<PAGE> 1
As filed with the Securities and Exchange Commission on February 15, 1996
Registration No. 33-92928
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
--------
FIRST COMMERCIAL BANCORP, INC.
(Exact name of issuer as specified in its charter)
Delaware 94-2683725 6022
(State or other jurisdiction of (I.R.S. Employer (Primary Standard
incorporation or organization) Identification No.) Industrial Classification
Code Number)
865 HOWE AVENUE, SACRAMENTO, CALIFORNIA 95825 - (916) 641-3288
(Address including zip code and telephone number, including area code, of
Registrant's principal executive offices)
--------
Corporation Trust Company, Corporation Trust Center
1209 Orange Street, Wilmington, Delaware 19801, (302) 658-7581
(Name, address and telephone number of agent for service)
The Commission is requested to send copies of all communications to:
MANUEL PERRY, JR. RONALD W. BACHLI, ESQ.
Chairman of the Board of Directors LILLICK & CHARLES LLP
FIRST COMMERCIAL BANCORP, INC. Two Embarcadero Center
865 Howe Avenue San Francisco, CA 94111
Sacramento, CA 95825 Telephone: (415) 984-8200
Telephone: (916) 641-3288
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the Registration Statement becomes
effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. /X/
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================================================
Title of Securities Amount to be Proposed Maximum Proposed Maximum Amount of
to be Registered Registered Offering Price Per Share Aggregate Offering Price Registration Fee
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stockholder Subscription Rights
(Common Stock) 4,675,110 $0.00 $ 0.00 $ 0.00
Common Stock, $0.01 par value (1) 50,000,000 $0.10 $ 5,000,000 $1,721(2)
- -----------------------------------------------------------------------------------------------------------------------------------
Dividend Subscription Rights (Common Stock) 4,673,110 $0.00 $ 0.00 $ 0.00
Common Stock, $0.01 par value (4) 9,688,875 $0.10 $968,887.44 $ 334(3)
===================================================================================================================================
</TABLE>
(1) To be offered and sold pursuant to Stockholder Subscription Rights.
(2) Filing fee of $1,825 previously paid with Registration Statement No.
33-92928.
(3) Filing fee of $230 previously paid with Registration Statement
33-92928.
(4) To be offered and sold pursuant to Dividend Subscription Rights.
- -------------------
The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter
<PAGE> 2
become effective in accordance with section 8(a) of the Securities Act of 1933
or until the Registration Statement shall become effective on such date as the
Commission, acting pursuant to said section 8(a), may determine.
-ii-
<PAGE> 3
Cross Reference Sheet
Pursuant to Item 501(b) of Regulation S-K
<TABLE>
<CAPTION>
Item of Form S-1 Location of Prospectus Caption
- ---------------- ------------------------------
<S> <C>
1. Forepart of the Registration Statement and Facing Page of Registration Statement; Cross
Outside Front Cover Page of Prospectus Reference Sheet; Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages of
Prospectus Prospectus
3. Summary Information, Risk Factors and Ratio PROSPECTUS SUMMARY; RISK FACTORS
of Earnings to Fixed Charges
4. Use of Proceeds PROSPECTUS SUMMARY; USE OF PROCEEDS
5. Determination of Offering Price Front Cover Page of Prospectus; MARKET
INFORMATION; DETERMINATION OF
OFFERING PRICE
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution PLAN OF DISTRIBUTION; THE OFFERING
9. Description of Securities to be Registered MARKET INFORMATION; DESCRIPTION OF
SECURITIES
10. Interests of Named Experts and Counsel Not Applicable
11. Information with Respect to the Registrant SELECTED FINANCIAL AND OTHER DATA;
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS; BUSINESS; THE STOCK
PURCHASE AGREEMENT AND CHANGE IN
CONTROL OF THE COMPANY; MANAGEMENT
12. Disclosure of Commission Position on Part II - Information Not Required In Prospectus
Indemnification for Securities Act Liabilities
</TABLE>
-iii-
<PAGE> 4
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS
FIRST COMMERCIAL BANCORP, INC.
