time 1,102,734 1,099,394
- ------------------------------------------------------------------------------------------------------------
$2,359,139 2,219,923
============================================================================================================
</TABLE>
7. SHORT-TERM BORROWING ARRANGEMENT
At December 31, 1996, the Bank had pledged approximately $11,600,000 in
mortgage loans to the Federal Home Loan Bank of San Francisco to maintain a
readily available borrowing capacity of approximately $9,300,000. The Bank
borrows from the Federal Home Loan Bank on an as-needed basis. At December
31, 1996, the Bank had borrowed $2,135,000, bearing an interest rate of
8.33%. There were no borrowings outstanding at December 31, 1995.
8. INCOME TAXES
The provision for income taxes for the years ended December 31, 1996 and
1995 consisted of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1996 Federal State Total
============================================================================================================
<S> <C> <C> <C>
Current $ (16,000) 1,000 (15,000)
Deferred (98,000) (22,000) (120,000)
- ------------------------------------------------------------------------------------------------------------
Income tax benefit $(114,000) (21,000) (135,000)
============================================================================================================
1995
- ------------------------------------------------------------------------------------------------------------
Current $ 23,000 10,000 33,000
Deferred (8,000) (7,000) (15,000)
- ------------------------------------------------------------------------------------------------------------
Income tax expense $ 15,000 3,000 18,000
============================================================================================================
</TABLE>
F-15
<PAGE> 139
Deferred tax assets (liabilities) are comprised of the following at
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 251,000 195,000
Loans held for sale 23,000 --
Premium on sale of SBA loans 38,000 23,000
State net operating loss carryforward 5,000 --
Allowance for losses on other real estate 21,000 --
Future benefit of state income tax deduction -- 4,000
Unrealized loss on available-for-sale
investment securities 14,000 --
Other 2,000 19,000
- ------------------------------------------------------------------------------------------------------------
Total deferred tax assets 354,000 241,000
- ------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Loan fee income (160,000) (159,000)
Bank premises and equipment (140,000) (137,000)
Tax bad debt reserves (72,000) (96,000)
Federal Home Loan Bank stock dividends (88,000) (79,000)
Unrealized gain on available-for-sale
investment securities -- (9,000)
Other -- (15,000)
- ------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (460,000) (495,000)
- ------------------------------------------------------------------------------------------------------------
Net deferred tax liabilities $(106,000) (254,000)
============================================================================================================
</TABLE>
At December 31, 1996, the Bank had net operating losses (NOLS) totaling
$50,100 for State income tax reporting purposes. The NOLS are available to
offset future taxable income through the year 2001. Federal NOLS generated
in 1996 totaling $37,900 were carried back to offset taxable income in
previous years.
The (benefit) provision for income taxes differs from amounts computed
by applying the statutory Federal income tax rates to operating (loss) income
before income taxes. The significant items comprising these differences for
the years ended December 31, 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal income tax (benefit)
expense, at statutory rate $(115,217) (34.0)% 18,409 34.0%
Benefit of graduated tax rates -- -- (9,828) (18.3)
State franchise tax (benefit)
expense, net of Federal tax effect (25,080) (7.4) 4,347 8.1
Interest on obligations of states
and political subdivisions (7,702) (2.3) (9,088) (16.9)
Other 12,999 3.9 14,160 26.9
- ------------------------------------------------------------------------------------------------------------------
Total income tax
(benefit) expense $(135,000) (39.8)% 18,000 33.8%
==================================================================================================================
</TABLE>
F-16
<PAGE> 140
9. COMMITMENTS AND CONTINGENCIES
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 in order to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments consist of commitments to extend credit and
letters of credit. These instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the
balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by the
other party for commitments to extend credit and letters of credit is
represented by the contractual amount of those instruments. The Bank uses
the same credit policies in making commitments and letters of credit as it
does for loans included on the balance sheet.
The following financial instruments represent off-balance-sheet credit
risk:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
December 31,
- ------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit $5,615,600 2,747,100
Letters of credit $ -- 150,000
</TABLE>
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any conditions 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 credit-worthiness 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 borrower.
Collateral held varies, but may include bank deposits, accounts receivable,
inventory, equipment and deeds of trust on real estate and income-producing
commercial properties.
Letters of credit are conditional commitments issued by the Bank to
guarantee the performance or financial obligation of a customer to a third
party. The Bank's outstanding commitments are for twelve months or less.
The credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loans to customers.
At December 31, 1996, real estate secured loan commitments represent
approximately 96% of total commitments and are generally secured by property
with a loan-to-value ratio not to exceed 75%. The majority of real estate
secured commitments have variable interest rates. Commercial loan
commitments represent approximately 2% of total commitments and are generally
unsecured and have variable interest rates. Unsecured consumer lines of
credit represent the remaining 2% of total commitments.
F-17
<PAGE> 141
Significant Concentrations of Credit Risk
The Bank grants real estate mortgage, real estate construction,
commercial and consumer loans to customers throughout Solano and Napa
counties.
Although the Bank has a diversified loan portfolio, a substantial
portion of its portfolio is secured by commercial and residential real
estate. However, personal and business income represent the primary source
of repayment for a majority of these loans.
Federal Reserve Requirements
Banks are required to maintain reserves with the Federal Reserve Bank
equal to a percentage of their reservable deposits. The reserve balances
held with the Federal Reserve Bank totaled $249,000 and $172,000 at December
31, 1996 and 1995, respectively.
Contingencies
The Bank is subject to legal proceedings and claims which arise in the
ordinary course of business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect
the financial position or results of operations of the Bank.
10. STOCKHOLDERS' EQUITY
Dividends
Upon declaration by the Board of Directors, all stockholders of record
will be entitled to receive dividends. The California Financial Code
restricts the total dividend payment of any bank in any calendar year to the
lesser of (1) the bank's retained earnings or (2) the bank's net income for
its last three fiscal years, less distributions made to stockholders during
the same three-year period. At December 31, 1996, there were no retained
earnings free of such restrictions.
Convertible Preferred Stock - Series A
During 1990, the Bank issued 61,050 shares of Convertible Preferred
Stock - Series A with a redemption value of $20 per share plus any accrued
and unpaid dividends.
Dividends on the preferred stock, which are not cumulative, are to be
declared semiannually by the Board of Directors of the Bank. Dividends are
payable semiannually, on July 31 and January 31 of each year, at an annual
rate equal to the average of the six most recent monthly Federal Home Loan
Bank Eleventh District Cost of Funds Indices released prior to the dividend
declaration date. The preferred stock, which has limited voting rights, is
F-18
<PAGE> 142
entitled to a liquidation preference of $20 per share plus accrued and unpaid
dividends and is senior to all other equity securities of the Bank with
respect to dividends and rights to payment on liquidation. The preferred
stock is redeemable at the option of the Bank, subject to regulatory
approval, at $20 per share plus accrued and unpaid dividends. The preferred
stock is convertible anytime, at the option of the holders, into the common
stock of the Bank at a conversion price, subject to adjustment under certain
conditions, of $23.51 per share.
Regulatory Capital
The Bank is subject to certain regulatory capital requirements
administered by the Federal Deposit Insurance Corporation (FDIC). Failure to
meet these minimum capital requirements 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 quantitative 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 of total and
Tier I capital to risk-weighted assets and of Tier I capital to average
assets. Each of these components is defined in the regulations. Management
believes that the Bank meets all its capital adequacy requirements as of
December 31, 1996.
In addition, the most recent notification from the FDIC as of December
31, 1996 categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-
F-19
<PAGE> 143
based, Tier I risk-based and Tier I leverage ratios as set forth below.
There are no conditions or events since that notification that management
believes have changed the Bank's category.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Leverage Ratio
Surety Bank & Subsidiary $4,912,000 7.0% 5,176,000 8.3%
Minimum requirement for
"Well-Capitalized" institution 3,516,000 5.0 3,135,000 5.0
Minimum regulatory requirement 2,813,000 4.0 2,508,000 4.0
Tier I Risk-Based Capital Ratio
Surety Bank & Subsidiary 4,912,000 9.9 5,176,000 12.6
Minimum requirement for
"Well-Capitalized" institution 2,965,000 6.0 2,464,000 6.0
Minimum regulatory requirement 1,977,000 4.0 1,643,000 4.0
Total Risk-Based Capital Ratio
Surety Bank and Subsidiary 5,498,000 11.1 5,611,000 13.7
Minimum requirement for
"Well Capitalized" institution 4,942,000 10.0 4,107,000 10.0
Minimum regulatory requirement 3,954,000 8.0 3,285,000 8.0
</TABLE>
Stock Option Plans
In 1995 and 1985, the Board of Directors adopted, and the stockholders
ratified, Stock Option Plans for which 40,444 shares of common stock are
reserved for issuance to employees and directors under incentive and
nonqualified agreements.
The plans require that the price of all options may not be less than the
greater of $10 or the fair market value of the stock at the date the option
is granted, and that the stock must be paid for in full at the time the
option is exercised. All options expire on a date determined by the Board of
Directors, but not later than 10 years from the date of grant. Options vest
ratably over a five year period. Shares granted under all plans are
considered to be common stock equivalents for purposes of calculating
earnings per share.
F-20
<PAGE> 144
The 1985 plans terminated in 1995 and no additional options will be
granted. However, the vesting schedule and ability to exercise options
currently granted were not affected.
A summary of the combined activity within the plans follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1985 Stock Option Plans
Options outstanding, beginning of year 2,152 $17.10 13,106 $16.70
Options resulting from
stock dividend -- -- 440 19.03
Options exercised -- -- (2,450) 11.50
Options canceled (315) 17.10 (8,944) 19.61
----- ------
Options outstanding, end of year 1,837 17.10 2,152 17.10
===== ======
Options exercisable, end of year 1,837 17.10 2,152 17.10
===== ======
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995 Tandem Stock Option Plans
Options outstanding, beginning of year 5,250 $17.10 -- --
Options granted 1,500 17.10 5,000 $18.00
Options resulting from stock dividend -- -- 250 17.10
Options canceled (600) 17.10 -- --
----- ------
Options outstanding, end of year 6,150 17.10 5,250 17.10
===== ======
Options exercisable, end of year 1,050 17.10 --
===== ======
</TABLE>
A summary of options outstanding at December 31, 1996 follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Number of Weighted Number of
Options Average Options
Outstanding Remaining Exercisable
December 31, Contractual December 31,
1996 Life 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Range of Exercise Prices
1985 Stock Option Plans
$17.10 1,837 3 years 1,837
===== =====
1995 Tandem Stock Option Plans
$17.10 6,150 4 years 1,050
===== =====
</TABLE>
F-21
<PAGE> 145
11. OTHER EXPENSES
Other expenses consisted of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Year ended December 31,
- ------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Advertising and promotional expenses $ 73,668 78,611
Telephone and postage 113,332 100,282
Data processing charges 282,768 239,409
Directors' fees and expenses 76,014 102,607
Regulatory assessments 110,217 128,044
Professional fees 97,230 103,267
Stationary and supplies 88,477 120,944
Loan expense 59,905 17,829
Other operating expenses 426,855 281,116
- ------------------------------------------------------------------------------------------------------------
$1,328,466 1,172,109
============================================================================================================
</TABLE>
12. 401(k) PLAN
The Bank maintains the Surety Bank 401(k) Plan for employees who have
attained the age of twenty that have completed one year of continuous
service. Contributions to the plan are made at the discretion of the Bank's
Board of Directors. The Bank contributed $15,000 and $11,700 to the plan for
the years ended December 31, 1996 and 1995, respectively.
13. RELATED PARTY TRANSACTIONS
During the normal course of business, the Bank enters into transactions
with related parties, including Directors and affiliates. These transactions
include borrowings from the Bank with substantially the same terms, including
rates and collateral, as loans to unrelated parties. The following is a
summary of the aggregate activity involving related party borrowers during
1996:
<TABLE>
- ------------------------------------------------------------------------------------------------------------
<S> <C>
Balance, January 1, 1996 $ 59,493
Disbursements 522,949
Amounts repaid (65,410)
- ------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 517,032
============================================================================================================
Undisbursed commitments to related parties, December 31, 1996 $101,000
============================================================================================================
</TABLE>
14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values are disclosed for financial instruments for which
it is practicable to estimate fair value. These estimates are made at a
specific point in time based on relevant market data and information about
the financial instruments. These estimates do not reflect any premium or
discount that could result from offering the Bank's entire holdings of a
particular financial instrument for sale at one time, nor do they attempt to
estimate the value of anticipated future business related to the instruments.
In addition, the tax ramifications related
F-22
<PAGE> 146
to the realization of unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in any of these
estimates.
Because no market exists for a significant portion of the Bank's
financial instruments, fair value estimates are based on judgments regarding
current economic conditions, risk characteristics of various financial
instruments and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could
significantly affect the fair values presented.
The following methods and assumptions were used by the Bank to estimate
the fair value of its financial instruments at December 31, 1996 and 1995:
Cash and cash equivalents and other borrowed funds: For cash
and cash equivalents and other borrowed funds, the carrying amount is
estimated to be fair value.
Investment securities: For investment securities, fair values are
based on quoted market prices, where available. If quoted market prices are
not available, fair values are estimated using quoted market prices for
similar securities and indications of value provided by brokers.
Loans and loans held for sale: For variable-rate loans that reprice
frequently with no significant change in credit risk, fair values are based
on carrying values. Fair values of loans held for sale are estimated using
quoted market prices for similar loans. The fair values for other loans are
estimated using discounted cash flow analyses, using interest rates being
offered at each reporting date for loans with similar terms to borrowers of
comparable creditworthiness. The carrying amount of accrued interest
receivable approximates its fair value.
Note receivable: The fair value of the note receivable is equal to
its carrying value as the note was discounted using an interest rate
currently offered for borrowings with similar terms to a borrower of similar
credit quality.
Deposits: The fair values for demand deposits are, by definition,
equal to the amount payable on demand at the reporting date represented by
their carrying amount. Fair values for fixed-rate certificates of deposit
are estimated using a discounted cash flow analyses using interest rates
offered at each reporting date by the Bank for certificates with similar
remaining maturities. The carrying amount of accrued interest payable
approximates its fair value.
Commitments to extend credit and letters of credit: Commitments
to extend credit are primarily for variable rate loans. For these
commitments, there is no difference between the committed amounts and their
fair values. Commitments to fund fixed rate loans and letters of credit are
at rates which approximate fair value at each reporting date.
F-23
<PAGE> 147
The estimated fair values of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
December 31, 1996 December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 2,320,960 2,320,960 3,617,995 3,617,995
Federal funds sold -- -- 500,000 500,000
Investment securities 11,037,600 11,037,600 9,274,100 9,274,100
Loans 50,931,790 50,894,000 46,843,242 46,857,000
Loans held for sale 4,463,060 4,527,000 -- --
Note receivable 895,000 895,000 852,503 852,503
Accrued interest receivable 488,475 488,475 399,251 399,251
- ------------------------------------------------------------------------------------------------------------------------
$70,136,885 70,163,035 61,487,091 61,500,849
========================================================================================================================
Financial liabilities:
Deposits $64,368,964 64,385,000 57,570,202 57,664,000
Other borrowed funds 2,135,000 2,135,000 -- --
Accrued interest payable 147,757 147,757 17,454 17,454
- ------------------------------------------------------------------------------------------------------------------------
$66,651,721 66,667,757 57,587,656 57,681,454
========================================================================================================================
Off-balance-sheet financial instruments:
Commitments to extend credit $ 5,615,600 5,615,600 2,747,100 2,747,100
Standby letters of credit -- -- 150,000 150,000
- ------------------------------------------------------------------------------------------------------------------------
$ 5,615,600 5,615,600 2,897,100 2,897,100
========================================================================================================================
</TABLE>
15. ONE-TIME SAVINGS ASSOCIATION INSURANCE FUND (SAIF)
ASSESSMENT
The Deposit Insurance Funds Act of 1996 (Funds Act) was enacted on
September 30, 1996 and required the Federal Deposit Insurance Corporation
(FDIC) to impose a one-time special assessment on SAIF assessable deposits to
capitalize the SAIF at its target Designated Reserve Ratio of 1.25% of
insured deposits effective October 1, 1996. The Bank's assessment totaled
$350,624, based on a rate of $0.657 per $100 of SAIF assessable deposits held
by the Bank as of March 31, 1995.
With the SAIF capitalized at the targeted ratio by the special
assessment, the Funds Act also requires the FDIC to set future assessment
rates so as to maintain this ratio which will result in lower SAIF rates
effective January 1, 1997.
16. SUBSEQUENT EVENT
On January 1, 1997, the Bank rescinded their exchange agreement with
Exchange Holding Corporation (Exchange) discussed in Note 5. Exchange
transferred ownership of the Fairfield facility to the Bank to satisfy their
obligation recorded as a note receivable on the Bank's balance sheet.
F-24
<PAGE> 148
17. BASIS OF PRESENTATION-INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
The unaudited interim consolidated financial statements include the
accounts of Surety and its subsidiary after elimination of material
intercompany transactions. This unaudited data, in the opinion of Surety,
includes all adjustments necessary for the fair presentation thereof. All
adjustments made were of a normal and recurring nature.
