<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
First Commercial Bancorp, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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/x/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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<PAGE> 3
FIRST COMMERCIAL BANCORP, INC.
865 HOWE AVENUE
SACRAMENTO, CALIFORNIA 95825
---------------------------
NOTICE OF A SPECIAL MEETING OF STOCKHOLDERS
DECEMBER 5, 1995
6:00 O'CLOCK P.M.
---------------------------
Dear Stockholder:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of First
Commercial Bancorp, Inc. (the "Company"), a Delaware corporation and bank
holding company for First Commercial Bank, a California banking corporation
(the "Bank"), will be held at the Red Lion Sacramento Inn, located at 1401
Arden Way, Sacramento, California 95815 on Tuesday, December 5, 1995 at 6:00
o'clock p.m., local time (the "Meeting"), for the following purposes:
1. To approve the terms of an Amended and Restated Stock Purchase
Agreement (the "Stock Purchase Agreement") dated as of August
7, 1995 by and among the Company, the Bank, James F. Dierberg,
an individual, and First Banks, Inc., a Missouri corporation
and registered bank holding company ("First Banks"), for the
sale of Common Stock and the issuance of a convertible
debenture by the Company pursuant to which First Banks may
acquire a greater than majority interest in the Company; and
2. To adopt an amendment to the Certificate of Incorporation of
the Company to increase to 250,000,000 the number of shares of
Common Stock which the Company shall have the authority to
issue.
Only stockholders of record at the close of business on October 6,
1995 are entitled to notice of, and to vote at, the Meeting and any
adjournments thereof. Such stockholders may vote in person or by proxy. A
list of those stockholders will be open to examination by any stockholder of
the Company who is present at the Meeting and for a period of 10 days prior to
the Meeting, during ordinary business hours and for any purpose germane to the
Meeting, at the headquarters of the Company located at the address set forth
above.
STOCKHOLDERS WHO FIND IT CONVENIENT ARE CORDIALLY INVITED TO ATTEND
THE MEETING IN PERSON. IF YOU ARE NOT ABLE TO DO SO AND WISH TO VOTE YOUR
STOCK, YOU ARE REQUESTED TO FILL IN, SIGN, DATE AND RETURN THE ACCOMPANYING
PROXY IN THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED IF THE ACCOMPANYING
PROXY IS MAILED IN THE UNITED STATES.
BY ORDER OF THE BOARD OF DIRECTORS,
Dagmar E. Hotel, Corporate Secretary
Sacramento, California
November 20, 1995
<PAGE> 4
Mailed to stockholders on
or about November 20, 1995
FIRST COMMERCIAL BANCORP, INC.
865 HOWE AVENUE
SACRAMENTO, CALIFORNIA 95825
___________________________
PROXY STATEMENT
___________________________
INFORMATION CONCERNING THE SOLICITATION
This Proxy Statement is furnished in connection with the solicitation
by and on behalf of the Board of Directors (the "Board of Directors") of First
Commercial Bancorp, Inc. (the "Company"), a Delaware corporation and bank
holding company for First Commercial Bank, a California banking corporation
(the "Bank"), of the enclosed Proxy for use at the Special Meeting of
Stockholders of the Company to be held at the Red Lion Sacramento Inn, located
at 1401 Arden Way, Sacramento, California 95815 on Tuesday, December 5, 1995 at
6:00 o'clock p.m., local time, and at all adjournments thereof (the "Meeting").
The purposes of the Meeting are:
1. To approve the terms of an Amended and Restated Stock Purchase
Agreement (the "Stock Purchase Agreement") dated as of August
7, 1995 by and among the Company, the Bank, James F. Dierberg,
an individual ("Dierberg"), and First Banks, Inc., a Missouri
corporation and registered bank holding company ("First
Banks"), for the sale of Common Stock and the issuance of a
convertible debenture by the Company pursuant to which First
Banks may acquire a greater than majority interest in the
Company; and
2. To adopt an amendment to the Certificate of Incorporation of
the Company (the "Certificate of Incorporation") to increase
to 250,000,000 the number of shares of Common Stock which the
Company shall have the authority to issue.
Any person giving a Proxy in the form accompanying this Proxy
Statement has the power to revoke such Proxy prior to its exercise. Such Proxy
is revocable prior to the Meeting by an instrument revoking it, or by a duly
executed Proxy bearing a later date delivered to the Corporate Secretary of the
Company. Such Proxy is also revoked if the stockholder is present at the
Meeting and elects to vote in person.
Unless contrary instructions are indicated on the Proxy, all shares
represented by a valid Proxy received pursuant to this solicitation (and not
revoked before such shares are voted) will be voted (i) FOR the approval of the
terms of the Stock Purchase Agreement; and (ii) FOR the adoption of the
amendment of the Certificate of Incorporation to increase to 250,000,000 the
number of authorized shares of Common Stock of the Company.
In addition, such shares will be voted, at the discretion of the
holder of the Proxy, on such other matters, if any, which may properly come
before the Meeting (including any proposal to adjourn the Meeting), except that
Proxies which have been voted against either Proposal No. 1 or 2 will not be
voted by the Proxy holder for any proposal to adjourn the Meeting. In the
event a stockholder specifies a different choice on the Proxy, his or her
shares will be voted in accordance with the specification so made.
COST OF PROXY SOLICITATION
The Company will bear the entire cost of preparing, assembling,
printing and mailing the proxy materials furnished by the Board of Directors to
the stockholders of the Company. Copies of the proxy materials will be
furnished
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<PAGE> 5
to brokerage houses, nominees, fiduciaries and other custodians to be forwarded
to the beneficial owners of the Common Stock of the Company, par value $0.01 per
share (the "Company Common Stock"). In addition to the solicitation of Proxies
by use of the mail, some of the officers, directors and regular employees of the
Company and its subsidiary, the Bank, may (without additional compensation)
solicit Proxies by telephone or personal interview, the costs of which the
Company will bear.
It is important that your shares be represented at the Meeting. If
you are unable to be present in person, you are respectfully requested to fill
in, sign, date, and return the accompanying proxy in the enclosed envelope as
promptly as possible.
VOTE REQUIRED
Proposal No. 1 described in this Proxy Statement requires the
affirmative vote of the holders of a majority of the votes cast at the Meeting,
assuming a quorum is present. Proposal No. 2 requires the affirmative vote of
the holders of a majority of the issued and outstanding shares of Company
Common Stock entitled to vote at the Meeting. THE BOARD OF DIRECTORS OF THE
COMPANY RECOMMENDS A VOTE FOR EACH OF THE PROPOSALS SET FORTH ABOVE.
METHOD OF COUNTING VOTES
Holders of Company Common Stock are entitled to one vote for each
share of Company Common Stock held on the matters to be presented at the
Meeting.
The Inspectors of Election, who are employees of The First National
Bank of Boston, the Company's independent transfer agent (the "Bank of
Boston"), will oversee the tabulation of votes cast at the Meeting.
Abstentions, votes withheld and broker non-votes are counted for purposes of
determining whether a quorum is present at the Meeting. With respect to
Proposal No. 1, approval of the terms of the Stock Purchase Agreement and
possible change in control of the Company, abstentions and broker non-votes
will be treated as not entitled to vote for purposes of determining the vote
required for approval. With respect to Proposal No. 2, adoption of an
amendment to the Certificate of Incorporation to increase the number of shares
of Company Common Stock which the Company shall have the authority to issue,
abstentions, votes withheld and shares not voted, including broker non-votes,
are included in determining the number of shares of Company Common Stock issued
and outstanding, but will have the same effect as a vote against such Proposal.
STOCKHOLDERS ENTITLED TO VOTE
Only holders of record of the Company Common Stock on October 6, 1995
(the "Record Date") are entitled to notice of and to vote at the Meeting. On
the Record Date, there were 4,675,110 shares of Company Common Stock
outstanding.
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PRINCIPAL STOCKHOLDERS
As of the Record Date, no person or group known to the Company owned
beneficially more than five percent (5%) of the outstanding shares of Company
Common Stock, except as set forth below:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP PERCENT OF CLASS
---------------- ----------------------- ----------------
<S> <C> <C>
Dimensional Fund Advisors, Inc. (1)
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401 247,418 5.29%
First Banks, Inc.
135 North Meramec 50,000,000 to 43.60% to
Clayton, Missouri 63105 115,000,000 (2) 96.09% (3)
</TABLE>
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(1) Dimensional Fund Advisors, Inc. ("Dimensional"), a registered
investment advisor, is deemed to have beneficial ownership, as such
term is defined in Rule 13d-3(d)(1) promulgated under the Securities
Exchange Act of 1934, as amended (the "1934 Act"), of 247,418 shares
of Company Common Stock as of December 31, 1994, all of which shares
are held in portfolios of DFA Investment Dimensions Group, Inc., a
registered open-end investment company, the DFA Investment Trust
Company, a registered open-end investment company, or the DFA Group
Trust and the DFA Participating Group Trust, investment vehicles for
qualified employee benefit plans. Dimensional serves as investment
manager for all of the above.
(2) First Banks is deemed to have beneficial ownership, as such term is
defined in Rule 13d-3(d)(1) promulgated under the 1934 Act, of
115,000,000 shares of Company Common Stock assuming the occurrence of
the following events: (i) the Stock Purchase Agreement is approved by
the stockholders of the Company, (ii) the amendment to the Certificate
of Incorporation is adopted by the stockholders of the Company to
increase the number of shares of Company Common Stock to 250,000,000,
(iii) the Company issues 50,000,000 shares of Company Common Stock to
First Banks in exchange for the tender by First Banks of 750,000
shares of Bank Preferred Stock (described below) and 116,666,666
shares of Bank Common Stock (described below), (iv) the Company issues
a $5.0 million convertible debenture (the "Debenture") to First Banks
(described below) and the Debenture is immediately converted, at the
option of First Banks, into 50,000,000 shares of Company Common Stock,
and (v) the Investment Debenture (described below) is immediately
converted by First Banks into 15,000,000 shares of Company Common
Stock (collectively, all of the foregoing events are defined as the
"Approvals and Issuances"). However, in the event First Banks holds
the Debenture and the Investment Debenture for the five-year term
until mandatory conversion and assuming Company Common Stock is issued
in lieu of the 12% per annum dividend, First Banks would be issued
104,000,000 shares of Company Common Stock in connection with the
Debenture.
(3) First Banks is deemed to have beneficial ownership, as such term is
defined in Rule 13d-3(d)(1) promulgated under the 1934 Act, of 96.09%
of the Company Common Stock which shall be outstanding assuming the
occurrence of the Approvals and Issuances. However, if First Banks
does not immediately convert the Debenture and the Investment
Debenture, its record ownership would be limited to 91.45% of the
Company's outstanding Common Stock. The Company is planning to
conduct an offering of up to $5.0 million of Company Common Stock at a
purchase price of $0.10 per share and a dividend exchange offer of up
to $1.0 million (which offering is defined and described under
"POSSIBLE COMPANY OFFERING" herein). If such offering is completed
and fully subscribed, First Banks' ownership of the Company Common
Stock shall be reduced to approximately 43.60% if the Debenture and
the Investment Debenture are not immediately converted and would
increase to 64.0% assuming the occurrence of the Approvals and
Issuances. In addition, the current stockholders of the Company may
have the right to receive shares of Company Common Stock (or cash)
based on the future occurrence of certain events (which occurrences
are described under "ISSUANCE OF APPRECIATION RIGHTS" herein). If
said events occur and the stockholders are issued shares of Company
Common Stock, First Banks' ownership will be further diluted.
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<PAGE> 7
STOCK OWNERSHIP OF MANAGEMENT
The following table sets forth the number of shares of Company Common
Stock beneficially owned by the directors and executive officers of the
Company, individually and as a group, as of the Record Date:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------
NAME OF DIRECTOR OR OFFICER AMOUNT PERCENT OF CLASS
- --------------------------- ------ ----------------
<S> <C> <C>
Michael Denton, Jr 23,050 (1) .49%
Class "A" Director
Fred L. Harris 10,600 (1) (2) .23%
Class "B" Director
Michael P. Morris 0 N/A
Class "A" Director
Manuel Perry, Jr 21,150 (1) .45%
Chairman of the Board of
the Company and the Bank;
Class "C" Director
Michael E. Spinetti 24,800 (1) .53%
Class "B" Director
Dennis F. Ceklovsky 0 N/A
E.V.P. and Senior Credit Officer
of the Company and the Bank (3)
James E. Culleton 34,978 .74%
Interim President of the Company and the Bank;
E.V.P. of the Company and E.V.P. and Chief
Operating Officer of the Bank
Anne H. Long 7,800 .17%
E.V.P. and Chief Financial Officer
of the Company and the Bank
_______ ____
ALL DIRECTORS AND EXECUTIVE 122,378 (4) 2.57%(4)
Officers as a Group
(consisting of (8) individuals)
</TABLE>
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(1) Includes 10,000 shares subject to options presently exercisable under
the Company's Directors' Stock Option Plan.
(2) Held in an individual retirement account for the benefit of Mr.
Harris.
(3) Mr. Ceklovsky has resigned from his positions at the Company and the
Bank effective October 31, 1995, pursuant to the terms of a Severance
Agreement and General Release.
(4) Includes 40,800 shares of Company Common Stock subject to options
presently exercisable under the Company's Amended and Restated Stock
Option Plan; 40,000 shares subject to options presently exercisable
under the Company's Director Stock Option Plan, and 1,541 shares which
have been allocated to officers' accounts in the Company's Employee
Stock Ownership Plan.
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<PAGE> 8
RECENTLY APPOINTED DIRECTORS, PROPOSED DIRECTORS AND CHANGES IN MANAGEMENT
At a meeting of the Board of Directors held on August 29, 1995 (the
"August Meeting"), the Board of Directors accepted the resignations of Manuel
J. Barandas, a Class C Director; Harry S. Curry, a Class B Director; and Earl
W. Nichols, Jr., a Class A Director (the "Resignations"). In addition, at the
August Meeting, the Board of Directors adopted a resolution fixing at five (5)
the number of directors on the Board of Directors (the "Resolution"). The
Resolution was adopted pursuant to the exclusive authority granted to the Board
of Directors by Article Seventh of the Certificate of Incorporation and Section
1 of Article II of the Bylaws of the Company (the "Bylaws").
Furthermore, at the August Meeting the Board of Directors appointed
Mr. Michael P. Morris to the Board of Directors as a Class A Director. At a
separate meeting on August 29, 1995, the Board of Directors of the Bank
appointed Mr. Morris to the Board of Directors of the Bank. Michael P. Morris
had previously received the requisite approval of the California State Banking
Department ("SBD"), and the non-disapproval of the Federal Deposit Insurance
Corporation ("FDIC") and the Federal Reserve Bank of San Francisco ("Reserve
Bank") to serve as a director of the Company and the Bank. Mr. Morris
currently is, and for the past four (4) years has been, the Chief Financial
Officer of Stille Holding Company, a $200 million private company with two
retail subsidiaries and one real estate subsidiary. Prior to that time, Mr.
Morris was a partner for six years in the Sacramento office of KPMG Peat
Marwick, a worldwide certified public accounting firm. While with KPMG Peat
Marwick, Mr. Morris specialized as a bank auditing partner with extensive
experience auditing community banks in northern California. Mr. Morris joined
KPMG Peat Marwick in 1978.
In the event the stockholders of the Company approve the Stock
Purchase Agreement at the Meeting, the Company has agreed to elect to the Board
of Directors, assuming the receipt of all necessary regulatory approvals, three
(3) of First Banks' nominees. In addition, pursuant to the Stock Purchase
Agreement, the Company agreed to use reasonable efforts to retain at least two
(2) directors currently on the Board of Directors. First Banks has proposed
James F. Dierberg, Allen H. Blake and Donald W. Williams to be designated as
directors of the Company and submitted the appropriate notice and application
therefor to the Reserve Bank, which the Reserve Bank approved on October 23,
1995.
The Stock Purchase Agreement also provided that upon First Banks'
infusion of $3.5 million into the Bank, the Company would cause three (3) of
First Banks' nominees to be elected to the Board of Directors of the Bank,
assuming the receipt of all necessary regulatory approvals. Messrs. Dierberg,
Blake and Williams each received the requisite approvals and, accordingly, have
been elected to serve as directors of the Bank. The following biographical
information is provided for Messrs. Dierberg, Blake and Williams.
James F. Dierberg has been the Chairman of the Board and Chief
Executive Officer of First Banks and its predecessor companies since 1966. He
has been a director of First Banks since 1979. Mr. Dierberg was President of
First Banks from 1979 until February 1992, and he was re-appointed President of
First Banks in April 1994. In September 1994, Mr. Dierberg was appointed
Chairman of the Board, President and Chief Executive Officer of First Banks
America, Inc. (formerly BancTEXAS Group Inc.), headquartered in Houston, Texas.
Mr. Dierberg is also a director of First Bank & Trust (formerly Commercial
Center Bank), Santa Ana, California, and since 1957, Mr. Dierberg has served in
various capacities with other bank holding companies and banks owned or
controlled by him or members of his family.
Allen H. Blake has been a Senior Vice President of First Banks since
February 1992. Mr. Blake joined First Banks as Vice President and Chief
Financial Officer in 1984, and in 1988 he was appointed to the office of
Secretary and to the Board of Directors of First Banks. In addition, Mr. Blake
is a director of First Bank, headquartered in O'Fallon, Illinois, First Bank &
Trust, headquartered in Santa Ana, California, and since September 1994, Mr.
Blake has served as Chief Financial Officer, Vice President and Secretary and
director of First Banks America, Inc.
Donald W. Williams has been Senior Vice President and Chief Credit
Officer of First Banks since March, 1993. In addition, he is Chairman of the
Board and Chief Executive Officer of First Bank & Trust and director of each of
First Bank and First Bank FSB, both of which are headquartered in St. Louis
County, Missouri, First Banks America, Inc. and Bank Texas National
Association. From 1989 to the time he assumed his positions with First Banks,
he was Senior Vice President at Mercantile Bank of St. Louis, N.A., where he
was responsible for credit approval. The requisite
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<PAGE> 9
approvals have been obtained from the SBD and the FDIC for Mr. Williams to serve
as Chief Executive Officer of the Bank and on October 24, 1995, Mr. Williams was
appointed as Chief Executive Officer of the Bank. The Company will file the
appropriate application with the Reserve Bank for Mr. Williams' approval as
Chief Executive Officer of the Company.
In addition, First Banks filed the appropriate applications with the
FDIC and SBD for James E. Culleton, who presently serves as the Interim
President of the Bank, to be elected to serve as President and as a director of
the Bank. Both agencies responded with the requisite approvals for Mr.
Culleton to serve in those capacities.
The requisite applications also have been filed with the SBD and the
FDIC for approval of Terrance McCarthy as Senior Vice President and Chief
Credit Officer of the Bank. Mr. McCarthy currently is Senior Vice President
and Chief Credit Officer of First Bank & Trust, Santa Ana, California, a
wholly-owned subsidiary of First Banks.
PROPOSAL NO. 1
APPROVAL OF THE STOCK PURCHASE AGREEMENT
AND CHANGE IN CONTROL OF THE COMPANY
GENERAL; REASONS FOR ENTERING INTO THE STOCK PURCHASE AGREEMENT; CRITICAL NEED
FOR STOCKHOLDER APPROVAL
The Company and the Bank have entered into the Stock Purchase
Agreement with First Banks and James F. Dierberg, an individual whose family
owns voting control of First Banks.
The Board of Directors has determined that entering into the Stock
Purchase Agreement is in the best interests of the Company and its stockholders
because of the significant capital infusion provided by First Banks which,
prior to the Meeting, has enabled the Bank to raise its Tier 1 capital level
(1/) above 3%. The Board of Directors believes that the acquisition of Company
Common Stock by First Banks preserves the stockholders' value in their shares of
Company Common Stock. In addition, if the Stock Purchase Agreement is approved
by the Company stockholders, First Banks will become the bank holding company of
the Company and the Bank as a result of the consummation of the transactions
contemplated by the Stock Purchase Agreement and will be under certain statutory
and regulatory obligations to maintain the capital of the Bank at adequate
levels.
In the event the stockholders of the Company fail to approve the Stock
Purchase Agreement, First Banks' investment will be made directly into the Bank
and, as a result, the Company will cease to have a controlling interest in the
Bank, and the Company's stockholders' equity will remain impaired.
Net losses sustained by the Company and the Bank for the years ended
1992, 1993 and 1994 and during the first nine months of 1995 have resulted in
the Bank's deteriorating capital levels. The results of the 1995 joint
examination of the Bank by the FDIC and the SBD indicate that further
deterioration in the financial condition of the Company and the Bank are
possible. In addition, for the third quarter ended September 30, 1995, the Bank
sustained additional losses of approximately $1,021,000. The Bank and the
Company have been operating under severe regulatory restrictions since July
1993, and on August 4, 1995, the Bank received from the FDIC a notice under the
prompt corrective action provisions of the Federal Deposit Insurance Act. See
"REGULATORY AGREEMENTS AND ORDERS" herein. The stockholders of the Company are
under a continuing threat of future losses in the value of their shares of
Company Common Stock unless an outside investor makes additional significant
capital investments in the Company or the Bank. The Company believes that while
undertaking the Offering (described below) is an important component of
recapitalizing the Company, the Offering, even if fully subscribed, would not
adequately recapitalize the Company.
- -----------------------------
(1/) Tier 1 capital is generally defined as the sum of the core capital elements
less goodwill and certain intangibles. The following items are defined as core
capital elements: (i) common stockholders' equity; (ii) qualifying
noncumulative perpetual preferred stock and related surplus; and (iii) minority
interests in the equity accounts of consolidated subsidiaries.
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<PAGE> 10
Accordingly, the Company believes that the investment of $11.5 million
pursuant to the Stock Purchase Agreement provides a measure of reassurance that
the Company and the Bank will be recapitalized while providing the stockholders
the opportunity to invest in the Company through the purchase of Company Common
Stock at the same price as the sale of Company Common Stock to First Banks.
The Company Common Stock was involuntarily delisted from the NASDAQ
National Market as of July 7, 1995 as a result of the Company's failure to meet
the tangible asset requirements for continued listing. The Company Common Stock
was immediately listed on the NASDAQ SmallCap Market where it currently is
listed.
As described below, pursuant to the provisions of the Stock Purchase
Agreement, First Banks may acquire a greater than majority interest in the
Company as a result of the acquisition through an exchange mechanism described
herein of $5.0 million in shares of Company Common Stock. Although stockholder
approval of First Banks' investment and the anticipated change in control of the
Company is not required by law, the directors of the Company determined that
they wished to allow the stockholders of the Company the opportunity to
participate in the decision to restructure the Company. Accordingly, the Board
of Directors is presenting the proposal to stockholders of the Company for
review and approval. Please note, however, that if stockholder approval of the
Stock Purchase Agreement is not obtained, First Banks will acquire a majority
interest in the Bank through an aggregate investment of $11.5 million in the
capital stock of the Bank. As a result of such $11.5 million investment in the
Bank, First Banks would be the beneficial owner of approximately 99.56% of the
outstanding shares of common stock of the Bank, no par value per share (the
"Bank Common Stock"), and 100% of the outstanding shares of the Bank Preferred
Stock.
On July 25, 1995, the Board of Directors unanimously approved the Stock
Purchase Agreement as a crucial element in the recapitalization of the Company
and the Bank and a step toward the return of the Bank to earnings through
profitable operations. The Board of Directors believes that the continuing
viability of the Company and the Bank depends upon consummation of the
transactions contemplated by the Stock Purchase Agreement and, accordingly,
urges the stockholders to approve Proposal No. 1. As described below, Dierberg
and First Banks to date have invested $5.0 million in the capital stock of the
Bank,(2/) and First Banks has agreed, upon receiving stockholder approval of the
Stock Purchase Agreement, to loan an additional $5.0 million to the Company. See
"DESCRIPTION OF THE TERMS OF THE STOCK PURCHASE AGREEMENT, Issuance of the
Debenture or Sale of Bank Stock." The majority of the proceeds of such loan will
be contributed to the Bank and will thereby increase the Bank's capital levels.
On October 31, 1995, First Banks loaned to the Company an additional $1.5
million in the form of a 12% convertible debenture (the "Investment Debenture").
See "CAPITAL INFUSIONS TO DATE." The proceeds of the Investment Debenture were
contributed to the Bank by the Company. In addition, the Company has agreed that
upon receiving stockholder approval of the Stock Purchase Agreement and the
requisite regulatory approval, the Company will issue $5.0 million in shares of
Company Common Stock to First Banks in exchange for the shares of the capital
stock of the Bank then held by First Banks. Thus, the Board of Directors
believes that First Banks' capital infusion and acquisition of control of the
Company, as described herein, will provide stockholders of the Company with
added value for their shares of Company Common Stock through (i) the continued
viability of the Company and the Bank, (ii) an immediate increase in the book
value per share of the Company Common Stock and (iii) the commitment to the
Company indicated by First Banks' investment. If the stockholders of the Company
approve the terms of the Stock Purchase Agreement and if the Offering (described
below) is completed and fully subscribed, such stockholders will continue to own
a significant percentage of the Company Common Stock, and the Company will
remain as the sole shareholder of the Bank.
- ---------------
(2/) Dierberg received approval from the SBD to sell to First Banks the
750,000 shares of Series A Preferred Stock of the Bank, no par value per share
(the "Bank Preferred Stock"), which he purchased at a price of $2.00 per share
on June 30, 1995 (which purchase is described further herein) and consummated
the transfer to First Banks on August 22, 1995. Thus, First Banks is the
beneficial holder of the Bank Preferred Stock. In addition, on August 23,
1995, First Banks infused $3.5 million into the Bank in exchange for
116,666,666 shares of Bank Common Stock at a price of $0.03 per share, the book
value of the Bank Common Stock on August 22, 1995. As a result, First Banks
became the owner of 98.95% of the outstanding Bank Common Stock; however, First
Banks has no voting power with respect to the Bank Common Stock.
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<PAGE> 11
If the stockholders of the Company fail to approve First Banks'
investment in the Company as described in Proposal No. 1, the Stock Purchase
Agreement provides that First Banks shall purchase an additional $5.0 million in
shares of Bank Common Stock for an aggregate investment of $10.0 million in the
capital stock of the Bank. In addition, the Investment Debenture would be
convertible into $1.5 million in shares of Bank Common Stock. In that event, the
Company's stockholders will continue to own 100% of the outstanding Company
Common Stock, but the Company's ownership interest in the Bank shall be reduced
to approximately 0.44%. Accordingly, the Company's ability to receive dividends
from the Bank, if and when declared in the future, will be reduced
correspondingly. Thus, the stockholders of the Company may benefit from the
recapitalization of the Bank to the extent of First Banks' investment therein,
but First Banks' infusion of capital at the Bank level will not necessarily
allow the Company to pay dividends(3/) to the stockholders of the Company or to
cause the removal of the regulatory orders to which the Company is subject. See
"PRO FORMA FINANCIAL INFORMATION" herein for a discussion of the pro forma
effect upon the capital levels of the Company and the Bank as a result of the
actual and alternative proposed capital infusions pursuant to the terms of the
Stock Purchase Agreement.
BOARD OF DIRECTORS RECOMMENDATION
The Board of Directors, with the advice of its financial advisor,
Carpenter & Company ("Carpenter"), has concluded that the terms of the Stock
Purchase Agreement are fair to and in the best interests of the stockholders of
the Company. In evaluating the terms of the Stock Purchase Agreement, the
Board of Directors considered a variety of factors, including the opinion
rendered by Carpenter as further described below, to the effect that the terms
of the Stock Purchase Agreement taken as a whole are fair from a financial
point of view to the stockholders of the Company as of the date of the Stock
Purchase Agreement.
FAIRNESS OPINION
The Board of Directors retained Carpenter as its financial advisor in
connection with the Board of Directors' evaluation and approval of the Stock
Purchase Agreement and the transactions contemplated thereunder (for purposes
of the "FAIRNESS OPINION," collectively, the "Transaction"). Carpenter has
delivered to the Company its written opinion dated September 26, 1995 that,
based on the matters set forth therein and as of the date of the Stock Purchase
Agreement, the terms of the Transaction are fair, from a financial point of
view, to the stockholders of the Company. The Company did not impose any
limitations on Carpenter with respect to its opinion. A copy of Carpenter's
opinion is attached hereto as Exhibit A. Carpenter has consented to the
inclusion in this Proxy Statement of its opinion and the summary disclosure
contained herein.
Carpenter is engaged in financial institution analysis and regularly
conducts valuations of businesses, particularly financial institutions, and
their securities in connection with stock offerings, mergers, acquisitions,
negotiated underwritings and private placements, among other things. As part
of its financial services activities, Carpenter is called upon to advise
clients in mergers, acquisitions, valuations and various other business
combinations and activities. The Company selected Carpenter as the Company's
financial advisor because of its recognition as an expert in such matters.
On August 7, 1995, Carpenter delivered its oral opinion to the
Company's Board of Directors that the terms of the Transaction are fair, from a
financial point of view, to the stockholders of the Company. At the September
26, 1995 meeting of the Company's Board of Directors, Carpenter delivered its
written opinion, confirming its previous oral opinion.
In rendering its opinion in connection with the Transaction, Carpenter
relied upon information and materials provided by the Company, including the
Capital Plan (as such term is defined in "REGULATORY AGREEMENTS AND ORDERS"
herein) of the Company. In addition, Carpenter met with the directors and
management of the Company and reviewed other data relating to the economics for
the relevant area and conducted tests of the market value of the Company Common
Stock. Carpenter also reviewed this Proxy Statement and the drafts of the
Company's Registration Statement
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(3/) With respect to dividends by the Bank, it should be noted that First
Banks, as the holder of Bank Preferred Stock, would have priority over the
Company in the payment of any dividends by the Bank.
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<PAGE> 12
on Form S-1 with respect to the potential Offering (described below), and
compared the financial terms thereof with other selected recent business
combinations and recapitalizations in the financial services industry, compared
the Company from a financial point of view with other selected companies in the
financial services industry, reviewed alternatives available to the Company and
considered such other information as it deemed appropriate. Carpenter has not
independently verified the information and documents provided by the directors
and management of the Company.
Carpenter has been paid a retainer fee in the amount of $50,000 in
connection with its advisory services to the Company, which services included
the preparation of its opinion and report. Carpenter received a success fee of
$185,000 in connection with First Banks initial $5.0 million investment.
Carpenter will receive additional fees in the amount of $185,000 contingent
upon the completion of First Banks' investment of $10.0 million into the
Company or the Bank. In addition, if the Offering is conducted, Carpenter
would receive a fee equal to 4.5% of any proceeds (up to $5.0 million) received
in the Offering. Carpenter also received normal out-of-pocket expenses and was
provided with indemnification for certain actions. Carpenter formerly assisted
the Company in connection with the preparation of its Capital Plan and
anticipates acting as a financial adviser in connection with the Company's
proposed offering of Company Common Stock pursuant to the Registration
Statement with respect to the Offering (described below).
CAPITAL INFUSIONS TO DATE
Pursuant to the Stock Purchase Agreement, on June 30, 1995, Dierberg
purchased $1.5 million in shares of Bank Preferred Stock. However, as a result
of the joint examination of the Bank by the FDIC and the SBD, which commenced
on May 22, 1995, the examiners required the Bank to take additional write-offs.
These write-offs caused the Bank's Tier 1 capital ratio to fall to 1.09% as of
June 30, 1995. Institutions whose Tier 1 capital ratio falls below 2% are
subject to the prompt corrective action provisions of the Federal Deposit
Insurance Act, which impose stringent operating restrictions on such
institutions and the threat of further regulatory action, including the
imposition of a conservator or receiver. In addition, the Bank's Tier 1
capital ratio as of June 30, 1995 was significantly below the 6.5% level
required by the regulatory orders to which the Bank is subject.(4/)
Accordingly, pursuant to the Stock Purchase Agreement, First Banks
agreed to make an additional capital contribution to the Bank of $3.5 million
through the purchase of Bank Common Stock. On August 15, 1995 and August 22,
1995, First Banks received the approval of the Federal Reserve Bank of St.
Louis (the "St. Louis Reserve Bank") and the SBD, respectively, for a change in
control of the Bank. Thus, on August 23, 1995, First Banks infused $3.5
million into the Bank in exchange for 116,666,666 shares of Bank Common Stock
(referred to in the Stock Purchase Agreement as the "August Infusion") at a
price of $0.03 per share, the book value of the Bank Common Stock on August 22,
1995. These shares of Bank Common Stock are subject to the terms of an
irrevocable proxy agreement which allows the Company to vote such shares of
Bank Common Stock until the earliest to occur of (i) the failure of the
stockholders of the Company to approve the Stock Purchase Agreement at the
Meeting; (ii) termination of the Stock Purchase Agreement for any reason; (iii)
the first business day following a vote of the stockholders of the Company at
the Meeting to approve the Stock Purchase Agreement; or (iv) December 31, 1995.
As a result of the August Infusion and continuing operations, the Bank's Tier 1
capital ratio was 2.60% as of August 31, 1995.
On October 31, 1995, First Banks loaned to the Company an additional
$1.5 million, and the Company issued to First Banks the Investment Debenture,
structured on the same terms and conditions as the Debenture. All of the $1.5
million was contributed to the Bank by the Company. Thus, the Bank's Tier 1
capital ratio at October 31, 1995 was 3.19%, in excess of the 3.0% requirement
to which the SBD had agreed as a result of First Banks' agreement to provide
additional funds to the Company and the Bank.(4/)
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(4/) As more fully described under "REGULATORY AGREEMENTS AND ORDERS"
herein, the Bank is subject to a Cease and Desist Order, as amended, entered
into with the FDIC on July 27, 1993 and to a Final Order under California
Financial Code ("Financial Code") Section 1913, as amended, entered into with
the SBD on March 30, 1995 (collectively, the "Orders"). The Orders require the
Bank, inter alia, to have a ratio of tangible shareholders' equity to tangible
assets at June 30, 1995 of 6.5%, and to increase this ratio to 7.0% at December
31, 1995. The SBD extended the date to October 31, 1995 for attaining the 6.5%
Tier 1 capital level and reduced the requirement to 3.0%. As of October 31,
1995, the Bank's Tier 1 capital ratio was 3.19%.
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<PAGE> 13
DESCRIPTION OF THE TERMS OF THE STOCK PURCHASE AGREEMENT
The following is a summary of the material terms of the Stock Purchase
Agreement, the convertible debentures and the related Escrow, Proxy and Stock
Pledge Agreements. The description below is intended as a summary of the
material terms only and is qualified in its entirety by reference to the Stock
Purchase Agreement, including exhibits, which is attached hereto as Exhibit B
and incorporated herein by reference.
INFUSION OF $1.5 MILLION INTO THE BANK
The Stock Purchase Agreement was first entered into effective June 30,
1995 by and among the Company, the Bank, First Banks and Dierberg. Accordingly,
on June 30, 1995, Dierberg purchased 750,000 shares of Bank Preferred Stock, at
a price of $2.00 per share, for a total investment of $1.5 million.(5/) Dierberg
received approval from the SBD to sell to First Banks the 750,000 shares of Bank
Preferred Stock he purchased, and consummated such transfer on August 22, 1995.
The Stock Purchase Agreement provides that the Company is required, under
certain circumstances described below, to purchase from First Banks the 750,000
shares of Bank Preferred Stock and to issue in exchange therefor a number of
shares of Company Common Stock. On July 12, 1995, pursuant to the terms of the
Stock Purchase Agreement and an Escrow Agreement by and among the Company, First
Banks and the Bank of Boston (the "Escrow Agreement"), First Banks delivered
$8.5 million into an escrow account to be used for further investment in Company
and/or Bank Common Stock.
AMENDMENT OF THE STOCK PURCHASE AGREEMENT; INFUSION OF $3.5 MILLION
INTO THE BANK
Immediately after concluding the Stock Purchase Agreement on June 30,
1995, the Company and the Bank were informed that as a result of the then
ongoing joint examination of the Bank by the FDIC and the SBD, such examiners
would require the Bank to take additional write-offs as of June 30, 1995, which
significantly decreased the capital of the Bank as well as the capital of the
Company. These write-offs caused the Bank's Tier 1 capital ratio to fall below
2% and the Company's capital account to fall to a negative $398,000 as of June
30, 1995. Accordingly, it became apparent that an additional capital infusion
was urgently needed in order to prevent further significant regulatory action
from being taken against the Bank pursuant to the FDIC's prompt corrective
action regulations(6/) and that the Stock Purchase Agreement would require
substantial amendment in order to embody the terms on which such additional
capital infusion would be made.
On August 7, 1995, the Company, the Bank, First Banks and Dierberg
executed the Stock Purchase Agreement, as amended and restated. In order to
effect the Stock Purchase Agreement, First Banks filed applications on July 24,
1995 with the St. Louis Reserve Bank and on July 28, 1995 with the SBD to gain
control of the Company and the Bank through the purchase of shares of Bank
and/or Company Common Stock. Upon receiving the approvals of the SBD and the
St. Louis Reserve Bank, First Banks purchased 116,666,666 shares of Bank Common
Stock on August 23, 1995 at the book value per share thereof on August 22,
1995, the day immediately preceding such sale, or $0.03, for a purchase price
of $3,500,000. First Banks' capital infusion is considered Tier 1 capital of
the Bank.
First Banks entered into a Proxy Agreement also dated August 7, 1995
(the "Proxy Agreement"), pursuant to which First Banks transferred to the
Company the right to vote First Banks' shares of Bank Common Stock. The Proxy
Agreement will terminate upon the earliest to occur of: (i) failure of the
stockholders of the Company to approve the
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(5/) The Bank Preferred Stock is non-voting, non-cumulative, perpetual and
entitled to dividends, at least at the rate or in the amount declared on the
Bank Common Stock, only when and if declared by the Board of Directors of the
Bank in its sole discretion.
(6/) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Company's 1994 Annual Report to Stockholders.
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<PAGE> 14
Stock Purchase Agreement at the Meeting; (ii) termination of the Stock Purchase
Agreement for any reason; (iii) the first business day following a vote of the
stockholders of the Company at the Meeting to approve the Stock Purchase
Agreement; or (iv) December 31, 1995.
EXCHANGE OF FIRST BANKS' CAPITAL STOCK OF THE BANK FOR COMPANY COMMON
STOCK
The Stock Purchase Agreement provides that in the event the
stockholders of the Company approve the terms of the Stock Purchase Agreement at
the Meeting, the Company is required to issue to First Banks 50,000,000 shares
of Company Common Stock in exchange for the tender by First Banks of the 750,000
shares of Bank Preferred Stock and the 116,666,666 shares of Company Common
Stock held by First Banks.
ISSUANCE OF THE DEBENTURE OR SALE OF BANK STOCK
First Banks has agreed that if the stockholders of the Company approve
the terms of the Stock Purchase Agreement at the Meeting, First Banks will lend
to the Company an additional $5.0 million and the Company has agreed to issue
to First Banks a convertible debenture which shall bear interest at a rate of
12% per annum (the "Debenture") in exchange for such loan. The Company has
agreed that $4,750,000 of the proceeds of the loan will be contributed to the
Bank, while $250,000 will be retained by the Company. The Debenture will be
convertible into a total of 50,000,000 shares of Company Common Stock for a
period of five (5) years commencing upon the earlier of the (i) date of the
Meeting or (ii) December 31, 1995. The Debenture will be secured by all shares
of Bank Common Stock owned by the Company pursuant to the terms of a Stock
Pledge Agreement by and between the Company and First Banks (the "Stock Pledge
Agreement"). At the option of First Banks, the Debenture is convertible at any
time prior to the 5-year maturity of the Debenture (the "Debenture Termination
Date") into shares of Company Common Stock at a rate of $0.10 per share (the
"Conversion Rate"). Upon maturity, the Debenture will convert automatically
into Company Common Stock at the Conversion Rate. Pursuant to the Debenture,
First Banks may foreclose on the Bank Common Stock held by the Company only in
the event that the Company is insolvent, in bankruptcy, placed in receivership
by an agency with regulatory authority over the Company, or in the event the
Company defaults under or breaches the Stock Purchase Agreement. See
"Conditions to Closing" and "Termination of the Stock Purchase Agreement and
Liquidated Damages" herein for a description of the events which could cause a
default under or breach of the Stock Purchase Agreement.
In addition, the Company has agreed to pay interest in cash to First
Banks at the rate of 12% per annum on the outstanding unconverted principal
balance of the Debenture, only when in the sole and absolute discretion of the
Board of Directors of the Company, the Company has sufficient funds to make
such payment of interest or principal and can make such a payment in accordance
with any and all applicable regulatory requirements; provided, however, if and
to the extent the Company has not previously paid interest or principal on the
Debenture, then (i) prior to October 31, 2000, the holder of the Debenture
shall have the right to convert unpaid interest and principal into shares of
the Company Common Stock at a rate of $0.10 per share and upon such conversion,
that part of interest and principal so converted shall be deemed paid in full,
or (ii) upon maturity, the Debenture shall be payable and convert into the
Company's Common Stock at the rate of $0.10 per share. Due to the
undercapitalized condition of the Company and the Bank and the Bank's current
unprofitable condition, it is not anticipated that the Bank will be able to
pay, or if able, that the Bank's regulatory authorities would grant permission
for the Bank to pay, dividends to the Company from which the Company could pay
interest on the Debenture in cash. Neither is it currently anticipated that
the Company's regulatory authorities would permit the Company to pay interest
on the Debenture for the foreseeable future. For these reasons, it is also
unlikely that the Company will have sufficient funds or that the Company would
receive permission from its regulatory authorities to pay any dividend in cash
to stockholders of the Company.
In the event the stockholders of the Company fail to approve the Stock
Purchase Agreement at the Meeting, First Banks will invest the additional $5.0
million directly in the Bank through the purchase of Bank Common Stock for an
aggregate investment of $10.0 million in the capital stock of the Bank. At
that time, the Proxy Agreement shall terminate. Such additional shares of Bank
Common Stock will not be subject to voting restrictions and upon such purchase,
together with the simultaneous termination of the Proxy Agreement, First Banks
will control the Bank as a result of being the beneficial owner of 99.56% of
the outstanding shares of Bank Common Stock.
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<PAGE> 15
OTHER POTENTIAL CAPITAL INFUSIONS
The Stock Purchase Agreement also gives First Banks the first option
to make additional capital infusions through the purchase of Company Common
Stock in the event that the Bank's capital ratios do not meet the minimums
required by the Orders. Accordingly, the Stock Purchase Agreement provides
that if the Bank's Tier 1 capital ratio is not equal to or greater than 6.5% at
October 31, 1995, First Banks may purchase such dollar amount of shares of
Company Common Stock which will increase the Bank's Tier 1 capital ratio to
6.5% or more. The purchase price of such shares will be the book value per
share thereof on the business day immediately preceding such purchase, or
$0.10, whichever is greater. Similarly, if the Bank's Tier 1 capital ratio is
not equal to or greater than 7.0% at December 31, 1995, and if the Company has
not completed the Offering (described below) by such date, then First Banks may
elect to purchase the number of shares of Company Common Stock, at the dollar
price set forth in the preceding sentence, sufficient to increase the Bank's
Tier 1 capital ratio to 7.0% or more. In the event that the Company is
conducting the Offering (described below) at December 31, 1995, First Banks may
purchase shares of Bank Common Stock to increase the Bank's Tier 1 capital
ratio, which shares shall be convertible into shares of Company Common Stock at
the earlier of the conclusion of the Offering or June 30, 1996, at a rate of
$0.10 per share. If First Banks elects not to purchase shares of Company
Common Stock or Bank Common Stock, as applicable, the Bank will consider other
methods of raising capital, including the sale of Bank assets such as its
branch office located in Campbell, California, in order to reach the required
regulatory minimum capital requirements. Pursuant to the Stock Purchase
Agreement, First Banks shall have a right of first refusal to purchase such
branch at the price and terms which are the same as the best third-party offer
the Bank has obtained, exercisable by First Banks within thirty days of notice
from the Bank.
ADDITIONAL INVESTMENT AGREEMENT
On October 31, 1995, the Company, the Bank and First Banks entered
into an Additional Investment Agreement amending Section 1(b)(iii) of the Stock
Purchase Agreement. The Additional Investment Agreement provides that First
Banks would loan to the Company $1.5 million, which funds the Company will
contribute to the Bank. In exchange for the $1.5 million, the Company issued
to First Banks the Investment Debenture. If the stockholders approve the Stock
Purchase Agreement, the Investment Debenture will be convertible into a total
of 15,000,000 shares of Company Common Stock, and if the stockholders fail to
approve the Stock Purchase Agreement, into a number of shares of Bank Common
Stock based on the book value of the Bank Common Stock on the last day of the
month preceding the conversion. The remaining terms of the Investment
Debenture, including the maturity date, security and interest rate, are
identical to those of the Debenture.
SUMMARY OF EFFECT OF STOCKHOLDER APPROVAL OF AGREEMENT
In the event that the stockholders of the Company approve the Stock
Purchase Agreement at the Meeting, and assuming that all necessary regulatory
approvals have been obtained, the following will occur:
- The Company will issue 50,000,000 shares of Company Common
Stock to First Banks in exchange for the tender by First Banks
of the 750,000 shares of Bank Preferred Stock and 116,666,666
shares of Bank Common Stock then held by First Banks;
- First Banks will loan the Company $5.0 million secured by the
shares of Bank Common Stock owned by the Company, and the
Company will issue to First Banks the Debenture and execute
the Stock Pledge Agreement in exchange therefor. The
Debenture will bear interest at the rate of 12% per annum and
the principal sum, as well as any accrued but unpaid interest,
shall be convertible into shares of Company Common Stock at a
price of $0.10 per share;
- All of the proceeds of the $5.0 million loan, less $250,000,
will be contributed by the Company to the Bank;
- The Investment Debenture will be convertible into 15,000,000
shares of Company Common Stock;
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<PAGE> 16
- The Proxy Agreement will terminate on the first business day
following stockholder approval of the Stock Purchase
Agreement, giving First Banks voting power over the
116,666,666 shares of Bank Common Stock purchased by First
Banks as a result of the August Infusion until such Bank
Common Stock is exchanged for Company Common Stock (as
described above);
- The Company will issue to stockholders of the Company as of
the Record Date certain special asset appreciation rights
described below, which will provide stockholders with the
possibility of receiving additional shares of Company Common
Stock; and
- The Company's Stockholder Rights Agreement will be amended as
described herein.
In the event that the stockholders of the Company fail to approve the
Stock Purchase Agreement, or in the event the Meeting is not held prior to
December 31, 1995, then, assuming that all regulatory approvals have been
obtained, the following will occur:
- First Banks will purchase an additional $5.0 million in shares
of Bank Common Stock at the book value per share on the
business day immediately preceding the date of such purchase
and such shares will not be subject to any voting
restrictions;
- The Investment Debenture will be convertible into a number of
shares of Bank Common Stock based on the book value thereof;
- The Proxy Agreement will terminate, giving First Banks voting
power over the 116,666,666 shares of Bank Common Stock;
- As a result of First Banks $10.0 million investment in the
Bank, First Banks will be deemed to be the beneficial owner of
99.56% of the outstanding Bank Common Stock, which is the only
class of stock of the Bank entitled to voting rights; and
- The Company's ownership interest in the Bank will be reduced
to approximately 0.44% of the outstanding Bank Common Stock.
RIGHT TO NOMINATE DIRECTORS
Pursuant to the Stock Purchase Agreement, upon First Banks' infusion
of $3.5 million into the Bank, the following three (3) persons designated by
First Banks, James F. Dierberg, Allen H. Blake and Donald W. Williams, were
elected to the Bank's Board of Directors. Similarly, and having received all
necessary regulatory approvals, the Company has agreed to elect to its Board of
Directors, immediately upon receiving stockholder approval of the Stock
Purchase Agreement at the Meeting, three (3) of First Banks' nominees. The
Company also shall present such nominees to the stockholders at the next Annual
Meeting of Stockholders of the Company. Finally, the Company has agreed to use
reasonable efforts to retain at least two (2) of the Company's present
directors on the Board of Directors through June 30, 1996.
POSSIBLE COMPANY OFFERING
The Stock Purchase Agreement refers to an offering which the Company
has the discretion and presently intends to make to its existing stockholders
of rights to purchase additional shares of Company Common Stock (the "Rights
Offering") and a dividend exchange offer ("Dividend Exchange Offer") to certain
persons who were Company stockholders of record on June 15, 1992 or September
14, 1992. On May 31, 1995, the Company filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-1 (the
"Registration Statement") with respect to the Rights Offering, a public
offering of Company Common Stock and the Dividend Exchange Offer (collectively,
the "Offering"). THE REGISTRATION STATEMENT HAS NOT BEEN DECLARED EFFECTIVE BY
THE COMMISSION AND, IN THE EVENT THE COMPANY PROCEEDS WITH THE OFFERING, THE
CONTENTS OF THE REGISTRATION STATEMENT WILL REQUIRE
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<PAGE> 17
AMENDMENT IN MATERIAL RESPECTS. THIS PROXY STATEMENT IS NOT TO BE CONSIDERED
AN OFFER FOR SALE OR AN OFFER TO PURCHASE SHARES OF COMPANY COMMON STOCK IN THE
OFFERING.
Pursuant to the Stock Purchase Agreement, the Company and First Banks
have agreed that the Rights Offering, if conducted, shall not exceed $5.0
million and that any public offering component of the Offering shall not exceed
$1.0 million of the $5.0 million total and will be conducted on a best efforts
basis. Thus, no assurance can be given as to the amount of proceeds, if any,
which may be obtained from the Offering.
The Company and First Banks have agreed that the purchase price of the
shares of Company Common Stock offered and sold in the Offering shall be $0.10
per share, the price which was used to calculate the number of shares of
Company Common Stock First Banks would receive pursuant to the Stock Purchase
Agreement as a result of First Banks' tender of shares of Bank Preferred Stock
and Bank Common Stock and its conversion of the Debenture. Each stockholder
who participates in the Rights Offering will have an oversubscription privilege
and will be entitled to subscribe for additional shares of Company Common Stock
that are not otherwise subscribed for in the Rights Offering.
In addition, the Dividend Exchange Offer will provide for the
distribution of dividend rights to persons who were stockholders of the Company
of record on June 15 or September 14, 1992. The dividend rights will be
exchangeable for shares of Company Common Stock in discharge of the Company's
outstanding obligation to pay to the applicable stockholders two dividends
declared by the Board of Directors of the Company, each in the amount of $0.08
per share plus interest accrued thereon, which remained unpaid as of October
31, 1995. As of October 31, 1995, the accumulated dividend and interest amount
per share was approximately $0.20.
The Stock Purchase Agreement provides that the Board of Directors, in
consultation with First Banks, may determine the optimal time to commence the
Offering, may choose not to conduct the Offering or any component thereof or
may withdraw or amend the Registration Statement or any component of the
Offering. In the event the stockholders of the Company fail to approve the
Stock Purchase Agreement at the Meeting, the Company has the right not to
conduct the Offering and, in such event, it is unlikely that the Company will
conduct the Offering.
The purpose of the Offering, when and if conducted, will be to raise
additional capital for the Company in order to maintain compliance with
regulatory capital levels and to provide the stockholders of the Company with
the opportunity to increase their proportionate investment in the Company
vis-a-vis First Banks. First Banks and Dierberg have agreed, even if otherwise
eligible, not to participate in the Offering.
SUMMARY AND DESCRIPTION OF STOCKHOLDER RIGHTS
The following constitutes a summary description of the Stockholder
Rights (defined below), which the Company intends to issue in connection with
the Offering. The terms of the Stockholder Rights are subject to change,
however, and reference should be made to the terms of a definitive
Registration Statement, including a final prospectus, when and as declared
effective by the Commission.
The Company currently contemplates conducting the Offering by
distributing to stockholders of record as of the Record Date nontransferable
rights (the "Stockholder Rights") to purchase 10.695 shares of Company Common
Stock for each share held on the Record Date (the "Basic Subscription
Privilege"). In addition, any stockholder exercising the Basic Subscription
Privilege also would be entitled to exercise an oversubscription privilege (the
"Oversubscription Privilege") to the extent of available shares, subject to
reduction under certain circumstances. The exercise price for each share of
Company Common Stock would be $0.10 per share. Stockholder Rights would be
exercisable for a defined period, after which they would expire. Any shares
not subscribed for pursuant to Stockholder Rights would become available for
sale in the Public Offering, subject to the $1.0 million limitation.
CONDITIONS TO CLOSING
The closing of the sale of shares of Company Common Stock and issuance
of the Debenture to First Banks is conditioned on (i) First Banks and the
Company obtaining all approvals required under applicable state and federal law
and regulations promulgated thereunder, which approvals have been received,
(ii) the Company receiving stockholder
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<PAGE> 18
approval of the Stock Purchase Agreement and (iii) the continued accuracy of
the representations and warranties contained in the Stock Purchase Agreement.
The closing of the sale by the Bank of 116,666,666 shares of Bank Common Stock
to First Banks was consummated on August 23, 1995.
STANDSTILL PROVISIONS
Pursuant to the Stock Purchase Agreement, Dierberg and First Banks,
respectively, have agreed that during the period commencing on August 7, 1995,
and continuing until the Company Closing Date or the Second Bank Closing Date
(as such terms are defined in the Stock Purchase Agreement) (the "Pendency
Period"), neither of them will offer, sell, contract to sell or otherwise
dispose of, or bid for, purchase, contract to purchase or otherwise acquire,
any shares of Company Common Stock, Bank Common Stock or Bank Preferred Stock
except in accordance with applicable laws, including all applicable securities
laws.
In addition, the Stock Purchase Agreement provides that the Company
and the Bank, respectively, will not issue, during the Pendency Period, any
securities or rights to acquire securities except (i) as contemplated in the
Stock Purchase Agreement, (ii) as described in the Registration Statement as
currently on file with the Commission or the Registration Statement as it may
subsequently be amended, (iii) as may be required pursuant to the terms of the
Company's employee and director stock option plans in accordance with past
practice, or (iv) unless required pursuant to a transaction involving a change
of control and which is subject to stockholder approval which transaction the
Board of Directors, upon the advice of counsel, is required to enter into in
order to comply with the Company's and the Bank's fiduciary duties to
stockholders imposed by law.
TERMINATION OF THE STOCK PURCHASE AGREEMENT AND LIQUIDATED DAMAGES
The Stock Purchase Agreement may be terminated under certain
circumstances, including (i) the parties mutually consenting thereto or (ii) a
breach of the representations, warranties or covenants given by any of the
parties. Finally, the Escrow Agreement provides that in the event First Banks
breaches its representations, warranties and/or covenants and the Stock
Purchase Agreement is thus terminated, the Company will receive liquidated
damages of $1.0 million as full compensation for harm which the Company may
have sustained as a result of such breach.
AMENDMENT OF THE STOCKHOLDER RIGHTS AGREEMENT
The stockholders of the Company approved the adoption of the Company's
Stockholder Rights Agreement (the "Rights Agreement") at the 1990 Special
Meeting of Stockholders, at which the reincorporation of the Company in the
State of Delaware also was approved. As a result of the current financial
condition of the Company and the Bank, the Board of Directors agreed to amend
the Rights Agreement ("Amendment No. 1 to the Rights Agreement") to exempt the
transactions contemplated by the Stock Purchase Agreement from triggering the
operation of the Rights Agreement. The Board of Directors deems Amendment No.
1 to the Rights Agreement to be in the best interests of the stockholders of
the Company and the holders of the Rights (as defined below). The description
of Amendment No. 1 to the Rights Agreement below is intended as a summary only
and is qualified in its entirety by reference to Amendment No. 1 to the Rights
Agreement which is attached hereto as Exhibit C and the Rights Agreement which
is attached hereto as Exhibit D.
The Rights Agreement provides that the holders of each outstanding
share of Company Common Stock are entitled to a right ("Right") to purchase
from the Company a unit consisting of one-hundredth of a share (a "Unit") of
Series A Participating Preferred Stock, par value $.01 per share ("Series A
Participating Preferred Stock"), at a price of $50 in cash per Unit, subject to
adjustment. The Right attaches to each share of Company Common Stock
outstanding and no separate Rights Certificates have been distributed. The
Rights will separate from the Company Common Stock and a "Distribution Date"
will occur upon the earlier of (i) ten (10) days following a public
announcement that a person or group of Affiliates or Associates (as such terms
are defined in the Rights Agreement) (an "Acquiring Person") has acquired, or
obtained the right to acquire, beneficial ownership of twenty (20%) percent or
more of the outstanding shares of Company Common Stock (the "Stock Acquisition
Date") or (ii) ten (10) days following the commencement of a tender offer or
exchange offer that would result in a person or group beneficially owning
twenty-five (25%) percent or more of such outstanding shares of Company Common
Stock. The Rights Agreement provides that Rights are not exercisable until
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a Distribution Date occurs and that as soon as practicable after the
Distribution Date, Rights Certificates will be mailed to the holders of record
of Company Common Stock as of the close of business on the Distribution Date.
Once the Rights Certificates have been mailed, the separate Rights Certificates
alone will represent the Rights.
The Rights Agreement provides that if at any time following the
Distribution Date, (i) a person becomes the beneficial owner of more than
twenty-five (25%) percent of the then outstanding shares of Company Common
Stock except pursuant to an offer for all outstanding shares of Company Common
Stock which the independent directors of the Company determine to be fair to,
and otherwise in the best interests of, the stockholders of the Company, or
(ii) the Company is the surviving corporation in a merger with an Acquiring
Person and Company Common Stock is not changed or exchanged, each holder of a
Right will have the right to receive, upon exercise, Company Common Stock (or,
in certain circumstances, cash, property or other securities of the Company)
having a value equal to two times the exercise price of the Right.
Notwithstanding the foregoing, following the occurrence of any of the events
set forth in this paragraph, all Rights that are, or (under certain
circumstances specified in the Rights Agreement) were, beneficially owned by
any Acquiring Person will be null and void.
In addition, the Rights Agreement provides that a "Triggering Event"
exists if (i) the Company is acquired in a merger or other business combination
transaction in which the Company is not the surviving corporation or Company
Common Stock is changed or exchanged (other than a merger which follows an
offer described in clause (i) of the preceding paragraph) or (ii) fifty percent
(50%) or more of the Company's assets or earning power are sold or transferred.
Upon the occurrence of a Triggering Event, each holder of a Right (except
Rights which previously have been voided as set forth above) will have the
right to receive, upon exercise, common stock of the acquiring company having a
value equal to two times the exercise price of the Right.
Amendment No. 1 to the Rights Agreement contains provisions in order
to exclude the applicability of the Rights Agreement from the transactions
contemplated by the Stock Purchase Agreement. Amendment No. 1 to the Rights
Agreement excludes First Banks and all Affiliates and Associates of First Banks
from the definition of Acquiring Person and excludes from the definition of
Stock Acquisition Date any report filed with respect to the Company pursuant to
Section 13(d) under the 1934 Act by Dierberg, First Banks or any Affiliates or
Associates of First Banks. Amendment No. 1 to the Rights Agreement also
excludes all the transactions contemplated by the Stock Purchase Agreement from
the definition of Triggering Event.
In addition, Amendment No. 1 to the Rights Agreement excludes the
transactions contemplated by the Stock Purchase Agreement from the definition
of (i) a "Section 11(a)(ii) Event" which provides for the adjustment of the
purchase price, number of shares and kind of Series A Participating Preferred
Stock under certain circumstances and (ii) a "Section 13 Event" which provides
the rights of the holder of a Right in the event of a consolidation or merger
involving the Company or a transfer of assets or earning power of the Company
or the Bank.
Furthermore, Amendment No. 1 to the Rights Agreement provides that the
Board of Directors may, at its option, redeem any and all of the outstanding
Rights or settle any disputes between the Company and any of its stockholders
or any person claiming the right to have distributed Rights at a redemption
price of $.05 per Right or such disputed Right.
EFFECT OF AMENDMENT NO. 1 TO THE RIGHTS AGREEMENT
Under normal circumstances, the acquisition of Company Common Stock by
First Banks would have been subject to the provisions of and would have
triggered the entitlement of the stockholders of the Company to Rights under
the Rights Agreement. However, due to the critical financial condition of the
Company and the Bank and the need for immediate capital infusions, the
acquisition of Company Common Stock and all other transactions contemplated
under the Stock Purchase Agreement have been exempted from the provisions of
the Rights Agreement as a result of the provisions of Amendment No. 1 to the
Rights Agreement and, thus, the stockholders' Rights in connection therewith
are inoperative.
If the stockholders of the Company fail to approve the terms of the
Stock Purchase Agreement, the Rights Agreement will not be amended as described
herein. However, because First Banks would own 99.56% of the Bank,
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the Company's only earning asset, it is unlikely that a potential acquiror
would seek to acquire the Company, thus rendering the Rights Agreement
essentially inoperative.
Because the acquisition by First Banks of more than 15% of the voting
control of the Company was approved by the Board of Directors, First Banks will
not be subject to certain restrictions which otherwise would be imposed
pursuant to Section 203 of the Delaware General Corporation Law.
ISSUANCE OF APPRECIATION RIGHTS
The Stock Purchase Agreement contains provisions designed to give the
stockholders of the Company as of the Record Date the benefit of any recoveries
the Bank may experience upon the liquidation, sale or other resolution of
certain charged-off assets of the Bank (the "Specified Assets"). Section 3(c)
of the Stock Purchase Agreement provides that if the stockholders of the
Company approve the Stock Purchase Agreement, the Company shall issue to each
stockholder as of the Record Date, certain non-transferable asset appreciation
rights ("Appreciation Rights") which shall permit such stockholders to receive,
at the Company's option, cash or shares of Company Common Stock ("Rights
Shares") without the payment of any additional consideration. The Company will
register the Appreciation Rights under the Securities Act of 1933, as amended.
Section 3(c) of the Stock Purchase Agreement sets forth certain
formulas (the "Measurement Formulas") to be used to determine whether the
Company shall distribute Rights Shares or cash pursuant to the Appreciation
Rights. The Measurement Formulas take into account recoveries on assets of the
Bank which were charged-off as of June 30, 1995, the cost of capital to the
Company and the Bank, certain expenses of the Offering, a reasonable reserve
for pending or threatened litigation related to the resolution of the Specified
Assets or certain stockholder litigation and other factors. The Board of
Directors may determine in its sole discretion (subject to regulatory approval)
whether cash or Rights Shares will be distributed pursuant to the Appreciation
Rights. The Stock Purchase Agreement provides that calculations pursuant to
the Measurement Formulas will occur and distribution of Rights Shares (or
cash), if any, may occur at each of three dates: June 30, 1996, December 31,
1997 and October 31, 1998. No Rights Shares or cash will be distributed if the
outcome of the calculations pursuant to the Measurement Formulas are negative.
The provisions allowing the Company to distribute Rights Shares (or
cash) to stockholders are designed to preserve for the current stockholders of
the Company the benefits of recoveries on assets, if any, which were written
off prior to First Banks' investment in the Company and the Bank.
SUMMARY AND DESCRIPTION OF THE APPRECIATION RIGHTS
The following constitutes a summary description of the Appreciation
Rights. Reference should be made to the Stock Purchase Agreement for the
definitive terms thereof.
If the stockholders of the Company approve the Stock Purchase
Agreement at the Meeting, the Company will issue Appreciation Rights to
stockholders as of the Record Date. The Appreciation Rights shall permit
stockholders to receive cash or Rights Shares on one or more of three
distribution dates, provided that the result of the Measurement Formulas
contained in the Stock Purchase Agreement is positive for each such
distribution date. The distribution dates are: June 30, 1996, December 31,
1997 and October 31, 1998. If the result of the Measurement Formulas is
positive for any distribution date, the Board of Directors of the Company has
the discretion to determine whether cash or Rights Shares will be distributed.
If distributed, Rights Shares will be exercisable for no additional
consideration.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a brief description of certain federal income tax
consequences which may be realized by stockholders from acquisition of the
Appreciation Rights. The discussion is based upon the existing provisions of
the Internal Revenue Code of 1986, as amended ("IRC"), the Treasury Regulations
promulgated thereunder, current positions of the Internal Revenue Service
contained in published revenue rulings and revenue procedures, and existing
judicial decisions, all of which are subject to change with or without
retroactive effect.
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<PAGE> 21
THIS DISCUSSION IS ONLY A SUMMARY AND IS NOT INTENDED AS A SUBSTITUTE
FOR CAREFUL TAX PLANNING, PARTICULARLY BECAUSE THE INCOME TAX CONSEQUENCES ARE
COMPLEX AND MAY NOT BE THE SAME FOR ALL RECIPIENTS OF THE APPRECIATION RIGHTS.
STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS AS TO THE TAX CONSEQUENCES
TO THEM OF RECEIPT OF THE APPRECIATION RIGHTS, INCLUDING THE APPLICABILITY OF
STATE, LOCAL AND OTHER TAX LAWS.
RECEIPT OF THE APPRECIATION RIGHTS
As described herein, the distribution of the Appreciation Rights may
be taxable to the stockholders. Generally, if common stock (or rights to
acquire stock such as the Appreciation Rights) is distributed pro rata to all
stockholders, the distribution is not subject to federal income tax. If,
however, the distribution (or a series of distributions) results in (i) the
receipt of property (including money) by some stockholders and (ii) an increase
in the proportionate interest of other stockholders in the earnings and profits
or assets of the corporation, the distribution of stock (or rights) may be
taxable to the stockholders. Such a stock distribution may be treated as a
distribution of property. Generally, cash and stock distributions occurring
within three years of each other are presumed to result in a taxable stock
distribution under IRC Section 305(b)(2).
For this purpose, a holder of a convertible debenture is treated as a
stockholder. Thus, if First Banks receives cash interest payments on the
Debenture, this would be treated as if a cash distribution were made to First
Banks in its capacity as a stockholder. Further, the distribution of the
Appreciation Rights appears to increase the proportionate interest of certain
but not all stockholders of the Company in the assets or earnings and profits
of the Company because it is only made to stockholders as of the Record Date,
which would exclude First Banks even if First Banks subsequently becomes a
stockholder of the Company as a result of the consummation of the transactions
contemplated if the Stock Purchase Agreement is approved by the stockholders of
the Company at the Meeting.
Accordingly, if First Banks receives cash interest payments on the
Debenture, the distribution of the Appreciation Rights may be treated as a
distribution of property under IRC Section 305(b)(2). On the other hand, if
First Bank receives only Company Common Stock as interest payments on the
Debenture, and if there are no other property or cash distributions to First
Banks (or nonrecord stockholders), then the distribution of Appreciation Rights
would not be treated as a distribution of property.
If the distribution of Appreciation Rights is treated as a
distribution of property, the stockholders receiving the Appreciation Rights
will receive a distribution equal to the fair market value of the Appreciation
Rights. In that case, the distribution will be taxable as ordinary dividend
income to the extent of the Company's current or accumulated earnings and
profits. To the extent distributions exceed the stockholder's allocable share
of the Company's current or accumulated earnings and profits, the distributions
will be treated as a return of capital, reducing the adjusted basis of the
Company Common Stock held by the stockholder. Any remaining distributions will
be treated as capital gain, if the Company Common Stock is held as a capital
asset. The stockholder will have a tax basis in the Appreciation Rights equal
to the fair market value of such Appreciation Rights.
Under current law, an individual is subject to a maximum 39.6% federal
income tax rate on ordinary income (including dividends), and a maximum 28%
federal tax rate on long-term capital gains (gain from the sale of a capital
asset held for more than one year). Generally, a corporation is subject to a
maximum 35% federal income tax rate on all taxable income.
Corporate recipients of dividends will be eligible for the 70%
dividends received deduction allowable to corporations under IRC Section 243,
subject to the applicable 45-day or 90-day holding period requirement and debt
financed portfolio stock limitations contained in IRC Sections 246 and 246A.
Corporate stockholders also may be subject to the "extraordinary dividend"
rules of IRC Section 1059 and the possible reduction or elimination of the
benefit of the dividends received deduction by the corporate alternative
minimum tax.
In contrast, if the distribution of the Appreciation Rights is not
treated as a distribution of property, the distribution would not be subject to
federal income tax. The stockholder would allocate its total tax basis in its
Company Common Stock between the Company Common Stock and the Appreciation
Rights, based on the relative fair market value of each on the distribution
date. If the fair market value of the Appreciation Rights is less than 15% of
the value of the
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<PAGE> 22
Company Common Stock held by the stockholder, however, the tax basis of the
Appreciation Rights is zero (unless the stockholder elects to allocate basis to
the Appreciation Rights).
RECEIPT OF COMPANY COMMON STOCK OR CASH FOR APPRECIATION RIGHTS
Although the law is not entirely clear, it appears that a stockholder
is not subject to taxation on receipt of Company Common Stock for the
Appreciation Right. In that case, a stockholder must allocate its tax basis in
the Appreciation Rights among the shares of Company Common Stock acquired.
The law is not clear as to the proper method for making such allocation.
Moreover, there is little legal authority dealing with these issues, and the
IRS could contend that the stockholders are subject to taxation upon receipt of
the Company Common Stock, based upon the difference between the fair market
value of the Company Common Stock and the stockholder's tax basis in the
Appreciation Rights.
If the stockholder receives cash for its Appreciation Rights, it will
have gain or loss equal to the difference between the cash received and its tax
basis in the Appreciation Right.
SALE OF COMPANY COMMON STOCK
If a stockholder sells Company Common Stock received under the
Appreciation Rights, the stockholder will realize a gain or loss equal to the
difference between the amount realized on the sale and the stockholder's tax
basis in the Company Common Stock sold. If the Company Common Stock is held as
a capital asset, this gain or loss will be capital gain or loss.
BACKUP WITHHOLDING
A holder of Company Common Stock may be subject to backup withholding
at the rate of 31% on dividends received on the Company Common Stock (whether
in the form of a distribution of the Appreciation Rights or otherwise). Backup
withholding may apply if (i) the holder of Company Common Stock fails to
furnish a taxpayer identification number ("TIN") to the Company; (ii) the
Internal Revenue Service ("IRS") notifies the Company that the TIN furnished by
the holder of Company Common Stock is incorrect; (iii) there has been a
"notified payee under reporting;" or (iv) there has been a failure of the
holder of Company Common Stock to certify under penalty of perjury that such
holder is not subject to withholding. If any one of these events occurs, the
Company may be required to withhold a tax equal to 31% from any dividend
payment made with respect to the Company Common Stock or, in certain cases,
from the proceeds of a sale of the Company Common Stock.
FOREIGN WITHHOLDING
If a recipient of a dividend on Company Common Stock (whether in the
form of a distribution of the Appreciation Rights or otherwise) is a foreign
individual or foreign corporation not engaged in business in the U.S., such
recipient may be subject to a 30% withholding tax on any such dividend. The
withholding tax may be decreased if such recipient qualifies for a reduced
withholding rate on dividends under an applicable U.S. tax treaty.
LIMITATION ON NET OPERATING LOSSES
Under IRC Section 382, if an "ownership change" occurs with respect to
a corporation which has net operating loss ("NOL") carryovers and other tax
attributes, the ability of the corporation to use such attributes following the
ownership change may be substantially limited. The purchase by First Banks of
Bank Common Stock constituted an ownership change and, accordingly, the ability
of the Company to use its NOL and other tax attributes to reduce future taxable
income has been substantially limited.
INFORMATION WITH RESPECT TO FIRST BANKS, INC.
First Banks, headquartered in St. Louis County, Missouri, is a
Missouri corporation and a registered bank holding company under the Bank
Holding Company Act of 1956, as amended. Its principal executive offices are
located
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<PAGE> 23
at 135 North Meramec, Clayton, Missouri 63105 and its telephone number is (314)
854-4600. At September 30, 1995, First Banks had approximately $3.70 billion
in total assets, $2.75 billion in total loans, net of unearned discount, $3.17
billion in total deposits, and $230.1 million in total stockholders' equity.
As of September 30, 1995, First Banks operated primarily through three
wholly-owned bank subsidiaries, one majority-owned bank subsidiary, and three
wholly-owned thrift subsidiaries.
First Banks' subsidiary financial institutions (the "Subsidiary
Financial Institutions") are: First Bank, headquartered in St. Louis County,
Missouri; First Bank, headquartered in O'Fallon, Illinois; First Bank & Trust,
headquartered in Santa Ana, California; First Bank FSB, headquartered in St.
Louis County, Missouri; Bank TEXAS National Association, headquartered in
Houston, Texas; St. Charles Federal Savings and Loan Association, headquartered
in St. Charles, Missouri; La Cumbre Savings Bank, F.S.B., headquartered in
Santa Barbara, California; and First Commercial Bank, headquartered in
Sacramento, California.
Through the 120 locations of the Subsidiary Financial Institutions,
First Banks offers a broad range of 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, financial, agricultural, municipal and industrial development, real
estate construction and development, residential real estate, consumer and
installment loans. Other financial services include mortgage banking, discount
brokerage, credit-related insurance, automatic teller machines, safe deposit
boxes, and trust services offered by certain Subsidiary Financial Institutions.
First Banks' Class C Preferred stock is quoted on the NASDAQ National Market
System under the symbol "FBNKP." First Banks America Inc. stock is quoted on
the NYSE under the symbol "FBA."
VOTE REQUIRED AND BOARD RECOMMENDATION
THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF THE ISSUED AND
OUTSTANDING SHARES OF COMPANY COMMON STOCK CAST AT THE MEETING, ASSUMING A
QUORUM IS PRESENT, IS REQUIRED FOR APPROVAL OF THE STOCK PURCHASE AGREEMENT AND
THE TRANSACTIONS AND CHANGE IN CONTROL CONTEMPLATED THEREBY.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE STOCK
PURCHASE AGREEMENT.
REGULATORY AGREEMENTS AND ORDERS
FDIC AND STATE BANKING DEPARTMENT REGULATORY ORDERS
As a result of an examination of the Bank by the FDIC and SBD, which
was concluded during the second quarter of 1993, the Bank consented to enter
into an amended Cease and Desist Order with the FDIC on July 27, 1993 (the
"FDIC Cease and Desist Order"). Similarly, the Bank consented on July 6, 1993
to the entrance of a Final Order under Financial Code Section 1913 with the
SBD, which was amended on March 30, 1995 (the "SBD Final Order") (collectively
defined as the "Orders" in footnote 3 above). The Orders remain in effect.
During the third quarter of 1995, the FDIC and the SBD completed a joint
examination of the Bank which was commenced on May 22, 1995.
Pursuant to the Orders, the Bank is required to: (a) maintain
management acceptable to the SBD and FDIC; (b) notify the SBD in writing prior
to adding any individual to its Board of Directors; (c) charge off assets
classified loss noted in the Report of Examination of the Bank as of March 25,
1994 ("1994 Report"); (d) reduce assets classified substandard in accordance
with a prescribed schedule; (e) reduce the amount of assets listed for
attention in the 1994 Report within a certain timeframe; (f) within 30 days,
develop and adopt and thereafter implement a profit plan and month-by-month
budget; (g) within 30 days, adopt and thereafter implement a strategic plan to
return the Bank to a profitable condition, in a form acceptable to the SBD and
FDIC; (h) not later than June 30, 1995, increase tangible shareholders' equity
to not less than 6.5% of tangible assets and increase such ratio to 7.0% by
December 31, 1995 and maintain such 7% ratio during the life of the Orders; (i)
make no distributions to any stockholder without the prior written consent of
the SBD; (j) immediately comply with all laws and regulations and correct or
eliminate within 30 days any apparent violations noted in the 1994 Report; and
(k) establish a committee to assure compliance with the SBD Final Order. All
of the items in the Orders have been complied with timely, except as discussed
herein.
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<PAGE> 24
With respect to acceptable management, as of June 1, 1994, James E.
Culleton, the Executive Vice President of the Company and Executive Vice
President and Chief Operating Officer of the Bank, was named as Interim
President of the Company and the Bank until a permanent President and Chief
Executive Officer could be employed. Applications have been approved by the
SBD and FDIC for approval of Mr. Culleton to serve as the permanent President
and Chief Operating Officer of the Bank, and Donald W. Williams has been
appointed Chief Executive Officer of the Bank. An application also will be
filed with the Reserve Bank for approval of Mr. Williams to serve as President
and Chief Executive Officer of the Company. The requisite applications have
been filed with the FDIC and the SBD to obtain the necessary approvals for
Terrance McCarthy to be appointed as Senior Vice President and Chief Credit
Officer of the Bank.
Pursuant to the Orders, the Bank agreed to maintain adjusted Tier 1
capital equal to or exceeding 6.5% of the Bank's total assets. Furthermore,
the Bank is required to maintain tangible shareholders' equity plus mandatorily
convertible subordinated debt equal to not less than 6.5% of total tangible
assets, and a minimum tangible shareholders' equity plus mandatorily
convertible subordinated debt of $12,300,000. The SBD Final Order requires the
ratio of shareholders' equity to tangible assets to increase to 7% at December
31, 1995.
In response to its capital deficiency, the Bank submitted to the FDIC
on August 23, 1994 its Capital Restoration Plan (the "Capital Plan") which was
amended on November 22, 1994, and approved by the FDIC on January 30, 1995.