865 HOWE AVENUE
SACRAMENTO, CALIFORNIA 95825
(916) 641-3288
59,688,875 SHARES
COMMON STOCK ($0.01 PAR VALUE)
INCLUDING UP TO 50,000,000 SHARES OFFERED PURSUANT TO NONTRANSFERABLE
STOCKHOLDER RIGHTS AND 9,688,875 SHARES RESERVED FOR AN
EXCHANGE FOR DIVIDEND RIGHTS
First Commercial Bancorp, Inc. (the "Company") hereby offers for sale
50,000,000 shares of its common stock, par value $0.01 per share (the "Common
Stock") to the stockholders of record of the Company at the close of business on
October 6, 1995 (the "Rights Record Date") pursuant to the exercise of
nontransferable rights (the "Stockholder Rights"). The Stockholder Rights
entitle stockholders to subscribe for and purchase 10.695 shares of Common Stock
(the "Rights Offering") for each share of Common Stock held on the Rights Record
Date at a cash price of $0.10 per share (the "Subscription Price"). Holders of
Stockholder Rights ("Rights Holders") will be able to exercise their Stockholder
Rights until 5:00 p.m., Eastern time, on April 12, 1996 (the "Rights Expiration
Date"), unless terminated or extended by the Board of Directors of the Company
in its sole discretion for up to two (2) consecutive periods of up to 30 days
each, or not later than June 11, 1996. The Board of Directors of the Company may
designate up to 10,000,000 shares of Common Stock not subscribed for pursuant to
Stockholder Rights for sale to the public in California at the Subscription
Price (the "Public Offering"). The Public Offering will be conducted on a best
efforts basis by the officers and directors of the Company. Stockholders of the
Company are not entitled to participate in the Public Offering, if conducted.
See "THE OFFERING."
Stockholders of the Company on the Rights Record Date will receive
Stockholder Rights to purchase 10.695 shares of Common Stock (the "Underlying
Shares") at the Subscription Price for each share of Common Stock held on the
Rights Record Date (the "Basic Subscription Privilege"), subject to reduction by
the Company under certain circumstances. In lieu of fractional shares, the
aggregate number of shares of Common Stock issuable upon exercise of Stockholder
Rights will be rounded up to the next whole number. Each Stockholder Right also
entitles any Rights Holder exercising the Basic Subscription Privilege in full
to subscribe concurrently for additional shares of Common Stock that are not
otherwise subscribed for pursuant to the exercise of the Basic Subscription
Privilege (the "Oversubscription Privilege"), up to the greater of (a) an
additional one million shares, or $100,000, or (b) an additional 10.695 shares
for each share held on the Rights Record Date, subject to certain restrictions
and to proration and reduction by the Company under certain circumstances.
Stockholders wishing to participate in the Rights Offering must complete, sign
and date the appropriate Subscription Rights Certificate, and return it,
together with full payment of the Subscription Price for each Underlying Share,
to The First National Bank of Boston (the "Subscription Agent") by the Rights
Expiration Date. See "THE OFFERING."
-1-
<PAGE> 5
In addition, the Company is registering transferable rights (the
"Dividend Rights") for distribution to certain persons who were Company
stockholders of record on June 15, 1992 or September 14, 1992
("Dividend-Eligible Stockholders"). The Dividend Rights will be exchangeable
("Dividend Exchange Offer") for up to 9,688,875 shares of Common Stock (the
"Dividend Exchange Shares") in discharge of the Company's outstanding obligation
to pay to the Dividend-Eligible 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 (the "1992 Dividends"), which remain unpaid as of December 31,
1995. As of December 31, 1995, the accumulated dividend and interest amount
payable to Dividend-Eligible Stockholders was $968,887.44, or $0.2073 per share.