F-25
<PAGE> 149
APPENDIX A-1
AGREEMENT AND PLAN OF REORGANIZATION
BY AND BETWEEN
FIRST BANKS AMERICA, INC.,
A DELAWARE CORPORATION,
AND
SURETY BANK,
A CALIFORNIA BANKING ASSOCIATION
JULY 28, 1997
<PAGE> 150
TABLE OF CONTENTS
ARTICLE I - TERMS OF THE MERGER & CLOSING; EXCHANGE OF SHARES
Section 1.01. The Merger . . . . . . . . . . . . . . . . 1
Section 1.02. Effect of the Merger . . . . . . . . . . . 1
Section 1.03. Conversion of Shares . . . . . . . . . . . 1
Section 1.04. The Closing. . . . . . . . . . . . . . . . 8
Section 1.05. Closing Date . . . . . . . . . . . . . . . 8
Section 1.06. Actions At Closing . . . . . . . . . . . . 8
Section 1.07. Exchange Procedures; Surrender of
Certificates . . . . . . . . . . . . . . . 9
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF SURETY
Section 2.01. Organization and Capital Stock . . . . . . 10
Section 2.02. Authorization; No Defaults . . . . . . . . 11
Section 2.03. Surety Subsidiaries. . . . . . . . . . . . 11
Section 2.04. Financial Information. . . . . . . . . . . 12
Section 2.05. Absence of Changes . . . . . . . . . . . . 12
Section 2.06. Regulatory Enforcement Matters . . . . . . 12
Section 2.07. Tax Matters. . . . . . . . . . . . . . . . 13
Section 2.08. Litigation . . . . . . . . . . . . . . . . 13
Section 2.09. Properties, Contracts, Employee Benefit
Plans and Other Agreements . . . . . . . . 13
Section 2.10. Reports. . . . . . . . . . . . . . . . . . 14
Section 2.11. Investment Portfolio . . . . . . . . . . . 15
Section 2.12. Loan Portfolio . . . . . . . . . . . . . . 15
Section 2.13. Employee Matters and ERISA . . . . . . . . 15
Section 2.14. Title to Properties; Insurance . . . . . . 17
Section 2.15. Environmental Matters. . . . . . . . . . . 17
Section 2.16. Compliance with Law. . . . . . . . . . . . 18
Section 2.17. Brokerage. . . . . . . . . . . . . . . . . 18
Section 2.18. No Undisclosed Liabilities . . . . . . . . 18
Section 2.19. Statements True and Correct. . . . . . . . 18
Section 2.20. Commitments and Contracts. . . . . . . . . 19
Section 2.21. Material Interest of Certain Persons . . . 19
Section 2.22. Conduct to Date. . . . . . . . . . . . . . 19
Section 2.23. Tax Status of Merger; Regulatory Status. . 20
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF FBA
Section 3.01. Organization and Capital Stock . . . . . . 20
Section 3.02. Authorization; No Defaults . . . . . . . . 21
Section 3.03. Subsidiaries . . . . . . . . . . . . . . . 21
Section 3.04. Financial Information. . . . . . . . . . . 22
Section 3.05. Absence of Changes . . . . . . . . . . . . 22
Section 3.06. Compliance with Law. . . . . . . . . . . . 23
Section 3.07. Brokerage. . . . . . . . . . . . . . . . . 23
Section 3.08. No Undisclosed Liabilities . . . . . . . . 23
Section 3.09. Statements True and Correct. . . . . . . . 23
Section 3.10. Material Interest of Certain Persons . . . 23
Section 3.11. Litigation . . . . . . . . . . . . . . . . 24
Section 3.12. Tax Matters. . . . . . . . . . . . . . . . 24
Section 3.13. Status of FBA Common Stock to be Issued
in Merger. . . . . . . . . . . . . . . . . 24
Section 3.14. Tax Status of Merger; Regulatory
Matters. . . . . . . . . . . . . . . . . . 24
2
<PAGE> 151
ARTICLE IV - AGREEMENTS OF SURETY
Section 4.01. Business in Ordinary Course. . . . . . . . 24
Section 4.02. Breaches . . . . . . . . . . . . . . . . . 27
Section 4.03. Submission to Shareholders . . . . . . . . 27
Section 4.04. Consummation of Agreement. . . . . . . . . 27
Section 4.05. Environmental Reports. . . . . . . . . . . 28
Section 4.06. Access to Information. . . . . . . . . . . 28
Section 4.07. Consents to Contracts and Leases . . . . . 28
Section 4.08. Subsequent Financial Statements. . . . . . 29
Section 4.09. Merger Agreement . . . . . . . . . . . . . 29
ARTICLE V - AGREEMENTS OF FBA
Section 5.01. Regulatory Approvals; Organization of
AcquisitionCo. . . . . . . . . . . . . . . 29
Section 5.02. Breaches . . . . . . . . . . . . . . . . . 29
Section 5.03. Consummation of Agreement. . . . . . . . . 29
Section 5.04. Indemnification. . . . . . . . . . . . . . 30
Section 5.05. Employee Benefits. . . . . . . . . . . . . 30
Section 5.06. Access to Information. . . . . . . . . . . 31
Section 5.07. Registration Statement, Prospectus and
Proxy Statement; Listing Application . . . 31
Section 5.08. Merger Agreement . . . . . . . . . . . . . 31
Section 5.09. Appointment of New Director of FBA and
AcquisitonCo . . . . . . . . . . . . . . . 31
Section 5.10. Notice Obligation. . . . . . . . . . . . . 32
Section 5.11. Subsequent Financial Statements. . . . . . 32
Section 5.12. Intentional Breach; Violation of Law . . . 32
ARTICLE VI - CONDITIONS PRECEDENT TO THE MERGER
Section 6.01. Conditions to the Obligations of FBA . . . 32
Section 6.02. Conditions to the Obligations of Surety. . 33
ARTICLE VII - TERMINATION; DAMAGES
Section 7.01. Mutual Agreement . . . . . . . . . . . . . 35
Section 7.02. Breach of Agreements . . . . . . . . . . . 35
Section 7.03. Failure of Conditions. . . . . . . . . . . 35
Section 7.04. Denial of Regulatory Approval. . . . . . . 35
Section 7.05. Environmental Reports. . . . . . . . . . . 35
Section 7.06. Regulatory Enforcement Matters . . . . . . 36
Section 7.07. Unilateral Termination . . . . . . . . . . 36
Section 7.08. Termination Related to Changes in Stock
Price. . . . . . . . . . . . . . . . . . . 36
Section 7.09. Damages and Limitation of Damages. . . . . 36
ARTICLE VIII - GENERAL PROVISIONS
Section 8.01. Confidential Information . . . . . . . . . 37
Section 8.02. Publicity. . . . . . . . . . . . . . . . . 37
Section 8.03. Return of Documents. . . . . . . . . . . . 37
Section 8.04. Notices. . . . . . . . . . . . . . . . . . 37
Section 8.05. Nonsurvival of Representations,
Warranties and Agreements. . . . . . . . . 38
Section 8.06. Costs and Expenses . . . . . . . . . . . . 38
Section 8.07. Entire Agreement . . . . . . . . . . . . . 38
Section 8.08. Headings and Captions. . . . . . . . . . . 38
Section 8.09. Waiver, Amendment or Modification. . . . . 39
Section 8.10. Rules of Construction. . . . . . . . . . . 39
Section 8.11. Counterparts . . . . . . . . . . . . . . . 39
Section 8.12. Successors and Assigns . . . . . . . . . . 39
Section 8.13. Governing Law. . . . . . . . . . . . . . . 39
3
<PAGE> 152
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization, dated as of July
28, 1997, is by and between First Banks America, Inc., a bank
holding company organized as a Delaware corporation ("FBA"), and
Surety Bank, a California banking association ("Surety"). This
Agreement and Plan of Reorganization is hereinafter referred to as
the "Agreement."
In consideration of the mutual representations, warranties,
agreements and covenants contained herein, FBA and Surety hereby
agree as follows:
ARTICLE I
TERMS OF THE MERGER & CLOSING; EXCHANGE
OF SHARES
Section 1.01. The Merger. Pursuant to the terms and
provisions of this Agreement and the Agreement and Plan of Merger
between Surety and AcquisitionCo, Inc., an interim bank to be
organized as a wholly-owned subsidiary of FBA ("AcquisitionCo")
attached hereto as Exhibit "A" (the "Merger Agreement"), Surety
shall merge with and into AcquisitionCo pursuant to the provisions
of the California Financial Code and the California General
Corporation Law (collectively referred to herein as the "Corporate
Law"). The parties contemplate that as soon as practicable after
the Effective Time, FBA will transfer the outstanding capital stock
of AcquisitionCo to FBA's wholly-owned subsidiary, Sundowner
Corporation ("Sundowner"), and that Sundowner's wholly-owned
subsidiary, Sunrise Bank of California will merge with and into
AcquisitionCo.
Section 1.02. Effect of the Merger. The Merger shall have
all of the effects provided in Section 1107 of the California
General Corporation Law, Section 4888 of the California Financial
Code, this Agreement and the Merger Agreement, and the separate
corporate existence of Surety shall cease on consummation of the
Merger and be combined in AcquisitionCo. The Articles of
Association and Bylaws of the resulting bank shall be those of
AcquisitionCo immediately prior to the Effective Time, and the
directors and officers of the resulting bank at the Effective Time
shall be the persons serving as directors and officers of
AcquisitionCo immediately prior to the Effective Time.
Section 1.03. Conversion of Shares.
(a) At the Effective Time (as defined in Section 1.05), each
share of common stock, $1.00 par value, of Surety ("Surety Common")
and each share of convertible preferred stock, $1.00 par value, of
Surety ("Surety Preferred") issued and outstanding immediately
prior to the Effective Time shall be converted into the right to
receive the appropriate proportionate part of the merger
consideration determined pursuant to subsection (c), subject to the
remaining provisions of this Section 1.03.
(b)(1) No fractional shares of common stock of FBA, $.15 par
value ("FBA Common Stock"), shall be issued as a result of the
Merger, but any holder of shares of Surety Common Stock or Surety
Preferred Stock (collectively, "Surety Capital Stock") who
otherwise would be entitled to receive a fractional share of FBA
Common Stock shall be paid cash in lieu thereof as provided in
Section 1.07(d).
4
<PAGE> 153
(2) Each share of Surety Capital Stock held in the treasury of
Surety or by any direct or indirect subsidiary of Surety
immediately prior to the Effective Time shall be cancelled and
shall not be taken into account in determining the allocation of
any of the merger consideration and shall not be part of the Total
Surety Common (as defined herein).
(3) Each share of Surety Preferred which is outstanding
immediately prior to the Closing shall be deemed, subject to the
completion of the Closing, to be converted in accordance with the
terms of the Surety Preferred into the appropriate number of shares
of Surety Common, and all shares of Surety Common, including those
deemed issued upon conversion of the Surety Preferred (the "Total
Surety Common"), shall be converted into the appropriate
consideration in accordance with the remaining provisions of this
Section 1.03.
(c)(1) The consideration to be exchanged for the Total Surety
Common shall consist of shares of FBA Common Stock and cash. The
proportions of the consideration consisting of FBA Common Stock and
cash shall be determined so that (i) FBA Common Stock will be
issued in exchange for shares of Surety Common which constitute
approximately fifty-one percent (51%) of the Total Surety Common
(the total number of shares of FBA Common Stock to be issued in
accordance with such percentage being referred to herein as the
"Stock Conversion Number"); and (ii) cash will be exchanged for
approximately forty-nine percent (49%) of the Total Surety Common.
The number of shares of FBA Common Stock to be issued and the
amount of cash to be paid shall be determined as follows, subject
to the procedures for allocation of the consideration set forth in
subsection (e):
(A) the number of shares of FBA Common Stock issued in
exchange for each share of Surety Common which is converted
into FBA Common Stock (the "FBA Stock Amount") shall equal the
quotient of $38.12 divided by the FBA Exchange Price (as
defined below); provided, however, that (I) if the FBA Stock
Amount as so determined would exceed that which would result
(the "Maximum Stock Amount") if the FBA Exchange Price were
fifteen percent (15%) less than the closing price of one share
of FBA Common Stock on the New York Stock Exchange Composite
Transactions Reporting System (the "NYSE Composite List") on
the date preceding the date of this Agreement (the "Base
Price"), then the FBA Stock Amount shall be fixed at the
Maximum Stock Amount; and (II) if the FBA Stock Amount as so
determined would be less than that which would result (the
"Minimum Stock Amount") if the FBA Exchange Price were fifteen
percent (15%) more than the Base FBA Price, then the FBA Stock
Amount shall be fixed at the Minimum Stock Amount; and
(B) cash shall be paid for the remaining outstanding shares
of Surety Common at the rate of $36.12 per share of Surety
Common.
(2) For the purposes of this Section 1.03, the term "FBA
Exchange Price" means the numerical average of the reported closing
prices of one share of FBA Common Stock on the NYSE Composite List
during a period of twenty (20) trading days ending on the Friday
preceding the date of the Shareholders' Meeting as set forth in the
Proxy Statement (as such terms are defined in Section 5.07) (or, if
there is no closing price reported for that day, the last preceding
day on which such a closing price is reported), rounded to the
nearest cent. The ratio of the FBA Stock Amount to one share of
Surety Common is referred to herein as the "Common Exchange Ratio."
(d) Subject to the remaining provisions of this Section 1.03,
each record holder of shares of Surety Capital Stock will have the
right to specify such holder's election to have his shares
converted into FBA Common Stock or cash, or
5
<PAGE> 154
to specify that such holder has no preference, in accordance with
the following procedures:
(i) As soon as practicable following the approval of the
Merger by the shareholders of Surety, a form of Election
Statement will be mailed to the holders of record of Surety
Capital Stock pursuant to Section 1.07 hereof. Surety may
also provide forms of the Election Statement to all persons
who become holders of record of Surety Capital Stock during
the period between the record date and the Election Deadline
(as defined in subsection (iv) below) and make such forms
available at its executive offices.
(ii) Any record holder of Surety Capital Stock may
specify, in an Election Statement meeting the requirements of
this Section that, as to all shares of Surety Capital Stock
covered by such Election Statement:
(A) all shares shall be converted
to FBA Common ("Stock Election
Shares");
(B) all shares shall be converted
to cash ("Cash Election Shares"); or
(C) a designated portion of such
shares shall be converted to cash as
Cash Election Shares and a portion
of such shares shall be converted to
FBA Common as Stock Election Shares;
or
(D) the shareholder has no
preference and accordingly makes no
election.
(iii) Any record holder of Surety Capital Stock who
is holding such shares for a beneficial owner, or as a nominee
for one or more beneficial owners, may submit an Election
Statement on behalf of any such beneficial owners. Any
beneficial owner of Surety Capital Stock on whose behalf a
record owner has submitted an Election Statement in accordance
with this Section will be considered a separate holder of
Surety Capital Stock for purposes of this Agreement.
(iv) An Election Statement will be effective only if a
properly completed and signed copy thereof, accompanied by
stock certificates for the shares of Surety Capital Stock to
which such Election Statement relates, shall have been
actually received by the Exchange Agent no later than fifteen
(15) days following the date on which the Election Statement
is mailed to the holders of Surety Capital Stock (the
"Election Deadline"). An Election Statement which meets the
requirements of this provision is hereinafter referred to as
an "Effective Election Statement."
(v) Any record holder of Surety Capital Stock who has
submitted an Effective Election Statement may at any time
until the Election Deadline amend such Election Statement if
the Exchange Agent actually receives, not later than the
Election Deadline, a later-dated, properly completed and
signed, amended Effective Election Statement.
(vi) FBA and Surety will have the right jointly to make
rules and adopt procedures (not inconsistent with the terms of
this Agreement) governing the form, terms and contents of
Election Statements, the validity and effectiveness of
Election Statements and the manner and extent to which
6
<PAGE> 155
they are to be taken into account in making the determinations
contemplated by subsection (e), the issuance and delivery of
certificates evidencing FBA Common Stock and cash into which
shares of Surety Capital Stock are converted in the Merger and
the payment for fractional interests.
(e)(1) The Exchange Agent shall effectuate the
allocation of the consideration to be issued pursuant to the
Merger on a date subsequent to the Election Deadline but no
more than five (5) business days thereafter (the "Allocation
Date").
(2) Any shares of Surety Capital Stock with respect to
which the holder shall not have submitted to the Exchange
Agent an Effective Election Statement on or before the
Election Deadline, and any shares with respect to which the
holder has submitted an Election Statement indicating that the
holder does not make any election, shall be deemed to be "No
Election Shares."
(3) Any shares of Surety Common Stock with respect to
which the holder has, as of the Allocation Date, submitted a
demand for the appraisal of such shares pursuant to applicable
provisions of the California Corporations Code and not
thereafter waived or released such demand shall be deemed to
be Cash Election Shares. FBA shall have reasonable discretion
to determine whether a holder has submitted an effective
demand for appraisal hereunder.
(4) If the number of Stock Election Shares is less than
fifty-one percent (51%) of the Total Surety Common, then:
(i) all Stock Election Shares shall be converted
into the right to receive the appropriate number of
shares of FBA Common Stock;
(ii) a number of No Election Shares shall be
converted into the right to receive shares of FBA
Common Stock so that the total number of shares of
FBA Common Stock to be issued shall equal the Stock
Conversion Number. Provided that there are a
sufficient number of Stock Election Shares and No
Election Shares to satisfy the requirements of the
preceding sentence, the Exchange Agent shall have
complete discretion in determining which No
Election Shares are so converted, and any No
Election Shares which are not so converted shall be
exchanged for cash; and
(iii) if the number of Stock Election Shares
and No Election Shares is not sufficient so that
the number of shares of FBA Common Stock will equal
the Stock Conversion Number, then all of the No
Election Shares shall be converted into the right
to receive the appropriate number of shares of FBA
Common Stock, and the Exchange Agent shall then
select from the Cash Election Shares, by either a
random selection process in which the shares are
divided into units of 500 shares or a pro rata
process, a sufficient number of shares ("Stock
Designated Shares") so that the total number of
shares of FBA Common Stock issued in the Merger
will equal the Stock Conversion Number; provided,
however, that in no event shall any Dissenting
Shares be selected as Stock Designated Shares; and
provided further, that shareholders of Surety who
(A) were the record holders of fewer than 200
shares of Surety Common on the day preceding the
date on which this Agreement is first
7
<PAGE> 156
announced and (B) elect to receive cash consideration
shall receive cash consideration for such shares. The
determination of whether the process for selecting
Stock Designated Shares or for selecting Cash
Designated Shares pursuant to paragraph (5) hereof
shall be made jointly by Surety and FBA.
(5) If the number of Stock Election Shares is greater
than fifty-one percent (51%) of the Total Surety Common, then:
(i) all Cash Election Shares except those which
are Dissenting Shares shall be converted into the
right to receive the appropriate cash
consideration;
(ii) a number of No Election Shares shall be
converted into the right to receive cash
consideration so that the total number of shares of
FBA Common Stock to be issued in exchange for the
remaining No Election Shares and all of the Stock
Election Shares shall equal the Stock Conversion
Number. Provided that there are a sufficient
number of Cash Election Shares and No Election
Shares to satisfy the requirements of the preceding
sentence, the Exchange Agent shall have complete
discretion in determining which No Election Shares
are so converted, and any No Election Shares which
are not so converted shall be converted into the
right to receive the appropriate number of shares
of FBA Common Stock; and
(iii) if the number of Cash Election Shares and
No Election Shares is not sufficient so that the
number of shares of Surety Common to be exchanged
for cash will equal approximately forty-nine
percent (49%) of the Total Surety Common, then all
of the No Election Shares shall be converted into
the right to receive cash consideration, and the
Exchange Agent shall then select from the Stock
Election Shares, by either a random selection
process in which the shares are divided into units
of 500 shares or a pro rata process, a sufficient
number of shares ("Cash Designated Shares") so that
the total number of shares of FBA Common Stock to
be issued in the Merger will equal the Stock
Conversion Number; provided, however, that
shareholders of Surety who (A) were the record
holders of fewer than 200 shares of Surety Common
on the day preceding the date on which this
Agreement is first announced and (B) elect to
receive stock consideration shall receive the
appropriate number of shares of FBA Common Stock
for such shares.
(6) Notwithstanding the provisions of paragraphs (4) and
(5), if the number of Stock Election Shares exceeds the Stock
Conversion Number, then FBA, with Surety's written consent,
may (but shall have no obligation to) instruct the Exchange
Agent to allow additional Stock Election Shares, up to but not
exceeding sixty-five percent (65%) of the Total Surety Common,
to be converted into the right to receive shares of FBA Common
Stock, in which event all of the remaining shares shall be
converted into the right to receive cash consideration. If
the number of Stock Election Shares exceeds sixty-five percent
(65%) of the Total Surety Common and FBA elects to so instruct
the Exchange Agent, the Exchange Agent shall utilize the
procedures set forth in paragraph (5) hereof to determine the
manner in which shares of Surety Capital Stock are converted.
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(f) The calculations set forth in this Section 1.03 shall be
subject to appropriate adjustment in the event that, subsequent to
the date of this Agreement but prior to the Effective Time, the
outstanding shares of FBA Common Stock shall have been increased,
decreased, changed into or exchanged for a different number through
reorganization, recapitalization, reclassification, stock dividend,
stock split, reverse stock split or other similar change in the
capitalization of FBA.
(g) The stock transfer books of Surety shall be closed and no
share transfers will be permitted after the Effective Time. At the
Effective Time, by virtue of the Merger and without any action on
the part of the holders thereof, all of the shares of Surety
Capital Stock shall cease to be outstanding and be cancelled. Upon
the surrender of any certificate or certificates which immediately
prior to the Effective Time represented outstanding shares of
Surety Capital Stock (the "Certificate"), each holder thereof shall
cease to have any rights with respect to such shares, except the
right of the holder to receive the appropriate merger consideration
determined in accordance with this Section 1.03.
(h) If holders of Surety Common are entitled to require
appraisal of their shares under applicable Corporate Law, issued
and outstanding shares of Surety Common held by a dissenting holder
who has perfected the right to obtain an appraisal of his shares
shall not be converted as described in this Section 1.03, but from
and after the Effective Time shall represent only the right to
receive such consideration as may be determined to be due pursuant
to applicable Corporate Law; provided, however, that each share of
Surety Common outstanding immediately prior to the Effective Time
and held by a dissenting holder who shall, after the Effective
Time, withdraw his demand for appraisal or lose his right of
appraisal shall thereafter have only such rights as are provided
under applicable Corporate Law.
(i)(1) At the Effective Time, each option granted by Surety
to purchase shares of Surety Common (each a "Surety Option")
outstanding immediately prior to the Effective Time shall cease to
represent the right to acquire shares of Surety Common and shall be
converted automatically into an option to purchase shares of FBA
Common Stock in an amount and at an exercise price which reflects
the relative values attributed to Surety Common and FBA Common
Stock in the Common Exchange Ratio. The number of shares of FBA
Common Stock subject to a new option shall be that which results in
the ratio thereof to the number of shares of Surety Common subject
to the corresponding Surety Option being equal to the Common
Exchange Ratio, and the exercise price of the new option shall be
that which results in the ratio of the exercise price of the
corresponding Surety Option to the exercise price of the new option
being equal to the Common Exchange Ratio. The adjustment provided
herein with respect to any options which are "incentive stock
options" (as defined in Section 422 of the Internal Revenue Code of
1986, as amended (the "Code") shall be effected in a manner
consistent with Section 424(a) of the Code and, to the extent it is
not so consistent, Section 424(a) shall override any provision to
the contrary contained herein. The duration and other terms of the
new option shall be the same as those of the corresponding Surety
Option.
(2) Promptly after the Effective Time, FBA and each holder of
an option subject to such conversion shall enter into an option
agreement setting forth the terms of the new option into which the
corresponding Surety Option has been converted.
Section 1.04. The Closing. The closing of the Merger (the
"Closing") shall take place at the location mutually agreeable to
the parties hereto at
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10:00 a.m. local time on the Closing Date described in Section 1.05
of this Agreement.
Section 1.05. Closing Date. At FBA's election, the Closing
shall take place on either (i) the business day which is three (3)
business days following the satisfaction or waiver of the last of
the conditions in Sections 6.01 and 6.02 to be satisfied or waived,
(ii) one of the last five (5) business days of the month, or (iii)
the first business day of the month following the month, or (iv)
the first business day of the first month of the next calendar
quarter following the month, in the case of clauses (ii) through
(iv), during which each of the conditions in Sections 6.01 and 6.02
is satisfied or waived by the appropriate party; provided, however,
that if the Closing shall not have occurred on or before November
15, 1997 then the Closing may be delayed at the written election of
Surety if Surety has reasonably determined in good faith that there
is a likelihood of a material benefit for those Surety shareholders
who receive cash in the Merger if the Closing were to occur in
January, 1998 rather than in 1997 because of a pending change in
the rate of taxation of capital gains in the Code. In the event of
such an election by Surety, the Closing shall occur, in the sole
discretion of FBA, either on a date selected by FBA in the first
week of January, 1998 or on the last business day of January, 1998.