One of the components of the Capital Plan consists of a decrease in the Bank's
asset size. On January 21, 1995, the Bank consummated the sale of its San
Diego branch office to the Bank of Commerce, and on April 14, 1995, the Bank's
Santa Rosa branch office was closed. On August 31, 1995, the Company moved its
corporate headquarters to the branch office of the Bank located at 865 Howe
Avenue, Sacramento, California, thus decreasing overhead by $24,000 per month.
As a result of the losses occurring during the year ended December 31,
1994 and the nine-month period ended September 30, 1995, the Bank is not in
compliance with its mandatory capital ratios. As of September 30, 1995, the
Bank's adjusted Tier 1 capital ratio was 2.41%, and the Bank's tangible
shareholders' equity plus mandatorily convertible subordinated debt was 2.36%
of total tangible assets. At that date, the Bank's tangible shareholders'
equity was $4,162,717, which includes the conversion of a $2,400,000
mandatorily convertible subordinated note and the contribution of $1,402,000 of
capital from the Company. As of October 31, 1995, the Bank's tangible
shareholders' equity was $5,436,000 and its Tier 1 capital ratio was 3.19%.
The Bank received a letter dated July 25, 1995, as amended on August
9, 1995, from the Superintendent of the SBD setting forth revised time frames
for the Bank to increase its capital levels. Under the terms of such letter,
the Bank must, (i) before August 25, 1995, increase its tangible shareholders'
equity to at least $5,160,000, or approximately 3% of the Bank's total tangible
assets (the "First Installment") and, (ii) on or before October 31, 1995,
increase its tangible shareholders' equity to at least $11,180,000, or
approximately 6.5% of the Bank's total tangible assets, including the increase
called for by the First Installment. The SBD decreased the October 31, 1995
6.5% requirement to 3.0%, as a result of First Banks' agreement to purchase the
$1.5 million Investment Debenture from the Company, and the contribution of
those funds to the Bank.
Another component of the Capital Plan is the raising of capital. In
addition to the $11.5 million recapitalization of the Company and the Bank by
First Banks (described above), the Company presently intends to conduct the
Offering to raise additional capital, which Offering shall not exceed $5.0
million pursuant to the terms of the Stock Purchase Agreement. The Company
also is considering conducting a Dividend Exchange Offer for approximately an
additional $1.0 million. In the event the Bank's Tier 1 capital ratio does not
reach 7.0% at December 31, 1995, the Stock Purchase Agreement provides that
First Banks may purchase shares of Company and/or Bank Common Stock sufficient
to meet this requirement. If First Banks chooses not to purchase such Company
or Bank shares, the Bank will consider other methods of raising capital,
including the sale of Bank assets, in order to reach the required capital
requirements.
The Bank continues to be designated as a problem bank and is
considered "troubled" for all regulatory purposes. Accordingly, the Bank is
required to provide prior notice to the FDIC of the employment of any senior
officer or appointment of a director. Due to the Bank's current regulatory
capital ratios, the Bank is prohibited from accepting funds
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obtained directly or indirectly through a deposit broker. In addition, the
Bank cannot provide pass-through deposit insurance to employee benefit plan
deposits so long as it is ineligible to accept brokered deposits.
Failure to comply with the terms of the Orders could result in various
regulatory actions against the Bank, including recapitalization, merger, and/or
acquisition of the Bank.
STATE CAPITAL IMPAIRMENT ORDERS
The Financial Code requires the Superintendent of the SBD to order any
bank whose contributed capital is impaired to correct such impairment within 60
days of the date of the order. Under Section 134(b) of the Financial Code, the
"contributed capital" of a bank, defined as all shareholders' 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.
The Bank received notices from the SBD (the "Capital Impairment
Orders") dated August 3, 1994, November 3, 1994, February 17, 1995, March 15,
1995, May 15, 1995 and August 7, 1995. As of September 30, 1995, the Bank had
contributed capital of $24.23 million and deficit-retained earnings of
approximately $20.07 million, or approximately 83% of contributed capital,
within the meaning of Section 134(b) of the Financial Code. Thus, under
Section 134(b) of the Financial Code, the Bank's contributed capital was
impaired as of that date in the approximate amount of $10.38 million. The Bank
has not complied with the Capital Impairment Orders.
Under Section 662 of the Financial Code, the Superintendent of the SBD
has the authority, in his or her discretion, to take certain appropriate
regulatory actions with respect to a bank having impaired contributed capital,
including possible seizure of such bank's assets. Under Section 663 of the
Financial Code, a bank that has deficit retained earnings may, subject to the
approval of its shareholders and of the Superintendent of the SBD, readjust its
accounts in a quasi-reorganization, which may include eliminating its deficit
retained earnings. However, a bank that is not able to effect such a
quasi-reorganization or otherwise to correct an impairment of its contributed
capital within 60 days of an order to do so from the Superintendent of the SBD
must levy and collect an assessment on its common shares pursuant to Section
423 of the California General Corporation Law.
The shareholders of the Bank, not the stockholders of the Company,
will receive any notices of assessment issued by the Bank. THE BANK IS IN
VIOLATION OF SECTION 662 OF THE FINANCIAL CODE WHICH REQUIRES IT TO ASSESS THE
OUTSTANDING SHARES OF BANK COMMON STOCK IN ORDER TO CORRECT THE IMPAIRMENT OF
THE BANK'S CAPITAL. AS LONG AS THE BANK'S CONTRIBUTED CAPITAL IS IMPAIRED AS
DEFINED UNDER CALIFORNIA LAW, THE SUPERINTENDENT OF THE SBD IS AUTHORIZED TO
TAKE POSSESSION OF THE PROPERTY AND BUSINESS OF THE BANK, TO CLOSE THE BANK OR
TO ORDER THE BANK TO COMPLY WITH THE LEGAL REQUIREMENT TO LEVY AN ASSESSMENT ON
THE OUTSTANDING SHARES OF BANK COMMON STOCK SUFFICIENT TO CORRECT THE
IMPAIRMENT. THE COMPANY, A SHAREHOLDER OF THE BANK, DOES NOT HAVE THE FUNDS TO
SATISFY SUCH AN ASSESSMENT.
The Bank's capital impairment may be corrected through earnings, by
raising additional capital or by a quasi-reorganization, subject to the
approval of the SBD. In a quasi-reorganization, the Bank's deficit retained
earnings would be reduced or eliminated by a corresponding reduction in the
Bank's contributed capital. As of September 30, 1995, the Bank would have been
required to raise $25,943,000 in new capital (inclusive of any proceeds from
the Offering) in order to correct its impaired contributed capital (because the
ratio of deficit retained earnings to contributed capital may not exceed 40%,
$2.50 of new capital must be raised for every dollar of impairment).
In order to permit a quasi-reorganization of a bank's capital, the SBD
requires, among other things, that a bank demonstrate that it is adequately
capitalized and that it is capable of operating profitably. Management
believes, although it cannot assure, that the Bank will be able to so
demonstrate at such time as the Bank's problem assets are substantially
resolved, and that it will then be possible for the Bank to effect a
quasi-reorganization, thus eliminating its capital impairment. Management
further believes that, because it is anticipated that the Bank would have high
leverage and
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<PAGE> 26
risk-based capital ratios after First Banks' investment in the Company and/or
the Bank, it is unlikely that the Superintendent of the SBD would seek to take
action solely on the basis of impaired capital as defined under Section 134 of
the Financial Code. There can be no assurance, however, that other
circumstances, such as insufficient liquidity, operating losses, or other
issues, could not arise that would provide incentives to the Superintendent to
utilize the powers granted by Section 134 of the Financial Code.
No assurance can be given that the Bank's capital condition will not
deteriorate further as a result of future operating losses prior to curing its
capital impairment. In addition, because a quasi-reorganization requires that
the Bank reduce its assets and liabilities to market value at the time of the
reorganization, the Bank's capital could be further reduced from its present
level as a result of such a reduction in the market value of the Bank's assets
over its liabilities. Finally, there can be no assurance that, following a
correction of the Bank's capital impairment (whether through a
quasi-reorganization or an infusion of sufficient capital to cure the
impairment or through earnings), the Bank's capital position will not continue
to erode through future operating losses. AS LONG AS THE BANK'S CONTRIBUTED
CAPITAL IS IMPAIRED, THE SUPERINTENDENT OF THE SBD IS AUTHORIZED TO TAKE
POSSESSION OF THE PROPERTY AND BUSINESS OF THE BANK, TO CLOSE THE BANK OR ORDER
THE BANK TO LEVY AN ASSESSMENT ON THE SHARES OF THE BANK HELD BY THE BANK'S
SHAREHOLDERS IN AN AMOUNT SUFFICIENT TO CORRECT THE IMPAIRMENT. THE COMPANY, A
SHAREHOLDER OF THE BANK, DOES NOT HAVE THE FUNDS TO SATISFY SUCH AN ASSESSMENT.
FEDERAL RESERVE BANK MEMORANDUM OF UNDERSTANDING
On October 17, 1994, the Company entered into a Memorandum of
Understanding ("MOU") with the Reserve Bank. Under the terms of the MOU, (i)
the Company may not declare or pay any dividends without the prior written
approval of the Reserve Bank, and may not take dividends from the Bank without
providing prior written notice to the Reserve Bank; (ii) the Company must
submit to the Reserve Bank a written plan to improve and maintain an adequate
capital position at the Company and the Bank; and (iii) the Company must take
reasonable actions to employ a full-time President for the Company and the
Bank. Further, the MOU sets forth restrictions on certain transactions between
the Bank and the Company; directs the Company to prepare and submit to the
Reserve Bank certain policies and procedures and financial information; and
requires the Company to provide prior notice to the Reserve Bank of any new, or
the renewal or modification of any existing, employment, service or severance
contracts with any executive officer. Within 45 days of the end of each
calendar quarter, the Company must submit to the Reserve Bank a written
Progress Report regarding the Company's compliance with the terms of the MOU.
On August 23, 1994, the Company submitted to the Reserve Bank its
Capital Plan setting forth the Company's plans for improving and maintaining an
adequate capital position at the Company and the Bank. The Company, however,
has not met the capital goals set forth in its Capital Plan.
1995 REGULATORY EXAMINATION
In connection with the joint examination of the Bank by the FDIC and
the SBD which commenced on May 22, 1995, the Bank was generally criticized by
the regulatory authorities for lack of a permanent Chief Executive Officer,
excessive loan losses, poor quality assets, large provisions for loan losses,
write-downs of other real estate, apparent violations of law, and inadequate
capital. Although the FDIC and the SBD believed the loan loss reserve was
underfunded as of May 22, 1995, the Bank, through its provision to loan loss
reserves for the second quarter of 1995 was in full compliance with all
recommended write-offs and write- downs, including an adequate loan loss
reserve as of June 30, 1995.
In addition, the FDIC has criticized the Bank for, in the FDIC's
opinion, not filing accurate Call Reports for December 1994 and March 1995.
The SBD examiners did not concur with the FDIC's opinion that these Call
Reports required restatement. The FDIC's criticism relates to two loans which
were written-off by the Bank during the second quarter of 1995, which the FDIC
claims should have been written off as of December 31, 1994. Following a
review of these loans and after consultation with the Company's independent
public accountants, the Board of Directors and management of the Bank do not
agree that these loans should have been written off at December 31, 1994, based
upon all relevant information available to them at December 31, 1994.
Accordingly, the Company has determined that it is not required to restate GAAP
financial statements as filed in its Annual Report on Form 10-K for the fiscal
year 1994 nor
-23-
<PAGE> 27
its Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1995, even if the Company restates its December 1994 and March 1995 FDIC Call
Reports to prevent further criticism by the FDIC.
COMPLIANCE WITH ORDERS AND MEMORANDUM
As of September 30, 1995, the Company and the Bank believe they are in
substantial compliance with the FDIC Cease and Desist Order and the SBD Final
Order except for reaching the 6.5% Tier 1 capital requirements of the Orders,
and, with respect to the FDIC's criticism concerning restating the Bank's
December 1994 and March 1995 Call Reports. In addition, based upon the
contemplated approval by the Reserve Bank of Mr. Williams as the Company's
President and Chief Executive Officer, the Company believes it will be in
substantial compliance with the MOU.
Full compliance with the capital requirements of the Company's MOU and
the 6.5% Tier 1 capital requirements of the Orders, as well as compliance with
the 7% Tier 1 capital requirement of the SBD Final Order is anticipated
following the approval of the Company's Stock Purchase Agreement by the
Company's stockholders and the completion of First Bank's capital investments,
as provided for therein and through a combination of the Company's proposed
stockholder rights offering, and the reduction of assets through the sale of
additional Bank branch offices, if necessary. The Bank, as yet, has not made a
final decision whether to restate its FDIC call reports for December 1994 and
March 1995.
Methods for the Bank's compliance with the Capital Impairment Orders
are described above in "State Capital Impairment Orders".
PRO FORMA FINANCIAL INFORMATION
The following pro forma financial information of each of the Company
and the Bank is provided to give effect to the transactions contemplated by the
Stock Purchase Agreement in each of the following alternatives: (i) the Stock
Purchase Agreement is approved by the stockholders of the Company and (ii) the
Stock Purchase Agreement is not approved by the stockholders of the Company.
-24-
<PAGE> 28
PRO FORMA CAPITALIZATION
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, 1995
Pro Forma Pro Forma
Actual Approval Non-Approval
-------- --------- ------------
<S> <C> <C> <C>
Company's Stockholders' Equity:
Preferred Stock $ 0.00 $ 0.00 $ 0.00
Common Stock 47 547 47
Additional paid-in capital 27,787 31,933 27,787
Retained Deficit (29,181) (29,181) (28,738)
Unrealized losses on securities (88) (88) ---
-------- -------- --------
Total stockholders' equity $ (1,435) $ 3,211 $(904)
======== ======== ========
Weighted average common shares outstanding 4,675 54,675 4,675
Book value per share $ (0.31) $ 0.06 $ (0.20)
Tier 1 Leverage Ratio (0.83)% 1.86% ---
Bank Shareholders' Equity:
Preferred Stock (750,000 shares @ $ 1,500 $ 1,500 $ 1,500
$2.00 per share)
Common Stock 12,194 18,444 18,694
Additional paid-in capital 10,619 10,119 10,119
Retained Deficit (20,067) (20,067) (20,067)
Unrealized losses on securities (88) (88) (88)
-------- -------- --------
Total stockholders' equity $ 4,158 $ 9,908 $ 10,158
======== ======== ========
Weighted average common shares outstanding 117,909 117,909 334,575
Book value per common share $ 0.02 $ 0.07 $ 0.03
Tier 1 Leverage Ratio 2.41% 5.73% 5.87%
</TABLE>
-25-
<PAGE> 29
FIRST COMMERCIAL BANCORP, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
STOCK PURCHASE AGREEMENT
(UNAUDITED)
THE UNAUDITED PRO FORMA FINANCIAL STATEMENTS SHOULD BE READ IN
CONJUNCTION WITH THE ACCOMPANYING NOTES AND THE CONSOLIDATED FINANCIAL
STATEMENTS OF FIRST COMMERCIAL BANCORP, INC., AS OF DECEMBER 31, 1994. THE PRO
FORMA FINANCIAL STATEMENTS MAY NOT BE INDICATIVE OF THE RESULTS THAT ACTUALLY
WOULD HAVE OCCURRED IF THE ACQUISITION HAD BEEN EFFECTED ON THE DATES INDICATED
OR WHICH MAY BE OBTAINED IN THE FUTURE.
APPROVAL OF AMENDED AND RESTATED STOCK PURCHASE AGREEMENT:
The following unaudited pro forma consolidated balance sheet of the
Company gives effect to the investment into the Company and the Bank by First
Banks as if the investment had been made as of September 30, 1995. The
unaudited pro forma consolidated statements of operations of the Company give
effect to the investment into the Company and the Bank by First Banks as if the
investment had been made as of December 31, 1994 and presented in September
1995, and as if the investment had been made on January 1, 1994 and presented
as of December 31, 1994. The following pro forma financial statements have
been prepared assuming that the stockholders of the Company approve the Stock
Purchase Agreement at the Meeting.
PRO FORMA ADJUSTMENTS - CONSOLIDATED FINANCIAL STATEMENTS:
(a) The Stock Purchase Agreement will be submitted for the approval of the
stockholders at a special meeting of the Company's stockholders (the
"Meeting") to be held in early December 1995. Upon the approval of
the Company's stockholders, the Bank Preferred Stock and the Bank
Common Stock will be exchanged for a total of 50,000,000 shares of
Company Common Stock, resulting in First Banks' ownership of 91.45% of
the then outstanding shares of Company Common Stock. In addition,
First Banks has placed $5 million in an escrow account for the
purchase of a convertible debenture of the Company (the "Debenture")
upon receipt of the approval of the Stock Purchase Agreement by the
stockholders. At that time, $4.75 million of the proceeds of the
Debenture will be contributed to the capital of the Bank with the
remaining $250,000 being retained by the Company for general corporate
purposes. The Debenture will bear interest at 12% per year and will
be secured by all of the Bank Common Stock held by the Company. The
Debenture matures five years after the Meeting. Interest on the
Debenture is payable in the sole discretion of the Company's Board of
Directors, upon receipt of any necessary regulatory authorization.
The principal and any accrued but unpaid interest thereon are
convertible into Company Common Stock at the option of First Banks at
any time prior to maturity at $.10 per share. At maturity, any
remaining principal and unpaid interest thereon must be converted into
shares of the Company's common stock at $.10 per share.
As a result of the structure and current status of the transactions
contemplated by the Stock Purchase Agreement, the Company owned 1.05%
of the outstanding common stock of the Bank as of September 30, 1995,
although it had the right to vote all of the Bank stock. However, if
the Stock Purchase Agreement is approved at the Meeting, the Company
will regain its ownership of all of the outstanding stock of the Bank.
Consequently, the accompanying Consolidated Financial Statements as of
September 30, 1995 have been prepared giving effect to the approval of
the Stock Purchase Agreement and the following transactions resulting
therefrom: (1) the exchange of 750,000 shares of nonvoting,
noncumulative Bank preferred stock held by First Banks for 15,000,000
shares of Company common stock; and (2) the exchange of 116,666,666
shares of Bank common stock held by First Banks for 35,000,000 shares
of Company common stock.
(b) Upon approval of the Stock Purchase Agreement by the stockholders of
the Company at the Meeting, First Banks will lend to the Company an
additional $5.0 million in exchange for the convertible Debenture
which will bear interest at a rate of 12% per annum.
-26-
<PAGE> 30
On October 31, 1995, First Banks purchased the Investment Debenture
from the Company for $1,500,000. On that same date, the Company
contributed the total proceeds of the $1,500,000 loan to the Bank.
(c) Upon approval of the Stock Purchase Agreement by the stockholders of
the Company at the Meeting, the 750,000 shares of non- voting
noncumulative Bank preferred stock held by First Banks will be
exchanged for 15,000,000 shares of Company common stock, and
116,666,666 shares of Bank common stock held by First Banks will be
exchanged for 35,000,000 shares of Company common stock.
(d) Intercompany balances between the Company and the Bank are not
material and have not been eliminated.
(e) Interest expense on the outstanding unconverted principal balance of
the Debentures is accrued at the rate of 12% per annum.
(f) The pro forma weighted average shares of common stock outstanding is
computed after giving retroactive effect to the exchange of Common
Stock for the shares of Bank Preferred Stock and Bank Common Stock
held by First Banks, Inc. as if such exchange had occurred at the
beginning to the period presented.
NON-APPROVAL OF AMENDED AND RESTATED STOCK PURCHASE AGREEMENT:
In the event the stockholders of the Company fail to approve the Stock
Purchase Agreement, First Banks will retain its ownership of Bank Preferred
Stock ($1.5 million) and Bank Common Stock ($3.5 million), and invest an
additional $5.0 million in the Bank through the purchase of newly issued Bank
Common Stock at a price equal to the book value per share at the date of the
investment. The Investment Debenture will automatically convert into Bank
stock at a price equal to the book value per share at the date of the
investment.
The following unaudited pro forma consolidated balance sheet of the
Company gives effect to the investment into the Bank by First Banks as if the
investment had been made as of September 30, 1995. The unaudited pro forma
consolidated statement of operations of the Company gives effect to the
investment into the Bank by First Banks as if the investment had been made as
of December 31, 1994 and presented in September 1995, and as if the investment
had been made on January 1, 1994 and presented as of December 31, 1994. The
pro forma financial statements have been prepared assuming that the
stockholders of the Company do not approve the Stock Purchase Agreement at the
Meeting.
(g) If the Stock Purchase Agreement is not approved by the Company's
stockholders, no investment would be made by First Banks into the
Company. First Banks would own 99.6% of the Bank, therefore, the
equity method of consolidation does not apply. The pro forma
adjustments represent the de-consolidation of the Company.
(h) Weighted average number of shares outstanding is computed using
outstanding shares plus the dilutive effect, if any, of stock options.
-27-
<PAGE> 31
FIRST COMMERCIAL BANCORP, INC.
CONSOLIDATED BALANCE SHEET
STOCK PURCHASE AGREEMENT APPROVED
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
SEPTEMBER ADJUSTMENTS PRO FORMA
(Dollar amounts in thousands) 30, 1995 (d) RESULTS
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 14,305 $ 14,305
Federal funds sold 5,500 (b) $ 5,000 12,000
(b) 1,500
Securities purchased under resale agreements 37,000 37,000
-------- ------- --------
Total cash and cash equivalents 56,805 6,500 63,305
Investment securities
Held-to-maturity 10,968 10,968
Available-for-sale 19,705 19,705
-------- ------- --------
Total investment securities 30,673 30,673
Loans, net of unearned income 81,919 81,919
Allowance for loan losses 4,838 4,838
-------- ------- --------
Net loans 77,081 77,081
Lease financing, net 991 991
Premises and equipment, net 2,147 2,147
Other real estate 2,054 2,054
Interest receivable and other assets 3,172 3,172
-------- ------- --------
TOTAL ASSETS $172,923 $ 6,500 $179,423
======== ======= ========
LIABILITIES
DEPOSITS:
Demand accounts $ 33,162 $ 33,162
Interest-bearing transaction accounts 43,376 43,376
Savings accounts 17,915 17,915
Time accounts 72,786 72,786
-------- ------- --------
Total deposits 167,239 167,239
Accrued expenses and other liabilities 2,473 2,473
(b) $ 5,000
Convertible debenture 0 (b) 1,500 6,500
Minority interest in subsidiary 4,646 (c) (4,646) ---
-------- ------- --------
Total Liabilities 174,358 1,854 176,212
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY (A)
Preferred stock: $.01 par value; authorized: 5,000,000
shares; issued and outstanding: none --- ---
Common stock: 1995, $.01 par value; authorized: 1995,
15,000,000 shares, pro forma 250,000,000 shares; issued and
outstanding: 1995, 4,675,110 shares, pro forma 54,675,000
shares 47 (c) 500 547
Additional paid-in capital 27,787 (c) 4,146 31,933
Retained deficit (29,181) (29,181)
Unrealized losses on securities available-for-sale (88) (88)
-------- ------- --------
Total stockholders' equity (1,435) 4,646 3,211
-------- ------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $172,923 $ 6,500 $179,423
======== ======= ========
</TABLE>
See notes to the pro forma financial statements.
-28-
<PAGE> 32
FIRST COMMERCIAL BANCORP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
STOCK PURCHASE AGREEMENT APPROVED
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED PRO FORMA
SEPTEMBER ADJUSTMENTS PRO FORMA
(Dollar amounts in thousands) 30, 1995 (d) RESULTS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans and leases $ 7,792 $ 7,792
Interest on Federal funds sold and securities purchased
under resale agreements 1,679 1,679
Interest on investment securities 1,180 1,180
------- ------- -------
Total interest income 10,651 10,651
------- ------- -------
INTEREST EXPENSE:
Interest on interest-bearing transaction accounts 850 850
Interest on savings accounts 339 339
Interest on time accounts and other borrowed funds 3,950 (e) $ 583 4,033
------- ------- -------
Total interest expense 4,639 583 5,222
------- ------- -------
NET INTEREST INCOME 6,012 (583) 5,429
Provision for loan losses 3,345 3,345
------- ------- -------
NET INTEREST INCOME (LOSS) AFTER PROVISION
FOR LOAN LOSSES 2,667 (583) 2,084
------- ------- -------
Non-interest income 1,131 1,131
Non-interest expense 10,097 10,097
------- ------- -------
LOSS BEFORE INCOME TAXES (6,299) (583) (6,882)
Provision for income taxes 2 2
------- ------- -------
NET LOSS $(6,301) $ (583) $(6,884)
======= ======= =======
- -------------------------------------------------------------------------------------------------------
PER SHARE DATA:
Net loss per share $ (1.35) $ (0.13)
Weighted average shares outstanding (F) 4,675 50,000 54,675
</TABLE>
See notes to the pro forma financial statements.
-29-
<PAGE> 33
FIRST COMMERCIAL BANCORP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
STOCK PURCHASE AGREEMENT APPROVED
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED PRO FORMA
DECEMBER ADJUSTMENTS PRO FORMA
(Dollar amounts in thousands) 31, 1994 (d) RESULTS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans and leases $ 15,126 $ 15,126
Interest on Federal funds sold and securities purchased
under resale agreements 2,026 2,026
Interest on investment securities 1,204 1,204
-------- ------- --------
Total interest income 18,356 18,356
-------- ------- --------
INTEREST EXPENSE:
Interest on interest-bearing transaction accounts 1,989 1,989
Interest on savings accounts 589 589
Interest on time accounts and other borrowed funds 3,332 (e) $ 780 4,112
-------- ------- --------
Total interest expense 5,910 780 6,690
-------- ------- --------
NET INTEREST INCOME 12,446 (780) 11,666
Provision for loan losses 9,809 9,809
-------- ------- --------
NET INTEREST INCOME (LOSS) AFTER PROVISION
FOR LOAN LOSSES 2,637 (780) 1,857
-------- ------- --------
Non-interest income 1,973 1,973
Non-interest expense 20,393 20,681
-------- ------- --------
LOSS BEFORE INCOME TAXES (15,783) (780) (16,851)
Provision for income taxes 2,407 2,407
-------- ------- --------
NET LOSS $(18,190) $ (780) $(19,258)
======== ======= ========
- ------------------------------------------------------------------------------------------------------
PER SHARE DATA:
Net loss per share $ (3.89) $ (0.35)
Weighted average shares outstanding (F) 4,675 50,000 54,675
</TABLE>
See notes to the pro forma financial statements.
-30-
<PAGE> 34
FIRST COMMERCIAL BANCORP, INC.
CONSOLIDATED BALANCE SHEET
STOCK PURCHASE AGREEMENT NOT APPROVED
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
SEPTEMBER ADJUSTMENTS PRO FORMA
(Dollar amounts in thousands) 30, 1995 (g) RESULTS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 14,305 $ (14,283) $ 22
Federal funds sold 5,500 (5,500) 0
Securities purchased under resale agreements 37,000 (37,000) 0
-------- --------- --------
Total cash and cash equivalents 56,805 (56,783) 22
Investment securities
Held-to-maturity 10,968 (10,968) 0
Available-for-sale 19,705 (19,705) 0
-------- --------- --------
Total investment securities 30,673 (30,673) 0
Loans, net of unearned income 81,919 (81,919) 0
Allowance for loan losses 4,838 (4,838) 0
-------- --------- --------
Net loans 77,081 (77,081) 0
Lease financing, net 991 (991) 0
Premises and equipment, net 2,147 (2,147) 0
Other real estate 2,054 (2,054) 0
Interest receivable and other assets 3,172 (3,128) 44
-------- --------- --------
TOTAL ASSETS $172,923 $(172,857) $ 66
======== ========= ========
LIABILITIES
DEPOSITS:
Demand accounts $ 33,162 $ (33,162) $ 0
Interest-bearing transaction accounts 43,376 (43,376) 0
Savings accounts 17,915 (17,915) 0
Time accounts 72,786 (72,786) 0
-------- --------- --------
Total deposits 167,239 (167,239) 0
Accrued expenses and other liabilities 2,473 (1,503) 970
Minority interest in subsidiary 4,646 (4,646) 0
-------- --------- --------
TOTAL LIABILITIES 174,358 (173,388) 970
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY (A)
Preferred stock: $.01 par value; authorized: 5,000,000
shares; issued and outstanding: none ---
Common stock: 1995, $.01 par value; authorized: 1995,
15,000,000 shares; issued and outstanding: 1995,
4,675,110 47 47
shares; pro forma - 4,675,110 shares 27,787 27,787
Additional paid-in capital (29,181) 443 (28,738)
Retained deficit (88) 88 ---
-------- --------- --------
Unrealized losses on securities available-for-sale
Total stockholders' equity (1,435) (531) (904)
-------- --------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $172,923 $(172,857) $ 66
======== ========= ========
</TABLE>
See notes to the pro forma financial statements.
-31-
<PAGE> 35
FIRST COMMERCIAL BANCORP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
STOCK PURCHASE AGREEMENT NOT APPROVED
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED PRO FORMA
SEPTEMBER ADJUSTMENTS PRO FORMA
(Dollar amounts in thousands) 30, 1995 (g) RESULTS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans and leases $ 7,792 $ (7,792) $ 0
Interest on Federal funds sold and securities purchased
under resale agreements 1,679 (1,679) 0
Interest on investment securities 1,180 (1,180) 0
------- -------- ------
Total interest income 10,651 (10,651) 0
------- -------- ------
INTEREST EXPENSE:
Interest on interest-bearing transaction accounts 850 (850) 0
Interest on savings accounts 339 (339) 0
Interest on time accounts and other borrowed funds 3,450 (3,450) 0
------- -------- ------
Total interest expense 4,639 (4,639) 0
------- -------- ------
NET INTEREST INCOME 6,012 (6,012) 0
Provision for loan losses 3,345 (3,345) 0
------- -------- ------
NET INTEREST INCOME (LOSS) AFTER PROVISION
FOR LOAN LOSSES 2,667 (2,667) 0
------- -------- ------
Non-interest income 1,131 (1,131) 0
Non-interest expense 10,097 (10,015) (82)
------- -------- ------
LOSS BEFORE INCOME TAXES (6,299) 6,217 (82)
Provision for income taxes 2 (2) 0
------- -------- ------
NET LOSS $(6,301) $ 6,219 $ (82)
======= ======== ======
- -------------------------------------------------------------------------------------------------------
PER SHARE DATA:
Net loss per share $ (1.35) $(0.02)
Weighted average shares outstanding (H) 4,675 4,675
</TABLE>
See notes to the pro forma financial statements.
-32-
<PAGE> 36
FIRST COMMERCIAL BANCORP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
STOCK PURCHASE AGREEMENT NOT APPROVED
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED PRO FORMA
DECEMBER ADJUSTMENTS PRO FORMA
(Dollar amounts in thousands) 31, 1994 (g) RESULTS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans and leases $ 15,126 $(15,126) $ 0
Interest on Federal funds sold and securities purchased
under resale agreements 2,026 (2,026) 0
Interest on investment securities 1,204 (1,204) 0
-------- -------- -------
Total interest income 18,356 (18,356) 0
-------- -------- -------
INTEREST EXPENSE:
Interest on interest-bearing transaction accounts 1,989 (1,989) 0
Interest on savings accounts 589 (589) 0
Interest on time accounts and other borrowed funds 3,332 (3,332) 0
-------- -------- -------
Total interest expense 5,910 (5,910) 0
-------- -------- -------
NET INTEREST INCOME 12,446 (12,446) 0
Provision for loan losses 9,809 (9,809) 0
-------- -------- -------
NET INTEREST INCOME (LOSS) AFTER PROVISION
FOR LOAN LOSSES 2,637 (2,637) 0
-------- -------- -------
Non-interest income 1,973 (1,973) 0
Non-interest expense 20,393 (19,136) (1,257)
-------- -------- -------
LOSS BEFORE INCOME TAXES (15,783) 14,616 (1,257)
Provision for income taxes 2,407 (2,439) 32
-------- -------- -------
NET LOSS $(18,190) $ 17,055 $(1,135)
======== ======== =======
- ------------------------------------------------------------------------------------------------------
PER SHARE DATA:
Net loss per share $ (3.89) $ (0.24)
Weighted average shares outstanding (H) 4,675 4,675
</TABLE>
See notes to the pro forma financial statements.
-33-
<PAGE> 37
PROPOSAL NO. 2
ADOPTION OF THE AMENDMENT TO THE
CERTIFICATE OF INCORPORATION
TO INCREASE THE NUMBER OF AUTHORIZED SHARES
On August 29, 1995, the Board of Directors unanimously adopted a
resolution, subject to stockholder and regulatory approvals, to amend Article
Fourth of the Certificate of Incorporation to increase the number of authorized
shares of Common Stock to Two Hundred Fifty Million (250,000,000) shares, par
value $.01 per share. A copy of the proposed Amendment to the Certificate of
Incorporation is attached hereto as Exhibit E, and any description of such
amendment is qualified in its entirety by reference to such Exhibit.
The Company currently has the authority to issue twenty million
(20,000,000) shares of stock, of which five million (5,000,000) shares are
designated as Preferred Stock, and fifteen million shares (15,000,000) are
designated as Common Stock. As of October 6, 1995, 4,675,110 shares of Company
Common Stock were issued and outstanding and no shares of Preferred Stock were
issued and outstanding. As of October 6, 1995, the Company had outstanding
employee stock options to purchase 264,048 shares of Company Common Stock and
director options to purchase 40,000 shares of Company Common Stock. As of that
date, the Company had reserved 778,000 shares of Company Common Stock for
issuance pursuant to employee stock options and reserved 250,000 shares of
Company Common Stock for issuance pursuant to director stock options.
Accordingly, at October 6, 1995, 9,296,890 authorized but unissued and
unreserved shares of Company Common Stock remained available for issuance
without further stockholder action.
UPON APPROVAL OF PROPOSAL NO. 2, THE BOARD OF DIRECTORS WILL HAVE THE
AUTHORITY TO ISSUE ADDITIONAL SHARES OF COMPANY COMMON STOCK WITHOUT FURTHER
APPROVAL BY THE STOCKHOLDERS.
CONTEMPLATED ISSUANCES OF COMPANY COMMON STOCK
As a result of certain issuances of shares of Company Common Stock
presently contemplated by the Company pursuant to the terms of the Stock
Purchase Agreement, it will be necessary to increase the number of authorized
shares of Company Common Stock. Thus, if Proposal No. 1 has been approved, the
stockholders also must approve Proposal No. 2 in order to implement the terms of
the Stock Purchase Agreement.
As of October 6, 1995, the Company had 9,296,890 shares of authorized
but unissued and unreserved shares of Company Common Stock. In the event the
stockholders of the Company approve the Stock Purchase Agreement at the Meeting,
the Company must increase the number of authorized shares of Company Common
Stock in order to consummate the following transactions contemplated by the
Stock Purchase Agreement. First, the Company will need additional authorized
shares of Company Common Stock in order to issue 50,000,000 shares of Company
Common Stock to First Banks in exchange for the tender by First Banks of 750,000
shares of Bank Preferred Stock and 116,666,666 shares of Bank Common Stock.
Second, in the event that the stockholders of the Company approve the
Stock Purchase Agreement at the Meeting, First Banks will lend to the Company
$5.0 million and the Company will issue the Debenture to First Banks. The
Company has agreed that $4,750,000 of the proceeds of such loan will be
contributed to the Bank, while $250,000 will be retained by the Company. Since,
pursuant to the terms of the Debenture, the principal amount of $5.0 million
will be convertible into a total of 50,000,000 shares of Company Common Stock,
the Company will need additional authorized shares of Company Common Stock to
effect such conversion. Similarly, in the event that the stockholders of the
Company approve the Stock Purchase Agreement at the Meeting, the Investment
Debenture will be convertible into a total of 15,000,000 shares of Company
Common Stock. In addition, in the event that the Company fails to make an
interest payment in cash on the Debenture or the Investment Debenture at such
time as such interest payment is due, each of the Debenture and the Investment
Debenture provides that such interest due and owing shall accrue and become
convertible, at the election of First Banks, into shares of Company Common Stock
at the Conversion Rate. Therefore, the Company may need additional authorized
shares of Company Common Stock to make such interest payments.
Third, in the event that the Company elects to distribute Appreciation Rights
to the stockholders as of the Record Date pursuant to the Measurement Formulas,
the Company will need additional authorized shares of Company Common Stock to
effect the exercise of the Appreciation Rights. The Appreciation Rights, if
distributed, will be exercisable for no additional consideration.
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<PAGE> 38
The Stock Purchase Agreement also gives First Banks the option to make
additional capital infusions through the purchase of Company Common Stock in the
event that the Bank's capital ratios do not meet the minimums required by the
Orders. Accordingly, if (i) the Bank's Tier 1 capital ratio is not equal to or
greater than 6.5% at October 31, 1995 or (ii) the Bank's Tier 1 capital ratio is
not equal to or greater than 7.0% at December 31, 1995 and if the Company has
not completed the Rights Offering by such date, then, after October 31, 1995 and
December 31, 1995, First Banks may purchase such dollar amount of shares of
Company Common Stock which will increase the Bank's Tier 1 capital ratio to 6.5%
and 7.0%, respectively. The purchase price of such shares of Company Common
Stock will be the book value per share thereof on the business day immediately
preceding such purchase, or $0.10, whichever is greater. On October 31, 1995,
pursuant to the Additional Investment Agreement, First Banks loaned to the
Company $1.5 million, and the Company issued to First Banks the Investment
Debenture, which is convertible into 15,000,000 shares of Company Common Stock.
Upon the election by First Banks to make an additional capital infusion at
December 31, 1995, the Company will need additional authorized shares of Company
Common Stock to effect such sales of Company Common Stock.
Finally, in the event that the Company completes the Offering,
additional authorized shares of Company Common Stock will be required for
issuances pursuant to such Offering. According to the terms of the Stock
Purchase Agreement, the Company and First Banks have agreed that the Rights
Offering, if conducted, shall not exceed $5.0 million. In addition, the
Company intends to offer approximately $1.0 million in dividend exchange rights
to certain stockholders of the Company. The Company and First Banks have
agreed that the purchase price of the shares of Company Common Stock offered
and sold in the Offering shall be $0.10 per share, the price which was used to
calculate the number of shares of Company Common Stock First Banks would
receive pursuant to the Stock Purchase Agreement as a result of its tender of
shares of Bank Common Stock and Bank Preferred Stock and its conversion of the
Debenture into shares of Company Common Stock.
In addition, the Board of Directors believes that it is desirable to
have additional authorized shares of Company Common Stock available for
possible future stock splits and stock dividends, issuances of additional
shares in public or private offerings, financing and acquisition transactions,
and other general corporate purposes. Having such additional authorized shares
of Company Common Stock available for issuance gives the Company greater
flexibility to respond to future business and market needs and opportunities by
allowing shares to be issued without the expense and delay of obtaining
stockholder approval. The additional authorized shares of the Company Common
Stock would be available for issuance without further action by the
stockholders of the Company, unless such action is required by applicable law
or the rules of any stock exchange on which the Company's securities may then
be listed.
The Company intends to contribute a majority of the proceeds received
pursuant to the transactions contemplated by the Stock Purchase Agreement to
the Bank in order to increase the Bank's Tier 1 capital ratio. The Bank will
use the proceeds contributed to it from the Company for general corporate
purposes. With respect to any proceeds retained by the Company, the Company
shall use such proceeds for general corporate purposes, including additional
capital contributions to the Bank.
Pursuant to the provisions of the Stock Purchase Agreement and the
issuances of Company Common Stock contemplated thereby if the stockholders of
the Company approve the Stock Purchase Agreement, First Banks may gain control
of the Company. Specifically, First Banks shall gain control of the Company as
a result of the acquisition of $5.0 million in shares of Company Common Stock
in exchange for the tender by First Banks of 750,000 shares of Bank Preferred
Stock and 116,666,666 shares of Bank Common Stock and the conversion of the
Investment Debenture and the Debenture into shares of Company Common Stock. In
addition, subsequent to the issuances of Company Common Stock described above,
the stockholders of the Company will suffer a substantial dilution in their
voting rights and their proportional share in any future net earnings of the
Company. However, the Board of Directors believes that First Banks' capital
infusions and potential acquisition of control of the Company are critical to
maintain the viability of the Company and the Bank, and may provide the
stockholders of the Company with added value for their shares of Company Common
Stock.
If the Amendment to the Certificate of Incorporation is approved by
the stockholders of the Company, all newly authorized shares of Company Common
Stock if and when issued will have the same rights as the shares of Company
Common Stock currently authorized, including, but not limited to, the right to
cast one vote per share and to participate in dividends when and to the extent
declared and paid. Under the Certificate of Incorporation and the Amendment to
the Certificate of Incorporation, no holders of any class of stock of the
Company are entitled to any preemptive rights with respect to any shares of the
Company's capital stock.
One effect of the Amendment of the Certificate of Incorporation will
be to enable the Board of Directors to issue additional shares of Company
Common Stock to discourage or make more difficult an attempt to obtain control
of the Company through a
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<PAGE> 39
merger, tender offer or proxy contest. With the exception of the Stock
Purchase Agreement and the transactions contemplated thereunder, the Board of
Directors has no knowledge of any effort to gain control of the Company or to
organize a proxy contest and does not presently intend to issue any additional
shares of Company Common Stock to prevent an acquisition of control of the
Company.
VOTE REQUIRED AND BOARD RECOMMENDATION
THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF THE ISSUED AND
OUTSTANDING SHARES OF COMPANY COMMON STOCK ENTITLED TO VOTE AT THE MEETING IS
REQUIRED FOR THE APPROVAL OF THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION.
IF PROPOSAL NO. 1 IS APPROVED, IT IS NECESSARY THAT PROPOSAL NO. 2 ALSO BE
APPROVED IN ORDER TO IMPLEMENT THE TERMS OF THE STOCK PURCHASE AGREEMENT.
The Board of Directors recommends a vote FOR the approval of the
Amendment to the Certificate of Incorporation.
ANNUAL MEETING OF STOCKHOLDERS
The 1995 Annual Meeting of Stockholders will be held on or about May
22, 1996. The deadline for stockholders to submit proposals to be considered
for inclusion in the Company's Proxy Statement and Form of Proxy for the 1995
Annual Meeting of Stockholders is January 24, 1996, unless such meeting date is
changed by more than 30 calendar days in which case such proposals must be
received by a reasonable time prior to the mailing of the Proxy Statement.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the 1934
Act, and in accordance therewith files reports and other information with the
Commission. Such reports, the Company's Proxy Statements filed pursuant to
Section 14(a) of the 1934 Act and other information filed by the Company can be
inspected and copied at the Public Reference Room of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at certain of its Regional Offices,
including the Northeast Regional Office, 7 World Trade Center, Suite 1300, New
York, N.Y. 10048, and the Midwest Regional Office, 500 West Madison Street,
Suite 1400, Chicago, IL 60661. Copies of such material can be obtained at
prescribed rates from the Public Reference Section of the Commission,
Washington, D.C. 20549.
CERTAIN DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated herein by reference:
1. The Company's audited financial statements as of December 31, 1994 and
the Report of Independent Public Accountants thereon, Selected
Financial Data and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's 1994
Annual Report to Stockholders.
2. The Company's Amended Quarterly Report on Form 10-Q/A for the fiscal
quarter ended September 30, 1995, previously filed pursuant to Section
13 of the 1934 Act.
All documents filed by the Company pursuant to Sections 13(a), 13(c),
14 or 15(d) of the 1934 Act subsequent to the date of this Proxy Statement and
prior to the date of the Meeting shall be deemed incorporated by reference into
this Proxy Statement and to be a part hereof from the respective dates of
filing of such documents with the Commission. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Proxy Statement to the
extent that a statement contained herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as
modified or superseded, to constitute part of this Proxy Statement. THE
COMPANY UNDERTAKES TO PROVIDE WITHOUT CHARGE, TO EACH PERSON TO WHOM THIS PROXY
STATEMENT IS DELIVERED, UPON WRITTEN REQUEST MADE TO THE CORPORATE SECRETARY,
FIRST COMMERCIAL BANCORP, INC., 865 HOWE AVENUE, SACRAMENTO, CALIFORNIA 95825
OR ORAL REQUEST MADE TO THE CORPORATE SECRETARY OF THE COMPANY AT (916)
646-0554, A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1994, INCLUDING THE FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULES, AND A COPY OF ANY DOCUMENT INCORPORATED OR DEEMED TO BE
INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT (NOT INCLUDING EXHIBITS
UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE) BY FIRST CLASS
MAIL OR OTHER EQUALLY PROMPT MEANS WITHIN ONE BUSINESS DAY OF RECEIPT OF SUCH
REQUEST.
-36-
<PAGE> 40
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN
CONNECTION WITH THE SOLICITATION OF PROXIES MADE HEREBY AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THE DELIVERY OF THIS PROXY STATEMENT SHALL NOT,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
OTHER INFORMATION
Representatives from the accounting firm of Arthur Andersen LLP will
be present at the Meeting, will be afforded the opportunity to make a statement
if they desire to do so, and will be available to respond to appropriate
questions.
The Company has incorporated by reference herein certain specified
portions of its 1994 Annual Report to Stockholders which contains the financial
statements of the Company for the year ended December 31, 1994, and its Amended
Quarterly Report on Form 10- Q/A for the quarter ended September 30, 1995, each
of which is being mailed to stockholders entitled to vote at the Meeting.
FIRST COMMERCIAL BANCORP, INC.
Dated: November 20, 1995
-37-
<PAGE> 41
FIRST COMMERCIAL BANCORP, INC.
PROXY FOR THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 5, 1995
THIS PROXY IS SOLICITED BY AND ON BEHALF OF THE
BOARD OF DIRECTORS
The undersigned holder of Common Stock of First Commercial Bancorp,
Inc., a Delaware corporation and bank holding company of First Commercial Bank
(the "Company"), acknowledges receipt of a copy of the Notice of a Special
Meeting of Stockholders of the Company and the accompanying Proxy Statement
dated November 20, 1995 and revoking any Proxy heretofore given, hereby
constitutes and appoints Manuel Perry, Jr. and Fred L. Harris, and each of
them, with full power of substitution, as attorneys and Proxies to appear and
vote all of the shares of Common Stock of the Company, standing in the name of
the undersigned which the undersigned could vote if personally present and
acting at the Special Meeting of Stockholders of the Company, to be held at the
Red Lion Sacramento Inn located at 1401 Arden Way, Sacramento, California 95815
on Tuesday, December 5, 1995, at 6:00 o'clock p.m., local time, or at any
adjournments thereof (the "Meeting"), upon the following items as set forth in
the Notice of a Special Meeting of Stockholders and Proxy Statement and to vote
according to their discretion on all other matters which may be properly
presented for action at the Meeting or any adjournments thereof.
1. To approve the terms of an Amended and Restated Stock Purchase
Agreement dated as of August 7, 1995 by and among the Company,
First Commercial Bank, James F. Dierberg, an individual, and
First Banks, Inc., a Missouri corporation ("First Banks"), for
the sale of Common Stock and the issuance of a convertible
debenture by the Company pursuant to which First Banks may
acquire a greater than majority interest in the Company.
/ / FOR / / ABSTAIN / / AGAINST
2. To adopt an amendment to the Certificate of Incorporation of
the Company to increase to 250,000,000 the number of shares of
Common Stock which the Company shall have the authority to
issue.
/ / FOR / / ABSTAIN / / AGAINST
3. In their discretion, the proxy holders are authorized to vote
upon such other business as may properly come before the
Meeting, except that Proxies which have been voted against
either Proposal No. 1 or 2 will not be voted by the proxy
holder for any proposal to adjourn the Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL NOS. 1 AND 2.
THE PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED. IF NO DIRECTION
IS MADE, IT WILL BE VOTED "FOR" PROPOSAL NOS. 1 AND 2.
SHAREHOLDER(S) PLEASE DATE AND SIGN EXACTLY AS YOUR NAME(S)
APPEAR(S). When signing as attorney, executor,
administrator, trustee, or guardian, please give
- --------------------------- full title as such. If more than one trustee
exists, all trustees should sign. All joint owners
- --------------------------- should sign. WHETHER OR NOT YOU PLAN TO ATTEND
THIS MEETING, PLEASE SIGN AND RETURN THIS PROXY AS
PROMPTLY POSSIBLE IN THE ENCLOSED POSTAGE-PAID
ENVELOPE.
DATE: , 1995
-----------
I/We do _____ or do not _____expect to attend this
meeting.
THIS PROXY IS SOLICITED BY, AND ON BEHALF OF, THE BOARD OF DIRECTORS
AND MAY BE REVOKED BY THE STOCKHOLDER PRIOR TO ITS EXERCISE.
-1-
<PAGE> 42
September 26, 1995
Board of Directors
First Commercial Bancorp
2450 Venture Oaks Way
Sacramento, CA 95833
Members of the Board:
We understand that First Commercial Bancorp ("the Company") has entered into an
Amended and Restated Stock Purchase Agreement dated as of August 7, 1995, ("the
Agreement") with First Banks, Inc. and Mr. James F. Dierberg, pursuant to which
First Banks shall acquire shares of newly issued common stock of the Company,
the Company shall conduct a shareholder right offering in which shareholders
shall be offered the opportunity to purchase additional newly issued shares of
Company common stock, the shareholders of the Company shall be entitled to
receive a distribution of certain additional shares of common stock under
certain circumstances at the end of a Measurement Period ending June 30, 1996,
and the shareholders of the Company shall be entitled, under certain
circumstances, to receive additional shares or cash distributions in 1997 and/or
1998 (collectively "the Transaction"). The terms of the Transaction are more
fully set forth in the Agreement. You have asked for our opinion as to whether
the terms of the Transaction taken as a whole are fair from a financial point of
view to the shareholders of the Company as of the date of the Agreement.
In connection with our opinion, we have, among other things: (a) reviewed
certain publicly available financial and other data with respect to the Company,
including the consolidated financial statements for recent years and for interim
periods to June 30, 1995, and certain other relevant financial and operating
data relating to the Company made available to us from published sources and
from the internal records of the Company; (b) reviewed the Agreement; (c)
reviewed certain historical market prices and trading volume of Company common
stock; (d) compared the Company from a financial point of view with certain
other companies in the financial services industry which we deemed relevant; (e)
considered the financial terms, to the extent publicly available, of selected
recent transactions which we deemed to be comparable, in whole or in part, to
the Transaction; (f) reviewed and discussed with representatives of the
management of the Company certain information of a business and financial nature
regarding the Company, including financial forecasts and related assumptions of
the Company; (g) made inquiries regarding and discussed the Transaction and the
Agreement and other matters relating thereto with the Company's counsel; and (h)
performed such other analyses and examinations as we have deemed appropriate.
In connection with our review, we have not independently verified any of the
foregoing information with respect to the Company,
<PAGE> 43
have relied on all such information, and have assumed that all such information
is complete and accurate in all material respects. With respect to the financial
forecasts for the Company provided to us by the Company's management we have
assumed for purposes of our opinion that they have been reasonably prepared on
bases reflecting the best available estimates and judgments of the Company's
management at the time of preparation as to the future financial performance of
the Company and that they provide a reasonable basis upon which we can form our
opinion. We have also assumed that there have been no material changes in the
Company's assets, financial condition, results of operations, business or
prospects since the respective dates of their last financial statements made
available to us. We have relied on advice of counsel to the Company as to all
legal matters with respect to the Company, the Transaction, and the Agreement.
In addition, we have not made an independent evaluation, appraisal or physical
inspection of the assets or individual properties of the Company, nor have we
been furnished with any such appraisals. Further, our opinion is based on
economic, monetary and market conditions existing as of the date of the
Agreement.
Based upon the foregoing, and in reliance thereon, it is our opinion that, as of
the date of the Agreement, the terms of the Transaction, taken as a whole, are
fair to the shareholders of the Company from a financial point of view.
This opinion is furnished pursuant to our engagement letter, dated December 29,
1994, and is solely for the benefit of the Board of Directors of the Company.
Except as provided in such engagement letter, this opinion may not be used or
referred to by the Company or quoted or disclosed to any person in any manner
without our prior written consent.
Very Truly Yours
CARPENTER & COMPANY
By: /s/ John D. Flemming
----------------------
<PAGE> 44
AMENDED AND RESTATED STOCK PURCHASE AGREEMENT
THIS AMENDED AND RESTATED STOCK PURCHASE AGREEMENT (the "Agreement"),
made and entered into as of August 7, 1995, by and between FIRST COMMERCIAL
BANCORP, INC., a Delaware corporation (the "Company"), FIRST COMMERCIAL BANK, a
California chartered banking corporation wholly-owned by the Company (the
"Bank"), JAMES F. DIERBERG, an individual ("Dierberg"), and FIRST BANKS, INC.,
a Missouri corporation ("First Banks").
W I T N E S S E T H
WHEREAS, the parties to the Agreement entered into a Standby Stock
Purchase Agreement dated as of June 30, 1995 and have agreed to amend certain
provisions thereof and restate this Agreement;
WHEREAS, on June 30, 1995, the Bank issued and sold 750,000 shares of
Series A Preferred Stock of the Bank, par value $7.00 per share (the "Bank
Preferred Stock"), to Dierberg at a purchase price of $2.00 per share in order
to provide an immediate capital infusion to the Bank;
WHEREAS, First Banks desires to purchase shares of Bank common stock,
par value $7.00 per share (the "Bank Common Stock") in order to effect the
August Infusion, as defined in Section 2(a) of the Agreement;
WHEREAS, First Banks additionally desires to acquire shares of Common
Stock of the Company, par value $0.01 per share (the "Company Common Stock")
and to provide the Company with a loan of $5 million secured by certain shares
of Bank Common Stock held by the Company;
WHEREAS, on July 12, 1995, First Banks deposited into an escrow
account (the "Escrow Account") at The First National Bank of Boston ("Escrow
Agent") a total of $8,500,000 (the "Escrow Funds"), to be used to effectuate
the terms of the Agreement;
WHEREAS, in order for First Banks to effect the August Infusion and to
consummate the transactions contemplated by this Agreement, First Banks must
seek and obtain appropriate regulatory approvals;
WHEREAS, First Banks has submitted applications for the requisite
regulatory approvals to purchase all of the Bank Preferred Stock from Dierberg
and, provided that First Banks
1
<PAGE> 45
obtains such regulatory approvals, the Company and the Bank do not object to
such transfer by Dierberg;
WHEREAS, First Banks is aware and acknowledges that (a) the Bank's
contributed capital is impaired within the meaning of Section 134(b) of the
California Financial Code, (b) the Bank has been ordered by the Superintendent
of Banks of the State of California (the "Superintendent") pursuant to Section
662 of the California Financial Code to levy an assessment against the
outstanding shares of Bank Common Stock (all of which are held by the Company),
(c) the Bank has not levied the ordered assessment on the shares of Bank Common
Stock held by the Company and is in violation of the California law requiring
it to assess the shares of Bank Common Stock in order to correct its capital
impairment, (d) the Superintendent may issue additional future orders to the
Bank requiring the Bank to assess its outstanding shares of Common Stock, (e)
the Bank's Articles of Incorporation provide that an assessment to cure a
capital impairment may only be imposed on the outstanding shares of Bank Common
Stock, and (f) the Bank's Articles of Incorporation do not provide for
assessability of Bank preferred stock;
WHEREAS, the Company anticipates issuing to the holders of its issued
and outstanding shares of Company Common Stock, certain transferable rights
(the "Rights") to subscribe for and purchase additional shares of Company
Common Stock, such transaction generally being referred to herein as the
"Rights Offering"; and
NOW, THEREFORE, for and in consideration of the promises contained in
this Agreement, and other good and valuable consideration, the receipt and
sufficiency of all of which is hereby acknowledged, the parties hereto agree as
follows:
1. BANK OFFERING; PERMITS; RIGHTS OFFERING; REGISTRATION OF
COMMON STOCK; STOCKHOLDER APPROVAL AND CONSEQUENCES THEREOF
(a) (i) The Bank received a permit from the California State
Banking Department (the "SBD") dated June 29, 1995 approving the offer and sale
of the Bank Preferred Stock to Dierberg (the "Dierberg Sale"), at a purchase
price of $2.00 per share, for a total purchase price of $1,500,000. The
Dierberg Sale was consummated as of June 30, 1995. The Bank Preferred Stock is
subject to purchase by the Company, as more particularly set forth in Section
3(a) hereof.
(ii) The Bank hereby agrees to file with the SBD an
application for a permit approving the offer and sale to First Banks of
$3,500,000 in shares of Bank Common Stock at a purchase price equal to the book
value thereof per share as of the business day immediately preceding the date
of such issuance, as determined in accordance with generally accepted
accounting principals ("GAAP"). The permit also shall request approval of any
offer and sale to First Banks of an additional $5,000,000 in shares of
2
<PAGE> 46
Company Common Stock pursuant to Section 3(c) hereof. The Board of Directors
of the Bank has approved an amendment to the Articles of Incorporation of the
Bank, which shall be filed with the SBD and upon approval of the SBD shall be
filed with the Office of the California Secretary of State ("SOS"), and which
increases the number of authorized shares of the Bank Common Stock and of the
Bank Preferred Stock (except the Series A Preferred Stock), eliminates the par
value of the Bank Common Stock and the Bank Preferred Stock (except the Series
A Preferred Stock) and effects certain additional nonmaterial amendments.
(iii) First Banks filed the appropriate applications to
consummate the transactions contemplated by this Agreement, including a change
in control of the Company and the Bank, with the Federal Reserve Bank of St.
Louis (the "Federal Reserve Bank") on July 24, 1995 and with the SBD on July
28, 1995 (together, the "Applications").
(b) (i) A Registration Statement No. 33-92928 on Form S-1 (the
"Registration Statement") with respect to a proposed Rights Offering has been
filed with the Securities and Exchange Commission (the "Commission"). The
Registration Statement also covers a proposed exchange offer pursuant to which
the Company has allocated shares of Company Common Stock (the "Exchange
Shares") for issuance to certain present and former stockholders of the Company
who agree to exchange the right to receive accrued and unpaid cash dividends
for shares of Company Common Stock (the "Exchange Offering") and an offering of
Company Common Stock to the public (the "Public Offering")(the Rights Offering,
the Exchange Offering and the Public Offering are collectively referred to
herein as the "Offering"). A copy of the Registration Statement, including the
preliminary prospectus contained therein (the "Preliminary Prospectus"), has
been furnished to Dierberg who has provided it to First Banks, and copies of
all subsequent amendments thereto shall be provided to each of Dierberg and
First Banks.
(ii) The Registration Statement has not yet been declared
effective by the Commission and the contents thereof are subject to material
amendment. The Company and First Banks hereby agree that: (A) the Registration
Statement shall be amended to include and register the shares of Company Common
Stock to be offered, sold and issued to First Banks and Dierberg as provided
for herein; (B) the terms of the Offering shall be revised to provide that a
maximum of $5,000,000 in Company Common Stock shall be offered in the Rights
Offering and the Public Offering and that the Public Offering shall not exceed
$1 million thereof; (C) the shares of Company Common Stock to be offered and
sold pursuant to the Offering shall be offered and sold at the same price First
Banks paid for the Company Shares under this Agreement; (D) if the Company
shall determine that withdrawal of the Registration Statement is in its best
interests and the best interests of its stockholders, any subsequently filed
registration statement shall contain terms consistent herewith; (E) the Board
of Directors of the Company shall determine, in consultation with First Banks,
the
3
<PAGE> 47
optimal time for commencement of the Rights Offering, which is anticipated to
commence as soon as practicable after the Special Meeting (as defined below)
and in any event on or before June 30, 1996; and (F) notwithstanding the above,
the Board of Directors of the Company, in consultation with First Banks, shall
have the option to determine that the Company shall not conduct the Rights
Offering, the Public Offering, the Exchange Offering, or any one or more
thereof, and to withdraw the Registration Statement filed with respect thereto
or to amend such Registration Statement to withdraw or change any component of
the Offering. The Company will provide to Dierberg and First Banks copies of
all correspondence to and from the Commission in connection with the
Registration Statement and amendments thereto; provided, that, neither Dierberg
nor First Banks will distribute or make public in any way the fact of or the
information contained in the Registration Statement, the amendments or the
correspondence in connection therewith. In the event First Banks and/or
Dierberg are stockholders of record of the Company as of the record date for
the Rights Offering, neither shall be entitled to subscribe for any shares
offered or participate in the Rights Offering in any other manner.
(iii) In the event that the Bank's tangible capital ratio at
October 31, 1995 shall not be equal to or greater than 6.5% and, further, in
the event that the Offering has not been concluded prior to December 31, 1995
and the Bank's tangible capital ratio at December 31, 1995 shall not be equal
to or greater than 7%, then First Banks shall have the option, upon receipt of
all necessary regulatory Approvals (as defined below), to contribute to the
Company immediately prior to October 31, 1995 or December 31, 1995, in exchange
for the issuance of shares of Company Common Stock, such dollar amount as will
increase the Bank's tangible capital ratio to 6.5% or 7%, or more,
respectively. The Company will downstream such funds to the Bank. The
purchase price of shares of Company Common Stock in the event of such purchase
shall be the book value per share of the Company Common Stock as of the
business day immediately preceding October 31, 1995 or December 31, 1995,
respectively, or $0.10 per share, whichever is greater. In the event the
Company is conducting the Offering at that time, First Banks shall contribute
such funds to the Bank in exchange for the issuance of shares of Bank Common
Stock, which shall be convertible into shares of Company Common Stock at the
earlier of the conclusion of the Offering or June 30, 1996 at a rate of $0.10
per share. The Company shall proceed to conduct the Offering, which shall
conclude no later than June 30, 1996.
(c) The Company shall use its reasonable efforts to cause a special
meeting of stockholders to be duly called and held as soon as practicably
possible after execution hereof (the "Special Meeting"), but in no event after
December 31, 1995, unless the parties hereto shall agree to a reasonable period
of extension of that date. The Company may present the terms of the Agreement
for the approval of its stockholders at the Special Meeting. In addition, the
Company will present for the approval of the stockholders proposals to amend
the Certificate of Incorporation of
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<PAGE> 48
the Company to effect a reverse stock split and/or to increase the number of
authorized shares of the Company and/or, with the prior approval of First
Banks, such other proposals as the Board of Directors in its discretion shall
determine may be necessary or appropriate to effect the transactions
contemplated by the Agreement, as amended. The Company will provide First
Banks with a copy of the preliminary proxy statement prepared in connection
with the Special Meeting in advance of filing the same with the Commission,
which proxy statement shall be substantially consistent with the terms of this
Agreement.
2. PURCHASE AND DELIVERY OF BANK STOCK
(a) First Banks hereby agrees to purchase from the Bank, and the
Bank agrees to issue to First Banks, immediately following consummation of the
transaction contemplated in 2(b) below, $3,500,000 in shares of Bank Common
Stock, at a purchase price of the book value thereof per share as of the
business day immediately preceding the date of such issuance (the "Purchase
Price"), as determined in accordance with GAAP (the "August Infusion"), subject
to receipt by First Banks of approval of the Applications and any other
required regulatory or other approvals (collectively, the "Approvals"). The
shares of Bank Common Stock issuable pursuant to this Section 2(a) (the
"Infusion Shares") shall be subject to the terms of an Irrevocable Proxy
Agreement entered into with the Company simultaneously with this Agreement (the
"Proxy Agreement"), on substantially the terms set forth in Exhibit 2(a) to
this Agreement, which is incorporated herein by reference.
(b) Dierberg hereby agrees to sell to First Banks and First Banks
hereby agrees to purchase from Dierberg, the Bank Preferred Stock for a
purchase price of $1,500,000, subject to receipt by First Banks of all
necessary Approvals. Assuming receipt of such Approvals, the Company and the
Bank have no objection to such sale.
(c) Upon execution of the Agreement, the Company and First Banks
shall instruct the Escrow Agent to wire to First Banks' account at the Bank
$3,500,000 of the Escrow Funds. Bank agrees, at the direction of First Banks,
to invest, pending receipt of the Approvals, such funds solely in an overnight
repurchase agreement at First Commercial Bank, which overnight repurchase
agreement shall be invested with banks or broker-dealers, fully secured by
obligations issued or guaranteed by the United States of America or any agency
or instrumentality thereof. Upon receipt of the Approvals, the parties agree
to apply immediately the $3,500,000 to the purchase price of the Infusion
Shares. In the event any Approval shall be denied or not obtained by August
31, 1995, the $3,500,000 shall be returned to First Banks in accordance with
the terms of the Escrow Agreement, as amended, and this Agreement shall
terminate immediately unless extended pursuant to Section 5(a) of this
Agreement. A copy of the Escrow Agreement, as amended, is set forth as Exhibit
2(c) to this Agreement and incorporated herein by reference.
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<PAGE> 49
(d) In connection with the offer and sale of shares pursuant to the
August Infusion, First Banks agrees to execute an appropriate form of
Investment Letter of Representation.
3. PURCHASE AND DELIVERY OF COMPANY COMMON STOCK
(a) On the first (1st) business day after approval of the Agreement
by the Company's stockholders at the Special Meeting or, if the Board of
Directors does not present the Agreement for the approval of the stockholders
at the Special Meeting, on the first (1st) business day following the Special
Meeting:
(A) the Company shall: (1) purchase from First Banks
or Dierberg, the shares of Bank Preferred Stock held by First Banks or Dierberg
and issue in exchange therefor 15,000,000 shares of Company Common Stock, as
adjusted in accordance with Section 10 hereof, and (2) purchase from First
Banks the Infusion Shares held by First Banks and issue in exchange therefor
35,000,000 shares of Company Common Stock, as adjusted in accordance with
Section 10 hereof, (in either case and together, the "Bridge Exchange Shares");
provided, that First Banks and Dierberg (or any approved transferee) shall have
obtained any and all Approvals for the issuance to it or him (or such approved
transferee), respectively, of the Bridge Exchange Shares; and
(B) First Banks hereby agrees to lend to the Company
from the Escrow Funds remaining in the Escrow, and the Company hereby agrees to
borrow from First Banks, pursuant to the terms and conditions set forth in the
debenture attached hereto as Exhibit 3(a) (the "Debenture"), $5,000,000, and
the Company hereby agrees to execute such Debenture; provided, that the Company
shall have received any required regulatory approvals for the execution of said
Debenture. Interest shall accrue on the Debenture at a rate of 12% per annum
(or such other rate from time to time, if less, which is the maximum lawful
rate of interest chargeable under applicable usury laws), but shall be paid
only with the requisite regulatory approvals. The Debenture shall be secured
by all of the outstanding shares of Bank stock held by the Company on the date
of execution of the Debenture, pursuant to the terms of a security agreement
attached hereto as a part of Exhibit 3(a) (the "Security Agreement"), which
Exhibit is incorporated herein by reference in its entirety. The principal
amount of and any accrued but unpaid interest on the Debenture shall be
convertible into shares of Company Common Stock for a period of five (5) years
commencing at the earlier of the date of the Special Meeting or December 31,
1995 on the basis of $0.10 per share; provided, that First Banks shall have
received any required Approvals prior to making any election to convert. On
the date of termination of the five-year period, the Debenture shall terminate
(the "Debenture Termination Date") and any amount not previously converted
automatically shall convert to shares of Common Stock on the basis of $0.10 per
share. Interest accrued but unpaid during the term of the Debenture also shall
be convertible into Company Common Stock during the term of the Debenture on
the same terms as the conversion of principal or,
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<PAGE> 50
if not so converted, automatically shall be so converted at the Debenture
Termination Date. The Company hereby agrees to contribute to the Bank
$4,750,000 of the proceeds of the Debenture and to retain $250,000 of the
proceeds at the Company.
(b) In the event that the stockholders of the Company fail to
approve the Agreement at the Special Meeting, or in the event that the Special
Meeting is not held prior to December 31, 1995, then:
(i) Sections 3(a), 3(c) and 4 hereof shall not apply; and
(ii) The Bank hereby agrees to issue to First Banks and First
Banks hereby agrees to purchase from the Bank with the $5,000,000 of Escrow
Funds remaining in the Escrow Account a number of shares of Bank Common Stock
to be determined by dividing $5,000,000 by the book value of the Bank Common
Stock per share on the first business day immediately preceding the date of
purchase (the "Additional Bank Shares"); provided, that the Bank and First
Banks shall have received all necessary approvals required for the issuance to
First Banks of the Additional Bank Shares. The Bank and the Company agree to
use their reasonable efforts to effect the purposes of this subsection by
amending the Articles of Incorporation of the Bank either to increase the
number of authorized shares of common stock of the Bank or to effect a reverse
stock split of the Bank common stock in such proportion as shall be necessary
to assure the availability of a sufficient number of shares for issuance to
First Banks, if possible, to seek and obtain from the SBD approval of such
amendment and to file such amendment with the SOS; and
(c) In addition to the provisions of Section 3(a) and 3(b)
hereof, and in the event the stockholders approve the Agreement, the following
shall apply:
(i) The Company shall issue certain special asset
appreciation rights (the "Appreciation Rights") to stockholders of the Company
of record for the Special Meeting. The Appreciation Rights shall permit such
stockholders to receive a certain number of shares of the Company Common Stock
(the "Rights Shares"), without payment of any consideration or, at the sole
election of the Company, such stockholders may receive cash in accordance with
the provisions of this Section 3(c).
(ii) As of June 30, 1996 (the "First Measurement Date"), such
number of Rights Shares shall be issued to stockholders of the Company of
record for the Special Meeting as shall be determined pursuant to the following
formula:
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<PAGE> 51
(1) A - B - (C x D) = F
(2) G +(-) H - I = J
(3) F + J = K
(4) K + L - M = N
(5) (N / 0.10) - 0 = P
Where (each as of the First Measurement Date, unless otherwise stated):
A = Total common stockholders' equity (net of any dividend
payments and repurchases of any of the Company's securities
including any rights to purchase such securities) reported in
the consolidated financial statements of the Company for the
period ended as of the First Measurement Date.
B = Total intangible assets reported in the consolidated financial
statements of the Company for the period ended as of the First
Measurement Date.
C = Aggregate purchase price of Bank Common Stock, Bank Preferred
Stock and any additional capital invested by First Banks or
raised in the Offering in the Bank and the Company as of the
First Measurement Date.
D = 1.00 plus the product of .01 and the number of months or
portions thereof that the capital invested by First Banks or
Dierberg or raised in the Offering has been held by the
Company or the Bank through the First Measurement Date (net of
interest charged on the Debenture which has been reflected in
the consolidated financial statements of the Company for the
period ended as of the First Measurement Date).
G = Bank reserve for loan losses applicable to loans classified by
Bank or the examiners as substandard, doubtful or loss, as of
June 30, 1995, calculated at the rates of 15%, 50% and 100%,
respectively ("June 30 Classified Loans").
H = During the First Measurement Period, all recoveries and
charge-offs, in whole or in part, of Bank loans included in
its portfolio as of June 30, 1995, or charged-off and included
in the separate list of Bank loans set forth in Schedule
3(c)(ii) hereto, shall be reflected as increases or decreases
to the reserve required as of June 30, 1995.
I = At the First Measurement Date, the reserve required will be
calculated by applying the percentages specified in (G) above
for Classified Loans to the total of substandard, doubtful and
loss loans reflected on the internal watch list of Bank,
including only those loans made prior to the Company Closing.
J = The excess (if J is a positive number) or deficiency (if J is
a negative number) of the required reserve at the First
Measurement Date from that at June 30, 1995, after giving
effect to subsequent recoveries and charge-offs as described
above.
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L = $550,000 or in the event that Bank's Campbell, California
branch is sold during the First Measurement Period, the actual
net sales proceeds of such sale.
M = The actual or anticipated expenses of legal counsel,
independent accountants, investment advisors and other
expenses in connection with the Offering which have not been
recorded by the Company or the Bank as an expense or charged
to capital surplus as of the First Measurement Date.
O = The number of all issued and outstanding shares of Company
Common Stock, excluding shares issued to First Banks or sold
in the Offering.
P = The number of Rights Shares to be distributed. If P is a
negative number, no shares will be distributed.
(iii) Immediately following the First Measurement Date,
Management of the Company shall identify all assets owned by the Bank as of the
Company Closing and which have been fully charged off as of the First
Measurement Date (the "Specified Assets") and shall separately account for such
assets (the "Specified Asset Pool"). Thereafter, Net Proceeds, as defined
below, shall be determined in order to calculate the number of additional
Rights Shares which are issuable or cash payable at the Second and Final
Measurement Dates (as defined in this Section 3(c)).
(iv) The Net Proceeds shall consist of all funds
collected by the Bank in connection with the Specified Asset Pool, together
with any recovery by the Bank of reserve amounts recorded by the Bank in
connection with the "Wildwood Set-Aside Letter", net of all costs of collection
and maintenance directly attributable to or arising out of the Specified Asset
Pool, including without limitation, legal, consulting, appraisal, taxes and
environmental costs or expenses, any and all additional required reserves, the
costs associated with personnel directly involved in whole or in part in the
collection and maintenance of the Specified Assets, the costs or expenses of
litigation, settlement or final judgments paid by the Company or the Bank in
connection with the Specified Assets, and also including, without limitation,
any costs or expenses of litigation, settlement or final judgment, incurred by
the Company or the Bank (not paid or covered by insurance) in connection with
damages to a shareholder or shareholders generally, proximately caused by any
alleged action or inaction of the Company or the Bank or any present or former
directors, officers or employees of the Company or the Bank occurring prior to
the date of the Special Meeting.
(v) The Net Proceeds of the Specified Asset Pool shall be
calculated at each of the Second or Final Measurement Dates and, the number of
shares which shall be issued or cash paid pursuant to the Appreciation Rights
shall be calculated in accordance with the following formula:
(A/B) - C = D
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<PAGE> 53
A = Aggregate Net Proceeds of the Specified Asset Pool at the
Second or Final Measurement Date, as the case may be. If the
Company exercises its election to cause cash to be paid in
lieu of Rights Shares distributed, the aggregate cash
distribution shall equal A.
B = Company consolidated book value per share as calculated in
accordance with GAAP at the Second or Final Measurement Date,
as the case may be.
C = The number of Rights Shares previously distributed pursuant to
this provision.
D = The number of Rights Shares to be distributed at the Second or
Final Measurement Date, as the case may be.
If D is a negative number, no Rights Shares or cash shall be distributed.
(vi) Net Proceeds shall be calculated as of December 31,
1997 (the "Second Measurement Date"). 66-2/3% of the Net Proceeds as of the
Second Measurement Date shall be distributed as soon as practicable thereafter.
Subsequently, all remaining Net Proceeds shall be calculated as of October 31,
1998 (the "Final Measurement Date") and distributed as soon as practicable
thereafter.
Notwithstanding anything in this Agreement to the
contrary, if at either the Second Measurement Date or the Final Measurement
Date there shall have been any claim or cause of action commenced against the
Company or the Board of Directors of the Company with respect to any
shareholder litigation as described in Subsection (iv), then and in that event,
the Company may withhold any reasonable reserve amount it deems necessary and
appropriate to cover the expected costs to defend, settle or satisfy such claim
or action. No further distributions shall be made with respect to the
Specified Asset Pool following the distribution made in connection with the
Final Measurement Date. The Company retains the right in its sole discretion
to distribute the Net Proceeds in cash in lieu of the issuance of Shares
pursuant to the Appreciation Rights.
4. NOMINATION OF DIRECTORS
In consideration of its agreements hereunder, First Banks, upon
consummation of the issuance of the Bridge Exchange Shares, immediately shall
have the right to nominate three (3) persons to serve as directors of the
Company, which nominees the Board of Directors of the Company shall use its
reasonable efforts to elect to the Board of Directors as of the first Company
Board of Directors meeting following such purchase. In addition, the Company
shall use its reasonable efforts to cause two (2) of the current directors of
the Company to continue to serve at least through June 30, 1996 as members of
the Board of Directors of the Company. The Board of Directors of the Company
shall use its reasonable efforts to present all of the above nominations to the
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<PAGE> 54
Company's stockholders in connection with the annual meeting of stockholders of
the Company as part of the management slate of nominees. In addition, upon
First Banks' purchase of Bank Common Stock pursuant to the August Infusion, the
Company shall cause three (3) persons designated by First Banks to be nominated
to the Board of Directors of the Bank, and the Board of Directors of the Bank
shall use its reasonable efforts to elect such nominees to the Board of
Directors of the Bank, as of the first Bank board meeting after the August
Infusion. Notwithstanding any of the foregoing, if a new nominee as a director
of the Company or the Bank generally shall be required pursuant to statute,
regulation or order of a regulatory authority to obtain prior approval to serve
as a director of the Company or the Bank, each person nominated by First Banks
not previously so approved shall obtain the approval of the Federal Reserve
Bank of San Francisco, the Federal Deposit Insurance Corporation ("FDIC")
and/or the SBD, or any other required regulatory approvals, before such person
may assume the position of a director of the Company or the Bank.