The offering of the Dividend Exchange Shares will terminate on April 12,
1996, the ("Dividend Rights Expiration Date"), unless terminated earlier or
extended by the Company's Board of Directors in its sole discretion for up to
two (2) consecutive periods of up to 30 days each, or until not later
than June 11, 1996.
The Dividend Rights will entitle a Dividend Rights Holder to receive
one share of Common Stock for each $0.10 of dividend and accrued interest amount
exchanged for Common Stock. Stockholders eligible to participate in the Dividend
Exchange Offer will receive an Exchange Offer Certificate, which will indicate
the total amount of the 1992 Dividends which such stockholder is entitled to
receive and the number of Dividend Exchange Shares for which such Dividend
Rights may be exchanged. In lieu of fractional shares, the number of shares of
Common Stock issuable upon exercise of Dividend Rights will be rounded up to the
nearest whole number. Stockholders wishing to participate in the Dividend
Exchange Offer must complete, sign and date the Exchange Offer Certificate and
the attached Dividend Exchange Offer Subscription Form and return it to the
Subscription Agent by the Dividend Rights Expiration Date.
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A
SIGNIFICANT DEGREE OF INVESTMENT RISK. PROSPECTIVE INVESTORS SHOULD READ
CAREFULLY THIS ENTIRE PROSPECTUS, ESPECIALLY THE SECTION ENTITLED "RISK
FACTORS" COMMENCING AT PAGE 21 HEREOF.
The Company and its wholly owned subsidiary, First Commercial Bank
(the "Bank") have entered into an Amended and Restated Stock Purchase
Agreement (the "Stock Purchase Agreement") dated August 7, 1995, with First
Banks, Inc., a Missouri corporation ("First Banks"), pursuant to which First
Banks has gained control of the Company and the Bank. See "SUMMARY" and "THE
STOCK PURCHASE AGREEMENT AND CHANGE IN CONTROL OF THE COMPANY."
-2-
<PAGE> 6
First Banks has committed that it will purchase in this
offering (the "Offering") as a "Standby Purchaser," at the Subscription Price
and after expiration of the Rights Offering and any Public Offering, if
necessary, such number of shares as may be required to raise the Bank's Tier I
capital level to 7.0%, as required by the regulatory orders to which the Bank is
subject.
The purpose of this Offering is to complete the recapitalization of the
Company and the Bank. The Company intends to use the remaining net proceeds of
the Offering for general corporate purposes and payment of operating expenses.
See "USE OF PROCEEDS." The right of stockholders to purchase shares of Common
Stock at the $0.10 per share Subscription Price in the Offering was determined
by the Board of Directors of the Company based on information which the Board
of Directors deemed to be relevant, including the $0.10 price per share at
which the Common Stock was sold to First Banks pursuant to the Stock Purchase
Agreement and an opinion from the Company's financial advisor as to the
fairness to stockholders of the terms of the Stock Purchase Agreement,
including the $0.10 per share Subscription Price in this Offering. See
"DETERMINATION OF OFFERING PRICE" and "THE OFFERING -- Financial Advisor." On
February 14, 1996, the per share bid price of the Common Stock was $0.344 and
the per share ask price was $0.375. See "MARKET INFORMATION." No assurance can
be given that the trading price per share of the Common Stock will remain above
the Subscription Price at any time during or following completion of this
Offering.
The Company and the Bank are subject to minimum capital requirements
imposed by regulation and the terms of certain regulatory orders outstanding
against the Company issued by the FRB and against the Bank issued by the FDIC
and California State Banking Department ("SBD"). As of December 31, 1995, the
Bank met the 6.5% Tier I capital requirement of the Cease and Desist Order
issued by the FDIC. However, because of differences in the capital calculation
formula utilized by the SBD, for SBD purposes the Bank's Tier I capital was
6.45%, which did not meet the SBD's 7.0% Tier I capital requirement at that
date. On a pro forma basis, at December 31, 1995, the Bank would have required
approximately an additional $1,009,000 in capital in order to meet the capital
requirements of the SBD's regulatory order. However, as discussed herein, the
SBD has allowed the Bank to meet the 7.0% requirement through the proceeds of
this Offering including any participation by First Banks as Standby Purchaser.