The date of the Closing is referred to herein as the "Closing
Date." The Merger shall be effective upon the filing of the Merger
Agreement with the Banking Department and the Secretary of State of
the State of California in accordance with the California
Corporations Code and the California Financial Code (the "Effective
Time").
Section 1.06. Actions At Closing. (a) At the Closing,
Surety shall deliver to FBA:
(i) certified copies of the Articles of Incorporation and
Bylaws of Surety and the certificate or articles of
incorporation and bylaws of each of its subsidiaries;
(ii) a certificate signed by an appropriate officer of Surety
stating that (A) each of the representations and warranties
contained in Article II is true and correct in all material
respects at the time of the Closing with the same force and
effect as if such representations and warranties had been made
at the Closing, and (B) all of the conditions set forth in
Section 6.01 have been satisfied or waived as provided
therein;
(iii) certified copies of the resolutions of Surety's
Board of Directors and shareholders, establishing the
requisite approvals under applicable Corporate Law of this
Agreement, the Merger and the other transactions contemplated
hereby;
(iv) a certificate issued by the Franchise Tax Board of the
State of California (the "Franchise Tax Board"), dated a
recent date, certifying that Surety is in good standing;
(v) a certificate of existence as to Surety, issued by the
Banking Department of the State of California (the "Banking
Department"), dated a recent date; and
(vi) a legal opinion from counsel for Surety regarding Surety,
this Agreement and the transactions contemplated hereby, in
form reasonably satisfactory to FBA and its counsel.
(b) At the Closing, FBA shall deliver to Surety:
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(i) certified copies of the Certificate of Incorporation and
Bylaws of FBA and the Articles of Incorporation and Bylaws of
AcquisitionCo;
(ii) certificates signed by appropriate officers of FBA and
AcquisitionCo stating that (A) each of the representations and
warranties contained in Article III is true and correct in all
material respects at the time of the Closing with the same
force and effect as if such representations and warranties had
been made at the Closing, and (B) all of the conditions set
forth in Section 6.02 have been satisfied or waived as
provided therein;
(iii) certified copies of the resolutions of the Board of
Directors and stockholders of each of FBA and AcquisitionCo,
establishing the requisite approvals of each of them under
applicable Corporate Law of this Agreement, the Merger and the
other transactions contemplated hereby;
(iv) certificates, each dated a recent date, of the Secretary
of State of the State of Delaware, stating that FBA is in good
standing, and of the Franchise Tax Board, certifying that
AcquisitionCo is in good standing;
(v) a certificate of existence as to AcquisitionCo, issued by
the Banking Department, dated a recent date; and
(vi) a legal opinion from counsel for FBA regarding FBA, this
Agreement and the transactions contemplated hereby, in form
reasonably satisfactory to Surety.
Section 1.07. Exchange Procedures; Surrender of Certificates.
(a) Chase Mellon Shareholder Services, or another firm
selected by FBA to which Surety has no reasonable objection, shall
act as Exchange Agent in the Merger (the "Exchange Agent").
(b) The Exchange Agent shall mail to each record holder of
shares of Surety Capital Stock within the time period specified in
Section 1.03(d) hereof (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title
to Certificates shall pass, only upon proper delivery of the
Certificates to the Exchange Agent and shall be in such form and
have such other provisions as the Exchange Agent may reasonably
specify) (each such letter, the "Letter of Transmittal"); (ii)
instructions for use in effecting the surrender of Certificates;
and (iii) the Election Statement described in Section 1.03 hereof.
Upon surrender to the Exchange Agent of a Certificate, together
with a duly executed Letter of Transmittal and any other required
documents, the holder of a Certificate shall be entitled to receive
in exchange therefor solely the Merger Consideration in the form
determined pursuant to Section 1.03, without interest.
(c) If shares of FBA Common Stock are to be issued in a name
other than a person in whose name a surrendered Certificate is
registered, it shall be a condition of acceptance of the
surrendered Certificate that the same shall be properly endorsed or
otherwise in proper form for transfer and that the person
requesting such payment shall pay to the Exchange Agent any
required transfer or other taxes or establish to the satisfaction
of the Exchange Agent that such taxes have been paid or are not
applicable.
(d) In lieu of the issuance of any fractional share of FBA
Common Stock, FBA shall cause the Exchange Agent to pay to each
former shareholder of Surety who otherwise would be entitled to
receive a fractional share an amount in cash
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determined by multiplying (i) the FBA Exchange Price by (ii) the
fraction of a share of FBA Common Stock to which such holder would
otherwise be entitled to receive pursuant to Section 1.03 hereof.
(e) At any time following six months after the Effective
Time, FBA shall be entitled to terminate the Exchange Agent
relationship, and thereafter holders of Certificates shall be
entitled to look only to FBA (subject to abandoned property,
escheat or other similar laws) with respect to the surrender of any
Certificate.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SURETY
Surety represents and warrants to FBA and Sunrise as follows:
Section 2.01. Organization and Capital Stock.
(a) Surety is a banking association duly organized, validly
existing and in good standing under the laws of the State of
California and has the corporate power to own all of its property
and assets, to incur all of its liabilities and to carry on its
business as now being conducted. Surety is an insured bank as
defined in the Federal Deposit Insurance Act.
(b) As of the date hereof, the authorized capital stock of
Surety consists of (i) 2,000,000 shares of Surety Common, of which
148,560 shares are outstanding, duly and validly issued, fully paid
and, except as provided in Section 600.2 of the California
Financial Code, non-assessable; and (ii) 2,000,000 shares of Surety
Preferred, of which 61,050 shares are outstanding, duly and validly
issued, fully paid and non-assessable. None of the outstanding
shares of Surety Capital Stock has been issued in violation of any
preemptive rights. Surety has granted and outstanding stock
options in the amount and at the exercise prices (the "Surety
Options") set forth in Section 2.01(b) of that certain document
delivered by Surety to FBA entitled the "Surety Disclosure
Schedule" and executed by both Surety and FBA concurrently with the
execution and delivery of this Agreement (the "Surety Disclosure
Schedule"). Each certificate representing shares of Surety Capital
Stock issued in replacement of any certificate theretofore issued
by it which was claimed by the record holder thereof to have been
lost, stolen or destroyed was issued by Surety only upon receipt of
an affidavit of lost stock certificate and a bond sufficient to
indemnify Surety against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such
Certificate or the issuance of such replacement Certificate.
(c) Except as disclosed in Section 2.01(b), and except for
the stock option granted to FBA pursuant to the Stock Option
Agreement (the "Stock Option Agreement") of even date herewith (the
"Stock Option"), there are no shares of capital stock or other
equity securities of Surety issued or outstanding and no
outstanding options, warrants, rights to subscribe for, calls or
commitments of any character whatsoever relating to, or securities
or rights convertible into or exchangeable for, shares of the
capital stock of Surety or contracts, commitments, understandings
or arrangements by which Surety is or may be obligated to issue
additional shares of its capital stock.
Section 2.02. Authorization; No Defaults. Surety's Board of
Directors has by all requisite action approved this Agreement, the
Merger Agreement, the Stock Option Agreement and the Merger and
authorized the execution hereof on its
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behalf by its duly authorized officers and the performance by
Surety of its obligations hereunder and thereunder. Nothing in the
Articles of Incorporation or Bylaws of Surety or, to the best of
Surety's knowledge, any other agreement, instrument, decree,
proceeding, law or regulation (except as specifically referred to
in or contemplated by this Agreement) by or to which Surety or any
of its subsidiaries is bound or subject would prohibit or inhibit
Surety from consummating this Agreement and the Merger on the terms
and conditions herein contained. This Agreement has been duly and
validly executed and delivered by Surety and constitutes a legal,
valid and binding obligation of Surety, enforceable against Surety
in accordance with its terms. Neither Surety nor any Surety
Subsidiary (as defined in Section 2.03 hereof) is in default under
nor in violation of any provision of its articles or certificates
of incorporation or bylaws, or, to the best of Surety's knowledge,
any promissory note, indenture or any evidence of indebtedness or
security therefor, lease, contract, purchase or other commitment or
any other agreement which is material to Surety and its
subsidiaries taken as a whole.
Section 2.03. Surety Subsidiaries. Each of Surety's direct
and indirect subsidiaries (hereinafter referred to singly as a
"Surety Subsidiary" and collectively as the "Surety Subsidiaries"),
the names and jurisdictions of incorporation of which are disclosed
in Section 2.03 of the Surety Disclosure Schedule, is duly
organized, validly existing and in good standing under the laws of
the jurisdiction of its incorporation, and each of the Surety
Subsidiaries has the corporate power to own its properties and
assets, to incur its liabilities and to carry on its business as
now being conducted. The number of issued and outstanding shares of
capital stock of each Surety Subsidiary and the ownership of such
shares is set forth in Section 2.03 of the Surety Disclosure
Schedule; and all of such shares are owned by Surety or a Surety
Subsidiary, free and clear of all liens, encumbrances, rights of
first refusal, options or other restrictions of any nature
whatsoever, except as disclosed in Section 2.03 of the Surety
Disclosure Schedule. There are no options, warrants or rights
outstanding to acquire any capital stock of any Surety Subsidiary,
and no person or entity has any other right to purchase or acquire
any unissued shares of stock of any Surety Subsidiary, nor does any
Surety Subsidiary have any obligation of any nature with respect to
its unissued shares of stock. Except as disclosed in Section 2.03
of the Surety Disclosure Schedule, neither Surety nor any Surety
Subsidiary is a party to any partnership or joint venture or owns
an equity interest in any other business or enterprise.
Section 2.04. Financial Information. The audited
consolidated balance sheets of Surety and its subsidiaries as of
December 31, 1996 and related consolidated income statements and
statements of changes in shareholders' equity and of cash flows for
the three years ended December 31, 1996, together with the notes
thereto, included in Surety's 1996 Annual Report; the unaudited
consolidated balance sheets of Surety and its subsidiaries as of
March 31, 1997 and related consolidated income statements for the
three months ended March 31, 1997, together with the notes thereto,
in the form set forth in Section 2.04 of the Surety Disclosure
Schedule; and Surety's year-end and quarter-end Reports of
Condition and Reports of Income for 1996 and for the three month
period ending March 31, 1997, respectively, as filed with the
Federal Deposit Insurance Corporation (the "FDIC") (such financial
statements and notes collectively referred to herein as the "Surety
Financial Statements"), have been prepared in accordance with
generally accepted accounting principles applied on a consistent
basis (except as may be disclosed therein and except for regulatory
reporting differences required for Surety's reports) and fairly
present the consolidated financial position and the consolidated
results of operations, changes in shareholders' equity and cash
flows of the respective entity and its consolidated subsidiaries as
of the dates and for the periods indicated.
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Section 2.05. Absence of Changes. Except as disclosed in
Section 2.05 of the Surety Disclosure Schedule, since March 31,
1997 there has not been any material adverse change in the
financial condition, the results of operations or the business or
prospects of Surety and its subsidiaries taken as a whole, nor have
there been any events or transactions having such a material
adverse effect which should be disclosed in order to make the
Surety Financial Statements not misleading. Since November 12,
1996, the date of the most recent examination of Surety by the
FDIC, there has been no material adverse change in Surety's
financial condition, results of operations or business except for
any such changes as are disclosed in Surety's Reports of Condition
and Income filed with the FDIC since such date.
Section 2.06. Regulatory Enforcement Matters. Except as
disclosed in Section 2.06 of the Surety Disclosure Schedule,
neither Surety nor any Surety Subsidiary is subject to, or has
received any notice or advice that it may become subject to, any
order, agreement, memorandum of understanding or other regulatory
enforcement action or proceeding with or by any federal or state
agency charged with the supervision or regulation of banks or bank
holding companies or engaged in the insurance of bank deposits or
any other governmental agency having supervisory or regulatory
authority with respect to Surety or any of its subsidiaries.
Section 2.07. Tax Matters. Surety and the Surety
Subsidiaries have filed all federal, state and local income,
franchise, excise, sales, use, real and personal property and other
tax returns required to be filed. All such returns fairly reflect
the information required to be presented therein. All provisions
for accrued but unpaid taxes contained in the Surety Financial
Statements were made in accordance with generally accepted
accounting principles and in the aggregate do not materially fail
to provide for potential tax liabilities.
Section 2.08. Litigation. Except as disclosed in Section
2.08 of the Surety Disclosure Schedule, there is no litigation,
claim or other proceeding pending or, to the knowledge of Surety,
threatened against Surety or any of the Surety Subsidiaries, or of
which the property of Surety or any of the Surety Subsidiaries is
or would be subject, which, if adversely resolved, could have a
material and adverse effect on the financial condition or
operations of Surety and the Surety Subsidiaries, taken as a whole.
Section 2.09. Properties, Contracts, Employee Benefit Plans
and Other Agreements. Section 2.09 of the Surety Disclosure
Schedule specifically identifies the following:
(a) all real property owned by Surety or any Surety
Subsidiary and the principal buildings and structures located
thereon, together with a legal description of such real estate, and
each lease of real property to which Surety or any Surety
Subsidiary is a party, identifying the parties thereto, the annual
rental payable, the expiration date thereof and a brief description
of the property covered;
(b) all loan and credit agreements, conditional sales
contracts or other title retention agreements or security
agreements relating to money borrowed by Surety or a Surety
Subsidiary, exclusive of deposit agreements with customers of
Surety entered into in the ordinary course of business, agreements
for the purchase of federal funds and repurchase agreements;
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(c) all agreements, loans, contracts, leases, guaranties,
letters of credit, lines of credit or commitments of Surety or any
Surety Subsidiary not referred to elsewhere in this Section 2.09
which:
(i) involve payment by Surety or any Surety
Subsidiary of more than $50,000 (other than
loans, loan commitments or letters of credit);
(ii) involve payments based on profits of Surety or
any Surety Subsidiary;
(iii) relate to the future purchase of goods or
services in excess of the requirements of its
respective business at current levels or for
normal operating purposes;
(iv) were not made in the ordinary course of business;
or
(v) materially affect the business or financial
condition of Surety or any Surety Subsidiary;
(d) all contracts, agreements, plans and arrangements by
which any profit sharing, group insurance, hospitalization, stock
option, pension, retirement, bonus, deferred compensation, stock
bonus, stock purchase, collective bargaining agreements, contracts
or arrangements under which pensions, deferred compensation or
other retirement benefits is being paid, or plans or arrangements
established or maintained, sponsored or undertaken by Surety or any
Surety Subsidiary for the benefit of officers, directors or
employees, including each trust or other agreement with any
custodian or any trustee for funds held under any such agreement,
plan or arrangement, and in respect to any of them, the latest
reports or forms, if any, filed with the Department of Labor and
Pension Benefit Guaranty Corporation under ERISA (as defined
below), any current financial or actuarial reports and any
currently effective IRS private ruling or determination letters
obtained by or for the benefit of Surety or any Surety Subsidiary;
(e) all leases, subleases or licenses with respect to real or
personal property, whether as lessor, lessee, licensor or licensee,
with annual rental or other payments due thereunder in excess of
$25,000;
(f) all agreements for the employment, retention or
engagement, or with respect to the severance, of any officer,
employee, agent, consultant or other person or entity which by its
terms is not terminable by Surety or a Surety Subsidiary on thirty
(30) days written notice or less without any payment by reason of
such termination; and
(g) the name and annual salary as of January 1, 1997 of each
director or employee of Surety or any Surety Subsidiary with a
salary in excess of $75,000.
Copies of each document, plan or contract identified in
Section 2.09 of the Surety Disclosure Schedule are appended to such
Schedule and are hereby incorporated into and constitute a part of
the Surety Disclosure Schedule.
Section 2.10. Reports. Except as disclosed in Section 2.10
of the Surety Disclosure Schedule, to the best of Surety's
knowledge, Surety and the Surety Subsidiaries have filed all
reports and statements, together with any amendments required to be
made with respect thereto, required to be filed with the Banking
Department, the FDIC or any other state securities or banking
authorities or any other governmental authority with jurisdiction
over Surety or any Surety Subsidiary. As of the dates indicated
thereon, to the best of Surety's
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knowledge, each of such reports and documents, including any
financial statements, exhibits and schedules thereto, complied in
all material respects with the relevant statutes, rules and
regulations enforced or promulgated by the regulatory authority
with which they were filed, and did not contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they
were made, not misleading.
Section 2.11. Investment Portfolio. All United States
Treasury securities, obligations of other United States Government
agencies and corporations, obligations of States and political
subdivisions of the United States and other investment securities
held by Surety and the Surety Subsidiaries, as reflected in the
latest consolidated balance sheet of Surety included in the Surety
Financial Statements, are carried in accordance with generally
accepted accounting principles.
Section 2.12. Loan Portfolio. Except as disclosed in Section
2.12 of the Surety Disclosure Schedule, (i) all loans and discounts
shown on the Surety Financial Statements at March 31, 1997 or which
were or will be entered into after March 31, 1997 but before the
Closing Date were and will be made in all material respects for
good, valuable and adequate consideration in the ordinary course of
the business of Surety and the Surety Subsidiaries, in accordance
in all material respects with sound lending practices, and they are
not subject to any material known defenses, setoffs or
counterclaims, including without limitation any such as are
afforded by usury or truth in lending laws, except as may be
provided by bankruptcy, insolvency or similar laws or by general
principles of equity; (ii) the notes and other evidences of
indebtedness evidencing such loans and all forms of pledges,
mortgages and other collateral documents and security agreements
are and will be in all material respects enforceable, valid, true
and genuine and what they purport to be; and (iii) Surety and the
Surety Subsidiaries have complied and will through the Closing Date
comply with all laws and regulations relating to such loans, or to
the extent there has not been such compliance, such failure to
comply will not materially interfere with the collection of any
loan. All loans and loan commitments extended by Surety and any
extensions, renewals or continuations of such loans and loan
commitments were made in accordance with its customary lending
standards in the ordinary course of business. To the best of
Surety's knowledge, such loans are evidenced by appropriate and
sufficient documentation based upon Surety's customary and ordinary
past practices. The reserve for possible loan and lease losses
shown on Surety's Report of Condition and Income as of March 31,
1997 is adequate in all material respects under the requirements of
generally accepted accounting principles to provide for possible
losses, net of recoveries relating to loans previously charged off,
on loans outstanding (including, without limitation, accrued
interest receivable) as of March 31, 1997.
Section 2.13. Employee Matters and ERISA.
(a) Neither Surety nor any Surety Subsidiary has entered into
any collective bargaining agreement with any labor organization
with respect to any group of employees of Surety or any Surety
Subsidiary, and to the knowledge of Surety there is no present
effort nor existing proposal to attempt to unionize any group of
employees of Surety or any Surety Subsidiary.
(b)(i) Surety and the Surety Subsidiaries have been and are in
compliance, to the best of Surety's knowledge, with all applicable
laws respecting employment and employment practices, terms and
conditions of employment and wages and hours, including, without
limitation, any laws respecting employment discrimination and
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occupational safety and health requirements, and neither Surety nor
any Surety Subsidiary is engaged in any unfair labor practice; (ii)
there is no unfair labor practice complaint against Surety or any
Surety Subsidiary, pending or, to the best of Surety's knowledge,
threatened before the National Labor Relations Board; (iii) there
is no labor dispute, strike, slowdown or stoppage, pending or
threatened, against or directly affecting Surety or any Surety
Subsidiary; and (iv) neither Surety nor any Surety Subsidiary has
experienced any work stoppage or material labor difficulty during
the past five years.
(c) Except as disclosed in Section 2.13(c) of the Surety
Disclosure Schedule, neither Surety nor any Surety Subsidiary
maintains, contributes to or participates in or has any liability
under any employee benefit plans, as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or any nonqualified employee benefit plans or deferred
compensation, bonus, stock or incentive plans, or other employee
benefit or fringe benefit programs for the benefit of former or
current employees of Surety or any Surety Subsidiary (collectively,
the "Employee Plans"). To the knowledge of Surety, no present or
former employee of Surety or any Surety Subsidiary has been charged
with breaching nor has breached a fiduciary duty under any Employee
Plan. Neither Surety nor any Surety Subsidiary participates in, nor
has it in the past five years participated in, nor has it any
present or future obligation or liability under, any multiemployer
plan (as defined at Section 3(37) of ERISA). Except as separately
disclosed in Section 2.13(c) of the Surety Disclosure Schedule,
neither Surety nor any Surety Subsidiary maintains, contributes to,
or participates in any plan that provides health, major medical,
disability or life insurance benefits to former employees of Surety
or any Surety Subsidiary.