5. THE BANK CLOSING; THE COMPANY CLOSING
(a) The closing of the sale to First Banks of the Bank Common
Stock pursuant to the August Infusion, including the delivery of payment for
the shares, shall occur no later than 2 p.m. California time on the first
business day after the receipt of all Approvals, but not later than August 31,
1995 (the "August Infusion Closing Date") at the executive offices of the Bank,
except as such date may be extended upon the mutual agreement of the parties
hereto in the event First Banks has not received all required Approvals and
such Approvals will be obtained within a reasonable period; provided, however,
that this Agreement will terminate immediately if any party hereto does not
agree to such an extension.
(b) Promptly following the Special Meeting:
(i) If the stockholders of the Company approved the Agreement,
as amended, or if such approval is not obtained because the Board of Directors
determines that the Company was not required to present the Agreement for the
approval of the stockholders at the Special Meeting, pursuant to Section 3(a)
hereof, the delivery of and payment for the Bridge Exchange Shares, the
issuance of the Debenture and the execution of the Security Agreement shall
take place at the executive offices of the Company at 2 p.m., California time,
on a date promptly after all Approvals have been obtained (such time and date
being referred to as the "Company Closing Date" and the consummation of the
transaction being referred to as the "Company Closing"); provided, however,
that the Company Closing Date shall occur no later than December 31, 1995; and
provided further, however, that the Company Closing Date may be extended upon
the mutual consent of the Company and First Banks in the event First Banks has
not received all required Approvals and such Approvals will be obtained within
a reasonable period; and provided further, that if any party hereto does not
agree to such an extension, this Agreement will terminate immediately.
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<PAGE> 55
(ii) If the stockholders of the Company fail to approve the
Agreement, as amended, or if the Special Meeting is not held by December 31,
1995, the delivery of and payment for the Additional Bank Shares shall take
place at the executive offices of the Bank at 2 p.m., California time, on a date
promptly after all required Approvals have been obtained (such time and date
being referred to as the "Second Bank Closing Date" and the consummation of the
transaction being referred to as the "Second Bank Closing"); provided, however,
that the Second Bank Closing Date shall occur no later than December 31, 1995;
and provided further, however, that the Second Bank Closing Date may be extended
upon the mutual consent of the Company, the Bank and First Banks in the event
First Banks has not received all required Approvals and such Approvals will be
obtained within a reasonable period; and provided further, that if any party
hereto does not agree to such an extension, this Agreement will terminate
immediately.
6. DELIVERY OF CERTIFICATES
(a) Subject to receipt of the necessary Approvals therefor and
compliance with all applicable securities laws, upon due presentment to the
Bank by Dierberg of the certificate(s) representing the shares of Bank
Preferred Stock registered in Dierberg's name on the books of the Bank,
together with a request for a transfer to First Banks of some or all of said
shares of Bank Preferred Stock, the Bank shall effect the transfer to First
Banks of said shares of Bank Preferred Stock by registering First Banks as, or
causing the Bank's transfer agent to register First Banks as, the record holder
thereof as of the date of such presentment and shall issue to First Banks a
certificate representing the shares of Bank Preferred Stock then held by First
Banks.
(b) At the August Infusion Closing, one or more certificates
representing the Infusion Shares, registered in the name of First Banks, shall
be delivered by or on behalf of the Bank to First Banks, against delivery by
First Banks of the purchase price of $3,500,000 from First Banks' repurchase
agreement being held at the Bank, as described in Section 2(c) of this
Agreement. The certificate representing the Infusion Shares shall contain such
restrictive legends as the SBD may require in its permit authorizing the sale
thereof and shall contain a legend noting the restrictions of the Proxy
Agreement.
(c) At the Company Closing, the Bridge Exchange Shares to be
acquired by First Banks hereunder, registered in the name of First Banks, shall
be delivered by or on behalf of the Company to First Banks for First Banks'
account, against delivery by First Banks of the Bank Common Stock and delivery
by First Banks or Dierberg of the Bank Preferred Stock. The certificate(s)
representing the shares of Company Common Stock shall contain such legends
deemed necessary by counsel to the Company, including any legends with respect
to the affiliate status, if any, of First Banks and the issuance of the Company
Shares in a private offering.
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<PAGE> 56
(d) At the Second Bank Closing, one or more certificates
representing the Additional Bank Shares to be purchased by First Banks,
registered in the name of First Banks, shall be delivered by or on behalf of
the Bank to First Banks, against delivery by First Banks of the full purchase
price therefor from the Escrow Funds in next day funds in the form of one or
more certified or official bank checks or a wire transfer to an account
designated by the Bank. The certificate representing the shares of Bank Common
Stock shall contain such restrictive legends as the SBD may require in its
permit authorizing the sale thereof.
7. REPRESENTATIONS AND WARRANTIES
(a) The Bank hereby represents and warrants to Dierberg and First
Banks as follows:
(i) The Bank is duly chartered and is an existing
corporation in good standing under the laws of the State of California with
corporate power and corporate authority to perform its obligations under this
Agreement, to own all of its property and assets, to incur all of its
liabilities and to carry on its business as now being conducted.
(ii) The execution, delivery and performance of this
Agreement by the Bank and the consummation by the Bank of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
of the Bank; and this Agreement, when duly executed and delivered by Dierberg,
the Company and First Banks will constitute a valid and legally binding
instrument of the Bank enforceable in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors'
rights and to general equitable principles.
(iii) The Bank Preferred Stock has been duly authorized by
the Bank and as issued and delivered by the Bank against payment therefor as
contemplated hereby, are validly issued and, notwithstanding their issuance at
a price below par value, fully paid and, as preferred stock, nonassessable.
(iv) As of the date hereof, the authorized number of shares
of Bank Common Stock is 4,200,000. As of the date hereof, the authorized
number of shares of Bank Preferred Stock is 4,200,000, par value $7.00 per
share, and Series A of the Bank's Preferred Stock comprises 750,000 shares
thereof. As of the date of this Agreement, there were issued and outstanding
1,242,000 shares of Bank Common Stock, all of which are held by the Company,
750,000 shares of Bank Preferred Stock, all of which are held by Dierberg. All
of the issued and outstanding shares of Bank Common Stock are duly and validly
issued, outstanding and are fully paid. None of the outstanding shares of Bank
Common Stock have been issued in violation of any preemptive rights of the
current or past stockholders of Bank.
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(v) Except as contemplated by this Agreement, there are no
shares of capital stock or other equity securities of the Bank issued or
outstanding and there are 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 the Bank or contracts, commitments, understandings or
arrangements by which the Bank is or may be obligated to issue additional
shares of its capital stock or options, warrants or rights to purchase or
acquire any additional shares of its capital stock.
(vi) The execution and delivery of this Agreement by the
Bank, the consummation by the Bank of the transactions herein contemplated and
the compliance by the Bank with the terms hereof do not and will not violate
the Articles of Incorporation or Bylaws of the Bank, or result in a breach or
violation of any of the terms or provisions of, or constitute a default under,
any indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Bank is a party or by which the Bank is bound or to
which any of its properties or assets are subject, with such exceptions as
would not have a material adverse effect on the financial condition of the Bank
or any applicable statute, regulation or any order, judgment, decree, rule or
regulation of any court or governmental agency or body having jurisdiction over
the Bank or any of its properties or assets; and, to the Bank's reasonable
knowledge, no consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or body is
required for the valid authorization, execution, delivery and performance by
the Bank of this Agreement or the issue of the Bank Common Stock to First Banks
or the consummation by the Bank of the other transactions contemplated by this
Agreement, except such as have been, or prior to the August Infusion Closing
Date and the Second Bank Closing Date will have been, obtained from the Federal
Reserve Bank of San Francisco, the SBD and/or the FDIC.
(vii) The Bank Preferred Stock, as well as the shares of Bank
Common Stock which may be issued at the Second Bank Closing and at the August
Infusion Closing, are exempt from the registration provisions of the Securities
Act of 1933, as amended (the "Securities Act"), by virtue of Section 3(a)(2)
thereof.
(viii) The shares of Bank Common Stock which may be issued at
the Second Bank Closing and the August Infusion Closing will be duly authorized
by the Bank and when issued and delivered by the Bank against payment therefor
as contemplated hereby, will be validly issued, outstanding and,
notwithstanding their issuance at a price below par value, if applicable, fully
paid.
(ix) No anti-takeover provision or plan exists with respect
to the Bank.
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<PAGE> 58
(b) The Company hereby represents and warrants to Dierberg and First
Banks as follows:
(i) The Company is a "bank holding company" within the
meaning of the Bank Holding Company Act of 1956 and has been duly incorporated
and is an existing corporation in good standing under the laws of the State of
Delaware with corporate power and corporate authority to perform its
obligations under this Agreement, to own all of its properties and assets, to
incur all of its liabilities and to carry on its business as now being
conducted, except as set forth in Schedule 7(b)(i).
(ii) The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action of the Board of Directors of the Company; and this Agreement,
when duly executed and delivered by First Banks, Dierberg and the Bank, will
constitute a valid and legally binding instrument of the Company enforceable in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equitable principles.
(iii) The Company Shares, when issued and delivered by the
Company against payment therefor as contemplated hereby, will have been duly
authorized by the Company and will be validly issued, outstanding, fully paid
and nonassessable.
(iv) As of the date hereof, the authorized capital stock of
the Company consists of 15,000,000 shares of Common Stock, $.01 par value per
share, and 5,000,000 shares of preferred stock, $.01 par value per share. The
aggregate number of shares of the Company's Common Stock issued and outstanding
as of the date of this Agreement is 4,675,110, all of which are validly issued,
fully paid and nonassessable, and no shares of preferred stock are issued and
outstanding. None of the outstanding shares of Company Common Stock have been
issued in violation of any preemptive rights of the current or past
stockholders of the Company. As of the date hereof, the Company currently has
outstanding employee stock options to purchase 149,800 shares of Company Common
Stock and director options to purchase 70,000 shares of Company Common Stock.
As of the date hereof, the Company had reserved 778,000 shares for issuance
pursuant to employee stock options and 250,000 shares for issuance pursuant to
director stock options. The vesting of stock options granted by the Company is
not accelerated nor is the exercise price reduced as a result of the
transactions contemplated hereby. The Company has a Stockholders' Rights Plan
("Rights Plan") outstanding which gives each common stock holder a Unit
Purchase Right entitling such holder to purchase from the Company, in the event
of certain takeover attempts of the Company, a unit consisting of one-hundredth
of a share of Series A Participating Preferred Stock. The Board of Directors
of the Company will amend the Rights Plan subject to receipt of written
approval of the
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Rights Agent (as defined in the Rights Plan) to exclude the transactions
contemplated by this Agreement from constituting a takeover attempt which would
trigger the Rights Plan.
(v) Under the Rights Plan as amended, it is intended that the
transactions contemplated by this Agreement shall not constitute a "Trigger
Event" and no shareholder "Unit Purchase Right" (as such terms are defined in
the Rights Plan) will occur, as a result of the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby. The
transactions contemplated hereby and the super-majority shareholder vote
requirement set forth in Article 8 of the Company's certificate of
incorporation, as amended, shall not apply to this transaction. However, if
and to the extent the Company may determine that it is necessary and
appropriate for the Company to exercise its right of redemption under the
Rights Plan or settle any disputes with respect to such a "redemption" and, if
at such time the Company's Board of Directors determines in good faith that
payment or such settlement of such "redemption" would violate any outstanding
regulatory agreements or orders, is otherwise not permitted by its regulatory
authorities, or that it would be imprudent to expend Company funds or other
consideration therefore, then and in that event, First Banks shall have the
right, at its sole election, to arrange for the payment of such "redemption"
and the Company shall issue shares of Company Common Stock, on the basis of
$0.10 per share, in an aggregate amount equal to the cost and expense of the
"redemption" paid by First Banks.
(vi) Except as set forth in subsections (iv) and (v) hereof
and except as provided by this Agreement (including, but not limited to,
distributions to stockholders pursuant to the Offering and upon or after the
Measurement Date), there are no shares of capital stock or other equity
securities of the Company issued or outstanding and there are 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 the Company or contracts,
commitments, understandings or arrangements by which the Company is or may be
obligated to issue additional shares of its capital stock or options, warrants
or rights to purchase or acquire any additional shares of its capital stock.
(vii) The execution and delivery of this Agreement by the
Company, the consummation by the Company of the transactions herein
contemplated and the compliance by the Company with the terms hereof do not and
will not violate the Certificate of Incorporation or Bylaws of the Company, or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company is a party or
by which the Company is bound or to which any of its properties or assets are
subject, with such exceptions as would not have a material adverse effect on
the financial condition of the Company on a consolidated basis or any
applicable statute,
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<PAGE> 60
regulation or any order, judgment, decree, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or any of its
properties or assets; and, to the Company's reasonable knowledge, no consent,
approval, authorization, order, registration or qualification of or with any
such court or governmental agency or body is required for the valid
authorization, execution, delivery and performance by the Company of this
Agreement, the issue of the Bridge Exchange Shares or the consummation by the
Company of the other transactions contemplated by this Agreement, except such
as have been, or prior to the Company Closing will have been, obtained under
the Securities Act of 1933, as amended (the "Securities Act"), the "blue sky"
laws of applicable states and/or from the Board of Governors of the Federal
Reserve System, the Federal Reserve Bank of San Francisco and/or the FDIC.
(c) The Company with respect to itself and the Bank with respect to
itself hereby further represent and warrant to First Banks as follows:
(i) Each of the Company's and the Bank's Board of Directors
have, by all appropriate action, approved this Agreement and authorized the
execution hereof and thereof on its behalf by its duly authorized officers and
the performance by the Company and the Bank of their respective obligations
hereunder and thereunder, subject, in the case of obligations contemplated
hereby to be satisfied after the approvals of the transaction contemplated by
this Agreement by the Company's stockholders and applicable regulatory
authorities, to receipt of such approvals.
(ii) Except as set forth in Schedule 7(c)(ii) hereto, nothing
in the Certificate of Incorporation or Bylaws of the Company or the Articles of
Incorporation or Bylaws of the Bank, as amended, or any other agreement,
instrument, decree, proceeding, law or regulation (except as specifically
referred to in or contemplated by this Agreement) by or to which they are bound
or subject would prohibit or inhibit the Company or the Bank from consummating
this Agreement on the terms and conditions herein contained. To their
reasonable knowledge, the Company and Bank are neither in default under nor in
violation of any provision of their articles or certificates of incorporation,
bylaws or 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 the Company or the Bank taken as a whole, except
as set forth in Schedule 7(c)(ii) hereto.
(iii) Bank is the sole subsidiary of the Company. Neither
the Company nor the Bank is a party to any partnership or joint venture or owns
an equity interest in any other business or enterprise.
(iv) Except as set forth in Schedule 7(c)(iv) hereto, there
is no litigation, claim or other proceeding pending or, to the reasonable
knowledge of the Company, threatened, against the
17
<PAGE> 61
Company or the Bank, or of which the property of the Company or the Bank is or
would be subject.
(v) Except as set forth in Schedule 7(c)(v) hereto, neither
the Company nor the Bank is a party to or bound by any written contract for the
employment, retention or engagement, or with respect to the severance, of any
officer, employee, agent or consultant which, by its terms, is not terminable
by the Company or the Bank on thirty (30) days written notice or less without
the payment of any amount by reason of such termination. A true, accurate and
complete copy of each written agreement disclosed in Schedule 7(c)(v) is
attached thereto.
(vi) (A) Neither the Company nor the Bank has entered into
any collective bargaining agreement with any labor organization with respect to
any group of employees of the Company or the Bank and to the reasonable
knowledge of the Company there is no present effort nor existing proposal to
attempt to unionize any group of employees of the Company or the Bank.
(B) Except as set forth in Schedule 7(c)(vi) hereto, (i)
to their reasonable knowledge, the Company and the Bank are and have been in
material compliance with all applicable laws respecting employment and
employment practices, terms and conditions of employment and wages and hours,
including, without limitation, any such laws respecting employment
discrimination and occupational safety and health requirements, and, to their
reasonable knowledge, neither the Company nor the Bank is engaged in any unfair
labor practice; (ii) there is no material unfair labor practice complaint
against the Company or the Bank pending or, to the reasonable knowledge of the
Company or the Bank, threatened before the National Labor Relations Board; (iii)
there is no labor dispute, strike, slowdown or work stoppage actually pending
or, to the reasonable knowledge of the Company and the Bank, threatened against
the Company or the Bank; and (iv) neither the Company nor the Bank has
experienced any material work stoppage during the past five years.
(C) Except as set forth in Schedule 7(c)(vi) hereto, to
their reasonable knowledge, neither the Company nor the Bank 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 ("E.R.I.S.A."), or any non-qualified 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 the Company or the Bank (the "Employee Plans"). To the
reasonable knowledge of the Company, no present or former employee of the
Company or the Bank has been charged with breaching nor has breached a fiduciary
duty under any of the Employee Plans. Neither the Company nor the Bank
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 E.R.I.S.A.).
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<PAGE> 62
Except as set forth in Schedule 7(c)(vi) hereto, neither the Company nor the
Bank maintains, contributes to, or participates in, any plan that provides
health, major medical, disability or life insurance benefits to former employees
of the Company or the Bank.
(D) To the Company's and the Bank's reasonable knowledge,
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 December 31, 1994, had
or has had an accumulated funding deficiency. All insurance premiums have been
paid in full, subject only to normal retrospective adjustments in the ordinary
course. To the reasonable knowledge of the Company, no claim is pending or
threatened 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 the Company or the Bank would be liable after December 31,
1994, except as is reflected on the Company's financial statements. To the
Company's reasonable knowledge, after December 31, 1994, the Company and its
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 E.R.I.S.A.
with respect to any Employee Plan. To the Company's reasonable knowledge, all
Employee Plans have been operated, administered and maintained materially in
accordance with the terms thereof and in material compliance with the
requirements of all applicable laws, including, without limitation, E.R.I.S.A.
(vii) Except as set forth in Schedule 7(c)(vii), with respect
to all real estate owned by the Company and Bank, other than Other Real Estate
Owned ("OREO"), as such real estate is internally classified on the books of the
Company and the Bank, the Company and the Bank have marketable title, 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 Company
financial statements and easements, rights-of-way, and other restrictions which
are not material) to all of their real properties. Except as set forth in
Schedule 7(c)(vii), with respect to OREO, the Company and the Bank have such
title thereto as is stated in the respective policy of title insurance thereon,
a copy of each of which such policies has been made available to First Banks.
All leasehold interests for real property and any material personal property
used by the Company and the Bank in their businesses are held pursuant to lease
agreements which are valid and enforceable in accordance with their terms. To
the Company's and the Bank's reasonable knowledge, 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 the reasonable knowledge of
the Company and the Bank, threatened with respect to such properties. The
Company and the Bank have valid title or other ownership rights under licenses
to all material intangible personal or intellectual property used by the Company
or the Bank in its business, free and
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<PAGE> 63
clear of any claim, defense or right of any other person or entity which is
material to such property, subject only to rights of the licensors pursuant to
applicable license agreements, which rights do not materially adversely
interfere with the use of such property. Except as set forth in Schedule
7(c)(vii), all material insurable properties owned or held by the Company and
the Bank 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.
(viii) (A) As used in this Agreement, "Environmental Laws"
means all local, state and federal environmental, health and safety laws and
regulations currently in effect in all jurisdictions in which the Company and
its subsidiaries conduct business or own, lease or operate 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.
(B) Except as set forth in Schedule 7(c)(viii) hereto, to
the actual knowledge of the Company and the Bank, neither the conduct nor
operation of the Company or the Bank nor any condition of any property presently
owned, leased or operated by any of them on their own behalf or in a fiduciary
capacity violates Environmental Laws in any respect material to the business of
the Company and the Bank taken as a whole and, to the actual knowledge of the
Company and the Bank, no condition or event has occurred with respect to any of
them or any such property that, with notice or the passage of time, or both,
would constitute a violation material to the business of the Company and the
Bank taken as a whole of Environmental Laws or obligate the Company or the Bank
to remedy, stabilize, neutralize or otherwise alter the environmental condition
of any such property where the aggregate cost of such actions would be material
to the Company and the Bank taken as a whole. Except as set forth in Schedule
7(c)(viii) hereto, neither the Company nor the Bank has received any written
notice from any person or entity that the Company or the Bank or the operation
or condition of any property ever or presently owned, leased or operated by any
of them on their own behalf or in a fiduciary capacity are in violation of any
Environmental Laws currently in effect or that the Company or the Bank are
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.
(ix) Except for fees payable to Carpenter & Company by the
Company, and except as may be incurred by the Company in connection with the
Offering, 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 the Company or the Bank.
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<PAGE> 64
(x) Except with respect to information concerning First Banks
and/or Dierberg supplied to the Company by First Banks and/or Dierberg, the
Proxy Statement (to be prepared and filed in connection with the Special
Meeting) and the Registration Statement and Prospectus (with respect to the
Offering) and any other documents to be filed by the Company with the Commission
or any banking or other regulatory authority in connection with the transactions
contemplated hereby, will not, at the respective times such documents are filed,
and, in the case of the Proxy Statement and Prospectus, when first mailed to the
stockholders of the Company, 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, in the case of the Proxy Statement and
Prospectus or any amendment thereof or supplement thereto, at the time of the
Special Meeting or effective date of the offering, be false or misleading with
respect to any material fact, 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 Special Meeting. All documents
that the Company is responsible for filing with the Commission 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 currently in effect and the applicable rules and regulations
thereunder.
(xi) Except as set forth in Schedule 7(c)(xi) hereto (and with
a true and correct copy of the document or other item in question made available
to First Banks for inspection), neither the Company nor the Bank is a party or
subject to any of the following (whether written or oral):
(A) any agreement, indenture or other instrument not
reflected in the Company's financial statements relating to the borrowing of
money by the Company or the Bank or the guarantee by the Company or the Bank of
any such obligation (other than trade payables or instruments related to
transactions entered into in the ordinary course of business by the Company or
the Bank, such as deposits, Fed Funds borrowings and repurchase agreements),
other than such agreements, indentures or instruments providing for annual
payments of less than $10,000;
(B) any contract containing covenants which limit the
ability of the Company or the Bank to compete in any line of business or with
any person or containing any restriction of the geographical area in which, or
method by which, the Company or the Bank may carry on its business (other than
as may be required by law or any applicable regulatory authority); or
(C) any real or personal property lease (excepting
therefrom lease of current branch facilities and administrative office space)
with annual rental payments aggregating $25,000 or more.
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<PAGE> 65
(d) Dierberg hereby represents and warrants to the Bank and Company as
follows:
(i) As of the date of this Agreement and immediately prior to
its execution, Dierberg beneficially owns no shares of Company Common Stock.
(ii) Dierberg is entitled to receive no Exchange Shares in the
Exchange Offering.
(iii) The execution, delivery and performance of this Agreement
by Dierberg, and the consummation by Dierberg of the transactions contemplated
hereby have been duly authorized by all necessary action of Dierberg; and this
Agreement, when duly executed and delivered by Dierberg, will constitute a valid
and legally binding instrument, enforceable in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles.
(iv) To Dierberg's reasonable knowledge, no state, federal or
foreign regulatory approvals, permits, licenses or consents or other contractual
or legal obligations are required for Dierberg to enter into this Agreement or
otherwise purchase the Bank Preferred Stock, except those that have been
obtained or performed and those which the failure to obtain or perform will not
impair their respective abilities to perform their obligations under this
Agreement.
(v) The execution and delivery of this Agreement, the
consummation by Dierberg of the transactions herein contemplated and the
compliance by Dierberg with the terms hereof do not and will not conflict with,
or result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which Dierberg is a party or by
which his properties or assets are bound, with such exceptions as would not
prevent Dierberg from performing his obligations hereunder, or any applicable
statute or any order, judgment, decree, rule or regulation of any court or
governmental agency or body, domestic or foreign, having jurisdiction over
Dierberg or any of his properties or assets; and no consent, approval,
authorization, order, registration or qualification of or with any such court or
governmental agency or body is required for the valid authorization, execution,
delivery and performance by Dierberg of this Agreement or the consummation by
Dierberg of the transactions contemplated by this Agreement, except as set forth
in (v) above.
(vi) Dierberg is an "accredited investor" within the meaning of
Rule 501(a) under the Securities Act. Dierberg has received and reviewed the
Preliminary Prospectus included in the Registration Statement, and (A) except as
set forth in this Agreement and in the Preliminary Prospectus, no
representations or
22
<PAGE> 66
warranties have been made to Dierberg by the Company or the Bank, any of their
respective officers, directors or any agent, employee or affiliate of any of
them and (B) in entering into this Agreement, Dierberg is not relying upon any
information other than information contained in this Agreement and in the
Preliminary Prospectus.
(vii) Information concerning Dierberg and his family, family
trusts, corporate holdings and related or affiliated entities owned or
controlled by him or them, supplied to the Company by Dierberg in connection
with the preparation by the Company of the Proxy Statement (to be prepared and
filed in connection with the Special Meeting) and the Registration Statement and
Prospectus (with respect to the Offering) and any other documents to be filed by
the Company with the Commission or any banking or other regulatory authority in
connection with the transactions contemplated hereby, will not, at the
respective times such documents are filed, and, in the case of the Proxy
Statement and Prospectus, when first mailed to the stockholders of the Company,
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, in the case of the Proxy Statement and Prospectus or any amendment thereof
or supplement thereto, at the time of the Special Meeting or effective date of
the offering, be false or misleading with respect to any material fact, 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 Special Meeting.
(e) First Banks hereby represents and warrants to the Bank and Company
as follows:
(i) As of the date of this Agreement and immediately prior to
its execution, First Banks beneficially owns no shares of Company Common Stock.
(ii) First Banks is entitled to receive no Exchange Shares in
the Exchange Offering.
(iii) First Banks is a corporation duly incorporated, validly
existing and in good standing under the laws of the state of Missouri, with
corporate power and authority to perform its obligations under this Agreement,
to own all of its properties and assets, to incur all of its liabilities and to
carry on its business as now being conducted. First Banks is a "bank holding
company" within the meaning of the Bank Holding Company Act of 1956.
(iv) The execution, delivery and performance of this Agreement
by First Banks and the consummation by First Banks of the transactions
contemplated hereby have been duly authorized by all necessary action of First
Banks; and this Agreement, when duly executed and delivered by First Banks, will
constitute a valid and legally binding instrument, enforceable in accordance
with its
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<PAGE> 67
terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles.
(v) First Banks is not insolvent and has sufficient cash funds
on hand (including funds under management) or available credit arrangements to
purchase the Company Shares and the shares of Bank Common Stock on the terms and
conditions contained in this Agreement, has placed such funds in the Escrow
Account, along with instructions authorizing the investment of such funds in
accordance with Section 2(b) hereof, and release of such funds to the Company on
the Company Closing Date or to the Bank on the Second Bank Closing Date, as
applicable. First Banks has simultaneously with the execution and delivery of
this Agreement or prior thereto provided the Company and the Bank with evidence
or substantiated that First Banks has the financial means to satisfy its
financial obligations under this Agreement and the foregoing evidence and
substantiation is a true and accurate representation of such means.
(vi) First Banks is an "accredited investor" within the meaning
of Rule 501(a) and/or a "qualified institutional buyer" as defined in Rule 144A
under the Securities Act. First Banks has received or reviewed all information
with respect to the Company and the Bank which it deems reasonably necessary in
connection with making its investment decision.
(vii) To First Banks' reasonable knowledge, no state, federal
or foreign regulatory approvals, permits, licenses or consents or other
contractual or legal obligations are required for First Banks to enter into this
Agreement or otherwise purchase the Company Shares, except the prior approval of
the Federal Reserve Bank and the SBD.
(viii) The execution and delivery of this Agreement, the
consummation by First Banks of the transactions herein contemplated and the
compliance by First Banks with the terms hereof do not and will not conflict
with, or result in a breach or violation of any of the terms or provisions of,
or constitute a default under, the Certificate or Articles of Incorporation, as
the case may be, or Bylaws of First Banks or any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which First Banks is a
party or by which any of First Banks' properties or assets are bound, with such
exceptions as would not have a material adverse effect on the financial
condition of First Banks, or any applicable statute or any order, judgment,
decree, rule or regulation of any court or governmental agency or body, domestic
or foreign, having jurisdiction over First Banks or any of First Banks'
properties or assets; and no consent, approval, authorization, order,
registration or qualification of or with any such court or governmental agency
or body is required for the valid authorization, execution, delivery and
performance by First Banks of this Agreement or the consummation by First Banks
of the
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<PAGE> 68
transactions contemplated by this Agreement, except as set forth in (vii) above.
(ix) First Banks has not entered into any contracts,
arrangements, understandings or relationships (legal or otherwise) with any
other unaffiliated person or persons with respect to any securities of the
Company or the Bank, including but not limited to transfer or voting of any of
the securities, finder's fees, joint ventures, loan or option arrangements, puts
or calls, guarantees of profits, division of profits or loss, or the giving or
withholding of proxies; and First Banks does not own any securities of the
Company which are pledged or otherwise subject to a contingency the occurrence
of which would give another person voting power or investment power over such
securities.
(x) First Banks has received and reviewed the Preliminary
Prospectus included in the Registration Statement, and except as set forth in
this Agreement and in the Preliminary Prospectus, no representations or
warranties have been made to First Banks by the Company, any of its officers,
directors or any agent, employee or affiliate of any of them.
(xi) Information with respect to First Banks, its subsidiaries,
corporate holdings and related or affiliated entities owned or controlled by it,
supplied to the Company by First Banks in connection with the preparation by the
Company of the Proxy Statement (to be prepared and filed in connection with the
Special Meeting) and the Registration Statement and Prospectus (with respect to
the Offering) and any other documents to be filed by the Company with the
Commission or any banking or other regulatory authority in connection with the
transactions contemplated hereby, will not, at the respective times such
documents are filed, and, in the case of the Proxy Statement and Prospectus,
when first mailed to the stockholders of the Company, 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, in the case of the
Proxy Statement and Prospectus or any amendment thereof or supplement thereto,
at the time of the Special Meeting or effective date of the offering, be false
or misleading with respect to any material fact, 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 Special
Meeting.
(xii) With respect to the indemnification of officers and
directors and officers' and directors' insurance, First Banks agrees as follows:
(A) First Banks shall ensure that all rights to
indemnification and all limitations of liability existing in favor of any
person who was, as of January 1, 1995, or who becomes prior to the Company
Closing Date, a director or officer of the Company or the Bank (the
"Indemnified Parties"), in the Company's and the Bank's respective charter
and bylaws or applicable law as currently
25
<PAGE> 69
in effect, as applicable in the particular case and as in effect on the date
hereof, shall, with respect to claims arising from facts or events that occurred
before the Company Closing Date, survive the Company Closing and shall continue
in full force and effect. Nothing contained in this Section 7(e)(xii)(A) shall
be deemed to preclude the liquidation, consolidation or merger of the Company or
the Bank, in which case all of such rights to indemnification and limitations on
liability shall be deemed to so survive and continue as contractual rights
notwithstanding any such liquidation or consolidation or merger; provided,
however, that in the event of liquidation or sale of substantially all of the
assets of the Company or the Bank, First Banks shall guarantee, to the extent of
its pro rata portion of the net asset value of the Company or the Bank, as
applicable, after the Measurement Settlement Date, after completion of the
Offering and after the issuance of any Rights Shares, the indemnification
obligations of the Company or the Bank to the extent of the above mentioned
indemnification obligations of the Company and the Bank described above.
Notwithstanding anything to the contrary contained in this Section 7(e)(xii),
nothing contained herein shall require First Banks to ensure that any person who
was a director or officer of the Company or the Bank is indemnified to a greater
extent than the Company or the Bank is, as of the Company Closing Date, required
to indemnify any such person;
(B) any Indemnified Party wishing to claim
indemnification under Section 7(e)(xii), upon learning of any such claim,
action, suit, proceeding or investigation, shall promptly notify First Banks
thereof, but the failure to so notify shall not relieve First Banks of any
liability it may have to such Indemnified Party. In the event of any such claim,
action, suit, proceeding or investigation (whether arising before or after the
Company Closing Date, (i) First Banks shall have the right to assume the defense
thereof and First Banks shall not be liable to such Indemnified Parties for any
legal expenses of other counsel or any other expenses subsequently incurred by
such Indemnified Parties in connection with the defense thereof, except that if
First Banks elects not to assume such defense or counsel for the Indemnified
Parties advises that there are issues which raise conflicts of interest between
First Banks and the Indemnified Parties, the Indemnified Parties may retain
counsel satisfactory to them, and First Banks shall pay the reasonable fees and
expenses of such counsel for the Indemnified Parties promptly as statements
therefor are received; provided, however, that First Banks shall be obligated
pursuant to this subparagraph (B) to pay for only one firm of counsel for all
Indemnified Parties in any jurisdiction unless the use of one counsel for such
Indemnified Parties would present such counsel with a conflict of interest and
(ii) the Indemnified Parties shall cooperate in the defense of any such matter;
(C) for a period of three years after the Company Closing
Date, First Banks shall use all reasonable efforts to cause to be maintained in
effect the current directors' and officers' liability insurance maintained by
the Company or the Bank (provided
26
<PAGE> 70
that First Banks may substitute therefor insurance of at least the same coverage
and amount containing terms and conditions which are substantially no less
advantageous) with respect to claims arising from facts or events which occurred
before the Company Closing Date; provided, however, that in no event shall First
Banks be obligated to expend, in order to maintain or provide insurance coverage
pursuant to this Section 7(e)(xii), an aggregate amount in excess of 150% of the
amount of the annual premium paid as of the date hereof by the Company or the
Bank for such insurance (the "Maximum Amount"), and provided further, that,
prior to the Company Closing Date, the Company and the Bank shall notify the
appropriate directors' and officers' liability insurers of the Company Closing
and of all pending or threatened claims, actions, suits, proceedings or
investigations, if any, asserted or claimed against any Indemnified Party, or
circumstances likely to give rise thereto, in accordance with terms and
conditions of the applicable policies. If the amount of the premiums necessary
to maintain or procure such insurance coverage would exceed the Maximum Amount,
First Banks shall use reasonable efforts to maintain the most advantageous
policies of directors' and officers' insurance obtainable for the Maximum
Amount;
(D) if First Banks or any of its successors or assigns
(a) shall consolidate with or merge into any other corporation or entity and
shall not be the continuing or surviving corporation or entity of such
consolidation or merger or (b) shall transfer all or substantially all of its
properties and assets to any individual, corporation or other entity, then and
in each such case, proper provision shall be made so that the successors and
assigns of First Banks shall assume the obligations set forth in this Section
7(e)(xii);
(E) the provisions of this Section 7(e)(xii) are intended
to be for the benefit or , and shall be enforceable by, each Indemnified Party
and his or her heirs and representatives.
(f) Dierberg with respect to himself and First Banks with respect to
itself hereby further represent and warrant to the Company and the Bank as
follows:
(i) Each of Dierberg, individually, and First Banks' Board of
Directors have, by all appropriate action, approved this Agreement and
authorized the execution hereof and thereof on his and its behalf by him and by
its duly authorized officers, and the performance by Dierberg and First Banks of
their respective obligations hereunder and thereunder, subject, in the case of
obligations contemplated hereby to be satisfied after the Approvals of the
transactions contemplated by this Agreement, to receipt of such approvals.
(ii) Except as set forth in Schedule 7(f)(ii) hereto, nothing
in the Certificate of Incorporation or Bylaws of First Banks, as amended, or any
other agreement, instrument, decree, proceeding, law or regulation (except as
specifically referred to
27
<PAGE> 71
in or contemplated by this Agreement) by or to which Dierberg and/or First Banks
are bound or subject would prohibit or inhibit Dierberg or First Banks from
consummating this Agreement on the terms and conditions herein contained. To
their reasonable knowledge, Dierberg and First Banks are neither in default
under nor in violation of any provisions of, as to First Banks, its articles or
certificate of incorporation, bylaws or, as to Dierberg and First Banks, 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 Dierberg's or First Banks' performance of this Agreement in
accordance with its terms.
8. COVENANTS OF THE PARTIES
(a) Except as contemplated by this Agreement, except pursuant to the
terms of the Offering, except as proposed to be presented to the stockholders of
the Company at the Special Meeting and except as otherwise disclosed herein or
in the Schedules hereto, neither the Company nor Bank shall declare or pay any
dividend or make any other distribution to stockholders, whether in cash, stock
or other property, after the date of this Agreement.
(b) Except as contemplated by this Agreement, except pursuant to the
terms of the Offering, except as proposed to be presented to the stockholders of
the Company at the Special Meeting and except as otherwise disclosed herein or
in the Schedules hereto, from the date hereof and through the Company Closing
Date or the Second Bank Closing Date, the Company shall, and shall cause Bank
to, continue to carry on its 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, neither the Company nor Bank shall, without the prior consent of
First Banks:
(i) issue any stock or other capital stock or any options,
warrants, or other rights to subscribe for or purchase stock or any other
capital stock or any securities convertible into or exchangeable for any capital
stock (except for the issuance of stock pursuant to the exercise of the Company
Stock Options, to purchase the same which are outstanding on the date of this
Agreement to the extent of the exercise thereof after the date hereof); or
(ii) directly or indirectly redeem, purchase or otherwise
acquire any capital stock of the Company or Bank; or
(iii) except for a reverse stock split by the Company and/or
the Bank, 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
28
<PAGE> 72
(iv) change its certificate or articles of incorporation, as
the case may be, or bylaws; or
(v) grant any increase 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, other than in the normal course of business; or
(vi) 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 (for the purpose hereof, it is understood
and agreed that the incurrence of obligations under repurchase agreements shall
be considered as transactions in the ordinary course of business); or
(vii) 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 Five Hundred Thousand Dollars
($500,000) or that would increase the aggregate credit outstanding to any one
borrower (or group of affiliated borrowers) to more than Five Hundred Thousand
Dollars ($500,000)(excluding for this purpose any accrued interest or
overdrafts), without the prior written consent of First Banks, acting through
Donald W. Williams or such other designee as First Banks may give notice of to
the Company; or
(viii) purchase or otherwise acquire any investment security
for its own account having an average remaining life to maturity greater than
five years, any asset-backed securities other than those issued or guaranteed by
the Government National Mortgage Association, the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation having an expected
average life to maturity of greater than five years or any interest only,
principal only, residual or stripped securities, other than in the ordinary
course of business; or
(ix) enter into any agreement, contract or commitment out of
the ordinary course of business or 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
(x) except in the ordinary course of business (which includes
pledges of securities in connection with public funds deposits and pledges of
securities to dealers and/or the Federal Home Loan Bank of San Francisco), place
on any of its assets or properties any mortgage, pledge, lien, charge, or other
encumbrance; or
(xi) cancel or accelerate (A) any indebtedness owing to the
Company or Bank which would cause a loss to the Company or the
29
<PAGE> 73
Bank of more than $100,000, or (B) except in the ordinary course of business,
any claims which the Company or Bank may possess or (C) or waive any material
rights of substantial value; or
(xii) except in the ordinary course of business, sell or
otherwise dispose of any real property or any material amount of any tangible or
intangible personal property other than (A) properties acquired in foreclosure
or otherwise in the ordinary collection of indebtedness to the Company and the
Bank or (B) those assets which the Board of Directors of the Bank or the Company
may determine is necessary and appropriate to sell in order to meet regulatory
capital requirements and for the safe and sound operation of the Bank; provided,
however, that if Bank determines to sell one or more branch facilities as part
of its determination pursuant to clause (B) immediately above, the Company and
the Bank agree that First Banks shall have a right of first refusal to purchase
said branch(es) at the price and terms which are the same as the best third
party offer the Bank has obtained, exercisable by First Banks within 30 days of
notice from the Bank; or
(xiii) purchase, 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 the Company and its 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 it has reason to
believe that such property might contain any such waste materials or otherwise
might be contaminated; or
(xiv) knowingly 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 Company's and the Bank's business, financial
condition, or earnings, taken as a whole; or
(xv) knowingly violate any law, statute, rule, governmental
regulation, or order, which violation might have a material adverse effect on
the Company's and its subsidiaries' business, financial condition, or earnings;
or
(xvi) purchase any real or personal property or make any other
capital expenditure where the amount paid or committed therefor is in excess of
Fifty Thousand Dollars ($50,000).
(c) The Company and the Bank shall not, without the prior written
consent of First Banks, engage in any transaction or take any action that would
render untrue in any material respect any of the representations and warranties
of the Company and the Bank contained in Section 7 hereof, if such
representations and warranties were given as of the date of such transaction or
action.
30
<PAGE> 74
(d) The Company and the Bank shall promptly notify First Banks, making
reference to this section, of the occurrence of any matter or event known to and
directly involving the Company or Bank, which would not include any changes in
conditions that affect the banking industry generally in the markets in which
the Company and the Bank operate, that is materially adverse to the business,
operations, properties, assets, or condition (financial or otherwise) of the
Company and the Bank taken as a whole.
(e) The Company and the Bank shall promptly advise First Banks of their
respective receipt of any proposal (or inquiry concerning any possible such
proposal) regarding an acquisition of all or any substantial portion of the
business, assets or stock of the Company or Bank and, subject to the fulfillment
of the fiduciary duties of the Board of Directors of the Company and the Bank,
the substance of such proposal or inquiry.
(f) The Company and the Bank 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 First Banks and use its best efforts to prevent or
promptly remedy the same.
(g) First Banks and Dierberg shall not, without the prior written
consent of the Company and the Bank, knowingly engage in any transaction or take
any action that would render untrue in any material respect any of the
representations and warranties of the Dierberg and First Banks contained in
Section 7 hereof, if such representations and warranties were given as of the
date of such transaction or action.
(h) First Banks shall promptly notify the Company, making reference to
this section, of the occurrence of any matter or event known to and directly
involving First Banks, which would not include any changes in conditions that
affect the banking industry generally in the markets in which First Banks
operates, that would materially adversely affect First Banks' performance of
this Agreement in accordance with its terms.
(i) First Banks and Dierberg shall promptly advise the Company of their
respective receipt of any proposal (or inquiry concerning any possible such
proposal) regarding an acquisition of all or any substantial portion of the
business, assets or stock of First Banks and, subject to the fulfillment of the
fiduciary duties of the Board of Directors of First Banks, the substance of such
proposal or inquiry.
(j) First Banks and Dierberg shall, in the event it or he has knowledge
of the occurrence, or impending or threatened occurrence, of any event or
condition which would cause or constitute a material breach (or would have
caused or constituted a material
31
<PAGE> 75
breach had such event occurred or been known prior to the date hereof) of any of
its or his representations or agreements contained or referred to herein, give
prompt written notice thereof to the Company and use its or his best efforts to
prevent or promptly remedy the same.
9. CLOSING CONDITIONS
The respective obligations of Dierberg, First Banks, the Bank and the
Company to consummate the transactions contemplated hereby shall be subject, in
the discretion of each of the parties hereto, as the case may be, to the
condition that all representations and warranties and other statements of each
other party are, at and as of the respective Closing Dates, true and correct in
all material respects, the condition that each other party shall have performed
all of its obligations hereunder theretofore to be performed in all material
respects, and to the additional condition that, if the Registration Statement
has been declared effective, no stop order suspending the effectiveness of the
Registration Statement or any amendment or supplement thereto shall have been
issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission. In addition, the following specific conditions to
consummation shall be in effect:
(a) the obligation of the Bank to issue to First Banks any Infusion
Shares at the August Infusion Closing and the obligation of First Banks to
purchase from Bank any Infusion Shares at the August Infusion Closing shall be
conditioned (i) upon the receipt by the Bank of all necessary federal or state
governmental or regulatory approvals; and (ii) upon receipt by First Banks of
all necessary Approvals;
(b) the obligation of the Bank to issue to First Banks the Additional
Bank Stock at the Second Bank Closing shall be conditioned upon (i) failure of
the Company's stockholders to approve the Agreement at the Special Meeting as
provided by Section 3(b) hereof; (ii) receipt by the Bank of all necessary
federal or state governmental or regulatory approvals; (iii) upon the receipt by
First Banks of all necessary Approvals; and (iv) execution of the Proxy
Agreement; and
(c) the obligation of the Company to issue the Bridge Exchange Shares
to First Banks and Dierberg (or any approved transferee) shall be conditioned
upon (i) receipt by the Company of stockholder approval at the Special Meeting
or a determination of the Board of Directors of the Company that such approval
is not required, in accordance with Section 3(b) hereof; (ii) receipt by First
Banks and Dierberg (or any approved transferee) of all necessary Approvals; and
(iii) compliance by the Company, Dierberg and First Banks with all applicable
securities laws.
32
<PAGE> 76
10. ADJUSTMENT IN EVENT OF REVERSE STOCK SPLIT
Notwithstanding anything in this Agreement to the contrary, in the
event that, after the date of execution of this Agreement, the Company shall
effect a stock split, a reverse stock split or issue a stock dividend (other
than pursuant to the Exchange Offering, a distribution from the Liquidating
Trust or as a Warrant), then the number of shares of Company Common Stock
issuable hereunder as Bridge Exchange Shares or Note Conversion Shares shall be
automatically proportionately adjusted so as to retain the proportionate rights
of Dierberg and First Banks as provided for by this Agreement.
11. TERMINATION
(a) This Agreement may be terminated (i) except as otherwise provided
herein, by any party hereto, if the transactions contemplated hereby are not
consummated by June 30, 1996 through no fault of or delay of the party choosing
to terminate; (ii) by the Company or the Bank, in the event the Company or the
Bank is unable to obtain required federal or state approvals for the
transactions contemplated hereby despite its or their reasonable efforts to
obtain such approvals; (iii) by First Banks, in the event that First Banks,
individually or together with any other person or entity, is unable to obtain
required Approvals for the transactions required hereby despite its or their
reasonable efforts to obtain such approvals; (iv) by any party upon written
notice to the other parties if there has been a material breach of any of the
representations, warranties or covenants set forth in this Agreement on the part
of the breaching party, which breach by its nature cannot be cured prior to the
applicable Closing Date and which breach would have a material adverse effect on
the breaching party or the breaching party and its subsidiaries taken as a
whole; (v) by any party upon written notice to the other parties if there has
been a material breach of the covenants or agreements set forth in this
Agreement on the part of the breaching party, which breach is not cured within
thirty (30) days following receipt by the breaching party of written notice of
such breach from the other party hereto; (vi) upon mutual consent of the parties
hereto; (vii) in the event a general banking moratorium is declared by federal
or state banking authorities; or (viii) pursuant to Section 2(c) or 5(b) of this
Agreement.
(b) First Banks may terminate this Agreement in the event the Bank is
declared insolvent or a bankruptcy petition is filed by or with respect to the
Company.
(c) The parties hereto hereby agree that any termination of this
Agreement pursuant to Sections 10(a) and 10(b) (other than termination in the
event of a breach of this Agreement by Company, Bank, Dierberg or First Banks or
misrepresentation of any of the statements made herein by Company, Bank,
Dierberg or First Banks) shall be without liability to any of the parties
hereto.
33
<PAGE> 77
12. FUTURE ACQUISITIONS AND DISPOSITIONS OF SHARES
Dierberg and First Banks each respectively agrees that during the
period beginning on the date hereof and continuing until the Company Closing
Date or the Second Bank Closing Date (the "Pendency Period"), it will not offer,
sell, contract to sell or otherwise dispose of, or bid for, purchase, contract
to purchase or otherwise acquire, any shares of Company Common Stock or Bank
Common or Preferred Stock except in accordance with applicable law, including
the Securities Act and the rules and regulations of the Commission thereunder.
The Company and the Bank agree not to issue during the Pendency Period
any securities or rights to acquire securities except as contemplated herein, as
described in the Registration Statement as currently on file with the Commission
or the Registration Statement as agreed herein to be amended or subsequently
filed, as required pursuant to the terms of the Company's employee and director
stock option plans in accordance with past practice, or unless required pursuant
to a transaction involving a change in control and which is subject to
stockholder approval which transaction the Board, upon advice of counsel, is
required to enter into in order to comply with the Company's and the Bank's
fiduciary duties to shareholders imposed by law.
13. NOTICES
All communications hereunder will be in writing and, if to the Company,
will be mailed, delivered or telecopied and confirmed to it at the offices of
Company at:
First Commercial Bancorp, Inc.
2450 Venture Oaks Way
Sacramento, California 95833
Attention: Mr. Manuel Perry, Jr.
Chairman of the Board of Directors
Facsimile: (916) 646-0860
with a copy each to:
Lillick & Charles
Two Embarcadero Center, Suite 2600
San Francisco, CA 94111
Attention: Ronald W. Bachli, Esq.
Facsimile: (415) 421-4799
34
<PAGE> 78
and
Carpenter & Company
2600 Michaelson Dr., Suite 300
Irvine, CA 92715
Attention: Mr. John Flemming
Facsimile: (714) 261-0880
and, if to Dierberg, will be mailed, delivered or telecopied and confirmed to
Dierberg, at the offices of:
James F. Dierberg
135 North Meramec
Clayton, Missouri 63105
Attention: James F. Dierberg
Facsimile: (314) 854-5454
and, if to First Banks, will be mailed, delivered or telecopied and confirmed to
First Banks, at the offices of:
First Banks, Inc.
135 North Meramec
Clayton, Missouri 63105
Attention: Allen H. Blake
Facsimile: (314) 854-5454
with a copy each to:
Lewis, Rice & Fingersh
500 N. Broadway
St. Louis, Missouri 63102
Attention: Thomas C. Erb
Facsimile: (314) 241-6056
14. BINDING EFFECT
This Agreement shall be binding upon, and shall inure solely to the
benefit of, each of the parties hereto, and each of their respective heirs,
executors, administrators, successors and permitted assigns, and no other person
shall acquire or have any right under or by virtue of this Agreement. Dierberg
may not assign any of his rights or obligations hereunder to any other person or
entity except in compliance with the terms of the permit from the SBD dated June
29, 1995 authorizing the sale of the Bank Preferred Stock to Dierberg. First
Banks may not assign any of its rights or obligations hereunder with respect to
the shares of Bank Common Stock to any other person or entity except in
compliance with the terms of the permit to be received from the SBD authorizing
the sale of the shares of Bank Common Stock to First Banks. Except as provided
in the previous sentence, First Banks may not assign any of its rights or
obligations hereunder to any other person or entity without the prior written
consent of the Company and the Bank, and any such assignment shall be subject to
35
<PAGE> 79
receipt of all necessary governmental or regulatory approvals and delivery of
appropriate representations and warranties.
15. GOVERNING LAW
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Delaware in effect at the time of the execution hereof.
16. EXECUTION IN COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which counterparts when so executed and delivered shall be deemed to be an
original, but all such respective counterparts shall together constitute but one
and the same instrument.
17. ENTIRE AGREEMENT
This Agreement, as amended, including Exhibits, the Proxy Agreement,
the Debenture, the Security Agreement, the Escrow Agreement, the Letters of
Representation received and to be received pursuant hereto and the Permits
received and to be received pursuant hereto constitute the entire agreement of
the parties with respect to the subject matter hereof.
IN WITNESS WHEREOF, and intending to be legally bound thereby, each of
James F. Dierberg, First Banks, Inc., First Commercial Bank and First Commercial
Bancorp, Inc. has signed or caused to be signed its name, all as of the day and
year first above written.
FIRST COMMERCIAL BANCORP, INC.
By:
-------------------------------
Name: Manuel Perry, Jr.
Title: Chairman of the Board of Directors
36
<PAGE> 80
FIRST COMMERCIAL BANK
By:
-------------------------------
Name: James E. Culleton
Title: Interim President
DIERBERG
-----------------------------------
James F. Dierberg, an individual
FIRST BANKS, INC.
By:
-------------------------------
Name:
Title:
37
<PAGE> 81
PROXY AGREEMENT
This PROXY AGREEMENT between FIRST COMMERCIAL BANCORP, INC. a Delaware
corporation (the "Company"), and FIRST BANKS, INC., a Missouri corporation
("First Banks") is entered into as of the __________ day of ___________________,
1995.
RECITALS
Simultaneously with the execution of this Proxy Agreement, First
Banks; the Company; James F. Dierberg, an individual; and First Commercial
Bank, a California-chartered bank (the "Bank") and subsidiary of the Company,
are entering into an Amended and Restated Stock Purchase Agreement (the
"Agreement") pursuant to which First Banks will purchase $3.5 million of newly
issued common stock, no par value per share (the "Bank Common"), from the Bank
and engage in certain other transactions with Mr. Dierberg, the Bank and the
Company, all upon the terms and conditions set forth in the Agreement.
First Banks has agreed to execute in favor of the Company a proxy with
respect to the Proxy Shares, as defined below, of Bank Common held by First
Banks, upon the terms and conditions set forth herein, such that First Banks
will not exercise voting rights with respect to such Proxy Shares during this
Agreement.
NOW THEREFORE, it is agreed as follows:
SECTION 1. GRANT OF PROXY. First Banks hereby grants to the Company
a proxy, coupled with an interest, pursuant to and as contemplated by the
provisions of the applicable California law, as amended, to vote, at a duly
called meeting of the stockholders of the Bank or by written consent in lieu
thereof, for any and all purposes, all shares of Bank Common currently owned and
held by First Banks plus any additional shares which First Banks may own and
hold as of the date of the meeting and which First Banks is entitled to vote
(the "Proxy Shares") in any manner deemed appropriate in the sole and absolute
discretion of the Board of Directors of the Company. The proxy granted hereby
is coupled with an interest and shall be irrevocable.
SECTION 2. RESTRICTION ON TRANSFER OF SHARES. Until this Proxy
Agreement terminates pursuant to Section 4 below, First Banks shall not sell,
transfer, assign, or otherwise dispose of the Proxy Shares or attempt to grant a
proxy to vote the Proxy Shares to any other person.
SECTION 3. FIRST BANKS'S WARRANTY OF OWNERSHIP. First Banks
represents and warrants that (i) First Banks is the record and beneficial owner
and holder of the Proxy Shares (except with respect to any Proxy Shares which
First Banks does not own as of the date of the Proxy Agreement but may acquire
following the date of this Proxy Agreement and which are included within the
definition of Proxy Shares), (ii) First Banks has full right, power, and
authority to enter into and perform this Proxy Agreement, and (iii) nothing in
this Proxy Agreement will violate the terms of any other agreement affecting the
Proxy Shares.
SECTION 4. TERMINATION. This Proxy Agreement shall terminate upon
receipt by First Banks of the Approvals, if required, and the earliest to occur
of: (i) termination of the Agreement in accordance with the terms and conditions
thereof; (ii) the first business day after either the vote of the shareholders
of the Company in favor of approving the Agreement and the transactions
contemplated thereby or a
<PAGE> 82
determination by the Board of Directors of the Company to proceed with such
transactions without such a shareholder vote; (iii) the vote of the
shareholders of the Company against approving the Agreement and the
transactions contemplated thereby or (iv) December 31, 1995, unless either the
stockholders of the Company shall have voted in favor of the Agreement or the
Board of Directors of the Company has determined to proceed with the
transactions contemplated by the Agreement without such shareholder approval
and one business day has not passed from the date of such vote or
determination, as the case may be.
SECTION 5. MISCELLANEOUS PROVISIONS.
SECTION 5.01. NOTICE. All notices under this Proxy Agreement
shall be in writing and may be given by personal delivery, telecopier,
overnight express mail by a registered national air courier, or by registered
mail. Notice by personal delivery shall be deemed given upon actual receipt.
Notice by telecopier or overnight express mail shall be deemed given on the
date of actual receipt. Notice given by registered mail shall be deemed given
on the third business day following the date when the notice material is
deposited in the United States Mail, return receipt requested, addressed (in
any case) as follows:
(a) if to First Banks:
First Banks, Inc.
135 North Meramec Ave.
Clayton, Missouri 63105
Attention: Mr. James F. Dierberg
Facsimile: (314) 854-5454
with a copy to:
Lewis, Rice & Fingersh
500 North Broadway, Suite 2000
St. Louis, Missouri 63102
Attention: Thomas C. Erb, Esq.
Facsimile: (314) 241-6056
and
(b) if to the Company:
First Commercial Bancorp, Inc.
2450 Venture Oaks Way
Sacramento, California 95833
Attention: Manuel Perry, Jr.
Facsimile: (916) 646-0860
2
<PAGE> 83
with copies to:
Lillick & Charles
Two Embarcadero Center
San Francisco, California 94111
Attention: Ronald W. Bachli, Esq.
Facsimile: (415) 421-4799
SECTION 5.02. APPLICABLE LAW. This Proxy Agreement and the
rights and obligations of First Banks and the Company under this Proxy
Agreement shall be governed, construed, and interpreted in accordance with the
laws of the State of California.
SECTION 5.03. ENTIRE AGREEMENT. This Proxy Agreement and the
Agreement constitute the entire agreement between First Banks and the Company
with respect to the subject matter hereof. All prior oral understandings and
memoranda expressing agreements regarding the subject matter hereof between the
parties are merged herein and are extinguished hereby.
SECTION 5.04. AMENDMENT. This Proxy Agreement may not be
amended except by a writing executed by both First Banks and the Company.
SECTION 5.05. ASSIGNABILITY AND BINDING EFFECT. This Proxy
Agreement and the rights of the Company and First Banks hereunder may not be
assigned, except the Company that may act pursuant to this Proxy Agreement, in
voting the Proxy Shares or otherwise, through any officer, employee or
designated agent of the Company. This Proxy Agreement shall be binding upon
and inure to the benefit of First Banks and the Company and their respective
heirs, devises, legatees, personal representatives, agents and assigns.
SECTION 5.06. COUNTERPARTS; FACSIMILE. This Proxy Agreement
may be executed by the parties hereto on any number of separate counterparts,
and all such counterparts so executed constitute one agreement binding on all
the parties notwithstanding that all the parties are not signatories to the
same counterpart. For purposes of executing this Proxy Agreement, a document
(or signature page thereto) signed and transmitted by facsimile machine or
telecopier is to be treated as an original document. The signature of any
party thereon, for purposes hereof, is to be considered as an original
signature, and the document transmitted is to be considered to have the same
binding effect as an original signature on an original document. At the
request of any party, any facsimile or telecopy document is to be re-executed
in original form by the parties who executed the facsimile or telecopy
document. No party may raise the use of a facsimile machine or telecopier or
the fact that any signature was transmitted through the use of a facsimile or
telecopier machine as a defense to the enforcement of this Proxy Agreement or
any amendment or other document executed in compliance with this section.
3
<PAGE> 84
IN WITNESS WHEREOF, First Banks and the Company have executed this
Proxy Agreement as of the date set forth above.
FIRST BANKS, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
FIRST COMMERCIAL BANCORP, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
4
<PAGE> 85
ESCROW AGREEMENT
THIS ESCROW AGREEMENT ("Agreement") is entered into this ____ day of
__________, 1995 by and between FIRST COMMERCIAL BANCORP, INC., a Delaware
corporation ("First Commercial"), FIRST BANKS, INC., a Missouri corporation
("First Banks"), and THE FIRST NATIONAL BANK OF BOSTON, a national banking
association ("Escrow Agent"), with respect to the following:
WITNESSETH
WHEREAS, First Commercial anticipates issuing to the holders of its issued
and outstanding shares of common stock, $0.01 par value per share (the "Common
Stock"), certain transferable rights (the "Rights") to subscribe for and
purchase additional shares of Common Stock (the "Rights Offering");
WHEREAS, First Banks has agreed to serve as a Standby Purchaser for all of
the shares of Common Stock available for issuance upon the expiration of
unexercised Rights and the sale of Common Stock to the public, and to obtain a
Warrant (the "Warrant") to purchase additional shares of Common Stock;
WHEREAS, First Commercial and First Banks, together with First Commercial
Bank, a California corporation and First Commercial's wholly-owned subsidiary
(the "Bank"), and James F. Dierberg, an individual ("Dierberg"), have entered
into a Standby Stock Purchase Agreement dated July 7, 1995 (the "Stock Purchase
Agreement"), pursuant to which Dierberg shall purchase shares of Bank Series A
Preferred Stock and First Banks shall act as Standby Purchaser for the purchase
of shares of Common Stock (the "Standby Shares"), as set forth therein;
WHEREAS, pursuant to the Stock Purchase Agreement, First Banks has agreed
to deposit into escrow no later than July 12, 1995 a minimum of $8,500,000 (the
"Escrow Funds"), to be released to First Commercial or returned to First Banks
in accordance with the terms of this Agreement and the Stock Purchase Agreement;
WHEREAS, The First National Bank of Boston acts in the ordinary course of
business as an escrow agent; and
WHEREAS, First Commercial and First Banks desire to engage The First
National Bank of Boston, and The First National Bank of Boston has consented to
act as Escrow Agent for First Commercial and First Banks and to accept and hold
the funds described herein in accordance with the terms of this Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
1. First Commercial and First Banks hereby appoint The First National Bank
of Boston as Escrow Agent, and Escrow Agent hereby
<PAGE> 86
accepts such appointment, subject to the terms and conditions hereunder.
2. First Banks shall deliver the Escrow Funds to the Escrow Agent on or
before July 12, 1995 by wire transfer for deposit into an escrow account with
Escrow Agent (the "Escrow Account"). On the Company Closing Date, that portion
of the Escrow Funds shall be released to First Commercial which is the product
of the number of Standby Shares purchased by First Banks as Standby Purchaser
multiplied by the Subscription Price per share, in accordance with and as
defined in the Stock Purchase Agreement. The remainder of the Escrow Funds shall
be refunded to First Banks pursuant to paragraph 4 hereof, together with all
earnings thereon, if any, less any loss suffered with respect thereto, if any.
The Escrow Agent shall not release the Escrow Funds to First Commercial nor
refund the remainder to First Banks until it receives instructions specifying
the amounts to be released and refunded, duly executed by the President or Chief
Financial Officer of each of First Commercial and First Banks.
3. During the term of this Agreement and until release of the Escrow Funds
to First Commercial pursuant to paragraph 2 hereof or return of the Escrow Funds
to First Banks pursuant to paragraph 4 hereof, the Escrow Funds shall be
invested by the Escrow Agent in a repurchase agreement with banks or
broker-dealers, fully secured by obligations issued or guaranteed by the United
States of America or any agency or instrumentality thereof, and having a
maturity date not more than 30 days from the date of purchase. The Escrow Agent
is authorized and instructed to withdraw and deposit the Escrow Funds in
accordance with the investment instructions contained herein. The Escrow Agent
shall not be liable or responsible for any loss resulting from investments made
pursuant to this Agreement. For tax reporting purposes, all interest earned on
the Escrow Funds shall be allocable to First Banks.
4. (a) This Agreement shall terminate upon the earlier of the termination
of the Stock Purchase Agreement or the release of the Escrow Funds to First
Commercial pursuant to paragraph 2 hereof. In the event that the Stock Purchase
Agreement is terminated by any party for any reason other than termination
pursuant to Sections 10(a)(iv) or (v) thereof due to a breach by First Banks
and/or Dierberg, then the Escrow Funds shall be refunded to First Banks in full
by the Escrow Agent, together with all earnings thereon, if any, less any loss
suffered with respect thereto, if any. Any refund to First Banks shall occur
pursuant to the mechanisms of paragraph 5 hereof. Notwithstanding the foregoing,
in the event that the Stock Purchase Agreement is terminated pursuant to
Sections 10(a)(iv) or (v) thereof due to a breach by First Banks and/or
Dierberg, then the Escrow Agent shall deliver to First Commercial from the
Escrow Funds the sum of
2
<PAGE> 87
$1,000,000, which shall constitute liquidated damages, and shall return the
remaining Escrow Funds to First Banks, together with all earnings thereon, if
any, less any loss suffered with respect thereto, if any, in accordance with
paragraph 5 hereof. The parties hereto agree that the liquidated damages
provided for hereby constitute reasonable and full liquidated damages and
compensation for losses suffered by First Commercial and do not constitute a
penalty or forfeiture.
5. In the event of a refund of the Escrow Funds to First Banks pursuant to
paragraph 4 hereof, First Banks shall provide to the Escrow Agent instructions
as to the method of effecting such refund. Such instructions may include
instructions reasonably necessary to avoid any prepayment or other penalties in
connection with any investment instrument and may require the Escrow Agent to
refund the Escrow Funds as such investment instruments come due.
6. The Escrow Agent reserves the right to resign as Escrow Agent at any
time by giving twenty (20) business days' written notice to First Commercial and
First Banks and may deliver all monies then held by it to any new escrow agent
appointed by First Commercial and First Banks, at which time the Escrow Agent
will be released from any further responsibility with respect to this Agreement.
If no successor is appointed, the Escrow Agent may apply to a court of competent
jurisdiction for such appointment.
7. First Commercial hereby agrees to pay the Escrow Agent $3,000, plus any
out-of-pocket expenses such as postage, stationery, messenger service, attorney
fees, etc., for the services to be rendered hereunder. For any other services
not specifically covered herein but which are requested by First Commercial an
additional reasonable fee will be charged. A breakdown of the Escrow Agent's
fees is attached hereto as Exhibit A and incorporated herein by reference. First
Commercial hereby agrees to indemnify and hold First Banks harmless from and
against any liability asserted by Escrow Agent against First Banks pursuant to
the provisions of Paragraph 9 hereof; provided, however, that no indemnity need
be paid in the case of First Banks' gross negligence or willful misconduct.
8. Escrow Agent may act upon any instrument or other writing believed by
it in good faith to be genuine and to have been signed or presented by the
proper person and shall not be liable to any party hereto in connection with the
performance of its duties hereunder, except for its own gross negligence or
willful misconduct. Escrow Agent's duties shall be determined only with
reference to this Escrow Agreement and applicable laws and Escrow Agent is not
charged with knowledge of or any duties or responsibilities in connection with
any other document or agreement. If in doubt as to its duties and
responsibilities hereunder, Escrow Agent may consult with counsel of its choice
and
3
<PAGE> 88
shall be protected in any action taken or omitted in connection with the advice
or opinion of such counsel.
9. In consideration of its acceptance of the appointment as Escrow Agent,
the other parties hereto, jointly and severally, agree to indemnify and hold
Escrow Agent harmless as to any liability incurred by it to any person, firm or
corporation by reason of its having accepted the same or in carrying out any of
the terms hereof, and to reimburse Escrow Agent for all its costs and expenses,
including, among other things, counsel fees and expenses, incurred by reason of
any matter as to which an indemnity is paid; provided, however, that no
indemnity need be paid in the case of Escrow Agent's gross negligence or willful
misconduct. To secure the obligations of the parties other than Escrow Agent
under this clause B, Escrow Agent shall have a lien on the funds and property
held in escrow.
10. Escrow Agent may execute any of its powers or responsibilities
hereunder and exercise any rights hereunder either directly or by or through its
agents or attorneys. Nothing in this Escrow Agreement shall be deemed to impose
upon the Escrow Agent any duty to qualify to do business or to act as a
fiduciary or otherwise in any jurisdiction other than The Commonwealth of
Massachusetts. Escrow Agent shall not be responsible for and shall not be under
a duty to examine into or pass upon the validity, binding effect, execution or
sufficiency of this Escrow Agreement or of any agreement amendatory or
supplemental hereto.
11. In the event that Escrow Agent should at any time be confronted with
inconsistent claims or demands by the parties hereto, Escrow Agent shall have
the right to interplead said parties hereto, Escrow Agent shall have the right
to interplead said parties in any court of competent jurisdiction and request
that such court determine the respective rights of the parties with respect to
this Escrow Agreement, and upon doing so, the Escrow Agent automatically shall
be released from any obligations or liability as a consequence of any such
claims or demands.
12. All disbursements shall be made by Escrow Agent's usual form of trust
check and mailed by United States mail, or delivered as directed in writing by
First Banks or First Commercial.
13. This Agreement may be signed in counterparts, each of which so
executed shall be deemed an original; said counterparts together shall
constitute one and the same instrument.
14. Each notice, demand or change of this Agreement shall be given in
writing to the parties at the addresses set forth below, and shall be effective
upon receipt.
4
<PAGE> 89
15. This Agreement is made under and shall be governed by the laws of the
State of Delaware. If either party to this Agreement brings suit, action or
counterclaim to enforce the provisions of this Agreement, the prevailing party
therein shall be entitled to recover a reasonable allowance for attorneys' fees
and litigation expenses in addition to court costs. "Prevailing party" within
the meaning of this section includes, without limitation, a party who agrees to
dismiss an action or proceeding upon the other's payment of the sums allegedly
due for performance of the provisions allegedly breached, or who obtains
substantially the relief sought by it.
16. This Agreement may be amended by a writing duly executed by the
parties hereto.
17. This Agreement, together with the Stock Purchase Agreement, represent
the full agreement between First Commercial and First Banks with respect to the
subject matter hereof.
5
<PAGE> 90
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
FIRST COMMERCIAL BANCORP, INC. with a copy to:
2450 Venture Oaks Way Linda C. Sayler, Esq.
Sacramento, CA 95833 Lillick & Charles
Two Embarcadero Center,
Suite 2700
San Francisco, CA 94111
By:
----------------------------------
Name: James E. Culleton
Title: Interim President
FIRST BANKS, INC. with a copy to:
135 North Meramec Thomas C. Erb, Esq.
Clayton, MO 63105 Lewis, Rice & Fingersh
500 N. Broadway
St. Louis, MO 63102
By:
----------------------------------
Name:
Title:
THE FIRST NATIONAL BANK OF BOSTON
as Escrow Agent
By:
----------------------------------
Name:
Title:
150 Royale Street, Mail Stop 45-02-15
Canton, Massachusetts 02021
Attn: Corporate Trust Division
6
<PAGE> 91
AMENDMENT NO. 1 TO
ESCROW AGREEMENT
THIS AMENDMENT NO. 1 TO THE ESCROW AGREEMENT ("Agreement") dated July 12,
1995, by and between FIRST COMMERCIAL BANCORP, INC., a Delaware corporation
("First Commercial"), FIRST BANKS, INC., a Missouri corporation ("First Banks"),
and THE FIRST NATIONAL BANK OF BOSTON, a national banking association ("Escrow
Agent"), is entered into on August __, 1995, with respect to the following:
W I T N E S S E T H
WHEREAS, the parties to this Agreement have agreed to amend certain
provisions of the Agreement in order to conform the terms of the Agreement with
those of the Amended and Restated Stock Purchase Agreement (the "Stock Purchase
Agreement"), entered into between the parties on August __, 1995;
WHEREAS, capitalized terms used in this Amendment No. 1 not otherwise
defined herein shall have the meanings ascribed to them in the Stock Purchase
Agreement;
NOW, THEREFORE, the parties hereto agree as follows:
I. Paragraph 2 of the Agreement is amended to read in its entirety as
follows:
"2. First Banks delivered the Escrow Funds to the Escrow Agent on or
before July 12, 1995 by wire transfer for deposit into an escrow account with
Escrow Agent (the "Escrow Account"). No Escrow Funds shall be released by the
Escrow Agent to the Bank or First Commercial pursuant to the Stock Purchase
Agreement until the Escrow Agent shall have received instructions for the
release of said Escrow Funds in the form of a certificate signed by the
President or Chief Financial Officer of First Commercial and First Banks
specifying the amount of Escrow Funds to be released and citing the section of
the Stock Purchase Agreement pursuant to which said Escrow Funds shall be
released; provided, however, that First Banks, upon the maturity of each
investment pursuant to Section 3 hereof, may request and shall receive all
investment earnings on the Escrow Funds so long as the Escrow Account consists
of at least $5,000,000."
II. The following shall be inserted after the first full sentence of
Paragraph 3 of the Agreement:
"Upon execution of the Agreement, the Company and First Banks shall
instruct the Escrow Agent to wire to First Banks' account at the Bank
$3,500,000 of the Escrow
1
<PAGE> 92
Funds. Bank agrees, at the direction of First Banks, to invest, pending
receipt of the Approvals, such funds solely in an overnight repurchase
agreement at First Commercial Bank, which overnight repurchase agreement
shall be invested with banks or broker-dealers, fully secured by
obligations issued or guaranteed by the United States of America or any
agency or instrumentality thereof."
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1
to the Agreement on the day and year first above written.
FIRST COMMERCIAL BANCORP, INC. with a copy to:
2450 Venture Oaks Way
Sacramento, CA 95833 Linda C. Sayler, Esq.
Lillick & Charles
Two Embarcadero Center,
Suite 2700
San Francisco, CA 94111
By:
----------------------------------
Name: Manuel Perry, Jr.
Title: Chairman of the Board
of Directors
FIRST BANKS, INC. with a copy to:
135 North Meramec
Clayton, MO 63105 Thomas C. Erb, Esq.
Lewis, Rice & Fingersh
500 N. Broadway
St. Louis, MO 63102
By:
----------------------------------
Name:
Title:
THE FIRST NATIONAL BANK OF BOSTON
as Escrow Agent
By:
----------------------------------
Name: Carla A. Mastromatte
Title: Account Manager
150 Royale Street, Mail Stop 45-02-15
Canton, Massachusetts 02021
Attn: Corporate Trust Division
2
<PAGE> 93
FIRST COMMERCIAL BANCORP, INC.
A DELAWARE CORPORATION
DEBENTURE
THIS IS THE SOLE DEBENTURE OF
AN ISSUANCE OF DEBENTURES TOTALING
$5,000,000.00
BY FIRST COMMERCIAL BANCORP, INC. ON THIS DATE
Amount of Debenture: $5,000,000.00 ____________________, 1995
Due: October 31, 2000
1. PROMISE TO PAY. FIRST COMMERCIAL BANCORP, INC., a Delaware
corporation (the "Company"), for value received, promises to pay to FIRST
BANKS, INC., a Missouri corporation, or its successors and assigns (the
"Holder"), the sum of Five Million Dollars ($5,000,000.00), together with
interest on the principal amount hereof (not compounded) as hereinafter
provided. Unless otherwise provided herein, payments on this Debenture shall
be in dollars of the United States of America and payments shall be made to the
address of the Holder as specified in Section 13 below.
2. INTEREST. Interest on this Debenture shall accrue at the rate
of interest of twelve percent (12%) annually.
3. PAYMENTS. The Company shall make payments on this Debenture
when, in the sole and absolute discretion of the Board of Directors of the
Company, the Company has sufficient funds to make such a payment of interest or
principal on this Debenture and can make such a payment in accordance with law
and all applicable regulatory requirements; provided, however, if and to the
extent the Company has not previously paid interest or principal on this
Debenture, then (i) prior to October 31, 2000 ("Maturity"), the Holder of this
Debenture shall have the right to convert unpaid interest or principal at the
times and in the manner described in Section 5, and upon such conversion, that
portion of interest or principal so converted shall be deemed paid in full and
(ii) upon Maturity, the Debenture shall be payable and convert to Company
Common pursuant to the provisions of Section 5(b). Notwithstanding anything to
the contrary herein, Company shall give Holder ten (10) days prior written
notice of Company's intention to make any payment to Holder on the Debenture.
4. SECURITY. As security for the obligations of Company
hereunder, Company shall execute a Stock Pledge Agreement in form and substance
acceptable to Holder, granting holder a security interest in all shares of
common and preferred stock held by Company in Company's subsidiary, First
Commercial Bank.
<PAGE> 94
5. CONVERSION RIGHTS.
(a) RIGHT TO CONVERT. At the sole option and discretion
of the Holder of this Debenture, unpaid principal and accrued but unpaid
interest may be converted into common stock, par value $0.01 per share
("Company Common"), of the Company at the Conversion Price set forth in
Subsection (c) below. A Holder desiring to convert shall follow the conversion
procedure set forth in Subsection (d). On the date that the conversion is
effective as provided in Subsection (d) below, all or any portion of the unpaid
principal and interest which has then accrued but remains unpaid, and which
Holder elects to convert, shall be converted into shares of Company Common.
(b) AUTOMATIC CONVERSION. Notwithstanding the provisions
of Section 5(a) above and absent an Event of Default, at Maturity, all unpaid
principal and accrued but unpaid interest shall be automatically converted into
Company Common at the Conversion Price set forth in Subsection (c) below. Once
the automatic conversion has occurred, no further interest shall accrue, and
the Holder shall be deemed to be paid in full.
(c) CONVERSION PRICE. The price per share of Company
Common at which the convertible portion of the interest or principal of this
Debenture may be converted (the "Conversion Price") shall be equal to $0.10 per
share.
(d) CONVERSION PROCEDURE. If Holder desires to convert
all or any portion of the unpaid principal or accrued but unpaid interest of
this Debenture, then Holder shall deliver a written notice to the Company
stating that the Holder desires to convert and specifying the amount of unpaid
principal and accrued by unpaid interest that Holder wishes to convert.
Promptly after receipt of such written notice, the Company shall deliver to the
Holder of this Debenture any and all documents which the Company shall require
in order to permit the conversion, including, without limitation, any and all
documents necessary to comply with applicable securities law exemptions or to
satisfy any and all requirements of applicable law and regulations, including
any requirements of any regulatory bodies having jurisdiction over the Company.