Unless otherwise specified, Tier I capital numbers for the Bank given herein
are calculated under the FDIC methodology. See "SUPERVISION AND REGULATION" and
"REGULATORY AGREEMENTS AND ORDERS."
The Company and the Bank are deemed to be troubled institutions for all
regulatory purposes and the Bank is deemed a problem Bank. The Company and the
Bank anticipate that substantial compliance with the regulatory orders to which
they respectively are subject will occur through the proceeds of this Offering,
including participation by First Banks as "Standby Purchaser," if necessary.
However, no assurance can be given that the Bank will not suffer future
additional operating losses which may erode the capital position of the Bank
following completion of the Offering. See "RISK FACTORS" and "REGULATORY
AGREEMENTS AND ORDERS."
The expenses of registering the securities offered hereby are being
paid by the Company.
-3-
<PAGE> 7
The Company did not call and hold an annual meeting of stockholders
during 1995 and as such is in violation of applicable provisions of the Delaware
General Corporation Law.
The Common Stock was involuntarily delisted from the NASDAQ National
Market System as of July 7, 1995, as a result of the Company's failure to meet
the tangible asset requirements for continued listing. The Common Stock is
publicly traded in the over-the-counter market and is quoted on the Nasdaq Stock
Market's Small-Cap Market System ("Nasdaq Small-Cap") under the symbol "FCOB."
The NASD has informed the Company that it will be delisted from the Nasdaq Small
Cap unless certain conditions are met. See "MARKET INFORMATION." On December
29, 1995, the last reported sales price of the Common Stock on the Nasdaq
Small-Cap was $0.219.
It is the present intention of present directors and officers to
exercise Rights and/or exercise the Oversubscription Privilege for
approximately 100,000 shares or 0.2% of the shares being offered.
AFTER THE RIGHTS EXPIRATION DATE, THE STOCKHOLDER RIGHTS WILL NO LONGER
BE EXERCISABLE AND WILL HAVE NO VALUE.
---------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSIONER OF ANY STATE,
NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSIONER PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THESE SECURITIES ARE NOT SAVINGS ACCOUNTS OR DEPOSITS WITH FIRST
COMMERCIAL BANK AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
-4-
<PAGE> 8
<TABLE>
<CAPTION>
===================================================================================================
Underwriting discounts Proceeds to issuer
Price to Public(1) and commissions or other persons(2)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share of Common Stock $0.10 $0 $0.10
- ---------------------------------------------------------------------------------------------------
Total (3) $5,000,000 $0 $5,000,000
===================================================================================================
</TABLE>
(1) Also constitutes the price to stockholders pursuant to Stockholder Rights.
(2) Before deducting expenses payable by the Company estimated at an aggregate
of $444,000. See "USE OF PROCEEDS."
(3) The total price to the public and total proceeds to the issuer assumes the
purchase of 50,000,000 shares of Common Stock in the Rights Offering and
excludes the effect of the discharge of the Company's dividend obligation.
The date of this Prospectus is February 15, 1996.
[Rest of page intentionally left blank.]
-5-
<PAGE> 9
OTHER AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 (the "Registration Statement") of which this
Prospectus is a part, under the Securities Act of 1933, as amended, with respect
to the securities offered hereby. For information in addition to that contained
in this Prospectus, reference is made to the Registration Statement and to the
exhibits filed therewith.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
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,
including the Registration Statement referred to above, can be inspected and
copied at the Public Reference Room of the Securities and Exchange 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, NY 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.