(d) All liabilities of the Employee Plans have been funded on
the basis of consistent methods in accordance with sound actuarial
assumptions and practices, and no Employee Plan, at the end of any
plan year, or at March 31, 1997, had an accumulated funding
deficiency. No actuarial assumptions have been changed since the
last written report of actuaries on the Employee Plans. All
insurance premiums (including premiums to the Pension Benefit
Guaranty Corporation) have been paid in full, subject only to
normal retrospective adjustments in the ordinary course. Except as
reflected in the Surety Financial Statements, Surety and the Surety
Subsidiaries have no contingent or actual liabilities under Title
IV of ERISA. No accumulated funding deficiency (within the meaning
of Section 302 of ERISA or Section 412 of the Internal Revenue Code
of 1986, as amended (the "Code")) has been incurred with respect to
any Employee Plan, whether or not waived. No reportable event (as
defined in Section 4043 of ERISA) has occurred with respect to any
Employee Plan as to which a notice would be required to be filed
with the Pension Benefit Guaranty Corporation. No claim is pending,
threatened or imminent with respect to any Employee Plan (other
than a routine claim for benefits for which plan administrative
review procedures have not been exhausted) for which Surety or any
Surety Subsidiary would be liable, except as is reflected in the
Surety Financial Statements. Surety and the Surety Subsidiaries
have no liability for excise taxes under Sections 4971, 4975, 4976,
4977, 4979 or 4980B of the Code or for a fine under Section 502 of
ERISA with respect to any Employee Plan. To the best of Surety's
knowledge, all Employee Plans have in all material respects been
operated, administered and maintained in accordance with the terms
thereof and in compliance with the requirements of all applicable
laws, including, without limitation, ERISA.
Section 2.14. Title to Properties; Insurance. Except as
disclosed in Section 2.14 of the Surety Disclosure Schedule: (i)
Surety and the Surety Subsidiaries have marketable title, insurable
at standard rates, free and clear of all liens, charges and
encumbrances (except taxes which are a lien but not yet payable and
liens, charges or encumbrances reflected in the Surety Financial
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Statements and easements, rights-of-way, and other restrictions
which are not material, and further excepting in the case of other
Real Estate Owned ("OREO"), as such real estate is internally
classified on the books of Surety or any Surety Subsidiary, rights
of redemption under applicable law), to all of their real
properties; (ii) all leasehold interests for real property and any
material personal property used by Surety or any Surety Subsidiary
in its business are held pursuant to lease agreements which are
valid and enforceable in accordance with their terms; (iii) all
such properties comply in all material respects with all applicable
private agreements, zoning requirements and other governmental laws
and regulations relating thereto, and there are no condemnation
proceedings pending or, to Surety's knowledge, threatened with
respect to any of such properties; (iv) Surety and the Surety
Subsidiaries have valid title or other ownership rights under
licenses to all material intangible personal or intellectual
property used by Surety or any Surety Subsidiary in its business,
free and clear of any material claim, defense or right of any other
person or entity, subject only to rights of the licensors pursuant
to applicable license agreements, which rights do not materially
and adversely interfere with the use of such property; and (v) all
material insurable properties owned or held by Surety or any Surety
Subsidiary are adequately insured by financially sound and
reputable insurers in such amounts and against fire and other risks
insured against by extended coverage and public liability
insurance, as is customary with banks of similar size.
Section 2.15. Environmental Matters. As used in this
Agreement, "Environmental Laws" means all local, state and federal
environmental, health and safety laws and regulations in all
jurisdictions in which Surety or any Surety Subsidiary has done
business or owned, leased or operated property, including, without
limitation, the Federal Resource Conservation and Recovery Act, the
Federal Comprehensive Environmental Response, Compensation and
Liability Act, the Federal Clean Water Act, the Federal Clean Air
Act, and the Federal Occupational Safety and Health Act.
Except as disclosed in Section 2.15 of the Surety Disclosure
Schedule, neither the conduct nor operation of Surety or any Surety
Subsidiary nor any condition of any property presently or
previously owned, leased or operated by any of them on their own
behalf or in a fiduciary capacity violates or violated any
Environmental Law in any respect material to the business of Surety
and the Surety Subsidiaries, taken as a whole, and no condition or
event has occurred with respect to any of them or any property
that, with notice or the passage of time, or both, would constitute
a violation material to the business of Surety and the Surety
Subsidiaries, taken as a whole, of any Environmental Law or
obligate (or potentially obligate) Surety or any Surety Subsidiary
to remedy, stabilize, neutralize or otherwise alter the
environmental condition of any property, where the aggregate cost
of such actions would be material to Surety and the Surety
Subsidiaries, taken as a whole. Except as disclosed in Section 2.15
of the Surety Disclosure Schedule, neither Surety nor any Surety
Subsidiary has received notice from any person or entity that
Surety or any Surety Subsidiary, or the operation or condition of
any property ever owned, leased or operated by any of them on their
own behalf or in a fiduciary capacity, are or were in violation of
any Environmental Law, or that Surety or any Surety Subsidiary is
responsible (or potentially responsible) for remedying, or the
cleanup of, any pollutants, contaminants, or hazardous or toxic
wastes, substances or materials at, on or beneath any such
property.
Section 2.16. Compliance with Law. Surety and the Surety
Subsidiaries have all licenses, franchises, permits and other
governmental authorizations that are legally required to enable
them to conduct their respective businesses in all material
respects, are qualified to conduct business in every jurisdiction
in
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which such qualification is legally required and, to the best of
Surety's knowledge, are in compliance in all material respects with
all applicable laws and regulations.
Section 2.17. Brokerage. Except for fees payable by Surety
to Baxter Fentriss and Company, there are no existing claims or
agreements for brokerage commissions, finders' fees, or similar
compensation in connection with the transactions contemplated by
this Agreement payable by Surety or any Surety Subsidiary.
Section 2.18. No Undisclosed Liabilities. Surety and the
Surety Subsidiaries do not have any material liability, whether
known or unknown, asserted or unasserted, absolute or contingent,
accrued or unaccrued, liquidated or unliquidated, and whether due
or to become due (and, to the best of Surety's knowledge, there is
no past or present fact, situation, circumstance, condition or
other basis for any present or future action, suit or proceeding,
hearing, charge, complaint, claim or demand against Surety or any
Surety Subsidiary giving rise to any such liability), except (i)
liabilities reflected in the Surety Financial Statements, (ii)
liabilities of the same type incurred in the ordinary course of
business of Surety and the Surety Subsidiaries since March 31, 1997
and (iii) as disclosed in Section 2.18 of the Surety Disclosure
Schedule.
Section 2.19. Statements True and Correct. None of the
information supplied or to be supplied by Surety for inclusion in
the Registration Statement (as defined in Section 5.07 hereof) or
in any other document to be filed with the SEC or any regulatory
authority in connection with the transactions contemplated hereby
will, at the respective times such documents are filed, and, in the
case of Surety's proxy statement, when first mailed to the
shareholders of Surety and at the time of the Shareholders' Meeting
(as defined in Section 4.03 hereof), be false or misleading with
respect to any material fact, or omit to state any material fact
necessary in order to make the statements therein not misleading,
or omit to state any material fact required to be stated in order
to correct any statement in any earlier communication with respect
to the solicitation of any proxy for the Shareholders' Meeting. All
documents that Surety is responsible for filing with any regulatory
authority in connection with the transactions contemplated hereby
will comply as to form in all material respects with the provisions
of applicable law and the applicable rules and regulations
thereunder.
Section 2.20. Commitments and Contracts. Except as disclosed
in Section 2.20 of the Surety Disclosure Schedule (and with a true
and correct copy of the document or other item in question having
been made available to FBA for inspection), neither Surety nor any
Surety Subsidiary is a party or subject to any of the following
(whether written or oral, express or implied):
(i) any agreement, arrangement or commitment not made in the
ordinary course of business;
(ii) any agreement, indenture or other instrument not
reflected in the Surety Financial Statements relating to the
borrowing of money by Surety or a Surety Subsidiary or the
guarantee by Surety or a Surety Subsidiary of any obligation (other
than trade payables or instruments related to transactions entered
into in the ordinary course of business by Surety or a Surety
Subsidiary, such as deposits, federal funds borrowings and
repurchase agreements), other than agreements, indentures or
instruments providing for annual payments of less than $10,000; or
(iii) any contract containing covenants which limit the
ability of Surety to compete in any line of business or with any
person or containing any
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restriction of the geographical area in which, or method by which,
Surety or any Surety Subsidiary may carry on its business (other
than as may be required by law or any applicable regulatory
authority).
Section 2.21. Material Interest of Certain Persons. Except
as disclosed in Section 2.21 of the Surety Disclosure Schedule:
(a) no officer or director of Surety or any "associate" (as
such term is defined in Rule 14a-1 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) of any such officer
or director, has any material interest in any material contract or
property (real or personal, tangible or intangible), used in or
pertaining to the business of Surety or any Surety Subsidiary; and
(b) all outstanding loans from Surety to any present officer,
director, employee or any associate or related interest of any such
person which were required to be approved by or reported to
Surety's Board of Directors ("Insider Loans") were approved by or
reported to the Board of Directors in accordance with all
applicable laws and regulations.
Section 2.22. Conduct to Date. Except as disclosed in
Section 2.22 of the Surety Disclosure Schedule, from and after
December 31, 1996 through the date of this Agreement, neither
Surety nor any Surety Subsidiary has (i) failed to conduct its
business in the ordinary and usual course consistent with past
practices; (ii) issued, sold, granted, conferred or awarded any
common or other stock, or any corporate debt securities which would
be classified under generally accepted accounting principles
applied on a consistent basis as long-term debt on the balance
sheets of Surety or any Surety Subsidiary; (iii) effected any stock
split or adjusted, combined, reclassified or otherwise changed its
capitalization; (iv) except for dividends on outstanding shares of
Surety Preferred in accordance with the terms thereof, declared,
set aside or paid any dividend or other distribution in respect of
its capital stock, or purchased, redeemed, retired, repurchased, or
exchanged, or otherwise directly or indirectly acquired or disposed
of any of its capital stock; (v) except for obligations undertaken
in this Agreement, incurred any material obligation or liability
(absolute or contingent), except normal trade or business
obligations or liabilities incurred in the ordinary course of
business, or subjected to lien any of its assets or properties
other than in the ordinary course of business consistent with past
practice; (vi) discharged or satisfied any material lien or paid
any material obligation or liability (absolute or contingent),
other than in the ordinary course of business; (vii) sold,
assigned, transferred, leased, exchanged, or otherwise disposed of
any of its properties or assets other than for a fair consideration
in the ordinary course of business; (viii) except as required by
contract or law, (A) increased the rate of compensation of, or paid
any bonus to, any of its directors, officers, or other employees,
except in accordance with existing policy, (B) entered into any
new, or amended or supplemented any existing, employment,
management, consulting, deferred compensation, severance or other
similar contract, (C) entered into, terminated or substantially
modified any of the Employee Plans or (D) agreed to do any of the
foregoing; (ix) suffered any material damage, destruction, or loss,
whether as the result of fire, explosion, earthquake, accident,
casualty, labor trouble, requisition, or taking of property by any
regulatory authority, flood, windstorm, embargo, riot, act of God
or the enemy, or other casualty or event, and whether or not
covered by insurance; (x) cancelled or compromised any debt, except
for debts charged off or compromised in accordance with past
practice; (xi) entered into any material transaction, contract or
commitment outside the ordinary course of its business or (xii)
made or guaranteed any loan to any of the Employee Plans.
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2.23. Tax Status of Merger; Regulatory Status. To the
best of Surety's knowledge, neither Surety nor any of its
subsidiaries has taken or agreed to take any action or has
knowledge of any fact or circumstance that would (i) prevent the
transactions contemplated by this Agreement, including the Merger,
from qualifying as a reorganization within the meaning of Section
368 of the Code or (ii) materially impede or delay the approval of
the Merger by any regulatory authority or result in the imposition
of any conditions that FBA would reasonably determine are unduly
burdensome.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF FBA
FBA represents and warrants to Surety as follows:
Section 3.01. Organization and Capital Stock.
(a) FBA is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware and a bank
holding company registered as such pursuant to the Bank Holding
Company Act, as amended. FBA has the corporate power to own all of
its property and assets, to incur all of its liabilities and to
carry on its business as now being conducted.
(b) As of the date hereof, the authorized capital stock of
FBA consists of 6,666,666 shares of FBA Common Stock, of which
1,088,242 shares are outstanding, duly and validly issued, fully
paid and non-assessable; 4,000,000 shares of Class B Common Stock,
$.15 par value, of which 2,500,000 shares are outstanding, duly and
validly issued, fully paid and non-assessable; and 3,000,000 shares
of preferred stock, $1.00 par value, none of which is issued and
outstanding. None of the outstanding shares of FBA Common Stock or
Class B Common Stock has been issued in violation of any preemptive
rights. FBA has granted and outstanding (i) stock options
representing the right to acquire an aggregate of 15,001 shares of
FBA Common Stock for the aggregate exercise price of $56,256 and
(ii) warrants representing the right to acquire an aggregate of
65,663 shares of FBA Common Stock for the aggregate price of
$5,328,552.
(c) Except as disclosed in Section 3.01(b) and in Section
3.01 of that certain document delivered by FBA to Surety entitled
the "FBA Disclosure Schedule" and executed by both FBA and Surety
concurrently with the execution and delivery of this Agreement (the
"FBA Disclosure Schedule"), there are no shares of capital stock or
other equity securities of FBA issued or outstanding and no
outstanding options, warrants, rights to subscribe for, calls or
commitments of any character whatsoever relating to, or securities
or rights convertible into or exchangeable for, shares of the
capital stock of FBA or contracts, commitments, understandings or
arrangements by which FBA is or may be obligated to issue
additional shares of its capital stock.
Section 3.02. Authorization; No Defaults. The Board of
Directors of FBA has by all requisite action approved this
Agreement and the Merger and authorized the execution hereof on its
behalf by its duly authorized officers and the performance by FBA
of its obligations hereunder. Nothing in the Certificate of
Incorporation or Bylaws of FBA or, to the best of FBA's knowledge,
any other agreement, instrument, decree, proceeding, law or
regulation (except as specifically referred to in or contemplated
by this Agreement) by or to which FBA or any of its subsidiaries is
bound or subject would prohibit or inhibit FBA from consummating
this Agreement and the Merger on the terms and conditions herein
contained. This Agreement has been duly and validly executed and
delivered by
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FBA and constitutes a legal, valid and binding obligation of FBA,
enforceable against FBA in accordance with its terms. FBA and its
subsidiaries are neither in default under nor in violation of any
provision of their respective articles or certificates of
incorporation or bylaws, or, to the best of FBA's knowledge, any
promissory note, indenture or any evidence of indebtedness or
security therefor, lease, contract, purchase or other commitment or
any other agreement which is material to FBA and its subsidiaries
taken as a whole.
Section 3.03. Subsidiaries. (a) Each of FBA's direct and
indirect subsidiaries (hereinafter referred to singly as an "FBA
Subsidiary" and collectively as the "FBA Subsidiaries"), the names
and jurisdictions of incorporation of which are disclosed in
Section 3.03 of the FBA Disclosure Schedule, is duly organized,
validly existing and in good standing under the laws of the
jurisdiction of its incorporation, and each of the FBA Subsidiaries
has the corporate power to own its properties and assets, to incur
its liabilities and to carry on its business as now being
conducted. The number of issued and outstanding shares of capital
stock of each FBA Subsidiary and the ownership of such shares is
set forth in Section 3.03 of the FBA Disclosure Schedule; and all
of such shares are owned by FBA or an FBA Subsidiary, free and
clear of all liens, encumbrances, rights of first refusal, options
or other restrictions of any nature whatsoever, except as disclosed
in Section 3.03 of the FBA Disclosure Schedule. There are no
options, warrants or rights outstanding to acquire any capital
stock of any FBA Subsidiary, and no person or entity has any other
right to purchase or acquire any unissued shares of stock of any
FBA Subsidiary, nor does any FBA Subsidiary have any obligation of
any nature with respect to its unissued shares of stock. Except as
may be disclosed in Section 3.03 of the FBA Disclosure Schedule,
neither FBA nor any FBA Subsidiary is a party to any partnership or
joint venture or owns an equity interest in any other business or
enterprise.
(b) FBA's indirect bank subsidiaries, Sunrise Bank of
California, a California banking association ("Sunrise Bank") and
BankTEXAS National Association, a banking association chartered by
the United States of America ("BankTEXAS"), are insured banks as
defined in the Federal Deposit Insurance Act.
Section 3.04. Financial Information. The audited
consolidated balance sheets of FBA and its subsidiaries as of
December 31, 1996 and related consolidated income statements and
statements of changes in shareholders' equity and of cash flows for
the three years ended December 31, 1996, together with the notes
thereto, included in FBA's Annual Report on Form 10-K for the year
ended December 31, 1996, as currently on file with the Securities
and Exchange Commission (the "SEC"); the unaudited consolidated
balance sheets of FBA and its subsidiaries as of March 31, 1997 and
related consolidated income statements and statements of changes in
shareholders' equity and of cash flows for the three months ended
March 31, 1997, together with the notes thereto, included in FBA's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997
as currently on file with the SEC; and the year-end and quarter-end
Reports of Condition and Reports of Income of BankTEXAS and Sunrise
Bank for 1996 and the three month period ending March 31, 1997, as
filed with the Office of the Comptroller of the Currency (with
respect to BankTEXAS) and the Banking Department (with respect to
Sunrise Bank) (such financial statements and notes collectively
referred to herein as the "FBA Financial Statements"), have been
prepared in accordance with generally accepted accounting
principles applied on a consistent basis (except as may be
disclosed therein and except for regulatory reporting differences
required for reports of either bank) and fairly present the
consolidated financial position and the consolidated results of
operations, changes in shareholders' equity and cash flows of the
respective entity and its consolidated subsidiaries as of the dates
and for the periods indicated. The allowance for possible loan
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losses shown on FBA's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997 is adequate in all material respects under the
requirements of generally accepted accounting principles to provide
for possible losses, net of recoveries relating to loans previously
charged off, on loans outstanding (including, without limitation,
accrued interest receivable) as of March 31, 1997.
Section 3.05. Absence of Changes. Since March 31, 1997 there
has not been any material adverse change in the financial
condition, the results of operations or the business or prospects
of FBA and its subsidiaries taken as a whole, nor have there been
any events or transactions having such a material adverse effect
which should be disclosed in order to make the FBA Financial
Statements not misleading.
Section 3.06. Compliance with Law. FBA and the FBA
Subsidiaries have all licenses, franchises, permits and other
governmental authorizations that are legally required to enable
them to conduct their respective businesses in all material
respects, are qualified to conduct business in every jurisdiction
(whether federal, state, local or foreign) in which such
qualification is legally required and, to the best of FBA's
knowledge, are in compliance in all material respects with all
applicable laws and regulations.
Section 3.07. Brokerage. There are no existing claims or
agreements for brokerage commissions, finders' fees, or similar
compensation in connection with the transactions contemplated by
this Agreement payable by FBA or any FBA Subsidiary.
Section 3.08. No Undisclosed Liabilities. Neither FBA nor
any FBA Subsidiary has any material liability, whether known or
unknown, asserted or unasserted, absolute or contingent, accrued or
unaccrued, liquidated or unliquidated, and whether due or to become
due (and, to the best of FBA's knowledge, there is no past or
present fact, situation, circumstance, condition or other basis for
any present or future action, suit or proceeding, hearing, charge,
complaint, claim or demand against FBA or any FBA Subsidiary giving
rise to any such liability), except for (i) liabilities reflected
in the FBA Financial Statements, and (ii) liabilities of the same
type incurred in the ordinary course of business of FBA and the FBA
Subsidiaries since March 31, 1997.
Section 3.09. Statements True and Correct. None of the
information supplied or to be supplied by FBA for inclusion in the
Registration Statement or any other document to be filed with the
SEC or any regulatory authority in connection with the transactions
contemplated hereby will, at the respective times such documents
are filed, and, in the case of FBA's proxy statement, when first
mailed to the stockholders of FBA and at the time of the
Shareholders' Meeting (as defined in Section 4.03 hereof), be false
or misleading with respect to any material fact, or omit to state
any material fact necessary in order to make the statements therein
not misleading, or omit to state any material fact required to be
stated in order to correct any statement in any earlier
communication with respect to the solicitation of any proxy for the
Shareholders' Meeting. All documents that FBA is responsible for
filing with the SEC or any other regulatory authority in connection
with the transactions contemplated hereby will comply as to form in
all material respects with the provisions of applicable law and the
applicable rules and regulations thereunder.