Promptly after receipt from Holder by the Company of such documents as the
Company may require to permit conversion, the Company shall send written notice
to the Holder and the Holder shall execute the written notice that the portion
of this Debenture that the Holder requested be converted has in fact been
converted into common stock of the Company at the Conversion Price and
specifying the number of shares of Company Common to which the Holder will be
entitled as a result of such conversion. The conversion shall be deemed to
have taken effect as of the date of such written notice from the Holder to the
Company, and, promptly thereafter, the Company shall cause to be delivered to
the Holder from the Company or its transfer agent, a certificate representing
such shares of Company Common, which shares shall bear a legend substantially
in the form of that set forth in Section 7 of this Debenture (with such changes
as are necessary to reflect that the legend condition affects the shares
represented by that certificate in lieu of the language pertaining to this
Debenture). With respect to an automatic conversion of the Debenture on and as
of October 31, 2000, such conversion shall occur automatically as set forth
herein, except that no notice shall be required.
2
<PAGE> 95
6. RESERVATION. The Company shall, at all times, reserve and
keep available, out of its authorized but unissued shares of Company Common,
solely for the purpose of effecting the conversion of this Debenture, the full
number of shares of Company Common deliverable upon the conversion of all
Debentures from time to time outstanding. The Company shall from time to time
in accordance with Delaware law, increase the authorized number of shares of
Company Common if at any time the authorized number of such shares remaining
unissued shall not be sufficient to permit the conversion of all of the
Debentures at the time outstanding.
7. COVENANTS. So long as all or any portion of the Debenture
shall remain outstanding, the Company shall not, without first obtaining the
approval of the Holder of the Debenture (or if all or a portion of the
Debenture has been assigned or transferred to a permissible assignee or
transferee under the terms of this Debenture, then the approval of the Holders
of a majority of the principal amount of this Debenture), repurchase any of its
common stock or pay a dividend on its common stock, or make any other
distribution to its shareholders or other debenture holders, except as provided
for in that certain Amended and Restated Stock Purchase Agreement, dated August
7, 1995 by and among Company, Holder, First Commercial Bank and James F.
Dierberg (the "Amended Agreement"), the proposed Offering by the Company (as
defined in the Amended Agreement), and except as proposed to be presented to
the stockholders of the Company at the Special Meeting (as defined in the
Amended Agreement).
8. RESTRICTED NATURE OF DEBENTURES. This Debenture has been
issued pursuant to the Amended Agreement. This Debenture is subject to the
restrictions contained in the Amended Agreement and no interest in this
Debenture may be sold or transferred by the holder hereof without compliance
with the provisions of the Amended Agreement. The Holder of this Debenture
understands that the Company may require, upon the conversion of this Debenture
into Company Common, that the Holder make certain representations to the
Company to comply with applicable securities law exemptions. The Holder
understands that this Debenture and Company Common into which this Debenture is
convertible are "restricted securities" under the Securities Act of 1933 and
this Debenture and the Company Common into which this Debenture is convertible
is and will be subject to the following legend condition:
THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"). THE DEBENTURE HAS BEEN ACQUIRED BY THE
HOLDER FOR INVESTMENT AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF: (1) AN
EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER THAT ACT;
(2) AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED; OR (3) A "NO ACTION" LETTER FROM THE
SECURITIES AND EXCHANGE COMMISSION TO THE EFFECT THAT THE STAFF OF THE
COMMISSION WILL NOT RECOMMEND THAT ANY ACTION BE TAKEN UNDER THE ACT
AGAINST THE COMPANY IF
3
<PAGE> 96
SUCH PROPOSED SALE IS CONSUMMATED WITHOUT REGISTRATION UNDER THE ACT.
The issuance of the Company Common may be delayed in order for the Company to
obtain any and all necessary regulatory approvals and to comply with federal
and securities laws.
9. DEFAULT. Each of the following shall constitute an event of
default ("Events of Default") under this Debenture:
(a) Default or breach by the Company in the due observance or
performance of any of the terms, covenants or agreements set forth in
this Debenture if such default is not remedied by such the Company or
waived by Holder within 30 days following the Company's receipt of
notice thereof.
(b) The Company (i) fails to pay, or admits in writing such
Borrower's inability to pay, such Borrower's debts as they become due,
or otherwise becomes insolvent (however evidenced); (ii) makes an
assignment for the benefit of creditors; (iii) files a petition in
bankruptcy, is adjudicated insolvent or bankrupt, petitions or applies
to any tribunal for any receiver or any trustee of the Company or any
substantial part of the Company's property; (iv) commences any
proceeding relating to the Company under any reorganization,
arrangement, readjustment of debt, dissolution or liquidation law or
statute of any jurisdiction, whether now or hereafter in effect; (v)
if there is commenced against the Company any such proceeding which
remains undismissed for a period of thirty (30) days, or the Company
by any act indicates its consent to, approval of, or acquiescence in
any such proceeding or the appointment of any receiver of or any
trustee for such Borrower or of any substantial part of the Company's
property, or suffers any such receivership or trusteeship to continue
undischarged for a period of 30 days or the Company takes any
partnership or corporate action to authorize any of the foregoing; or
(vi) is placed in receivership by any federal or state agency with
regulatory authority over the Company.
(c) The Company files a certificate of dissolution under
applicable state law or is liquidated or dissolved or suspends or
terminates the operation of its business, or has commenced against it
any action or proceeding for its liquidation or dissolution or the
winding up of its business, or takes any corporate action in
furtherance thereof.
10. RIGHTS AND REMEDIES IN THE EVENT OF DEFAULT. Upon any Event
of Default, and at any time thereafter, Holder may, at its option, do any one
or more of the following: (a) Declare this Debenture to be immediately due and
payable in cash; (b) exercise any or all of the rights accruing to a secured
party, upon default by a debtor, under the Uniform Commercial Code as in effect
from time to time in the State of Missouri and any other applicable law; or (c)
exercise any other rights or remedies available to holder under this Debenture,
the Amended Agreement, the Stock Pledge Agreement or any other agreement
entered into pursuant to the terms of the Amended Agreement or otherwise
available to Holder at law or in equity.
4
<PAGE> 97
11. MODIFICATION. The terms of this Debenture may be amended or
modified by the Company with the written consent of the Holder. If the Holder
transfers or assigns all or a portion of this Debenture to a permitted assignee
or transferee, then the Holders, by vote of Holders holding a majority of the
principal amount of this Debenture, may authorize any amendment, modification,
or waiver of compliance by the Company of the provisions or defaults under this
Debenture. Any such consent or waiver by the Holder (or majority in interest
of subsequent Holders) of the Debenture shall be conclusive and binding upon
the Holder (and all other Holders) and upon all future holders of this
Debenture.
12. GOVERNING LAW AND ATTORNEYS' FEES. This Debenture and the
rights and obligations of the parties hereunder are to be governed by and
construed and interpreted in accordance with the laws of the State of Missouri
applicable to contracts made and to be performed wholly within Missouri,
without regard to choice or conflict of laws rules. If either party incurs
legal expenses in any action arising out of this Debenture, then the prevailing
party in such action shall be entitled to recover from the nonprevailing party
all reasonably attorneys' fees, expert witness fees, and other costs, in
addition to any other relief to which such party may be entitled. This
Debenture and the agreements referred to herein, including but not limited to
the Amended Agreement, constitute the entire agreement among the parties
pertaining the subject matter hereof and fully supersede any and all prior
agreements between the parties hereto respecting the subject matter hereof.
13. NOTICES. Any notice required to be given to the Holder of
this Debenture shall be deemed given if it is set forth in writing addressed to
the Holder at the Holder's address appearing on the books of the Company.
Notices to the Company shall be in writing and sent to the President, or any
Executive Vice President of the Company in care of the then present principal
place of business of the Company. Such notices shall be deemed effectively
delivered: (a) three business days after deposit in the United States mail,
postage prepaid; (b) when actually received if delivered by personal delivery;
or (c) as of two business days after delivery to Federal Express or some other
third-party who will guarantee delivery by overnight courier addressed to the
address of such party as provided in this section.
14. USURY LAW PROVISION. All payments due hereunder are hereby
expressly limited so that in no contingency or event whatsoever shall the
amount paid or agreed to be paid to the Holder of this Debenture for the use,
forbearance, or detention of the money exceed the highest lawful rate
permissible. If, from any circumstance, whatsoever, fulfillment of any of the
provisions of this Debenture, or any other agreement referred to herein, as of
the time performance of such provision shall be due, shall involve a payment
that exceeds the lawful amount permissible under law which a court of competent
jurisdiction may deem applicable, then the obligations to be fulfilled shall be
reduced to the limit of such validity, and if from any circumstance the Holder
of this Debenture shall ever receive as interest an amount which would exceed
the highest lawful rate, such amount which would be excessive interest shall be
applied to the reduction of unpaid principal balance due hereunder, and not to
the payment of interest, or, if such excessive interest exceeds the unpaid
principal balance due hereunder, the excess shall be refunded to the
undersigned.
5
<PAGE> 98
15. NON-TRANSFERABLE. Except with the consent of the Company
(which consent shall not be unreasonably withheld) or to an entity controlled
by or under common control with Holder, this Debenture is not transferable by
the Holder hereof.
FIRST COMMERCIAL BANCORP, INC.
By:
---------------------------------
Manuel Perry, Jr.
Chairman of the Board
By:
---------------------------------
Dagmar Hotel
Secretary
6
<PAGE> 99
STOCK PLEDGE AGREEMENT
This Stock Pledge Agreement (this "Agreement") is made and entered
into as of the _______________ day of ___________________ , 1995, by and
between FIRST COMMERCIAL BANCORP, INC., a Delaware corporation ("Pledgor"), and
FIRST BANKS, INC., a Missouri corporation (the "Lender" or "Pledgee").
RECITALS
A. Pledgor owns __________ shares of the issued and outstanding
capital stock of First Commercial Bank, a California- chartered bank (the
"Bank"), more particularly described in Exhibit A attached hereto and made a
part hereof (the "Shares").
B. Pledgor, Pledgee, the Bank and Mr. James F. Dierberg, an
individual, have executed that certain Amended and Restated Stock Purchase
Agreement, dated as of August 7, 1995, (the "Amended Agreement"), and, pursuant
to such Amended Agreement, Pledgor has executed a Debenture, of even date
herewith (the "Debenture"), and Pledgee is holder of such Debenture.
C. Pledgor and Pledgee desire to secure the payment and
performance of all Pledgor's obligations, covenants and agreements with
Pledgee, as more particularly described in the Debenture, and all Pledgor's
obligations as more particularly described by the Amended Agreement, by a
collateral pledge to Pledgee of the Shares. Capitalized terms used but not
defined herein have the meanings given them in the Amended Agreement or the
Debenture.
In consideration of the foregoing, the agreements below and other
sufficient consideration, the receipt of which is hereby acknowledged, Pledgor
and Pledgee agree as follows:
1. PLEDGE AND GRANT OF SECURITY INTEREST.
1.1. To secure the due and punctual payment and performance of all
of the obligations of Pledgor under the Debenture, Pledgor hereby grants to
Pledgee a security interest under Articles 8 and 9 of the Uniform Commercial
Code, as currently effective in the State of Missouri, and any other applicable
law pertaining to security interests in personal property, in all of the
Shares. The Shares are represented by certificates which are herewith
delivered, together with a stock power attached to each such stock certificate
executed in blank by Pledgor, to Pledgee.
1.2. In addition, Pledgor hereby grants to Pledgee a security
interest in the following (which shall be deemed included in the term
"Shares"): (i) all dividends, cash, securities, instruments and other property
from time to time paid, payable or otherwise distributed in respect of or in
exchange for any or all of such Shares, (ii) any and all distributions made in
respect to the Shares, whether in cash or in kind, by way of dividends or stock
splits, or pursuant to a merger or consolidation or otherwise, or any
substitute security issued upon conversion, reorganization or otherwise, (iii)
any and all other property hereafter delivered to Pledgor or Pledgee in
substitution for or in addition to any of the foregoing (including without
limitation all securities issued pursuant to any shareholder agreement, stock
purchase agreement, stock purchase rights or other agreement with respect to
stock of companies represented by the Shares to which Pledgor may now or
hereafter be a party), all certificates and instruments representing or
evidencing such property and all cash, securities, interest, dividends, rights,
and other property at any time and from time to time received, receivable or
otherwise distributed in respect of or in exchange for any or all thereof, and
(iv) any and all proceeds of any of the foregoing. If any of the foregoing
shall be received by Pledgor, Pledgor shall immediately deliver the same to
Pledgee or its designated nominee, accompanied, if appropriate, by proper
instruments of assignment and/or stock powers executed by Pledgor in accordance
with Pledgee's instructions, to be held subject to the terms of this Agreement.
Notwithstanding the foregoing and provided that no default has occurred or is
continuing, Pledgor shall be entitled to collect and use for its proper
corporate purposes all cash dividends (except cash dividends paid or payable in
respect of the total or partial liquidation of the Bank) paid on the Shares so
long as the declaration and payment of such dividends does not violate
<PAGE> 100
the provisions of the Amended Agreement; provided, however, that until actually
paid, all rights to such dividends shall remain subject to the security
interest created by this Agreement. All dividends (other than cash dividends
governed by the immediately preceding sentence) and all other distributions in
respect of any of the Shares or any of the other collateral, whenever paid or
made, shall be delivered to Lender and held by it subject to the security
interest created by this Agreement.
2. REPRESENTATIONS AND WARRANTIES. Pledgor represents and warrants that:
2.1. Pledgor owns the Shares, free of all liens or other encumbrances
other than any assessment due with respect to the Shares pursuant to section
662 of the California Financial Code.
2.2. There are no outstanding warrants, options, subscriptions or
other contractual arrangements for the purchase of any other shares of stock or
any securities convertible into shares of stock of the Bank, other than equity
securities of the Bank held by Pledgee or Mr. Dierberg
2.3. The delivery of the Shares to Pledgee pursuant to this Agreement
and the filing of the financing statements (if any), which have been, or
contemporaneously with the execution of this Agreement shall be, delivered to
Pledgee, in the offices shown thereon, create a valid and fully perfected first
priority security interest in the Shares, securing the satisfaction of the
Company's obligations under the Debenture.
2.4. Pledgor has all requisite corporate power and authority to (i)
pledge, assign, grant a security interest in, transfer and deliver the Shares
to Pledgee in the manner hereby done or contemplated and (ii) execute, deliver
and perform all of its obligations under this Agreement;
2.5. This Agreement has been duly authorized, executed and,
delivered by Pledgor and constitutes the legal, valid and binding obligation of
Pledgor, enforceable in accordance with its terms;
3. DILUTION OF STOCK. Except as may be required or permitted pursuant to
the terms and conditions of the Amended Agreement, Pledgor agrees that it will
cause the Bank not to issue any stock or other securities (including any
warrants, options, subscriptions or other contractual arrangements for the
purchase of stock or securities convertible into stock) in addition to or in
substitution for the Shares.
4. ADDITIONAL LIENS. Pledgor agrees that it will not (i) sell or
otherwise dispose of, or grant any option with respect to, any of the Shares or
(ii) create any lien or other encumbrance or permit any lien or other
encumbrance to exist upon or with respect to any of the Shares, except for the
lien under this Agreement and any assessment due with respect to the Shares
pursuant to section 662 of the California Financial Code.
5. RELEASE OF SHARES. Pledgee shall return the certificates representing
the Shares to Pledgor, with the stock powers executed by Pledgor attached, and
such Shares shall be deemed released from any lien or other encumbrance
hereunder if: (i) the full amount of the obligations of Pledgor pursuant to the
terms of the Debenture have been paid to Pledgee in compliance with the terms
of the Debenture and the Amended Agreement or (ii) Pledgee has converted into
Pledgor's common stock, par value $0.01 per share, the full amount of the
principal of and accrued but unpaid interest on the Debenture, as permitted
under the terms and conditions of the Debenture and the Amended Agreement.
6. DEFAULT. As used herein, the term "default" means and includes any
violation by Pledgor of any of the terms or conditions of this Agreement or an
event or condition that constitutes an Event of Default under the Debenture.
7. REMEDIES. Subject to any prior regulatory approvals required under
federal or state law, upon the occurrence and during the continuance of any
default, Pledgee may at any time exercise the rights and pursue the
2
<PAGE> 101
remedies provided under Articles 8 and 9 of the Uniform Commercial Code as
currently effective in, or as hereafter amended by, the State of Missouri, and
any other applicable law pertaining to security interests in personal property,
including but not limited to selling the Shares, in whole or partial lots, at
any public sale or, at private sale without advertisement if in Pledgee's
reasonable judgement such partial or total lot sale, or private sale, would
result in a greater sale price than a public sale. The parties agree that in
the event Pledgee elects to proceed with respect to the Shares, whenever
applicable provisions of the Uniform Commercial Code or other applicable law
require that notice be reasonable, ten (10) days' notice shall be deemed
reasonable. Pledgee shall not be obligated to make any sale of the Shares
regardless of notice of sale having been given. Pledgee may adjourn any public
or private sale from time to time by announcement at the time and place fixed
therefor, and such sale may, without further notice, be made at the time and
place to which it was so adjourned. Pledgee may bid and become a purchaser at
any such sale, if public, and upon any such sale Pledgee may collect, receive,
and hold and apply, as provided herein, the proceeds thereof to the payment of
the Obligations, and assign and deliver the Shares and the certificate therefor
to the purchaser at any such sale. The proceeds from any such sale shall be
applied first to the payment of costs, expenses and reasonable attorney's fees
incurred by Pledgee in connection with the sale, secondly, to the Obligations,
and any remainder shall be delivered to Pledgor.
8. RIGHT TO VOTE SHARES. Until the Debenture is fully paid, Pledgee
shall have the sole right to vote the Shares with regard to any proposed
amendment to the Articles of Incorporation of the Bank which would result in a
change in the preferences, qualifications, limitations, restrictions, or the
special or relative rights in respect of the Shares. Otherwise, Pledgor shall
have, subject to the covenants contained in the Debenture and the Amended
Agreement, the sole right to vote the Shares unless there is a default
hereunder.
9. PRESERVATION AND PERFECTION OF LIENS. Pledgor shall promptly, upon
the reasonable request of Pledgee and at Pledgor's expense, execute,
acknowledge and deliver, or cause the execution, acknowledgment and delivery
of, and thereafter, if applicable, register, file or record in an appropriate
governmental office, any document or instrument supplemental to or confirmatory
of this Agreement, and give such further assurances as may otherwise be
necessary or desirable for the creation, preservation and/or perfection of the
liens created by this Agreement.
10. CERTAIN COVENANTS. All covenants contained in the Amended Agreement
and referred to herein are incorporated by reference as if fully set forth
herein and shall be deemed to be set forth, in their entirety, herein.
11. CUSTODY AND PRESERVATION OF PLEDGED SECURITIES. Neither the failure
of Pledgee to preserve or protect the value of the Shares nor any rights with
respect to any of the Shares against other parties shall be deemed a failure to
exercise reasonable care in the custody or preservation of such Shares.
Pledgee shall act reasonably with respect to the Shares, however, Pledgee shall
not be deemed to have failed to exercise reasonable care in the custody and
preservation of any Shares if it fails to sell or convert such Shares in a
falling market. Failure to sell or convert such Shares while Pledgee is
diligently considering a request by Pledgor that Pledgee waive a default or
forbear from collection after a default or restructure any of the Obligations,
or while negotiating any such restructuring in good faith, shall not be deemed
negligence or gross negligence under any circumstances. Pledgee shall have the
absolute right, exercisable in its sole and absolute discretion, to sell the
Shares, in whole or partial lots, and convert them to cash at any time
following default.
12. WAIVERS AND MODIFICATIONS. No waiver by the Pledgee hereunder shall
be effective unless it is in a writing signed by an authorized officer of the
Pledgee. No such waiver shall operate as a waiver of any other matter or of a
similar matter at a future time. This Agreement may not be changed except by a
writing executed by Pledgor and an authorized officer of the Pledgee.
13. WAIVERS BY THE PLEDGOR.
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<PAGE> 102
13.1 The Pledgor further waives presentment and demand for payment
of any of the obligations secured hereby, protest and notice of dishonor or
default with respect to any of such obligations, and all other notices to which
the Pledgor might otherwise be entitled, except as otherwise expressly provided
in this Agreement.
13.2 The Pledgor (to the extent that it may lawfully do so)
covenants that it shall not at any time insist upon or plead, or in any manner
claim or take the benefit or advance of, any stay (except in connection with a
pending appeal), valuation, appraisal, redemption or extension law now or at
any time hereafter in force that, but for this waiver, might be applicable to
any sale made under any judgment, order or decree based on this Agreement or
any other Loan Document; and the Pledgor (to the extent that it may lawfully do
so) hereby expressly waives and relinquishes all benefit and advance of any and
all such laws and hereby covenants that it will not hinder, delay or impede the
execution of any power in this Agreement or therein granted and delegated to
the Pledgee, but that it will suffer and permit the execution of every such
power as though no such law or laws had been made or enacted.
14. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
shall be deemed to be one and the same instrument.
15. SEVERABILITY. Any provision of this Agreement which is prohibited,
unenforceable or not authorized in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition,
unenforceability or nonauthorization without invalidating the remaining
provisions hereof or affecting the validity, enforceability or legality of such
provision in any other jurisdiction unless the ineffectiveness of such
provision would result in such a material change as to cause completion of the
transactions contemplated hereby to be unreasonable.
16. NOTICES. All notices, consents, requests and demands to or upon the
respective parties hereto shall be given in the manner required for notices
under the Loan Agreement.
17. FAILURE OR DELAY. No failure on the part of Pledgee to exercise, and
no delay in exercising, any right, power or privilege hereunder operates as a
waiver thereof; nor does any single or partial exercise of any right, power or
privilege hereunder preclude any other or further exercise thereof, or the
exercise of any other right, power or privilege. No notice to or demand on
Pledgor in any case entitles Pledgor to any other or further notice or demand
in similar or other circumstances.
18. GOVERNING LAW. This Agreement shall be governed and construed under
the laws of the State of Missouri without regard to conflict or choice of laws
rules.
4
<PAGE> 103
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date
first above written.
FIRST COMMERCIAL BANCORP, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
FIRST BANKS, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
5
<PAGE> 104
EXHIBIT A
SHARES PLEDGED
1.
-------------------------------------------------------------------
2.
-------------------------------------------------------------------
6
<PAGE> 105
AMENDMENT NO. 1 TO THE RIGHTS AGREEMENT
THIS AMENDMENT NO. 1 TO THE RIGHTS AGREEMENT (the "Agreement") dated
as of March 17, 1990, by and between FIRST COMMERCIAL BANCORP, INC., a Delaware
corporation (the "Company"), and THE FIRST NATIONAL BANK OF BOSTON (the "Rights
Agent"), is entered into as of July 31, 1995, with respect to the following:
W I T N E S S E T H
WHEREAS, Section 26 of the Agreement entitled "Supplements and
Amendments" provides, subject to certain exceptions, that the Company and the
Rights Agent shall, if the Company so directs, supplement or amend any
provisions of the Agreement without the approval of any holders of certificates
representing shares of Common Stock (as defined in the Agreement);
WHEREAS, Section 28 of the Agreement entitled "Determinations and
Actions by the Board of Directors,etc." provides that "The Board of Directors
of the Company shall have the exclusive power and authority to administer this
Agreement and to exercise all rights and powers specifically granted to the
Board or to the Company, or as may be necessary or advisable in the
administration of this Agreement, including, without limitation, the right and
power to (i) interpret the provisions of this Agreement, and (ii) make all
determinations deemed necessary or advisable for the administration of this
Agreement (including a determination to redeem or not to redeem the Rights or
to amend the Agreement). All such actions, calculations, interpretations and
determinations (including, for purposes of clause (y) below, all omissions with
respect to the forgoing) which are done or made in good faith by the Board in
good faith, shall (x) be final, conclusive and binding on the Company, the
Rights Agent, the holders of the Rights and all other parties, and (y) not
subject the Board to any liability to the holders of the Rights."
WHEREAS, the Company has reported net losses for the years ended
December 31, 1992, 1993 and 1994, respectively, and for the six month period
ended June 30, 1995;
WHEREAS, due to the reported net losses incurred by the Company and
First Commercial Bank, a California chartered banking corporation and
subsidiary of the Company (the "Bank"), the Company and the Bank failed to meet
the capital adequacy requirements applicable to bank holding companies and
banks, respectively;
WHEREAS, the Bank is classified as a "critically undercapitalized"
institution and the Company and the Bank are classified as troubled
institutions for regulatory purposes;
1
<PAGE> 106
WHEREAS, as a result of an examination of the Bank by the Federal
Deposit Insurance Company ("FDIC") and the State Banking Department ("SBD"),
the Bank consented to enter into a Cease and Desist Order with the FDIC dated
August 11, 1992 which was subsequently amended and consented to enter into a
Final Order under Financial Code Section 1913 with the SBD which was
subsequently amended;
WHEREAS, the Bank was given notice that the SBD may take extreme
action against the Bank unless the Bank increases its tangible shareholders'
equity to at least $5,160,000 on or before August 11, 1995 and increases its
tangible shareholders' equity to at least $11,180,000 on or before October 31,
1995;
WHEREAS, the Company, the Bank, James F. Dierberg, an individual, and
First Banks, Inc., a Missouri corporation, entered into a Standby Stock
Purchase Agreement dated as of June 30, 1995 and have agreed to amend certain
provisions thereof and restate the same (the "Amended and Restated Stock
Purchase Agreement");
WHEREAS, the Board of Directors of the Company has determined that the
transactions contemplated by the Amended and Restated Stock Purchase Agreement
are the only transactions presently available to the Company and the Bank to
enable the Bank to meet the demands of the SBD and avoid receivership by the
FDIC;
WHEREAS, the Board of Directors of the Company deems an amendment to
the Agreement to exclude the applicability of the Agreement to the transactions
contemplated by the Amended and Restated Stock Purchase Agreement to be in the
best interests of the shareholders of the Company and the holders of rights
pursuant to the Agreement;
WHEREAS, the Company and the Rights Agent have agreed to amend the
Agreement to exclude the applicability of the Agreement to the transactions
contemplated by the Amended and Restated Stock Purchase Agreement;
WHEREAS, capitalized terms used in this Amendment No. 1 to the
Agreement and not otherwise defined herein shall have the meanings ascribed to
them in the Agreement;
NOW, THEREFORE, the parties hereto agree as follows:
1. Section 1(a) of the Agreement is amended to read in its
entirety as follows:
"(a) "Acquiring Person" shall mean any Person who or which, together
with all Affiliates and Associates of such Person, shall be the Beneficial
Owner of 20% or more of the shares of Common Stock then outstanding, but shall
not include the Company, any Subsidiary of the Company, any employee benefit
plan of the Company
2
<PAGE> 107
or any Subsidiary of the Company, any Person or entity organized, appointed or
established by the Company for or pursuant to the terms of any such plan, or
First Banks, Inc., a Missouri corporation ("First Banks") and all Affiliates
and Associates of First Banks."
2. Section 1(v) of the Agreement is amended to read in its
entirety as follows:
"(v) "Section 11(a)(ii) Event" shall mean any event described in
Section 11(a)(ii)(A) or (B) hereof and shall exclude the consummation of any
and all transactions contemplated by the Standby Stock Purchase Agreement dated
as of June 30, 1995 by and among the Company, First Commercial Bank, a
California chartered banking corporation wholly-owned by the Company, James F.
Dierberg, an individual, and First Banks, as now or hereafter amended (the
"Amended and Restated Stock Purchase Agreement")."
3. Section 1(x) of the Agreement is amended to read in its
entirety as follows:
"(x) "Section 13 Event" shall mean any event described in clauses
(x), (y) or (z) of Section 13(a) hereof and shall exclude the consummation of
any and all transactions contemplated by the Amended and Restated Stock
Purchase Agreement."
4. Section 1 (z) of the Agreement is amended to read in its entirety
as follows:
"(z) "Stock Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition, shall include, without
limitation, a report filed pursuant to Section 13(d) under the Exchange Act) by
the Company or an Acquiring Person that an Acquiring Person has become such,
but shall not include any such report filed with respect to the Company
pursuant to such Section 13(d) by James F. Dierberg, First Banks or any
Affiliates or Associates of First Banks."
5. Section 1(dd) of the Agreement is amended to read in its
entirety as follows:
"(dd) "Triggering Event" shall mean any Section 11(a)(ii) Event or
any Section 13 Event and shall exclude the consummation of any and all
transactions contemplated by the Amended and Restated Stock Purchase
Agreement."
6. Section 11(a)(ii) of the Agreement is amended by adding the
following sentence after the last sentence thereof:
"Notwithstanding anything in this Agreement to the contrary, this
Section 11(a)(ii) shall not be applicable to a transaction described in
subparagraphs (A) and (B) hereof if the Person or
3
<PAGE> 108
Acquiring Person, as the case may be, described therein is First Banks or any
Affiliate or Associate of First Banks."
7. Section 13(d) of the Agreement is amended by adding the
following sentence after the last sentence thereof:
"Notwithstanding anything in this Agreement and specifically this
Section 13(d) to the contrary, Section 13 shall not be applicable to a
transaction described in subparagraphs (x), (y) and (z) of Section 13(a) if
such transaction is consummated with First Banks or any Affiliate or Associate
of First Banks."
8. Section 23 of the Agreement is amended by adding the following
sentence after the last sentence of Section 23 (a):
"Notwithstanding anything in this Section 23 to the contrary,
the Board of Directors of the Company may, at its option, anytime prior to the
Final Expiration Date, redeem any or all of outstanding Rights or settle any
disputes between the Company and any of its stockholders or any other person
claiming the right to have distributed Rights to such stockholder or other
person at a redemption price of $.05 per Right or such disputed Right.
9. All other terms and provisions of the Agreement shall remain
in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
No. 1 to the Agreement as of the day and year first above written.
Attest: FIRST COMMERCIAL BANCORP, INC.
By: By:
------------------------------- ---------------------------------
Name : Name:
Title: Title:
Attest: THE FIRST NATIONAL BANK OF
BOSTON
By: By:
------------------------------- ---------------------------------
Name: Name:
Title: Title:
4
<PAGE> 109
- --------------------------------------------------------------------------------
FIRST COMMERCIAL BANCORP, INC.
and
BANK OF AMERICA, N.T. & S.A.
RIGHTS AGENT
____________________
RIGHTS AGREEMENT
Dated as of March 17, 1990
- --------------------------------------------------------------------------------
<PAGE> 110
Table of Contents
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C> <C>
1 Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2 Appointment of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . 3
3 Issue of Rights Certificates . . . . . . . . . . . . . . . . . . . . . . . . 3
4 Form of Rights Certificates . . . . . . . . . . . . . . . . . . . . . . . . . 5
5 Countersignature and Registration . . . . . . . . . . . . . . . . . . . . . . 5
6 Transfer, Split Up, Combination and Exchange of Rights Certificates;
Mutilated, Destroyed, Lost or Stolen Rights Certificates . . . . . . . . . 6
7 Exercise of Rights; Purchase Price; Expiration Date of Rights . . . . . . . . 6
8 Cancellation and Destruction of Rights Certificates . . . . . . . . . . . . . 8
9 Reservation and Availability of Capital Stock . . . . . . . . . . . . . . . . 8
10 Preferred Stock Record Date . . . . . . . . . . . . . . . . . . . . . . . . . 9
11 Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
12 Certificate of Adjusted Purchase Price or Number of Shares . . . . . . . . . 15
13 Consolidation, Merger or Sale or Transfer of Assets or Earning
Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
14 Fractional Rights and Fractional Shares . . . . . . . . . . . . . . . . . . . 17
15 Rights of Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
16 Agreement of Rights Holders . . . . . . . . . . . . . . . . . . . . . . . . . 18
17 Rights Certificate Holder Not Deemed a Stockholder . . . . . . . . . . . . . 19
18 Concerning the Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . 19
19 Merger or Consolidation or Change of Name of Rights Agent . . . . . . . . . . 19
20 Duties of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
21 Change of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
22 Issuance of New Rights Certificates . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
-i-
<PAGE> 111
<TABLE>
<S> <C> <C>
23 Redemption and Termination . . . . . . . . . . . . . . . . . . . . . . . . . 22
24 Notice of Certain Events . . . . . . . . . . . . . . . . . . . . . . . . . . 23
25 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
26 Supplements and Amendments . . . . . . . . . . . . . . . . . . . . . . . . . 24
27 Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
28 Determination and Actions by the Board of Directors, etc. . . . . . . . . . . 24
29 Benefits of this Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 25
30 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
31 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
32 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
33 Descriptive Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>
Exhibit A -- Certificate of Designation, Preferences and Rights
Exhibit B -- Form of Rights Certificate
Exhibit C -- Form of Summary of Rights
-ii-
<PAGE> 112
RIGHTS AGREEMENT
RIGHTS AGREEMENT, dated as of March 17, 1990 (the "Agreement"),
between First Commercial Bancorp, Inc., a Delaware corporation (the "Company"),
and Bank of America, N.T & S.A. (the "Rights Agent").
W I T N E S S E T H
WHEREAS, on February 27, 1990 (the "Rights Dividend Declaration
Date"), the Board of Directors of the Company authorized and declared a
dividend distribution of one Right for each share of Common Stock (as
hereinafter defined) of the Company outstanding at the close of business on
April 5, 1990 (the "Record Date"), and has authorized the issuance of one Right
(as such number may hereinafter be adjusted pursuant to the provisions of
Section 11(p) hereof) for each share of Common Stock of the Company issued
between the Record Date (whether originally issued or delivered from the
Company's treasury) and the Distribution Date (as hereinafter defined), each
Right initially representing the right to purchase one one-hundredth of a share
of Series A Participating Preferred Stock of the Company having the rights,
powers and preferences set forth in the form of Certificate of Designation,
Preferences and Rights attached hereto as Exhibit A, upon the terms and subject
to the conditions hereinafter set forth (the "Rights");
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person who or
which, together with all Affiliates and Associates of such Person, shall be the
Beneficial Owner of 20% or more of the shares of Common Stock then outstanding,
but shall not include the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or of any Subsidiary of the Company, or any Person
or entity organized, appointed or established by the Company for or pursuant to
the terms of any such plan.
(b) "Act" shall mean the Securities Act of 1933.
(c) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended and in effect
on the date of this Agreement (the "Exchange Act").
(d) A Person shall be deemed the "Beneficial Owner" of,
and shall be deemed to "beneficially own," any securities:
(i) which such Person or any of such Person's
Affiliates or Associates, directly or indirectly, has the right to
acquire (whether such right is exercisable immediately or only after
the passage of time) pursuant to any agreement, arrangement or
understanding (whether or not in writing) or upon the exercise of
conversion rights, exchange rights, rights, warrants or options, or
otherwise; provided, however, that a Person shall not be deemed the
"Beneficial Owner" of, or to "beneficially own," (A) securities
tendered pursuant to a tender or exchange offer made by such Person or
any of such Person's Affiliates or Associates until such tendered
securities are accepted for purchase or exchange, or (B) securities
issuable upon exercise of Rights at any time prior to the occurrence
of a Triggering Event, or (C) securities issuable upon exercise of
Rights from and after the occurrence of a Triggering Event which
Rights were acquired by such Person or any of such Person's Affiliates
or Associates prior to the Distribution Date or pursuant to Section
3(a) or Section 22 hereof (the "Original
<PAGE> 113
Rights") or pursuant to Section 11(i) hereof in connection with an
adjustment made with respect to any Original Rights;
(ii) which such Person or any of such Person's
Affiliates or Associates, directly or indirectly, has the right to
vote or dispose of or has "beneficial ownership" of (as determined
pursuant to Rule 13d-3 of the General Rules and Regulations under the
Exchange Act), including pursuant to any agreement, arrangement or
understanding, whether or not in writing; provided, however, that a
Person shall not be deemed the "Beneficial Owner" of, or to
"beneficially own," any security under this subparagraph (ii) as a
result of an agreement, arrangement or understanding to vote such
security if such agreement, arrangement or understanding: (A) arises
solely from a revocable proxy given in response to a public proxy or
consent solicitation made pursuant to, and in accordance with, the
applicable provisions of the General Rules and Regulations under the
Exchange Act, and (B) is not also then reportable by such Person on
Schedule 13D under the Exchange Act (or any comparable or successor
report); or
(iii) which are beneficially owned, directly or
indirectly, by any other Person (or any Affiliate or Associate
thereof) with which such Person (or any of such Person's Affiliates or
Associates) has any agreement, arrangement or understanding (whether
or not in writing), for the purpose of acquiring, holding, voting
(except pursuant to a revocable proxy as described in the proviso to
subparagraph (ii) of this paragraph (d)) or disposing of any voting
securities of the Company; provided, however, that nothing in this
paragraph (d) shall cause a person engaged in business as an
underwriter of Securities to be the "Beneficial Owner" of, or to
"beneficially own," any securities acquired through such Person's
participation in good faith in a firm commitment underwriting until
the expiration of forty days after the date of such acquisition.
(e) "Business Day" shall mean any day other than a
Saturday, Sunday or a day on which banking institutions in the State of
California are authorized or obligated by law or executive order to close.
(f) "Close of business" on any given date shall mean 5:00
P.M., Sacramento time, on such date; provided, however, that if such date is
not a Business Day it shall mean 5:00 P.M., Sacramento time, on the next
succeeding Business Day.
(g) "Common Stock" shall mean the common stock, $.01 par
value per share, of the Company, except that "Common Stock" when used with
reference to any Person other than the Company shall mean the capital stock of
such Person with the greatest voting power, or the equity securities or other
equity interest having power to control or direct the management, of such
Person.
(h) "Common stock equivalents" shall have the meaning set
forth in Section 11(a)(iii) hereof.
(i) "Current market price" shall have the meaning set
forth in Section 11(d)(i) hereof.
(j) "Current Value" shall have the meaning set forth in
Section 11(a)(iii) hereof.
(k) "Distribution Date" shall have the meaning set forth
in Section 3(a) hereof.
(l) "Exchange Act" shall have the meaning set forth in
Section 1(c) hereof.
(m) "Expiration Date" shall have the meaning set forth in
Section 7(a) hereof.
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(n) "Final Expiration Date" shall mean the close of
business on April 5, 2000.
(o) "Person" shall mean any individual, firm,
corporation, partnership or other entity.
(p) "Preferred Stock" shall mean shares of Series A
Participating Preferred Stock, par value $.01 per share, of the Company and, to
the extent that there is not a sufficient number of shares of Series A
Participating Preferred Stock authorized to permit the full exercise of the
Rights, any other series of Preferred Stock, par value $.01 per share, of the
Company designated for such purpose containing terms substantially similar to
the terms of the Series A Participating Preferred Stock.
(q) "Principal Party" shall have the meaning set forth in
Section 13(b) hereof.
(r) "Purchase Price" shall have the meaning set forth in
Section 4(a) hereof.
(s) "Redemption Price" shall have the meaning set forth
in Section 23(a) hereof.
(t) "Rights" shall have the meaning set forth in the
WHEREAS clause at the beginning of the Agreement.
(u) "Rights Certificates" shall have the meaning set
forth in Section 3(a) hereof.
(v) "Section 11(a)(ii) Event" shall mean any event
described in Section 11(a)(ii) (A) or (B) hereof.
(w) "Section 11(a)(ii) Trigger Date" shall have the
meaning set forth in Section 11(a)(iii) hereof.
(x) "Section 13 Event" shall mean any event described in
clauses (x), (y) or (z) of Section 13(a) hereof.
(y) "Spread" shall have the meaning set forth in Section
11(a)(iii) hereof.
(z) "Stock Acquisition Date" shall mean the first date of
public announcement (which, for purposes of this definition, shall include,
without limitation, a report filed pursuant to Section 13(d) under the Exchange
Act) by the Company or an Acquiring Person that an Acquiring Person has become
such.
(aa) "Subsidiary" shall mean, with reference to any
Person, any corporation of which an amount of voting securities sufficient to
elect at least a majority of the directors of such corporation is beneficially
owned, directly or indirectly, by such Person, or otherwise controlled by such
Person.
(bb) "Substitution Period" shall have the meaning set
forth in Section 11(a)(iii) hereof.
(cc) "Trading Day" shall have the meaning set forth in
Section 11(d)(i) hereof.
(dd) "Triggering Event" shall mean any Section 11(a)(ii)
Event or any Section 13 Event.
Section 2. Appointment of Rights Agent. The Company hereby appoints
the Rights Agent to act as agent for the Company and the holders of the Rights
(who, in accordance with Section 3 hereof, shall prior to the Distribution Date
also be the holders of the Common Stock) in accordance with the terms and
conditions hereof, and the Rights Agent hereby accepts such appointment. The
Company may from time to time appoint such Co-Rights Agents as it may deem
necessary or desirable.
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Section 3. Issue of Rights Certificates.
(a) Until the earlier of (i) the close of business on the
tenth day after the Stock Acquisition Date (or, if the tenth day after the
Stock Acquisition Date occurs before the Record Date, the close of business on
the Record Date), or (ii) the close of business on the tenth business day after
the date that a tender or exchange offer by any Person (other than the Company,
any Subsidiary of the Company, any employee benefit plan of the Company or of
any Subsidiary of the Company, or any Person or entity organized, appointed or
established by the Company for or pursuant to the terms of any such plan) is
first published or sent or given within the meaning of Rule 14d-2(a) of the
General Rules and Regulations under the Exchange Act, if upon consummation
thereof, such Person would be the Beneficial Owner of 25% or more of the shares
of Common Stock then outstanding (the earlier of (i) and (ii) being herein
referred to as the "Distribution Date"), (x) the Rights will be evidenced
(subject to the provisions of paragraph (b) of this Section 3) by the
certificates for the Common Stock registered in the names of the holders of the
Common Stock (which certificates for Common Stock shall be deemed also to be
certificates for Rights) and not by separate certificates, and (y) the Rights
will be transferable only in connection with the transfer of the underlying
shares of Common Stock (including a transfer to the Company). As soon as
practicable after the Distribution Date, the Rights Agent will send by
first-class, insured, postage prepaid mail, to each record holder of the Common
Stock as of the close of business on the Distribution Date, at the address of
such holder shown on the records of the Company, one or more rights
certificates, in substantially the form of Exhibit B hereto (the "Rights
Certificates"), evidencing one Right for each share of Common Stock so held,
subject to adjustment as provided herein. In the event that an adjustment in
the number of Rights per share of Common Stock has been made pursuant to
Section 11(p) hereof, at the time of distribution of the Rights Certificates,
the Company shall make the necessary and appropriate rounding adjustments (in
accordance with Section 14(a) hereof) so that Rights Certificates representing
only whole numbers of Rights are distributed and cash is paid in lieu of any
fractional Rights. As of and after the Distribution Date, the Rights will be
evidenced solely by such Rights Certificates.
(b) The Company will send a copy of a Summary of Rights
to Purchase Preferred Stock, in substantially the form attached hereto as
Exhibit C, by first-class, postage prepaid mail, to each record holder of the
Common Stock as of the close of business on the Record Date, at the address of
such holder shown on the records of the Company. With respect to certificates
for the Common Stock outstanding as of the Record Date, until the Distribution
Date, the Rights will be evidenced by such certificates for the Common Stock
and the registered holders of the Common Stock shall also be the registered
holders of the associated Rights. Until the earlier of the Distribution Date
or the Expiration Date (as such term is defined in Section 7 hereof), the
transfer of any certificates representing shares of Common Stock in respect of
which Rights have been issued shall also constitute the transfer of the Rights
associated with such shares of Common Stock.
(c) Rights shall be issued in respect of all shares of
Common Stock which are issued (either as an original issuance or from the
Company's treasury) after the Record Date but prior to the earlier of the
Distribution Date or the Expiration Date. Certificates representing such
shares of Common Stock shall also be deemed to be certificates for Rights and
shall bear the following legend:
This certificate also evidences and entitles the holder hereof
to certain Rights as set forth in the Rights Agreement between First
Commercial Bancorp, Inc. (the "Company") and Bank of America, N.T. &
S.A. (the "Rights Agent") dated as of March 17, 1990 (the "Rights
Agreement"), the terms of which are hereby incorporated herein by
reference and a copy of which is on file at the principal offices of
the Company. Under certain circumstances, as set forth in the Rights
Agreement, such Rights will be evidenced by separate certificates and
will no longer be evidenced by this certificate. The Company will
mail to the holder of this certificate a copy of the Rights Agreement,
as in effect on the date of mailing, without charge promptly after
receipt of a written request therefor. Under certain circumstances
set forth in the Rights Agreement, Rights issued to, or held by, any
Person who is, was or becomes an
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Acquiring Person or any Affiliate or Associates thereof (as such terms
are defined in the Rights Agreement), whether currently held by or on
behalf of such Person or by any subsequent holder, may become null and
void.
With respect to such certificates containing the foregoing legend, until the
earlier of (i) the Distribution Date or (ii) the Expiration Date, the Rights
associated with the Common Stock represented by such certificates shall be
evidenced by such certificates alone and registered holders of Common Stock
shall also be the registered holders of the associated Rights, and the transfer
of any of such certificates shall also constitute the transfer of the Rights
associated with the Common Stock represented by such certificates.
Section 4. Form of Rights Certificates.
(a) The Rights Certificates (and the forms of election to
purchase and of assignment to be printed on the reverse thereof) shall each be
substantially in the form set forth in Exhibit B hereto and may have such marks
of identification or designation and such legends, summaries or endorsements
printed thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
applicable law or with any rule or regulation made pursuant thereto or with any
rule or regulation of any stock exchange on which the Rights may from time to
time be listed, or to conform the usage. Subject to the provisions of Section
11 and Section 22 hereof, the Rights Certificates, whenever distributed, shall
be dated as of the Record Date and on their face shall entitle the holders
thereof to purchase such number of one one-hundredths of a share of Preferred
Stock as shall be set forth therein at the price set forth therein (such
exercise price per one one-hundredth of a share, the "Purchase Price"), but the
amount and type of securities purchasable upon the exercise of each Right and
the Purchase Price thereof shall be subject to adjustment as provided herein.
(b) Any Rights Certificate issued pursuant to Section
3(a) or Section 22 hereof that represents Rights beneficially owned by Persons
known to be: (i) an Acquiring Person or any Associate or Affiliate of an
Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee after the Acquiring Person
becomes such, or (iii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee prior to or concurrently with
the Acquiring Person becoming such and receives such Rights pursuant to either
(A) a transfer (whether or not for consideration) from the Acquiring Person to
holders of equity interests in such Acquiring Person or to any Person with whom
such Acquiring Person has any continuing agreement, arrangement or
understanding regarding the transferred Rights or (B) a transfer which the
Board of Directors of the Company has determined is part of a plan, arrangement
or understanding which has as a primary purpose or effect avoidance of Section
7(e) hereof, and any Rights Certificate issued pursuant to Section 6 or Section
11 hereof upon transfer, exchange, replacement or adjustment of any other
Rights Certificate referred to in this sentence, shall contain (to the extent
feasible) the following legend:
The Rights represented by this Rights Certificate are or were
beneficially owned by a Person who was or became an Acquiring Person
or an Affiliate or Associate of an Acquiring Person (as such terms are
defined in the Rights Agreement). Accordingly, this Rights
Certificate and the Rights represented hereby may become null and void
in the circumstances specified in Section 7(e) of such Agreement.
Section 5. Countersignature and Registration.
(a) The Rights Certificates shall be executed on behalf
of the Company by its Chairman of the Board, its President or any Vice
President, either manually or by facsimile signature, and shall have affixed
thereto the Company's seal or a facsimile thereof which shall be attested by
the Secretary or an Assistant Secretary of the Company, either manually or by
facsimile signature. The Rights Certificates shall be manually
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countersigned by the Rights Agent and shall not be valid for any purpose unless
so countersigned. In case any officer of the Company who shall have signed any
of the Rights Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Rights Certificates, nevertheless, may be countersigned by the Rights
Agent and issued and delivered by the Company with the same force and effect as
though the person who signed such Rights Certificates had not ceased to be such
officer of the Company; and any Rights Certificates may be signed on behalf of
the Company by any person who, at the actual date of the execution of such
Rights Certificate, shall be a proper officer of the Company to sign such
Rights Certificate, although at the date of the execution of this Rights
Agreement any such person was not such an officer.
(b) Following the Distribution Date, the Rights Agent
will keep or cause to be kept, at its principal office or offices designated as
the appropriate place for surrender of Rights Certificates upon exercise or
transfer, books for registration and transfer of the Rights Certificates issued
hereunder. Such books shall show the names and addresses of the respective
holders of the Rights Certificates, the number of Rights evidenced on its face
by each of the Rights Certificates, the Certificate number and the date of each
of the Rights Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.
(a) Subject to the provisions of Section 4(b), Section
7(e) and Section 14 hereof, at any time after the close of business on the
Distribution Date, and at or prior to the close of business on the Expiration
Date, any Rights Certificate or Certificates may be transferred, split up,
combined or exchanged for another Rights Certificate or Certificates, entitling
the registered holder to purchase a like number of one one-hundredths of a
share of Preferred Stock (or, following a Triggering Event, Common Stock, other
securities, cash or other assets, as the case may be) as the Rights Certificate
or Certificates surrendered then entitled such holder (or former holder in the
case of a transfer) to purchase. Any registered holder desiring to transfer,
split up, combine or exchange any Rights Certificate or Certificates shall make
such request in writing delivered to the Rights Agent, and shall surrender the
Rights Certificate or Certificates to be transferred, split up, combined or
exchanged at the principal office or offices of the Rights Agent designated for
such purpose. Neither the Rights Agent nor the Company shall be obligated to
take any action whatsoever with respect to the transfer of any such surrendered
Rights Certificate until the registered holder shall have completed and signed
the certificate contained in the form of assignment on the reverse side of such
Rights Certificate and shall have provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request. Thereupon the
Rights Agent shall, subject to Section 4(b), Section 7(e) and Section 14
hereof, countersign and deliver to the Person entitled thereto a Rights
Certificate or Rights Certificates, as the case may be, as so requested. The
Company may require payment of a sum sufficient to cover any tax or
governmental charge that may be imposed in connection with any transfer, split
up, combination or exchange of Rights Certificates.
(b) Upon receipt by the Company and the Rights Agent of
evidence reasonably satisfactory to them of the loss, theft, destruction or
mutilation of a Rights Certificate, and, in case of loss, theft or destruction,
of indemnity or security reasonably satisfactory to them, and reimbursement to
the Company and the Rights Agent of all reasonable expenses incidental thereto,
and upon surrender to the Rights Agent and cancellation of the Rights
Certificate if mutilated, the Company will execute and deliver a new Rights
Certificate of like tenor to the Rights Agent for countersignature and delivery
to the registered owner in lieu of the Rights Certificate so lost, stolen,
destroyed or mutilated.
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Section 7. Exercise of Rights; Purchase Price; Expiration Date of
Rights.
(a) Subject to Section 7(e) hereof, the registered holder
of any Rights Certificate may exercise the Rights evidenced thereby (except as
otherwise provided herein including, without limitation, the restrictions on
exercisability set forth in Section 9(c), Section 11(a)(iii) and Section 23(a)
hereof) in whole or in part at any time after the Distribution Date upon
surrender of the Rights Certificate, with the form of election to purchase and
the certificate on the reverse side thereof duly executed, to the Rights Agent
at the principal office or offices of the Rights Agent designated for such
purpose, together with payment of the aggregate Purchase Price with respect to
the total number of one one-hundredths of a share (or other securities, cash or
other assets, as the case may be) as to which such surrendered Rights are then
exercisable, at or prior to the earlier of (i) Final Expiration Date, or (ii)
the time at which the Rights are redeemed as provided in Section 23 hereof (the
earlier of (i) and (ii) being herein referred to as the "Expiration Date").
(b) The Purchase Price for each one one-hundredth of a
share of Preferred Stock pursuant to the exercise of a Right shall initially be
$50 and shall be subject to adjustment from time to time as provided in
Sections 11 and 13(a) hereof and shall be payable in accordance with paragraph
(c) below.
(c) Upon receipt of a Rights Certificate representing
exercisable Rights, with the form of election to purchase and the certificate
duly executed, accompanied by payment, with respect to each Right so exercised,
of the Purchase Price per one one-hundredth of a share of Preferred Stock (or
other shares, securities, cash or other assets, as the case may be) to be
purchased as set forth below and an amount equal to any applicable transfer
tax, the Rights Agent shall, subject to Section 20(k) hereof, thereupon
promptly (i) (A) requisition from any transfer agent of the shares of Preferred
Stock (or make available, if the Rights Agent is the transfer agent for such
shares) certificates for the total number of one one-hundredths of a share of
Preferred Stock to be purchased and the Company hereby irrevocably authorizes
its transfer agent to comply with all such requests, or (B) if the Company
shall have elected to deposit the total number of shares of Preferred Stock
issuable upon exercise of the Rights hereunder with a depositary agent,
requisition from the depositary agent depositary receipts representing such
number of one one-hundredths of a share of Preferred Stock as are to be
purchased (in which case certificates for the shares of Preferred Stock
represented by such receipts shall be deposited by the transfer agent with the
depositary agent) and the Company will direct the depositary agent to comply
with such request, (ii) requisition from the Company the amount of cash, if
any, to be paid in lieu of fractional shares in accordance with Section 14
hereof, (iii) after receipt of such certificates or depositary receipts, cause
the same to be delivered to or upon the order of the registered holder of such
Rights Certificate, registered in such name or names as may be designated by
such holder, and (iv) after receipt thereof, deliver such cash, if any, to or
upon the order of the registered holder of such Rights Certificate. The
payment of the Purchase Price (as such amount may be reduced pursuant to
Section 11(a)(iii) hereof) may be made in cash or by certified bank check or
money order payable to the order of the Company. In the event that the Company
is obligated to issue other securities (including Common Stock) of the Company,
pay cash and/or distribute other property pursuant to Section 11(a) hereof, the
Company will make all arrangements necessary so that such other securities,
cash and/or other property are available for distribution by the Rights Agent,
if and when appropriate. The Company reserves the right to require prior to
the occurrence of a Triggering Event that, upon any exercise of Rights, a
number of Rights be exercised so that only whole shares of Preferred Stock will
be issued.
(d) In case the registered holder of any Rights
Certificate shall exercise less than all the Rights evidenced thereby, a new
Rights Certificate evidencing Rights equivalent to the Rights remaining
unexercised shall be issued by the Rights Agent and delivered to, or upon the
order of, the registered holder of such Rights Certificate, registered in such
name or names as may be designated by such holder, subject to the provisions of
Section 14 hereof.
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(e) Notwithstanding anything in this Agreement to the
contrary, from and after the first occurrence of a Section 11(a)(ii) Event, any
Rights beneficially owned by (i) an Acquiring Person or an Associate or
Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or
of any such Associate or Affiliate) who becomes a transferee after the
Acquiring Person becomes such, or (iii) a transferee of an Acquiring Person (or
of any such Associate or Affiliate) who becomes a transferee prior to or
concurrently with the Acquiring Person becoming such and receives such Rights
pursuant to either (A) a transfer (whether or not for consideration) from the
Acquiring Person to holders of equity interests in such Acquiring Person or to
any Person with whom the Acquiring Person has any continuing agreement,
arrangement or understanding regarding the transferred Rights or (B) a transfer
which the Board of Directors of the Company has determined is part of a plan,
arrangement or understanding which has as a primary purpose or effect the
avoidance of this Section 7(e), shall become null and void without any further
action and no holder of such Rights shall have any rights whatsoever with
respect to such Rights, whether under any provision of this Agreement or
otherwise. The Company shall use all reasonable efforts to insure that the
provisions of this Section 7(e) and Section 4(b) hereof are complied with, but
shall have no liability to any holder of Rights Certificates or other Person as
a result of its failure to make any determinations with respect to an Acquiring
Person or its Affiliates, Associates or transferees hereunder.
(f) Notwithstanding anything in this Agreement to the
contrary, neither the Rights Agent nor the Company shall be obligated to
undertake any action with respect to a registered holder upon the occurrence of
any purported exercise as set forth in this Section 7 unless such registered
holder shall have (i) completed and signed the certificate contained in the
form of election to purchase set forth on the reverse side of the Rights
Certificate surrendered for such exercise, and (ii) provided such additional
evidence of the identity of the Beneficial Owner (or former Beneficial Owner)
or Affiliates or Associates thereof as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Rights Certificates. All
Rights Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or any of its
agents, be delivered to the Rights Agent for cancellation or in cancelled form,
or, if surrendered to the Rights Agent, shall be cancelled by it, and no Rights
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. The Company shall deliver to the
Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any other Rights Certificate purchased or acquired by the
Company otherwise than upon the exercise thereof. The Rights Agent shall deliver
all cancelled Rights Certificates to the Company, or shall, at the written
request of the Company, destroy such cancelled Rights Certificates, and in such
case shall deliver a certificate of destruction thereof to the Company.
Section 9. Reservation and Availability of Capital Stock.
(a) The Company covenants and agrees that it will cause
to be reserved and kept available out of its authorized and unissued shares of
Preferred Stock (and, following the occurrence of a Triggering Event, out of
its authorized and unissued shares of Common Stock and/or other securities or
out of its authorized and issued shares held in its treasury), the number of
shares of Preferred Stock (and, following the occurrence of a Triggering Event,
Common Stock and/or other securities) that, as provided in this Agreement
including Section 11(a)(iii) hereof, will be sufficient to permit the exercise
in full of all outstanding Rights.
(b) So long as the shares of Preferred Stock (and,
following the occurrence of a Triggering Event, Common Stock and/or other
securities) issuable and deliverable upon the exercise of the Rights may be
listed on any national securities exchange, the Company shall use its best
efforts to cause, from and after such time as the Rights become exercisable,
all shares reserved for such issuance to be listed on such exchange upon
official notice of issuance upon such exercise.
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(c) The Company shall use its best efforts to (i) file,
as soon as practicable following the earliest date after the first occurrence
of a Section 11(a)(ii) Event on which the consideration to be delivered by the
Company upon exercise of the Rights has been determined in accordance with
Section 11(a)(iii) hereof, or as soon as is required by law following the
Distribution Date, as the case may be, a registration statement under the Act,
with respect to the securities purchasable upon exercise of the Rights on an
appropriate form, (ii) cause such registration statement to become effective as
soon as practicable after such filing, and (iii) cause such registration
statement to remain effective (with a prospectus at all times meeting the
requirements of the Act) until the earlier of (A) the date as of which the
Rights are no longer exercisable for such securities, or (B) the date of the
expiration of the Rights. The Company will also take such action as may be
appropriate under, or to ensure compliance with, the securities or "blue sky"
laws of the various states in connection with the exercisability of the Rights.
The Company may temporarily suspend, for a period of time not to exceed ninety
(90) days after the date set forth in clause (i) of the first sentence of this
Section 9(c), the exercisability of the Rights in order to prepare and file
such registration statement and permit it to become effective. Upon any such
suspension, the Company shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended, as well as a
public announcement at such time as the suspension is no longer in effect.
Notwithstanding any provision of this Agreement to the contrary, the Rights
shall not be exercisable in any jurisdiction, unless the requisite
qualification in such jurisdiction shall have been obtained and until a
registration statement has been declared effective.
(d) The Company covenants and agrees that it will take
all such action as may be necessary to ensure that all one one-hundredths of a
share of Preferred Stock (and, following the occurrence of a Triggering Event,
Common Stock and/or other securities) delivered upon exercise of Rights shall,
at the time of delivery of the certificates for such shares (subject to payment
of the Purchase Price), be duly and validly authorized and issued and fully
paid and nonassessable.
(e) The Company further covenants and agrees that it will
pay when due and payable any and all federal and state transfer taxes and
charges which may be payable in respect of the issuance or delivery of the
Rights Certificates and of any certificates for a number of one one-hundredths
of a share of Preferred Stock (or Common Stock and/or other securities, as the
case may be) upon the exercise of Rights. The Company shall not, however, be
required to pay any transfer tax which may be payable in respect of any
transfer or delivery of Rights Certificates to a Person other than, or the
issuance or delivery of a number of one one-hundredths of a share of Preferred
Stock (or Common Stock and/or other securities, as the case may be) in respect
of a name other than that of, the registered holder of the Rights Certificates
evidencing Rights surrendered for exercise or to issue or deliver any
certificates for a number of one one-hundredths of a share of Preferred Stock
(or Common Stock and/or other securities, as the case may be) in a name other
than that of the registered holder upon the exercise of any Rights until such
tax shall have been paid (any such tax being payable by the holder of such
Rights Certificate at the time of surrender) or until it has been established
to the Company's satisfaction that no such tax is due.
Section 10. Preferred Stock Record Date. Each person in whose name
any certificate for a number of one one-hundredths of a share of Preferred
Stock (or Common Stock and/or other securities, as the case may be) is issued
upon the exercise of Rights shall for all purposes be deemed to have become the
holder of record of such fractional shares of Preferred Stock (or Common Stock
and/or other securities, as the case may be) represented thereby on, and such
certificate shall be dated, the date upon which the Rights Certificate
evidencing such Rights was duly surrendered and payment of the Purchase Price
(and all applicable transfer taxes) was made; provided, however, that if the
date of such surrender and payment is a date upon which the Preferred Stock (or
Common Stock and/or other securities, as the case may be) transfer books of the
Company are closed, such Person shall be deemed to have become the record
holder of such shares (fractional or otherwise) on, and such certificate shall
be dated, the next succeeding Business Day on which the Preferred Stock (or
Common Stock and/or other securities, as the case may be) transfer books of the
Company are open. Prior to the exercise of the Rights evidenced thereby, the
holder of a Rights Certificate shall not be entitled to
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any rights of a stockholder of the Company with respect to shares for which the
Rights shall be exercisable, including, without limitation, the right to vote,
to receive dividends or other distributions or to exercise any preemptive
rights, and shall not be entitled to receive any notice of any proceedings of
the Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number and Kind of Shares
or Number of Rights. The Purchase Price, the number and kind of shares covered
by each Right and the number of Rights outstanding are subject to adjustment
from time to time as provided in this Section 11.
(a)(i) In the event the Company shall at any time after the
date of this Agreement (A) declare a dividend on the Preferred Stock
payable in shares of Preferred Stock, (B) subdivide the outstanding
Preferred Stock, (C) combine the outstanding Preferred Stock into a
smaller number of shares, or (D) issue any shares of its capital stock
in a reclassification of the Preferred Stock (including any such
reclassification in connection with a consolidation or merger in which
the Company is the continuing or surviving corporation), except as
otherwise provided in this Section 11(a) and Section 7(e) hereof, the
Purchase Price in effect at the time of the record date for such
dividend or of the effective date of such subdivision, combination or
reclassification, and the number and kind of shares of Preferred Stock
or capital stock, as the case may be, issuable on such date, shall be
proportionately adjusted so that the holder of any Right exercised
after such time shall be entitled to receive, upon payment of the
Purchase Price then in effect, the aggregate number and kind of shares
of Preferred Stock or capital stock, as the case may be, which, if
such Right had been exercised immediately prior to such date and at a
time when the Preferred Stock transfer books of the Company were open,
the holder would have owned upon such exercise and been entitled to
receive by virtue of such dividend, subdivision, combination or
reclassification. If an event occurs which would require an
adjustment under both this Section 11(a)(i) and Section 11(a)(ii)
hereof, the adjustment provided for in this Section 11(a)(i) shall be
in addition to, and shall be made prior to, any adjustment required
pursuant to Section 11(a)(i) hereof.
(ii) In the event:
(A) any Person (other than the Company, any
Subsidiary of the Company, any employee benefit plan of the Company or
of any Subsidiary of the Company, or any Person or entity organized,
appointed or established by the Company for or pursuant to the terms
of any such plan), alone or together with its Affiliates and
Associates, shall, at any time after the Rights Dividend Declaration
Date, become the Beneficial Owner of 25% or more of the shares of
Common Stock then outstanding, unless the event causing the 25%
threshold to be crossed is a transaction set forth in Section 13(a)
hereof, or is an acquisition of shares of Common Stock pursuant to a
tender offer or an exchange offer for all outstanding shares of Common
Stock at a price and on terms determined by at least a majority of the
members of the Board of Directors who are not officers of the Company
and who are not representatives, nominees, Affiliates or Associates of
an Acquiring Person, after receiving advice from one or more
investment banking firms, to be (a) at a price which is fair to
stockholders (taking into account all factors which such members of
the Board deem relevant including, without limitation, prices which
could reasonably be achieved if the Company or its assets were sold on
an orderly basis designed to realize maximum value) and (b) otherwise
in the best interests of the Company and its stockholders, or
(B) any Acquiring Person or any Associate or
Affiliate of any Acquiring Person, at any time after the date of this
Agreement, directly or indirectly, shall merge into the Company or
otherwise combine with the Company and the Company shall be the
continuing or surviving corporation of such merger or combination and
the Common Stock of the Company shall remain outstanding and
unchanged, then, promptly following the first occurrence of a Section
11(a)(ii) Event, proper provision
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shall be made so that each holder of a Right (except as provided below
and in Section 7(e) hereof) shall thereafter have the right to
receive, upon exercise thereof at the then current Purchase Price in
accordance with the terms of this Agreement, in lieu of a number of
one one-hundredths of a share of Preferred Stock, such number of
shares of Common Stock of the Company as shall equal the result
obtained by (x) multiplying the then current Purchase Price by the
then number of one one-hundredths of a share of Preferred Stock for
which a Right was exercisable immediately prior to the first
occurrence of a Section 11(a)(ii) Event, and (y) dividing that product
(which, following such first occurrence, shall thereafter be referred
to as the "Purchase Price" for each Right and for all purposes of this
Agreement) by 50% of the current market price (determined pursuant to
Section 11(d) hereof) per share of Common Stock on the date of such
first occurrence (such number of shares, the "Adjustment Shares").
(iii) In the event that the number of shares of Common Stock
which are authorized by the Company's certificate of incorporation but
not outstanding or reserved for issuance for purposes other than upon
exercise of the Rights are not sufficient to permit the exercise in
full of the Rights in accordance with the foregoing subparagraph (ii)
of this Section 11(a), the Company shall: (A) determine the excess of
(1) the value of the Adjustment Shares issuable upon the exercise of a
Right (the "Current Value") over (2) the Purchase Price (such excess,
the "Spread"), and (B) with respect to each Right, make adequate
provision to substitute for the Adjustment Shares, upon payment of the
applicable Purchase Price, (1) cash, (2) a reduction in the Purchase
Price, (3) Common Stock or other equity securities of the Company
(including, without limitation, shares, or units of shares, of
preferred stock which the Board of Directors of the Company has deemed
to have the same value as shares of Common Stock (such shares of
preferred stock, "common stock equivalents")), (4) debt securities of
the Company, (5) other assets, or (6) any combination of the foregoing,
having an aggregate value equal to the Current Value, where such
aggregate value has been determined by the Board of Directors of the
Company based upon the advice of a nationally recognized investment
banking firm selected by the Board of Directors of the Company;
provided, however, if the Company shall not have made adequate
provision to deliver value pursuant to clause (B) above within thirty
(30) days following the later of (x) the first occurrence of a Section
11(a)(ii) Event and (y) the date on which the Company's right of
redemption pursuant to Section 23(a) expires (the later of (x) and (y)
being referred to herein as the "Section 11(a)(ii) Trigger Date"), then
the Company shall be obligated to deliver, upon the surrender for
exercise of a Right and without requiring payment of the Purchase
Price, shares of Common Stock (to the extent available) and then, if
necessary, cash, which shares and/or cash have an aggregate value equal
to the Spread. If the Board of Directors of the Company shall determine
in good faith that it is likely that sufficient additional shares of
Common Stock could be authorized for issuance upon exercise in full of
the Rights, the thirty (30) day period set forth above may be extended
to the extent necessary, but not more than ninety (90) days after the
Section 11(a)(ii) Trigger Date, in order that the Company may seek
shareholder approval for the authorization of such additional shares
(such period, as it may be extended, the "Substitution Period"). To
the extent that the Company determines that some action need be taken
pursuant to the first and/or second sentences of this Section
11(a)(iii), the Company (x) shall provide, subject to Section 7(e)
hereof, that such action shall apply uniformly to all outstanding
Rights, and (y) may suspend the exercisability of the Rights until the
expiration of the Substitution Period in order to seek any
authorization of additional shares and/or to decide the appropriate
form of distribution to be made pursuant to such first sentence and to
determine the value thereof. In the event of any such suspension, the
Company shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended, as well as
a public announcement at such time as the suspension is no longer in
effect. For purposes of this Section 11(a)(iii), the value of the
Common Stock shall be the current market price (as determined pursuant
to Section 11(d) hereof) per share of the Common Stock on the Section
11(a)(ii) Trigger Date and the value of any "common stock equivalent"
shall be deemed to have the same value as the Common Stock on such
date.
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(b) In case the Company shall fix a record date for the
issuance of rights, options or warrants to all holders of Preferred Stock
entitling them to subscribe for or purchase (for a period expiring within
forty-five (45) calendar days after such record date) Preferred Stock (or
shares having the same rights, privileges and preferences as the shares of
Preferred Stock ("equivalent preferred stock")) or securities convertible into
Preferred Stock or equivalent preferred stock at a price per share of Preferred
Stock or per share of equivalent preferred stock (or having a conversion price
per share, if a security convertible into Preferred Stock or equivalent
preferred stock) less than the current market price (as determined pursuant to
Section 11(d) hereof) per share of Preferred Stock on such record date, the
Purchase Price to be in effect after such record date shall be determined by
multiplying the Purchase Price in effect immediately prior to such record date
by a fraction, the numerator of which shall be the number of shares of
Preferred Stock outstanding on such record date, plus the number of shares of
Preferred Stock which the aggregate offering price of the total number of
shares of Preferred Stock and/or equivalent preferred stock so to be offered
(and/or the aggregate initial conversion price of the convertible securities so
to be offered) would purchase at such current market price, and the denominator
of which shall be the number of shares of Preferred Stock outstanding on such
record date, plus the number of additional shares of Preferred Stock and/or
equivalent preferred stock to be offered for subscription or purchase (or into
which the convertible securities so to be offered are initially convertible).
In case such subscription price may be paid by delivery of consideration part
or all of which may be in a form other than cash, the value of such
consideration shall be as determined in good faith by the Board of Directors of
the Company, whose determination shall be described in a statement filed with
the Rights Agent and shall be binding on the Rights Agent and the holders of
the Rights. Shares of Preferred Stock owned by or held for the account of the
Company shall not be deemed outstanding for the purpose of any such
computation. Such adjustment shall be made successively whenever such a record
date is fixed, and in the event that such rights or warrants are not so issued,
the Purchase Price shall be adjusted to be the Purchase Price which would then
be in effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for a
distribution to all holders of Preferred Stock (including any such distribution
made in connection with a consolidation or merger in which the Company is the
continuing corporation) of evidences of indebtedness, cash (other than a
regular quarterly cash dividend out of the earnings or retained earnings of the
Company), assets (other than a dividend payable in Preferred Stock, but
including any dividend payable in stock other than Preferred Stock) or
subscription rights or warrants (excluding those referred to in Section 11(b)
hereof), the Purchase Price to be in effect after such record date shall be
determined by multiplying the Purchase Price in effect immediately prior to
such record date by a fraction, the numerator of which shall be the current
market price (as determined pursuant to Section 11(d) hereof) per share of
Preferred Stock on such record date, less the fair market value (as determined
in good faith by the Board of Directors of the Company, whose determination
shall be described in a statement filed with the Rights Agent) of the portion
of the cash, assets or evidences of indebtedness so to be distributed or of
such subscription rights or warrants applicable to a share of Preferred Stock
and the denominator of which shall be such current market price (as determined
pursuant to Section 11(d) hereof) per share of Preferred Stock. Such
adjustments shall be made successively whenever such a record date is fixed,
and in the event that such distribution is not so made, the Purchase Price
shall be adjusted to be the Purchase Price which would have been in effect, if
such record date had not been fixed.
(d)(i) For the purpose of any computation hereunder, other
than computations made pursuant to Section 11(a)(iii) hereof, the
"current market price" per share of Common Stock on any date shall be
deemed to be the average of the daily closing prices per share of such
Common Stock for the thirty (30) consecutive Trading Days (as such
term is hereinafter defined) immediately prior to such date, and for
purposes of computations made pursuant to Section 11(a)(iii) hereof,
the "current market price" per share of Common Stock on any date shall
be deemed to be the average of the daily closing prices per share of
such Common Stock for the ten (10) consecutive Trading Days
immediately following such date; provided, however, that in the event
that the current market price per share of the Common Stock is
determined during a period following the announcement by the issuer of
such
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Common Stock of (A) a dividend or distribution on such Common Stock
payable in shares of such Common Stock or securities convertible into
shares of such Common Stock (other than the Rights), or (B) any
subdivision, combination or reclassification of such Common Stock, and
prior to the expiration of the requisite thirty (30) Trading Day or
ten (10) Trading Day period, as set forth above, after the ex-dividend
date for such dividend or distribution, or the record date for such
subdivision, combination or reclassification, then, and in each such
case, the "current market price" shall be properly adjusted to take
into account ex-dividend trading. The closing price for each day
shall be the last sale price, regular way, or, in case no such sale
takes place on such day, the average of the closing bid and asked
prices, regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the
shares of Common Stock are listed or admitted to trading or, if the
shares of Common Stock are not listed or admitted to trading on any
national securities exchange, the last quoted price or, if not so
quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by the National Association of
Securities Dealers, Inc. Automated Quotation System ("NASDAQ") or such
other system then in use, or, if on any such date the shares of Common
Stock are not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market
maker making a market in the Common Stock selected by the Board of
Directors of the Company. If on any such date no market maker is
making a market in the Common Stock, the fair value of such shares on
such date as determined in good faith by the Board of Directors of the
Company shall be used. The term "Trading Day" shall mean a day on
which the principal national securities exchange on which the shares
of Common Stock are listed or admitted to trading is open for the
transaction of business or, if the shares of Common Stock are not
listed or admitted to trading on any national securities exchange, a
Business Day. If the Common Stock is not publicly held or not so
listed or traded, "current market price" per share shall mean the fair
value per share as determined in good faith by the Board of Directors
of the Company, whose determination shall be described in a statement
filed with the Rights Agent and shall be conclusive for all purposes.
(ii) For the purpose of any computation hereunder, the
"current market price" per share of Preferred Stock shall be determined
in the same manner as set forth above for the Common Stock in clause
(i) of this Section 11(d) (other than the last sentence thereof). If
the current market price per share of Preferred Stock cannot be
determined in the manner provided above or if the Preferred Stock is
not publicly held or listed or traded in a manner described in clause
(i) of this Section 11(d), the "current market price" per share of
Preferred Stock shall be conclusively deemed to be an amount equal to
100 (as such number may be appropriately adjusted for such events as
stock splits, stock dividends and recapitalizations with respect to the
Common Stock occurring after the date of this Agreement) multiplied by
the current market price per share of the Common Stock. If neither the
Common Stock nor the Preferred Stock is publicly held or so listed or
traded, "current market price" per share of the Preferred Stock shall
mean the fair value per share as determined in good faith by the Board
of Directors of the Company, whose determination shall be described in
a statement filed with the Rights Agent and shall be conclusive for all
purposes. For all purposes of this Agreement, the "current market
price" of one one-hundredth of a share of Preferred Stock shall be
equal to the "current market price" of one share of Preferred Stock
divided by 100.
(e) Anything herein to the contrary notwithstanding, no
adjustment in the Purchase Price shall be required unless such adjustment would
require an increase or decrease of at least one percent (1%) in the Purchase
Price; provided, however, that any adjustments which by reason of this Section
11(e) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section 11
shall be made to the nearest cent or to the nearest ten-thousandth of a share
of Common Stock or other share or one-millionth of a share of Preferred Stock,
as the case may be. Notwithstanding the first sentence of this Section 11(e),
any adjustment required by this Section 11 shall be
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made no later than the earlier of (i) three (3) years from the date of the
transaction which mandates such adjustment, or (ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to
Section 11(a)(ii) or Section 13(a) hereof, the holder of any Right thereafter
exercised shall become entitled to receive any shares of capital stock other
than Preferred Stock, thereafter the number of such other shares so receivable
upon exercise of any Right and the Purchase Price thereof shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Preferred Stock contained in
Sections 11(a), (b), (c), (e), (g), (h), (i), (j), (k) and (m), and the
provisions of Sections 7, 9, 10, 13 and 14 hereof with respect to the Preferred
Stock shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company
subsequent to any adjustment made to the Purchase Price hereunder shall
evidence the right to purchase, at the adjusted Purchase Price, the number of
one one-hundredths of a share of Preferred Stock purchasable from time to time
hereunder upon exercise of the Rights, all subject to further adjustment as
provided herein.