Section 3.10. Material Interest of Certain Persons. Except
as disclosed in Section 3.10 of the FBA Disclosure Schedule:
(a) no officer or director of FBA or any "associate" (as such
term is defined in Rule 14a-1 under the Securities Exchange Act of
1934, as amended (the
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"Exchange Act")) of any such officer or director, has any material
interest in any material contract or property (real or personal,
tangible or intangible), used in or pertaining to the business of
FBA or any FBA Subsidiary; and
(b) all outstanding loans from Sunrise Bank and BankTEXAS to
any present officer, director, employee or any associate or related
interest of any such person which were required to be approved by
or reported to Bank's Board of Directors ("Insider Loans") were
approved by or reported to the Board of Directors in accordance
with all applicable laws and regulations.
Section 3.11. Litigation. Except as disclosed in Section
3.11 of the FBA Disclosure Schedule, there is no litigation, claim
or other proceeding pending or, to the knowledge of FBA threatened
against FBA or any of the FBA Subsidiaries, or of which the
property of FBA or any of the FBA Subsidiaries is or would be
subject, which, if adversely resolved, could have a material and
adverse effect on the financial condition or operations of FBA and
the FBA Subsidiaries, taken as a whole.
Section 3.12. Tax Matters. FBA and the FBA Subsidiaries have
filed all federal, state and local income, franchise, excise,
sales, use, real and personal property and other tax returns
required to be filed. All such returns fairly reflect the
information required to be presented therein. All provisions for
accrued but unpaid taxes contained in the FBA Financial Statements
were made in accordance with generally accepted accounting
principles and in the aggregate do not materially fail to provide
for potential tax liabilities.
Section 3.13. Status of FBA Common Stock to be Issued in the
Merger. At the Effective Time, the FBA Common Stock to be issued
pursuant to the Merger will be duly authorized, validly issued,
fully-paid, non-assessable and will not be subject to any
preemptive rights.
Section 3.14. Tax Status of Merger; Regulatory Status. To
the best of FBA's knowledge, neither FBA nor any of its
subsidiaries has taken or agreed to take any action or has
knowledge of any fact or circumstance that would (i) prevent the
transactions contemplated by this Agreement, including the Merger,
from qualifying as a reorganization within the meaning of Section
368 of the Code or (ii) materially impede or delay the approval of
the Merger by any regulatory authority or result in the imposition
of any conditions that FBA would reasonably determine are unduly
burdensome.
ARTICLE IV
AGREEMENTS OF SURETY
Section 4.01. Business in Ordinary Course.
(a) Surety shall, and shall cause each Surety Subsidiary to,
continue to carry on after the date hereof its respective business
and the discharge or incurrence of obligations and liabilities only
in the usual, regular and ordinary course of business, as
heretofore conducted, and by way of amplification and not
limitation, Surety and each Surety Subsidiary will not:
(i) declare or pay any dividend or make any other
distribution to shareholders, whether in cash, stock or other
property (except for dividends payable on the Surety Preferred
in accordance with the terms thereof); or
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(ii) issue any Surety Capital Stock or other stock or any
options, warrants, or other rights to subscribe for or
purchase Surety Capital Stock or any other stock or any
securities convertible into or exchangeable for any capital
stock (except for the issuance of Surety Common pursuant to
the valid exercise of the Surety Options described in Section
2.01(b) hereof or the conversion of currently outstanding
shares of Surety Preferred); or
(iii) directly or indirectly redeem, purchase or otherwise
acquire any Surety Capital Stock or any other stock of Surety
or any Surety Subsidiary; or
(iv) effect a reclassification, recapitalization, splitup,
exchange of shares, readjustment or other similar change in or
to any capital stock, or otherwise reorganize or recapitalize;
or
(v) change its certificate or articles of incorporation or
association, as the case may be, or bylaws.
(b) Surety and each Surety Subsidiary will not, without the
prior written consent of FBA (which may not be unreasonably
withheld or delayed):
(i) grant any increase (other than ordinary and normal
increases consistent with past practices) in the compensation
payable or to become payable to officers or salaried
employees, grant any stock options or, except as required by
law, adopt or make any change in any bonus, insurance,
pension, or other Employee Plan, agreement, payment or
arrangement made to, for or with any of such officers or
employees; provided, however, that Surety has requested FBA's
cooperation in devising a program whereby Surety will
encourage designated officers and employees to continue their
employment until a mutually-agreed date after the Effective
Time, and FBA has agreed (A) to cooperate with Surety in
devising such a program with an aggregate cost acceptable to
FBA, and (B) upon consummation of the Merger, to cause
AcquisitionCo to assume the severance obligations described in
the Surety Disclosure Schedule relating to John A. DiMichele,
Christopher A. Olson, Mark Day and Sheila Moran; or
(ii) borrow or agree to borrow any amount of funds except
in the ordinary course of business, or directly or indirectly
guarantee or agree to guarantee any obligations of others; or
(iii) make or commit to make any new loan or letter of
credit or any new or additional discretionary advance under
any existing line of credit, in principal amounts in excess of
$250,000 or that would increase the aggregate credit
outstanding to any one borrower (or group of affiliated
borrowers) to more than $500,000 (excluding for this purpose
any accrued interest or overdrafts); or
(iv) purchase or otherwise acquire any investment security
for its own account having an average remaining life greater
than three years or any asset-backed securities other than
those issued or guaranteed by the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation; or
(v) enter into any agreement, contract or commitment
having a term in excess of three (3) months other than letters
of credit, loan agreements, deposit agreements, and other
lending, credit and deposit agreements and documents made in
the ordinary course of business; or
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(vi) except in the ordinary course of business, place on
any of its assets or properties any mortgage, pledge, lien,
charge, or other encumbrance; or
(vii) except in the ordinary course of business, cancel or
accelerate any material indebtedness owing to Surety or a
Surety Subsidiary or any claims which Surety or any Surety
Subsidiary may possess, or waive any material rights of
substantial value; or
(viii) sell or otherwise dispose of any real property or any
material amount of any tangible or intangible personal
property, other than properties acquired in foreclosure or
otherwise in the ordinary collection of indebtedness; or
(ix) foreclose upon or otherwise take title to or
possession or control of any real property without first
obtaining a phase one environmental report thereon which
indicates that the property is free of pollutants,
contaminants or hazardous or toxic waste materials; provided,
however, that Surety and the Surety Subsidiaries shall not be
required to obtain such a report with respect to single
family, non-agricultural residential property of one acre or
less to be foreclosed upon unless the entity proposing to
acquire the property has reason to believe that such property
might contain any such waste materials or otherwise might be
contaminated; or
(x) intentionally commit any act or fail to do any act
which will cause a breach of any agreement, contract or
commitment and which will have a material adverse effect on
the business, financial condition or earnings of Surety or a
Surety Subsidiary; or
(xi) knowingly violate any law, statute, rule, governmental
regulation or order, which violation might have a material
adverse effect on the business, financial condition, or
earnings of Surety or a Surety Subsidiary; or
(xii) purchase any real or personal property or make any
other capital expenditure where the amount paid or committed
therefor is in excess of $25,000; or
(xiii) increase or decrease the rate of interest paid on time
deposits or on certificates of deposit, except in a manner
consistent with past practices.
(c) Surety and the Surety Subsidiaries shall not, without the
prior written consent of FBA, engage in any transaction or take any
action that would render untrue in any material respect any of the
representations and warranties of Surety contained in Article Two
hereof, if such representations and warranties were given
immediately following such transaction or action.
(d) Surety shall promptly notify FBA of the occurrence of any
matter or event known to and directly involving Surety or the
Surety Subsidiaries that is materially adverse to the business,
operations, properties, assets, or condition (financial or
otherwise) of Surety and the Surety Subsidiaries, taken as a whole.
(e) Surety shall not solicit or encourage any proposal for
the acquisition of its assets or those of any Surety Subsidiary,
or, unless the Board of Directors of Surety shall have received
written legal advice to the effect that the directors have a
fiduciary obligation under applicable law to do so, hold
discussions or negotiations with or provide information to, or
enter into any
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agreement to merge or consolidate with, or sell a significant
portion of its assets or those of any Surety Subsidiary to, any
person or entity. Surety shall promptly advise FBA of its receipt
of any proposal or inquiry relating to any of such possible
transactions and the substance thereof and of any act of the Board
of Directors which would be prohibited by the preceding sentence
but for the exception based on legal advice.
Section 4.02. Breaches. Surety shall, in the event it has
knowledge of the occurrence, or impending or threatened occurrence,
of any event or condition which would cause or constitute a breach
(or would have caused or constituted a breach had such event
occurred or been known prior to the date hereof) of any of its
representations or agreements contained or referred to herein, give
prompt written notice thereof to FBA and use its best efforts to
prevent or promptly remedy the same.
Section 4.03. Submission to Shareholders. Surety shall
cooperate with FBA in the preparation and filing of the
Registration Statement and, promptly following the effectiveness
thereof, cause to be duly called and held a meeting of its
shareholders (such meeting together with any adjournments thereof
referred to as the "Shareholders' Meeting") for approval of this
Agreement, the Merger Agreement and the Merger as required by
Corporate Law, and cause the same to be voted on at the
Shareholders' Meeting. Unless the Board of Directors of Surety has
received written legal advice to the effect that the directors have
a fiduciary obligation under applicable law not to do so, the Board
of Directors shall recommend to the shareholders of Surety the
approval of the Agreement, the Merger Agreement and the Merger and
use its best efforts to obtain such approval.
Section 4.04. Consummation of Agreement. Surety shall
perform and fulfill all conditions and obligations on its part to
be performed or fulfilled under this Agreement and to cause the
Merger to be consummated as expeditiously as reasonably
practicable. Surety shall furnish to FBA in a timely manner all
information, data and documents requested by FBA for filing with
any regulatory authority or otherwise required to effect the
transactions contemplated by this Agreement and shall join with FBA
and/or AcquisitionCo in making any application with respect to
which FBA determines it is necessary or desirable for Surety to do
so.
Section 4.05. Environmental Reports. Surety shall provide to
FBA, as soon as reasonably practical, but not later than forty-five
(45) days after the date hereof, a report of a phase one
environmental investigation on all real property owned, leased or
operated by Surety or any Surety Subsidiary as of the date hereof
(other than space in retail and similar establishments leased by
Surety for automatic teller machines), and within ten (10) days
after the acquisition or lease of any real property acquired or
leased by Surety or any Surety Subsidiary after the date hereof
(other than space in retail and similar establishments leased or
operated for automatic teller machines), except as otherwise
provided in Section 4.01(b)(ix). If required by the phase one
investigation, in FBA's reasonable opinion, Surety shall obtain and
provide to FBA a report of a phase two investigation on properties
requiring such additional study. FBA shall have fifteen (15)
business days from the receipt of any such phase two report to
notify Surety of any objection to the contents of such report.
Should the cost of taking all remedial and corrective actions and
measures (i) required by applicable law or (ii) recommended or
suggested by such report or prudent in light of serious life,
health or safety concerns, in the aggregate, exceed the sum of
$200,000 as reasonably estimated by an environmental expert
retained for such purpose by FBA and reasonably acceptable to
Surety, or if the cost of such actions and measures cannot be so
reasonably estimated by such expert to be $200,000 or less with a
reasonable degree of certainty, then
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FBA shall have the right pursuant to Section 7.05 hereof, for a
period of ten (10) business days following receipt of such estimate
or indication that the cost of such actions and measures can not be
so reasonably estimated, to terminate this Agreement, which shall
be FBA's sole remedy in such event.
Section 4.06. Access to Information. Surety shall permit FBA
reasonable access, in a manner which will avoid undue disruption or
interference with Surety's normal operations to its properties and
shall cause the Surety Subsidiaries to provide to FBA comparable
access to their properties, and Surety shall disclose and make
available to FBA all books, documents, papers and records relating
to the assets, stock ownership, properties, operations, obligations
and liabilities of Surety and the Surety Subsidiaries including,
but not limited to, all books of account (including the general
ledger), tax records, minute books of directors' and shareholders'
meetings, organizational documents, material contracts and
agreements, loan files, filings with any regulatory authority,
accountants' workpapers (if available and subject to the respective
independent accountants' consent), litigation files, plans
affecting employees, and any other business activities or prospects
in which FBA may have a reasonable and legitimate interest in
furtherance of the transactions contemplated by this Agreement.
FBA will hold any nonpublic information in confidence in accordance
with the provisions of Section 8.01 hereof.
Section 4.07. Consents to Contracts and Leases. Surety shall
obtain all necessary consents with respect to all interests of
Surety and the Surety Subsidiaries in any material leases,
licenses, contracts, instruments and rights which require the
consent of another person for the Merger.
Section 4.08. Subsequent Financial Statements. As soon as
available after the date hereof, Surety shall deliver to FBA the
monthly unaudited consolidated balance sheets and profit and loss
statements of Surety prepared for its internal use, its Report of
Condition and Income for each quarterly period completed prior to
the Closing, and all other financial reports or statements
submitted to regulatory authorities after the date hereof, to the
extent permitted by law (collectively, the "Subsequent Surety
Financial Statements"). The Subsequent Surety Financial Statements
shall be prepared on a basis consistent with past accounting
practices and shall fairly present the financial condition and
results of operations for the dates and periods presented, and
Surety shall not knowingly include any material assets or omit to
state any material liabilities, absolute or contingent, or other
facts, which inclusion or omission would render such financial
statements misleading in any material respect.
Section 4.09. Merger Agreement. Promptly following the
satisfaction or waiver by Surety of all of the conditions set forth
in Section 6.02, Surety will enter into the Merger Agreement (as
amended, if necessary, to conform to any requirements imposed by
any regulatory authority having jurisdiction over the Merger) and
perform its obligations thereunder.
ARTICLE V
AGREEMENTS OF FBA
Section 5.01. Regulatory Approvals; Organization of
AcquisitionCo. Promptly after the execution of this Agreement and
not more than forty-five (45) days following the date hereof, FBA
shall file with the appropriate banking regulatory authorities all
regulatory applications required in order to consummate the Merger,
including but not limited to the necessary applications
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for the prior approval of the Federal Reserve Board, use its best
efforts to obtain all necessary approvals and authorizations
required to consummate the transactions contemplated by this
Agreement, keep Surety reasonably informed as to the status of such
applications and make available to Surety, upon reasonable request
by Surety from time to time, copies of such applications and any
supplementally filed materials. FBA will cause AcquisitionCo to be
organized pursuant to the laws of the State of California.
Section 5.02. Breaches. FBA shall, in the event it has
knowledge of the occurrence, or impending or threatened occurrence,
of any event or condition which would cause or constitute a breach
(or would have caused or constituted a breach had such event
occurred or been known prior to the date hereof) of any of its
representations or agreements contained or referred to herein, give
prompt written notice thereof to Surety and use its best efforts to
prevent or promptly remedy the same.
Section 5.03. Consummation of Agreement. FBA shall perform
and fulfill all conditions and obligations on its part to be
performed or fulfilled under this Agreement and to cause the Merger
to be consummated as expeditiously as reasonably practicable.
Section 5.04. Indemnification.
(a) For four years after the Effective Time, AcquisitionCo
shall (i) indemnify, defend and hold harmless the present and
former officers, directors, employees and agents of Surety and the
Surety Subsidiaries (each, an "Indemnified Party") against all
losses, expenses, claims, damages or liabilities arising out of
actions or omissions occurring on or prior to the Effective Time
(including, without limitation, the transactions contemplated by
this Agreement) to the full extent then permitted under Corporate
Law and by Surety's Articles of Incorporation as in effect on the
date hereof; and (ii) purchase insurance in the form of an
extension of coverage under Surety's existing insurance policy
Number 751-039179-96 issued by Executive Risk Indemnity Inc.,
insuring the Indemnified Parties against such losses, expenses,
claims, damages or liabilities, for the term of coverage which may
be obtained for a premium not exceeding $30,000.
(b) If after the Effective Time AcquisitionCo or its
successors or assigns (i) shall consolidate with or merge into any
other corporation or entity and shall not be the continuing or
surviving entity of such consolidation or merger, or (ii) shall
transfer all or substantially all of its properties and assets to
any individual, corporation or other entity, then and in each such
case, FBA shall make proper provision for the successors and
assigns of AcquisitionCo to assume any remaining obligations set
forth in this Section 5.04. If AcquisitionCo shall liquidate,
dissolve or otherwise wind up its business, then FBA (and any
successor, if applicable) shall indemnify, defend and hold harmless
each Indemnified Party to the same extent and on the same terms
that AcquisitionCo was so obligated pursuant to this Section 5.04.
Section 5.05. Employee Benefits. FBA shall provide the
benefits described in this Section 5.05 with respect to each person
who remains an employee of Surety or any Surety Subsidiary
following the Closing Date (each a "Continued Employee"). Subject
to FBA's ongoing right to adopt subsequent amendments or
modifications of any plan referred to in this Section 5.05 or to
terminate any such plan, in FBA's sole discretion, each Continued
Employee shall be entitled, as a new employee of a subsidiary of
FBA, to participate in such employee benefit plans, as defined in
Section 3(3) of ERISA, or any non-qualified employee benefit plans
or deferred compensation, stock option, bonus or incentive plans,
or other employee benefit or fringe benefit programs as may be in
effect
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generally for employees of all of FBA's subsidiaries (the "FBA
Plans"), if and as a Continued Employee shall be eligible and,
if required, selected for participation therein under the terms
thereof and otherwise shall not be participating in a similar plan
which is maintained by Surety or a Surety Subsidiary after the
Effective Time. Surety employees shall participate therein on the
same basis as similarly situated employees of other subsidiaries of
FBA. All such participation shall be subject to the terms of such
plans as may be in effect from time to time, and this Section 5.05
is not intended to give Continued Employees any rights or
privileges superior to those of other employees of subsidiaries of
FBA. FBA may terminate or modify all Employee Plans, and FBA's
obligation under this Section 5.05 shall not be deemed or construed
so as to provide duplication of similar benefits but, subject to
that qualification, FBA shall credit each Continued Employee with
his or her term of service with Surety and the Surety Subsidiaries,
for purposes of vesting and any age or period of service
requirements for commencement of participation with respect to any
FBA Plan in which Continued Employees may participate.
Section 5.06. Access to Information. FBA shall permit Surety
reasonable access, in a manner which will avoid undue disruption or
interference with FBA's normal operations, to its properties and
shall disclose and make available to Surety all books, documents,
papers and records relating to its operations, obligations and
liabilities, including, but not limited to, minute books of
directors' and stockholders' meetings, organizational documents,
material contracts and agreements, filings with any regulatory
authority, plans affecting employees, and any other business
activities or prospects in which Surety may have a reasonable and
legitimate interest in furtherance of the transactions contemplated
by this Agreement. Surety will hold any nonpublic information in
confidence in accordance with the provisions of Section 8.01
hereof.
Section 5.07. Registration Statement, Prospectus and Proxy
Statement; Listing Application.
(a) FBA shall as soon as reasonably practicable (i)
prepare and file a registration statement with the SEC relating to
the sale of the FBA Common Stock to be issued in the Merger and the
resale of such stock by persons who are affiliates of Surety (the
"Registration Statement"); (ii) use its best efforts to cause the
Registration Statement to become effective; (iii) take any action
required under any applicable state Blue Sky or securities laws in
connection with the Merger and the issuance of the FBA Common
Stock; and (iv) file and use its best efforts to obtain approval of
an application with the NYSE for the listing of the shares of FBA
Common Stock to be issued in the Merger. The Registration
Statement shall contain a prospectus relating to the FBA Common
Stock and Surety's proxy statement for the Shareholders' Meeting
(the "Surety Proxy Statement").
(b) FBA shall use its best efforts to cause the
shares of FBA Common Stock to be issued in the Merger to be
approved for listing on the New York Stock Exchange, subject to
official notice of issuance.
Section 5.08. Merger Agreement. Promptly following the
satisfaction or waiver by FBA of all of the conditions set forth in
Section 6.01, FBA will cause AcquisitionCo to enter into the Merger
Agreement (as amended, if necessary, to conform to any requirements
imposed by any regulatory authority having jurisdiction over the
Merger), and FBA will cause AcquisitionCo to perform all of its
obligations thereunder.
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Section 5.09. Appointment of New Director of FBA and
AcquisitionCo. Subject to the approval or non-objection of
regulatory authorities having jurisdiction over AcquisitionCo, the
Board of Directors of FBA will take all necessary actions so that,
immediately following the Effective Time, one person designated
prior to Closing by the Board of Directors of Surety will be
appointed or elected to the Board of Directors of FBA and two
persons so designated will be appointed or elected to the Board of
Directors of AcquisitionCo and will remain on such Board of
Directors following the second merger referred to in Section 1.01.
Section 5.10. Notice Obligation. FBA shall promptly notify
Surety of the occurrence of any matter or event known to and
directly involving FBA or the FBA Subsidiaries that is materially
adverse to the business, operations, properties, assets, or
condition (financial or otherwise) of FBA and the FBA Subsidiaries,
taken as a whole.