(h) Unless the Company shall have exercised its election
as provided in Section 11(i), upon each adjustment of the Purchase Price as a
result of the calculations made in Sections 11(b) and (c), each Right
outstanding immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the adjusted Purchase Price, that number of
one one- hundredths of a share of Preferred Stock (calculated to the nearest
one-millionth) obtained by (i) multiplying (x) the number of one one-hundredths
of a share covered by a Right immediately prior to this adjustment, by (y) the
Purchase Price in effect immediately prior to such adjustment of the Purchase
Price, and (ii) dividing the product so obtained by the Purchase Price in
effect immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any
adjustment of the Purchase Price to adjust the number of Rights, in lieu of any
adjustment in the number of one one-hundredths of a share of Preferred Stock
purchasable upon the exercise of a Right. Each of the Rights outstanding after
the adjustment in the number of Rights shall be exercisable for the number of
one one-hundredths of a share of Preferred Stock for which a Right was
exercisable immediately prior to such adjustment. Each Right held of record
prior to such adjustment of the number of Rights shall become that number of
Rights (calculated to the nearest one- ten-thousandth) obtained by dividing the
Purchase Price in effect immediately prior to adjustment of the Purchase Price
by the Purchase Price in effect immediately after adjustment of the Purchase
Price. The Company shall make a public announcement of its election to adjust
the number of Rights, indicating the record date for the adjustment, and, if
known at the time, the amount of the adjustment to be made. This record date
may be the date on which the Purchase Price is adjusted or any day thereafter,
but, if the Rights Certificates have been issued, shall be at least ten (10)
days later than the date of the public announcement. If Rights Certificates
have been issued, upon each adjustment of the number of Rights pursuant to this
Section 11(i), the Company shall, as promptly as practicable, cause to be
distributed to holders of record of Rights Certificates on such record date
Rights Certificates evidencing, subject to Section 14 hereof, the additional
Rights to which such holders shall be entitled as a result of such adjustment,
or, at the option of the Company, shall cause to be distributed to such holders
of record in substitution and replacement for the Rights Certificates held by
such holders prior to the date of adjustment, and upon surrender thereof, if
required by the Company, new Rights Certificates evidencing all the Rights to
which such holders shall be entitled after such adjustment. Rights
Certificates so to be distributed shall be issued, executed and countersigned
in the manner provided for herein (and may bear, at the option of the Company,
the adjusted Purchase Price) and shall be registered in the names of the
holders of record of Rights Certificates on the record date specified in the
public announcement.
(j) Irrespective of any adjustment or change in the
Purchase Price or the number of one one-hundredths of a share of Preferred
Stock issuable upon the exercise of the Rights, the Rights Certificates
theretofore and thereafter issued may continue to express the Purchase Price
per one one-hundredth of a share
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and the number of one one-hundredths of a share which were expressed in the
initial Rights Certificates issued hereunder.
(k) Before taking any action that would cause an
adjustment reducing the Purchase Price below the then stated value, if any, of
the number of one one-hundredths of a share of Preferred Stock issuable upon
exercise of the Rights, the Company shall take any corporate action which may,
in the opinion of its counsel, be necessary in order that the Company may
validly and legally issue fully paid and nonassessable such number of one
one-hundredths of a share of Preferred Stock at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require
that an adjustment in the Purchase Price be made effective as of a record date
for a specified event, the Company may elect to defer until the occurrence of
such event the issuance to the holder of any Right exercised after such record
date the number of one one-hundredths of a share of Preferred Stock and other
capital stock or securities of the Company, if any, issuable upon such exercise
over and above the number of one one-hundredths of a share of Preferred Stock
and other capital stock or securities of the Company, if any, issuable upon
such exercise on the basis of the Purchase Price in effect prior to such
adjustment; provided, however, that the Company shall deliver to such holder a
due bill or other appropriate instrument evidencing such holder's right to
receive such additional shares (fractional or otherwise) or securities upon the
occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary
notwithstanding, the Company shall be entitled to make such reductions in the
Purchase Price, in addition to those adjustments expressly required by this
Section 11, as and to the extent that in their good faith judgment the Board of
Directors of the Company shall determine to be advisable in order that any (i)
consolidation or subdivision of the Preferred Stock, (ii) issuance wholly for
cash of any shares of Preferred Stock at less than the current market price,
(iii) issuance wholly for cash of shares of Preferred Stock or securities which
by their terms are convertible into or exchangeable for shares of Preferred
Stock, (iv) stock dividends or (v) issuance of rights, options or warrants
referred to in this Section 11, hereafter made by the Company to holders of its
Preferred Stock shall not be taxable to such stockholders.
(n) The Company covenants and agrees that it shall not,
at any time after the Distribution Date, (i) consolidate with any other Person
(other than a Subsidiary of the Company in a transaction which complies with
Section 11(o) hereof), (ii) merge with or into any other Person (other than a
Subsidiary of the Company in a transaction which complies with Section 11(o)
hereof), or (iii) sell or transfer (or permit any Subsidiary to sell or
transfer), in one transaction, or a series of related transactions, assets or
earning power aggregating more than 50% of the assets or earning power of the
Company and its Subsidiaries (taken as a whole) to any other Person or Persons
(other than the Company and/or any of its Subsidiaries in one or more
transactions each of which complies with Section 11(o) hereof), if (x) at the
time of or immediately after such consolidation, merger or sale there are any
rights, warrants or other instruments or securities outstanding or agreements
in effect which would substantially diminish or otherwise eliminate the
benefits intended to be afforded by the Rights or (y) prior to, simultaneously
with or immediately after such consolidation, merger or sale, the shareholders
of the Person who constitutes, or would constitute, the "Principal Party" for
purposes of Section 13(a) hereof shall have received a distribution of Rights
previously owned by such Person or any of its Affiliates and Associates.
(o) The Company covenants and agrees that, after the
Distribution Date, it will not, except as permitted by Section 23 or Section 26
hereof, take (or permit any Subsidiary to take) any action if at the time such
action is taken it is reasonably foreseeable that such action will diminish
substantially or otherwise eliminate the benefits intended to be afforded by
the Rights.
(p) Anything in this Agreement to the contrary
notwithstanding, in the event that the Company shall at any time after the
Rights Dividend Declaration Date and prior to the Distribution Date
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(i) declare a dividend on the outstanding shares of Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding shares of Common Stock,
or (iii) combine the outstanding shares of Common Stock into a smaller number
of shares, the number of Rights associates with each share of Common Stock then
outstanding, or issued or delivered thereafter but prior to the Distribution
Date, shall be proportionately adjusted so that the number of Rights thereafter
associated with each share of Common Stock following any such event shall equal
the result obtained by multiplying the number of Rights associated with each
share of Common Stock immediately prior to such event by a fraction of the
numerator which shall be the total number of shares of Common Stock outstanding
immediately prior to the occurrence of the event and the denominator of which
shall be the total number of shares of Common Stock outstanding immediately
following the occurrence of such event.
Section 12. Certificate of Adjusted Purchase Price or Number of
Shares. Whenever an adjustment is made as provided in Section 11 and Section
13 hereof, the Company shall (a) promptly prepare a certificate setting forth
such adjustment and a brief statement of the facts accounting for such
adjustment, (b) promptly file with the Rights Agent, and with each transfer
agent for the Preferred Stock and the Common Stock, a copy of such certificate,
and (c) mail a brief summary thereof to each holder of a Rights Certificate
(or, if prior to the Distribution Date, to each holder of a certificate
representing shares of Common Stock) in accordance with Section 25 hereof. The
Rights Agent shall be fully protected in relying on any such certificate and on
any adjustment therein contained.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power.
(a) In the event that, following the Stock Acquisition
Date, directly or indirectly, (x) the Company shall consolidate with, or merge
with and into, any other Person (other than a Subsidiary of the Company in a
transaction which complies with Section 11(o) hereof), and the Company shall
not be the continuing or surviving corporation of such consolidation or merger,
(y) any Person (other than a Subsidiary of the Company in a transaction which
complies with Section 11(o) hereof) shall consolidate with, or merge with or
into, the Company, and the Company shall be the continuing or surviving
corporation of such consolidation or merger and, in connection with such
consolidation or merger, all or part of the outstanding shares of Common Stock
shall be changed into or exchanged for stock or other securities of any other
Person or cash or any other property, or (z) the Company shall sell or
otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise
transfer), in one transaction or a series of related transactions, assets or
earning power aggregating 50% or more of the assets or earning power of the
Company and its Subsidiaries (taken as a whole) to any Person or Persons (other
than the Company or any Subsidiary of the Company in one or more transactions
each of which complies with Section 11(o) hereof), then, and in each such case,
proper provision shall be made so that: (i) each holder of a Right, except as
provided in Section 7(e) hereof, shall thereafter have the right to receive,
upon the exercise thereof at the then current Purchase Price in accordance with
the terms of this Agreement, such number of validly authorized and issued,
fully paid, non-assessable and freely tradeable shares of Common Stock of the
Principal Party (as such term is hereinafter defined), not subject to any
liens, encumbrances, rights of first refusal or other adverse claims, as shall
be equal to the result obtained by (1) multiplying the then current Purchase
Price by the number of one one-hundredths of a share of Preferred Stock for
which a Right is exercisable immediately prior to the first occurrence of a
Section 13 Event (or, if a Section 11(a)(ii) Event has occurred prior to the
first occurrence of a Section 13 Event, multiplying the number of such one
one-hundredths of a shares for which a Right was exercisable immediately prior
to the first occurrence of a Section 11(a)(ii) Event by the Purchase Price in
effect immediately prior to such first occurrence), and dividing that product
(which, following the first occurrence of a Section 13 Event, shall be referred
to as the "Purchase Price" for each Right and for all purposes of this
Agreement) by (2) 50% of the current market price (determined pursuant to
Section 11(d)(i) hereof) per share of the Common Stock of such Principal Party
on the date on consummation of such Section 13 Event; (ii) such Principal Party
shall thereafter be liable for, and shall assume, by virtue of such Section 13
Event, all the obligations and duties of the Company pursuant to this
Agreement; (iii) the term "Company" shall thereafter be deemed to refer to such
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Principal Party, it being specifically intended that the provisions of Section
11 hereof shall apply only to such Principal Party following the first
occurrence of a Section 13 Event; (iv) such Principal Party shall take such
steps (including, but not limited to, the reservation of a sufficient number of
shares of its Common Stock) in connection with the consummation of any such
transaction as may be necessary to assure that the provisions hereof shall
thereafter be applicable, as nearly as reasonably may be, in relation to its
shares of Common Stock thereafter deliverable upon the exercise of the Rights;
and (v) the provisions of Section 11(a)(ii) hereof shall be of no effect
following the first occurrence of any Section 13 Event.
(b) "Principal Party" shall mean
(i) in the case of any transaction described in
clause (x) or (y) of the first sentence of Section 13(a), the Person
that is the issuer of any securities into which shares of Common Stock
of the Company are converted in such merger or consolidation, and if
no securities are so issued, the Person that is the other party to
such merger or consolidation; and
(ii) in the case of any transaction described in
clause (z) of the first sentence of Section 13(a), the Person that is
the party receiving the greatest portion of the assets or earning
power transferred pursuant to such transaction or transactions;
provided, however, that in any such case, (1) if the Common Stock of such
Person is not at such time and has not been continuously over the preceding
twelve (12) month period registered under Section 12 of the Exchange Act, and
such Person is a direct or indirect Subsidiary of another Person the Common
Stock of which is and has been so registered, "Principal Party" shall refer to
such other Person; and (2) in case such Person is a Subsidiary, directly or
indirectly, of more than one Person, the Common Stocks of two or more of which
are and have been so registered, "Principal Party" shall refer to whichever of
such Persons is the issuer of the Common Stock having the greatest aggregate
market value.
(c) The Company shall not consummate any such
consolidation, merger, sale or transfer unless the Principal Party shall have a
sufficient number of authorized shares of its Common Stock which have not been
issued or reserved for issuance to permit the exercise in full of the Rights in
accordance with this Section 13 and unless prior thereto the Company and such
Principal Party shall have executed and delivered to the Rights Agent a
supplemental agreement providing for the terms set forth in paragraphs (a) and
(b) of this Section 13 and further providing that, as soon as practicable after
the date of any consolidation, merger or sale of assets mentioned in paragraph
(a) of this Section 13, the Principal Party will
(i) prepare and file a registration statement
under the Act, with respect to the Rights and the securities
purchasable upon exercise of the Rights on an appropriate form, and
will use its best efforts to cause such registration statement to (A)
become effective as soon as practicable after such filing and (B)
remain effective (with a prospectus at all times meeting the
requirements of the Act) until the Expiration Date; and
(ii) will deliver to holders of the Rights
historical financial statements for the Principal Party and each of
its Affiliates which comply in all respects with the requirements for
registration on Form 10 under the Exchange Act.
The provisions of this Section 13 shall similarly apply to successive mergers
or consolidations or sales or other transfers. In the event that a Section 13
Event shall occur at any time after the occurrence of a Section 11(a)(ii)
Event, the Rights which have not theretofore been exercised shall thereafter
become exercisable in the manner described in Section 13(a).
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(d) Notwithstanding anything in this Agreement to the
contrary, Section 13 shall not be applicable to a transaction described in
subparagraphs (x) and (y) of Section 13(a) if (i) such transaction is
consummated with a Person or Persons who acquired shares of Common Stock
pursuant to a tender offer or exchange offer for all outstanding shares of
Common Stock which complies with the provisions of Section 11(a)(ii)(A) hereof
(or a wholly owned subsidiary of any such Person or Persons), (ii) the price
per share of Common Stock offered in such transaction is not less than the
price per share of Common Stock paid to all holders of shares of Common Stock
whose shares were purchased pursuant to such tender offer or exchange offer,
and (iii) the form of consideration being offered to the remaining holders of
shares of Common Stock pursuant to such transaction is the same as the form of
consideration paid pursuant to such tender offer or exchange offer. Upon
consummation of any such transaction contemplated by this Section 13(d), all
Rights hereunder shall expire.
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions
of Rights, except prior to the Distribution Date as provided in Section 11(p)
hereof, or to distribute Rights Certificates which evidence fractional Rights.
In lieu of such fractional Rights, there shall be paid to the registered
holders of the Rights Certificates with regard to which such fractional Rights
would otherwise be issuable, an amount in cash equal to the same fraction of
the current market value of a whole Right. For purposes of this Section 14(a),
the current market value of a whole Right shall be the closing price of the
Rights for the Trading Day immediately prior to the date on which such
fractional Rights would have been otherwise issuable. The closing price of the
Rights for any day shall be the last sale price, regular way, or, in case no
such sale takes place on such day, the average of the closing bid and asked
prices, regular way, in either case as reported on the principal consolidated
transaction reporting system with respect to securities listed on the principal
national securities exchange on which the Rights are listed or admitted to
trading, or if the Rights are not listed or admitted to trading on any national
securities exchange, the last quoted price or, if not so quoted, the average of
the high bid and low asked prices in the over-the-counter market, as reported
by NASDAQ or such other system then in use or, if on any such date the Rights
are not quoted by any such organization, the average of the closing bid and
asked prices as furnished by a professional market maker making a market in the
Rights selected by the Board of Directors of the Company. If on any such date
no such market maker is making a market in the Rights the fair value of the
Rights on such date as determined in good faith by the Board of Directors of
the Company shall be used.
(b) The Company shall not be required to issue fractions
of shares of Preferred Stock (other than fractions which are integral multiples
of one one-hundredth of a share of Preferred Stock) upon exercise of the Rights
or to distribute certificates which evidence fractional shares of Preferred
Stock (other than fractions which are integral multiples of one one- hundredth
of a share of Preferred Stock). In lieu of fractional shares of Preferred
Stock that are not integral multiples of one one-hundredth of a share of
Preferred Stock, the Company may pay to the registered holders of Rights
Certificates at the time such Rights are exercised as herein provided an amount
in cash equal to the same fraction of the current market value of one one-
hundredth of a share of Preferred Stock. For purposes of this Section 14(b),
the current market value of one one-hundredth of a share of Preferred Stock (as
determined pursuant to Section 11(d)(ii) hereof) for the Trading Day
immediately prior to the date of such exercise.
(c) Following the occurrence of a Triggering Event, the
Company shall not be required to issue fractions of shares of Common Stock upon
exercise of the Rights or to distribute certificates which evidence fractional
shares of Common Stock. In lieu of fractional shares of Common Stock, the
Company may pay to the registered holders of Rights Certificates at the time
such Rights are exercised as herein provided an amount in cash equal to the
same fraction of the current market value of one (1) share of Common Stock.
For purposes of this Section 14(c), the current market value of one share of
Common Stock shall be the closing
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price of one share of Common Stock (as determined pursuant to Section 11(d)(i)
hereof) for the Trading Day immediately prior to the date of such exercise.
(d) The holder of a Right by the acceptance of the Rights
expressly waives his right to receive any fractional Rights or any fractional
shares upon exercise of a Right, except as permitted by this Section 14.
Section 15. Rights of Action. All rights of action in respect of
this Agreement are vested in the respective registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of
the Common Stock); and any registered holder of any Rights Certificate (or,
prior to the Distribution Date, of the Common Stock), without the consent of
the Rights Agent or of the holder of any other Rights Certificate (or, prior to
the Distribution Date, of the Common Stock), may, in the holder's own behalf
and for the holder's own benefit, enforce, and may institute and maintain any
suit, action or proceeding against the Company to enforce, or otherwise act in
respect of, the holder's right to exercise the Rights evidenced by such Rights
Certificate in the manner provided in such Rights Certificate and in this
Agreement. Without limiting the foregoing or any remedies available to the
holders of Rights, it is specifically acknowledged that the holders of Rights
would not have an adequate remedy at law for any breach of this Agreement and
shall be entitled to specific performance of the obligations hereunder and
injunctive relief against actual or threatened violations of the obligations
hereunder of any Person subject to this Agreement.
Section 16. Agreement of Rights Holders. Every holder of a Right by
accepting the same consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of Common Stock;
(b) after the Distribution Date, the Rights Certificates
are transferable only on the registry books of the Rights Agent if surrendered
at the principal office or offices of the Rights Agent designated for such
purposes, duly endorsed or accompanied by a proper instrument of transfer and
with the appropriate forms and certificates fully executed;
(c) subject to Section 6(a) and Section 7(f) hereof, the
Company and the Rights Agent may deem and treat the person in whose name a
Rights Certificate (or, prior to the Distribution Date, the associated Common
Stock certificate) is registered as the absolute owner thereof and of the
Rights evidenced thereby (notwithstanding any notations of ownership or writing
on the Rights Certificates or the associated Common Stock certificate made by
anyone other than the Company or the Rights Agent) for all purposes whatsoever,
and neither the Company nor the Rights Agent, subject to the last sentence of
Section 7(e) hereof, shall be required to be affected by any notice to the
contrary; and
(d) notwithstanding anything in this Agreement to the
contrary, neither the Company nor the Rights Agent shall have any liability to
any holder of a Right or other person as a result of its inability to perform
any of its obligations under this Agreement by reason of any preliminary or
permanent injunction or other order, decree or ruling issued by a court of
competent jurisdiction or by a governmental, regulatory or administrative
agency or commission, or any statute, rule, regulation or executive order
promulgated or enacted by any governmental authority, prohibiting or otherwise
restraining performance of such obligation; provided, however, the Company must
use its best efforts to have any such order, decree or ruling lifted or
otherwise overturned as soon as possible.
Section 17. Rights Certificate Holder Not Deemed a Stockholder. No
holder, as such, of any Rights Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the number of one
one-hundredths of a share of Preferred Stock or any other securities of the
Company which may at any time
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be issuable on the exercise of the Rights represented thereby, nor shall
anything contained herein or in any Rights Certificate be construed to confer
upon the holder of any Rights Certificate, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors
or upon any matter submitted to stockholders at any meeting thereof, or to give
or withhold consent to any corporate action, or to receive notice of meetings
or other actions affecting stockholders (except as provided in Section 24
hereof), or to receive dividends or subscription rights, or otherwise, until
the Right or Rights evidenced by such Rights Certificate shall have been
exercised in accordance with the provisions hereof.
Section 18. Concerning the Rights Agent.
(a) The Company agrees to pay to the Rights Agent
reasonable compensation for all services rendered by it hereunder and, from
time to time, on demand of the Rights Agent, its reasonable expenses and
counsel fees and disbursements and other disbursements incurred in the
administration and execution of this Agreement and the exercise and performance
of its duties hereunder. The Company also agrees to indemnify the Rights Agent
for, and to hold it harmless against, any loss, liability, or expense, incurred
without negligence, bad faith or willful misconduct on the part of the Rights
Agent, for anything done or omitted by the Rights Agent in connection with the
acceptance and administration of this Agreement, including the costs and
expenses of defending against any claim of liability in the premises.
(b) The Rights Agent shall be protected and shall incur
no liability for or in respect of any action taken, suffered or omitted by it
in connection with its administration of this Agreement in reliance upon any
Rights Certificate or certificate for Common Stock or for other securities of
the Company, instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice, direction, consent, certificate,
statement, or other paper or document believed by it to be genuine and to be
signed, executed and, where necessary, verified or acknowledged, by the proper
Person or Persons.
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
(a) Any corporation into which the Rights Agent or any
successor Rights Agent may be merged or with which it may be consolidated, or
any corporation resulting from any merger or consolidation to which the Rights
Agent or any successor Rights Agent shall be a party, or any corporation
succeeding to the corporate trust or stock transfer business of the Rights
Agent or any successor Rights Agent, shall be the successor to the Rights Agent
under this Agreement without the execution or filing of any paper or any
further act on the part of any of the parties hereto; provided, however, that
such corporation would be eligible for appointment as a successor Rights Agent
under the provisions of Section 21 hereof. In case at the time such successor
Rights Agent shall succeed to the agency created by this Agreement, any of the
Rights Certificates shall have been countersigned but not delivered, any such
successor Rights Agent may adopt the countersignature of a predecessor Rights
Agent and deliver such Rights Certificates so countersigned; and in case at
that time any of the Rights Certificates shall not have been countersigned, any
successor Rights Agent may countersign such Rights Certificates either in the
name of the predecessor or in the name of the successor Rights Agent; and in
all such cases such Rights Certificates shall have the full force provided in
the Rights Certificates and in this Agreement.
(b) In case at any time the name of the Rights Agent
shall be changed and at such time any of the Rights Certificates shall have
been countersigned but not delivered, the Rights Agent may adopt the
countersignature under its prior name and deliver Rights Certificates so
countersigned; and in case at that time any of the Rights Certificates shall
not have been countersigned, the Rights Agent may countersign such Rights
Certificates either in its prior name or in its changed name; and in all such
cases such Rights Certificates shall have the full force provided in the Rights
Certificates and in this Agreement.
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Section 20. Duties of Rights Agent. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Rights Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who
may be legal counsel for the Company), and the opinion of such counsel shall be
full and complete authorization and protection to the Rights Agent as to any
action taken or omitted by it in good faith and in accordance with such
opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that any fact
or matter (including, without limitation, the identity of any Acquiring Person
and the determination of "current market price") be proved or established by
the Company prior to taking or suffering any action hereunder, such fact or
matter (unless other evidence in respect thereof be herein specifically
prescribed) may be deemed to be conclusively proved and established by a
certificate signed by the Chairman of the Board, the President, any Vice
President, the Treasurer, any Assistant Treasurer, the Secretary or any
Assistant Secretary of the Company and delivered to the Rights Agent; and such
certificate shall be full authorization to the Rights Agent for any action
taken or suffered in good faith by it under the provisions of this Agreement in
reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for
its own negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason
of any of the statements of fact or recitals contained in this Agreement or in
the Rights Certificates or be required to verify the same (except as to its
countersignature on such Rights Certificates), but all such statements and
recitals are and shall be deemed to have been made by the Company only.
(e) The Rights Agent shall not be under any
responsibility in respect of the validity of this Agreement or the execution
and delivery hereof (except the due execution hereof by the Rights Agent) or in
respect of the validity or execution of any Rights Certificate (except its
countersignature thereof); nor shall it be responsible for any breach by the
Company of any covenant or condition contained in this Agreement or in any
Rights Certificate; nor shall it be responsible for any adjustment required
under the provisions of Section 11 or Section 13 hereof or responsible for the
manner, method or amount of any such adjustment or the ascertaining of the
existence of facts that would require any such adjustment (except with respect
to the exercise of Rights evidenced by Rights Certificates after actual notice
of any such adjustment); nor shall it by any act hereunder be deemed to make
any representation or warranty as to the authorization or reservation of any
shares of Common Stock or Preferred Stock to be issued pursuant to this
Agreement or any Rights Certificate or as to whether any shares of Common Stock
or Preferred Stock will, when so issued, be validly authorized and issued,
fully paid and nonassessable.
(f) The Company agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as may
reasonably be required by the Rights Agent for the carrying out or performing
by the Rights Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties hereunder
from the Chairman of the Board, the President, any Vice President, the
Secretary, any Assistant Secretary, the Treasurer or any Assistant Treasurer of
the Company, and to apply to such officers for advice or instructions in
connection with its duties, and it shall not be liable for any action taken or
suffered to be taken by it in good faith in accordance with instructions of any
such officer.
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(h) The Rights Agent and any stockholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall preclude the Rights Agent from acting
in any other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights
or powers hereby vested in it or perform any duty hereunder either itself or by
or through its attorneys or agents, and the Rights Agent shall not be answerable
or accountable for any act, default, neglect or misconduct of any such attorneys
or agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct; provided, however, reasonable care was exercised in the
selection and continued employment thereof.
(j) No provision of this Agreement shall require the Rights
Agent to expend or risk its own funds or otherwise incur any financial liability
in the performance of any of its duties hereunder or in the exercise of its
rights if there shall be reasonable grounds for believing that repayment of such
funds or adequate indemnification against such risk or liability is not
reasonably assured to it.
(k) If, with respect to any Right Certificate surrendered to
the Rights Agent for exercise or transfer, the certificate attached to the form
of assignment or form of election to purchase, as the case may be, has either
not been completed or indicates an affirmative response to clause 1 and/or 2
thereof, the Rights Agent shall not take any further action with respect to such
requested exercise of transfer without first consulting with the Company.
Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign or be discharged from its duties under this Agreement
upon thirty (30) days' notice in writing mailed to the Company, and to each
transfer agent of the Common Stock and Preferred Stock, by registered or
certified mail, and to the holders of the Rights Certificates by first-class
mail. The Company may remove the Rights Agent or any successor Rights Agent upon
thirty (30) days' notice in writing, mailed to the Rights Agent or successor
Rights Agent, as the case may be, and to each transfer agent of the Common Stock
and Preferred Stock, by registered or certified mail, and to the holders of the
Rights Certificates by first-class mail. If the Rights Agent shall resign or be
removed or shall otherwise become incapable of acting, the Company shall appoint
a successor to the Rights Agent. If the Company shall fail to make such
appointment within a period of thirty (30) days after giving notice of such
removal or after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Rights Agent or by the holders of a
Rights Certificate (who shall, with such notice, submit his Rights Certificate
for inspection by the Company), then any registered holder of any Rights
Certificatemay apply to any court of competent jurisdiction for the appointment
of a new Rights Agent. Any successor Rights Agent, whether appointed by the
Company or by such a court, shall be (a) a corporation organized and doing
business under the laws of the United States or of the State of California (or
of any other state of the United States so long as such corporation is
authorized to do business as a banking institution in the State of California in
good standing, having a principal office in the State of California, which is
authorized under such laws to exercise stock transfer powers and is subject to
supervision or examination by federal or state authority and which has at the
time of its appointment as Rights Agent a combined capital and surplus of at
least $100,000,000 or (b) an affiliate of a corporation described in clause (a)
of this sentence. After appointment, the successor Rights Agent shall be vested
with the same powers, rights, duties and responsibilities as if it had been
originally named as Rights Agent without further act or deed; but the
predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Not later
than the effective date of any such appointment, the Company shall file notice
thereof in writing with the predecessor Rights Agent and each transfer agent of
the Common Stock and the Preferred Stock, and mail a notice thereof in writing
to the registered holders of the Rights Certificates. Failure to give
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any notice provided for in this Section 21, however, or any defect therein,
shall not affect the legality or validity of the resignation or removal of the
Rights Agent or the appointment of the successor Rights Agent, as the case may
be.
Section 22. Issuance of New Rights Certificates. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Rights Certificates evidencing Rights in such form
as may be approved by its Board of Directors to reflect any adjustment or change
in the purchase Price and the number or kind or class of shares or other
securities or property purchasable under the Rights Certificates made in
accordance with the provisions of this Agreement. In addition, in connection
with the issuance or sale of shares of Common Stock following the Distribution
Date and prior to the redemption or expiration of the Rights, the Company (a)
shall, with respect to shares of Common Stock so issued or sold pursuant to the
exercise of stock options or under any employee plan or arrangement, or upon the
exercise, conversion or exchange of securities hereinafter issued by the
Company, and (b) may, in any other case, if deemed necessary or appropriate by
the Board of Directors of the Company, issue Rights Certificates representing
the appropriate number of Rights in connection with such issuance or sale;
provided, however, that (i) no such Rights Certificate shall be issued if, and
to the extent that, the Company shall be advised by counsel that such issuance
would create a significant risk of material adverse tax consequences to the
Company or the Person to whom such Rights Certificate would be issued, and (ii)
no such Rights Certificate shall be issued if, and to the extent that,
appropriate adjustment shall otherwise have been made in lieu of the issuance
thereof.
Section 23. Redemption and Termination.
(a) The Board of Directors of the Company may, at its
option, at any time prior to the earlier of (i) the close of business on the
tenth day following the Stock Acquisition Date (or, if the Stock Acquisition
Date shall have occurred prior to the Record Date, the close of business on the
tenth day following the Record Date), or (ii) the Final Expiration Date, redeem
all but not less than all the then outstanding Rights at a redemption price of
$.05 per Right, as such amount may be appropriately adjusted to reflect any
stock split, stock dividend or similar transaction occurring after the date
hereof (such redemption price being hereinafter referred to as the "Redemption
Price"); provided, however, that if, following the occurrence of a Stock
Acquisition Date and following the expiration of the right of redemption
hereunder but prior to any Triggering Event, (i) a Person who is an Acquiring
Person shall have transferred or otherwise disposed of a number of shares of
Common Stock in one transaction or series of transactions, not directly or
indirectly involving the Company or any of its Subsidiaries, which did not
result in the occurrence of a Triggering Event such that such Person is
thereafter a Beneficial Owner of 10% or less of the outstanding shares of Common
Stock, and (ii) there are no other Persons, immediately following the occurrence
of the event described in clause (i), who are Acquiring Persons, then the right
of redemption shall be reinstated and thereafter be subject to the provisions of
this Section 23. Notwithstanding anything contained in this Agreement to the
contrary, the Rights shall not be exercisable after the first occurrence of a
Section 11(a)(ii) Event until such time as the Company's right of redemption
hereunder has expired. The Company may, at its option, pay the Redemption Price
in cash, shares of Common Stock (based on the "current market price", as defined
in Section 11(d)(i) hereof, of the Common Stock at the time of redemption) or
any other form of consideration deemed appropriate by the Board of Directors.
(b) Immediately upon the action of the Board of Directors
of the Company ordering the redemption of the Rights, evidence of which shall
have been filed with the Rights Agent and without any further action and without
any notice, the right to exercise the Rights will terminate and the only right
thereafter of the holders of Rights shall be to receive the Redemption Price for
each Right so held. Promptly after the action of the Board of Directors ordering
the redemption of the Rights, the Company shall give notice of such redemption
to the Rights Agent and the holders of the then outstanding Rights by mailing
such notice to all such holders at each holder's last address as it appears upon
the registry books of the Rights Agent or, prior to the Distribution
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Date, on the registry books of the Transfer Agent for the Common Stock. Any
notice which is mailed in the manner herein provided shall be deemed given,
whether or not the holder receives the notice. Each such notice of redemption
will state the method by which the payment of the Redemption Price will be made.
Section 24. Notice of Certain Events.
(a) In case the Company shall propose, at any time after
the Distribution Date, (i) to pay any dividend payable in stock of any class to
the holders of Preferred Stock or to make any other distribution to the holders
of Preferred Stock (other than a regular quarterly cash dividend out of earnings
or retained earnings of the Company), or (ii) to offer to the holders of
Preferred Stock rights or warrants to subscribe for or to purchase any
additional shares of Preferred Stock or shares of stock of any class or any
other securities, rights or options, or (iii) to effect any consolidation or
merger into or with any other Person (other than a Subsidiary of the Company in
a transaction which complies with Section 11(o) hereof), or to effect any sale
or other transfer (or to permit one or more of its Subsidiaries to effect any
sale or other transfer), in one transaction or a series of related transaction,
of 50% or more of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any other Person or Persons (other than the
Company and/or any of its Subsidiaries in one or more transactions each of which
complies with Section 11(o) hereof), or (v) to effect the liquidation,
dissolution or winding up of the Company, then, in each such case, the Company
shall give to each holder of a Rights Certificate, to the extent feasible and in
accordance with Section 25 hereof, a notice of such proposed action, which shall
specify the record date for the purposes of such stock dividend, distribution of
rights or warrants, or the date on which such reclassification, consolidation,
merger, sale, transfer, liquidation, dissolution, or winding up is to take place
and the date of participation therein by the holders of the shares of Preferred
Stock, if any such date is to be fixed, and such notice shall be so given in the
case of any action covered by clause (i) or (ii) above at least twenty (20) days
prior to the record date for determining holders of the shares of Preferred
Stock for purposes of such action, and in the case of any such other action, at
least twenty (20) days prior to the date of the taking of such proposed action
or the date of participation therein by the holders of the shares of Preferred
Stock whichever shall be the earlier.
(b) In case any of the events set forth in Section
11(a)(ii) hereof shall occur, then, in any such case, (i) the Company shall as
soon as practicable thereafter give to each holder of a Rights Certificate, to
the extent feasible and in accordance with Section 25 hereof, a notice of the
occurrence of such event, which shall specify the event and the consequences of
the event to holders of Rights under Section 11(a)(ii) hereof, and (ii) all
references in the preceding paragraph to Preferred Stock shall be deemed
thereafter to refer to Common Stock and/or, if appropriate, other securities.
Section 25. Notices. Notices or demands authorized by this Agreement to
be given or made by the Rights Agent or by the holder of any Rights Certificate
to or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:
First Commercial Bancorp, Inc.
2450 Venture Oaks Way
Sacramento, California 95833
Subject to the provisions of Section 21, any notice of demand authorized by this
Agreement to be given or made by the Company or by the holder of any Rights
Certificate to or on the Rights Agent shall be sufficiently given
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or made if sent by first-class mail, postage prepaid, addressed (until another
address is filed in writing with the Company) as follows:
Bank of America, N.T. & S.A.
55 Hawthorne Street
Eighth Floor
Attention: Equity Administration #9527
San Francisco, California 94105
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate (or, if
prior to the Distribution Date, to the holder of certificates representing
shares of Common Stock) shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed to such holder at the address of
such holder as shown on the registry books of the Company.
Section 26. Supplements and Amendments. Prior to the Distribution Date
and subject to the penultimate sentence of this Section 26, the Company and the
Rights Agent shall, if the Company so directs, supplement or amend any
provisions of this Agreement without the approval of any holders of certificates
representing shares of Common Stock. From and after the Distribution Date and
subject to the penultimate sentence of this Section 26, the Company and the
Rights Agent shall, if the Company so directs, supplement or amend this
Agreement without the approval of any holders of Rights Certificates in order to
(i) to cure any ambiguity, (ii) to correct or supplement any provision contained
herein which may be defective or inconsistent with any other provisions herein,
(iii) to shorten or lengthen any time period hereunder, or (iv) to change or
supplement the provisions hereunder in any manner which the Company may deem
necessary or desirable and which shall not adversely affect the interests of the
holders of Rights Certificates (other than an Acquiring Person or an Affiliate
or Associate of an Acquiring Person); provided, this Agreement may not be
supplemented or amended to lengthen, pursuant to clause (iii) of this sentence,
(A) a time period relating to when the Rights may be redeemed at such time as
the Rights are not then redeemable, or (B) any other time period unless such
lengthening is for the purpose of protecting, enhancing or clarifying the rights
of, and/or the benefits to, the holders of Rights. Upon the delivery of a
certificate from an appropriate officer of the Company which states that the
proposed supplement or amendment is in compliance with the terms of this Section
26, the Rights Agent shall execute such supplement or amendment. Notwithstanding
anything contained in this Agreement to the contrary, no supplement or amendment
shall be made which changes the Redemption Price, the Final Expiration Date, the
Purchase Price or the number of one one-hundredths of a share of Preferred Stock
for which a Right is exercisable. Prior to the Distribution Date, the interests
of the holders of Rights shall be deemed coincident with the interests of the
holders of Common Stock.
Section 27. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 28. Determinations and Actions by the Board of Directors, etc.
For all purposes of this Agreement, any calculation of the number of shares of
Common Stock outstanding at any particular time, including for purposes of
determining the particular percentage of such outstanding shares of Common Stock
of which any Person is the Beneficial Owner, shall be made in accordance with
the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations
under the Exchange Act. The Board of Directors of the Company shall have the
exclusive power and authority to administer this Agreement and to exercise all
rights and powers specifically granted to the Board or to the Company, or as may
be necessary or advisable in the administration of this Agreement, including,
without limitation, the right and power to (i) interpret the provisions of this
Agreement, and (ii) make all determinations deemed necessary or advisable for
the administration of this Agreement (including a determination to redeem or not
redeem the Rights or to amend the Agreement). All such actions, calculations,
interpretations and determinations (including, for purposes of
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clause (y) below, all omissions with respect to the foregoing) which are done or
made by the Board in good faith, shall (x) be final, conclusive and binding on
the Company, the Rights Agent, the holders of the Rights and all other parties,
and (y) not subject the Board to any liability to the holders of the Rights.
Section 29. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any Person other than the Company, the Rights Agent and
the registered holders of the Rights Certificates (and, prior to the
Distribution Date, registered holders of the Common Stock) any legal or
equitable right, remedy or claim under this Agreement; but this Agreement shall
be for the sole and exclusive benefit of the Company, the Rights Agent and the
registered holders of the Rights Certificates (and, prior to the Distribution
Date, registered holders of the Common Stock).
Section 30. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that notwithstanding anything in this Agreement to the
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board of
Directors of the Company determines in its good faith judgment that severing the
invalid language from this Agreement would adversely affect the purpose or
effect of this Agreement, the right of redemption set forth in Section 23 hereof
shall be reinstated and shall not expire until the close of business on the
tenth day following the date of such determination by the Board of Directors.
Section 31. Governing Law. This Agreement, each Right and each Rights
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts made
and to be performed entirely within such State, except for Sections 18, 19, 20
and 21 hereof which for all purposes shall be governed by and construed under
the laws of the State of California.
Section 32. Counterparts. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
Section 33. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first above written.
Attest: FIRST COMMERCIAL BANCORP, INC.
By: By:
---------------------------------- -----------------------------------
Name: Name:
Title: Title:
Attest: BANK OF AMERICA, N.T. & S.A.
By: By:
---------------------------------- -----------------------------------
Name: Shirley D. Nelson Name: W. Greg Karr
Title: Corporate Secretary Title: President/Chief Executive
Officer
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Exhibit A
FORM OF
CERTIFICATE OF DESIGNATION,
PREFERENCES AND RIGHTS OF SERIES A
PARTICIPATING PREFERRED STOCK
FIRST COMMERCIAL BANCORP, INC.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
We, W. Greg Karr, President, and Shirley Nelson, Secretary, of First
Commercial Bancorp, Inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by
the Certificate of Incorporation of the said Corporation, the said Board of
Directors on February 27, 1990, adopted the following resolution creating a
series of 500,000 shares of Preferred Stock designated as Series A Participating
Preferred Stock:
RESOLVED, that pursuant to the authority vested in the Board of
Directors of this Corporation in accordance with the provisions of its
Certificate of Incorporation, a series of Preferred Stock of the Corporation be,
and it hereby is, created and that the designation and amount thereof and the
voting powers, preferences and relative, participating, optional and other
special rights of the shares of such series and the qualifications, limitations
or restrictions thereof are as follows:
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series A Participating Preferred Stock" and the number of shares
constituting such series shall be 500,000.
Section 2. Dividends and Distributions.
(A) The dividend rate on the shares of Series A
Participating Preferred Stock for each quarterly dividend period (hereinafter
referred to as a "quarterly dividend period"), which quarterly dividend periods
shall commence on January 1, April 1, July 1 and October 1 in each year (each
such date being referred to herein as a "Quarterly Dividend Payment Date") (or
in the case of original issuance, from the date of original issuance) and shall
end on and include the day next preceding the first date of the next quarterly
dividend period, shall be equal (rounded to the nearest cent) to the greater of
(a) $10 or (b) subject to the provision for adjustment hereinafter set forth,
100 times the aggregate per share amount of all cash dividends, and 100 times
the aggregate per share amount (payable in cash, based upon the fair market
value at the time the non-cash dividend or other distribution is declared as
determined in good faith by the Board of Directors) of all non-cash dividends or
other distributions other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared (but not withdrawn) on the Common Stock, $.01 par value, of
this Corporation (the "Common Stock") during the immediately preceding quarterly
dividend period or, with respect to the first quarterly dividend period, since
the first issuance of any share or fraction of a share of Series A Participating
Preferred Stock. In the event the Corporation shall at any time after February
27, 1990 (the "Rights Declaration Date") (i) declare any dividend on Common
Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common
Stock, or (iii) combine the outstanding Common Stock into a smaller number of
shares, then in each such case the amount to which holders of shares of Series A
Participating Preferred Stock were entitled immediately prior to such event
under clause (b) of the preceding sentence shall be adjusted by multiplying such
amount by a fraction the numerator of which
<PAGE> 139
is the number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution
on the Series A Participating Preferred Stock as provided in paragraph (a) above
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); provided that, in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $10 per share on the
Series A Participating Preferred Stock shall nevertheless be payable on such
subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Participating Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares of Series
A Participating Preferred Stock, unless the date of issue of such shares is
prior to the record date for the first Quarterly Dividend Payment Date, in which
case dividends on such shares shall begin to accrue from the date of issue of
such shares, or unless the date of issue is a Quarterly Dividend Payment Date or
is a date after the record date for the determination of holders of shares of
Series A Participating Preferred Stock entitled to receive a quarterly dividend
and before such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Series A Participating Preferred Stock in an amount less
than the total amount of such dividends at the time accrued and payable on such
shares shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding. The Board of Directors may fix a record date for
the determination of holders of shares of Series A Participating Preferred Stock
entitled to receive payment of a dividend or distribution declared thereon,
which record date shall be no more than 30 days prior to the date fixed for the
payment thereof.
Section 3. Voting Rights. The holders of shares of Series A
Participating Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set
forth, each share of Series A Participating Preferred Stock shall entitle the
holder thereof to one vote on all matters submitted to a vote of the
stockholders of the Corporation. In the event the Corporation shall at any time
after the Rights Declaration Date (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock,
or (iii) combine the outstanding Common Stock into a smaller number of shares,
then in each such case the number of votes per share to which holders of shares
of Series A Participating Preferred Stock were entitled immediately prior to
such event shall be adjusted by multiplying such number by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided herein or by law, the
holders of shares of Series A Participating Preferred Stock and the holders of
shares of Common Stock shall vote together as one class on all matters submitted
to a vote of stockholders of the Corporation.
(C) (i) If at any time dividends on any Series A
Participating Preferred Stock shall be in arrears in an amount equal to six (6)
quarterly dividends thereon, the occurrence of such contingency shall mark the
beginning of a period (herein called a "default period") which shall extend
until such time when all accrued and unpaid dividends for all previous quarterly
dividend periods and for the current quarterly dividend period on all shares of
Series A Participating Preferred Stock then outstanding shall have been declared
and paid or set apart for payment. During each default period, all holders of
the Series A Participating Preferred Stock
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with dividends in arrears in an amount equal to six (6) quarterly dividends
thereon, voting as a class, shall have the right to elect two (2) Directors.
(ii) During any default period, such voting right
of the holders of Series A Participating Preferred Stock may be exercised
initially at a special meeting called pursuant to subparagraph (iii) of this
Section (3)(c) or at any annual meeting of stockholders, and thereafter at
annual meetings of stockholders, provided that neither such voting right nor the
right of the holders of any other series of preferred stock, if any, to
increase, in certain cases, the authorized number of Directors shall be
exercised unless the holders of ten percent (10%) in number of shares of Series
A Participating Preferred Stock outstanding shall be present in person or by
proxy. The absence of a quorum of the holders of Common Stock shall not affect
the exercise by the holders of Series A Participating Preferred Stock of such
voting right. At any meeting at which the holders of Series A Participating
Preferred Stock shall exercise such voting right initially during an existing
default period, they shall have the right, voting as a class, to elect Directors
to fill such vacancies, if any, in the Board of Directors as may then exist up
to two (2) Directors or if such right is exercised at an annual meeting, to
elect two (2) Directors. If the number which may be so elected at any special
meeting does not amount to the required number, the holders of the Series A
Participating Preferred Stock shall have the right to make such increase in the
number of Directors as shall be necessary to permit the election by them of the
required number. After the holders of the Series A Participating Preferred Stock
shall have exercised their right to elect Directors in any default period and
during the continuance of such period, the number of Directors shall not be
increased or decreased except by vote of the holders of Series A Participating
Preferred Stock as herein provided or pursuant to the rights of any equity
securities ranking senior to or pari passu with the Series A Participating
Preferred Stock.
(iii) Unless the holders of Series A Participating
Preferred Stock shall, during an existing default period, have previously
exercised their right to elect Directors, the Board of Directors may order, or
any stockholder or stockholders owning in the aggregate not less than ten
percent (10%) of the total number of shares of Series A Participating Preferred
Stock outstanding, irrespective of series, may request, the calling of a special
meeting of the holders of Series A Participating Preferred Stock, which meeting
shall thereupon be called by the Chairman, the President or the Secretary of the
Corporation. Notice of such meeting and of any annual meeting at which holders
of Series A Participating Preferred Stock are entitled to vote pursuant to this
paragraph (c) (iii) shall be given to each holder of record of Series A
Participating Preferred Stock by mailing a copy of such notice to the holder at
the holder's last address as the same appears on the books of the Corporation.
Such meeting shall be called for a time not earlier than 20 days and not later
than 60 days after such order or request, or in default of the calling of such
meeting within 60 days after such order or request, such meeting may be called
on similar notice by any stockholder or stockholders owning in the aggregate not
less than ten percent (10%) of the total number of shares of Series A
Participating Preferred Stock outstanding. Notwithstanding the provisions of
this paragraph (c) (iii), no such special meeting shall be called during the
period within 60 days immediately preceding the date fixed for the next annual
meeting of the stockholders.
(iv) In any default period, the holders of Common
Stock, and other classes of stock of the Corporation if applicable, shall
continue to be entitled to elect the whole number of Directors until the holders
of Series A Participating Preferred Stock shall have exercised their right to
elect two (2) Directors voting as a class, after the exercise of which right (x)
the Directors so elected by the holders of Series A Participating Preferred
Stock shall continue in office until their successors shall have been elected by
such holders or until the expiration of the default period, and (y) any vacancy
in the Board of Directors may (except as provided in paragraph (c)(ii) of this
Section (3)) be filled by vote of a majority of the remaining Directors
theretofore elected by the holders of the class of stock which elected the
Director whose office shall have become vacant. References in this paragraph (c)
to Directors elected by the holders of a particular class of stock shall include
Directors elected by such Directors to fill vacancies as provided in clause (y)
of the foregoing sentence.
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<PAGE> 141
(v) Immediately upon the expiration of a default
period, (x) the right of the holders of Series A Participating Preferred Stock
as a class to elect Directors shall cease, (y) the term of any Directors elected
by the holders of Series A Participating Preferred Stock as a class shall
terminate, and (z) the number of Directors shall be such number as may be
provided for in the certificate of incorporation or by-laws irrespective of any
increase made pursuant to the provisions of paragraph (c)(ii) of this Section
(3) (such number being subject, however, to change thereafter in any manner
provided by law or in the certificate of incorporation or by-laws). Any
vacancies in the Board of Directors effected by the provisions of clauses (y)
and (z) in the preceding sentence may be filled by a majority of the remaining
Directors.
(D) Except as set forth herein, holders of Series A
Participating Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for taking any corporate
action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Participating Preferred Stock as provided
in Section (2) are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of Series A
Participating Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire for consideration,
any shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Participating Preferred Stock;
(ii) declare or pay dividends on, or make any other
distributions on, any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series A
Participating Preferred Stock, except dividends paid ratably on the Series A
Participating Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the holders of
all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series A Participating
Preferred Stock, provided that the Corporation may at any time redeem, purchase
or otherwise acquire shares of any such parity stock in exchange for shares of
any stock of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series A Participating Preferred
Stock;
(iv) purchase or otherwise acquire for
consideration any shares of Series A Participating Preferred, or any shares of
stock ranking on a parity with the Series A Participating Preferred Stock,
except in accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of the respective
series and classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (a) of
this Section (4), purchase or otherwise acquire such shares at such time and in
such manner.
Section 5. Reacquired Shares. Any shares of Series A Participating
Preferred Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after
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<PAGE> 142
the acquisition thereof. All such shares shall upon their cancellation become
authorized but unissued shares of Preferred Stock and may be reissued as part of
the new series of Preferred Stock to be created by resolution or resolutions of
the Board of Directors, subject to the conditions and restrictions on issuance
set forth herein.
Section 6. Liquidation, Dissolution or Winding Up.
(A) In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, no distribution shall
be made to the holders of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Participating Preferred
Stock unless, prior thereto, the holders of shares of Series A Participating
Preferred Stock shall have received $100 per share, plus an amount equal to
accrued and unpaid dividends to the date of distribution, whether or not earned
or declared to the date of such payment (the "Series A Liquidation Preference").
Following the payment of the full amount of the Series A Liquidation Preference,
no additional distributions shall be made to the holders of shares of Series A
Participating Preferred Stock unless, prior thereto, the holders of shares of
Common Stock shall have received an amount per share (the "Common Adjustment")
equal to the quotient obtained by dividing (i) the Series A Liquidation
Preference by (ii) 100, as appropriately adjusted as set forth in subparagraph
(c) below to reflect such events as stock splits, stock dividends and
recapitalizations with respect to the Common Stock, (such number in clause (ii),
the "Adjustment Number"). Following the payment of the full amount of the Series
A Liquidation Preference and the Common Adjustment in respect of all outstanding
shares of Series A Participating Preferred Stock and Common Stock, respectively,
holders of Series A Participating Preferred Stock and holders of shares of
Common Stock shall receive their ratable and proportionate share of the
remaining assets to be distributed in the ratio of the Adjustment Number to 1
with respect to such Preferred Stock and Common Stock, on a per share basis,
respectively.
(B) In the event, however, that there are not sufficient
assets available to permit payment in full of the Series A Liquidation
Preference and the liquidation preferences of all other series of preferred
stock, if any, which rank on a parity with the Series A Participating Preferred
Stock, then such remaining assets shall be distributed ratably to the holders of
such parity shares in proportion to their respective liquidation preferences. In
the event, however, that there are not sufficient assets available to permit
payment in full of the Common Adjustment, then such remaining assets shall be
distributed ratably to the holders of Common Stock.
(C) In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the amount to which holders of shares of Series A Participating
Preferred Stock were entitled immediately prior to such event pursuant to clause
(b) of the preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series A Participating Preferred Stock shall at the same time be similarly
exchanged or changed in an amount per share (subject to the provision for
adjustment hereinafter set forth) equal to 100 times the aggregate amount of
stock, securities, cash and/or any other property (payable in kind), as the case
may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series A Participating Preferred Stock shall be adjusted by
multiplying such
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<PAGE> 143
amount by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
Section 8. Redemption and Termination.
(A) The Board of Directors of the Company may, at its
option, at any time prior to the earlier of (i) the close of business on the
tenth day following the Stock Acquisition Date (or, if the Stock Acquisition
Date shall have occurred prior to the Record Date, the close of business on the
tenth day following the Record Date), or (ii) the Final Expiration Date, redeem
all but not less than all the then outstanding Rights at a redemption price of
$.05 per Right, as such amount may be appropriately adjusted to reflect any
stock split, stock dividend or similar transaction occurring after the date
hereof (such redemption price being hereinafter referred to as the "Redemption
Price"); provided, however, that if, following the occurrence of a Stock
Acquisition Date and following the expiration of the right of redemption
hereunder but prior to any Triggering Event, (i) a Person who is an Acquiring
Person shall have transferred or otherwise disposed of a number of shares of
Common Stock in one transaction or series of transactions, not directly or
indirectly involving the Company or any of its Subsidiaries, which did not
result in the occurrence of a Triggering Event such that such Person is
thereafter a Beneficial Owner of 10% or less of the outstanding shares of Common
Stock, and (ii) there are no other Persons, immediately following the occurrence
of the event described in clause (i), who are Acquiring Persons, then the right
of redemption shall be reinstated and thereafter be subject to the provisions of
this Section 23. Notwithstanding anything contained in this Agreement to the
contrary, the Rights shall not be exercisable after the first occurrence of a
Section 11(a)(ii) Event until such time as the Company's right of redemption
hereunder has expired. The Company may, at its option, pay the Redemption Price
in cash, shares of Common Stock (based on the "current market price", as defined
in Section 11(d)(i) hereof, of the Common Stock at the time of redemption) or
any other form of consideration deemed appropriate by the Board of Directors.
(B) Immediately upon the action of the Board of Directors of
the Company ordering the redemption of the Rights, evidence of which shall have
been filed with the Rights Agent and without any further action and without any
notice, the right to exercise the Rights will terminate and the only right
thereafter of the holders of Rights shall be to receive the Redemption Price for
each Right so held. Promptly after the action of the Board of Directors ordering
the redemption of the Rights, the Company shall give notice of such redemption
to the Rights Agent and the holders of the then outstanding Rights by mailing
such notice to all such holders at each holder's last address as it appears upon
the registry books of the Rights Agent or, prior to the Distribution Date, on
the registry books of the Transfer Agent for the Common Stock. Any notice which
is mailed in the manner herein provided shall be deemed given, whether or not
the holder receives the notice. Each such notice of redemption will state the
method by which the payment of the Redemption Price will be made.
Section 9. Ranking. The Series A Participating Preferred Stock shall
rank junior to all other series, if any, of the Corporation's preferred stock as
to the payment of dividends and as regards liquidation, dissolution and winding
up, unless the terms of any such series shall provide otherwise.
Section 10. Amendment. The Certificate of Incorporation of the
Corporation shall not be further amended in any manner which would materially
alter or change the powers, preferences or special rights of the Series A
Participating Preferred Stock so as to affect them adversely without the
affirmative vote of the holders of a majority or more of the outstanding shares
of Series A Participating Preferred Stock, voting separately as a class.
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<PAGE> 144
Section 11. Fractional Shares. Series A Participating Preferred Stock
may be issued in fractions of a share which shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of holders of Series A Participating Preferred Stock.
IN WITNESS WHEREOF, we have executed and subscribed this Certificate
and do affirm the foregoing as true under the penalties of perjury this 15th day
of March, 1990.
/s/ W. Greg Karr
----------------------------------------
W. Greg Karr
President
Attest:
/s/ Shirley Nelson
- -------------------------------------
Shirley Nelson
Secretary
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<PAGE> 145
Exhibit B
[Form of Rights Certificate]
Certificate No.R- __________Rights
NOT EXERCISABLE AFTER APRIL 5, 2000 OR SUCH EARLIER FINAL EXPIRATION DATE AS
DESCRIBED IN THE RIGHTS AGREEMENT OR EARLIER IF REDEEMED BY THE COMPANY. THE
RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY, AT $.05 PER
RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN
CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON (AS SUCH TERM IS
DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY
BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR
WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN
AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE
RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS
REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN
SECTION 7(e) OF SUCH AGREEMENT.](1)
Rights Certificate
FIRST COMMERCIAL BANCORP, INC.
This certifies that ____________________, or registered assigns, is the
registered owner of the number of Rights set forth above, each of which entitles
the owner thereof, subject to the terms, provisions and conditions of the Rights
Agreement, dated as of March 17, 1990 (the "Rights Agreement"), between First
Commercial Bancorp, Inc., a Delaware corporation (the "Company"), and Bank of
America, N.T. & S.A. (the "Rights Agent"), to purchase from the Company at any
time prior to 5:00 p.m. (Sacramento time) on April 5, 2000 or such earlier Final
Expiration Date as described in the Rights Agreement at the office or offices of
the Rights Agent designated for such purpose, or its successors as Rights Agent,
one one-hundredth of a fully paid, non-assessable share of Series A
Participating Preferred Stock (the "Preferred Stock") of the Company, at a
purchase price of $50 in cash per one one-hundredth of a share (the "Purchase
Price"), upon presentation and surrender of this Rights Certificate with the
Form of Election to Purchase and related Certificate duly executed. The number
of Rights evidenced by this Rights Certificate (and the number of shares which
may be purchased upon exercise thereof) set forth above, and the Purchase Price
per share set forth above, are the number and Purchase Price as of ________,
19__, based on the Preferred Stock as constituted at such date. Pursuant to the
Rights Agreement, the Company reserves the right to require prior to the
occurrence of a Triggering Event (as defined below) that, upon any exercise of
Rights, a number of Rights be exercised so that only whole shares of Preferred
Stock will be issued.
Upon the occurrence of a Section 11(a)(ii) Event (as such term is
defined in the Rights Agreement), if the Rights evidenced by this Rights
Certificate are beneficially owned by (i) an Acquiring Person or an Affiliate or
Associate of any such Acquiring Person (as such terms are defined in the Rights
Agreement), (ii) a transferee of any such Acquiring Person, Associate or
Affiliate, or (iii) under certain circumstances specified in the Rights
Agreement, a transferee of a person who, after such transfer, became an
Acquiring Person, or an Affiliate or
______________________________
(1) The portion of the legend in brackets shall be inserted only if applicable
and shall replace the preceding sentence.
<PAGE> 146
Associate of an Acquiring Person, such Rights shall become null and void and no
holder hereof shall have any right with respect to such Rights from and after
the occurrence of such Section 11(a)(ii) Event.
As provided in the Rights Agreement, the Purchase Price and the number
and kind of shares of Preferred Stock or other securities, which may be
purchased upon the exercise of the Rights evidenced by this Rights Certificate
are subject to modification and adjustment upon the happening of certain events,
including Triggering Events.
This Rights Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Rights Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under the specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the above-mentioned office of the
Rights Agent and are also available upon written request to the Rights Agent.
This Rights Certificate, with or without other Rights Certificates,
upon surrender at the principal office or offices of the Rights Agent designated
for such purpose, may be exchanged for another Rights Certificate or Rights
Certificates of like tenor and date evidencing Rights entitling the holder to
purchase a like aggregate number of one one-hundredths of a share of Preferred
Stock as the Rights evidenced by the Rights Certificate or Rights Certificates
surrendered shall have entitled such holder to purchase. If this Rights
Certificate shall be exercised in part, the holder shall be entitled to receive
upon surrender hereof another Rights Certificate or Rights Certificates for the
number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced
by this Certificate may be redeemed by the Company at its option at a redemption
price of $.05 per Right at any time prior to the earlier of the close of
business on (i) the tenth day following the Stock Acquisition Date (as such time
period may be extended pursuant to the Rights Agreement), and (ii) the Final
Expiration Date. After the expiration of the redemption period, the Company's
right of redemption may be reinstated if an Acquiring Person reduces such
Person's beneficial ownership to 10% or less of the outstanding shares of Common
Stock in a transaction or series of transactions not involving the Company.
No fractional shares of Preferred Stock will be issued upon the
exercise of any Right or Rights evidenced hereby (other than fractions which are
integral multiples of one one-hundredth of a share of Preferred Stock, which
may, at the election of the Company, be evidenced by depositary receipts), but
in lieu thereof a cash payment will be made, as provided in the Rights
Agreement.
No holder of this Rights Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of shares of Preferred
Stock or of any other securities of the Company which may at any time be
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or, to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Rights
Certificate shall have been exercised as provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
-2-
<PAGE> 147
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal.
Dated as of ________, 19__
ATTEST: FIRST COMMERCIAL BANCORP, INC.
By________________ By______________
Shirley Nelson W. Greg Karr
Secretary President
Countersigned:
BANK OF AMERICA, N.T. & S.A.
By______________________________
Authorized Signature
-3-
<PAGE> 148
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Rights Certificate.)
FOR VALUE RECEIVED __________________________________________________ hereby
sells, assigns and transfers unto_______________________________________________
(Please print name and address of transferee)
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint______________________________
_____________________ Attorney, to transfer the within Rights Certificate on the
books of the within-named Company, with full power of substitution.
Dated: ________________, 19__
_______________________________________
Signature
Signature Guaranteed:
Certificate
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) this Rights Certificate [ ] is [ ] is not being sold, assigned
and transferred by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of any such Acquiring Person (as such terms are
defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned,
it [ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate
from any Person who is, was or subsequently became an Acquiring Person or an
Affiliate or Associate of an Acquiring Person.
Dated: ________________, 19__
_______________________________________
Signature
Signature Guaranteed:
NOTICE
The signature of the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
<PAGE> 149
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise
Rights represented by the Rights Certificate.)
To: FIRST COMMERCIAL BANCORP, INC.
The undersigned hereby irrevocably elects to exercise ________ Rights
represented by this Rights Certificate to purchase the shares of Preferred Stock
issuable upon the exercise of the Rights (or such other securities of the
Company or of any other person which may be issuable upon the exercise of the
Rights) and requests that certificates for such shares be issued in the name of
and delivered to:
Please insert social security or other identifying number
________________________________________________________________________________
____
(Please print name and address)
________________________________________________________________________________
____
If such number of Rights shall not be all the Rights evidenced by this
Rights Certificate, a new Rights Certificate for the balance of such Rights
shall be registered in the name of and delivered to:
Please insert social security or other identifying number
________________________________________________________________________________
____
(Please print name and address)
________________________________________________________________________________
____
________________________________________________________________________________
____
Dated: ________, 19__
_______________________________________
Signature
<PAGE> 150
Certificate
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) this Rights Certificate [ ] is [ ] is not being sold, assigned
and transferred by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of any such Acquiring Person (as such terms are
defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned,
it [ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate
from any Person who is, was or subsequently became an Acquiring Person or an
Affiliate or Associate of an Acquiring Person.
Dated: ________________, 19__
_______________________________________
Signature
Signature Guaranteed:
NOTICE
The signature of the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
<PAGE> 151
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
FIRST COMMERCIAL BANCORP, INC.
First Commercial Bancorp, Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY
as follows:
1. The present name of the corporation is First Commercial Bancorp, Inc. (the
"Corporation"), which is the name under which the Corporation was originally
incorporated; and the date of filing the original Certificate of Incorporation
of the Corporation with the Secretary of State of the State of Delaware was
December 11, 1989.
2. The amendment of the Certificate of Incorporation herein certified has been
duly adopted by the Corporation's Board of Directors and stockholders entitled
to vote in accordance with the provisions of Section 242 of the General
Corporation Law of the State of Delaware.
3. The Certificate of Incorporation of the Corporation is hereby amended by
striking out Article Fourth Paragraph A thereof and by substituting in lieu of
said Article and Paragraph the following:
FOURTH:
A. The total number of shares of all classes of stock
which the Corporation shall have authority to issue is two hundred
fifty-five million (255,000,000), consisting of:
(1) five million (5,000,000) shares of Preferred
Stock, par value one cent ($.01) per share (the "Preferred Stock"); and
(2) two hundred fifty million (250,000,000) shares of
Common Stock, par value one cent ($.01) per share (the "Common Stock").
IN WITNESS WHEREOF, this Certificate of Amendment of the Certificate of
Incorporation of the Corporation has been affirmed and acknowledged this _______
day of _______________, 1995.
FIRST COMMERCIAL BANCORP, INC.
By:__________________________
James E. Culleton
Interim President
<PAGE> 152
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/ X / QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-9477
FIRST COMMERCIAL BANCORP, INC.
(Exact Name of registrant as specified in its charter)
DELAWARE 94-2683725
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
865 Howe Avenue, Suite 310, Sacramento, California, 95825
(Address of principal executive offices, including zip code)
(916) 641-3288
( Registrant's telephone number, including area code)
2450 Venture Oaks Way, Sacramento, California, 95833
(Former name, former address, and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Number of Shares Outstanding
Title of Class at October 31, 1995
- -------------- ----------------------------
<S> <C>
Common Stock $.01 par value 4,675,110
</TABLE>
<PAGE> 153
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1995
and December 31, 1994
Consolidated Statements of Operations for the three and nine
months ended September 30, 1995 and 1994
Consolidated Statements of Changes in Stockholders'
Equity for the nine months ended September 30, 1995
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1995 and 1994
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
</TABLE>
1
<PAGE> 154
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST COMMERCIAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
(Dollar amounts in thousands) 1995 1994
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 14,305 $ 19,059
Federal funds sold 5,500 27,200
Securities purchased under resale agreements 37,000 40,000
---------- ----------
Total cash and cash equivalents 56,805 86,259
Interest-bearing deposits with other financial institutions - 299
Investment securities (Note 3):
Held-to-maturity (market value of $11,061 in 1995 and $3,815 in 1994) 10,968 3,963
Available-for-sale 19,705 13,727
---------- ----------
Total investment securities: 30,673 17,690
Loans, net of unearned income of $170 in 1995 and $243 in 1994 81,919 130,172
Allowance for loan losses (Note 4) 4,838 7,437
---------- ----------
Net loans 77,081 122,735
Lease financing, net 991 1,038
Premises and equipment, net 2,147 2,637
Other real estate 2,054 5,222
Interest receivable and other assets 3,172 3,426
---------- ----------
TOTAL ASSETS $ 172,923 $ 239,306
========== ==========
LIABILITIES
DEPOSITS:
Demand accounts $ 33,162 $ 56,483
Interest-bearing transaction accounts 43,376 68,840
Savings accounts 17,915 21,695
Time accounts 72,786 86,518
---------- ----------
Total deposits 167,239 233,536
Accrued expenses and other liabilities 2,473 1,415
Minority interest 4,646 -
---------- ----------
TOTAL LIABILITIES 174,358 234,951
STOCKHOLDERS' EQUITY (NOTE 2)
Preferred stock: $.01 par value; authorized: 5,000,000
shares; issued and outstanding: none --- ---
Common stock: 1995 and 1994, $.01 par value, authorized: 1995 and
1994, 15,000,000 shares, issued and outstanding: 1995 and 1994,
4,675,110 shares 47 48
Additional paid-in capital 27,787 28,495
Retained deficit (29,181) (22,880)
Common stock in treasury, at cost: 1995, none; 1994, 100,000 shares - (709)
Unrealized losses on securities available-for-sale (88) (599)
---------- ----------
Total stockholders' equity (1,435) 4,355
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 172,923 $ 239,306
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
2
<PAGE> 155
FIRST COMMERCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
(Dollar amounts in thousands) 1995 1994 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans and leases $ 2,228 $ 3,863 $ 7,792 $ 11,726
Interest on Federal funds sold and securities purchased under
resale agreements 556 532 1,679 1,227
Interest on time deposits with other financial institutions -- 21 -- 87
Interest on investment securities 464 254 1,180 848
-------- -------- -------- --------
Total interest income 3,248 4,670 10,651 13,888
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on interest-bearing transaction accounts 240 498 850 1,543
Interest on savings accounts 111 149 339 448
Interest on time accounts and other borrowed funds 1,176 916 3,450 2,242
-------- -------- -------- --------
Total interest expense 1,527 1,563 4,639 4,233
-------- -------- -------- --------
NET INTEREST INCOME 1,721 3,107 6,012 9,655
Provision for loan losses 100 1,022 3,345 9,057
-------- -------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,621 2,085 2,667 598
-------- -------- -------- --------
Non-interest income 277 617 1,131 1,711
Non-interest expense 2,919 5,406 10,097 14,561
-------- -------- -------- --------
LOSS BEFORE INCOME TAXES (1,021) (2,704) (6,299) (12,252)
Provision for income taxes -- -- 2 1,926
-------- -------- -------- --------
NET LOSS $ (1,021) $ (2,704) $ (6,301) $(14,178)
======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA:
Net loss per share $ (0.22) $ (0.58) $ (1.35) $ (3.03)
Weighted average shares of common stock outstanding 4,675 4,675 4,675 4,675
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE> 156
FIRST COMMERCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS
OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
UNREALIZED TOTAL
ADDITIONAL COMMON GAINS (LOSSES) STOCKHOLDERS'
COMMON PAID-IN RETAINED STOCK IN ON SECURITIES EQUITY
(DOLLAR AMOUNTS IN THOUSANDS) STOCK CAPITAL DEFICIT TREASURY AVAILABLE-FOR-SALE (DEFICIT)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1994 $ 48 $ 28,495 $(22,880) $ (709) $ (599) $ 4,355
Three months ended March 31, 1995:
Net loss -- -- (1,039) -- -- (1,039)
Adjustment to unrealized gains
(losses) on available-for-
sale securities (Note 3) -- -- -- -- 298 298
-------- -------- -------- -------- -------- --------
BALANCES, MARCH 31, 1995 48 28,495 (23,919) (709) (301) 3,614
Three months ended June 30, 1995:
Net loss -- -- (4,241) -- -- (4,241)
Adjustment to unrealized gains
(losses) on available-for-sale
securities (Note 3) -- -- -- -- 229 229
Treasury stock retirement (1) (708) -- 709 -- --
-------- -------- -------- -------- -------- --------
BALANCES, JUNE 30, 1995 47 27,787 (28,160) -- (72) (398)
Three months ended September 30, 1995:
Net loss -- -- (1,021) -- (1,021)
Adjustment to unrealized gains (losses)
on available-for-sale securities (Note 3) -- -- -- -- (16) (16)
-------- -------- -------- -------- -------- --------
BALANCES, SEPTEMBER 30, 1995 $ 47 $ 27,787 $(29,181) $ -- $ (88) $ (1,435)
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE> 157
FIRST COMMERCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
(Dollar amounts in thousands) 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss
Adjustments to reconcile loss to net cash $ (6,301) $ (14,178)
provided by operating activities:
Depreciation and amortization 576 1,734
Provision for loan losses 3,345 9,057
Write-down of other real estate 1,026 1,031
Fixed asset retirements 224 --
Decrease in interest receivable and other assets 254 5,743
Decrease in interest payable (17) (52)
Increase (decrease) in accrued expenses and other liabilities 1,075 (505)
-------- --------
Net cash provided by (used in) operating activities 182 2,830
-------- --------
Cash flows from investing activities:
Net decrease in interest-bearing deposits with other
financial institutions 299 2,480
Proceeds from the sale and maturity of investment securities 2,300 30,989
Purchase of investment securities (15,000) (4,974)
Net decrease in loans made to customers 41,605 27,009
Net decrease in deferred loan fees (73) (177)
Purchases of premises and equipment (82) (246)
Net decrease in lease financing 47 47
Proceeds from sale of other real estate 3,009 3,893
Payments to complete other real estate (90) (617)
-------- --------
Net cash provided by investing activities 32,015 58,404
-------- --------
Cash flows from financing activities:
Increase in minority interest in subsidiary (Note 2) 4,646 --
Net decrease in demand accounts, interest-bearing transaction
accounts and savings accounts (52,565) (67,054)
Net increase (decrease) in time accounts (13,732) 12,699
-------- --------
Net cash used in financing activities (61,651) (54,355)
-------- --------
Net decrease in cash and cash equivalents (29,454) 6,879
Cash and cash equivalents at beginning of period 86,259 86,874
-------- --------
Cash and cash equivalents at end of period $ 56,805 $ 93,753
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 4,622 $ 4,285
Income taxes $ -0- $ -0-
Supplemental Schedule of noncash investing and financing activities:
Net decrease in other real estate as a result of foreclosure or
financing, and other related transactions $ 777 $ 3,227
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE> 158
FIRST COMMERCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1
- --------------------------------------------------------------------------------
BASIS OF PRESENTATION
The accompanying consolidated financial statements of First Commercial Bancorp,
Inc. (the "Company") are unaudited and should be read in conjunction with the
consolidated financial statements contained in the Company's 1994 Annual Report
to Stockholders. In the opinion of management, all adjustments are of a normal
recurring nature. Operating results for the three and nine month periods ended
September 30, 1995 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1995.
The consolidated financial statements include the accounts of the parent company
and its sole subsidiary, First Commercial Bank (the "Bank"). As described in
Note 2, at September 30, 1995, the Company owned 1.05% of the outstanding common
stock of the Bank, although it continued to own 100% of the voting securities
of the Bank.
The net loss per share has been computed by dividing the reported net loss for
the period by the weighted average shares of common stock outstanding.
In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS 114,
"Accounting by Creditors for Impairment of a Loan" (SFAS 114). During October
1994, the FASB issued SFAS 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures" (SFAS 118), which amends SFAS 114.
SFAS 114 (as amended by SFAS 118) defines the recognition criterion for loan
impairment and the measurement methods for certain impaired loans and loans
whose terms have been modified in troubled debt restructurings (a restructured
loan). Specifically, a loan is considered impaired when it is probable a
creditor will be unable to collect all principal and interest according to the
contractual terms of the loan agreement. When measuring impairment, the expected
future cash flows of an impaired loan are required to be discounted at the
loan's effective rate. Alternatively, impairment can be measured by reference to
an observable market price, if one exists, or the fair market value of the
collateral for a collateral-dependent loan. Regardless of the measurement method
used historically, SFAS 114 requires a creditor to measure impairment based on
the fair value of the collateral when the creditor determines foreclosure is
probable. Additionally, impairment of a restructured loan is measured by
discounting the total expected future cash flows at the loan's effective rate of
interest as stated in the original loan agreement. Because the Company is
principally a collateral-based lender and, consequently, has used collateral
value to determine such reductions independent of the requirement of SFAS 114.
All loans in the Bank's portfolio are reviewed individually and are not
included in any homogeneous categories.
SFAS 118 amends SFAS 114 to allow a creditor to use existing methods for
recognizing interest income on an impaired loan. Prior to the issuance of SFAS
118, SFAS 114 provided for two alternative income recognition methods to be used
to account for changes in the net carrying amount of an impaired loan subsequent
to the initial measurement of impairment. Under the first income recognition
method, a creditor would accrue interest on the net carrying amount of the
impaired loan and report other changes in the net carrying amount of the loan as
an adjustment to the provision for possible loan losses. Under the second income
recognition method, a creditor would recognize all changes in the net carrying
amount of the loan as an adjustment to the provision for possible loan losses.
While those income recognition methods are no longer required, SFAS 118 does not
preclude a creditor from using either of those methods.
6
<PAGE> 159
SFAS 114, as amended by SFAS 118, applies to financial statements for fiscal
years beginning after December 15, 1994. Accordingly, the Company adopted SFAS
114 on January 1, 1995. The adoption of SFAS 114 and SFAS 118 did not have a
material effect on its consolidated financial position or results of operations.
NOTE 2
- --------------------------------------------------------------------------------
RECAPITALIZATION
On August 7, 1995, the Company and the Bank entered into the Stock Purchase
Agreement with James F. Dierberg, an individual, and First Banks, a Missouri
bank holding company, which provides for the recapitalization of the Company and
the Bank. Under the terms of the Stock Purchase Agreement, as of June 30, 1995,
Mr. Dierberg, who is Chairman, Chief Executive Officer and President of First
Banks, acquired 750,000 shares of nonvoting, noncumulative preferred stock of
the Bank for $1.5 million. After receiving the necessary regulatory approvals,
on August 22, 1995 First Banks acquired the preferred stock from Mr. Dierberg
for $1.5 million, and on August 23, 1995, First Banks acquired 116,666,666
shares of common stock of the Bank for $3.5 million. As a result of these
transactions, First Banks owned 98.95% of the outstanding common stock and 100%
of the outstanding preferred stock of the Bank as of September 30, 1995.
The Bank common stock held by First Banks is subject to the terms of a proxy
agreement (the "Proxy") transferring to the Company the right to vote all of
the Bank common stock until the earlier of the conclusion of the Shareholders'
Meeting or December 31, 1995. Accordingly, the Company continues to own 100% of
the voting securities of the Bank. If the Company fails to hold the
Shareholders' Meeting on or before December 31, 1995, or if the shareholders
fail to approve the Stock Purchase Agreement, (1) the Proxy restricting First
Banks' voting of the Bank common stock will terminate and First Banks will
assume voting control of the Bank, (2) the $5 million currently held in escrow
will be invested in additional common stock of the Bank, and (3) the principal
and accrued but unpaid interest of the Investment Debenture would become
immediately convertible into shares of Bank common stock at the then current
book value per share. In that event, the Company would own less than one
percent (1%) of the outstanding shares of common stock of the Bank.
The Stock Purchase Agreement will be submitted for the approval of the
shareholders at a special meeting of the Company's shareholders (the
"Shareholders' Meeting") to be held in early December 1995. Upon the approval of
the Company's shareholders, the Bank preferred stock and the Bank common stock
will be exchanged for a total of 50,000,000 shares of Company common stock,
resulting in First Banks' ownership of 91.45% of the then outstanding shares of
Company common stock. In addition, First Banks has placed $5 million in an
escrow account for the purchase of a convertible debenture of the Company (the
"Debenture") upon receipt of the approval of the Stock Purchase Agreement by the
shareholders. At that time, $4.75 million of the proceeds of the Debenture will
be contributed to the capital of the Bank with the remaining $250,000 being
retained by the Company for general corporate purposes. The Debenture will bear
interest at 12% per year and will be secured by all of the Bank common stock
held by the Company. The Debenture matures five years after the Shareholders'
Meeting. Interest on the Debenture is payable in the sole discretion of the
Company's Board of Directors, upon receipt of any necessary regulatory
authorization. The principal and any accrued but unpaid interest thereon are
convertible into Company common stock at the option of First Banks at any time
prior to maturity at $.10 per share. At maturity, any remaining principal and
unpaid interest thereon must be converted into shares of the Company's common
stock at $.10 per share.
In order to enable the Bank to meet certain capital requirements of its
regulatory orders, on October 31, 1995, First Banks purchased, pursuant to the
terms of an Additional Investment Agreement, a convertible debenture of the
Company (the "Investment Debenture") for $1.5 million, the proceeds of which
were contributed to the Bank. The terms of the Investment Debenture are
identical to those of the Debenture described above, and the Investment
Debenture is convertible into 15,000,000 shares of Company common stock. In
addition, the terms of the Stock Purchase Agreement provide that if the Rights
Offering described below has not been concluded prior to December 31, 1995 and
the Bank's tangible capital ratio at that date does not equal 7.0%, First Banks
has the option to make an additional capital contribution to the Company through
the purchase of shares of Company common stock, at a purchase price of the then
current book value per share or $.10 per share, whichever is greater. In the
event First Banks elects not to make an additional capital infusion into the
Company or Bank, as applicable, the Bank will consider other methods of raising
capital, including the sale of additional Bank branch offices.
The Stock Purchase Agreement also provides for the Company to distribute shares
of Company common stock or cash to stockholders of record as of the record date
for the Shareholders' Meeting based on certain future events primarily related
to the earnings performance and the adequacy of the allowance for loan losses of
the Company during the period from July 1, 1995 to June 30, 1996 and recoveries
of certain previously charged-off assets, net of collection expenses and any
litigation costs thereafter through October 31, 1998.
7
<PAGE> 160
Finally, the Agreement provides that the Company shall amend the Company's
Stockholders' Rights Plan, adopted by the stockholders of the Company at the
1990 Special Meeting of the Stockholders (the "Rights Plan"), to exempt the
transactions contemplated by the Agreement from triggering the operation of the
Rights Plan. Further, if the Board of Directors of the Company determines that
the Company shall exercise its right of redemption under the Rights Plan then,
under certain conditions, First Banks may elect to arrange for the payment of
the redemption and the Company shall issue to First Banks shares of Company
common stock, on the basis of $.10 per share, in exchange for the aggregate
amount of such redemption.
Pursuant to the terms of the Stock Purchase Agreement, the Company has the
discretion and presently intends to make to its existing stockholders an
offering of rights to purchase additional shares of Company common stock and a
dividend exchange offer to certain stockholders. The Company is amending its
Registration Statement on Form S-1, which was filed on May 31, 1995 with the
Securities and Exchange Commission, to reflect the terms of the Stock Purchase
Agreement and Additional Investment Agreement, as well as to include current
financial and other information. The Registration Statement provides, inter
alia, for a rights offering of Company common stock to existing shareholders and
an offering in exchange for dividends owed to Company stockholders of record on
June 15 or September 14, 1992 (the "Offering"). If it is conducted, the Offering
would be intended to raise a maximum of $5 million of additional capital. The
Offering price would be the same as the price at which the Company's common
stock is purchased by First Banks. The Company cautions that the securities
covered by the Registration Statement may not be offered by the Company, nor may
offers to buy be accepted by the Company, prior to the time the Registration
Statement is declared effective by the Securities and Exchange Commission, and
then only by means of a prospectus. The Registration Statement has not been
declared effective by the Commission and the contents thereof are subject to
amendment.
8
<PAGE> 161
NOTE 3
- --------------------------------------------------------------------------------
INVESTMENT SECURITIES - HELD-TO-MATURITY AND AVAILABLE-FOR-SALE
The Company classifies its investments in debt and equity securities as
"held-to-maturity," "trading securities" or "available-for-sale." Investments
classified as "held-to-maturity" are reported at amortized cost, investments
classified as "trading" securities are reported at fair value with unrealized
gains and losses included in earnings, and investments classified as
"available-for-sale" are reported at fair value with unrealized gains and losses
reported as a separate component of stockholders' equity. As of September 30,
1995, the Company's assets and equity capital were reduced by $88,000 to reflect
unrealized losses on available-for-sale securities.
The estimated market value of investment securities is determined based on
current quotations, where available. The amortized cost (book value) and
estimated market value of investment securities at September 30, 1995 are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
(Dollar amounts in thousands) COST GAINS LOSSES VALUE YIELD
- ------------------------------------------- ---------- ---------- ------- -----
<S> <C> <C> <C> <C> <C>
HELD-TO-MATURITY:
U.S. TREASURY SECURITIES $ 7,022 $ 49 $ -- $7,071 6.51%
U.S. GOVERNMENT AGENCIES 3,946 51 7 3,990 5.32
AVAILABLE-FOR-SALE:
U.S. TREASURY SECURITIES 11,063 25 20 11,068 5.92
U.S. GOVERNMENT AGENCIES 8,661 34 58 8,637 6.11
------- ---- --- -------
TOTAL INVESTMENT SECURITIES $30,692 $159 $ 85 $30,766 6.02%
======= ==== ==== =======
</TABLE>
On June 20, 1995, a Federal Home Loan Mortgage Corporation security with a book
value of $1,059,000, classified as "available-for-sale" was sold for a gain of
approximately $3,000. The Bank did not sell any other securities during the
nine-month period ended September 30, 1995, or the year ended December 31, 1994.
The following table shows the amortized cost and estimated market value of
investment securities at September 30,1995, by contractual maturity. Maturities
of mortgage-backed securities are classified in accordance with contractual
repayment schedules. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or
9
<PAGE> 162
prepay obligations with or without call or prepayment penalties. The amortized
cost and estimated market values, by contractual maturity were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY AVAILABLE-FOR-SALE
------------------------------------------------------------------------
AMORTIZED MARKET AMORTIZED MARKET
(Dollar amounts in thousands) COST VALUE YIELD COST VALUE YIELD
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MATURING WITHIN ONE YEAR:
U.S. TREASURY SECURITIES $ 3,996 $ 4,020 6.48% $10,025 $10,046 6.10%
U.S. GOVERNMENT AGENCIES 2,015 2,008 4.70 4,034 4,061 7.01
------- ------- ------- -------
TOTAL MATURING WITHIN ONE YEAR 6,011 6,028 5.88 14,059 14,107 6.36
------- ------- ------- -------
MATURING FROM ONE TO FIVE YEARS:
U.S. TREASURY SECURITIES 3,026 3,051 6.55 1,038 1,022 4.17
U.S. GOVERNMENT AGENCIES 1,931 1,982 5.78 4,628 4,576 5.33
------- ------- ------- -------
TOTAL MATURING FROM ONE TO FIVE YEARS 4,957 5,033 6.25 5,666 5,598 5.11
------- ------- ------- -------
TOTAL INVESTMENT SECURITIES $10,968 $11,061 6.05% $19,725 $19,705 6.00%
======= ======= ======= =======
</TABLE>
NOTE 4
- --------------------------------------------------------------------------------
LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the loan portfolio is summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
(Dollar amounts in thousands) 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
COMMERCIAL $ 37,075 $ 69,597
REAL ESTATE CONSTRUCTION 7,398 16,386
REAL ESTATE SECURED 33,982 38,439
INSTALLMENT 3,634 5,993
--------- ---------
TOTAL GROSS LOANS 82,089 130,415
UNEARNED INCOME (170) (243)
ALLOWANCE FOR LOAN LOSSES (4,838) (7,437)
--------- ---------
NET LOANS $ 77,081 $ 122,735
========= =========
</TABLE>
CONCENTRATION OF LARGE BORROWERS
The Company's loan portfolio is presently concentrated in twenty-two loans,
eleven of which exceed 25% of the Bank's September 30, 1995 capital. Commitments
to these borrowers represent $33.5 million or 41% of the Bank's total loan
portfolio at September 30, 1995. Outstanding balances to these borrowers at
September 30, 1995 were $22.7 million or 28% of the Bank's loan portfolio. Seven
of these loans, representing $14.9 million or 18% of the Bank's total loan
portfolio, have been classified by the Bank as substandard. One loan in the
amount of $638,000 is on nonaccrual status.
At September 30, 1995 the Bank's unsecured lending limit was $1.3 million and
its combined secured and unsecured lending limit was $2.2 million. The Bank
currently has five loans, representing $10.3 million, which exceed its unsecured
lending limit and two loans, representing $9.3 million that exceed the secured
and unsecured lending limit. The Company intends to be able to continue to
satisfy its larger customer's borrowing needs by participating loan amounts
above its lending limit with other banks until such time as the Bank becomes
recapitalized. Upon consummation of the transaction described in Note 2,
approximately $5.75 million will be added to the Bank's stockholders' equity as
of September 30,
10
<PAGE> 163
1995, after deducting the related expenses. As a result, the Bank's capital is
expected to be approximately $9.9 million. Based on this capital level, the
Bank's unsecured lending limit would be $2.2 million and the Bank's secured and
unsecured lending limit would be $3.7 million. Thereafter, the Bank would have
only one loan representing $3.3 million which would exceed its unsecured lending
limit, and two loans representing $9.3 million would exceed its secured and
unsecured lending limit.
CONCENTRATION OF CLASSIFIED ASSETS
Federal regulations require banks to review their assets on a regular basis and
to classify them if any weaknesses are noted. Banks must maintain adequate
allowances for assets classified as "Substandard" or "Doubtful" and must
immediately write off those assets classified as "Loss." The Bank has a
comprehensive process for classifying assets and asset reviews are performed on
a periodic basis. In addition to identifying adversely classified assets, the
Bank identifies certain assets as "Special Mention," which do not currently
expose the Bank to a sufficient degree of risk to warrant a more adverse
classification but do possess credit deficiencies or potential weaknesses
deserving management's close attention. Assets that do not possess credit
deficiencies are not classified and are considered "Pass" loans. The Bank
stratifies its loan portfolio based on collateral type concentrations and
delinquency trends. The objective of the review process is to identify any
trends and determine the levels of loss exposure to the Bank that would require
an adjustment to the valuation allowance.
Classified assets include nonperforming loans, other real estate and performing
loans that exhibit credit quality weaknesses. The table below outlines the
Bank's classified assets as of September 30, 1995:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
(Dollar amounts in thousands)
- ----------------------------------------------------------
<S> <C>
Performing loans $21,029
Nonperforming loans 5,347
Other real estate 2,054
-------
Total classified assets $28,430
=======
</TABLE>
The Bank has been required by the Orders (as defined in Note 6) to reduce its
classified assets based upon the amount of classified loans as of the dates of
the 1993 and 1994 examinations. The Bank is in full compliance with the
classified loan reductions scheduled in connection with each of these
examinations. The classified assets described above are consistent with the
classification findings of the FDIC and SBD examiners in connection with the
1995 joint examination and represent 33.8% of the Bank's total loans and ORE.
Although the Bank has not as yet been required by the FDIC and SBD to agree
upon a classified asset reduction schedule, the Bank, based upon its past
experience, believes that it will be able to satisfy such a classified asset
reduction schedule once it is agreed upon with its regulatory authorities.
11
<PAGE> 164
The changes to the allowance for loan losses consisted of the following for the
nine-month period ended September 30, 1995 and for the year ended December 31,
1994:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
(Dollar amounts in thousands) 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
BALANCE AT BEGINNING OF PERIOD $ 7,437 $ 7,337
CHARGE-OFFS:
COMMERCIAL 4,880 3,712
REAL ESTATE CONSTRUCTION 430 5,591
REAL ESTATE SECURED 644 661
INSTALLMENT 281 59
-------- --------
6,235 10,023
-------- --------
RECOVERIES:
COMMERCIAL 306 176
REAL ESTATE CONSTRUCTION -- 125
REAL ESTATE SECURED -- --
INSTALLMENT 12 13
-------- --------
318 314
-------- --------
NET CHARGE-OFFS ON LOANS 5,917 9,709
ADDITIONS TO ALLOWANCE CHARGED
TO OPERATING EXPENSE 3,345 9,809
REDUCTION IN ALLOWANCE FOR LOAN LOSSES
TRANSFERRED WITH BRANCH SALE (27) --
-------- --------
BALANCE AT END OF PERIOD $ 4,838 $ 7,437
======== ========
- --------------------------------------------------------------------------------
NET CHARGE-OFFS ON LOANS 7.26% 5.62%
TO AVERAGE LOANS
ALLOWANCE FOR LOAN LOSSES TO 5.89% 5.70%
TOTAL LOANS OUTSTANDING
</TABLE>
12
<PAGE> 165
The following table provides information with respect to all nonperforming
assets:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
(Dollar amounts in thousands) 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C>
TOTAL LOANS OUTSTANDING $ 82,089 $130,415
======== ========
ACCRUAL LOANS PAST DUE NINETY DAYS OR MORE $ -- $ 22
NONACCRUAL LOANS 4,738 11,433
RESTRUCTURED LOANS 609 710
-------- --------
NONPERFORMING LOANS 5,347 12,165
OTHER REAL ESTATE 2,054 5,222
-------- --------
NONPERFORMING ASSETS $ 7,401 $ 17,387
======== ========
LOANS PAST DUE 30 TO 89 DAYS $ 1,133 $ 4,514
======== ========
RATIOS:
NONPERFORMING LOANS TO TOTAL LOANS OUTSTANDING 6.51% 9.33%
ALLOWANCE FOR LOAN LOSSES TO NONPERFORMING LOANS 90.48% 61.13%
NONPERFORMING ASSETS TO LOANS AND OTHER REAL ESTATE 8.80% 12.82%
</TABLE>
During the nine months ended September 30, 1995, the Bank's nonperforming loans
decreased from $12,165,000 at December 31, 1994 to $5,347,000 at September 30,
1995, or 56.0%. At September 30, 1995, 65% of nonperforming loans were
collateralized by real estate. Loans past due 30 days or more and less than 90
days decreased 74.9% from $4,514,000 at December 31, 1994 to $1,133,000 at
September 30, 1995.
A loan is classified as nonaccrual and the accrual of interest on such loan is
discontinued when the contractual payment of principal or interest has become 90
days past due or management has serious doubts about further collectibility of
principal or interest, even though the loan currently is performing. When a loan
is placed on nonaccrual status, the Bank reverses any accrual and unpaid
interest and all payments thereafter are applied to principal until such time as
management believes the full repayment of principal and interest is assured. At
such time, the loan may be returned to accrual status and payment then applied
to principal and/or interest according to the terms of the loan. Interest on
impaired loans which are performing is recognized in accordance with the loan
documents.
At September 30, 1995, the recorded investment in loans that are considered to
be impaired under Statement 114 was $7,349,000. Thirty-five percent (35.32%), or
$1,709,000 of the allowance for loan losses at September 30, 1995, has been
provided for impaired loans. Impaired loans are reviewed monthly and are
assigned asset quality ratings as part of the Company's on-going Asset Quality
Plan review. At September 30, 1995, 36%, or $4,738,000 of the impaired loans
were on a nonaccrual basis. The average recorded investment in impaired loans
for the quarter and nine months ended September 30, 1995, was $6,573,000 and
$9,795,000, respectively. The Company uses the cash basis method of income
recognition for recording interest income on impaired loans, which are
nonperforming.
Other real estate acquired through foreclosure decreased 60.7% from $5,222,000
at December 31, 1994 to $2,054,000 at September 30, 1995. During the first nine
months, the Bank sold $5,308,000 which was offset by foreclosures on $3,215,000
of other real estate.
The Bank has three loans totaling $609,000 which are accounted for as "troubled
debt restructurings" as defined in Statement of Financial Accounting Standards
Number 15. The amount of interest income which has not been recognized with
respect to these loans is not material to the consolidated financial statements.
13
<PAGE> 166
There are no loans made by the Bank to directors, executive officers or any
associate of such persons exceeding $60,000 for the nine-month period ended
September 30, 1995.
NOTE 5
- --------------------------------------------------------------------------------
INCOME TAXES
The Company and the Bank file consolidated federal income tax returns. Because
of the structure of the transaction described in Note 2 to the consolidated
financial statements, current regulations of the Internal Revenue Service would
prohibit the Company from continuing to file a consolidated income tax return
with the Bank for the period after August 22, 1995. However, the regulations
allow the Commissioner of the Internal Revenue Service to grant waivers of this,
if the circumstances warrant.
The Company and the Bank are considering applying to the Commissioner for such a
waiver, which, if granted, would allow their continued consolidation for federal
income tax purposes until the Stock Purchase Agreement is approved by the
shareholders. Thereafter, if First Banks continues to hold at least 80% of the
voting stock of the Company, both the Company and the Bank could be included in
the consolidated federal income tax return of First Banks.
NOTE 6
- --------------------------------------------------------------------------------
REGULATORY AGREEMENTS
For each of the three years ended December 31, 1994 as well as the nine months
ended September 30, 1995, the Company and the Bank have incurred substantial
losses from operations. These losses were associated primarily with the emphasis
which the Bank had placed on real estate based lending and the deterioration of
the California economy during that period, particularly as it related to the
real estate sector. Because of the magnitude of problem assets which arose and
the reduction of the Bank's capital due to the losses, the Company has been
operating under the terms of a Memorandum of Understanding with the Federal
Reserve Bank of San Francisco (the "MOU"), and the Bank has been operating under
the terms of a Cease and Desist Order issued by the Federal Deposit Insurance
Corporation, a Final Order issued by the State Banking Department and several
Capital Impairment Orders (collectively the "Orders"). The MOU and the Orders
have placed significant restrictions on the Company and the Bank including
restrictions on the payment of dividends, requirements of specified capital
levels and reduction of classified assets.
The Company and the Bank have entered into a Stock Purchase Agreement with First
Banks and James F. Dierberg as outlined in Note 2, which provides for a
substantial recapitalization of the Company and the Bank upon the approval of
the stockholders and, if the stockholders fail to approve the Stock Purchase
Agreement, a recapitalization of only the Bank. See REGULATORY AGREEMENTS. In
addition, the Company is considering an offering of the Company's common stock
to existing stockholders and an exchange offer for dividends owed to certain
stockholders. However, the Company has continued to incur losses from operations
through September 30, 1995. Consequently, there can be no assurance that (1) the
Stock Purchase Agreement will be approved by the Company's stockholders, (2) the
Offering will be conducted, or if conducted that it will be successful, (3) the
Company will not incur substantial additional losses in the liquidation of its
portfolio of problem assets, (4) continued losses will not adversely effect the
Company's ability to comply with the requirement of the MOU and the Orders, or
(5) because of any of the preceding, the Company and the Bank may not be
required to raise additional capital or have additional regulatory agreements
imposed upon them in the future.
NOTE 7
- --------------------------------------------------------------------------------
TRANSACTIONS WITH FIRST BANKS
In October, 1995, the Board of Directors of the Bank approved a management
services agreement with First Banks and a cost sharing agreement with First Bank
& Trust, Santa Ana, California, a wholly owned subsidiary of First Banks. The
management fee agreement provides that the Bank will compensate First Banks on
an hourly basis for its use of personnel for various functions including
internal auditing, loan review, income tax preparation and assistance,
accounting and other
14
<PAGE> 167
management and administrative services. Hourly rates for such services compare
favorably with those of similar services from unrelated sources, as well as the
internal costs of the Bank personnel which were used previously. It is estimated
that the aggregate cost for such services will be more economical than those
previously incurred separately by the Bank.
The cost sharing agreement provides a structure for the Bank and First Bank &
Trust to share the cost of certain personnel and services which will be used by
both banks. This will include the salaries and benefits of certain loan and
administrative personnel. Expenses associated with loan origination personnel
will be allocated based on the relative loan volume between the banks. Costs of
most other personnel will be allocated on an hourly basis. Because this involves
distributing essentially fixed costs over a larger asset base, it allows each
bank to receive the benefit of personnel and services at a reduced cost.
It is anticipated that the Bank will also enter into a data processing agreement
with FirstServ, Inc., a wholly owned data processing subsidiary of First Banks.
Under this agreement, FirstServ, Inc. will provide data processing and item
processing to the Bank beginning in December, 1995. The fees for such services
will be substantially less than the Bank is incurring in connection with its
current data processing or than it would incur with non-affiliated vendors.
The management services agreement, cost sharing agreement and data processing
agreement are subject to the review and approval of the Bank's regulatory
authorities. As of November 15, 1995, no fees had been charged to the Bank under
any of these agreements. See REGULATORY AGREEMENTS.
In addition, the Bank may purchase certain services and supplies from or through
First Banks or one of its subsidiaries. This would include insurance policies,
office supplies and other commonly used banking products which can be acquired
more economically than had previously been possible for the Bank separately.
These items are purchased on a cost pass-through basis and the amount of such
purchases is not expected to be material to the Company's consolidated financial
position or results of operations.
15
<PAGE> 168
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion relates to the consolidated results of operations of
the Company and the Bank for the three and nine month periods ended September
30, 1995 and should be read in conjunction with the Consolidated Financial
Statements, and accompanying notes included in Part I, Item 1.
GENERAL
The Company is a registered bank holding company incorporated in Delaware and
headquartered in Sacramento, California. Through the Bank, the Company operates
seven banking offices in Northern California.
As a result of substantial losses which the Company has incurred for each of the
three years ended December 31, 1994 and the nine months ended September 30,
1995, the Company and the Bank have been operating under the terms of an MOU and
certain regulatory Orders which have placed significant restrictions on their
operations, including restrictions on the payment of dividends, requirements for
specified capital levels and reductions of classified assets. The Company and
the Bank have not yet been able to achieve full compliance with the requirements
of the MOU and the Orders, particularly relative to earnings and the level of
capital. See REGULATORY AGREEMENTS.
In response to the MOU and the Orders, and recognizing its continuing losses and
declining capital during the nine months ended September 30, 1995, the Company
and the Bank have pursued a strategy to: (1) reduce total assets; (2) reduce
operating expenses and staffing levels; (3) reduce nonperforming assets while
increasing the reserve coverage of nonperforming assets; (4) reduce the
portfolio of real estate construction lending; (5) eliminate volatile deposits
and close non strategic branch offices; and (6) maintain high levels of
liquidity to facilitate asset and deposit dispositions. The effects of the
various components of this strategy are apparent throughout the Consolidated
Financial Statements.
During the first nine months of 1995, the Company reduced its assets 28% to
$172,923,000 and its deposits 28% to $167,239,000 at September 30, 1995. These
reductions were accomplished in part by the sale of the Bank's San Diego Branch
office in January, 1995 and the closure of the Santa Rosa branch in April of
1995. The liquidity necessary to dispose of these two branches was partially
provided by the Company's reduction in its commercial and real estate loan
portfolio. For the nine months ended September 30, 1995, the Company's
commercial loan portfolio decreased by 47% to $37,075,000 and the real estate
loan portfolio decreased by 25% to $41,380,000. For the three months ended
September 30, 1995, the Company continued to sustain losses from operations of
$(1,021,000), further reducing its capital to $(1,435,000), also resulting in
the Company's Tier 1 capital leverage ratio decreasing to (0.83)%. On August
23, 1995, the Bank was infused with an additional $3,500,000 in capital by
First Banks, Inc., thereby increasing the Bank's Tier 1 capital leverage ratio
to 2.41%. The Company and the Bank continue to be considered "troubled" for all
regulatory purposes as of October 31, 1995 and are deemed "critically
undercapitalized" and "undercapitalized," respectively, under the prompt
corrective action provisions of FDICIA. See CAPITAL ADEQUACY REQUIREMENTS. As of
October 31, 1995, the Bank's Tier 1 capital ratio reached 3.19%, as a result of
the purchase of a $1.5 million Investment Debenture by First Banks and by the
Company's contribution of the $1.5 million to the Bank.
LENDING AND CREDIT MANAGEMENT
Interest and fees earned on the loan portfolio is the primary source of income
of the Company. This income was 68.6% and 73.2% of total interest income for the
three and nine-month periods ended September 30, 1995, respectively, compared to
82.7% and 84.4% for the same periods in 1994. The reduction in income from loans
reflects the overall
16
<PAGE> 169
decrease in the amount of loans outstanding, particularly in the commercial and
real estate construction portfolios. Total loans outstanding were $156,468,000
at September 30, 1994, compared with $82,089,000 at September 30, 1995.
This reduction in loan income is critical to the profitability of the Bank.
While loans carry with them inherent credit risks, this can be controlled by
effective loan underwriting and loan approval procedures, a strong credit
administration and risk management system and periodic independent loan reviews.
At the same time, loans typically have interest rates and fees which are
substantially higher than alternative earning assets, such as investment
securities and Federal funds sold. For the three and nine-month periods ended
September 30, 1995, the yield on the Bank's loan portfolio was 9.94% and 9.57%,
respectively, compared to 5.91% and 5.84%, respectively, on its investment
portfolio. Consequently, the shifting of funds out of the loan portfolio and
into lower-earning assets has been a significant factor in the reduction of its
net interest margin.
As previously discussed, the Company's strategy to address the problems created
by its asset quality included the reduction of real estate construction loans
outstanding as well as the overall reduction of loans which were classified.
Because of this, the focus of the lending staff has been on the collection,
strengthening and restructuring of loans considered problems, rather than on the
origination of new loans to replace them. This was further compounded in recent
months by the resignation of a majority of the Bank's loan officers.
With a substantial recapitalization plan in place, and the continuing reduction
in the level of problem assets, management of the Bank has initiated a plan for
the renewal of business development efforts in its markets. Critical to those
efforts is the restaffing of the lending organization, which the Bank is in the
process of accomplishing.
Management of the Bank believes that the return of the Bank to satisfactory
condition requires: (1) the replenishment of the depleted capital base; (2) the
rapid reduction in the portfolio of problem assets to a more acceptable level;
(3) relief from all or most of the existing regulatory Orders; and (4) the
rebuilding of the Bank's loan portfolio by developing new, high quality
business. Consequently, these steps to regenerate a quality loan portfolio are
an integral part of this process.
SUMMARY OF OPERATIONS
The net loss for the quarter ended September 30, 1995, was $(1,021,000) compared
to net loss of $(2,704,000) for the quarter ended September 30, 1994. Net loss
per share was $(0.22) for the third quarter in 1995, compared to net loss per
share of $(0.58) for the third quarter in 1994. The Company's net loss for the
nine months ended September 30, 1995, was $(6,301,000), compared to a net loss
of $(14,178,000) for the same period last year. Net loss per share was $(1.35)
for the nine months ended September 30, 1995 compared to $(3.03) for the same
period in 1994.
The net loss for the quarter ended September 30, 1995 was primarily due to the
reduction in interest on loans resulting from the decrease in the amount of
loans outstanding, the writedown and other expenses associated with Other Real
Estate ("ORE") properties of $400,000 and the write-off of deferred costs of
$288,000 associated with portions of the Company's recapitalization plan, which
subsequently were revised.
NET INTEREST INCOME
Net interest income is the difference between interest and loan fees earned by
the Company on its earning assets and the interest expense paid on its
interest-bearing deposits and other borrowed funds. Net interest income,
expressed as a percentage of average total earning assets, is referred to as net
interest margin.
The Bank's prime rate averaged 8.75% for the quarter, compared to 7.5% for the
same quarter last year. Yield on earning assets increased to 8.28% compared to
7.91% for the same period past year. However, rates paid on interest-bearing
liabilities increased to 4.45% for the third quarter, compared to 3.30% for the
third quarter in 1994. As a result, the Bank's net interest margin was 4.51%
compared to 5.27% for the same period last year. In addition to this compression
17
<PAGE> 170
between the interest rates earned on assets and paid on liabilities, the
reduction which was occurring in the loan portfolio led to a shifting of funds
from loans, which typically carry higher interest rates to investments and
Federal Funds sold, which have lower interest rates. Total loans were 49.09% of
total deposits as of September 30, 1995, compared with 58.07% as of September
30, 1994.
Net interest income for the quarter ended September 30, 1995, was $1,721,000
compared to $3,107,000, for the same quarter last year, representing a decrease
of $1,386,000 or 44.61%. The majority of this decline was due to the reduction
in the level of real estate construction, real estate amortizing and commercial
loans. For the quarter ended September 30, 1995, average real estate
construction loans were $8,636,000, compared to $28,100,000 for the same period
last year, a decrease of $19,464,000 or 69.27%. Average real estate amortizing
loans were $19,216,000, compared to $22,924,000 for the same period last year, a
decrease of $3,708,000 or 16.18%. Average commercial loans were $41,553,000,
compared to $96,579,000 for the same period last year, a decrease of $55,026,000
or 56.98%.
Included in real estate construction loans are loans for the construction of
nonowner-occupied real estate. These loans averaged $4,858,000 for the quarter
ended September 30, 1995, compared to $20,879,000 for the same period last year,
a decrease of $16,021,000 or 76.73%. At September 30, 1995, nonowner-occupied
real estate construction loans were $4,383,000 compared to $18,278,000 at
September 30, 1994, a reduction of $13,895,000 or 76.02%.
Offsetting the decrease in interest income created by the reduction in the
volume of loans was the decrease in nonaccrual loans. At September 30, 1995,
nonaccrual loans totaled $4,738,000, a decrease of $7,742,000 or 62.04% from the
same period last year and a decrease of $6,695,000 or 58.56% from December 31,
1994. Included in nonaccrual loans at September 30, 1995 are 11 real estate
secured loans totaling $3,101,000, of which $1,060,000 are single-family
residences, $989,000 are single-family lots, $277,000 are land and $775,000 are
commercial buildings.
At September 30, 1995, the Bank had ORE totaling $2,054,000 compared to
$11,073,000 for the same period last year and $5,222,000 at December 31, 1994.
Included in ORE are 17 properties, 3 of which consist of single-family
residences with a book value of $395,000 and 14 in the single-family lot
category with a book value of $1,659,000. The activity in ORE for the nine
months ended September 30, 1995 includes sales of 15 separate properties
totaling approximately $5,308,000, which resulted in a net gain of $202,000.
During the third quarter of this year, the Bank foreclosed on four properties
totaling $1,158,000 which were included in ORE as of September 30, 1995.
Net interest income for the nine months ended September 30, 1995 was $6,012,000
compared to $9,655,000 for the same period last year, a decrease of $3,643,000
or 37.73%, again primarily due to a reduction in the level of real estate and
commercial loans. For the nine months ended September 30, 1995, average real
estate construction loans were $12,219,000 compared to $33,149,000 for the same
period last year, a decrease of $20,930,000 or 63.14%. Average commercial loans
were $55,593,000 for the nine months ended September 30, 1995, compared to
$100,209,000 for the same period last year, a decrease of $44,616,000 or 44.52%.
The Bank's interest expense increased $406,000 or 9.59% for the nine months
ended September 30, 1995 in comparison to the same period last year. This
increase is primarily due to a change in the mix of deposits, as well as a
general increase in the rates paid on deposits. See "Liquidity" herein.
The Bank's prime rate averaged 8.86% for the nine months ended September 30,
1995, compared to 6.99% for the same period last year. Yield on earning assets
increased to 8.17%, compared to 7.46% for the same period last year. However,
rates paid on interest-bearing liabilities increased to 4.09% for the nine
months ended September 30, 1995, compared to 3.05% for the same period last
year. As a result, the Bank's net interest margin was 4.77% compared to 5.31%
for the same period last year.
18
<PAGE> 171
PROVISION FOR LOAN LOSSES
The allowance for loan losses is maintained at a level that management of the
Bank considers to be adequate to provide for future losses that reasonably can
be anticipated. The allowance for loan losses is increased by charges to the
provision for loan losses and reduced by charge-offs net of recoveries on loans
previously charged off. Future losses include those that are known, those
reasonably anticipated and inherent losses which are probable but not
identifiable on a specific loan by loan basis. Although management utilizes its
best judgment in providing for possible loan losses and establishing the
allowance for loan losses, the allowance is an estimate which is inherently
uncertain and depends on the outcome of future events.
It is the policy of the Bank to establish the allowance for loan losses based
upon a systematic and documented approach which is consistently applied and
regularly monitored. The methodology employed is dynamic and addresses both
general and specific allowances for loan losses, encompassing internal factors
based upon the individual credit components of the Bank's loan portfolio and
external factors based upon economic, political and regulatory factors. Coupled
with the internal and external analysis of the Bank's risk assets, the Bank's
historical experience, current conditions, and anticipated future developments
are integrated into the process of evaluating and calculating the reserve. In
addition, the reserve is determined based upon the following factors: the
delinquency status of the loan portfolio, inherent risk by type of loan,
historical loss trends derived from experience, industry statistical data,
recommendations made by the Bank's regulatory authorities and the current
economic environment.
Incumbent in establishing the appropriate level of the allowance for loan losses
are two components which are vital to the overall credit administration process
of the Bank. They are the asset quality rating process and the internal loan
review process, which serve to establish an assessment of the general quality of
the Bank's loan portfolio. The asset quality rating process occurs on a
continuous basis. Credit review procedures are performed on a quarterly basis,
with annual and periodic reviews performed by the external auditors and the
regulatory authorities, respectively.
During the quarter ended September 30, 1995, the Bank provided $100,000 to its
allowance for loan losses as compared to $1,022,000 for the same period in 1994.
The provision for loan losses for the nine months ended September 30, 1995 was
$3,345,000 as compared to $9,057,000 for the same period in 1994. Of the
provisions for 1995, $3,245,000 or ninety-seven percent was made during the
quarter ended June 30, 1995. The 1995 second quarter provision was significantly
influenced by two events: (1) a provision of $2,166,000 to fully charge-off six
loans in the aggregate amount of $4,238,000, net of $2,072,000 previously
provided to the allowance for loan losses with respect to those loans and (2) an
increase in the allowance for loan losses required for certain substandard loans
of $891,000 resulting from an increase in the percentage applied to these loans
in calculating the allowance from 7.5% to 15%. Substantially all of the 1995
second quarter provisions to its allowance for loan losses resulted from
recommendations made by the Bank's regulatory examiners during the joint
FDIC/State Banking Department examination which commenced on May 22, 1995. Of
the six loans charged-off during the quarter, one loan charge-off, in the
principal amount of $3,010,000, net of $1,500,000 previously provided to the
allowance for loan losses for this loan, resulted from a bankruptcy proceeding
threatened by the borrower during the second quarter of 1995 and commenced
during the third quarter.
Net loan charge-offs for the quarter ended September 30, 1995 were $80,000,
compared to $940,000 for the same quarter last year. Net loan charge-offs for
the nine months ended September 30, 1995 were $5,917,000, compared to $8,079,000
for the same period last year. The ratio of net charge-offs to average total
loans was 0.36% for the third quarter of 1995 and 2.16% for the same period in
1994. The charge-off ratio for the nine months ended September 30, 1995 and 1994
was 7.26% and 5.92%, respectively. At September 30, 1995, the loan loss reserve
was $4,838,000, or 5.89% of total loans compared to $8,314,000 or 5.31% of total
loans at September 30, 1994. The loan loss reserve as a percentage of
nonperforming loans was 90.48%, at September 30, 1995, compared to 61.18% for
the same period last year. Additionally, the loan loss reserve as a percentage
of nonperforming assets, which includes ORE, was 65.37% at September 30, 1995,
compared to 42.77% for the same period last year.
19
<PAGE> 172
NON-INTEREST INCOME
Non-interest income consists primarily of service charges on deposit accounts
and other related fees, merchant discount income, other non-yield related fees
and charges, and other income. Total non-interest income decreased $340,000 or
55.11% for the quarter ended September 30, 1995, compared to the same period
last year. Service charges on deposit accounts and other related fees decreased
$134,000 primarily due to a decrease in deposit accounts. Merchant discount
income decreased $5,000 over the same quarter last year due to a decrease in
volume of merchant customer activity. VISA card and personal lines of credit
annual fee income decreased $11,000 in comparison to same quarter last year
because of a decrease in personal lines of credit loans outstanding and due to
the termination of the Bank's in-house VISA credit card program during the
second quarter of 1995. Mortgage fee income decreased $3,000 in comparison to
the same period last year due to the closing of the mortgage loan division
effective April, 1994.
Included in other non-interest income for the quarter ended September 30, 1995
are net gains on sales of ORE totaling $33,000. Included in this category for
the quarter ended September 30, 1994, are net gains on sales of ORE totaling
$24,000 and a partial settlement of a lawsuit in favor of the Company of
$198,000.
Non-interest income was $1,131,000 for the nine-months ended September 30, 1995,
compared to $1,711,000 for the same period last year, a decrease of $580,000 or
33.90%. Service charges on deposit accounts decreased $356,000 due to a decrease
in the number of deposit accounts. Merchant discount income decreased $8,000 due
to an decrease in volume of merchant customer activity. VISA card and personal
lines of credit annual fee income decreased $27,000, and mortgage fee income
decreased $65,000.
Included in other non-interest income for the nine-months ended September 30,
1995 are net gains on sales of ORE totaling $202,000 and recovery of collection
expenses on a charged-off loan of $40,000. Included in other non-interest income
for the nine-months ended September 30, 1994 are net gains on sales of ORE
totaling $171,000 and a partial settlement of a lawsuit for $230,000.
NON-INTEREST EXPENSE
The following table summarizes the significant components of non-interest
expense for the quarters ended September 30, 1995 and 1994:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
DOLLAR PERCENTAGE
(Dollar amounts in thousands) 1995 1994 CHANGE CHANGE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALARIES AND RELATED BENEFITS $ 984 $ 1,545 $ (561) (36.31)%
OCCUPANCY 305 389 (84) (21.59)%
EQUIPMENT 160 193 (33) (17.10)%
OTHER 1,470 3,279 (1,809) (55.17)%
------- ------- -------
TOTAL $ 2,919 $ 5,406 $(2,487) (46.00)%
======= ======= =======
</TABLE>
Other non-interest expense was $1,470,000 for the quarter ended September 30,
1995, compared to $3,279,000 for the quarter ended September 30, 1994, a
decrease of $1,809,000 or 55.17%. This decrease is primarily attributable to a
decrease in ORE write downs and other ORE expenses, reflecting a decrease in ORE
from $11,073,000 at September 30, 1994 to $2,054,000 at September 30, 1995, a
reduction of $9,019,000 or 81.45%. ORE related expenses for the quarter ended
September 30, 1995 consisted of write downs of four properties totaling $145,000
and expenses of $255,000 to acquire, maintain, and complete residential home and
lot properties for the quarter ended September 30, 1995, compared to a write
down of two properties totaling $788,000 and expenses of $358,000 for the
quarter ended September 30, 1994.
20
<PAGE> 173
In July of 1994, the Company charged-off $992,000 of unamortized deferred costs
associated with the 1988 acquisition of the Citizens Banks of Roseville. As a
result of this write-off, no acquisition amortization expense was required for
the quarter ended September 30, 1995, whereas $1,001,000 was recorded for the
same period last year.
Effective September 30, 1994, the Bank discontinued third party vendor payments
for all title and escrow deposit accounts. As a result, there were no services
provided to title company customers and no title company expense for the third
quarter ended September 30, 1995, compared to $164,000 for the same period last
year. In addition, there were decreases in insurance expense, FDIC insurance,
stationery and supplies, courier expense, telephone expense and operating losses
for the quarter ended September 30, 1995 when compared to the same quarter of
the prior year.
A substantial portion of the decrease in these expenses resulted from the sale
of the Bank's San Diego office and closure of its Santa Rosa branch as well as
the Company's continuing efforts to reduce its operating expenses.
Offsetting these decreases in other non-interest expense for the third quarter
ended September 30, 1995, were legal expenses of $86,000, management consulting
expenses of $123,000, certified public accounting expenses of $63,000, and
miscellaneous expenses of $16,000 which related to the write-off of deferred
costs in connection with certain portions of the recapitalization of the Company
and the Bank, which were subsequently revised. An additional increase of $61,000
in legal expenses resulted from general corporate legal matters and legal costs
associated with the reduction and resolution of problem assets.
Salaries and related benefits decreased $561,000 or 36.31%. This decrease is
primarily due to a reduction in staff. At September 30, 1995, the Bank has
reduced the level of its full-time equivalent employees to 97 from 155 at
September 30, 1994. Additional staff reductions were implemented effective
October 13, 1995. Anticipated salary savings from this reduction are
approximately $47,000 per month. The Bank anticipates further staff reductions
upon completion of a scheduled computer conversion in early December which will
result in salary savings of approximately $34,000 per month.
Occupancy and equipment expense was $465,000 for the quarter ended September 30,
1995, compared to $582,000 for the same period last year, a decrease of $117,000
or 20.1%. This decrease is primarily due to the selling of the San Diego branch
office on January 21, 1995 and the closure of the Santa Rosa branch on April 14,
1995. Additionally, at the end of the third quarter of 1995, the Bank relocated
its head office which will result in a monthly reduction in rent expense of
approximately $24,000.
The following table summarizes the significant components of non-interest
expense for the nine months ended September 30, 1995, and 1994:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
DOLLAR PERCENTAGE
(Dollar amounts in thousands) 1995 1994 CHANGE CHANGE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALARIES AND RELATED BENEFITS $ 3,196 $ 5,145 $(1,949) (37.88)%
OCCUPANCY 1,318 1,089 229 21.03 %
EQUIPMENT 483 764 (281) (36.78)%
OTHER 5,100 7,563 (2,463) (32.57)%
------- ------- -------
TOTAL $10,097 $14,561 $(4,464) (30.66)%
======= ======= =======
</TABLE>
Other non-interest expense was $5,100,000 for the nine months ended September
30, 1995, compared to $7,563,000 for the same period last year, a decrease of
$2,463,000 or 32.57%. This decrease is primarily attributable to ORE write downs
and other expenses of $2,410,000 for the nine months ended September 30, 1995
compared to $3,146,000 for the same period last year, a decrease of $736,000.
ORE related expenses for the first nine months of 1995 consisted of write
21
<PAGE> 174
downs on 17 properties totaling $1,273,000 and expenses of $1,137,000 to
acquire, maintain, complete and to increase the contingency reserve on
residential home and lot properties. For the nine months ended September 30,
1994, the Bank incurred write downs on ten properties totaling $2,434,000 and
expenses of $712,000.
There was no acquisition amortization expense related to the acquisition of the
Citizens Bank of Roseville required for the nine months ended September 30,
1995, whereas $1,047,000 was recorded for the same period last year.
Other decreases in expenses include a reduction in the cost of services provided
to title company customers of $672,000, FDIC insurance of $131,000, telephone
expense of $58,000, stationary and supplies of $82,000, travel and business
development $65,000, directors fees of $57,000, courier expense of $59,000
and operating losses of $70,000. The operating loss for the nine months ended
September 30, 1994 included a portion of the loss deductible under the Bank's
Financial Institution Bond for a defalcation perpetrated by a former employee of
the Bank.
Offsetting these decreases in other non-interest expense for the nine months
ended September 30, 1995, were increases in legal expense of $341,000 primarily
relating to the reduction and resolution of problem assets and the write-off of
deferred costs in connection with the recapitalization of the Company and the
Bank. There were also increases in management consulting expense of $103,000 and
certified public accounting expense of $42,000.
Salaries and related benefits decreased $1,949,000 or 37.88%. This decrease is
primarily due to a reduction in staff and the sale and closure of branch
offices, as noted on the previous page.
Occupancy and equipment expense was $1,801,000 for the nine months ended
September 30, 1995, compared to $1,853,000 for the same period last year, a
decrease $52,000 or 2.81%. During the second quarter of 1995, the Bank expensed
the unamortized balance of leasehold improvements and furniture and equipment
relating to one of the Bank's discontinued branch offices of $158,000. The Bank
also recorded the remaining rent expense of $182,000 in connection with this
discontinued branch, and a nonrecurring rent expense of $40,000 relating to
common area maintenance expense on the San Diego branch office. Offsetting these
increases to occupancy and equipment were decreases of $182,000 in depreciation
expense relating to data processing equipment which became fully depreciated in
1994 and the ongoing costs that were associated with the San Diego and Santa
Rosa branch offices.
PROVISION FOR INCOME TAXES
Due to the loss reported for the nine-month period ended September 30, 1995, and
the substantial losses reported for the year ended December 31, 1994, the
Company concluded that it no longer met the realization standards for its income
tax assets as embodied in Statement of Financial Accounting Standards No. 109,
and recorded the losses for the quarter and nine-month period ended September
30, 1995 on a pre-tax benefit basis. California State Franchise tax expense of
$2,000 was recorded for the nine-month period ended September 30, 1995. This
compares to a provision for income taxes of $0 and $1,926,000 for the quarter
and nine-month period ended September 30, 1994, respectively.
LIQUIDITY
Liquidity refers to the Company's ability to maintain a cash flow adequate to
fund both on and off-balance sheet sources (assets) and meet obligations
(liabilities) on a timely and cost-effective basis. Potential significant
liquidity requirements include funding of commitments to loan customers and
withdrawals from non-interest-bearing demand deposits, as well as meeting the
funding requirements created by the Company's decisions to reduce title and
escrow company deposits, reduce brokered and other non-core deposits and sell or
close two branch offices.
The Company's liquidity ratio is defined as: (1) cash and due from banks net of
reserve requirements, Federal funds sold, securities purchased under resale
agreements, interest-bearing deposits with other financial institutions and
marketable securities, less amounts pledged to secure deposits and for other
purposes, divided by (2) total deposits, less deposits secured by marketable
securities, and short-term borrowings. Using this definition at September 30,
1995, the Company's
22
<PAGE> 175
liquidity ratio was 51.54%, compared to 40.36% at September 30, 1994. At
September 30, 1995, the loan-to-deposit ratio was 49.09%, which compares to
58.07% at September 30, 1994.
The following table highlights the average deposit structure as of September 30,
1995, and September 30, 1994:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
DOLLAR PERCENTAGE
(Dollar amounts in thousands) 1995 1994 CHANGE CHANGE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DEMAND (EXCLUDING TITLE AND ESCROW ACCOUNTS) $ 30,968 $ 54,455 $(23,487) (43.13)%
CORE TITLE AND ESCROW DEMAND ACCOUNTS (1) 1,062 17,000 (15,938) (93.75)
INTEREST BEARING TRANSACTION ACCOUNTS 43,787 77,302 (33,515) (43.36)
SAVINGS ACCOUNTS 17,973 24,091 (6,118) (25.40)
TIME ACCOUNTS, LESS THAN $100,000 57,052 44,124 12,928 29.30
-------- -------- --------
TOTAL CORE DEPOSIT ACCOUNTS 150,842 216,972 (66,130) (30.48)
EXCESS TITLE AND ESCROW DEMAND ACCOUNTS (1) -- 3,905 (3,905) (100.00)
PUBLIC TIME ACCOUNTS -- 339 (339) (100.00)
TIME ACCOUNTS, MORE THAN $100,000 17,953 37,401 (19,448) (52.00)
-------- -------- --------
TOTAL DEPOSIT ACCOUNTS $168,795 $258,617 $(89,822) (34.73)%
======== ======== ========
</TABLE>
(1) In accordance with a recommendation of the FDIC, title and escrow company
deposits in excess of the Bank's historical minimum level of $17,000,000
were considered volatile and were excluded from core deposits. These
excess title and escrow company deposits were invested in liquid assets
with one-day maturities in order to assist in managing the Bank's
liquidity.
During the second quarter of 1994, the Bank began a program to reduce title and
escrow company deposit balances in order to reduce its dependency on volatile
liabilities and the related non-interest expenses. Effective September 30, 1994,
the Bank discontinued third party vendor payments for all title and escrow
deposit accounts. Title and escrow company deposits at September 30, 1995 were
$1,148,000 compared to $21,542,000 at September 30, 1994.
The decrease in total deposit accounts was primarily due to the reduction in the
asset size of the Bank to compensate for the decline in the Company's capital.
As part of this reduction, the Company sold the San Diego branch on January 20,
1995, and closed the Santa Rosa branch on April 14, 1995. Included in the third
quarterly averages for 1994 for these two branches were $6,771,000 in demand
accounts; $13,567,000 in core title and escrow company accounts; $12,901,000 in
interest-bearing transaction accounts; $2,493,000 in savings; $5,486,000 in time
accounts less than $100,000; and $2,702,000 in time accounts more than $100,000.
The additional decreases in all deposit categories excluding time accounts less
than $100,000, was due to a decision to allow deposits to decrease in order to
control the interest rates paid on deposits.
The increase in time accounts less than $100,000 is due to a bank-wide calling
program which was implemented in mid-February 1995 and which resulted in the
origination of approximately $12,000,000 in such new time accounts at a rate of
7% with a term of one year. See "Net Interest Income."
The volatile liability dependency ratio is defined as time accounts greater than
$100,000, Federal funds purchased, other short-term borrowings and excess title
and escrow company deposits less short-term investments, divided by total
earning assets less short-term investments. A positive ratio indicates the
extent to which the Bank is funding long-term assets with short-term volatile
deposits. At September 30, 1995, the Bank had a negative volatile liability
dependency ratio of (48.42%) compared to (12.58)% at September 30, 1994.
23
<PAGE> 176
To augment possible short-term liquidity needs, the Bank has a secured
borrowing arrangement with the Federal Reserve Bank of San Francisco. At
September 30, 1995, the Bank had investment securities in the aggregate
principal amount of $17,252,000 and loans totaling $20,140,000 eligible for
pledging as collateral. At September 30, 1995, the Bank could borrow up to
approximately 75.77% of the value of the pledged assets. This borrowing
arrangement was not utilized during the nine-month period ended September
30, 1995, nor during the year ended December 31, 1994.
Undisbursed loan commitments, which are a factor in managing liquidity,
totaled $23,164,000, compared to $41,504,000 at December 31, 1994, and
$50,240,000 at September 30, 1994. Listed below are these commitments by
loan category as of September 30, 1995:
- Commitments of $12,634,000 are associated with commercial loans,
substantially all of which are contingent upon customers maintaining
specific credit standards. This represents a 58.08% reduction from the
$30,138,000 at September 30, 1994.
- There were no commitments associated with speculative real
construction loans with short-term maturities at September 30, 1995,
compared to commitments of $2,644,000 at September 30, 1994.
- Commitments of $776,000 are associated with owner/builder construction
loans. This represents a 71.63% reduction from the $2,735,000 at
September 30, 1994.
- Commitments of $9,754,000 are associated with consumer loan products
consisting of equity lines and personal lines of credit. This
represents a 33.75% reduction from the $14,723,000 at September 30,
1994.
These present commitments are expected to be funded through existing
liquidity and the repayment of existing loans. Management believes the Bank
presently has sufficient funding sources from which to meet its funding
requirements for outstanding loan commitments.
CAPITAL ADEQUACY REQUIREMENTS
The Company is subject to the Federal Reserve Board's capital guidelines for
bank holding companies and the Bank is subject to the FDIC's regulations
governing capital adequacy for nonmember banks. The Federal banking agencies
have proposed regulations which would impose additional capital requirements
on banks based on the interest rate risk inherent in a bank's portfolio.
The Federal Reserve Board has established risk-based and leverage capital
guidelines for bank holding companies which are similar to the FDIC's
capital adequacy regulations for nonmember banks. The Federal Reserve Board
guidelines apply on a consolidated basis to bank holding companies with
consolidated assets of $150 million or more. In addition, the Bank is
subject to specific capital requirements imposed by the FDIC and State
Banking Department. See REGULATORY AGREEMENTS.
The Federal Reserve Board capital guidelines for bank holding companies and
the FDIC's regulations for nonmember banks set total capital requirements
and define capital in terms of "core capital elements," or Tier 1 capital(1)
and
----------------------------
(1) Tier 1 capital is generally defined as the sum of the core capital
elements less goodwill and certain intangibles. The following items are defined
as core capital elements: (i) common stockholders equity; (ii) qualifying
noncumulative perpetual preferred stock and related surplus; and (iii) minority
interests in the equity accounts of consolidated subsidiaries.
24
<PAGE> 177
"supplemental capital elements," or Tier 2 capital(2). The maximum amount of
supplemental capital elements which qualify as Tier 2 capital is limited to
one-hundred percent (100%) of Tier 1 capital, net of goodwill.
Both bank holding companies and nonmember banks are required to maintain a
minimum ratio of qualifying total capital to risk-weighted assets of eight
percent (8%), at least one-half of which must be in the form of Tier 1
capital. Risk-based capital ratios are calculated with reference to
risk-weighted assets, including both on and off-balance sheet exposures,
which are multiplied by certain risk weights assigned by the Federal Reserve
Board to those assets.
PROMPT CORRECTIVE ACTION
In addition to the minimum regulatory capital requirements set forth above,
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
created capital categories for the purpose of determining when supervisory
or other corrective action is appropriate. The five capital categories are
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized.
In order to be well capitalized, an institution must have a total risk-based
capital ratio of 10% or more, a Tier 1 risk-based capital ratio of 6% or
more, a leverage capital ratio of 5% or more, and not be subject to any
written agreement or order issued by the FDIC. An adequately capitalized
institution must have a total risk-based capital ratio of 8% or more, a Tier
1 risk-based capital ratio of 4% or more and a leverage ratio of 4% or more.
An undercapitalized institution has a total risk-based capital ratio of less
than 8%, or a Tier 1 risk-based capital ratio of less than 4% or a leverage
ratio of less than 4%. Significantly undercapitalized means a financial
institution with a total risk-based ratio of less than 6%, or a Tier 1
risk-based ratio of less than 3% or a leverage ratio of less than 3%. A
critically undercapitalized institution has a ratio of tangible equity to
total assets that is equal to or less than 2%. At September 30, 1995, the
Bank was classified as a significantly undercapitalized institution.
Set forth in the table below are the Company's and the Bank's risk-based
and leverage capital ratios as of September 30, 1995. Information provided
for the Company gives effect the approval of the Stock Purchase Agreement
by the Company's Stockholders as if such approval had occurred on September
30, 1995. Accordingly the following transactions are reflected therein: (1)
the exchange of 750,000 shares of nonvoting, noncumulation Bank preferred
stock held by First Banks for 15,000,000 shares of Company common stock,
and (2) the exchange of 116,666,666 shares of Bank common stock held by
First Banks for 35,000,000 shares of Company common stock.
-------------------------
(2) Supplementary capital elements include: (i) allowance for loan and lease
losses (which cannot exceed 1.25% of an institution's risk weighted assets);
(ii) perpetual preferred stock and related surplus not qualifying as core
capital; (iii) hybrid capital instruments, perpetual debt and mandatory
convertible debt instruments; and (iv) term subordinated debt and
intermediate-term preferred stock and related surplus.
25
<PAGE> 178
Risk-Based and Leverage Capital Ratios
as of September 30, 1995 (1)
<TABLE>
<CAPTION>
COMPANY BANK
- ---------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TIER 1 RISK-BASED CAPITAL (2) $ (1,431) (1.40)% $ 4,163 4.09 %
TIER 1 CAPITAL MINIMUM REQUIREMENT 4,075 4.00 % 4,075 4.00 %
--------- ---- ---------- ----
EXCESS/(DEFICIENCY) $ (5,506) (5.40)% $ 88 0.09 %
========= ==== ========== ====
TOTAL RISK-BASED CAPITAL (3) $ (112) (0.11)% $ 5,481 5.38 %
TOTAL CAPITAL MINIMUM REQUIREMENT 8,150 8.00 % 8,150 8.00 %
--------- ---- ---------- ----
EXCESS/(DEFICIENCY) $ (8,262) (8.11)% $ (2,669) (2.62)%
========= ==== ========== ====
RISK-ADJUSTED ASSETS $ 101,879 $ 101,879
========= ==========
LEVERAGE CAPITAL RATIO (4) (0.83)% 2.41 %
==== ====
TOTAL AVERAGE ASSETS $ 173,001 $ 173,001
========= ==========
</TABLE>
(1) As a result of the purchase of a $1.5 Investment Debenture by First Banks
and the contribution of the funds to the Bank, the Bank's Tier 1 capital
ratio reached 3.19% at October 31, 1995.
(2) Includes common stockholders' equity.
(3) Includes common stockholders' equity and allowance for loan losses,
subject to certain limitations.
(4) Tier 1 capital divided by average assets for the period. Under the current
rules, a minimum leverage ratio of 3% is required for institutions which
have been determined to be in the highest of five categories used by
regulators to rate financial institutions. All other institutions,
including the Company and the Bank, are required to maintain leverage
ratios of at least 100 to 200 basis points above the 3% minimum.
Commencing December 9, 1992, insured institutions such as the Bank must,
among other things, maintain a leverage ratio of at least 4% or 5% to be
considered "adequately capitalized" or "well capitalized," respectively,
under the prompt corrective action provisions of the FDICIA.
Because of its capital position, as determined by the FDIC, the Bank is subject
to significant restrictions under Section 38 of the Federal Deposit Insurance
Act ("FDIA").
An institution which is undercapitalized, significantly undercapitalized or
critically undercapitalized becomes subject to the following mandatory
supervisory actions immediately upon notification of its capital category: (1)
restrictions on payment of capital distributions, such as dividends; (2)
restrictions on payment of management fees to any person having control of the
institution; (3) close monitoring by the FDIC of the condition of the
institution, compliance with capital restoration plans, restrictions, and
requirements imposed under Section 38, and periodic review of the institution's
efforts to restore its capital and comply with restrictions; (4) requirement
that the institution submit within the time allowed by the FDIC a capital
restoration plan, which must include (a) the steps the institution will take to
become adequately capitalized, (b) the levels of capital to be attained during
each year in which the plan will be in effect, (c) how the institution will
comply with restrictions or requirements imposed on its activities, (d) the
types and levels of activities in which the institution will engage, and (e)
such other information as the FDIC may require; (5) requirement that any company
which controls an undercapitalized institution must guarantee, in an amount
equal to 5% of the institution's total assets or the amount needed to bring the
institution into full capital compliance, that the institution will comply with
the capital restoration plan until the institution has been adequately
capitalized, on the average, for four consecutive quarters;
26
<PAGE> 179
(6) restrictions on growth of the institution's total assets so that its average
total assets during any calendar quarter do not exceed its average total assets
during the preceding calendar quarter unless (a) the FDIC has accepted the
institution's capital restoration plan, (b) any increase in total assets is
consistent with the capital restoration plan, and (c) the institution's ratio of
tangible equity to assets increases during the calendar quarter at a rate
sufficient to enable the institution to become adequately capitalized within a
reasonable time; and (7) limitations on the institution's ability to make any
acquisition, open any new branch offices or engage in any new line of business
unless the FDIC has accepted the institution's capital plan and has granted
prior approval.
In addition to the above, the FDIC may take any of the actions described below
for institutions which fail to submit and implement a capital restoration plan.
Significantly undercapitalized and undercapitalized institutions that fail to
submit and implement adequate capital restoration plans are subject to the
mandatory provisions set forth above and, in addition, will be required to do or
comply with one or more of the following: (1) sell enough additional capital,
including voting shares, to bring the institution to an adequately capitalized
level or, if one or more grounds exist for appointing a conservator or receiver
for the institution, be acquired by or combined with another insured depository
institution; (2) restrict transactions with affiliates; (3) restrict interest
rates paid on deposits to the prevailing rates in the region where the
institution is located as determined by the FDIC; (4) restrict asset growth or
reduce total assets more stringently than described above; (5) terminate, reduce
or alter any activity (including any activity conducted by a subsidiary of the
institution) determined by the FDIC to pose an excessive risk to the
institution; (6) hold a new election for the institution's board of directors;
(7) dismiss directors or senior officers and/or employ new officers, subject to
agency approval; (8) cease accepting deposits from correspondent depository
institutions, including renewals and rollovers of prior deposits; (9) divest or
liquidate any subsidiary that is in danger of becoming insolvent and poses a
significant risk to the institution or that is likely to cause significant
dissipation of the institution's assets or earnings; or (10) take any other
action that the FDIC determines to be appropriate.
Significantly undercapitalized institutions are also prohibited from paying any
bonus or raise to a senior executive officer without prior FDIC approval. No
such approval will be granted to an institution which is required but has failed
to submit an acceptable capital restoration plan. Further, the FDIC may impose
one or more of the restrictions applicable to critically undercapitalized
institutions set forth below.
In addition to all of the restrictions set forth above, a critically
undercapitalized institution must be placed in conservatorship or receivership
within 90 days of becoming critically undercapitalized, unless the FDIC
determines that other action would better achieve the purposes of the FDIA.
A determination of alternate action by the FDIC is effective for only 90 days,
after which period the FDIC must reexamine whether to appoint a conservator or
receiver for the Bank. Such determination must thereafter be renewed by the FDIC
at the end of each 90-day period. Notwithstanding the FDIC's periodic
redetermination of the effectiveness of the alternative actions it has ordered,
if the Bank is critically undercapitalized on average during the calendar
quarter beginning 270 days after the Bank became critically undercapitalized,
the FDIC is required by FDICIA to appoint a receiver for the Bank unless the
FDIC finds that: (a) the Bank has positive net worth; (b) the Bank has been in
substantial compliance with its Capital Plan, as approved by the FDIC; (c) the
Bank is profitable or has an upward trend in earnings which the FDIC projects is
sustainable; and (d) the Bank is reducing the ratio of non-performing loans to
total loans. In addition, both the FDIC and the Chairman of the Board of the
Bank must certify that the Bank is viable and not expected to fail.
A critically undercapitalized institution also is prohibited from taking a
number of actions without FDIC prior written approval, including entering into
any material transaction other than in the usual course of business, making
payments on subordinated debt, financing a highly leveraged transaction,
adopting charter or by-law amendments, materially changing accounting methods,
engaging in any covered transaction as defined in the Federal Reserve Act,
paying excessive compensation or bonuses, and paying interest on new or renewed
liabilities at a rate that would increase the institution's
27
<PAGE> 180
weighted average cost of funds to a level significantly exceeding the prevailing
rates of interest on insured deposits in the institution's normal market areas.
The FDIC, in its discretion, may restrict even further the activities of a
critically undercapitalized institution.
As of July 30, 1995, the Bank was notified that it was critically
undercapitalized and that the Bank would have been placed in receivership on
October 30, 1995, unless the Bank's Tier 1 capital ratio increased above 2% or a
determination was made that a different action was more appropriate. As
previously noted, as of October 31, 1995, the Bank's Tier 1 capital ratio was
approximately 3.19%. Thus, its classification has been upgraded to
"undercapitalized." If the Company's stockholders approve the Stock Purchase
Agreement, First Banks will purchase an additional $5 million convertible
Debenture, $4.75 million of which will be provided to the Bank as additional
capital. Giving effect to this as if the Stock Purchase Agreement were approved
and the transactions contemplated thereby consummated, as of October 31, 1995,
the Bank's Tier 1 capital ratio would be increased to approximately 5.98%
REGULATORY AGREEMENTS
FDIC AND STATE BANKING DEPARTMENT REGULATORY ORDERS
As a result of an examination of the Bank by the FDIC and the State Banking
Department ("SBD") which was concluded during the second quarter of 1993, the
Bank consented to enter into an amended Cease and Desist Order with the FDIC on
July 27, 1993 (the "FDIC Cease and Desist Order"). Similarly, the Bank consented
on July 6, 1993, to the entrance of a Final Order under Financial Code Section
1913 with the SBD, which was amended on March 30, 1995, (the 'SBD Final Order")
(collectively, the "Orders"). The Orders remain in effect.
During the second quarter of 1995, the FDIC and SBD conducted a joint
examination of the Bank which was commenced on May 22, 1995. All recommendations
from the examiners with respect to loan and other asset write-offs, including
recommended provisions to the Bank's loan loss reserves, were complied with as
of June 30, 1995.
Pursuant to the Orders, the Bank is required to: (a) maintain management
acceptable to the SBD and FDIC; (b) notify the SBD in writing prior to adding
any individual to its Board of Directors; (c) charge off assets classified loss
noted in the ROE of the Bank as of March 25, 1994; (d) reduce assets classified
substandard in accordance with a prescribed schedule; (e) reduce the amount of
assets listed for attention in the ROE within a certain time frame; (f) within
30 days, develop and adopt and thereafter implement a profit plan and
month-by-month budget; (g) within 30 days, adopt and thereafter implement a
strategic plan to return the bank to a profitable condition, in a form
acceptable to the SBD and FDIC; (h) not later than September 30, 1995, increase
tangible shareholders' equity to not less than 6.5% of tangible assets and
increase such ratio to 7.0% by December 31, 1995 and maintain such 7% ratio
during the life of the Orders; (i) make no distributions to any shareholder
without the prior written consent of the SBD; (j) immediately comply with all
laws and regulations and correct or eliminate within 30 days any apparent
violations noted in the ROE; and (k) establish a committee to assure compliance
with the SBD Amended Final Order. All of the items in the Orders have been
complied with timely, except as discussed herein.
With respect to acceptable management, as of June 1, 1994, James E. Culleton,
the Executive Vice President of the Company and Executive Vice President and
Chief Operating Officer of the Bank, was named as Interim President of the
Company and the Bank until a permanent President and Chief Executive Officer
could be employed. Applications have been approved by the SBD and FDIC for
Mr. Culleton to serve as the permanent President and Chief Operating Officer of
the Bank, and Donald W. Williams has been appointed Chief Executive Officer of
the Bank. An application also will be filed with the Reserve Bank for approval
of Mr. Williams to serve as President and Chief Executive Officer of the
Company. The requisite applications have been filed with the FDIC and the SBD
to obtain the necessary approvals for Terrance McCarthy to be appointed as
Senior Vice President and Chief Credit Officer of the Bank.
28
<PAGE> 181
Pursuant to the Orders, the Bank agreed to maintain adjusted Tier 1 capital
equal to or exceeding 6.5% of the Bank's total assets. Furthermore, the Bank is
required to maintain tangible shareholders' equity plus mandatorily convertible
subordinated debt equal to not less than 6.5% of total tangible assets, and a
minimum tangible shareholders' equity plus mandatorily convertible subordinated
debt of $12,300,000. The SBD Final Order requires the ratio of shareholders'
equity to tangible assets to increase to 7% at December 31, 1995.
In response to its capital deficiency, the Bank submitted to the FDIC on August
23, 1994 its Capital Restoration Plan (the "Capital Plan") which was amended on
November 22, 1994, and approved by the FDIC on January 30, 1995. One of the
components of the Capital Plan consists of a decrease in the Bank's asset size.
On January 21, 1995, the Bank consummated the sale of its San Diego branch
office to the Bank of Commerce, and on April 14, 1995, the Bank's Santa Rosa
branch office was closed. On August 31, 1995, the Company moved its corporate
headquarters to the branch office of the Bank located at 865 Howe Avenue,
Sacramento, California, thus decreasing overhead by $24,000 per month.
As a result of the losses occurring during the year ended December 31, 1994 and
for the nine-month period ended September 30, 1995, the Bank is not in
compliance with its mandatory capital ratios. As of September 30, 1995, the
Bank's adjusted Tier 1 capital ratio was 2.41%, and the Bank's tangible
shareholders' equity plus mandatorily convertible subordinated debt was 2.36% of
total tangible assets. At that date, the Bank's tangible shareholders' equity
was $4,162,717, which includes the conversion of a $2,400,000 mandatorily
convertible subordinated note and the contribution of $1,402,000 of capital from
the Company. As of October 31, 1995, the Bank's tangible shareholders' equity
was $5,436,000 and its Tier 1 capital ratio was approximately 3.19%.
The Bank received a letter dated July 25, 1995, as amended on August 9, 1995,
from the Superintendent of the SBD setting forth revised time frames for the
Bank to increase its capital levels. Under the terms of such letter, the Bank
must, (i) before August 25, 1995, increase its tangible shareholders' equity to
at least $5,160,000 and approximately 3% of the Bank's total tangible assets
and, (ii) on or before October 31, 1995, increase its tangible shareholders'
equity to at least $11,180,000 or approximately 6.5% of the Bank's total
tangible assets, including the increase called for by the First Installment. The
SBD decreased the October 31, 1995 6.5% requirement to 3.0% as a result of First
Banks' agreement to purchase a $1,500,000 Investment Debenture from the Company,
and the contribution of those funds to the Bank.
Another component of the Capital Plan is the raising of capital. In addition to
the $11.5 million recapitalization of the Company and the Bank by First Banks
(described above), the Company presently intends to conduct the Offering to
raise additional capital, which Offering shall not exceed $5.0 million pursuant
to the terms of the Stock Purchase Agreement. The Company also is considering
conducting a Dividend Exchange Offer for approximately an additional $1.0
million. In the event the Bank's Tier 1 capital ratio does not reach 7.0% at
December 31, 1995, the Stock Purchase Agreement provides that First Banks may
purchase shares of Company and/or Bank Common Stock sufficient to meet this
requirement. If First Banks chooses not to purchase such Company or Bank shares,
the Bank will consider other methods of raising capital, including the sale of
Bank assets, in order to reach the required capital requirements.
The Bank continues to be designated as a problem bank and is considered
"troubled" for all regulatory purposes. Accordingly, the Bank is required to
provide prior notice to the FDIC of the employment of any senior officer or
appointment of a director. Due to the Bank's current regulatory capital ratios,
the Bank is prohibited from accepting funds obtained directly or indirectly
through a deposit broker. In addition, the Bank cannot provide pass-through
deposit insurance to employee benefit plan deposits so long as it is ineligible
to accept brokered deposits.
Failure to comply with the terms of the Orders could result in various
regulatory actions against the Bank, including recapitalization, merger, and/or
acquisition of the Bank.
29
<PAGE> 182
STATE CAPITAL IMPAIRMENT ORDERS
The California Financial Code (the "Financial Code") requires the Superintendent
to order any bank whose contributed capital is impaired to correct such
impairment within 60 days of the date of the Order. Under Section 134(b) of the
Financial Code, the "contributed capital" of a bank, defined as all
shareholders' 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. The Bank received notices from the SBD dated August 3,
1994, November 3, 1994, February 17, March 13, May 15, 1995, and August 7, 1995
that its contributed capital is impaired (the "Capital Impairment Orders"). As
of September 30, 1995, the Bank had contributed capital of $24.23 million and
deficit-retained earnings of approximately $20.07 million, or approximately 83%
of contributed capital, within the meaning of Section 134(b) of the Financial
Code. Thus, under Section 134(b) of the Financial Code, the Bank's contributed
capital was impaired as of that date in the approximate amount of $10.38
million. The Bank has not complied with the Capital Impairment Orders.
Under Section 662 of the Financial Code, the Superintendent has the authority,
in his or her discretion, to take certain appropriate regulatory action with
respect to a bank having impaired contributed capital, including possible
seizure of such bank's assets. A bank that has deficit retained earnings may,
subject to the approval of its shareholders and of the Superintendent, readjust
its accounts in a quasi-reorganization, which may include eliminating its
deficit retained earnings, under Section 663 of the Financial Code. However, a
bank that is not able to effect such a quasi-reorganization or otherwise to
correct an impairment of its contributed capital within 60 days of an order to
do so from the Superintendent must levy and collect an assessment on its common
shares pursuant to Section 423 of the California Corporations Code.
The shareholders of the Bank (not the Company's stockholders) will receive any
notices of assessment issued by the Bank. THE BANK IS IN VIOLATION OF THIS
CALIFORNIA LAW REQUIRING IT TO ASSESS THE SHARES OF THE BANK IN ORDER TO CORRECT
THE IMPAIRMENT OF THE BANK'S CAPITAL. AS LONG AS THE BANK'S CONTRIBUTED CAPITAL
IS IMPAIRED AS DEFINED UNDER CALIFORNIA LAW, THE SUPERINTENDENT IS AUTHORIZED TO
TAKE POSSESSION OF THE PROPERTY AND BUSINESS OF THE BANK, TO CLOSE THE BANK OR
TO ORDER THE BANK TO COMPLY WITH THE LEGAL REQUIREMENT TO LEVY AN ASSESSMENT ON
THE OUTSTANDING SHARES OF BANK COMMON STOCK SUFFICIENT TO CORRECT THE
IMPAIRMENT. THE COMPANY, A STOCKHOLDER OF THE BANK, DOES NOT HAVE THE FUNDS TO
SATISFY SUCH AN ASSESSMENT.
The Bank's capital impairment may be corrected through earnings, by raising
additional capital or by a quasi-reorganization, subject to the approval of the
SBD. In a quasi-reorganization, the Bank's deficit retained earnings would be
reduced or eliminated by a corresponding reduction in the Bank's contributed
capital. As of September 30, 1995, the Bank would have been required to raise
$25,943,000 in new capital (inclusive of any proceeds from the offering) in
order to correct its impaired contributed capital (because the ratio of deficit
retained earnings to contributed capital may not exceed 40%, $2.50 of new
capital must be raised for every dollar of impairment).
It is the policy of the Superintendent not to grant a quasi-reorganization
unless a bank can establish that (a) it has adequate capital, (b) the problems
that created past losses and the impairment of capital have been corrected, and
(c) it is currently operating on a profitable basis and will continue to do so
in the future.
Management also believes that, because it is anticipated that the Bank would
have high leverage and risk-based capital ratios after First Banks' investment
in the Company and/or the Bank, it is unlikely that the Superintendent would
seek to take action solely on the basis of impaired capital under the Section
134 definition. There can be no assurance, however, that other circumstances,
such as insufficient liquidity, operating losses, or other issues, could not
arise that would provide incentives to the Superintendent to utilize the powers
granted by Section 134.
No assurance can be given that the Bank's capital condition will not deteriorate
further as a result of future operating losses prior to curing its capital
impairment. In addition, because a quasi-reorganization requires that the Bank
reduce
30
<PAGE> 183
its assets and liabilities to market value at the time of the reorganization,
the Bank's capital could be further reduced from its present level as a result
of such a reduction in the market value of the Bank's assets over its
liabilities. Finally, there can be no assurance that, following a correction of
the Bank's capital impairment (whether through earnings, an infusion of
sufficient capital or a quasi-reorganization), the Bank's capital position will
not continue to erode through future operating losses.
FEDERAL RESERVE BANK MEMORANDUM OF UNDERSTANDING
On October 17, 1994, the Company entered into a Memorandum of Understanding
("Memorandum") with the Federal Reserve Bank of San Francisco (the "Reserve
Bank"). Under the terms of the Memorandum, the Company may not declare or pay
any dividends without the prior written approval of the Reserve Bank and may not
take dividends from the Bank without providing prior written notice to the
Reserve Bank; the Company must submit to the Reserve Bank a written plan to
improve and maintain an adequate capital position at the Company and the Bank;
and the Company must take reasonable actions to employ a full-time president for
the Company and the Bank. Further, the Memorandum sets forth restrictions on
certain transactions between the Bank and the Company, directs the Company to
prepare and submit to the Reserve Bank certain policies and procedures and
financial information, and requires the Company to provide prior notice to the
Reserve Bank of any new, or the renewal or modification of any existing,
employment, service or severance contracts with any executive officer. Within 45
days of the end of each calendar quarter, the Company must submit to the Reserve
Bank a written progress report regarding the Company's compliance with the terms
of the Memorandum.
On August 23, 1994, the Company submitted to the Reserve Bank its Capital
Restoration Plan setting forth the Company's plans for improving and maintaining
an adequate capital position at the Company and the Bank. The Capital
Restoration Plan was updated on November 23, 1994.
1995 REGULATORY EXAMINATION
In connection with the joint examination of the Bank by the FDIC and the SBD
which commenced on May 22, 1995, the Bank was generally criticized by the
regulatory authorities for lack of a permanent Chief Executive Officer,
excessive loan losses, poor quality assets, large provisions for loan losses,
write-downs of other real estate, apparent violations of law, and inadequate
capital. Although the FDIC and the SBD believed the loan loss reserve was
underfunded as of May 22, 1995, the Bank, through its provision to loan loss
reserves for the second quarter of 1995 was in full compliance with all
recommended write-offs and write-downs, including an adequate loan loss
reserve as of June 30, 1995.
In addition, the FDIC has criticized the Bank for, in the FDIC's opinion, not
filing accurate Call Reports for December 1994 and March 1995. The SBD examiners
did not concur with the FDIC's opinion that these Call Reports required
restatement. The FDIC's criticism relates to two loans which were written-off by
the Bank during the second quarter of 1995, which the FDIC claims should have
been written off as of December 31, 1994. Following a review of these loans and
after consultation with the Company's independent public accountants, the Board
of Directors and management of the Bank do not agree that these loans should
have been written off at December 31, 1994, based upon all relevant information
available to them at December 31, 1994. Accordingly, the Company has determined
that it is not required to restate GAAP financial statements as filed in its
Annual Report on Form 10-K for the fiscal year 1994 nor its Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1995, even if the Company
restates its December 1994 and March 1995 FDIC Call Reports to prevent further
criticism by the FDIC.