Section 5.11. Subsequent Financial Statements. As soon as
available after the date hereof, FBA shall deliver to Surety a copy
of each Quarterly Report on Form 10-Q and each Report on Form 8-K
filed by FBA with the SEC and of each Report of Condition and
Income for each quarterly period filed by Sunrise Bank and
BankTEXAS prior to the Closing (collectively, the "Subsequent FBA
Financial Statements"). The Subsequent FBA Financial Statements
shall be prepared on a basis consistent with past accounting
practices and shall fairly present the financial condition and
results of operations for the dates and periods presented, and FBA
shall not knowingly include any material assets or omit to state
any material liabilities, absolute or contingent, or other facts,
which inclusion or omission would render such financial statements
misleading in any material respect.
Section 5.12. Intentional Breach; Violation of Law. FBA
shall not (i) intentionally commit any act or fail to do any act
which will cause a breach of any agreement, contract or commitment
and which will have a material adverse effect on the business,
financial condition or earnings of FBA or an FBA Subsidiary; or
(ii) knowingly violate any law, statute, rule, governmental
regulation or order, which violation might have a material adverse
effect on the business, financial condition, or earnings of FBA or
an FBA Subsidiary.
ARTICLE VI
CONDITIONS PRECEDENT TO THE MERGER
6.01 Conditions to the Obligations of FBA. The obligations
of FBA to effect the Merger and the other transactions contemplated
by this Agreement shall be subject to the satisfaction (or waiver
by FBA) prior to or on the Closing Date of the following
conditions:
(a) the representations and warranties made by Surety in this
Agreement shall be true in all material respects on and as of the
Closing Date with the same effect as though such representations
and warranties had been made or given on and as of the Closing
Date. For the purpose of determining whether this condition has
been satisfied, any limitation in a representation or warranty
relating to Surety's knowledge shall be disregarded, but the
presence or absence of such knowledge shall be taken into account
in the determination of whether damages may be awarded pursuant to
Section 7.09;
(b) Surety shall have performed and complied in all material
respects with all of its obligations and agreements required to be
performed prior to the
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Closing Date. For the purposes of determining whether this
condition has been satisfied, any limitation on the scope of any
obligation or agreement of Surety herein relating to Surety's
knowledge or intention shall be disregarded, but the presence or
absence of such knowledge shall be taken into account in the
determination of whether damages may be awarded pursuant to Section
7.09;
(c) no temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent
jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger shall be in effect, nor shall any
proceeding by any regulatory authority or other person seeking any
of the foregoing be pending. There shall not be any action taken,
or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the Merger which makes the
consummation of the Merger illegal;
(d) the Registration Statement shall have become effective
under the Securities Act; no stop order suspending the
effectiveness thereof shall have been issued and no proceedings for
the issuance of such an order shall have been initiated or
threatened by the SEC; and the Surety Proxy Statement shall have
been mailed to the holders of record of Surety Common Stock, and,
if required, Surety Preferred Stock in accordance with applicable
requirements of Corporate Law;
(e) all necessary approvals, consents and authorizations
required by law for consummation of the Merger and the issuance of
the FBA Common Stock, including the requisite approval of the
shareholders of Surety and all legally required regulatory
approvals, shall have been obtained, and all waiting periods
required by law shall have expired;
(f) FBA shall have received the environmental reports
required by Section 4.05 hereof and shall not have elected pursuant
to Section 7.05 hereof to terminate this Agreement;
(g) FBA shall have received all documents required to be
received from Surety on or prior to the Closing Date, all in form
and substance reasonably satisfactory to FBA;
(h) shareholders owning no more than ten percent (10%) of the
outstanding Surety Common shall have perfected the right to dissent
from the Merger;
(i) the Surety Financial Statements shall not be inaccurate
in any material respect; and
(j) FBA shall have received an opinion of Lewis, Rice &
Fingersh, or another firm selected by FBA to which Surety has no
reasonable objection, substantially to the effect that, on the
basis of facts, representations and assumptions set forth in such
opinion, the Merger will be treated for federal income tax purposes
as a reorganization within the meaning of Section 368 of the Code
and that, accordingly, no gain or loss will be recognized by FBA,
AcquisitionCo or Surety as a result of the Merger.
Section 6.02. Conditions to the Obligations of Surety. The
obligations of Surety to effect the Merger and the other
transactions contemplated by this Agreement shall be subject to the
satisfaction (or waiver by Surety) prior to or on the Closing Date
of the following conditions:
(a) the representations and warranties made by FBA in this
Agreement shall be true in all material respects on and as of the
Closing Date with the same effect as though such representations
and warranties had been made or given on
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the Closing Date. For the purpose of determining whether this
condition has been satisfied, any limitation in a representation or
warranty relating to FBA's knowledge shall be disregarded, but the
presence or absence of such knowledge shall be taken into account
in the determination of whether damages may be awarded pursuant to
Section 7.09;
(b) FBA shall have performed and complied in all material
respects with all of its obligations and agreements hereunder
required to be performed prior to the Closing Date. For the
purposes of determining whether this condition has been satisfied,
any limitation on the scope of any obligation or agreement of FBA
herein relating to FBA's knowledge or intention shall be
disregarded, but the presence or absence of such knowledge shall be
taken into account in the determination of whether damages may be
awarded pursuant to Section 7.09;
(c) no temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent
jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger shall be in effect, nor shall any
proceeding by any bank regulatory authority or other person seeking
any of the foregoing be pending. There shall not be any action
taken, or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the Merger which makes the
consummation of the Merger or the other transactions contemplated
hereby illegal;
(d) the Registration Statement shall have become effective
under the Securities Act; no stop order suspending the
effectiveness thereof shall have been issued and no proceedings for
the issuance of such an order shall have been initiated or
threatened by the SEC; and the Surety Proxy Statement shall have
been mailed to the holders of record of Surety Common Stock, and,
if required, Surety Preferred Stock in accordance with applicable
requirements of Corporate Law;
(e) all necessary approvals, consents and authorizations
required by law for consummation of the Merger, including the
requisite approval of the shareholders of Surety and all legally
required regulatory approvals, shall have been obtained, and all
waiting periods required by law shall have expired;
(f) Surety shall have received all documents required to be
received from FBA on or prior to the Closing Date, all in form and
substance reasonably satisfactory to Surety;
(g) the FBA Financial Statements shall not be inaccurate in
any material respect;
(h) Surety shall have obtained as of the date of this
Agreement a fairness opinion of Surety's financial advisor to the
effect that the Merger is fair to the shareholders of Surety from
a financial point of view, and such fairness opinion shall have
been updated to the same effect by such financial advisor as of the
date of mailing of the Proxy Statement to the shareholders of
Surety; and
(i) Surety shall have received an opinion of Lewis, Rice &
Fingersh, or another firm selected by FBA to which Surety has no
reasonable objection, substantially to the effect that, on the
basis of facts, representations and assumptions set forth in such
opinion, the Merger will be treated for federal income tax purposes
as a reorganization within the meaning of Section 368 of the Code
and that, accordingly, no gain or loss will be recognized by FBA,
AcquisitionCo or Surety as a result of the Merger.
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ARTICLE VII
TERMINATION; DAMAGES
Section 7.01. Mutual Agreement. This Agreement may be
terminated by the mutual written agreement of the parties at any
time prior to the Closing Date, regardless of whether approval of
this Agreement and the Merger by the shareholders of Surety or FBA
shall have been previously obtained.
Section 7.02. Breach of Agreements. In the event that there
is a material breach of any of the representations and warranties
or agreements of FBA or Surety which breach is not cured within
thirty (30) days after notice to cure such breach is given to the
breaching party by the non-breaching party, then the non-breaching
party, regardless of whether approval of this Agreement and the
Merger by the shareholders of Surety of FBA, or both, shall have
been previously obtained, may terminate and cancel this Agreement
by providing written notice of such action to the other parties
hereto.
Section 7.03. Failure of Conditions. In the event that any
of the conditions to the obligations of a party are not satisfied
or waived on or prior to the Closing Date, and if any applicable
cure period provided in Section 7.02 hereof has lapsed, then such
party may, regardless of whether approval of the transactions
contemplated by this Agreement by the shareholders of Surety or
FBA, or both, shall have been previously obtained, terminate and
cancel this Agreement by delivery of written notice of such action
to the other parties.
Section 7.04. Denial of Regulatory Approval. If any
regulatory application filed pursuant to Section 5.08 hereof should
be finally denied or disapproved by a regulatory authority, then
this Agreement thereupon shall be deemed terminated and cancelled;
provided, however, that a request for additional information or
undertaking by FBA, as a condition for approval, shall not be
deemed to be a denial or disapproval so long as FBA diligently
provides the requested information or undertaking. In the event an
application is denied pending an appeal, petition for review or
similar such act on the part of FBA (hereinafter referred to as the
"Appeal") then the application will be deemed denied unless FBA
prepares and timely files an Appeal and continues the appellate
process for purposes of obtaining the necessary approval.
Section 7.05. Environmental Reports. FBA may terminate this
Agreement to the extent provided in Section 4.05 by giving written
notice of such termination to Surety.
Section 7.06. Regulatory Enforcement Matters. In the event
that Surety or any Surety Subsidiary shall become a party or
subject to any new or amended written agreement, memorandum of
understanding, cease and desist order, imposition of civil money
penalties or other regulatory enforcement action or proceeding with
any regulatory authority after the date of this Agreement, then FBA
may terminate this Agreement by giving written notice of such
termination to Surety.
Section 7.07. Unilateral Termination. If the Closing Date
does not occur on or prior to February 28, 1998, then this
Agreement may be terminated by any party by giving written notice
to the other parties.
Section 7.08. Termination Related to Changes in Stock Price.
(a) Subject to FBA's right to offer to adjust the terms of the
conversion of Surety Capital Stock pursuant to Section 1.03, Surety
shall have the right to terminate this Agreement by giving written
notice to FBA, if the FBA Stock Amount would exceed
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the Maximum Stock Amount, but for the provision in Section 1.03(c)
that imposes a limit on the FBA Stock Amount.
(b) Subject to Surety's right to offer to adjust the terms of
the conversion of Surety Capital Stock pursuant to Section 1.03,
FBA shall have the right to terminate this Agreement by giving
written notice to Surety, if the FBA Stock Amount would be less
than the Minimum Stock Amount, but for the provision in Section
1.03(c) that imposes a limit on the FBA Stock Amount.
(c) If either Surety or FBA (the "Terminating Party") gives
a written notice to the other party pursuant to subsection (a) or
subsection (b) hereof, the party receiving such notice (the "Non-
Terminating Party") shall have the right, at any time within five
(5) business days after the date when the notice is given, to offer
to adjust the terms on which the Surety Capital Stock is to be
converted. If the Non-Terminating Party offers to do so and such
offer is accepted by the Terminating Party, then the terms of
conversion shall be so adjusted, the notice given pursuant to
subsection (a) or (b) shall be deemed withdrawn and this Agreement
shall remain in full force and effect.
Section 7.09. Damages and Limitations on Damages. In the
event that either FBA or Surety shall have breached any provision
of this Agreement and the other party shall have properly
terminated this Agreement pursuant to Section 7.02, then the party
breaching this Agreement shall be liable to the non-breaching party
for damages in the amount of all out-of-pocket costs and expenses
incurred by the non-breaching party in connection with this
Agreement and the transactions contemplated hereby, including the
fees and expenses paid by such party to third parties, but the
amount of any recovery for such damages shall be limited to a
maximum of $100,000.
ARTICLE VIII
GENERAL PROVISIONS
8.01 Confidential Information. The parties acknowledge the
confidential and proprietary nature of the "Information" (as herein
defined) which has heretofore been exchanged and which will be
received from each other hereunder and agree to hold and keep the
same confidential. Such Information will include any and all
financial, technical, commercial, marketing, customer or other
information concerning the business, operations and affairs of a
party that may be provided to the others, irrespective of the form
of the communications, by such party's employees or agents. Such
Information shall not include information which is or becomes
generally available to the public other than as a result of a
disclosure by a party or its representatives in violation of this
Agreement. The parties agree that the Information will be used
solely for the purposes contemplated by this Agreement and that
such Information will not be disclosed to any person other than
employees and agents of a party who are directly involved in
implementing the Merger, who shall be informed of the confidential
nature of the Information and directed individually to abide by the
restrictions set forth in this Section 8.01. The Information shall
not be used in any way detrimental to a party, including use
directly or indirectly in the conduct of the other party's business
or any business or enterprise in which such party may have an
interest, now or in the future, and whether or not now in
competition with such other party. Neither Surety nor any person
to whom it discloses Information shall purchase or sell any
security issued by FBA for so long as this Agreement remains in
effect.
Section 8.02. Publicity. FBA and Surety shall cooperate with
each other in the development and distribution of all news releases
and other public disclosures concerning this Agreement and the
Merger. Neither party shall issue
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any news release or make any other public disclosure without the
prior consent of the other party, unless such is required by law
upon the written advice of counsel or is in response to published
newspaper or other mass media reports regarding the transaction
contemplated hereby, in which latter event the parties shall
consult with each other to the extent practicable regarding such
responsive public disclosure.
Section 8.03. Return of Documents. Upon termination of this
Agreement without the Merger becoming effective, each party shall
deliver to the others originals and all copies of all Information
made available to such party and will not retain any copies,
extracts or other reproductions, in whole or in part, of such
Information.
Section 8.04. Notices. Any notice or other communication
shall be in writing and shall be deemed to have been given or made
on the date of delivery, in the case of hand delivery, or three (3)
business days after deposit in the United States Registered Mail,
postage prepaid, or upon receipt if transmitted by facsimile
telecopy or any other means, addressed (in any case) as follows:
(a) if to FBA: First Banks America, Inc. c/o First Banks, Inc.
11901 Olive Boulevard
Creve Coeur, Missouri 63141
Attention: Mr. Allen H. Blake
Facsimile: (314) 567-3490
with a copy to: John S. Daniels
Attorney at Law
8117 Preston Road, Suite 800
Dallas, Texas 75225
Facsimile: (214) 692-0508
(b) if to Surety: Surety Bank
116 Springstowne Center
Vallejo, California 94591
Attention: John A. DiMichele
Facsimile: (707) 554-9876
with a copy to: Kerry C. Smith, Esquire
Hovis, Smith, Stewart, Lipscomb & Cross, LLP
100 Pine Street, 21st Floor
San Francisco, California 94111
Facsimile: (415) 421-0320
or to such other address as any party may from time to time
designate by notice to the others.
Section 8.05. Nonsurvival of Representations, Warranties and
Agreements. Except for the agreements set forth in Sections 5.04,
5.05 and 5.09, no representation, warranty or agreement contained
herein shall survive the Closing. In the event that this Agreement
is terminated prior to Closing, the representations, warranties and
agreements set forth herein shall survive such termination.
Section 8.06. Costs and Expenses. Except as may be otherwise
provided herein, each party shall pay its own costs and expenses
incurred in connection with this Agreement and the matters
contemplated hereby, including without limitation all fees and
expenses of attorneys, accountants, brokers, financial advisors and
other professionals.
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Section 8.07. Entire Agreement. This Agreement, together
with the Merger Agreement and the Stock Option Agreement,
constitutes the entire agreement among the parties and supersedes
and cancels any and all prior discussions, negotiations,
undertakings, agreements in principle and other agreements among
the parties relating to the subject matter hereof.
Section 8.08. Headings and Captions. The captions of
Articles and Sections hereof are for convenience only and shall not
control or affect the meaning or construction of any of the
provisions of this Agreement.
Section 8.09. Waiver, Amendment or Modification. The
conditions of this Agreement which may be waived may only be waived
by written notice delivered to the other parties. The failure of
any party at any time or times to require performance of any
provision hereof shall in no manner affect the right at a later
time to enforce the same. This Agreement may not be amended or
modified except by a written document duly executed by the parties
hereto.
Section 8.10. Rules of Construction. Unless the context
otherwise requires: (a) a term has the meaning assigned to it; (b)
an accounting term not otherwise defined has the meaning assigned
to it in accordance with generally accepted accounting principles;
(c) "or" is not exclusive; and (d) words in the singular may
include the plural and in the plural include the singular.
Section 8.11. Counterparts. This Agreement may be executed
in multiple counterparts, each of which shall be deemed an original
and all of which shall be deemed one and the same instrument.
Section 8.12. Successors and Assigns. None of the parties
may assign any of its rights or obligations hereunder without the
prior written consent of the other parties. Subject to the
preceding sentence, this Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective
successors and assigns. There shall be no third party
beneficiaries hereof.
Section 8.13. Governing Law. This Agreement shall be
governed by the laws of the State of California, the general
corporate laws of the State of Delaware applicable to FBA and any
applicable federal laws and regulations.
IN WITNESS WHEREOF, FBA and Surety have caused this Agreement
to be signed by their respective officers thereunto duly
authorized, all as of the date first written above.
FIRST BANKS AMERICA, INC.
By: /s/ James F. Dierberg
-----------------------------------------
Chairman, Chief Executive Officer
and President
SURETY BANK
By: /s/ John A. DiMichele
-----------------------------------------
President and Chief Executive Officer
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EXHIBIT A
AGREEMENT OF MERGER
This Agreement of Merger is entered into between Surety Bank,
a banking association chartered by the State of California
("Merging Corporation"), and AcquisitionCo, Inc. ("Surviving
Corporation"), an interim bank chartered by the State of California
solely for the purpose of entering into this Agreement of Merger
and consummating the transaction contemplated hereby.
1. Merging Corporation shall be merged into Surviving
Corporation.
2. The outstanding shares of Merging Corporation shall be
converted into the right to receive the consideration provided for
in that certain Agreement and Plan of Reorganization dated July ---,
1997 by and between First Banks America, Inc., a Delaware
corporation which is the parent company of Surviving Corporation,
and Merging Corporation.
3. The outstanding shares of Surviving Corporation shall
remain outstanding and are not affected by the merger.
4. Merging Corporation shall from time to time, as and
when requested by Surviving Corporation, execute and deliver all
such documents and instruments and take all such action as is
necessary or desirable to evidence or carry out the merger.
5. The effect of the merger and the effective date of the
merger are as prescribed by law.
In Witness Whereof, the parties have executed this Agreement
as of -----------------, 1997.
SURETY BANK
----------------------------------
John A. DiMichele
President
ACQUISITIONCO, INC.
By:
-------------------------------
Its:
------------------------------
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APPENDIX A-2
STOCK OPTION AGREEMENT
This Stock Option Agreement, dated as of July 28, 1997 (the
"Agreement") is by and between First Banks America, Inc., a
Delaware corporation ("FBA"), and Surety Bank, a California banking
association ("Surety").
Whereas, FBA and Surety have entered into an Agreement and
Plan of Reorganization of even date herewith (the "Reorganization
Agreement") providing for, among other things, the merger of Surety
into a wholly-owned subsidiary of FBA, which Reorganization
Agreement is being executed simultaneously with this Agreement; and
Whereas, as an inducement to FBA to enter into the
Reorganization Agreement and in consideration therefor, Surety has
agreed to issue to FBA the option described herein, entitling FBA
to purchase authorized but unissued shares of common stock, par
value $1.00 per share (the "Shares"), of Surety ("Surety Common")
in the circumstances and subject to the terms and conditions set
forth herein;
Now, therefore, in consideration of the execution of the
Reorganization Agreement and of the agreements and covenants
contained herein, FBA and Surety agree as follows:
1. Grant of Option. Subject to the terms and conditions set
forth herein, Surety hereby grants and issues to FBA an option (the
"Option") to purchase up to 19.99% of the shares of Surety Common
outstanding from time to time, at a purchase price of $28.00 per
share (the "Option Price"), subject to adjustment as set forth
herein. Surety agrees that it will at all times maintain and
reserve a sufficient number of authorized but unissued shares of
Surety Common, after taking into account all other options,
warrants, convertible securities and other rights to purchase
Surety Common, and that all Shares issued upon exercise of the
Option shall be duly authorized, validly issued, fully paid and,
except as otherwise required by the California Financial Code, non-
assessable. Surety will not take any action that would have the
effect of preventing or delaying it from delivering to FBA, upon
exercise of the Option, the Shares then deliverable or from
otherwise performing its obligations under this Agreement.