COMPLIANCE WITH ORDERS AND MEMORANDUM
As of September 30, 1995, the Company and the Bank believe they are in
substantial compliance with the FDIC Cease and Desist Order and the SBD Final
Order except for reaching the 6.5% Tier 1 capital requirements of the Orders,
and, with respect to the FDIC's criticism concerning restating the Bank's
December 1994 and March 1995 Call Reports. In
31
<PAGE> 184
addition, based upon the contemplated approval by the Reserve Bank of Mr.
Williams as the Company's President and Chief Executive Officer, the Company
believes it will be in substantial compliance with the Memorandum.
Full compliance with the capital requirements of the Company's MOU, the 6.5%
Tier 1 capital requirements of the Orders, as well as compliance with the 7%
Tier 1 capital requirement of the SBD Final Order is anticipated following the
approval of the Company's Stock Purchase Agreement by the Company's stockholders
and the completion of First Bank's capital investments, as provided for therein,
and through a combination of the Company's proposed stockholder rights offering,
and the reduction of assets through the sale of additional Bank branch offices,
if necessary. The Bank, as yet, has not made a final decision whether to restate
its FDIC call reports for December 1994 and March 1995.
Methods for the Bank's compliance with the Capital Impairment Orders are
described above in "State Capital Impairment Orders".
32
<PAGE> 185
PART II: OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
10(a) Additional Investment Agreement
dated October 31, 1995
----
10(b) Investment Debenture Agreement
dated October 31, 1995
----
10(c) Stock Pledge Agreement
dated October 31, 1995
----
10(d) Lease between Northrup-Howe Tower Group
and First Commercial Bank dated June 14, 1995
----
10(e) Severance Agreement and General Release
between Dennis F. Ceklovsky, First Commercial
Bancorp, Inc. and First Commercial Bank
----
10(f) Amendment No. 1 to Employment Agreement
by and between Anne H. Long, First Commercial
Bancorp, Inc. and First Commercial Bank
----
10(g) Management Services Agreement by and between
First Commercial Bank and First Banks, Inc.
----
10(h) Cost Sharing Agreement by and between First
Bank & Trust, First Commercial Bank and
First Commercial Bancorp, Inc.
27 Financial Data Schedule ----
Possible Other Items:
Item 5. Other Information
</TABLE>
CHANGES IN DIRECTORS AND MANAGEMENT
On October 24, 1995, the Board of Directors of First Commercial Bank elected
Donald W. Williams as Chief Executive Officer of First Commercial Bank.
On August 24, 1995, the Bank submitted an application to the FDIC and the State
Banking Department for approval of James E. Culleton, Interim President of the
Bank, as President and Director of First Commercial Bank. Both agencies have
responded with a notice of nondisapproval.
Mr. Dennis F. Ceklovsky, Executive Vice President and Chief Credit Officer has
resigned effective October 31, 1995. To replace Mr. Ceklovsky, the Board has
retained the services of Mr. Terrance McCarthy to become the Senior Vice
33
<PAGE> 186
President and Chief Credit Officer upon the receipt of the necessary regulatory
approvals. Mr. McCarthy is Senior Vice President and Chief Credit Officer of
First Bank & Trust, Santa Ana, California, a wholly-owned subsidiary of First
Banks. The requisite applications with respect to Mr. McCarthy have been
submitted to the FDIC and State Banking Department. Assisting Mr. McCarthy will
be Mr. Norman Boyer, who will be responsible for administration and disposition
of problem assets. Mr. McCarthy and Mr. Boyer have been working together in
similar positions at Queen City Bank, N.A., Long Beach, California for the last
twelve months.
Effective August 29, 1995, Manuel Barandas, Harry Curry and Earl Nichols
resigned as directors of First Commercial Bank and First Commercial Bancorp.
On August 29, 1995, the Board of Directors of First Commercial Bancorp, Inc. and
First Commercial Bank elected Michael P. Morris to serve as a member of the
Board of Directors of First Commercial Bancorp, Inc. and First Commercial Bank.
On September 26, 1995, the Board of Directors of the Bank elected Allen H.
Blake, James F. Dierberg and Donald W. Williams as Directors of the Bank.
On September 22, 1995, First Banks submitted an application to the Federal
Reserve Bank of St. Louis for approval of Allen H. Blake, James F. Dierberg and
Donald W. Williams as directors of First Commercial Bancorp, Inc. On October 23,
1995, the Federal Reserve Bank responded with a no objection letter.
No reports on Form 8-K were filed with the SEC during the quarter ended
September 30, 1995.
34
<PAGE> 187
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST COMMERCIAL BANCORP, INC.
Registrant
DATE: November 16, 1995 /s/ James E. Culleton
-----------------------------
JAMES E. CULLETON
Interim President
DATE: November 16, 1995 /s/ Anne Heck Long
-----------------------------
ANNE HECK LONG
(Principal Financial and Accounting Officer)
Executive Vice President and Chief Financial Officer
35
<PAGE> 188
FIRST COMMERCIAL BANCORP
[LOGO]
Annual Report
1994
<PAGE> 189
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------
IN THOUSANDS 1994 1993
- ------------ -------- --------
<S> <C> <C>
ASSETS
Cash and due from banks (Note 2) $ 19,059 $ 21,574
Federal funds sold 27,200 15,300
Securities purchased under resale agreements (Note 3) 40,000 50,000
-------- --------
Total cash and cash equivalents 86,259 86,874
Interest-bearing deposits with other financial institutions 299 3,973
Investment securities:
Held-to-maturity (market value of $3,815 in 1994 and $44,782 in 1993) 3,963 44,428
Available-for-sale 13,727 --
-------- --------
Total investment securities (Note 4) 17,690 44,428
Loans, net of unearned income of $243 in 1994 and $544 in 1993 (Note 5) 130,172 194,377
Allowance for loan losses 7,437 7,337
-------- --------
Net loans 122,735 187,040
-------- --------
Lease financing, net (Note 6) 1,038 1,085
Premises and equipment, net (Note 7) 2,637 3,169
Other real estate 5,222 13,171
Interest receivable and other assets (Note 8) 3,426 10,037
-------- --------
TOTAL ASSETS $239,306 $349,777
======== ========
LIABILITIES
Deposits:
Demand accounts $ 56,483 $134,961
Interest-bearing transaction accounts 68,840 85,081
Savings accounts 21,695 24,611
Time accounts 86,518 79,143
-------- --------
Total deposits 233,536 323,796
Accrued expenses and other liabilities 1,415 2,837
-------- --------
Total liabilities 234,951 326,633
-------- --------
Commitments and contingent liabilities (Note 9)
STOCKHOLDERS' EQUITY:
Preferred stock: 1994 and 1993, $.01 par value;
Authorized: 1994 and 1993, 5,000,000 shares;
Issued and outstanding: 1994 and 1993 -- none -- --
Common stock: 1994 and 1993, $.01 par value;
Authorized: 1994 and 1993, 15,000,000 shares;
Issued: 1994 and 1993, 4,775,110 shares;
Outstanding: 1994 and 1993, 4,675,110 shares 48 48
Additional paid-in capital 28,495 28,495
Retained deficit (22,880) (4,690)
Common stock in treasury, at cost:
1994 and 1993, 100,000 shares (709) (709)
Unrealized losses on securities available-for-sale (599) --
-------- --------
Total stockholders' equity 4,355 23,144
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $239,306 $349,777
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
PAGE NO. 1
<PAGE> 190
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------
IN THOUSANDS 1994 1993 1992
- ------------ -------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans and leases $ 15,126 $17,787 $ 21,717
Interest on Federal funds sold and securities
purchased under resale agreements 2,026 898 678
Interest on time deposits with other
financial institutions 95 129 226
Interest on investment securities 1,109 1,286 1,984
-------- ------- --------
Total interest income 18,356 20,100 24,605
-------- ------- --------
INTEREST EXPENSE:
Interest on interest-bearing transaction accounts 1,989 2,405 3,586
Interest on savings accounts 589 723 822
Interest on time accounts and other borrowed funds 3,332 3,242 4,565
-------- ------- --------
Total interest expense 5,910 6,370 8,973
-------- ------- --------
NET INTEREST INCOME: 12,446 13,730 15,632
Provision for loan losses (Note 5) 9,809 8,100 7,260
-------- ------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,637 5,630 8,372
-------- ------- --------
NON-INTEREST INCOME:
Service charges on deposit accounts 1,282 1,426 1,430
Other 691 1,569 1,072
-------- ------- --------
Total non-interest income 1,973 2,995 2,502
-------- ------- --------
NON-INTEREST EXPENSE:
Salaries and related benefits (Note 12) 6,568 6,951 6,777
Occupancy (Notes 7 & 9) 1,443 1,475 1,383
Equipment (Note 7) 930 1,075 1,000
Other (Note 13) 11,452 10,202 7,104
-------- ------- --------
Total non-interest expense 20,393 19,703 16,264
-------- ------- --------
LOSS BEFORE INCOME TAXES (15,783) (11,078) (5,390)
Provision for (benefit of) income taxes (Note 8) 2,407 (3,767) (1,872)
-------- ------- --------
NET LOSS $(18,190) $(7,311) $ (3,518)
======== ======= ========
PER-SHARE DATA:
Net loss per share $ (3.89) $ (1.56) $ (.75)
Weighted average shares outstanding 4,675 4,675 4,663
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
PAGE NO. 2
<PAGE> 191
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
ADDITIONAL RETAINED COMMON GAINS (LOSSES) TOTAL
COMMON PAID-IN EARNINGS STOCK IN ON SECURITIES STOCKHOLDERS'
IN THOUSANDS STOCK CAPITAL (DEFICIT) TREASURY AVAILABLE-FOR-SALE EQUITY
- ------------ ------ ---------- --------- -------- ------------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1991 $47 $28,414 $ 6,157 $(709) $ -- $ 33,909
Net Loss (Note 18) -- -- (3,518) -- -- (3,518)
Exercise of stock options (Note 11) 1 70 -- -- -- 71
Cash dividends paid -- -- (18) -- -- (18)
--- ------- -------- ----- ----- --------
Balance, December 31, 1992 48 28,484 2,621 (709) -- 30,444
Net Loss (Note 18) -- -- (7,311) -- -- (7,311)
Exercise of stock options (Note 11) -- 11 -- -- -- 11
--- ------- -------- ----- ----- --------
Balance, December 31, 1993 48 28,495 (4,690) (709) -- 23,144
Adoption of SFAS 115 (Note 4) -- -- -- -- 342 342
Net Loss -- -- (18,190) -- -- (18,190)
Adjustment to unrealized gains (losses)
on available-for-sale securities (Note 4) -- -- -- -- (941) (941)
--- ------- -------- ----- ----- --------
Balance, December 31, 1994 $48 $28,495 $(22,880) $(709) $(599) $ 4,355
=== ======= ======== ===== ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
PAGE NO. 3
<PAGE> 192
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------
IN THOUSANDS 1994 1993 1992
- ------------ -------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(18,190) $ (7,311) $ (3,518)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 958 1,024 1,154
Provision for loan losses 9,809 8,100 7,260
Write-down of other real estate 4,963 2,981 567
Loss on disposal of assets 88 36 --
Benefit of deferred taxes (6,497) (1,090) (424)
Write-off of intangible 1,047 -- --
Valuation allowance for deferred taxes 8,904 -- --
(Increase) decrease in interest receivable and other assets 3,156 (1,459) 1,008
Decrease in interest payable (19) (11) (625)
Increase (decrease) in accrued expenses and other liabilities (1,404) 612 (693)
-------- -------- --------
Net cash provided by operating activities 2,815 2,882 4,729
-------- -------- --------
Cash flows from investing activities:
Net increase (decrease) in interest-bearing deposits with other
financial institutions 3,674 (308) 907
Proceeds from maturity of investment securities 30,982 8,160 14,943
Purchases of investment securities (5,135) (30,028) (8,531)
Net decrease in loans made to customers 48,082 28,452 39,396
Net increase (decrease) in deferred loan fees (301) (179) 12
Capital expenditures (222) (387) (293)
Net decrease in lease financing 47 23 --
Proceeds from sale of other real estate 10,340 8,111 5,114
Payments to complete other real estate (638) (487) (1,469)
-------- -------- --------
Net cash provided by investing activities 86,829 13,357 50,079
-------- -------- --------
Cash flows from financing activities:
Net increase (decrease) in demand accounts, interest-bearing
transaction accounts and savings accounts (97,634) 12,156 (14,745)
Net increase (decrease) in time accounts 7,375 11,894 (71,426)
Proceeds from issuance of common stock -- 11 71
Dividends paid on common stock -- -- (741)
-------- -------- --------
Net cash provided by (used in) financing activities (90,259) 24,061 (86,841)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (615) 40,300 (32,033)
Cash and cash equivalents at beginning of year 86,874 46,574 78,607
-------- -------- --------
Cash and cash equivalents at end of year $ 86,259 $ 86,874 $ 46,574
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 5,929 $ 6,380 $ 9,597
Income taxes
Supplemental schedules of noncash investing and financing activities: $ 17 $ 24 $ 42
Net increase in other real estate as a result of foreclosure
or financing, and other related transactions $ 6,714 $ 5,782 $ 15,647
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
PAGE NO. 4
<PAGE> 193
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1993 AND 1992
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NOTE NO. 1
- --------------------------------------------------------------------------------
The accounting and reporting policies of First Commercial Bancorp, Inc. (the
"Company") and its subsidiary conform with generally accepted accounting
principles ("GAAP") and general practice within the banking industry. The
following are descriptions of the more significant accounting and reporting
policies:
Financial Statement Presentation: The consolidated statements of the Company
include the accounts of the Company and its subsidiary, First Commercial Bank
(the "Bank"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
The consolidated statements of cash flows illustrate the change in cash and cash
equivalents as disclosed in the consolidated balance sheets. For purposes of
reporting cash flows, cash and cash equivalents include cash on hand, amounts
due from banks, Federal funds sold and securities purchased under resale
agreements. Generally, Federal funds and securities purchased under resale
agreements are purchased and sold for one-day periods.
Investment Securities: As of January 1, 1994, the Company adopted Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities ("SFAS" 115). Accordingly, the investment securities
have been classified as "held-to-maturity," "trading securities" or
"available-for-sale." Investments classified as held-to-maturity are reported at
amortized cost, investments classified as trading securities are reported at
fair value with unrealized gains and losses included in earnings, and
investments classified as available-for-sale are reported at fair value with
unrealized gains and losses, net of tax, if any, reported as a separate
component of stockholders' equity.
Loans and Allowance for Loan Losses: The allowance for loan losses is maintained
at a level which management estimates to be adequate to provide for losses that
can be reasonably anticipated, although ultimate losses may vary from the
current estimates. In evaluating the adequacy of this allowance and in
determining the provision to be charged to operating expense for each period,
management considers such factors as historical loan loss experience, known
problem loans, evaluations made by bank regulatory authorities and the
assessment of economic conditions and other appropriate data to identify the
risks in the loan portfolio. Although management utilizes its best judgment in
providing for possible loan losses and establishing the allowance for loan
losses, the allowance is an estimate which is inherently uncertain and depends
on the outcome of future events.
The Bank recognizes interest income on an accrual basis. Loans which are ninety
days past due are placed on a nonaccrual status and all accrued interest is
reversed regardless of the collateral value. Furthermore, the Bank has a general
policy that loans cannot be renewed without collection of accrued interest. Loan
origination and commitment fees net of certain direct loan origination costs are
amortized over the expected life of the associated loan.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed on the
straight-line method over estimated useful lives of one to forty years.
Leasehold improvements are capitalized and amortized over the shorter of their
estimated useful lives or the related lease terms.
Other Real Estate: Other real estate ("ORE") includes real estate acquired
through foreclosure, or by obtaining a deed in lieu of foreclosure. Other real
estate is initially recorded at the lower of the Bank's recorded cost in the
property or the net fair value of the related real estate. Recorded cost in the
property would include the recorded loan balance and all identifiable direct
costs of foreclosure. Estimated costs to complete, hold and sell the real estate
are taken into consideration in determining the estimated net fair value.
Subsequent gains or losses on sale, or other holding costs or write-downs are
recorded in other income or expense as incurred.
Intangibles: As part of the 1982 acquisition of the business of the thirteen
branches of California Canadian Bank, a leasehold interest intangible asset was
established. Leasehold interest, valued at $2,258,000 (based on an independent
appraisal), represents the present value of favorable lease rental rates for
future periods, and is amortized over the remaining lives of the leases
($93,000, $124,000 and $97,000 in 1994, 1993 and 1992, respectively). Balances
of leasehold interest as of December 31, 1994 and 1993, were $232,000 and
$325,000, respectively, and are included in interest receivable and other
assets.
In 1988, the Company acquired the business of three branches of Citizens Bank of
Roseville for $2,199,000. As a result of this acquisition, the Company recorded
an intangible of $1,425,000 in 1988, which was subsequently increased to
$1,447,000 in 1989. The Company completed an examination by the Federal Reserve
Bank of San Francisco on August 18, 1994. During the course of the examination,
the regulators concluded that there was no future value to the intangible. As of
September 30, 1994, the book value of the Citizens Bank merger intangible of
$992,000 was written off, resulting in total amortization expense for the year
of $1,047,000. Amortization expense was $73,000 in both 1993 and 1992.
Income Taxes: The Company has adopted Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes ("SFAS" 109). The impact of the
change was immaterial.
The Company files consolidated Federal and state income tax returns with its
subsidiary. The provisions for Federal and state income taxes of the Company and
its subsidiary are recorded on the basis of filing separate income tax returns,
making appropriate adjustments arising out of the consolidated Federal and state
income tax return regulations.
Net Income per Common and Common Equivalent Shares: Net income per share is
computed using the weighted average number of shares outstanding during the year
plus the dilutive effect, if any, of stock options.
Future Financial Accounting Standards: In May 1993, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, as amended by SFAS No. 118. Under the provisions of this
statement, a loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. SFAS No. 114 requires
creditors to measure impairment of a loan based on the present value of expected
future cash flows discounted at the loan's effective interest rate. If the
measure of the impaired loan is less than the recorded investment in the loan, a
creditor shall recognize an impairment by creating a valuation allowance with a
corresponding charge to the provision for loan losses. This statement also
applies to restructured loans and changes the definition of in-substance
foreclosures to apply only to loans where the creditor has taken physical
possession of the borrower's assets. SFAS No. 114 applies to financial
statements for fiscal years beginning after December 15, 1994. Accordingly, the
Company adopted SFAS No. 114 on January 1, 1995. The adoption of the statement
did not have a significant impact on its financial position and results of
operations.
PAGE NO. 5
<PAGE> 194
CASH AND DUE FROM BANKS
NOTE NO. 2
- --------------------------------------------------------------------------------
The Bank maintains balances at the Federal Reserve Bank to comply with reserve
requirements set forth by Regulation D of the Federal Reserve Act, as amended.
In compliance with these regulations, the Bank was required to maintain an
average balance in cash and due from banks of approximately $2,339,000 at
December 31, 1994, and $8,851,000 at December 31, 1993.
Included in the balance of cash and due from banks at year-end are current day
deposits (transit items) of approximately $10,067,000, the majority of which
become available the following business day, and deferred items from current and
prior days' deposits of approximately $4,359,000, which become available during
the next one to three business days.
SECURITIES PURCHASED UNDER RESALE AGREEMENTS
NOTE NO. 3
- --------------------------------------------------------------------------------
Securities purchased under resale agreements are typically collateralized by
U.S. Treasury securities, U.S. Government agencies, or mortgage-backed
securities and generally have maturities of one month or less. The agreements
outstanding on December 31, 1994, had a maturity date of January 3, 1995. The
following table shows the composition of securities purchased under resale
agreements at December 31, 1994.
<TABLE>
<CAPTION>
IN THOUSANDS COST
- ------------ -------
<S> <C>
General National Mortgage Association (GNMA)
mortgage-backed securities $20,000
Federal Home Loan Mortgage Corporation 20,000
-------
$40,000
=======
</TABLE>
INVESTMENT SECURITIES -- HELD-TO-MATURITY
AND AVAILABLE-FOR-SALE
NOTE NO. 4
- --------------------------------------------------------------------------------
As of January 1, 1994, the Company adopted the FASB Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities ("SFAS" 115). This statement requires that investments in debt
and equity securities be classified as "held-to-maturity," "trading securities"
or "available-for-sale." It requires that investments classified as
held-to-maturity be reported at amortized cost, that investments classified as
trading securities be reported at fair value with unrealized gains and losses
included in earnings, and that investments classified as available-for-sale be
reported at fair value with unrealized gains and losses reported as a separate
component of stockholders' equity. As of January 1, 1994, a security with an
amortized cost of $2,089,000 and a market value of $2,101,000 was classified as
held-to-maturity. Securities with an amortized cost of $42,339,000 and a market
value of $42,681,000 were classified as available-for-sale. The effect of
adopting SFAS 115 was to recognize an unrealized gain of $342,000 as an increase
in stockholders' equity. As of December 31, 1994, the Company's assets and
equity capital reflected an adjustment for unrealized losses of $599,000 on
available-for-sale securities.
The estimated market value of investment securities is determined based on
current quotations, where available. The amortized cost (book value), estimated
market value and yield of investment securities at December 31, 1994, were as
follows:
<TABLE>
<CAPTION>
1994
----------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
IN THOUSANDS COST GAINS LOSSES VALUE YIELD
- ------------- ---------- ---------- ---------- ------ -----
<S> <C> <C> <C> <C> <C>
Held-to-maturity:
U.S. Government
agencies $ 3,963 $-- $(148) $ 3,815 5.22%
Available-for-sale:
U.S. Treasury
securities 3,146 -- (108) 3,038 4.76
U.S. Government
agencies 11,096 9 (416) 10,689 6.27
------- --- ----- ------- ----
14,242 9 (524) 13,727 5.94
------- --- ----- ------- ----
Total investment
securities $18,205 $ 9 $(672) $17,542 5.78%
======= === ===== ======= ====
</TABLE>
The Bank did not sell available-for-sale or any other investment securities
during the twelve months ended December 31, 1994.
The following table shows the amortized cost, estimated market value and yield
of investment securities at December 31, 1994, by contractual maturity.
Maturities of mortgage-backed securities are classified in accordance with
contractual repayment schedules. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. The amortized cost and
estimated market values, by contractual maturity were as follows:
<TABLE>
<CAPTION>
1994
HELD-TO-MATURITY ------ AVAILABLE-FOR-SALE
---------------- ------------------
AMORTIZED MARKET AMORTIZED MARKET
IN THOUSANDS COST VALUE YIELD COST VALUE YIELD
- ------------ --------- ------ ----- --------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Maturity within a year:
U.S. Treasury
securities $ -- $ -- --% $ 1,030 $ 1,010 4.95%
U.S. Government
agencies -- -- -- 1,000 1,006 8.99
------ ------ ---- ------- ------- ----
Total maturing within
one year -- -- -- 2,030 2,016 6.94
------ ------ ---- ------- ------- ----
Maturity from one to five years:
U.S. Treasury
securities -- -- -- 2,116 2,028 4.67
U.S. Government
agencies 3,963 3,815 5.22 7,948 7,697 6.18
------ ------ ---- ------- ------- ----
Total maturing from
one to five years 3,963 3,815 5.22 10,064 9,725 5.86
------ ------ ---- ------- ------- ----
Maturity from five to ten years:
U.S. Treasury
securities -- -- -- -- -- --
U.S. Government
agencies -- -- -- 2,148 1,986 5.35
------ ------ ---- ------- ------- ----
Total maturing from
five to ten years -- -- -- 2,148 1,986 5.35
------ ------ ---- ------- ------- ----
Total investment
securities $3,963 $3,815 5.22% $14,242 $13,727 5.94%
====== ====== ==== ======= ======= ====
</TABLE>
The amortized cost and estimated market value of investment securities as of
December 31, 1993, were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
IN THOUSANDS COST GAINS LOSSES VALUE
- ------------ --------- ---------- ---------- ------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 4,104 $ 16 $ 8 $ 4,112
U.S. Government agencies 40,324 366 20 40,670
------- ----- ----- -------
Total investment securities $44,428 $ 382 $ 28 $44,782
======= ===== ===== =======
</TABLE>
PAGE NO. 6
<PAGE> 195
The book value of investment securities pledged to secure U.S. Government and
other public deposits and for other purposes as required or permitted by law
totaled $17,181,000 and $19,436,000 at December 31, 1994 and 1993, respectively.
LOANS AND ALLOWANCE FOR LOAN LOSSES
NOTE NO. 5
- --------------------------------------------------------------------------------
The composition of the loan portfolio is summarized as follows at December 31:
<TABLE>
<CAPTION>
IN THOUSANDS 1994 1993 1992 1991 1990
- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial $ 69,597 $103,949 $119,115 $132,928 $116,849
Real estate
construction 16,386 39,879 59,228 112,714 139,479
Real estate secured 38,439 43,803 48,060 40,303 35,517
Installment 5,993 7,290 9,243 10,527 12,306
-------- -------- -------- -------- --------
Total gross loans 130,415 194,921 235,646 296,472 304,151
Unearned income 243 544 723 711 1,137
Allowance for loan
losses 7,437 7,337 5,484 5,003 3,050
-------- -------- -------- -------- --------
Net loans $122,735 $187,040 $229,439 $290,758 $299,964
======== ======== ======== ======== ========
</TABLE>
The changes to the allowance for loan losses consisted of the following for the
years ended December 31:
<TABLE>
<CAPTION>
IN THOUSANDS 1994 1993 1992 1991 1990
- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at beginning
of year $ 7,337 $ 5,484 $ 5,003 $ 3,050 $ 2,398
Charge-offs:
Commercial 3,712 2,455 503 1,270 751
Real estate construction 5,591 3,831 5,991 1,574 -
Real estate secured 661 164 354 11 -
Installment 59 59 136 204 196
-------- -------- -------- -------- --------
10,023 6,509 6,984 3,059 947
-------- -------- -------- -------- --------
Recoveries:
Commercial 176 219 182 140 132
Real estate construction 125 - - - -
Real estate secured - 1 - - -
Installment 13 42 23 52 37
-------- -------- -------- -------- --------
314 262 205 192 169
-------- -------- -------- -------- --------
Net charge-offs on loans 9,709 6,247 6,779 2,867 778
-------- -------- -------- -------- --------
Additions to allowance
charged to
operating expense 9,809 8,100 7,260 4,820 1,430
-------- -------- -------- -------- --------
Balance at end of year $ 7,437 $ 7,337 $ 5,484 $ 5,003 $ 3,050
======== ======== ======== ======== ========
Net charge-offs on loans
to average loans 5.62% 2.86% 2.58% .94% .29%
Allowance for loan losses
to total loans
outstanding 5.70% 3.76% 2.33% 1.69% 1.00%
</TABLE>
The following table provides information with respect to all non-performing
assets at December 31:
<TABLE>
<CAPTION>
IN THOUSANDS 1994 1993 1992 1991 1990
- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total loans outstanding $130,415 $194,921 $235,646 $296,472 $304,151
======== ======== ======== ======== ========
Accrual loans past due
ninety days or more $ 22 $ 50 $ 300 $ 22,284 $ 1,875
Nonaccrual loans 11,433 21,100 26,605 7,822 2,393
-------- -------- -------- -------- --------
Total accrual loans past
due ninety days or more
and nonaccrual loans $ 11,455 $ 21,150 $ 26,905 $ 30,106 $ 4,268
======== ======== ======== ======== ========
Total accrual loans past
due ninety days or more
and nonaccrual loans to
total loans outstanding 8.78% 10.85% 11.42% 10.15% 1.40%
Allowance for loan losses
to total nonperforming
loans(1) 64.92% 34.69% 20.38% 16.62% 71.46%
Other real estate $ 5,222 $ 13,171 $ 17,994 $ 6,560 $ 2,268
</TABLE>
When a loan is placed on nonaccrual status, the accrued and unpaid interest
receivable is reversed and the loan is accounted for on a cash basis until
qualifying for return to accrual status. Generally, a loan may be returned to
accrual status when all delinquent interest and principal become current in
accordance with the terms of the loan agreement.
The following table represents interest income not recognized on loans on
nonaccrual status for 1994, 1993 and 1992:
<TABLE>
<CAPTION>
IN THOUSANDS 1994 1993 1992
- ------------ -------- ------- --------
<S> <C> <C> <C>
Estimated interest that would
have been recorded under
original terms $ 1,553 $ 2,092 $ 1,871
Gross interest recorded 594 96 96
-------- ------- --------
Reduction in interest income $ 959 $ 1,996 $ 1,775
======== ======= ========
</TABLE>
At December 31, 1994, $5,276,000 or 46% of the loans on nonaccrual status
consisted of nineteen real estate loans. Real estate loans secured by
single-family residences totaled $1,069,000, single-family lots totaled
$264,000, single-family residences and lots totaled $1,013,000, commercial lots
totaled $1,575,000, commercial buildings totaled $324,000 and multi-family
properties totaled $1,031,000.
The remaining nonaccrual loans consisted of commercial loans totaling $5,968,000
or 52% and other loans totaling $189,000 or 2%. At December 31, 1994, $2,807,000
of commercial loans were secured by real estate, $2,336,000 were secured by
business assets and $825,000 were unsecured.
At December 31, 1994, the Bank had ORE totaling $5,222,000, compared to
$13,171,000 at December 31, 1993. Included in ORE at year-end are twelve
properties. Nine of the properties have a book value of $4,346,000 and consist
of single-family residential lots. Three of the properties have a book value of
$876,000 and consist of commercial land and office projects. During 1994,
$3,135,000 was charged to the allowance for loan losses when the properties were
transferred to ORE, based upon their fair market value at that time, and
$4,961,000 was charged against income due to further declines in their fair
market values. The conversion of foreclosure properties to ORE gives the Bank
the opportunity to dispose of these nonearning assets through the sale of these
properties.
During 1994, twenty-three separate ORE properties were sold, resulting in net
proceeds to the Bank of $14,551,000 and resulting in a net loss of $656,000,
compared to twenty-five sales during 1993 totaling $12,650,000 and a net loss of
$98,000.
In December of 1992, the Bank restructured a $1,000,000 real estate loan in
which the interest rate was determined to be below market levels. The
concessionary interest rate was given to the borrower to better match the cash
flows associated with the commercial real estate project. The loan was accounted
for as "troubled debt restructuring" as that term is defined in SFAS No. 15. The
amount of interest income not recognized on this loan is immaterial. The balance
outstanding on this loan as of December 31, 1994, 1993 and 1992, was $710,000,
$1,000,000 and $1,000,000, respectively.
(1) At December 31, 1994, 71% of total nonperforming loans were secured by real
estate. Although the ratio of nonperforming loans to total loans outstanding
remained virtually constant during 1991 through 1993, the ratio of the allowance
for loan losses to total nonperforming loans was increased to cover the decline
in the values of the underlying real estate securing those loans. The level of
this coverage ratio increased substantially during 1994 (64.92%) due primarily
to the 46% reduction in nonperforming loans, while the amount of the allowance
for loan losses was maintained at the pre-1994 level in order to protect the
Bank against the uncertainty of further potential declines in the value of real
estate securing those loans.
PAGE NO. 7
<PAGE> 196
There are no loans made by the Bank to directors, executive officers or any
associate of such persons exceeding $60,000 for the year ended December 31,
1994.
LEASE FINANCING
NOTE NO. 6
- --------------------------------------------------------------------------------
The Company has an equity participation in a leveraged lease agreement. Under
the terms of the agreement, the Company's equity investment represents
approximately 35% of the cost of the leased equipment. The remaining 65% is
provided by a third party through long-term debt which provides no recourse
against the Company and is secured by first liens on the leased equipment. The
Company's net investment in the leveraged lease was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
IN THOUSANDS 1994 1993
- ------------ ------ ------
<S> <C> <C>
Lease rental receivable $ 695 $ 749
Estimated residual value 378 378
Less unearned and deferred income (35) (42)
------ ------
Investment in leveraged leases $1,038 $1,085
====== ======
</TABLE>
The net income from the Company's investment in the leveraged lease was $7,100
for each of the years ended December 31, 1994, 1993 and 1992.
PREMISES AND EQUIPMENT
NOTE NO. 7
- --------------------------------------------------------------------------------
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
IN THOUSANDS 1994 1993
- ------------ ------- -------
<S> <C> <C>
Buildings $ 616 $ 712
Land and land improvements 894 894
Leasehold improvements 1,485 1,597
Furniture, fixtures and equipment 4,669 5,059
------- -------
7,664 8,262
Less accumulated depreciation
and amortization (5,027) (5,093)
------- -------
Premises and equipment, net $ 2,637 $ 3,169
======= =======
</TABLE>
Depreciation and amortization expense related to these assets for the years
ended December 31, 1994, 1993 and 1992, amounted to $667,000, $875,000 and
$844,000, respectively.
INCOME TAXES
NOTE NO. 8
- --------------------------------------------------------------------------------
The Company has adopted Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes ("SFAS" 109). Under the asset and liability method
of SFAS 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. To the extent that current available evidence about the future raises
doubt about the realization of a deferred tax asset, a valuation allowance must
be established.
The current, deferred and valuation allowance components of the income tax
provision (benefit) included in the Statements of Operations for the years ended
December 31, 1994, 1993 and 1992, were as follows:
<TABLE>
<CAPTION>
IN THOUSANDS 1994 1993 1992
- ------------ ------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ 0 $(2,677) $(1,540)
State - - 92
------- ------- -------
0 (2,677) (1,448)
------- ------- -------
Deferred:
Federal (4,761) (1,090) (332)
State (1,736) - (92)
------- ------- -------
(6,497) (1,090) (424)
------- ------- -------
Valuation allowance 8,904 - -
------- ------- -------
Total $ 2,407 $(3,767) $(1,872)
======= ======= =======
</TABLE>
Deferred taxes arise from differences in the timing of recognition of revenues,
expenses and tax credits for tax and financial reporting purposes. The tax
effects of the principal items affecting deferred taxes for the years ended
December 31, 1994, 1993 and 1992 were:
<TABLE>
<CAPTION>
IN THOUSANDS 1994 1993 1992
- ------------ ------- ------- -------
<S> <C> <C> <C>
Difference in reporting methods for other
real estate for book and tax purposes $(2,047) $ (432) $ (189)
Difference in methods of reporting income
for book and tax purposes on
leveraged lease assets (101) (8) -
Difference between the book loan
loss provision and the provision
allowed for tax purposes 555 (577) (269)
Difference in amortization of intangibles
for book and tax purposes (420) 14 (35)
Difference in methods used to compute
depreciation on fixed assets for
book and tax purposes (118) (122) (55)
Difference between state taxes
deducted for book and tax purposes - 31 135
Net operating loss carry forwards (4,346) - -
Other (20) 4 (11)
------- ------- -------
$(6,497) $(1,090) $ (424)
======= ======= =======
</TABLE>
The provisions (benefits) for income taxes applicable to income before taxes for
the years ended December 31, 1994, 1993 and 1992 differ from amounts computed by
applying the statutory Federal income tax rates to income before taxes.
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
PERCENTAGE PERCENTAGE PERCENTAGE
OF PRETAX OF PRETAX OF PRETAX
INCOME INCOME INCOME
---------- ---------- ----------
<S> <C> <C> <C>
Statutory Federal income tax rate (34.0%) (34.0%) (34.0%)
Increases (reductions) in income
tax rates resulting from:
State taxes, net of federal benefit (7.5%) - -
Valuation allowance 56.7% - -
Other - - (.7%)
----- ----- -----
15.2% (34.0%) (34.7%)
===== ===== =====
</TABLE>
PAGE NO. 8
<PAGE> 197
The components of the net deferred tax asset of the Bank included in the
interest receivable and other assets as of December 31, 1994 and 1993 were as
follows:
<TABLE>
<CAPTION>
IN THOUSANDS 1994 1993
- ------------ ------- ------
<S> <C> <C>
Deferred tax assets:
Loan losses $ 1,377 $1,932
Other real estate 2,981 934
Net operating loss carry forward (1) 4,346 -
Depreciation 83 -
Intangibles 435 -
Deposit base amortization - 15
------- ------
Total deferred tax assets $ 9,222 $2,881
Deferred tax liabilities:
Leveraged leases 268 369
Depreciation - 35
Accretion 50 40
Other - 30
------- ------
Total deferred tax liabilities 318 474
------- ------
Net deferred tax asset before
valuation allowance 8,904 2,407
Valuation allowance (8,904) -
------- ------
Net deferred tax asset $ - $2,407
======= ======
</TABLE>
(1) The Company has net operating loss carry forwards of $11,486,000 for federal
income tax and $5,859,000 for state taxes. The net operating loss carry forwards
expire in 2009.
COMMITMENTS AND CONTINGENT LIABILITIES
NOTE NO. 9
- --------------------------------------------------------------------------------
Operating Leases
At December 31, 1994, the approximate minimum future lease rentals payable under
noncancelable operating leases for Bank premises were as follows:
In the table above, minimum lease payments have not been reduced by minimum
sublease rental income of $318,000 due in the future under a noncancelable
sublease.
<TABLE>
<CAPTION>
IN THOUSANDS YEAR AMOUNT
- ------------ ---- ------
<S> <C> <C>
1995 $ 809
1996 746
1997 326
1998 164
1999 132
Thereafter 188
------
Total minimum lease payments $2,365
======
</TABLE>
In the table above, minimum lease payments have not been reduced by minimum
sublease rental income of $318,000 due in the future under a noncancelable
sublease.
The net rental expense included in occupancy expense for Bank premises was
$871,000, $844,000 and $806,000 for the years ended December 31, 1994, 1993 and
1992, respectively. Rental income under a noncancelable sublease was $99,000 for
each of the years ended December 31, 1994 and 1993.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, the Bank enters into various types of
transactions which involve financial instruments with off-balance sheet risk.
These instruments include commitments to extend credit and letters of credit and
are not reflected in the accompanying consolidated balance sheets. These
financial transactions carry various degrees of credit risk. Credit risk is
defined as the possibility that a loss may occur from the failure of another
party to perform according to the terms of the contract.
The Bank's loans, and related credit risks, are primarily concentrated in
Northern California. The cities and surrounding metropolitan areas where the
majority of the Bank's loan customers reside are Sacramento, Roseville, San
Francisco, Concord, Campbell and Santa Rosa, California. Economic fluctuations
in the California regions of the Sacramento Valley and San Francisco Bay Area
have had, and will continue to have, a direct impact on the credit risk of the
Company.
Commitments to extend credit are legally binding loan commitments, subject to
certain conditions, with set expiration dates. The Bank typically receives a fee
for providing a commitment. The Bank evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Bank upon the extension of credit, is based on management's evaluation.
Collateral held varies, but may include cash, marketable securities, accounts
receivable, inventory, equipment and real estate property.
Standby letters of credit are provided to customers to guarantee their
performance, generally in the production of goods and services or under
contractual commitments in the financial markets. Commercial letters of credit
are issued to customers to facilitate foreign or domestic trade transactions.
They represent a substitution of the Bank's credit for the customer's credit.
The contractual amounts of commitments to extend credit and letters of credit
represent the amount of credit risk. Since many of the commitments and letters
of credit are expected to expire without being fully drawn, the contractual
amounts do not necessarily represent future cash requirements.
The following is a summary of various financial instruments with off-balance
sheet risk at December 31, 1994 and 1993:
<TABLE>
<CAPTION>
IN THOUSANDS 1994 1993
- ------------ ------- -------
<S> <C> <C>
Commitments to extend credit $41,504 $57,286
Standby letters of credit 3,329 4,637
</TABLE>
Real estate construction loan commitments were $3,425,000 at December 31, 1994,
and $4,163,000 at December 31, 1993, and are included in commitments to extend
credit in the schedule above.
LITIGATION
The Bank and/or the Company are involved in various routine legal actions as
both plaintiff and defendant. In the opinion of management, based upon the
present status of litigation and the advice of legal counsel, the ultimate
resolution of any of these matters will not have a material adverse impact on
the financial position or results of operations of the Bank or the Company.
DIVIDENDS
NOTE NO. 10
- --------------------------------------------------------------------------------
The stockholders of the Company will be 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 may be outstanding
and also subject to the restrictions of the Delaware General Corporation Law. At
December 31, 1994, there were no outstanding shares of preferred stock.
On December 31, 1991, the Board of Directors of the Company declared a $.32 per
share cash dividend on its common stock. This dividend was payable in four
installments during 1992. On July 9, 1992, the Company made the decision to
suspend payment of the third and fourth quarter dividends which totaled $.16 per
share. The Company will continue to accrue interest on these suspended dividends
at the current legal rate until such time as the dividends are paid to
stockholders of record as of June 15, 1992, and September 14, 1992. The payment
of the accrued dividends and declaration of subsequent dividends is subject to
approval of the Federal Reserve Bank of San Francisco (see Note 17).
PAGE NO. 9
<PAGE> 198
Dividends by the Bank to the Company are restricted under California law to the
lesser of the Bank's retained earnings, or the Bank's net income for the latest
three fiscal years, less dividends previously declared during that period, or,
with the approval of the California Superintendent of Banks, to the greater of
the retained earnings of the Bank, the net income of the Bank for its last
fiscal year or the net income of the Bank for its current fiscal year. In
addition, the Federal Reserve Board and the Federal Deposit Insurance
Corporation ("FDIC") have indicated that it would generally be considered to be
an unsafe and unsound banking practice for banks to pay dividends except out of
current operating earnings (see Note 17). Further, the Bank and the Company are
restricted from paying dividends under the terms of certain regulatory
agreements. See "Regulatory Agreements." During 1994, 1993 and 1992 the Bank
paid no dividends to the Company. As of December 31, 1994, the retained deficit
of the Bank was approximately $13,849,000.
Additionally, the Federal Reserve Act restricts loans, advances and investments
by the Bank in or to the Company which are limited to loans secured by specific
amounts of collateral and, generally, to 10% of the stockholders' equity of the
Bank.
STOCK OPTION PLANS
NOTE NO. 11
- --------------------------------------------------------------------------------
On June 19, 1979, the Company established an employee stock option plan (the
"Employee Plan") for full-time salaried officers and employees who have
substantial responsibility for the successful operation of the Company and its
subsidiary. The terms of the Employee Plan provide for the grant of "incentive
stock options," as defined in Section 422A of the Internal Revenue Code of 1986,
to purchase up to an aggregate of 192,885 shares of common stock of the Company.
Under the terms of the Employee Plan, options may be granted at an exercise
price not less than the fair market value of the stock at the date of grant.
Options granted to employees to purchase common stock of the Company follow a
vesting schedule equal to 20% per year and shall vest over a time period not to
exceed five years from the date the options are granted.
In March 1987, the Board of Directors amended and restated the Employee Plan to
reserve 590,115 additional shares; to provide for the grant of nonstatutory
options to any employee; to allow for the extension of the terms of options to
ten years; to allow options to be exercised with shares or other valid
consideration; and to provide the additional flexibility in the terms of
incentive stock options permitted by the Tax Reform Act of 1986. Stockholder
approval of the amendments to the Employee Plan was obtained on May 25, 1988.
Options may be granted, pursuant to the Employee Plan, until expiration of the
Employee Plan on March 11, 1997.
The Employee Plan is administered by the Board of Directors or a committee
appointed by the Board (in either case, the "Committee"). The Committee
determines to whom options will be granted and the terms of each option granted,
including the exercise price, number of shares subject to the option, the
vesting provisions thereof, and whether the option will be an incentive or
nonstatutory option.
Activity in 1994, 1993 and 1992 related to the Employee Plan was as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
SHARES -------------------
AVAILABLE PRICE
FOR GRANT SHARES PER SHARE
--------- ------- --------------
<S> <C> <C> <C>
Balance, December 31, 1991 165,000 555,800 $5.00 - $11.12
Options granted (225,800) 225,800 4.38 - 7.63
Options canceled 180,352 (180,352) 5.00 - 11.12
Options exercised - (77,548) 5.00
------- ------- --------------
Balance, December 31, 1992 119,552 523,700 4.38 - 11.12
Options granted (15,000) 15,000 4.00 - 5.88
Options canceled 25,500 (25,500) 6.13 - 10.75
Options exercised - (2,000) 5.63
------- ------- --------------
Balance, December 31, 1993 130,052 511,200 4.00 - 11.12
Options granted (3,500) 3,500 4.25 - 5.38
Options canceled 328,900 (328,900) 4.00 - 11.12
Options exercised - - -
------- -------- --------------
Balance, December 31, 1994 455,452 185,800 $4.25 - $11.12
======= ======== ==============
</TABLE>
As of December 31, 1994, options for 148,580 shares were exercisable at prices
ranging from $4.25 to $11.12.
On August 22, 1989, the Board of Directors amended the Employee Plan to provide
that in the event of a sale, dissolution or liquidation, merger or consolidation
in which the Company is not the surviving corporation (other than a merger or
consolidation solely for the purpose of charter migration), an optionee shall
have the right immediately prior to any such transaction, to exercise any
unvested and unexercised portion of said optionee's options.
On September 26, 1989 ("Commencement Date"), the Board of Directors of the
Company adopted the First Commercial Bancorp, Inc., Directors' Stock Option Plan
(the "Directors' Plan"), which was approved by the stockholders of the Company
at its Annual Stockholders' Meeting held on May 23, 1990.
There are presently reserved for issuance under the Directors' Plan 250,000
shares of the Company's common stock. Only non-employee directors of the
Company, of which there are currently eight, are eligible to receive options in
accordance with the Directors' Plan.
Seven of the present directors of the Company received a onetime grant of a
nonstatutory option to purchase 10,000 shares, which became exercisable upon
approval by the stockholders, service as a Board member for at least six months,
and satisfaction of certain vesting requirements set forth below.
On each anniversary date of the Commencement Date, each director who has been a
director continuously for the preceding year and who has not previously received
one or more grants of options to purchase a total of 10,000 shares, will receive
a grant of an option to purchase 2,000 shares. The maximum number of shares for
which options may be granted under the Directors' Plan to any director is 10,000
shares. Options granted to directors to purchase common stock of the Company
shall vest and become exercisable at the rate of twenty percent (20%) of the
shares per year from the exercise date and may be exercised by the optionee
during a period of ten years.
The Directors' Plan will expire on September 26, 1998, unless terminated earlier
by the Board of Directors.
As of December 31, 1994, options for 56,000 vested shares under the Directors'
Plan were exercisable at a price of $11.12 per share.
PAGE NO. 10
<PAGE> 199
NOTE NO. 12 EMPLOYEE BENEFIT PLANS
- -------------------------------------------------------------------------------
The Bank's Profit Sharing Plan (the "Plan"), established in January 1980, is
intended to provide deferred compensation benefits to all employees of the
Company and the Bank from contributions to the Plan by the Company. In March
1989, the Bank and the Company adopted an amendment to the Plan to include a
401(k) provision. Hourly and salaried employees of the Company and the Bank who
have completed 250 hours of service with the Company or the Bank are eligible to
participate in the Plan (the "Participants"). Participants may elect to defer 1%
to 15% of their annual salary up to the maximum dollar limitation as established
by the Internal Revenue Service (the "Participant Contributions"). A
Participant's interest in his or her Participant Contribution is fully vested
immediately.
The Company contributes on a quarterly basis fifty percent (50%) on every dollar
contributed by the employee up to six percent (6%) of annual salaries. The
Company has the discretion to make additional contributions which will be
allocated to the accounts of eligible Participants based on the ratio of each
Participant's compensation to the total compensation. Participants' interests in
such Company contributions vest on a five-year schedule according to years of
service rendered.
Under the Plan, the Participants are given the opportunity to invest their
contributions in one or more investment funds, each of which is registered under
the Investment Company Act of 1940.
During 1994, 1993 and 1992, the Bank matched (on a quarterly basis)
approximately $105,000, $116,000 and $118,000, respectively, to the 401(k). For
these same three years, the Bank paid for the Plan's administrative, accounting
and legal expenses of approximately $20,000, $33,000 and $30,000, respectively.
In September 1990, the Company and the Bank adopted an Employee Stock Ownership
Plan ("ESOP"), effective January 1, 1990, for all eligible employees. The ESOP
was adopted in order to provide the employees of the Company and its subsidiary
with an opportunity to acquire ownership interest in the Company. A Committee
appointed by the Board of Directors administers the ESOP for the exclusive
benefit of Participants. The Trustee of the ESOP Trust appointed by the Board is
presently The Mechanics Bank of Richmond. Under the terms of the ESOP, the
amount of contributions made is within the sole discretion of the Board of
Directors. Employees may not contribute to the ESOP. Contributions to the ESOP
will be allocated among eligible employees' accounts in relation to their
compensation as shares of stock of the Company are acquired. Such shares will be
allocated to employees' accounts in accordance with the terms of the ESOP, and
will vest over a period specified in the ESOP. Any shares held by the ESOP are
distributed to employees following death, disability, retirement, or other
separation from employment in accordance with the terms of the ESOP. For the
years ended December 31, 1994, 1993 and 1992, there were no contributions to the
ESOP.
NOTE NO. 13 OTHER NON-INTEREST EXPENSE
- -------------------------------------------------------------------------------
For the years ended December 31, 1994, 1993 and 1992, other non-interest expense
was comprised of the following:
<TABLE>
<CAPTION>
IN THOUSANDS 1994 1993 1992
- ------------ ------- ------- ------
<S> <C> <C> <C>
Professional fees (1) $ 676 $ 791 $ 989
FDIC assessment (1) 820 866 794
Courier 230 241 247
Stationery and supplies 268 294 264
Telephone 264 272 248
Insurance general 248 238 185
Visa processing 48 54 428
Net other real estate expense (1) 6,035 4,805 1,203
Third-party services provided
to customers (2) 732 1,065 1,141
Amortization and write-offs of
acquisition intangible (1) 1,047 73 73
Other expenses 1,084 1,503 1,532
------- ------- ------
$11,452 $10,202 $7,104
======= ======= ======
</TABLE>
(1) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Non-Interest Expense" for further information regarding the
Company's non-interest expense.
(2) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Non-Interest Expense" and "Liquidity" for further discussion of
title and escrow company deposits.
NOTE NO. 14 QUARTERLY STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
The following information is unaudited. However, in the opinion of management,
all adjustments, which include only normal recurring adjustments necessary to
present fairly the results of operations for such periods, are reflected.
Reference is made to Management's Discussion and Analysis of Financial Condition
and Results of Operations for further explanation of quarterly results of
operations. Also, see "Note 18 -- Restatement of Financial Statements," herein.
<TABLE>
<CAPTION>
QUARTERLY STATEMENTS
OF OPERATIONS 1994 QUARTER ENDED
------------------
IN THOUSANDS, EXCEPT PER-SHARE DATA MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ----------------------------------- -------- -------- ------------ -----------
(unaudited)
<S> <C> <C> <C> <C>
Interest income $4,603 $ 4,615 $ 4,670 $ 4,468
Interest expense 1,348 1,322 1,563 1,677
------ -------- -------- --------
Net interest income (1) 3,255 3,293 3,107 2,791
Provision for loan losses (2) - 8,035 1,022 752
------ -------- -------- --------
Net interest income (loss)
after provision for loan losses 3,255 (4,742) 2,085 2,039
Non-interest income (3) 532 562 617 262
Non-interest expense (4) 3,688 5,467 5,406 5,832
------ -------- -------- --------
Income (loss) before
income taxes 99 (9,647) (2,704) (3,531)
Provision for (benefit of)
income taxes (5) 34 1,893 - 480
------ -------- -------- --------
Net income (loss) $ 65 $(11,540) $ (2,704) $ (4,011)
====== ======== ======== ========
Net income (loss) per share $ 0.01 $ (2.47) $ (0.58) $ (0.85)
Weighted average shares
outstanding 4,675 4,675 4,675 4,675
</TABLE>
(1) See "Management's Discussion and Analysis -- Net Interest Income."
(2) See Note 5 - Loans and Allowance for Loan Losses. The provision for loan
losses of $8,035,000 for the quarter ended June 30, 1994, took into
consideration loan write-offs and ORE write-downs totaling $3,208,000 identified
as "Loss" and $966,000 in loans identified as "Doubtful" as a result of the 1994
Federal Deposit Insurance Corporation ("FDIC")/State Banking Department joint
examination of the Bank. Management agreed with these write-downs and in
addition, identified $2,913,000 in write-downs on ORE which were accounted for
in the allowance for loan losses. Following the examination, revised factors
were also implemented which resulted in the reserve being increased by $948,000.
Management continues to review its reserve methodology to incorporate the
effects of ever-changing economic conditions. See "Management's Discussion and
Analysis -- Allowance for Loan Losses."
PAGE NO. 11
<PAGE> 200
(3) See "Management's Discussion and Analysis -- Non-Interest Income."
(4) See "Management's Discussion and Analysis -- Non-Interest Expense."
(5) See Note 8 - Income Taxes. Income tax expense of $1,893,000 for the quarter
ended June 30, 1994, and $480,000 for the quarter ended December 31, 1994, are
the result of the Company writing off previously recorded tax benefits. In
recognition of the losses reported for the quarter ended June 30, 1994, and the
year ended December 31, 1994, the Company concluded that it no longer met the
realization standards for its income tax assets as embodied in Statement of
Financial Accounting Standards No. 109. See "Management's Discussion and
Analysis -- Income Taxes."
QUARTERLY STATEMENTS
OF OPERATIONS
<TABLE>
<CAPTION>
1993 QUARTER ENDED
------------------
IN THOUSANDS, EXCEPT PER-SHARE DATA MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ----------------------------------- -------- ------- ------------ -----------
(unaudited)
<S> <C> <C> <C> <C>
Interest income $ 5,159 $ 4,993 $ 5,013 $ 4,934
Interest expense 1,694 1,593 1,578 1,505
------- ------- ------- -------
Net interest income (1) 3,465 3,400 3,435 3,429
Provision for loan losses (2) 5,200 -- 300 2,600
------- ------- ------- -------
Net interest income (loss) after
provision for loan losses (1,735) 3,400 3,135 829
Non-interest income (3) 558 726 1,193 519
Non-interest expense (4) 6,187 3,663 4,053 5,800
------- ------- ------- -------
Income (loss) before income taxes (7,364) 463 275 (4,452)
Provision for (benefit of)
income taxes (5) (2,499) 155 92 (1,515)
------- ------- ------- -------
Net income (loss) $(4,865) $ 308 183 $(2,937)
======= ======= ======= =======
Net income (loss) per share $ (1.04) $ .07 $ .04 $ (.63)
Weighted average shares
outstanding 4,673 4,692 4,675 4,675
</TABLE>
(1) See "Management's Discussion and Analysis -- Net Interest Income."
(2) See Note 5 - Loans and Allowance for Loan Losses. The provision for loan
losses of $5,200,000 for the quarter ended March 31, 1993, was made in
connection with a joint FDIC/State Banking Department examination which
classified certain loans as "Loss" and took into consideration revised factors
for reserve calculations. Management's evaluation of the allowance for loan
losses at December 31, 1993, utilized the same methodology employed during the
quarter ended June 30, 1993, and resulted in the recording of a provision for
loan losses of $2,600,000. See "Management's Discussion and Analysis --
Allowance for Loan Losses."
(3) See "Management's Discussion and Analysis -- Non-Interest Income."
Non-interest income of $1,193,000 for the quarter ended September 30, 1993,
increased primarily due to the Company's settlement of two outstanding lawsuits
from which the Company recognized $672,000.
(4) See "Management's Discussion and Analysis -- Non-Interest Expense."
Increases to non-interest expense for all quarters reported can be primarily
attributed to increased other real estate owned ("OREO") expenses.
(5) See Note 8 - Income Taxes. Income tax benefits of $2,499,000 for the quarter
ended March 31, 1993, and $1,515,000 for the quarter ended December 31, 1993,
were recorded due to the Company's quarterly losses before income tax of
$7,364,000 and $4,452,000, respectively. See "Management's Discussion and
Analysis -- Income Taxes."
PARENT COMPANY ONLY FINANCIAL STATEMENTS
NOTE NO. 15
- --------------------------------------------------------------------------------
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
IN THOUSANDS 1994 1993
- ------------ -------- --------
<S> <C> <C>
ASSETS
Cash $ 22 $ 1,172
Investment in First Commercial Bank 5,219 21,471
Other assets -- 1,355
-------- --------
TOTAL ASSETS $ 5,241 $ 23,998
======== ========
LIABILITIES
Dividends payable $ 748 $ 748
Accrued expenses and other liabilities 138 106
-------- --------
Total Liabilities 886 854
-------- --------
STOCKHOLDERS' EQUITY
Total stockholders' equity 4,355 23,144
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 5,241 $ 23,998
======== ========
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
IN THOUSANDS 1994 1993 1992
- ------------ -------- -------- --------
<S> <C> <C> <C>
INCOME
Interest income $ 95 $ 224 $ 247
Other income -- 1 --
-------- -------- --------
95 225 247
-------- -------- --------
EXPENSE
Management fee 56 14 133
Other 1,182 591 343
-------- -------- --------
1,238 605 476
-------- -------- --------
Loss before taxes and equity in
undistributed loss of subsidiary (1,143) (380) (229)
Benefit of income taxes (9) (108) (26)
-------- -------- --------
Loss before equity in undistributed
loss of subsidiary (1,134) (272) (203)
Equity in undistributed
loss of subsidiary (17,056) (7,039) (3,315)
-------- -------- --------
NET LOSS $(18,190) $ (7,311) $ (3,518)
======== ======== ========
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
IN THOUSANDS 1994 1993 1992
- ------------ -------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(18,190) $ (7,311) $ (3,518)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization 1,047 73 73
Equity in undistributed
loss of subsidiary 17,056 7,039 3,315
Increase (decrease) in other assets 308 (118) (71)
Increase in liabilities 33 97 5
-------- -------- --------
Net cash (used in) operating activities 254 (220) (196)
-------- -------- --------
Cash flows from investing activities:
Increase in investment subsidiary (1,404) -- --
-------- -------- --------
Net cash used in investing activities (1,404) -- --
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of
common stock -- 11 71
Dividends paid on common stock -- -- (741)
-------- -------- --------
Net cash provided by (used in)
financing activities -- 11 (670)
-------- -------- --------
Net decrease in cash and cash
equivalents (1,150) (209) (866)
Cash and cash equivalents at
beginning of year 1,172 1,381 2,247
-------- -------- --------
Cash and cash equivalents
at end of year $ 22 $ 1,172 $ 1,381
======== ======== ========
</TABLE>
PAGE NO. 12
<PAGE> 201
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
NOTE NO. 16
- --------------------------------------------------------------------------------
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, Disclosures About Fair
Value of Financial Instruments. The estimated fair value amounts have been
determined by the Bank using available market information and appropriate
valuation methods. However, considerable judgment is required when prices from
external sources are not readily available to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Bank could realize in a current market exchange.
The use of different assumptions and/or estimation methods may have a material
effect on the estimated fair value amounts.
The following methods and assumptions were used to estimate fair value of each
class of financial instruments:
Cash and Cash Equivalents -- The carrying amount is a reasonable estimate of
fair value.
Interest-Bearing Deposits with Other Financial Institutions -- The carrying
amount is a reasonable estimate of fair value.
Investment Securities -- Estimated fair values for investments are obtained from
quoted market prices.
Loans -- The estimated fair values for loans are estimated by discounting the
expected cash flows using the current rate at which similar loans would be made
to borrowers with similar credit ratings and maturities. The fair value of
nonperforming loans was estimated based on allocating specific and general
reserves to the various nonperforming loan classifications.
Lease financing, net -- The carrying amount is a reasonable estimate of fair
value.
Deposits -- The estimated fair value of deposits with no defined maturities
(demand accounts, interest-bearing transaction accounts and savings accounts) is
the carrying amount. The fair value of time accounts is estimated by discounting
the estimated cash flows using the current rate at which similar certificates of
deposit would be issued.
Off-Balance Sheet Financial Instruments -- The carrying amounts for fees arising
from commitments to extend credit, standby letters of credit and financial
guarantees written and their related fair values are not material.
The estimated fair value of financial instruments at December 31, 1994, is
summarized as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
IN THOUSANDS AMOUNT VALUE
- ------------ -------- --------
<S> <C> <C>
Financial Assets:
Cash and cash equivalents $ 86,259 $ 86,259
Interest-bearing deposits with
other financial institutions 299 299
Investment securities 17,690 17,541
Net loans 122,735 116,315
Lease financing, net 1,038 1,038
-------- --------
Total Financial Assets $228,021 $221,452
======== ========
Financial Liabilities:
Deposits:
Demand accounts $ 56,483 $ 56,483
Interest-bearing transaction accounts 68,840 68,840
Savings accounts 21,695 21,695
Time accounts 86,518 86,769
-------- --------
Total Financial Liabilities $233,536 $233,787
======== ========
</TABLE>
REGULATORY AGREEMENTS
NOTE NO. 17
- --------------------------------------------------------------------------------
FDIC AND STATE BANKING DEPARTMENT REGULATORY ORDERS
As a result of an examination of the Bank by the FDIC and the State Banking
Department ("SBD") which was concluded during the second quarter of 1993, the
Bank consented to enter into an amended Cease and Desist Order with the FDIC on
July 27, 1993, and an Order under Financial Code Section 1913 with the SBD, on
July 6, 1993, which was amended on March 30, 1995 (collectively, the "Orders").
The Orders remain in effect.
The Bank completed a joint examination by the FDIC and SBD on July 20, 1995.
Under the terms of the Orders, the Bank agreed, among other things, to retain
qualified management. As of June 1, 1994, James E. Culleton, the Executive Vice
President of the Company and Executive Vice President and Chief Operating
Officer of the Bank, was named as Interim President of the Bank and the Company
until a permanent President and Chief Executive Officer can be employed. The
former President, Chief Executive Officer and a Director of the Bank and the
Company, and the former Executive Vice President of the Company and Executive
Vice President and Senior Credit Administrator of the Bank, resigned effective
August 15, 1994. On September 1, 1994, Dennis F. Ceklovsky was named Executive
Vice President and Chief Credit Officer of the Company and the Bank. Mr.
Ceklovsky assumed responsibility for overall management of the Bank's credit
operations, and oversees adherence to regulatory policies and procedures.
The Bank also agreed, pursuant to the Orders, to maintain adjusted Tier 1
capital equal to or exceeding 6.5% of the Bank's total assets. Furthermore, the
Bank is required to maintain tangible shareholders' equity plus mandatorily
convertible subordinated debt equal to not less than 6.5% of total tangible
assets, and a minimum tangible shareholders' equity plus mandatorily convertible
subordinated debt of $19,500,000. As a result of the loss for the year ended
December 31, 1994, the Bank is not in compliance with its mandatory capital
ratios. As of December 31, 1994, the Bank's adjusted Tier 1 capital ratio was
2.22%, and the Bank's tangible shareholders' equity plus mandatorily convertible
subordinated debt was 2.08% of total tangible assets. At that date, the Bank's
tangible shareholders' equity was $4,986,697, which includes the conversion of a
$2,400,000 mandatorily convertible subordinated note, the downstream of
$1,402,477 of capital from the Company and all adjustments required by the
Report of Examination dated March 28, 1994.
In response to its capital deficiency, the Bank submitted to the FDIC on August
23, 1994 its Capital Restoration Plan, which was amended on November 22, 1994,
and approved by the FDIC on January 30, 1995. One of the components of the
Capital Restoration Plan consists of a decrease in the Bank's asset size. On
January 21, 1995, the Bank consummated the sale of its San Diego branch office
to the Bank of Commerce, and on April 14, 1995, the Bank's Santa Rosa Branch
office was closed.
Another component of the Capital Restoration Plan is the raising of capital. The
Company and the Bank have engaged a financial advisor to assist in the
recapitalization of the Bank. See "Note No. 19 - Subsequent Event." The Company
intends to conduct a rights offering of its common stock in order to raise
approximately $5,000,000, and a dividend exchange offer for approximately $1.0
million in additional capital, thus obtaining capital compliance.
PAGE NO. 13
<PAGE> 202
The Bank received a letter dated March 9, 1995, from the FDIC setting forth
three areas covered in the FDIC Order to which the FDIC believes the Bank must
devote its undivided attention. These include successfully completing the
proposed capital offering, improving earnings and improving asset quality. The
Bank is in the process of addressing each of these areas.
In accordance with the Orders, all assets classified "Loss" and 50% of all
assets classified "Doubtful" as of the examination dated March 28, 1994, have
been charged off. Classified assets totaled $54,332,000, which includes
$2,599,000 in undisbursed commitments. At December 31, 1994, these assets
totaled $28,714,000.
The Bank has ceased the accrual of interest on any loan that is subject to
adverse classification by the FDIC or SBD and that is 90 days past due. In
addition, with respect to such loans, the Bank has reversed all previously
accrued but uncollected interest. Management has established a new policy
whereby the Bank's computer system automatically places loans on nonaccrual once
they become 90 days past due and will not return these loans to an accrual
status until all past due amounts are paid in full.
Pursuant to the Orders, the Bank agreed to reduce its concentration in
speculative real estate construction loans as a percent of Tier 1 capital. The
Order required 150% by February 28, 1994, and thereafter. However, as a result
of the 1994 FDIC/SBD examination, the amount of speculative real estate
construction loans increased significantly due to the decrease in capital. Thus,
as of December 31, 1994, speculative real estate construction loans outstanding
as a percent of Tier 1 capital were 192%. Accordingly, the Bank is not in
compliance with this agreement. The Bank's current policy is not to make any
speculative real estate loans.
The Board of Directors reviewed on October 31, 1994, the adequacy of the loan
loss reserve based on loans identified as "Loss," classified assets and revised
factors for reserve calculations resulting from the recent FDIC/SBD examination.
The revised factors include assigning reserve percentages to certain binding
undisbursed commitments and contingent liabilities. At December 31, 1994, the
loan loss reserve was $7,437,000 or 5.70% of total gross loans. See "Provision
for Loan Losses."
The Bank corrected all noted appraisal violations from the 1993 FDIC/SBD
examination. The apparent violations of Laws and Regulations noted in the recent
report of examination also have been addressed and corrected, if necessary.
The Bank has restated and resubmitted its quarterly Call Reports beginning
December 31, 1992 in order to reflect the complete charge-off of a certain asset
based on information which was unknown to current management at the time of the
original filings.
In response to the 1994 examination, the Bank has implemented a new policy
requiring that completed appraisals received by the Bank are reviewed by a
qualified, state-certified appraiser. The review must be in conformance with
USPAP Standard 3 and is in addition to the review of the appraisal by the
account officer.
The Board adopted a Liquidity and Funds Management Policy which provides for a
minimum liquidity level of 20% and a level of rate-sensitive assets to
rate-sensitive liabilities (which will include that portion of title company
demand deposits invested in Federal funds sold) in the range of 0.80 to 1.20 for
the periods of six, twelve and twenty-four months. Additionally, the policy
incorporates the new targets as proposed by the FDIC in the recent report of
examination. The Bank's liquidity level at December 31, 1994, was 43.49%. The
rate-sensitive assets to rate-sensitive liabilities were 1.10, 0.94 and 1.01 for
the six, twelve and twenty-four month periods. This calculation included title
company demand deposits in the selected liabilities to the extent that these
deposits are invested in Federal funds sold. The State Banking Department Order
also requires that this policy include an emphasis on increasing core deposits
and reducing the Bank's dependence on volatile liabilities. At December 31,
1994, the Bank's volatile liability dependency ratio was (21.70%).
Pursuant to the terms of the Orders, the Bank has not declared or paid cash
dividends since the March 1, 1993 examination date, and has made available to
the Company's stockholders a description of the Orders.
The Bank continues to be designated a problem bank and is considered "troubled"
for all regulatory purposes. Accordingly, the Bank is required to provide prior
notice to the FDIC of the employment of any senior officer or appointment of a
director. Due to the Bank's current regulatory capital ratios, the Bank is
prohibited from accepting funds obtained directly or indirectly through a
deposit broker. In addition, the Bank cannot provide pass-through deposit
insurance to employee benefit plan deposits so long as it is ineligible to
accept brokered deposits.
Failure to comply with the terms of the Orders could result in various
regulatory actions against the Bank, including recapitalization, merger and/or
acquisition of the Bank. For a general discussion of the consequences of failing
to comply with the Orders, see "Capital Adequacy" Requirements of the Company
and the Bank and "Prompt Corrective Action" herein.
CAPITAL IMPAIRMENT ORDERS
The California Financial Code (the "Financial Code") requires the SBD to order
any bank whose contributed capital is impaired to correct such impairment within
60 days of the date of the Order. Under Section 134(b) of the Financial
Code, the "contributed capital," defined as all shareholders' equity other than
retained earnings of a bank, is deemed to be impaired whenever such bank has
deficit retained earnings in an amount exceeding 40% of such contributed
capital. Under Section 662 of the Financial Code, the SBD has the authority, in
its discretion, to take certain appropriate regulatory action with respect to a
bank having impaired contributed capital, including possible seizure of such
bank's assets. An impairment of capital may be corrected through earnings, by
raising additional capital or by a quasi-reorganization. Although the Bank has
made no determination to seek a quasi-reorganization, a bank that has deficit
retained earnings may, subject to the approval of its shareholders and of the
SBD, readjust its accounts in a quasi-reorganization, which may include
eliminating its deficit retained earnings, under Section 663 of the Financial
Code. However, a bank that is not able to effect such a quasi-reorganization or
otherwise to correct an impairment of its contributed capital within 60 days of
an order to do so from the SBD must levy and collect an assessment on its common
shares pursuant to Section 423 of the California Corporations Code.
A bank is required to levy such an assessment within 60 days of the SBD's Order;
the assessment becomes a lien upon the shares assessed from the time of service
or publication of such notice of assessment. Within 60 days of the date on which
the assessment becomes delinquent, a bank subject to the SBD's Order must sell
or cause to be sold to the highest bidder for cash as many shares of each
delinquent holder of the assessed shares as may be necessary to pay the
assessment and charges thereon.
The assessment is levied against each outstanding share by apportioning the
amount required to cure the impairment among the outstanding shares of common
stock of the Bank. In the event the assessment is not paid when due and becomes
delinquent, the shares are subject to a penalty and to sale. If there is no
bidder at the sale, the shares are forfeited to the Bank in satisfaction of the
assessment and penalty. Stockholders of the Bank are not, however, subject to
personal liability for the assessment.
On February 16, 1995, and March 15, 1995, the Bank was notified that as of
December 31, 1994, the Bank had contributed capital of approximately $19,068,000
and deficit retained earnings
PAGE NO. 14
<PAGE> 203
of approximately $13,849,000, or approximately 73% of its contributed capital.
The Bank was issued orders by the SBD to correct within 60 days the impairment
of its contributed capital. The Bank previously had been issued orders on August
3 and November 3, 1994. The Bank received a further order on May 15, 1995.
The Bank has not complied with these orders. The shareholders of the
Bank, (not the Company's shareholders) will receive any notices of
assessment issued by the Bank. If the Bank does not comply with the orders, the
Bank will be in violation of this California law requiring it to assess the
shares of the Bank in order to correct the impairment of the Bank's capital. As
long as the Bank has a capital impairment, it may be subject to closure by the
California Superintendent of Banks ("Superintendent").
No assurance can be given that the Bank's capital condition will not deteriorate
further prior to a quasi-reorganization as a result of operating losses. In
addition, because a quasi-reorganization requires that the Bank reduce its
assets and liabilities to market value at the time of the reorganization, the
Bank's capital could be further reduced from its present level as a result of
the reduction in the market value of the Bank's assets over its liabilities.
Finally, there can be no assurance that, following a correction of the Bank's
capital impairment, whether through a quasi-reorganization or an infusion of
sufficient capital, the Bank's capital position will not continue to erode
through future operating losses. As long as the Bank's contributed capital is
impaired, the Superintendent is authorized to take possession of the property
and business of the Bank, or to order the Bank to comply with the legal
requirement and levy an assessment on the shares of the Bank sufficient to
correct the impairment. Management believes the Superintendent has never
exercised his bank takeover powers solely on the basis that a bank's capital is
impaired under the standards set forth in Section 134 of the Financial Code.
In order to permit a quasi-reorganization of the Bank's capital, the
Superintendent requires, among other things, that a bank demonstrate that it is
adequately capitalized and that it is capable of operating profitably.
Management believes, although it cannot assure, that, after raising adequate
capital, the Bank will be able to so demonstrate and that it will then be
possible for the Bank to effect a quasi-reorganization. Management also believes
that if, as management anticipates, the Bank has high equity capital ratios
after capital is raised, it is unlikely that the Superintendent would seek to
take action solely on the basis of impaired capital under the Section 134
definition. There can be no assurance, however, that other circumstances such as
insufficient liquidity or further operating issues could not arise that would
provide incentive to the Superintendent to utilize the powers granted by Section
134.
FEDERAL RESERVE BANK MEMORANDUM OF UNDERSTANDING
On October 17, 1994, the Company entered into a Memorandum of Understanding
("Memorandum") with the Federal Reserve Bank of San Francisco (the "Reserve
Bank"). Under the terms of the Memorandum, the Company may not declare or pay
any dividends without the prior written approval of the Reserve Bank and may not
take dividends from the Bank without providing prior written notice to the
Reserve Bank; the Company must submit to the Reserve Bank a written plan to
improve and maintain an adequate capital position at the Company and the Bank;
and the Company must take reasonable actions to employ a full-time president for
the Company and the Bank. Further, the Memorandum sets forth restrictions on
certain transactions between the Bank and the Company, directs the Company to
prepare and submit to the Reserve Bank certain policies and procedures and
financial information, and requires the Company to provide prior notice to the
Reserve Bank of any new, or the renewal or modification of any existing,
employment, service or severance contracts with any executive officer. Within 45
days of the end of each calendar quarter, the Company must submit to the Reserve
Bank a written progress report regarding the Company's compliance with the terms
of the Memorandum.
On August 23, 1994, the Company submitted to the Reserve Bank its Capital
Restoration Plan setting forth the Company's plans for improving and maintaining
an adequate capital position at the Company and the Bank. The Company, however,
has not met the capital goals set forth in its Capital Plan.
NOTE No. 18 RESTATEMENT OF FINANCIAL STATEMENTS
During the second quarter of 1994, the Company became aware of the existence of
certain previously unknown information which affected the reported carrying
value of certain assets included in the Company's December 31, 1992 and 1993
financial statements. Management believes that had this information been known
at December 31, 1992, the Company would have written off certain assets and
recognized a loss at that time. Thus, the Company's financial statements for the
fiscal years ended December 31, 1992 and 1993 have been restated to reflect the
effects of these charge-offs and losses. The effect of this restatement for 1994
was to decrease Other Real Estate by $3,900,000, increase the allowance for loan
losses by $974,000 for a charge-off recorded on this loan in 1993, decrease
interest income by $14,000, record a tax benefit of $5,000, increase cash by
$47,000 and increase savings accounts by $96,000. The net of these transactions
increased previously reported loss and retained deficit by $9,000.
The effect of this restatement for 1992 was to charge off real estate
construction loans of $4,891,000 to the allowance for loan losses and establish
a corresponding addition to the provision for loan losses. In addition, interest
income was reversed by approximately $18,000 and a tax benefit was recorded for
$1,718,000. The net of these transactions reduced previously reported net loss
and retained deficit by $3,191,000.
NOTE No. 19 SUBSEQUENT EVENT
On August 7, 1995, First Banks, Inc. (First Banks) executed an Amended and
Restated Stock Purchase Agreement (the Agreement) with the Company and the Bank
pursuant to which First Banks will invest an aggregate of $10 million in the
Company and/or the Bank in three installments. The Agreement provided that, on
June 30, 1995, First Banks purchased 750,000 shares of the Bank's nonvoting
noncumulative preferred stock for $1.5 million. On August 23, 1995, First Banks
purchased $3.5 million of newly issued Bank common stock at the Bank's book
value per share, conveying majority control of the Bank to First Banks. The
Bank's common stock held by First Banks is subject to an irrevocable proxy
agreement, pursuant to which the Company votes the shares until the occurrence
of certain events.
Upon approval of the Agreement by the Company's stockholders, all of the Bank
preferred and common stock held by First Banks will be exchanged for the
Company's common stock at $.10 per share. Simultaneously, First Banks will
purchase a $5 million senior debenture (the Debenture) of the Company secured
by all the outstanding common stock of the Bank. The Debenture will bear
interest at 12% per year and mature five years after issuance. The Debenture,
including any unpaid interest thereon, may be converted into Company common
stock at any time during the five years. In the event the stockholders fail to
approve the Agreement, First Banks will retain its ownership in Bank preferred
stock and Bank common stock and invest an additional $5 million in newly issued
Bank common stock at a price equal to the book value per share.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND THE BOARD OF DIRECTORS OF
FIRST COMMERCIAL BANCORP, INC.:
We have audited the consolidated balance sheets of First Commercial Bancorp,
Inc. (a Delaware corporation) and subsidiary as of December 31, 1994 and 1993,
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1994, as restated (see Note 18). These financial statements are the
responsibility of the Corporation'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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Commercial Bancorp, Inc.
and subsidiary as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that both
First Commercial Bancorp, Inc. (the "Company") and First Commercial Bank (the
"Bank") will continue as going concerns. As discussed in Note 17 to the
financial statements, both the Company and the Bank have entered into various
regulatory agreements (the "Agreements") with the Federal Deposit Insurance
Corporation (the "FDIC"), the California State Banking
PAGE No. 15
<PAGE> 204
Department and the Federal Reserve Bank of San Francisco. These Agreements
require the Company and the Bank, among other compliance terms, to maintain
certain minimum capital levels. The Company and the Bank are not in compliance
with these minimum capital requirements and have suffered recurring losses from
operations. An amended capital plan has been submitted to the bank regulators,
which plan was approved by the FDIC on January 30, 1995. The plan consists of
both an intent to decrease the Bank's asset size and the raising of capital
through the sale of stock. There is no assurance that the Company will be able
to raise sufficient capital to meet the minimum capital requirements. Failure to
meet regulatory capital requirements or comply with the terms of the Agreements
could subject the Company and the Bank to additional actions by the bank
regulatory authorities, including restrictions on operations, mandatory asset
dispositions or seizure. These matters raise substantial doubt about the ability
of the Company and the Bank to continue as going concerns. Their ability to
continue as going concerns is dependent on many factors, one of which is
regulatory action and the ability to raise sufficient capital. Management's
plans in regard to these matters are described in Note 17. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
San Francisco, California
March 29, 1995 (except with respect to the matter discussed in Note 19, as to
which the date is September 5, 1995)
THE BUSINESS OF FIRST COMMERCIAL BANCORP, INC.
GENERAL
The Company is a bank holding company located in Sacramento, California. The
Company's sole subsidiary, First Commercial Bank (the "Bank"), commenced
operations in 1979. The Bank conducts a general banking business through its
eight branch offices with two locations in Sacramento, two in Roseville, and one
each in Santa Rosa, San Francisco, Concord and Campbell, California. The
deposits of the Bank are insured by the FDIC up to the maximum amount permitted
by law.
On October 14, 1994, the Bank entered into a definitive agreement to sell its
San Diego branch office to the Bank of Commerce. The sale was consummated on
January 21, 1995.
On January 12, 1995, the Bank received approval from the California State
Banking Department to close its Santa Rosa branch, effective April 14, 1995.
ECONOMIC TRENDS
The Bank's business and consumer customers are located in northern California
with four branches located in the Sacramento Valley and four branches located in
the San Francisco Bay Area. The Northern California construction and real estate
industries have experienced and continue to experience a prolonged recession,
partially attributable to military base closures and reductions in the U.S.
Department of Defense spending budgets. Mather Air Force Base and the Sacramento
Army Depot have been closed in the Sacramento region while the Oakland-Alameda
Naval Yard, Mare Island Naval Shipyard and the Presidio in the San Francisco Bay
Area are all scheduled for closure.
The median price of home resales in Sacramento and San Francisco regions has
declined every year since 1991. The median price of a home in California in 1994
was $181,750 compared to $196,440 in 1991, a decline of 7.5% (1). High
unemployment driven by military base closures and defense spending cutbacks have
lowered consumer confidence, deterred business expansion and lowered real estate
values.
Declining California property values had an adverse effect on the Company's
operations in 1994 because a significant amount of the Bank's loans are secured
by real estate. The Bank's strategic business plan forecasts a reduction of the
real estate loan portfolio and an increase in commercial and consumer lending.
To reduce the level of existing problem loans and nonperforming assets the Bank
created a special assets department during 1994. The department has been
dedicated to the collection of delinquent loans and the aggressive reduction of
nonperforming assets.
The Northern California region appears to be experiencing a slight economic
recovery. At December 31, 1994, the unemployment rate for the Sacramento and San
Francisco Bay Area regions was 5.8% and 4.2%, respectively, compared to 7.1%
and 6.0% at December 31, 1993 (2). Civilian employment is expected to expand
during the first six months of 1995, predominantly in the areas of state
government, manufacturing and high-technology industries (3). An improving
Northern California economy will be of great benefit to the Company and the
Bank.
MARKET AREA AND CUSTOMER BASE
The Bank focuses on marketing a full range of financial services to its business
and consumer customers in the metropolitan areas of California where its eight
offices are located. The Bank's business customer base is diversified in the
areas of manufacturing, service industries, wholesale and retail trade,
transportation and real estate construction.
The commercial banking activities of the Bank are directed toward developing and
supporting small to medium-sized businesses within the Bank's service area, by
providing a full range of financial services. The Bank also markets its
financial services to individuals in order to develop core deposits and
non-interest income (fee income), with the primary objective of establishing
long-term customer relationships. When it is necessary to offer certain products
that the Bank's size does not permit on a cost-effective basis, the Bank has
arranged with vendors to provide such services and products. This ensures that
the Bank can provide a full range of financial services to its customers.
LENDING ACTIVITIES
The Bank concentrates its lending activities in commercial, real estate, and
installment loans made primarily to businesses, professionals and individuals
throughout California. At December 31, 1994, the Bank had total loans
outstanding of $130,415,000. This represented approximately 56% of the Bank's
total deposits and approximately 54% of the consolidated total assets of the
Company. At December 31, 1994, commercial loans comprised approximately 53% of
total loans outstanding. Real estate construction loans comprised approximately
13% of total loans outstanding and real estate secured loans (which includes
equity lines of credit) comprised approximately 29% of total loans outstanding.
Installment loans comprised approximately 5% at year-end. See Note 5 of the
Notes to Consolidated Financial Statements for additional information regarding
the Bank's loan portfolio.
Credit Risk. The Bank manages the risk of the credit portfolio through the
lending policies and procedures established by management and approved by the
Board of Directors. During 1994, the Board of Directors recognized a need to
implement more stringent underwriting criteria, necessitated by the need to
curtail the high level of classified assets and related loan losses.
(1) "Economic Profile Greater Sacramento Area," Real Estate and Land Use
Institute, California State University, Sacramento, January 1995.
(2) State of California, Department of Finance, Financial and Economic Research
Unit.
(3) "Economic Forecast," Real Estate and Land Use Institute, California State
University, Sacramento, March 1995.
PAGE No. 16
<PAGE> 205
A revised credit risk management process was implemented for the Bank. The Bank
maintains standards for credit risk management through the analytical process
performed by its loan officers and the review process performed by management
and the Board of Directors, who are responsible for approving all credit
extensions of the Bank except for installment loans of $25,000 or less. New
loans or renewals are granted only after the appropriate underwriting standards
have been met, including cash flow analysis and, with respect to real estate
related loans, current appraisals have been obtained. The diversity of the loan
portfolio, utilization of watch list/problem loan reports for early
identification of potential credit problems, and limited approval authority
assist with the control of the credit risk management function.
Commercial Loans. The Bank offers a variety of commercial lending services,
including revolving lines of credit, working capital loans, equipment financing,
and letters of credit, primarily to professionals, individuals and small to
medium-sized businesses. At December 31, 1994, the Bank had $69,597,000 in
commercial loans which represented approximately 53% of the total loan
portfolio, compared to $103,949,000 for the year ended December 31, 1993, a
reduction of 33%. This significant decrease is due to management's strategic
plan to decrease the asset size of the Bank. Typically, these loans have a
floating rate of interest based on the Bank's prime rate. Approximately 71% of
the Bank's commercial loans are for terms of one year or less. Commercial loans
are typically unsecured and may contain more inherent risk of loss than secured
loans. However, management believes that its underwriting controls and review
process provide the appropriate information to better manage the risk inherent
in such loans.
The Bank's principal criteria for underwriting commercial loans is the
determination and documentation of the borrower's ability to service the loan
from available cash flow which is considered to be the borrower's primary source
of repayment. The Bank also looks to the borrower's ability to provide the Bank
with a secondary repayment source. Finally, the underwriting process includes
the analysis of the value of collateral offered or available to secure the loan.
Real Estate Construction Loans. The Bank finances the construction of primarily
residential properties. At December 31, 1994, the Bank had $16,386,000 in real
estate construction loans which represented approximately 13% of the total loan
portfolio. In order to reduce the Bank's exposure resulting from further
declines in real estate values, during 1994, real estate construction loans
outstanding were reduced from $39,879,000 as of December 31, 1993 to $16,386,000
as of December 31, 1994, a reduction of $23,493,000 or 59%. Undisbursed real
estate construction commitments were reduced from $4,163,000 as of December 31,
1993 to $3,425,000 as of December 31, 1994, a reduction of $738,000 or 18%.
At December 31, 1994, the Bank had 99 residential loans, comprising $14,225,000
or 87% of the construction loan portfolio. The total residential construction
portfolio consists of single-family construction on owner-occupied properties
totaling $5,456,000 or 38%, single-family homes totaling $4,771,000 or 34%,
single-family lot development totaling $3,734,000 or 26% and a land loan
totaling $264,000 or 2% at December 31, 1994. The repayment of the
non-owner-occupied construction loans is predicated upon the completion and sale
of those properties which contain potential risks not inherent in most other
types of lending. These potential risks include declines in market values of
underlying collateral and delays or cost overruns. In addition, a decline in
general economic conditions can have an adverse effect upon the borrower's
ability to repay these loans. The Bank experienced increases in actual loan
losses, and continued high levels of nonperforming loans and ORE during 1994 due
to the decline in economic conditions and real estate values in the Bank's
market areas. In order to further reduce the risks inherent in the Bank's
construction lending, the Bank restricts such lending by both type and price
range to specific areas within its market area which management believes have
the most favorable market conditions. However, no assurance can be given that
future economic conditions may not continue to adversely affect the collateral
values of such loans.
Construction loans for six commercial properties totaled $2,161,000 or 13% of
the Bank's construction loan portfolio. These loans consist of three lot
development loans totaling $1,855,000 or 86%, two land loans totaling $190,000
or 9% at December 31, 1994, and the building of one commercial property totaling
$116,000 or 5%.
New construction loans typically have maturities of one year or less, have a
floating rate of interest based on the Bank's prime rate, are made primarily to
owner-builder users with a minimum cash equity of 20% of appraised value and are
secured by first deeds of trust. In addition, these loans generally do not
exceed the lesser of 85% of cost or the appropriate percentage of the appraised
value of the securing property when originated. The Bank does not typically
commit to refinance construction loans into real estate secured loans. The Bank
takes no profit interest in connection with its construction lending and none of
these loans are classified as acquisition, development or construction (ADC)
loans.
The Bank's real estate construction lending program consists of loans made to
finance the construction of single-family homes for an owner-builder. To quality
for a construction loan, the owner-builder must provide the Bank with a firm
"take out" loan commitment supplied by a third-party lender. Additional
underwriting criteria require that the real estate project have a current
independent appraisal and that the loan-to-appraised value ratio fall within the
parameters set forth in the Bank's current loan policy for the specific type of
loan. The borrower's construction plans are reviewed to determine whether the
construction project can be completed within the requested loan term.
Real Estate Secured Loans. In addition to home equity lines of credit, the Bank
presently grants loans classified as real estate secured loans primarily to
existing customers of the Bank. During 1994, $1,022,000 in new amortizing loans
were granted. At December 31, 1994, the Bank had $38,439,000 in real estate
secured loans which represented 29% of the total loan portfolio. These loans
consist of equity lines of credit of $17,213,000, and loans secured by first
deeds of trust on commercial and residential properties. Approximately 60% of
these loans bear interest at a floating rate tied to the Bank's prime rate, with
approximately 59% having maturities of five years or less. Management believes
that the Bank does not have any significant loss exposure with respect to such
loans, due to the Bank's collateral position. However, no assurance can be given
that a change in economic conditions would not affect the collateral positions
of the Bank and increase its exposure to loss. During 1994, $1,236,000 in
amortizing loans matured and were paid off. In addition, the Bank had $1,202,000
in prepayments of previously granted amortizing loans with maturities beyond
1994.
The Bank's principal criteria for underwriting real estate secured loans is the
determination and documentation of the borrower's ability to service the loan
from the income generated by the property. The debt-service coverage must equal
or exceed the requirements set forth in the Bank's loan policy. A current
independent appraisal is required and the loan-to-value ratio must fall within
the parameters of loan policy. Finally, tenant leases are reviewed for quality
and length of term, and they must be sufficient to support the payment of the
debt over the life of the loan.
Installment Loans. At December 31, 1994, the Bank had $5,993,000 in installment
loans which represented approximately 5% of the total loan portfolio. These
loans are made to individuals for household, family and other personal
expenditures, of which approximately 99% have maturities of five years or less.
Approximately 54% of all installment loans have floating rates tied to the
Bank's prime rate with the remainder having fixed interest rates.
PAGE No. 17
<PAGE> 206
To qualify for an installment loan the borrower's monthly income and expenses
are analyzed to determine sufficient debt service ability to support the loan.
Income is verified and credit reports are ordered from credit reporting
services. Advance rates against collateral must be within loan policy
guidelines.
Director Loans. The Bank's policy concerning director loans conforms with all
applicable laws and regulations, and prohibits new loan requests or loan
renewals in excess of $50,000 to directors unless the loan is secured by
marketable securities or a deposit account. In addition, this policy also
prohibits loans to companies in which any of the Bank's or Company's directors
is also a director, an executive officer, or a stockholder with greater than 10%
ownership. At December 31, 1994, the Bank had $152,000 in loan commitments to
directors and executive officers with an aggregate outstanding balance of
$19,000. Commitments to directors and executive officers represents 3.49% of
total stockholders' equity at December 31, 1994.
Lending Limits. The Directors' Loan and Discount Committee must approve all new
loans and loan renewals, with the exception of installment loans in the amount
of $25,000 or less. The Bank's legal lending limits at December 31, 1994 were
approximately $1,898,000 for unsecured loans and $3,164,000 for secured loans.
DEPOSITS
The Bank primarily obtains deposits from four sources: individuals, businesses
with whom it has established a banking relationship, local government agencies
and financial institutions.
Total deposits decreased to $233,536,000 at December 31, 1994, compared to
$323,796,000 at December 31, 1993, a decrease of approximately 28%.
At December 31, 1994, time accounts of $100,000 or more included $15,448,000 in
time accounts obtained from individuals, $10,022,000 from businesses with
established banking relationships, $200,000 in time deposits obtained from local
government agencies, and $802,000 from financial institutions.
At December 31, 1994, the Bank had approximately 15,758 accounts consisting of:
<TABLE>
<CAPTION>
Number of Average Balance
Accounts per Account
--------- ---------------
<S> <C> <C>
DEMAND ACCOUNTS:
Individuals 2,855 $ 2,670
Businesses 1,980 19,086
Local government agencies 7 16,330
Title & escrow companies 38 117,696
Financial institutions 1 147,937
------
TOTAL DEMAND ACCOUNTS 4,881
------
INTEREST-BEARING TRANSACTION ACCOUNTS:
Individuals 3,942 $ 10,966
Businesses 676 38,070
Local government agencies 9 56,737
Title & escrow companies 55 26,746
Financial institutions -- --
------
TOTAL INTEREST-BEARING TRANSACTION ACCOUNTS 4,682
------
SAVINGS ACCOUNTS:
Individuals 2,805 $ 6,672
Businesses 239 15,038
Local government agencies -- --
Title & escrow companies -- --
Financial institutions -- --
------
TOTAL SAVINGS ACCOUNTS 3,044
------
TIME ACCOUNTS:
Individuals 2,689 $ 20,709
Businesses 317 53,835
Local government agencies 2 194,662
Title & escrow companies -- --
Financial institutions 143 98,958
------
TOTAL TIME ACCOUNTS 3,151
------
TOTAL DEPOSIT ACCOUNTS 15,758
======
</TABLE>
See Note 13 of the Notes to Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity" for further information regarding the Bank's deposits.
SELECTED FINANCIAL DATA
The table on the following page sets forth certain selected consolidated
financial data of the Company for each year of the five-year period ended
December 31, 1994 and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
with the financial statements presented herein:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion relates to the consolidated results of the Company and
the Bank and should be read in conjunction with "Selected Financial Data,"
"Consolidated Financial Statements," and accompanying notes included herein.
SUMMARY OF OPERATIONS
The effects of the Company's concentration in real estate became pronounced
during 1994 due to increasing foreclosures and a continuing reduction in the
economic value of incomplete development projects. As a result of these events,
write-downs and associated costs on real estate properties owned reached
$6,035,000 during 1994 and the Bank's provision for loan losses increased to
$9,809,000.
The Company's capital was reduced to $4,355,000. In order to lessen the impact
of this decline in the Company's capital, the Company reduced the level of its
assets by over 30% and reduced its overhead by approximately $2,300,000 on an
annualized basis and will reduce the level of its full-time equivalent employees
by 41%, from approximately 185 at December 31, 1993, to approximately 110 by the
end of April, 1995.
The net loss for the year ended December 31, 1994 was $(18,190,000), compared to
a net loss of $(7,311,000) for the year ended December 31, 1993. The net loss in
1992 was $(3,518,000).
The net loss per share for the year ended December 31, 1994, was $(3.89),
compared to net loss per share of $(1.56) for the year ended December 31, 1993.
On a per-share basis, net loss was $(.75) for 1992.
The net loss for the 1994 year was primarily due to the write-downs and other
expenses associated with ORE properties, the increase to the provision for loan
losses, as well as the write-off of previously recorded income tax benefits of
$2,407,000.
Net interest income for the year ended December 31, 1994 was $12,446,000,
compared to $13,730,000 for the same period last year. Net interest income for
the year ended December 31, 1992 was $15,632,000. See "Net Interest Income" for
further discussion.
The provision for loan losses for the year ended December 31, 1994 was
$9,809,000, compared to $8,100,000 for the same period last year. The provision
for loan losses for the year ended December 31, 1992 was $7,260,000. See
"Provision for Loan Losses" for further discussion.
Non-interest income for the year ended December 31, 1994 was $1,973,000,
compared to $2,995,000 for the same period last year. Non-interest income for
the year ended December 31, 1992 was $2,502,000. See "Non-Interest Income" for
further discussion.
Non-interest expense for the year ended December 31, 1994 was $20,393,000,
compared to $19,703,000 for the same period last year, an increase of $690,000
or 3.5%. This increase can be primarily attributed to an increase in ORE expense
of $1,230,000. Non-interest expense for the year ended December 31, 1992 was
$16,264,000. See "Non-Interest Expense" for further discussion.
PAGE No. 18
<PAGE> 207
NET INTEREST INCOME
Net interest income is the difference between interest and loan fees earned by
the Company on its earning assets and the interest expense paid on its
interest-bearing deposits and other borrowed funds. Net interest income,
expressed as a percentage of average total earning assets, is referred to as net
interest margin (see "Liquidity").
1994 Compared to 1993. Net interest income for the year ended December 31, 1994,
was $12,446,000 compared to $13,730,000 for the same period last year, a
decrease of $1,284,000 or 9.35%. The yield on earning assets increased to 7.77%
for the year ended December 31, 1994, compared to 7.60% for the same period last
year. Rates paid on interest-bearing liabilities decreased slightly to 3.18% for
the 1994 year, compared to 3.22% for the same period last year. The Bank's net
interest margin increased to 5.27% for the year ended December 31, 1994,
compared to 5.19% the same period last year. The Bank's prime rate averaged
7.32% for the year ended December 31, 1994, compared to 6.50% for the same
period last year.
Interest and fees on all loans decreased $2,661,000 or 14.96%. The majority of
this decline was due to the reduction in the level of real estate and commercial
loans, which is the direct result of management's efforts to redirect and
strengthen the balance sheet. For the year ended December 31, 1994, average real
estate loans were $71,720,000, compared to $97,346,000 for the same period last
year, a decrease of $25,626,000 or 26.32%. Average commercial loans were
$94,748,000 for the year ended December 31, 1994, compared to $112,686,000 for
the same period last year, a decrease of $17,938,000 or 15.92%.
Included in real estate loans are loans for the construction of
non-owner-occupied real estate. These loans averaged $23,720,000 for the year
ended December 31, 1994, compared to $40,758,000 for the same period last year,
a decrease of $17,038,000 or 41.80%. At December 31, 1994, non-owner-occupied
real estate construction loans were $10,813,000, compared to $32,432,000 at
December 31, 1993, a reduction of 66.66%.
For the year ended December 31, 1994, average real estate secured loans which
are also included in the real estate category, were $41,206,000 compared to
$47,467,000 for the same period last year, a decrease of $6,261,000 or 13.19%.
Offsetting the decrease in interest income, (by the reduction in the volume of
loans), was the decrease in nonaccrual loans. Interest reversed and not
recognized during the year due to loans on nonaccrual status was $959,000 in
1994, compared to $1,996,000 in 1993. See Note 5 of Notes to Consolidated
Financial Statements. At December 31, 1994, nonaccrual loans totaled $11,433,000
compared to $21,100,000 for the same period last year, a decrease of $9,667,000
or 45.82%.
ORE properties averaged $15,367,000 for the year ended December 31, 1994,
compared to $16,971,000 for the same period last year. At December 31, 1994, the
Bank had ORE totaling $5,222,000, a decrease of $7,949,000 or 60.35% from
December 31, 1993. See Note 5 of Notes to Consolidated Financial Statements.
The decrease in nonperforming loans and ORE properties was the direct result of
collection and marketing efforts of management and the Board of Directors.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA YEAR ENDED DECEMBER 31,
-----------------------
IN THOUSANDS, EXCEPT PER-SHARE DATA AND RATIOS 1994 1993 1992 1991 1990
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income $ 18,356 $ 20,100 $ 24,605 $ 38,214 $ 39,560
Interest expense 5,910 6,370 8,973 16,090 15,649
--------- --------- --------- -------- --------
Net interest income 12,446 13,730 15,632 22,124 23,911
Provision for loan losses 9,809 8,100 7,260 4,820 1,430
--------- --------- --------- -------- --------
Net interest income after provision for loan losses 2,637 5,630 8,372 17,304 22,481
Non-interest income 1,973 2,995 2,502 2,212 2,196
Non-interest expense 20,393 19,703 16,264 17,377 14,828
--------- --------- --------- -------- --------
Income (loss) before income taxes (15,783) (11,078) (5,390) 2,139 9,849
Provision for (benefit of) income taxes 2,407 (3,767) (1,872) 536 3,131
--------- --------- --------- -------- --------
Net income (loss) $ (18,190) $ (7,311) $ (3,518) $ 1,603 $ 6,718
========= ========= ========= ======== ========
PER SHARE DATA:
Net Income (loss) $ (3.89) $ (1.56) $ (.75) $ .34 $ 1.39
Book value per share $ .93 $ 4.95 $ 6.51 $ 7.38 $ 7.36
Weighted average shares outstanding 4,675 4,675 4,663 4,754 4,850
BALANCE SHEET DATA:
Investment securities, Federal funds sold and
other short-term earning assets $ 85,189 $ 113,701 $ 46,224 $ 83,543 $ 43,005
Total loans 130,415 194,921 235,647 296,472 304,151
Total assets 239,306 349,777 332,426 423,295 386,624
Demand accounts 56,483 134,961 114,109 122,050 87,460
Interest-bearing transaction accounts 177,053 188,835 185,637 263,867 261,404
Retained earnings (deficit) (23,479) (4,690) 2,621 6,157 6,029
Total stockholders' equity 4,355 23,144 30,444 33,909 33,637
SELECTED FINANCIAL RATIOS:
Return on average assets (6.42%) (2.30%) (.98%) .41% 1.97%
Return on average stockholders' equity (112.01%) (26.57%) (10.29%) 4.42% 20.86%
Average stockholders' equity to average assets 5.73% 8.65% 9.48% 9.35% 9.45%
Dividend payout -- -- (227.00%) 94.12% 21.58%
Net interest margin 5.27% 5.19% 5.09% 6.35% 8.00%
Non-interest expense to average assets 7.20% 6.19% 4.51% 4.49% 4.35%
Net charge-offs on loans to average loans 5.62% 2.86% 2.58% .94% .29%
Allowance for loan losses to total loans outstanding 5.70% 3.76% 2.33% 1.69% 1.00%
Allowance for loan losses to total non-performing loans 64.92% 34.69% 20.38% 16.62% 71.46%
Primary capital to total assets 4.78% 8.54% 10.63% 9.09% 9.41%
Total tier 1 capital to average assets (leverage) 1.87% 6.61% 8.48% 8.10% 8.59%
Total risk-based capital to risk-adjusted assets 4.27% 10.16% 11.89% 11.12% 10.40%
Total regulatory risk-based capital requirement 8.00% 8.00% 8.00% 7.25% 7.25%
</TABLE>
PAGE No. 19
<PAGE> 208
In order to allow management the flexibility to restructure the Bank, all excess
funds were invested in repurchase agreements or Federal funds sold. These liquid
assets averaged $46,249,000 for the year ended December 31, 1994, compared to
$29,470,000 for the same period last year. This increase in both volume and
yield provided the Bank with increased interest income of $2,026,000. This
compares to interest income of $898,000 in 1993.
The primary factors described above resulted in an increase in yield on
interest-earning assets to 7.77% for the year ended December 31, 1994, compared
to 7.60% for the same period last year.
Increasing the Bank's net interest margin while restructuring the credit risk
profile of the loan portfolio would not have been possible without a
corresponding reduction in interest-bearing deposits.
The Bank's interest expense decreased $460,000 or 7.22% for the year ended
December 31, 1994, in comparison to the same period last year. This decrease is
primarily due to a reduction in total average interest-bearing deposits of
$11,140,000 (see "Liquidity"), as well as a slight decrease in the total
interest rate paid on interest-bearing deposits. Although prime increased 82
basis points, the Bank was successful in maintaining 94% of its interest-bearing
core deposits at a cost of four basis points less than the previous year.
1993 Compared to 1992. Net interest income for the year ended December 31, 1993,
was $13,730,000 compared to $15,632,000 for the same period last year, a
decrease of $1,902,000 or 12.17%. Interest and fees on all loans decreased
$3,930,000 or 18.10%. Offsetting this decrease is the reversal of $1,216,000 of
accrued interest during the second quarter of 1992. The Bank adopted a policy
which requires that any loan which is 90 days past due and subject to
classification (regardless of collateral value) be placed on nonaccrual status
and that the interest thereon be reversed. Interest income reversed on loans
placed on nonaccrual status totaled $649,000 for 1993, compared to $1,905,000
for 1992.
For the year ended December 31, 1993, average speculative real estate
construction loans were $40,758,000, compared to $74,014,000 for the year ended
December 31, 1992, a decrease of $33,256,000 or 44.93%.
For the year ended December 31, 1993, average commercial loans were $112,686,000
compared to $124,033,000 for the year ended December 31, 1992, a decrease of
$11,353,000 or 9.15%.
The average level of nonearning assets (nonaccrual loans and ORE) has also
contributed to the decline in interest income. Nonaccrual loans averaged
$23,212,000 for the year ended December 31, 1993, compared to $16,194,000 for
the year ended December 31, 1992. At December 31, 1993, nonaccrual loans totaled
$21,100,000, a decrease of $5,505,000 or 20.69% from December 31, 1992.
ORE properties averaged $16,971,000 for the year ended December 31, 1993,
compared to $14,530,000 for the year ended December 31, 1992. At December 31,
1993, the Bank had ORE totaling $13,171,000, a decrease of $4,823,000 or 26.80%
from December 31, 1992. See Note 5 of Notes to Consolidated Financial
Statements.
The above are the primary factors that contributed to the decrease in yield on
interest-earning assets to 7.60% for the year ended December 31, 1993, compared
to 8.02% for the year ended December 31, 1992.
The Bank's interest expense decreased $2,603,000 or 29.01% for the year ended
December 31, 1993, in comparison to the year ended December 31, 1992. This
decrease is primarily due to a general reduction of interest rates paid on
deposits throughout the year, and a decrease in brokered and jumbo time deposits
(see "Liquidity").
PROVISION FOR LOAN LOSSES
The provision for loan losses for the year ended December 31, 1994 was
$9,809,000, compared to $8,100,000 for the same period last year. The 1994
provision took into consideration loan write-offs and ORE write-downs totaling
$3,208,000 identified as "Loss" and $966,000 in loans identified as "Doubtful"
by management in conjunction with the 1994 Federal Deposit Insurance Corporation
("FDIC")/State Banking Department joint examination. In addition, management
identified $2,986,000 in write-downs on ORE and $2,549,000 in write-downs on
loans which were accounted for in the allowance for loan losses. Revised
percentage factors for reserve calculations were also implemented, which
resulted in the reserve being increased by $100,000. See Note 17 of Notes to
Consolidated Financial Statements.
<TABLE>
<CAPTION>
1994 1993 1992
-------------------------- --------------------------- ---------------------------
Interest Rates Interest Rates Interest Rates
AVERAGE BALANCES, YIELDS AND RATES Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
IN THOUSANDS Balance Expense Paid Balance Expense Paid Balance Expense Paid
------- -------- ------- ------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 23,212 $ 1,045 4.50% $ 21,794 $ 655 3.01% $ 18,969 $ 678 3.57%
Securities purchased under resale agreements 23,037 981 4.26 7,676 243 3.17 -- -- --
Interest-bearing deposits with other
financial institutions 2,560 95 3.71 3,418 129 3.77 4,358 226 5.18
Investment securities:
U.S. Treasury securities 3,197 160 5.01 5,330 325 6.10 5,710 386 6.75
U.S. Government agencies 17,499 949 5.42 14,407 952 6.61 19,767 1,553 7.86
Other securities -- -- -- 94 9 9.57 459 45 9.81
Loans (1) (2) 166,866 15,126 9.07 211,772 17,787 8.40 257,628 21,717 8.43
-------- ------- -------- ------- -------- -------
TOTAL INTEREST-EARNING ASSETS 236,371 18,356 7.77 264,491 20,100 7.60 306,891 24,605 8.02
------- ------- -------
Cash and due from banks 25,369 26,076 28,325
Lease financing 1,053 1,101 1,110
Premises and equipment 2,915 3,491 4,070
Interest receivable and other assets 17,865 23,045 20,090
-------- -------- --------
TOTAL ASSETS $283,573 $318,204 $360,486
-------- -------- --------
Liabilities and Stockholders' Equity
Interest-bearing transaction accounts $ 82,088 1,989 2.42 $ 88,002 2,405 2.73 $105,462 3,586 3.40
Savings accounts 24,032 589 2.45 24,846 723 2.91 23,774 822 3.46
Time accounts 79,200 3,280 4.14 83,612 3,157 3.78 97,172 4,559 4.69
Other borrowed funds 747 52 6.96 1,234 85 6.89 149 6 4.29
-------- ------- -------- ------- -------- -------
TOTAL INTEREST-BEARING LIABILITIES 186,067 5,910 3.18 197,694 6,370 3.22 226,557 8,973 3.96
------- ------- -------
Demand accounts 79,340 91,966 97,716
Accrued expenses and other liabilities 1,618 1,030 2,044
Stockholders' equity 16,548 27,514 34,169
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $283,573 $318,204 $360,486
======== ======== ========
NET INTEREST INCOME $12,446 $13,730 $15,632
======= ======= =======
NET INTEREST MARGIN (2) 5.27% 5.19% 5.09%
==== ==== ====
</TABLE>
(1) Average loans include nonaccrual loans. Interest income is included on
nonaccrual loans only to the extent to which cash payments have been received.
(2) Average loan balances are presented net of the allowance for loan losses.
Based on gross earning assets, the net interest margin would have been 5.14%,
5.07%, and 5.00% for the years ending December 31, 1994, 1993 and 1992,
respectively.
PAGE No. 20
<PAGE> 209
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL
The table on the preceding page sets forth average balance sheets and the
yields earned on interest-earning assets and the rates paid for interest-bearing
liabilities during each of the periods indicated. Interest income on loans
includes fees on loans to the extent these fees are recognized as current
income.
The following table sets forth an analysis of the increases and decreases in
interest income and expense in terms of changes in volume and interest rates for
the years ended December 31, 1994 and 1993. Changes which are the combined
result of volume and rate changes are allocated to the volume and rate in
proportion to the relationship of the absolute dollar amount of the change in
each.
<TABLE>
<CAPTION>
ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE 1994 OVER 1993 1993 OVER 1992
IN THOUSANDS VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest and fee income:
Federal funds sold $ 45 $ 345 $ 390 $ 93 $ (116) $ (23)
Securities purchased under resale agreements 630 108 738 243 -- 243
Interest-bearing deposits with
other financial institutions (32) (2) (34) (43) (54) (97)
Investment securities 53 (230) (177) (424) (274) (698)
Loans (1) (3,905) 1,244 (2,661) (3,395) (535) (3,930)
------- ------- ------- ------- ------- -------
Total increase (decrease) (3,209) 1,465 (1,744) (3,526) (979) (4,505)
------- ------- ------- ------- ------- -------
Increase (decrease) in interest expense:
Deposits:
Interest-bearing transaction accounts (155) (261) (416) (540) (641) (1,181)
Savings accounts (23) (111) (134) 33 (132) (99)
Time accounts (172) 295 123 (585) (817) (1,402)
Other borrowed funds (33) -- (33) 79 -- 79
------- ------- ------- ------- ------- -------
Total decrease (383) (77) (460) (1,013) (1,590) (2,603)
------- ------- ------- ------- ------- -------
Total change in net interest income $(2,826) $ 1,542 $(1,284) $(2,513) $ (611) $(1,902)
======= ======= ======= ======= ======= =======
</TABLE>
(1) Includes loan fees of $1,270,000, $1,751,000 and $2,444,000 in 1994, 1993
and 1992, respectively.
NON-INTEREST INCOME
Non-interest income has four separate categories consisting of service charges
on deposit accounts and other related fees, merchant discount income, mortgage
processing fees and other non-yield related fees, charges and other income.
1994 Compared to 1993. Non-interest income was $1,973,000 for the year ended
December 31, 1994, compared to $2,995,000 for 1993, a decrease of $1,022,000 or
34.12%. Service charges on deposit accounts and other related fees decreased
approximately $144,000 or 10.10%, primarily due to a decrease in the number of
deposit accounts. Merchant discount income increased approximately $21,000 or
30.87% over the same period last year due to an increase in volume of merchant
customer activity. The largest decline in non-interest income occurred in
mortgage fee income which was $68,000 for the year ended December 31, 1994,
compared to $345,000 for 1993, a decrease of approximately $277,000 or 80.29%.
The decrease in mortgage fee income was due to the decision to discontinue the
Bank's mortgage brokerage division effective April 1994. This decision was based
on the slowdown of home refinancing and the competitive market for mortgage
financing. Other non-yield related fees, charges and other income decreased
$622,000 or 53.75% from the previous year. The decrease is primarily due to a
decrease in other income, which, for the year ended December 31, 1994, included
settlement of a lawsuit for $290,000 and refunds on general insurance of
$27,000. Included in other income for the year ended December 31, 1993, is the
settlement of three outstanding lawsuits totaling $915,000.
1993 Compared to 1992. Non-interest income was $2,995,000 for the year ended
December 31, 1993, compared to $2,502,000 for 1992, an increase of $493,000 or
19.70%. Service charges on deposit accounts and other related fees decreased
approximately $4,000 or .33%. Merchant discount income decreased approximately
$439,000 or 86.80% over the year ended December 31, 1992, due to a change in net
merchant credit card processing (see Non-Interest Expense). The Bank established
a mortgage division in March 1992 which generated fees of $345,000 for the year
ended December 31, 1993, compared to $186,000 for the year ended December 31,
1992, an increase of $159,000 or 85.48%. Charges and other income increased
$780,000 from the year ended December 31, 1992. Other non-interest income for
1993 includes settlement of three outstanding lawsuits totaling $915,000.
Included in charges and other income in 1992 is a gain on sale of other real
estate property of $120,000 and escrow fees of $14,000.
NON-INTEREST EXPENSE
The following table summarizes the significant components of non-interest
expense for 1994, 1993 and 1992:
<TABLE>
<CAPTION>
DOLLAR PERCENTAGE
IN THOUSANDS 1994 1993 CHANGE CHANGE
---- ---- ------ ----------
<S> <C> <C> <C> <C>
Salaries and related benefits $ 6,568 $ 6,951 $ (383) (5.51)%
Occupancy 1,443 1,475 (32) (2.17)
Equipment 930 1,075 (145) (13.49)
Other 11,452 10,202 1,250 12.25
------- ------- -------
Total $20,393 $19,703 $ 690 3.50%
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DOLLAR PERCENTAGE
1993 1992 CHANGE CHANGE
---- ---- ------ ----------
<S> <C> <C> <C> <C>
Salaries and related benefits $ 6,951 $ 6,777 $ 174 2.57%
Occupancy 1,475 1,383 92 6.65
Equipment 1,075 1,000 75 7.50
Other 10,202 7,104 3,098 43.61
------- ------- -------
Total $19,703 $16,264 $3,439 21.14%
======= ======= =======
</TABLE>
1994 Compared to 1993. Non-interest expense was $20,393,000 for the year ended
December 31, 1994, compared to $19,703,000 for 1993, an increase of $690,000 or
3.50%. Salaries and related benefits were $6,568,000 for the year ended December
31, 1994, compared to $6,951,000 for the same period last year, a decrease of
$383,000 or 5.51%. This decrease is primarily due to a strategic reduction in
staff during 1994 implemented as part of the Bank's expense reduction plan. The
Bank has reduced the level of its full-time equivalent employees by 19%, from
185 at December 31, 1993, to 150 at December 31, 1994. Further reductions in
force, as a result of attrition, job-combining, the sale of the San Diego branch
and the closure of the Santa Rosa branch, will reduce this level to
approximately 110 by the end of April 1995. This will result in a total
reduction in full-time equivalents of 41% from December 31, 1993.
Occupancy and Equipment expense was $2,373,000 for the year ended December 31,
1994, compared to $2,550,000 for the same period last year, a decrease of
$177,000 or 6.94%. This decrease is primarily due to the reduction in
depreciation expense related to data processing equipment which was fully
depreciated in July of 1994.
PAGE No. 21
<PAGE> 210
Other non-interest expense, representing the largest component of non-interest
expense in 1994, was $11,452,000 for the year ended December 31, 1994, compared
to $10,202,000 for the same period last year, an increase of $1,250,000 or
12.25%. This increase can be primarily attributed to an increase in net ORE
expense of $1,230,000 and an increase in amortization of deferred acquisition
costs of $974,000 reduced by several other non-interest expenses including a
decrease in cost of services provided to title and escrow company customers of
$332,000, a decrease in professional fees of $114,000, a decrease in directors
fees of $65,000, and a decrease in FDIC insurance expense of $46,000.
Net other real estate expense for the year totaled $6,035,000 and consisted of
write-downs totaling $4,961,000 based on updated appraisals, expenses of
$418,000 to acquire, maintain and complete residential homes and lot properties
and net loss on sale of ORE properties of $656,000. This compares to write-downs
or ORE properties totaling $2,960,000, expenses of $1,746,000 and net loss on
sale of ORE properties of $99,000 for the same period last year.
In the third quarter of 1994, the book value of $992,000 of the Citizens Bank
of Roseville intangible was written off in accordance with SFAS No. 44.
During the year ended December 31, 1994, the Bank provided certain banking
services to its title and escrow depositors through third-party vendors for the
convenience of the Bank. Although the costs for these services are paid directly
by the Bank, the customer will be charged for such services in any case where
the third-party vendor's costs for such services exceeds the Bank's theoretical
costs of providing such services directly, or if the Bank determines through a
monthly account analysis that the cost of providing the third-party vendor
services exceeds the value of the customers' accounts to the Bank. These costs
are included in other non-interest expense. The Bank recognized $732,000 in 1994
for the cost of services to the Bank, a decrease of $332,000 or 31.18% from last
year. The Bank discontinued providing banking services to title and escrow
depositors in September 1994. See Note 13 of Notes to Consolidated Financial
Statements and "Liquidity" herein for further discussion of title and escrow
company deposits.
For the year ended December 31, 1994, legal and accounting fees were $676,000
compared to $791,000 in 1993, a decrease of 14.54%. Directors' fees for the year
ended December 31, 1994, were $57,000 compared to $122,000 in 1993, a decrease
of 53.28%. The decrease was due to the suspension of directors' retainer and
meeting fees.
For the year ended December 31, 1994, FDIC insurance was $820,000 compared to
$866,000 in 1993, a decrease of 5.31%.
Finally, the Bank recorded a net reduction in the remaining other expense
accounts of $397,000. The decrease in the remaining other expense accounts is
the direct result of the Bank's expense reduction plan implemented in 1994.
1993 Compared to 1992. Non-interest expense was $19,703,000 for the year ended
December 31, 1993, compared to $16,264,000 for 1992. Salaries and related
benefits were $6,951,000 for the year ended December 31, 1993, compared to
$6,777,000 for the year ended December 31, 1992, an increase of $174,000 or
2.57%. This increase represents salary adjustments and the increased cost of
employee benefits.
Occupancy and Equipment expense was $2,550,000 for the year ended December 31,
1993, compared to $2,383,000 for the year ended December 31, 1992, an increase
of $167,000 or 7.01%. This increase is primarily due to the relocation of the
Kearny Mesa branch office and the anticipated relocation of the Concord branch
office. The relocation of the Kearny Mesa branch office resulted in write-offs
of leasehold improvements of $41,000 and overlapping rent of $11,000. In
preparation for the 1994 relocation of the Concord branch office, write-offs for
leasehold improvements, leasehold interest and furniture, fixtures and equipment
were recorded for $17,000, $21,000 and $19,000, respectively. In addition to
these expenses, rent expense for other branch and department locations increased
$29,000, according to existing lease agreements.
Other non-interest expense was $10,202,000 for the year ended December 31, 1993,
compared to $7,104,000 for the year ended December 31, 1992, an increase of
$3,098,000 or 43.61%. This increase can be primarily attributed to an increase
in net ORE expenses of $3,602,000, and an increase in FDIC insurance expense of
$72,000 offset by a decrease in merchant bankcard expense of $374,000, a
decrease in cost of services provided to title and escrow company customers of
$76,000, a decrease in amortization expense for premium on deposits of $140,000
and a decrease in legal fees of $227,000.
For the year ended December 31, 1993, FDIC insurance was $866,000 compared to
$794,000 in 1992, an increase of 9.07%.
Net ORE expense for the year totaled $4,805,000 and consisted of write-downs
totaling $2,960,000 based on updated appraisals, expense of $1,746,000 to
acquire, maintain and complete residential homes and lot properties and net loss
on sale of ORE properties of $99,000. This compares to write-downs of thirteen
ORE priorities totaling $567,000 and expenses of $636,000 for the year ended
December 31, 1992.
Merchant bankcard expense for the year ended December 31, 1993, decreased
$374,000 from the year ended December 31, 1992. This decrease is due to a change
in net merchant credit card processing (see Non-Interest Income).
The cost of services provided to title and escrow company customers was
$1,065,000 for the year ended December 31, 1993, compared to $1,141,000 for the
year ended December 31, 1992, a decrease of $76,000 or 6.66%. See Note 13 of
Notes to Consolidated Financial Statements and "Liquidity," herein, for further
discussion of title and escrow company deposits.
INCOME TAXES
In recognition of the substantial loss reported for the year ended December 31,
1994, the Company concluded that it no longer met the realization standards for
its income tax assets as embodied in SFAS No. 109, and wrote off previously
recorded tax benefits of $2,431,000 as well as $6,497,000 of deferred tax
benefits created in 1994, and has recorded the year-to-date loss on a pre-tax
benefit basis.
The Company's effective tax rate (benefit) was 15.2% for 1994 compared to
(34.0%) for 1993 and (34.7%) for 1992. The income tax provision was $2,407,000
for 1994, compared to an income tax benefit of $(3,767,000) for 1993. The
Company had an income tax benefit of $(1,872,000) in 1992. See Note 8 of the
Notes to Consolidated Financial Statements for additional information regarding
income taxes.
INTEREST RATE SENSITIVITY
The operating income of the Bank depends to a substantial extent on "rate
differentials," i.e., the difference between the income the Bank receives from
loans, investment securities and other earning assets, and the interest expense
it pays on deposits and other borrowed funds. The interest rate sensitivity of
the Bank is measured over time and is based on the Bank's ability to reprice its
assets and liabilities. The opportunity to reprice assets in the same dollar
amounts and at the same time as liabilities would eliminate interest rate risk
in any interest rate environment. Although interest rate risk is influenced by
market forces, the management of interest rate sensitivity seeks to minimize the
fluctuation in net interest margins during changing interest rate environments
and is controlled by monitoring and managing the repricing characteristics of
the Bank's assets and liabilities.
PAGE No. 22
<PAGE> 211
The difference between the amount of assets and liabilities that are repricing
in various time frames is called the "gap." Generally, if repricing assets
exceed repricing liabilities in a time period, the Bank would be "asset
sensitive" or if repricing liabilities exceed repricing assets, the Bank would
be "liability sensitive."
The following table shows the interest rate sensitivity of the Bank at December
31, 1994:
<TABLE>
<CAPTION>
IMMEDIATELY THREE OVER THREE OVER SIX
REPRICING OPPORTUNITY ADJUSTABLE MONTHS MONTHS TO MONTHS TO OVER ONE
IN THOUSANDS RATES OR LESS SIX MONTHS ONE YEAR YEAR TOTAL
---------- ------- ---------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Selected Assets:
Federal funds sold $ 27,200 $ -- $ -- $ -- $ -- $ 27,200
Securities purchased under resale agreements 40,000 -- -- -- -- 40,000
Interest-bearing deposits with other financial institutions -- 299 -- -- -- 299
Investment securities -- 1,006 -- 1,011 15,673 17,690
Loans (1) 96,902 822 474 1,484 19,301 118,983
-------- -------- ------- -------- ------- --------
164,102 2,127 474 2,495 34,974 204,172
-------- -------- ------- -------- ------- --------
Selected Liabilities:
Interest-bearing transaction and savings accounts 90,535 -- -- -- -- 90,535
Time accounts, $100,000 or more 954 11,951 3,069 9,856 642 26,472
Other time accounts 8,250 25,541 6,825 18,206 1,224 60,046
-------- -------- ------- -------- ------- --------
99,739 37,492 9,894 28,062 1,866 177,053
-------- -------- ------- -------- ------- --------
Rate Gap $ 64,363 $(35,365) $(9,420) $(25,567) $33,108 $ 27,119
======== ======== ======= ======== ======= ========
Cumulative Rate Gap $ 64,363 $ 28,998 $19,578 $ (5,989) $27,119
======== ======== ======= ======== =======
Cumulative Ratio of Rate
Sensitive Assets to Rate
Sensitive Liabilities (2) 1.64% 1.21% 1.13% (.97%) 1.15%
======== ======== ======= ======== =======
</TABLE>
(1) The table above identifies the maturity of loans based upon their contract
terms. Loans with amortization greater than maturity date are due and payable at
maturity. Nonaccrual loans and unearned income have been excluded from the
table.
(2) Ratios greater than 1.0 indicate a net asset sensitive position. Ratios of
less than 1.0 indicate a liability sensitive position. A ratio of 1.0 indicates
a risk neutral position.
As shown in the table above, on a cumulative basis, the Bank is asset sensitive
in all time frames except the "Over Six Months to One Year." The effect of this
asset sensitivity is to favor the net interest earnings of the Bank in times of
rising rates and to unfavorably impact earnings in times of rapidly declining
rates. The table does not necessarily indicate the impact of general interest
rate movement on net interest income since the repricing of various categories
of assets and liabilities is subject to competitive pressures.
The net cumulative gap position indicates that the Bank does not have a
significant exposure to interest rate fluctuations during the next 12 months.
This risk reduction in 1994 is primarily due to management's strategic
downsizing of the Company.
See Note 5 of the Notes to Consolidated Financial Statements for additional
information concerning the Bank's loan portfolio.
LIQUIDITY
The objective of liquidity management is to maintain a cash flow adequate to
fund both on and off-balance sheet sources (assets) and meet obligations
(liabilities) on a timely and cost-effective basis. Potential significant
liquidity requirements include funding of commitments to loan customers and
withdrawals from non-interest-bearing demand deposits.
The Company's liquidity ratio is defined as cash and due from banks less reserve
requirements, Federal funds sold, securities purchased under resale agreements,
interest-bearing deposits with other financial institutions and marketable
securities less secured deposits, divided by total deposits less deposits
secured by marketable securities and short-term borrowings. Using this
definition at December 31, 1994, the Company had a liquidity ratio of 43.49%,
compared to 38.25% at December 31, 1993. At December 31, 1994, the
loan-to-deposit ratio was 55.84%, which compares to 60.20% at December 31, 1993.
The following table highlights the average deposit structure for each quarter of
1994:
<TABLE>
<CAPTION>
FOURTH THIRD SECOND FIRST
IN THOUSANDS QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Demand (exclude title co
accounts) $ 51,603 $ 54,455 $ 52,392 $ 51,056
Core title and escrow
demand accounts (1) 5,081 17,000 17,000 17,000
Interest-bearing transaction
accounts 96,974 101,393 110,373 111,186
Time accounts, less
than $100,000 47,752 44,124 40,876 43,331
-------- -------- -------- --------
Total core deposit accounts 201,410 216,972 220,641 222,573
Excess title and escrow
demand accounts (1) -- 3,905 17,655 30,212
Public time accounts 297 339 300 600
Time accounts, more
than $100,000 26,310 26,815 29,396 30,273
National certificates of deposit 14,801 10,586 -- --
-------- -------- -------- --------
Total deposit accounts $242,818 $258,617 $267,992 $283,658
======== ======== ======== ========
</TABLE>
The following table shows the maturity distribution of the Bank's loans:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------
LOAN MATURITIES MATURING
--------
WITHIN FROM ONE TO FIVE OR
IN THOUSANDS ONE YEAR FIVE YEARS MORE YEARS TOTAL %
- ------------ -------- ----------- ---------- -------- ------
<S> <C> <C> <C> <C> <C>
Commercial:
Fixed $ 690 $ 2,356 $ 548 $ 3,594 5.65%
Variable 44,783 14,636 616 60,035 94.35
------- ------- ------- -------- ------
Total 45,473 16,992 1,164 63,629 100.00%
------- ------- ------- -------- ------
Real Estate
Construction:
Fixed 680 281 -- 961 7.81%
Variable 11,176 167 -- 11,343 92.19
------- ------- ------- -------- ------
Total 11,856 448 -- 12,304 100.00%
------- ------- ------- -------- ------
Real Estate
Secured:
Fixed -- 11,589 3,191 14,780 39.85%
Variable 264 9,962 12,079 22,305 60.15
------- ------- ------- -------- ------
Total 264 21,551 15,270 37,085 100.00%
------- ------- ------- -------- ------
Installment:
Fixed 977 1,769 -- 2,746 46.03%
Variable 2,415 767 37 3,219 53.97
------- ------- ------- -------- ------
Total 3,392 2,536 37 5,965 100.00%
------- ------- ------- -------- ------
Total:
Fixed 2,310 16,032 3,739 22,081 18.56%
Variable 58,638 25,532 12,732 96,902 81.44
------- ------- ------- -------- ------
Total $60,985 $41,527 $16,471 $118,983 100.00%
======= ======= ======= ======== ======
</TABLE>
Note: Nonaccrual loans and unearned income have been excluded from the table.
PAGE No. 23
<PAGE> 212
(1) Based on the FDIC's recommendation, title and escrow company deposits in
excess of the Bank's historical low level of $17,000,000 were considered
volatile and were excluded from core deposits. These excess title and escrow
company deposits were invested in liquid assets with one-day maturities in order
to assist in managing the Bank's liquidity. Additionally, these excess balances
were incorporated into the Bank's computation of the volatile dependency ratio
as volatile deposits.
During the third quarter of 1994, the Bank began a program to reduce title and
escrow company deposit balances in order to improve its volatile liability
dependency ratio and reduce non-interest expense to the Bank. Effective
September 30, 1994, the Bank discontinued third-party vendor payments for all
title and escrow deposit accounts.
Title and escrow company deposits at December 31, 1994, were $5,775,000 compared
to $86,549,000 at December 31, 1993, a decrease of 93.33%. Average title and
escrow company deposits for the year ended December 31, 1994 decreased to
$27,049,000 from $47,215,000 for the year ended December 31, 1993. As of January
31, 1995, title and escrow company balances had been further reduced to
$2,769,000 compared to $63,308,000 at January 31, 1994.
Net interest margin and cost of funds for the Bank are calculated excluding the
title and escrow company accounts because the payments made to third-party
service providers are not considered to be interest payments. Net interest
margin for 1994, 1993 and 1992 was 5.27%, 5.19% and 5.09%, respectively, and
cost of funds for the same periods was 2.23%, 2.20% and 2.77%, respectively. For
comparison purposes, net interest margin for 1994, 1993 and 1992 would decrease
to 4.96%, 4.78% and 4.72%, respectively, if the payments were reclassified as
interest expense. Accordingly, cost of funds for 1994, 1993 and 1992 would
increase to 2.51%, 2.57% and 3.12%, respectively, if the payments were
reclassified as interest expense. See Note 13 of Notes to Consolidated Financial
Statements and "Non-Interest Expense," herein.
The decrease in interest-bearing transaction accounts was primarily due to
higher yielding investment alternatives in the marketplace (disintermediation --
i.e., mutual funds, bond market, stock market, etc.). In order to strengthen the
Bank's short-term liquidity in the event of any potential deposit runoff, and
after receiving concurrence of the FDIC and the State Banking Department, the
Bank solicited national certificates of deposit between July 26, 1994 and August
5, 1994. The average rate paid on these deposits is 5.64% with terms of three
and six months. Total national certificates of deposit as of December 31, 1994
are $14,063,000 and represent 5.31% of total Bank deposits. It is the Bank's
intention not to renew these deposits upon maturity. As of January 31, 1995,
these deposits totaled $4,444,000. Due to the Bank's current capital status, it
is restricted from accepting brokered deposits. See "Regulatory Agreements."
The table below highlights the average deposit structure for the years ended
December 31, 1994, 1993 and 1992. See "Interest Rate Sensitivity" for the
repricing and/or maturities of interest-bearing deposits at December 31, 1994.
The volatile liability dependency ratio is defined as time accounts greater than
$100,000, Federal funds purchased, other short-term borrowings and excess title
and escrow company deposits less short-term investments, divided by total
earning assets less short-term investments. This ratio determines the extent to
which the Bank is funding long-term assets with short-term volatile deposits. At
December 31, 1994, the Bank's volatile dependency ratio was (21.70%) compared to
4.52% at December 31, 1993.
To augment short-term liquidity needs, the Bank has a secured borrowing
arrangement with the Federal Reserve Bank of San Francisco. At December 31,
1994, the Bank had investment securities in the aggregate principal amount of
$14,133,000 and loans totaling $36,937,000 eligible for pledging as collateral.
At December 31, 1994, the Bank could borrow up to approximately 65% of the value
of the pledged assets. This borrowing arrangement was not utilized during the
year.
The Company's and the Bank's liquidity position is measured daily and monitored
by the Bank's Asset Liability Management Committee. The Asset Liability
Management Committee continually evaluates the Bank's product mix, pricing,
marketing, advertising and sales force for the purpose of maintaining
competitiveness for deposits and customers.
Undisbursed loan commitments, which are a factor in managing liquidity, totaled
$41,504,000 at December 31, 1994, compared to $57,286,000 at December 31, 1993,
a decrease of $15,782,000 or 28%. Listed below are these commitments by loan
category as of December 31, 1994:
- - Commitments of $23,581,000 are associated with commercial loans with
substantially all of these commitments contingent upon customers maintaining
specific credit standards. This represents a reduction of 41% from the
$39,662,000 at December 31, 1993.
- - Commitments of $1,885,000 are associated with speculative real estate
construction loans with short-term maturities.
- - Commitments of $1,540,000 are associated with owner/builder construction
loans.
- - Commitments of $14,498,000 are associated with consumer loan products
consisting of equity lines, personal lines of credit and credit card accounts.
These present commitments are expected to be funded through the repayment of
existing loans, through normal deposit growth and alternative funding sources
available to the Bank. Management believes the Bank presently has sufficient
funding sources from which to meet its funding requirements for its outstanding
loan commitments.
<TABLE>
<CAPTION>
AVERAGE FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
DEPOSITS 1994 1993 1992
------------------ ------------------ ------------------
IN THOUSANDS AMOUNT % AMOUNT % AMOUNT %
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Demand accounts (excluding title company accounts) $ 52,291 19.76% $ 44,751 15.52% $ 44,541 13.74%
Title and escrow demand accounts 27,049 10.22 47,215 16.37 53,175 16.41
Interest-bearing transaction accounts 82,088 31.02 88,002 30.51 105,462 32.54
Savings accounts 24,032 9.08 24,846 8.61 23,774 7.33
-------- ------ -------- ------ -------- ------
185,460 70.08 204,814 71.01 226,952 70.02
-------- ------ -------- ------ -------- ------
Time accounts:
CD's less than $100,000 49,919 18.86 45,453 15.76 41,168 12.70
CD's more than $100,000 29,281 11.06 38,159 13.23 56,004 17.28
-------- ------ -------- ------ -------- ------
Total time accounts 79,200 29.92 83,612 28.99 97,172 29.98
-------- ------ -------- ------ -------- ------
Total deposit accounts $264,660 100.00% $288,426 100.00% $324,124 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
PAGE No. 24
<PAGE> 213
EFFECT OF INFLATION
The consolidated financial statements and related financial information have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and results of operations in terms
of historical dollars without regard to changes in the relative purchasing power
of money over time. Unlike most industrial companies, all of the Company's
assets and liabilities, other than premises and equipment, are monetary, and the
Company has an excess of monetary assets over liabilities.
While inflation causes a loss of purchasing power in the value of shareholders'
equity for all banking organizations, of greater importance is the ability of a
company, financial or industrial, to earn a real return on equity. The
short-term monetary nature of the Company's assets and liabilities allows
flexibility to adjust its required return on equity in relation to the level of
inflation. Management does not believe that inflation has had a substantial
impact on the Company's operations to date.
ASSET QUALITY, PROVISION FOR LOAN LOSSES, AND LOAN LOSS EXPERIENCE
See Note 5 of Notes to Consolidated Financial Statements for the composition of
the Bank's loan portfolio.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level that management of the
Bank considers to be adequate to provide for future losses that reasonably can
be anticipated. The allowance is increased by charges to the provision for loan
losses and reduced by net charge-offs. Future losses include those that are
known, those reasonably anticipated and inherent losses which are probable but
not identifiable on a specific loan-by-loan basis. Although management utilizes
its best judgment in providing for possible loan losses and establishing the
allowance for loan losses, the allowance is an estimate which is inherently
uncertain and depends on the outcome of future events. Net loan charge-offs for
the year ended December 31, 1994, were $9,709,000 compared to $6,247,000 for the
same period last year. The ratio of net charge-offs to average total loans was
5.62% for the year 1994, compared to 2.86% for the year 1993.
It is the policy of the Bank to establish the allowance for loan losses based
upon a systematic and documented approach which is consistently applied and
regularly monitored by management and the Board of Directors. The methodology
employed is dynamic and addresses both general and specific allowances for loan
losses, encompassing internal issues based upon the individual credit components
of the Bank's loan portfolio and external issues based upon economic, political
and regulatory factors. Coupled with the internal and external analysis of the
Bank's risk assets, the Bank's historical experience, current conditions, and
anticipated future developments are integrated into the process of evaluating
and calculating the reserve. The reserve is determined based upon several
additional factors including: the delinquency status of the loan portfolio,
inherent risk by type of loans, historical loss trends derived from experience,
industry statistical data, and the current economic environment.
Incumbent in establishing the appropriate level of the allowance for loan losses
are two components which are vital to the overall credit administration process
of the Bank. They are the asset quality rating process and the internal loan
review process. These two functions serve to establish a reliable and responsive
assessment of the general quality of the Bank's loan portfolio. The asset
quality rating process occurs on a continuous basis. Credit review procedures
are performed on a quarterly basis, with annual and periodic reviews performed
by the external auditors and the regulatory authorities, respectively.
The balance in the allowance for loan losses at December 31, 1994, was
$7,437,000 or 5.70% of total loans, compared to $7,337,000 or 3.76% of total
loans at December 31, 1993. The allowance for loan losses at December 31, 1992,
was $5,484,000, or 2.33% of total loans.
Based on the assessment of the adequacy of the loan loss reserve, a provision
for loan losses may be charged against earnings.
The table below sets forth the allocation of the allowance for loan losses by
loan type as of the dates specified. The allocation to individual categories of
loans includes amounts applicable to specifically identified as well as
unidentified losses inherent in that segment of the loan portfolio and will
necessarily change whenever management determines that the risk characteristics
of the loan portfolio have changed.
Management believes that any breakdown or allocation of the allowance for loan
losses into loan categories lends an appearance of exactness which does not
exist, in that the allowance is utilized as a single unallocated allowance
available for all loans and undisbursed commitments. The allocation above should
not be interpreted as an indication of the specific amounts or loan categories
in which future charge-offs may occur.
CAPITAL ADEQUACY REQUIREMENTS OF THE COMPANY AND THE BANK
The Company is subject to the Federal Reserve Board's capital guidelines for
bank holding companies and the Bank is subject to the FDIC's regulations
governing capital adequacy for non-member banks. As noted below, the Federal
banking agencies have proposed regulations which would impose additional capital
requirements on banks based on the interest rate risk inherent in a bank's
portfolio.
The Federal Reserve Board has established risk-based and leverage capital
guidelines for bank holding companies which are similar to the FDIC's capital
adequacy regulations for nonmember banks. The Federal Reserve Board guidelines
apply on a consolidated basis to bank holding companies with consolidated assets
of $150 million or more.
The Federal Reserve Board capital guidelines for bank holding companies and the
FDIC's regulations for nonmember banks set total capital requirements and define
capital in terms of "core capital elements," or Tier 1 capital(2) and
"supplemental capital elements," or Tier 2 capital(3). The maximum amount of
supplemental capital elements which qualifies as Tier 2 capital is limited to
one-hundred percent (100%) of Tier 1 capital, net of goodwill.
Both bank holding companies and nonmember banks are required to maintain a
minimum ratio of qualifying total capital to risk-weighted assets of eight
percent (8%), at least one-half of which must be in the form of Tier 1 capital.
Risk-based capital ratios are calculated with reference to risk-weighted assets,
including both on and off-balance sheet exposures, which are multiplied by
certain risk weights assigned by the Federal Reserve Board to those assets.
<TABLE>
<CAPTION>
ALLOCATION OF ALLOWANCE BY LOAN TYPE DECEMBER 31,
--------------
IN THOUSANDS 1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $5,076(1) 53.37% $2,971 53.33% $1,613 50.55% $2,160 44.84% $2,084 38.42%
Real Estate Construction 971 12.56 3,950 20.46 3,624 25.13 2,496 38.02 486 45.86
Real Estate Secured 1,315 29.47 353 22.47 134 20.40 303 13.59 384 11.67
Installment 75 4.60 63 3.74 113 3.92 44 3.55 96 4.05
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$7,437 100.00% $7,337 100.00% $5,484 100.00% $5,003 100.00% $3,050 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
(1) Of the commercial loans which have been identified, 39% are dependent in
some part on real estate related activities.
PAGE No. 25
<PAGE> 214
The Federal Reserve Board and the FDIC have established a minimum leverage ratio
of three percent (3%) Tier 1 capital to total assets for bank holding companies
and nonmember banks that have received the highest composite regulatory rating
and are not anticipating or experiencing any significant growth. All other
institutions are required to maintain a leverage ratio of at least 100 to 200
basis points above the three percent (3%) minimum.
(2) Tier 1 capital is generally defined as the sum of the core capital elements
less goodwill and certain intangibles. The following items are defined as core
capital elements: (i) common stockholders' equity; (ii) qualifying noncumulative
perpetual preferred stock and related surplus; and (iii) minority interest in
the equity accounts of consolidated subsidiaries.
(3) Supplementary capital elements include: (i) allowance for loan and lease
losses (which cannot exceed 1.25% of an institution's risk weighted assets);
(ii) perpetual preferred stock and related surplus not qualifying as core
capital; (iii) hybrid capital instruments, perpetual debt and mandatory
convertible debt instruments; and (iv) term subordinated debt and
intermediate-term preferred stock and related surplus.
As a result of the loss for the year ended December 31, 1994, the Company and
Bank were not in compliance with the Federal Reserve Board and FDIC minimum
required risk-based capital ratio and minimum required leverage ratio.
In certain circumstances, the FDIC or the Federal Reserve Board may determine
that the capital ratios for an FDIC-insured bank or a bank holding company shall
be maintained at levels which are higher than the minimum levels required by the
guidelines or the regulations.
Pursuant to the terms of the SBD Order discussed herein, the Bank is required to
maintain tangible shareholders' equity equal to not less than 6.5% of tangible
assets. See Note 17 of Notes to Consolidated Financial Statements.
A bank or bank holding company which does not achieve and maintain the required
capital levels may be issued a capital directive by the FDIC or the Federal
Reserve Board to ensure the maintenance of required capital levels.
PROMPT CORRECTIVE ACTION
In addition to the minimum regulatory capital requirements set forth above, the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") has
created capital categories for the purpose of determining when supervisory or
other corrective action is appropriate. The five capital categories are well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized.
In order to be well capitalized, an institution must have a total risk-based
capital ratio of 10% or more, a Tier 1 risk-based capital ratio of 6% or more, a
leverage capital ratio of 5% or more, and not be subject to any written
agreement or order issued by the FDIC. An adequately capitalized institution
must have a total risk-based capital ratio of 8% or more, a Tier 1 risk-based
capital ratio of 4% or more and a leverage ratio of 4% or more. An
undercapitalized institution has a total risk-based capital ratio of less than
8%, or a Tier 1 risk-based capital ratio of less than 4% or a leverage ratio of
less than 4%. Significantly undercapitalized means a financial institution with
a total risk-based ratio of less than 6%, or a Tier 1 risk-based ratio of less
than 3% or a leverage ratio of less than 3%. A critically undercapitalized
institution has a ratio of tangible equity to total assets that is equal to or
less than 2%.
Set forth below are the Company's and the Bank's risk-based and leverage capital
ratios as of December 31, 1994:
RISK-BASED CAPITAL RATIOS
AS OF DECEMBER 31, 1994
<TABLE>
<CAPTION>
COMPANY BANK
------- ----
IN THOUSANDS AMOUNT RATIO AMOUNT RATIO
- ------------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
Tier 1 capital $ 4,722 2.97% $ 5,586 3.52%
Tier 1 capital minimum
requirement 6,356 4.00 6,356 4.00
------- ----- ------- -----
Deficiency $(1,634) (1.03%) $ (770) (0.48%)
======= ===== ======= =====
Total capital $ 6,779 4.27% $ 7,643 4.81%
Total capital minimum
requirement 12,711 8.00 12,711 8.00
------- ----- ------- -----
Deficiency $(5,932) (3.73%) $(5,068) (3.19%)
======= ===== ======= =====
Risk-adjusted assets $158,888 $158,888
======== ========
</TABLE>
LEVERAGE RATIOS
AS OF DECEMBER 31, 1994
<TABLE>
<CAPTION>
COMPANY BANK
------- ----
IN THOUSANDS AMOUNT RATIO AMOUNT RATIO
- ------------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
Tier 1 capital to
average total assets
(Leverage Ratio) $ 4,722 1.87% $ 5,586 2.22%
Minimum leverage
requirement $ 7,559 3.00% $ 7,559 3.00%
$12,598 5.00% $12,598 5.00%
Deficiency $(2,837) (1.13%) $(1,973) (0.78%)
$(7,876) (3.13%) $(7,012) (2.78%)
Average total assets $251,959 $251,959
======== ========
</TABLE>
Because of its capital position, as determined by the FDIC, the Bank is subject
to significant restrictions under Section 38 of the Federal Deposit Insurance
Act ("FDIA").
An institution which is undercapitalized, significantly undercapitalized or
critically undercapitalized becomes subject to the following mandatory
supervisory actions immediately upon notification of its capital category: (1)
restrictions on payment of capital distributions, such as dividends; (2)
restrictions on payment of management fees to any person having control of the
institution; (3) close monitoring by the FDIC of the condition of the
institution, compliance with capital restoration plans, restrictions, and
requirements imposed under Section 38, and periodic review of the institution's
efforts to restore its capital and comply with restrictions; (4) requirement
that the institution submit within the time allowed by the FDIC a capital
restoration plan, which must include (a) the steps the institution will take to
become adequately capitalized, (b) the levels of capital to be attained during
each year in which the plan will be in effect, (c) how the institution will
comply with restrictions or requirements imposed on its activities, (d) the
types and levels of activities in which the institution will engage, and (e)
such other information as the FDIC may require; (5) requirement that any company
which controls an undercapitalized institution must guarantee, in an amount
equal to 5% of the institution's total assets or the amount needed to bring the
institution into full capital compliance, that the institution will comply with
the capital restoration plan until the institution has been adequately
capitalized, on the average, for four consecutive quarters; (6) restrictions on
growth of the institution's total assets so that its average total assets during
any calendar quarter do not exceed its average total assets during the preceding
calendar quarter unless (a) the FDIC has accepted the institution's capital
restoration plan, (b) any increase in total assets is consistent with the
capital restoration plan, and (c) the institution's ratio of tangible equity
assets to increases during the calendar quarter are at a rate
PAGE No. 26
<PAGE> 215
sufficient to enable the institution to become adequately capitalized within a
reasonable time; and (7) limitations on the institution's ability to make any
acquisition, open any new branch offices or engage in any new line of business
unless the FDIC has accepted the institution's capital plan and has granted
prior approval.
In addition to the above, the FDIC may take any of the actions described below
for institutions which fail to submit and implement a capital restoration plan.
Significantly undercapitalized and undercapitalized institutions that fail to
submit and implement adequate capital restoration plans are subject to the
mandatory provisions set forth above and, in addition, will be required to do or
comply with one or more of the following: (1) sell enough additional capital,
including voting shares, to bring the institution to an adequately capitalized
level or, if one or more grounds exist for appointing a conservator or receiver
for the institution, be acquired by or combined with another insured depository
institution; (2) restrict transactions with affiliates; (3) restrict interest
rates paid on deposits to the prevailing rates in the region where the
institution is located, as determined by the FDIC; (4) restrict asset growth or
reduce total assets more stringently than described above; (5) terminate, reduce
or alter any activity (including any activity conducted by a subsidiary of the
institution) determined by the FDIC to pose an excessive risk to the
institution; (6) hold a new election for the institution's board of directors;
(7) dismiss directors or senior officers and/or employ new officers, subject to
agency approval; (8) cease accepting deposits from correspondent depository
institutions, including renewals and rollovers of prior deposits; (9) divest or
liquidate any subsidiary that is in danger of becoming insolvent and poses a
significant risk to the institution or that is likely to cause significant
dissipation of the institution's assets or earnings; or (10) take any other
action that the FDIC determines to be appropriate.
In addition, significantly undercapitalized institutions are prohibited from
paying any bonus or raise to a senior executive officer without prior FDIC
approval. No such approval will be granted to an institution which is required
but has failed to submit an acceptable capital restoration plan. Further, the
FDIC may impose one or more of the restrictions applicable to critically
undercapitalized institutions set forth below.
A critically undercapitalized institution must be placed in conservatorship or
receivership within 90 days of becoming critically undercapitalized, unless the
FDIC determines that other action would better achieve the purposes of the FDIA.
A critically undercapitalized institution also is prohibited from taking a
number of actions without FDIC prior written approval, including entering into
any material transaction other than in the usual course of business, making
payments on subordinated debt, financing a highly leveraged transaction,
adopting charter or by-law amendments, materially changing accounting methods,
engaging in any covered transaction as defined in the Federal Reserve Act,
paying excessive compensation or bonuses, and paying interest on new or renewed
liabilities at a rate that would increase the institution's weighted average
cost of funds to a level significantly exceeding the prevailing rates of
interest on insured deposits in the institution's normal market areas. The FDIC,
in its discretion, may even restrict further the activities of a critically
undercapitalized institution.
REGULATORY AGREEMENTS
As a result of an examination of the Bank by the FDIC and State Banking
Department which was concluded during the second quarter of 1993, the Bank
consented to enter into an amended Cease and Desist Order with the FDIC on
July 27, 1993, and an Order under Financial Code Section 1913 with the
State Banking Department on July 6, 1993, which was amended on March 30, 1995.
These Orders remain in effect. The Bank completed a joint examination by the
FDIC and State Banking Department on June 1, 1994 and on July 20, 1995. See
Note 17 of the Notes to Consolidated Financial Statements for a complete
discussion of the terms and conditions of the regulatory agreements.
INVESTOR INFORMATION
TRADING HISTORY
Until July 7, 1995, the Company's common stock was publicly traded in the
over-the-counter market and was quoted on the NASDAQ National Market System
under the symbol "FCOB." The Company's common stock currently is listed on the
NASDAQ SmallCap Market. There are seven market makers for the Company's common
stock.
The following table sets forth the range of representative high and low sales
prices for the periods indicated, as reported by NASDAQ. The sales prices shown
are not adjusted for retail markup, markdown, or commissions.
<TABLE>
<CAPTION>
1994 1995
---- ----
QUARTER HIGH LOW HIGH LOW
- ------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First $5 1/2 $3 3/4 $6 3/4 $4
Second 4 3/4 2 3/4 6 3/4 4
Third 3 1/2 2 5 1/4 3 1/2
Fourth 2 1/8 7/8 4 1/4 3 1/4
</TABLE>
At March 30, 1995, there were approximately 1,153 holders of record of the
Company's common stock. Trading activity during 1994 totaled 3,631,113 shares.
PAGE No. 27
<PAGE> 216
MARKET MAKERS
A.G. EDWARDS & SONS, INC.
11740 Sutton Way
Grass Valley, CA 95945
Robert Fournier
(916) 272-8823
(800) 952-5426
ALLEN & COMPANY INC.
711 Fifth Avenue
New York, NY 10048
(212) 832-7393
DATEK SECURITIES CORP.
4522 Ft. Hamilton Parkway
Brooklyn, NY 11219
(212) 435-7100
HAMBRECHT & QUIST, INC.
One Bush Street
San Francisco, CA 94104
Chris Meyer
(415) 576-3648
HERZONG, HEINE, GEDULD, INC.
26 Broadway
New York, NY 10004
Craig Schepp
(212) 908-5135
(800) 221-7864
MAYER & SCHWEITZER, INC.
111 Pavonia Avenue
Jersey City, NJ 07310
(201) 963-9100
SANDLER O'NEILL & PARTNERS, L.P.
Two World Trade Center
New York, NY 10048
(212) 466-7800
CORPORATE COUNSEL
LILLICK & CHARLES
Two Embarcadero Center, 27th Floor
San Francisco, CA 94111
INDEPENDENT PUBLIC ACCOUNTANTS
ARTHUR ANDERSEN LLP
Spear Street Tower, Suite 3500
One Market Plaza
San Francisco, CA 94105
FORM 10-K
A COPY OF FIRST COMMERCIAL BANCORP, INC.'S FORM 10-K REPORT AS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS AVAILABLE UPON WRITTEN REQUEST TO DAGMAR
HOTEL, CORPORATE SECRETARY, P.O. BOX 591, SACRAMENTO, CA 95812-0591.
This annual report is furnished to stockholders and customers of the Bank
pursuant to the requirements of the FDIC to provide an annual disclosure
statement. This annual report has not been reviewed or confirmed for accuracy or
relevance by the FDIC.
FIRST COMMERCIAL BANCORP,
INC. AND FIRST COMMERCIAL BANK
DIRECTORS
MICHAEL DENTON, JR.
Director, Denton Plastics, Inc.
FRED L. HARRIS
Attorney at Law
MICHAEL P. MORRIS
Certified Public Accountant
Chief Financial Officer,
Nugget Market
MANUEL PERRY, JR.
Chairman of the Board
First Commercial Bancorp, Inc.
Agent, New York Life
MICHAEL E. SPINETTI
Partner, Motherlode Real Investors
CORPORATE OFFICERS
JAMES E. CULLETON
Interim President
ANNE H. LONG
Executive Vice President
Chief Financial Officer
DENNIS F. CEKLOVSKY
Executive Vice President
Chief Credit Officer
DAGMAR E. HOTEL
Corporate Secretary
PAGE No. 28
<PAGE> 217
FIRST COMMERCIAL BANK
CAPITOL OFFICE
2450 Venture Oaks Way
Sacramento, CA 95833
(916) 646-0554
CAMPBELL OFFICE
94 San Tomas Aquino Road
Campbell, CA 95008
(408) 374-5300
CONCORD OFFICE
2395 Willow Pass Road
Concord, CA 94520
(510) 689-9100
DOUGLAS OFFICE
1625 Douglas Boulevard
Roseville, CA 95661
(916) 782-5561
HOWE AVENUE OFFICE
865 Howe Avenue
Sacramento, CA 95825
(916) 924-1778
PARKSIDE OFFICE
1000 Taraval Street
San Francisco, CA 94116
(415) 661-7070
VERNON OFFICE
201 Vernon Street
Roseville, CA 95678
(916) 782-5561
PAGE No. 32
<PAGE> 218
[LOGO]
FIRST COMMERCIAL BANCORP, INC.
865 Howe Avenue
Sacramento, California 95825
(916) 646-0554
Member FDIC
Equal Opportunity Employer
Equal Housing Lender