2. Conditions to Exercise. Subject to the receipt of any
required notice to or approval of any banking regulatory agency
then having jurisdiction over Surety and provided that FBA is not
then in material breach of the Reorganization Agreement, FBA may
exercise the Option, in whole or in part, upon the occurrence of
one or more of the following events ("Triggering Events") prior to
the termination of this Agreement:
(i) either (A) the public disclosure by any person or
group of persons, other than FBA or any affiliate of FBA,
of an offer or proposal to acquire 25% or more of the
outstanding Surety Common or to acquire, merge or
consolidate with Surety or to purchase all or
substantially all of Surety's assets (unless such offer
or proposal has been publicly withdrawn ten or more days
prior to the Shareholders' Meeting), or (B) any person
shall have filed a notice or application to acquire
Surety Common or control of Surety, and such notice or
application shall have been disclosed publicly or to the
shareholders of Surety prior to the date of the
Shareholders' Meeting, and any of the following shall
occur:
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(I) the failure of the shareholders of Surety
to approve the Merger;
(II) the failure of Surety to hold the
Shareholders' Meeting in compliance with the
Reorganization Agreement; or
(III) the failure by Surety's Board of
Directors to make the recommendation that the
shareholders of Surety approve the Merger, or
the withdrawal or modification of such
recommendation in a manner adverse to FBA;
(ii) any person or group of persons acting in concert
(other than FBA or any affiliate of FBA) shall acquire or
have the contractual right to acquire or vote 25% or more
of the outstanding Surety Common;
(iii) the expiration of the fifth day preceding the
scheduled expiration date of a tender or exchange offer
by any person or group of persons (other than FBA or any
affiliate of FBA) to purchase or acquire securities of
Surety if (A) upon consummation of such offer, such
person or group of persons would own, control or have the
contractual right to acquire or vote 25% or more of the
outstanding Surety Common (before giving effect to the
exercise of the Option), (B) such person or group has
received any required regulatory approval to consummate
such purchase and (C) such offer shall not be subject to
any financing condition, or any applicable financing
condition shall have been satisfied or waived;
(iv) upon Surety's entering into any agreement or
understanding, without the prior written approval of FBA,
with a person or group of persons contemplating such
person's or group's acquiring, merging or consolidating
with Surety or purchasing all or substantially all of
Surety's assets. As used in this Section 2, the terms
"person" and "group of persons" have the meanings set
forth in Section 13(d) of the Securities Exchange Act of
1934; or
(v) the willful breach by Surety of any provision of the
Reorganization Agreement, in anticipation of engaging in
a transaction of the type referred to in subsections
(ii), (iii) or (iv) hereof, such that FBA would have the
right to terminate the Reorganization Agreement pursuant
to Section 7.02 thereof.
Surety shall promptly notify FBA in writing upon becoming
aware of the occurrence of any Triggering Event, but the giving of
such notice shall not be a condition to the right of FBA or any
holder to exercise the Option.
3. Exercise of Option. In the event FBA wishes to exercise
the Option, in whole or in part, FBA shall deliver to Surety a
written notice of exercise, specifying the number of Shares as to
which the Option is thereby exercised, the event or events that
have occurred which entitle FBA to exercise the Option and a place
and date not less than three or more than twenty business days
after the date of such notice for the closing of such purchase (the
"Closing"); provided, however, that if prior notification to or
approval by any banking regulatory agency then having jurisdiction
over Surety is required in connection with such exercise, FBA shall
promptly file the required notice or application for approval and
shall expeditiously process the same, and the period of time that
otherwise
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would run pursuant to this sentence shall run instead from the date on
which any such required notification period has expired or been
terminated or such approval has been obtained and any applicable
waiting period shall have expired; provided further, however, that in
no event shall the date of any Closing be more than fifteen months
after the date on which the related notice is given, and if the
Closing shall not have occurred within such period because of a
failure to obtain any required regulatory approval, that portion of
the Option as to which such approval was required shall be deemed to
have expired.
At the Closing, FBA shall deliver to Surety (i) the aggregate
purchase price for the Shares as to which the Option is then
exercised, payable in cash or by bank cashier's check or wire
transfer in immediately available funds to a bank account
designated by Surety, and (ii) this Agreement. Surety shall
deliver to FBA (i) a certificate or certificates, in denominations
specified by FBA, representing the number of Shares purchased by
FBA, and (ii) if the Option is exercised in part, a new option
agreement substantially in the form hereof for any Shares for which
the Option has not been exercised; and each party shall execute and
deliver to the other party a receipt reflecting the consideration
received.
4. Adjustments. In the event of any change in the type of
outstanding shares of Surety Common by reason of any stock dividend,
stock split, reverse stock split, merger, recapitalization,
combination, conversion, exchange of shares or other similar
transaction, the number and kind of the Shares shall be adjusted
appropriately. In the event that any additional shares of Surety
Common are issued after the date of this Agreement (other than
pursuant to an event described in the preceding sentence), the
number of Shares subject to the Option shall be adjusted so that
the number of shares for which the Option is exercisable shall
equal 19.99% of the outstanding shares of Surety Common then issued
and outstanding (without giving effect to any Shares subject to, or
previously issued pursuant to, the Option).
5. "Piggyback Rights" in Public Offering. On or after the
occurrence of an event permitting exercise of the Option, each time
Surety or any successor hereof (including any holding company
organized to acquire control of Surety) shall determine to proceed
with the preparation and filing of an offering circular or
registration statement in connection with the proposed public
offering for cash of any of its securities (any such offering
circular or registration statement being referred to herein as a
"Registration Statement," whether at the time and under the
circumstances of such an offering a registration statement is
required to be prepared and filed with the Securities and Exchange
Commission), Surety will give written notice of its determination
to FBA. Upon the written request of FBA given within ten business
days after its receipt of any such notice, Surety will cause to be
included in the offering to which the request relates all Shares
which FBA shall request; provided, however, that nothing herein
shall prevent Surety from abandoning or delaying any offering in
the exercise of reasonable business judgment. If any offering
pursuant to this Section shall be underwritten in whole or in part,
Surety may require that Shares requested for inclusion pursuant to
this Section be included in the underwriting on the same terms and
conditions as the securities otherwise being sold through the
underwriters. In the event that the Shares requested for inclusion
pursuant to this Section would constitute more than 20% of the
total number of shares to be included in a proposed underwritten
public offering, and if in the good faith judgment of the
underwriter of such public offering the inclusion of all of such
Shares would interfere with the successful marketing of shares of
stock offered by Surety, the number of Shares otherwise to be
included in the underwritten public offering may be reduced;
provided, however, that after any such reduction the Shares to be
included in any offering for the
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account of FBA shall constitute at least 20% of the total number of
shares included in the offering.
6. Public Offering Covenants. If and whenever Surety is
required by the provisions of Section 5 hereof to effect a public
offering of any Shares on behalf of FBA, Surety will:
(a) prepare (and, if legally required, promptly file with the
SEC) a Registration Statement with respect to such securities, and
use its best efforts to cause such Registration Statement to become
and remain effective for such period as may be reasonably necessary
to effect the sale of such securities, not to exceed six months;
(b) prepare (and, if legally required, promptly file with the
SEC) such amendments to the Registration Statement and supplements
thereto as may be necessary to keep such Registration Statement
effective for such period as may be reasonably necessary to effect
the sale of such securities, not to exceed six months;
(c) furnish to FBA and to any underwriters of the securities
being registered such reasonable number of copies of the offering
circular or prospectus (preliminary or final, as appropriate)
contained in such Registration Statement and such other documents
as FBA or such underwriters may reasonably request in order to
facilitate the public offering of such securities;
(d) use its best efforts to register or qualify the
securities covered by such registration statement if legally
required under state securities or blue sky laws of any
jurisdictions as FBA or the underwriter may reasonably request;
provided, however, that Surety shall not be required by virtue
hereof to submit to general jurisdiction in any state;
(e) prepare (and, if legally required, promptly file with the
SEC), upon the request of FBA, any amendments or supplements to the
Registration Statement which, in the opinion of counsel for FBA
(concurred in by counsel for Surety), is legally required under
applicable securities laws in connection with the distribution of
the Shares by FBA;
(f) prepare (and, if legally required, promptly file with the
SEC) such amendment or supplement to the Registration Statement as
may be necessary to correct any statements or omissions if, at the
time when such prospectus is required to be delivered under
applicable law, any event shall have occurred as the result of
which such prospectus as then in effect would include an untrue
statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the
circumstances in which they were made, not misleading;
(g) advise FBA, promptly after it shall receive notice or
obtain knowledge thereof, of the issuance of any stop order by the
SEC or other order or ruling by any regulatory authority asserting
jurisdiction with respect to such offering, suspending the
effectiveness of such Registration Statement or the initiation or
threatening of any proceeding for that purpose and promptly use its
best efforts to prevent the issuance of any stop order or to obtain
its withdrawal if such stop order should be issued; and
(h) at the request of FBA, furnish on the date or dates
provided for in any underwriting agreement: (i) an opinion of
counsel representing Surety for the purposes of such offering,
addressed to the underwriters and to FBA, covering such matters as
such underwriters and FBA may reasonably request; and (ii) a
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<PAGE> 191
letter or letters from the independent certified public accountants of
Surety, addressed to the underwriters and to FBA covering such
matters as such underwriters of FBA may reasonably request, in
which letters such accountants shall state (without limiting the
generality of the foregoing) that they are independent certified
public accountants and that, in the opinion of such accountants,
the financial statements and other financial data of Surety
included in the Registration Statement, as amended or supplemented,
comply in all material respects with all applicable requirements.
7. Public Offering Expenses. With respect to any offering
in which Shares are to be sold by FBA pursuant to Section 5 hereof,
Surety shall bear the following fees, costs, and expenses: all
registration and filing fees, printing expenses, fees and
disbursements of counsel and accountants for Surety, fees and
disbursements of counsel for the underwriter or underwriters of
such securities (if Surety and/or FBA are required to bear such
fees and disbursements), and all legal fees and disbursements and
other expenses of complying with state securities or blue sky laws
of any jurisdictions in which the securities are to be offered.
Fees and disbursements of counsel and accountants for FBA,
underwriting discounts and commissions and transfer taxes
exclusively for FBA and any other expenses incurred by FBA not
expressly included above shall be borne by FBA.
8. Public Offering Indemnities. In the event of any
offering of Shares by FBA pursuant to Section 5 hereof:
(i) Surety will indemnify and hold harmless FBA, any
underwriter for FBA and each person, if any, who controls FBA or
such underwriter from and against any and all loss, damage,
liability, cost and expenses to which FBA or any such underwriter
or controlling person may become subject under the Securities Act
of 1933 (the "Securities Act") or otherwise, insofar as such
losses, damages, liabilities, costs or expenses are caused by any
untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement or arise out of or are
based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they
are made, not misleading; provided, however, that Surety will not
be liable in any such case to the extent that any such loss,
damage, liability, cost or expense arises out of or is based upon
an untrue statement or alleged untrue statement or omission or
alleged omission so made in conformity with information furnished
by FBA, such underwriter or such controlling persons in writing
specifically for use therein;
(ii) FBA will indemnify and hold harmless Surety, any
underwriter, and each person, if any, who controls Surety or such
underwriter from and against any and all loss, damage, liability,
cost or expense to which Surety or any such controlling person
and/or any underwriter may become subject under the Securities Act
or otherwise, insofar as such losses, damages, liabilities, costs
or expenses are caused by any untrue or alleged untrue statement of
any material fact contained in the Registration Statement, as
amended or supplemented, or arise out of or are based upon the
omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not
misleading, in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission
or alleged omission was so made in strict conformity with written
information furnished by FBA specifically for use in the
preparation thereof;
(iii) promptly after receipt by an indemnified party
pursuant to the provisions of subsection (i) or (ii) of this
Section 8 of notice of the
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commencement of any action involving the subject matter of the
foregoing indemnity provisions, such indemnified party will, if a
claim thereof is to be made against the indemnifying party pursuant to
the provisions of said paragraph (i) or (ii), promptly notify the
indemnifying party of the commencement thereof, but the omission to do
so will not relieve the indemnifying party from any liability which it
may have to any indemnified party (except to the extent that such
omission materially prejudices the rights of the indemnifying party).
In case such action is brought against any indemnified party and it
notifies the indemnifying party of the commencement thereof, the
indemnifying party shall have the right to participate in, and, to
the extent that it may wish, jointly with any other indemnifying
party, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; provided, however, if the
defendants in any action include both the indemnified part and the
indemnifying party and there is a conflict of interest which would
prevent counsel for the indemnifying party from also representing
the indemnified party, the indemnified party or parties shall have
the right to select separate counsel to participate in the defense
of such action on its behalf. After notice from the indemnifying
party to such indemnified party of its election so to assume the
defense, the indemnifying party will not be liable to such
indemnified party pursuant to the provisions of said subsection (i)
or (ii) for any legal or other expense subsequently incurred by
such indemnified party in connection with the defense thereof other
than reasonable costs of investigation, unless (i) the indemnified
party shall have employed counsel in accordance with the provision
of the preceding sentence; (ii) the indemnifying party shall not
have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after the
notice of the commencement of the action; or (iii) the
indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party; and
(iv) if recovery is not available under the foregoing
indemnification provisions, the parties entitled to indemnification
by the terms thereof shall be entitled to contribution to
liabilities and expenses. In determining the amount of
contribution to which the respective parties are entitled, there
shall be considered the parties' relative knowledge and access to
information concerning the matter with respect to which the claim
was asserted, the opportunity to correct and prevent any statement
or omission, and any other equitable considerations appropriate
under the circumstances.
9. Termination. The Option, to the extent not previously
exercised, shall terminate upon the earliest to occur of
(i) immediately before the Effective Time;
(ii) the expiration of three years after the Option
first becomes exercisable in accordance with Section 2
hereof; and
(iii) termination of the Reorganization Agreement in
accordance with its terms prior to the occurrence of one
or more Triggering Events.
10. Fractional Shares. No fractional shares of Surety Common
shall be issued upon exercise of the Option, but Surety shall
instead remit to FBA in lieu thereof, in cash or by certified or
official bank check, any portion of the total payment tendered by
FBA pursuant to Section 3 hereof representing payment for a
fractional share.
11. Investment Representation. FBA represents and warrants
to Surety that the Option is being acquired by FBA for its own
account and not with a view
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to the public distribution thereof, and that neither the Option nor
the Shares will be transferred except in one or more transactions
conducted in compliance with any applicable laws regulating the offer
and sale thereof.
12. Specific Performance. Without limiting the availability
of any other remedies, FBA and Surety specifically acknowledge
that, in the event of a breach of this Agreement, the non-breaching
party would not have an adequate remedy at law, and the parties
intend that a non-breaching party shall be entitled to specific
performance of the obligations of the other party pursuant to this
Agreement.
13. Substitute Option.(a) In the event that, prior to the
termination of this Agreement, Surety shall enter into an agreement
(i) to consolidate with or merge into any person, other than FBA or
an affiliate of FBA, and shall not be the continuing or surviving
entity of such merger or consolidation, (ii) to permit any person,
other than FBA or an affiliate of FBA, to merge into Surety and
Surety shall be the continuing or surviving entity but, in
connection with such merger or consolidation, the then outstanding
shares of Surety Common shall be changed into or exchanged for
stock or other securities of Surety or any other person or cash or
any other property or then outstanding shares of Surety Common
shall after such merger represent less than 50% of the outstanding
shares and share equivalents of the merged company, or (iii) to
sell or otherwise transfer all or substantially all of its assets
to any person, other than FBA or an affiliate of FBA, then, in each
such case, the agreement governing such transaction shall make
proper provision so that the Option shall, upon the consummation of
any such transaction and upon the terms and conditions set forth
herein, be converted into, or exchanged for, an option, at the
election of FBA, of either (I) the Acquiring Corporation (as
defined below), (II) any person that controls the Acquiring
Corporation, or (III) in the case of a merger described in clause
(ii), Surety.
(b) For the purposes hereof, "Acquiring Corporation" means
(i) the continuing or surviving entity of a consolidation or merger
with Surety (if other than Surety), (ii) Surety in a merger in
which Surety is the continuing or surviving entity, and (iii) the
transferee of all or substantially all of Surety's assets. The
provisions of the remainder of this Agreement shall apply with
appropriate adjustments to any securities for which the Option
becomes exercisable pursuant to this Section 10.
11. (a) Validity. If any provision of this Agreement is
held to be illegal, invalid or unenforceable, such provision shall
be fully severable, this Agreement shall be construed and enforced
as if such illegal, invalid or unenforceable provision never
comprised a part hereof, and the remaining provisions shall remain
in full force and effect and shall not be affected by the illegal,
invalid or unenforceable provision or by its severance.
Furthermore, in lieu of such illegal, invalid or unenforceable
provision, there shall be added as part of this Agreement a
provision as similar in its terms to such illegal, invalid or
unenforceable provision as may be legal, valid and enforceable.
(b) Entire Agreement. This Agreement, together with the
Reorganization Agreement and the Merger Agreement, constitutes the
entire agreement between the parties and supersedes and cancels any
and all prior discussions, negotiations, undertakings, agreements
in principle and other agreements among the parties relating to the
subject matter hereof.
(c) Notices. Any notice or other communication shall be in
writing and shall be deemed to have been given or made on the date
of delivery, in the case of hand delivery, or three (3) business
days after deposit in the United States
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Registered Mail, postage prepaid, or upon receipt if transmitted by
facsimile telecopy or any other means, addressed (in any case) as
follows:
If to FBA: First Banks America, Inc. c/o First Banks, Inc.
11901 Olive Boulevard
Creve Coeur, Missouri 63141
Attention: Mr. Allen H. Blake
Facsimile: (314) 567-3490
with a copy to: John S. Daniels
Attorney at Law
8117 Preston Road, Suite 800
Dallas, Texas 75225
Facsimile: (214) 692-0508
if to Surety: Surety Bank
116 Springstowne Center
Vallejo, California 94591
Attention: John A. DiMichele
Facsimile: (707) 554-9876
with a copy to: Kerry C. Smith, Esquire
Hovis, Smith, Stewart, Lipscomb & Cross, LLP
100 Pine Street, 21st Floor
San Francisco, California 94111
Facsimile: (415) 421-0320
or to such other address as any party may from time to time
designate by notice to the others.
(d) Governing Law. This Agreement shall be governed by the
laws of the State of Texas and any applicable federal laws and
regulations.
(e) Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of
which shall be deemed one and the same instrument.
(f) Headings and Captions. The captions of Articles and
Sections hereof are for convenience only and shall not control or
affect the meaning or construction of any of the provisions of this
Agreement.
(g) Assignment. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any
of the parties hereto without the prior written consent of the
other party, except that FBA may assign its rights hereunder to any
affiliate, and FBA may assign its rights in whole or in part after
the occurrence of a Triggering Event; provided, however, that any
such assignment shall be made in conformity with any statutes,
rules and regulations governing a change in control of Surety, if
applicable. Upon any permitted transfer of the Option or a portion
thereof, FBA shall give prompt written notice thereof to Surety,
and references to FBA in this Agreement shall thereafter be deemed
to refer to the holder or holder of the Option.
(h) Definitions. Capitalized terms which are used but not
defined herein shall have the meanings given to such terms in the
Reorganization Agreement.
46
<PAGE> 195
(i) No Rights as Shareholder. FBA shall not have any voting
or other rights with respect to the Shares subject to the Option
except to the extent that FBA has exercised the Option, and then
only to the extent of the Shares as to which the Option has been
exercised.
In Witness Whereof, the parties have caused this instrument to
be executed by their duly authorized officers as of the day first
above written.
FIRST BANKS AMERICA, INC.
By: /s/ James F. Dierberg
-----------------------------------
Chairman of the Board, Chief
Executive Officer and President
SURETY BANK
By: /s/ John A. DiMichele
-----------------------------------
President and Chief
Executive Officer
47
<PAGE> 196
APPENDIX B
[LETTERHEAD OF BAXTER FENTRISS AND COMPANY]
July 28, 1997
The Board of Directors
Surety Bank
116 Springstowne Center
Vallejo, CA 94591-5566
Dear Members of the Board:
Surety Bank, Vallejo, California ("Surety") and First Banks America, Inc.,
Houston, Texas, ("FBA") have entered into an agreement providing for the
acquisition of Surety by FBA ("Acquisition"). The terms of the Acquisition
are set forth in the Agreement and Plan of Reorganization dated July 28, 1997.
The terms of the Acquisition provide that, with the possible exception of
those shares as to which dissenter's rights may be perfected, each common
share of Surety will be converted into the right to receive either $36.12 per
share in cash or $38.12 per share in market value of FBA common stock
("Consideration"), subject to certain adjustments. The terms of the
Acquisition also provide that each preferred share of Surety (convertible into
0.8507 shares of common stock per the terms of the Surety preferred stock
issue) will be converted on a pro rata basis, subject to certain adjustments.
You have asked our opinion as to whether the proposed transaction, pursuant to
the terms of the Acquisition, is fair to the respective common and preferred
shareholders of Surety from a financial point of view.
In rendering our opinion, we have evaluated the consolidated financial
statements of Surety and FBA available to us from published sources. In
addition, we have, among other things: (a) to the extent deemed relevant,
analyzed selected public information of certain other financial institutions
and compared Surety and FBA from a financial point of view to the other
financial institutions; (b) considered the historical market price of the
common stock of Surety and FBA; (c) compared the terms of the Acquisition and
the terms of other comparable transactions to the extent information
concerning such acquisitions was publicly available; (d) reviewed the
Agreement and Plan of Reorganization and related documents; and (e) made such
other analyses and examinations as we deemed necessary. We also discussed
with the various senior officers of Surety and FBA the foregoing as well as
other matters that may be relevant.
We have not independently verified the financial and other information
concerning Surety, or FBA, or other data which we have considered in our
review. We have assumed the accuracy and completeness of all such
information; however, we have no reason to believe that such
<PAGE> 197
information is not accurate and complete. Our conclusion is rendered on the
basis of securities market conditions prevailing as of the date hereof and on
the conditions and prospects, financial and otherwise, of Surety and FBA as they
exist and are known to us as of June 30, 1997.
We have acted as financial advisor to Surety in connection with the
Acquisition and will receive from Surety a fee for our services, a significant
portion of which is contingent upon the consummation of the Acquisition.
It is understood that this opinion may be included in its entirety in any
communication by Surety or the Board of Directors to the stockholders of
Surety. The opinion may not, however, be summarized, excerpted from or
otherwise publicly referred to without our prior written consent.
Based on the foregoing, and subject to the limitations described above, we are
of the opinion that the terms of the Acquisition are fair to the common and
preferred shareholders of Surety from a financial point of view.
Sincerely,
/s/ Baxter Fentriss and Company
- -------------------------------
Baxter Fentriss and Company
<PAGE> 198
APPENDIX C
SECTIONS 1300-1312 OF THE CALIFORNIA GENERAL CORPORATION LAW
Section 1300. (a) If the approval of the outstanding shares (Section 152)
of a corporation is required for a reorganization under subdivisions (a) and
(b) or subdivision (e) or (f) of Section 1201, each shareholder of the
corporation entitled to vote on the transaction and each shareholder of a
subsidiary corporation in a short-form merger may, by complying with this
chapter, require the corporation in which the shareholder holds shares to
purchase for cash at their fair market value the shares owned by the
shareholder which are dissenting shares as defined in subdivision (b). The
fair market value shall be determined as of the day before the first
announcement of the terms of the proposed reorganization or short-form
merger, excluding any appreciation or depreciation in consequence of the
proposed action, but adjusted for any stock split, reverse stock split, or
share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by the
Commissioner of Corporations under subdivision (o) of Section 25100 or (B)
listed on the list of OTC margin stocks issued by the Board of Governors of
the Federal Reserve System, and the notice of meeting of shareholders to act
upon the reorganization summarizes this section and Sections 1301, 1302, 1303
and 1304; provided, however, that this provision does not apply to any shares
with respect to which there exists any restriction on transfer imposed by the
corporation or by any law or regulation; and provided, further, that this
provision does not apply to any class of shares described in subparagraph (A)
or (B) if demands for payment are filed with respect to 5 percent or more of
the outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted in
favor of the reorganization or, (B) if described in subparagraph (A) or (B)
of paragraph (1) (without regard to the provisos in that paragraph), were
voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case where
the approval required by Section 1201 is sought by written consent rather
than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
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(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
Section 1301. (a) If, in the case of a reorganization, any shareholders of
a corporation have a right under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation
to purchase their shares for cash, such corporation shall mail to each such
shareholder a notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such approval,
accompanied by a copy of Sections 1300, 1302, 1303, 1304 and this section, a
statement of the price determined by the corporation to represent the fair
market value of the dissenting shares, and a brief description of the
procedure to be followed if the shareholder desires to exercise the
shareholder's right under such sections. The statement of price constitutes
an offer by the corporation to purchase at the price stated any dissenting
shares as defined in subdivision (b) of Section 1300, unless they lose their
status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to
purchase the shareholder's shares for cash under Section 1300, subject to
compliance with paragraphs (3) and (4) of subdivision (b) thereof, and who
desires the corporation to purchase such shares shall make written demand
upon the corporation for the purchase of such shares and payment to the
shareholder in cash of their fair market value. The demand is not effective
for any purpose unless it is received by the corporation or any transfer
agent thereof (1) in the case of shares described in clause (i) or (ii) of
paragraph (1) of subdivision (b) of Section 1300 (without regard to the
provisos in that paragraph), not later than the date of the shareholders'
meeting to vote upon the reorganization, or (2) in any other case within 30
days after the date on which the notice of the approval by the outstanding
shares pursuant to subdivision (a) or the notice pursuant to subdivision (i)
of Section 1110 was mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be
the fair market value of those shares as of the day before the announcement
of the proposed reorganization or short-form merger. The statement of fair
market value constitutes an offer by the shareholder to sell the shares at
such price.
Section 1302. Within 30 days after the date on which notice of the
approval by the outstanding shares or the notice pursuant to subdivision (i)
of Section 1110 was mailed to the shareholder, the shareholder shall submit
to the corporation at its principal office or at the office of any transfer
agent thereof, (a) if the shares are certificated securities, the
shareholder's certificates representing any shares which the shareholder
demands that the corporation purchase, to be stamped or endorsed with a
statement that the shares are dissenting shares or to be exchanged for
certificates of appropriate denomination so stamped or endorsed or (b) if the
shares are uncertificated securities, written notice of the number of shares
which the shareholder demands that the corporation purchase. Upon subsequent
transfers of the dissenting shares on the books of the corporation, the new
certificates, initial transaction statement, and other written statements
C-2
<PAGE> 200
issued therefor shall bear a like statement, together with the name of the
original dissenting holder of the shares.
Section 1303. (a) If the corporation and the shareholder agree that the
shares are dissenting shares and agree upon the price of the shares, the
dissenting shareholder is entitled to the agreed price with interest thereon
at the legal rate on judgments from the date of the agreement. Any
agreements fixing the fair market value of any dissenting shares as between
the corporation and the holders thereof shall be filed with the secretary of
the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair
market value of dissenting shares shall be made within 30 days after the
amount thereof has been agreed or within 30 days after any statutory or
contractual conditions to the reorganization are satisfied, whichever is
later, and in the case of certificated securities, subject to surrender of
the certificates therefor, unless provided otherwise by agreement.
Section 1304. (a) If the corporation denies that the shares are dissenting
shares, or the corporation and the shareholder fail to agree upon the fair
market value of the shares, then the shareholder demanding purchase of such
shares as dissenting shares or any interested corporation, within six months
after the date on which notice of the approval by the outstanding shares
(Section 152) or notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, but not thereafter, may file a complaint in the
superior court of the proper county praying the court to determine whether
the shares are dissenting shares or the fair market value of the dissenting
shares or both or may intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be
joined as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues.
If the status of the shares as dissenting shares is in issue, the court shall
first determine that issue. If the fair market value of the dissenting
shares is in issue, the court shall determine, or shall appoint one or more
impartial appraisers to determine, the fair market value of the shares.
Section 1305. (a) If the court appoints an appraiser or appraisers, they
shall proceed forthwith to determine the fair market value per share.
Within the time fixed by the court, the appraisers, or a majority of them,
shall make and file a report in the office of the clerk of the court.
Thereupon, on the motion of any party, the report shall be submitted to the
court and considered on such evidence as the court considers relevant. If
the court finds the report reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such
further time as may be allowed by the court or the report is not confirmed by
the court, the court shall determine the fair market value of the dissenting
shares.
C-3
<PAGE> 201
(c) Subject to the provisions of Section 1306, judgment shall be
rendered against the corporation for payment of an amount equal to the fair
market value of each dissenting share multiplied by the number of dissenting
shares which any dissenting shareholder who is a party, or who has
intervened, is entitled to require the corporation to purchase, with interest
thereon at the legal rate from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for
the shares described in the judgment. Any party may appeal from the
judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and
interest at the legal rate on judgments from the date of compliance with
Sections 1300, 1301 and 1302 if the value awarded by the court for the shares
is more than 125 percent of the price offered by the corporation under
subdivision (a) of Section 1301).
Section 1306. To the extent that the provisions of Chapter 5 prevent the
payment to any holders of dissenting shares of their fair market value, they
shall become creditors of the corporation for the amount thereof together
with interest at the legal rate on judgments until the date of payment, but
subordinate to all other creditors in any liquidation proceeding, such debt
to be payable when permissible under the provisions of Chapter 5.
Section 1307. Cash dividends declared and paid by the corporation upon the
dissenting shares after the date of approval of the reorganization by the
outstanding shares (Section 152) and prior to payment for the shares by the
corporation shall be credited against the total amount to be paid by the
corporation therefor.
Section 1308. Except as expressly limited in this chapter, holders of
dissenting shares continue to have all the rights and privileges incident to
their shares, until the fair market value of their shares is agreed upon or
determined. A dissenting shareholder may not withdraw a demand for payment
unless the corporation consents thereto.
Section 1309. Dissenting shares lose their status as dissenting shares and
the holders thereof cease to be dissenting shareholders and cease to be
entitled to require the corporation to purchase their shares upon the
happening of any of the following:
(a) The corporation abandons the reorganization. Upon abandonment of
the reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable attorneys'
fees.
C-4
<PAGE> 202
(b) The shares are transferred prior to their submission for endorsement
in accordance with Section 1302 or are surrendered for conversion into shares
of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i)
of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
Section 1310. If litigation is instituted to test the sufficiency or
regularity of the votes of the shareholders in authorizing a reorganization,
any proceedings under Sections 1304 and 1305 shall be suspended until final
determination of such litigation.
Section 1311. This chapter, except Section 1312, does not apply to classes
of shares whose terms and provisions specifically set forth the amount to be
paid in respect to such shares in the event of a reorganization or merger.
Section 1312. (a) No shareholder of a corporation who has a right under
this chapter to demand payment of cash for the shares held by the shareholder
shall have any right at law or in equity to attack the validity of the
reorganization or short-form merger, or to have the reorganization or
short-form merger set aside or rescinded, except in an action to test whether
the number of shares required to authorize or approve the reorganization have
been legally voted in favor thereof; but any holder of shares of a class
whose terms and provisions specifically set forth the amount to be paid in
respect to them in the event of a reorganization or short-form merger is
entitled to payment in accordance with those terms and provisions or, if the
principal terms of the reorganization are approved pursuant to subdivision
(b) of Section 1202, is entitled to payment in accordance with the terms and
provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash
for such shareholder's shares pursuant to this chapter; but if the
shareholder institutes any action to attack the validity of the
reorganization or short-form merger or to have the reorganization or
short-form merger set aside or rescinded, the shareholder shall not
thereafter have any right to demand payment of cash for the shareholder's
shares pursuant to this chapter. The court in any action attacking the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded shall not restrain
or enjoin the consummation of the transaction except upon 10 days' prior
notice to the corporation and upon a determination by the court that clearly
no other remedy will adequately protect the complaining shareholder or the
class of shareholders of which such shareholder is a member.
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<PAGE> 203
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable
as to the shareholders of any party so controlled.
C-6
<PAGE> 204
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law permits a
corporation to indemnify its directors and officers or former directors or
officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and offices. Such law provides further
that the indemnification permitted thereunder shall not be deemed exclusive
of any other rights to which the directors and officers may be entitled under
FBA's Restated Certificate of Incorporation, By-Laws, any agreement or
otherwise.
Reference is made to Article X of FBA's By-Laws, which provides for
indemnification of directors, officers, employees and agents of FBA under
certain circumstances. The provisions of such By-Laws and Section 145 of the
Delaware General Corporation Law may be sufficiently broad to indemnify FBA's
directors, officers, employees and agents for certain liabilities arising
under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling FBA
pursuant to the foregoing provisions, FBA has been informed that, in the
opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
An index to Exhibits appears at pages II-6 through II-8 hereof.
(b) Financial Statement Schedules.
Not applicable.
Item 22. Undertakings.
The undersigned registrant hereby undertakes:
To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
II-1
<PAGE> 205
To include any prospectus required by section 10(a)(3) of the Securities
Act of 1933;
To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement.
To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
The undersigned registrant further undertakes:
That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
The undersigned registrant further undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to section 13(a) or section 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
The undersigned registrant further undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent
or given, the latest annual report to security holders that is incorporated
by reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver,
or cause to be delivered to each person to whom the prospectus is sent or
given, the latest quarterly report that is specifically incorporated by
reference in the prospectus to provide such interim financial information.
The undersigned registrant further undertakes as follows: That prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons
II-2
<PAGE> 206
who may be deemed underwriters, in addition to the information called for by the
other Items of the applicable form.
The undersigned registrant further undertakes that every prospectus (i)
that is filed pursuant to paragraph (h)(1) immediately preceding, or (ii)
that purports to meet the requirements of section 10(a)(3) of the Act and is
used in connection with an offering of securities subject to Rule 415
(Sec.230.415), will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and that,
for purposes of determining any liability under the Securities Act of 1933,
each such post- effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Proxy
Statement-Prospectus pursuant to Items 4, 11, or 13 of Form S-4, within one
business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
the registration statement through the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE> 207
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 15th day of
October, 1997.
FIRST BANKS AMERICA, INC.
By: /s/ James F. Dierberg
----------------------------------------------
James F. Dierberg
Chairman of the Board, Chief Executive Officer
and President
By: /s/ Allen H. Blake
----------------------------------------------
Allen H. Blake
Chief Financial Officer, Principal Accounting
Officer and Director
II-4
<PAGE> 208
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Charles A Crocco, Jr.<F*> Director October 15, 1997
- ---------------------------------
Charles A. Crocco, Jr.
/s/ Edward T. Story, Jr. <F*> Director October 15, 1997
- ---------------------------------
Edward T. Story, Jr.
/s/ Mark T. Turkcan <F*> Director October 15, 1997
- ---------------------------------
Mark T. Turkcan
/s/ Donald W. Williams <F*> Director October 15, 1997
- ---------------------------------
Donald W. Williams
<FN>
<F*> By Allen H. Blake, Attorney-in-fact
</TABLE>
II-5
<PAGE> 209
<TABLE>
EXHIBIT INDEX
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
<C> <S>
2(a) Agreement and Plan of Reorganization dated July 28, 1997, by
and between First Banks America, Inc. ("FBA" or the "Company")
and Surety Bank (included as Appendix A-1 to the Proxy
Statement-Prospectus and hereby incorporated by reference)
2(b) Stock Option Agreement dated July 28, 1997, by and between
First Banks America, Inc. and Surety Bank (included as Appendix
A-2 to the Proxy Statement-Prospectus and hereby incorporated
by reference)
3(a) Restated Certificate of Incorporation of the Company effective
August 31, 1995 (filed as Exhibit 3(a) to Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995 and
incorporated herein by reference).
3(b) Amended and Restated By-Laws of the Company (as amended April
21, 1995) (filed as Exhibit 3(b) to Quarterly Report on Form
10-Q for the quarter ended March 31, 1995 and incorporated
herein by reference).
4(a) Specimen Stock Certificate for Common Stock (filed as Exhibit
1.01 to the Company's Amendment No. 1 to Form 8-A on Form 8,
dated September 4, 1987, and incorporated herein by reference).
5 Opinion of John S. Daniels, counsel to FBA, with respect to the
legality of the securities registered--previously filed.
8 Opinion of Lewis, Rice & Fingersh, L.C., special tax counsel to
FBA, with respect to certain tax matter--previously filed.
10(a) BancTEXAS Group Inc. 1990 Stock Option Plan (as amended July
22, 1993) (filed as Exhibit 10(c) to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993, and
incorporated herein by reference).
10(b) 1993 Directors' Stock Bonus Plan (filed as Exhibit 10(k) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1993 and incorporated herein by reference).
10(c) Stock Purchase and Operating Agreement by and between First
Banks, Inc., a Missouri Corporation and the Company, dated May
19, 1994 (filed as Exhibit 10(d) to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994 and
incorporated herein by reference).
10(d) Management Agreement by and between First Banks, Inc. and
BankTEXAS N.A., dated November 17, 1994 (filed as Exhibit 10 (h)
to the Annual Report on Form 10-K for the year ended December
31, 1994 and incorporated herein by reference).
II-6
<PAGE> 210
10(e) Data Processing Agreement by and between FirstServ, Inc. (a
subsidiary of First Banks, Inc.) and BankTEXAS N.A., dated
December 1, 1994 (filed as Exhibit 10(i) to the Annual Report
on Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference).
10(f) Financial Management Policy by and between First Banks, Inc.
and the Company, dated September 15, 1994 (filed as Exhibit
10(j) to the Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference).
10(g) Federal Funds Agency Agreement by and between First Banks, Inc.
and the Company, dated September 15, 1994 (filed as Exhibit
10(k) to the Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference).
10(h) Funds Management Policy by and between First Banks, Inc. and
BancTEXAS, N.A., dated September 15, 1994 (filed as Exhibit
10(l) to the Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference).
10(i) Revolving Credit Agreement dated October 31, 1996 by and
between the Company and First Banks, Inc. (filed as Exhibit
10(k) to the Company's Current Report on Form 8-K dated
November 18, 1996 and incorporated herein by reference).
10(j) Management Services Agreement by and between First Banks, Inc.
and Sunrise Bank of California dated December 16, 1996 (filed
as Exhibit 10(j) to FBA's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by
reference).
10(k) Service Agreement by and between FirstServ, Inc. and Sunrise
Bank of California (relating to data processing services) dated
November 21, 1996 (filed as Exhibit 10(k) to FBA's Annual Report
on Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference).
10(l) Federal Funds Agency Agreement by and between First Banks, Inc.
and Sunrise Bank of California dated November 19, 1996 (filed
as Exhibit 10(l) Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference).
10(m) Funds Management Policy by and between First Banks, Inc. and
Sunrise Bank of California dated November 19, 1996 (filed as
Exhibit 10(m) Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference).
13(a) 1996 Annual Report to Stockholders--incorporated by reference.
13(b) Form 10-Q for the quarter ended March 31, 1997--incorporated by
reference.
II-7
<PAGE> 211
13(c) Form 10-Q for the quarter ended June 30, 1997--incorporated by
reference.
21 Subsidiaries of the Company--(filed as Exhibit 21 to the
Annual Report on Form 10-K for the year ended December 31, 1996
and incorporated herein by reference)
23(a) Consent of KPMG Peat Marwick LLP--filed herewith.
23(b) Consent of Perry-Smith & Co.--previously filed.
23(c) Consent of John S. Daniels--included in opinion filed as
Exhibit 5 to this Registration Statement.
23(d) Consent of Lewis, Rice & Fingersh, L.C.--included in opinion
filed as Exhibit 8 to this Registration Statement.
99(a) Consent of Baxter Fentriss and Company -- previously filed
99(b) Form of Proxy--filed herewith.
</TABLE>
II-8
<PAGE> 1
Exhibit 23(a)
Independent Auditors' Consent
The Board of Directors
First Banks America, Inc.:
We consent to the use of our report incorporated herein by reference and to
the reference to our firm under the heading "Experts" in the prospectus.
/s/KPMG Peat Marwick LLP
- ------------------------
St. Louis, Missouri
- -------------------
October 15, 1997
<PAGE> 1
Exhibit 99(b)
SURETY BANK
116 Springstowne Center
PROXY
for the Special Meeting of Shareholders
November 19, 1997
THIS PROXY IS SOLICITED
ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder of common stock of Surety Bank ("Bank") hereby
nominates and appoints Albert M. Lavezzo, John A. DiMichele and Fred K.
Sibley, and each of them, the agent and proxy of undersigned, with full power
of substitution, to vote the stock of undersigned at the Special Meeting of
Shareholders of the Bank to be held at the Bank's office, 116 Springetowne
Center, Vallejo, California on November 19, 1997, at 5:00 p.m. and any
postponements or adjournments thereof, with all powers the undersigned would
possess if present upon the following matters and upon any other business
that may properly come before the meeting or any adjournments or
postponements thereof:
1. To approve and adopt the agreement and Plan of Reorganization dated July
28, 1997 and the related Agreement of Merger, between First Banks
America, Inc. And Surety
FOR / /
AGAINST / /
WITHHOLD / /
2. To vote in their discretion, upon any other matters which may properly
come before the meeting or any adjournments or postponement thereof,
hereby revoking any proxy heretofore given by the undersigned for such
meeting.
<PAGE> 2
Exhibit 99(b)
THE PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS SPECIFIED HEREIN. IF
NO SPECIFICATION IS MADE WITH RESPECT TO ANY PARTICULAR PROPOSAL, IT IS THE
INTENTION OF THE PROXIES TO VOTE FOR PROPOSALS NUMBER 1 AND 2.
When signing as attorney, executor, officer, administrator, trustee or
guardian, please give full title. If more than one trustee, all should sign.
All joint owners must sign.
The Board of Directors recommends a vote
"FOR" each of the proposals listed above.
This proxy is solicited on behalf of the
Board of Directors and may be revoked
prior to its exercise.
Dated: __________________, 1997
_____________________________
Signature of Shareholder(s)
_____________________________
Print Name
______________________________
Signature of Shareholder(s)
______________________________
Print Name
I/We do [ ] do not [ ] expect to attend this meeting.
PLEASE SIGN, DATE AND MAIL THIS PROXY TODAY. YOUR VOTE IS IMPORTANT
II-2