NO DEALER, SALESPERSON, AGENT OR OFFICER OF THE COMPANY OR ANY OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESEN TATIONS SHOULD NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES,
OR AN OFFER OF SUCH SECURITIES TO A PERSON IN ANY STATE OR OTHER JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
-6-
<PAGE> 10
[THIS PAGE INTENTIONALLY LEFT BLANK]
-7-
<PAGE> 11
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUMMARY.................................................................................................
The Company and the Bank..................................................................................
The Offering..............................................................................................
Use of Proceeds...........................................................................................
Stock Purchase Agreement; Change in Control;
Potential Dilution of Voting Power and Earnings Per Share...........................................
Determination of Offering Price...........................................................................
RISK FACTORS.......................................................................................................
Recent Losses and Risk of Continued Losses................................................................
Limitation on Payment of Dividends........................................................................
Potential Dilution of Voting Power and Earnings Per Share.................................................
Other Real Estate Owned and Non-Accrual, Past Due and Restructured Loans..................................
Credit Quality Weaknesses.................................................................................
Provision for Possible Loan Losses and Risk of Additional Provisions......................................
Construction and Real Estate Secured Lending..............................................................
Concentration of Real Estate in the Sacramento Valley Area................................................
Concentration of Large Borrowers..........................................................................
Failure to Meet Capital Adequacy Requirements and Regulatory Orders.......................................
Recent Changes in Key Personnel...........................................................................
Effect of Delisting from NASDAQ SmallCap Market System and Effect on Liquity of the Common Stock;
Penny Stock.........................................................................................
Certain Anti-Takeover Provisions..........................................................................
Government Regulation and Competition.....................................................................
SELECTED FINANCIAL AND OTHER DATA..................................................................................
RECENT CHANGES ....................................................................................................
Recent Losses and Risk of Continued Losses................................................................
Capital Accounts and Ratios...............................................................................
Asset Quality.............................................................................................
Potential Delisting from NASDAQ SmallCap Market System....................................................
MARKET INFORMATION.................................................................................................
Trading History...........................................................................................
Dividends.................................................................................................
THE OFFERING.......................................................................................................
General .................................................................................................
How to Subscribe..........................................................................................
Method of Transferring Dividend Rights....................................................................
Financial Advisor.........................................................................................
Subscription Agent........................................................................................
Information Agent.........................................................................................
Escrow Agent..............................................................................................
Delivery of Common Stock Certificates.....................................................................
Other Offering Information................................................................................
Tax Limitation............................................................................................
Regulatory Limitation.....................................................................................
USE OF PROCEEDS....................................................................................................
DETERMINATION OF OFFERING PRICE....................................................................................
CAPITALIZATION.....................................................................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............................
General .................................................................................................
Lending and Credit Management.............................................................................
Summary of Operations.....................................................................................
Results of Operations - Years Ended December 31, 1994, 1993 and 1992......................................
Overview .................................................................................................
Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential....
BUSINESS...........................................................................................................
The Company and the Bank..................................................................................
Economic Trends...........................................................................................
</TABLE>
-8-
<PAGE> 12
<TABLE>
<S> <C>
Market Area and Customer Base.............................................................................
Lending Activities........................................................................................
Investments...............................................................................................
Deposits .................................................................................................
Premises .................................................................................................
Employees.................................................................................................
Competition...............................................................................................
THE STOCK PURCHASE AGREEMENT AND
CHANGE IN CONTROL OF THE COMPANY.............................................................................
General .................................................................................................
Option to Make Future Capital Infusions...................................................................
Terms of the Debentures and Future Dilution of Voting Power and Earnings Per Share........................
Issuance of Appreciation Rights...........................................................................
Right to Nominate Directors...............................................................................
Provision Affecting Rights Offering.......................................................................
Amendment of the Stockholder Rights Agreement.............................................................
Information with Respect to First Banks, Inc..............................................................
Effect of Stock Purchase Agreement on Accounting and Tax Issues...........................................
MANAGEMENT.........................................................................................................
Directors and Executive Officers..........................................................................
Committees of the Board of Directors......................................................................
Executive Compensation....................................................................................
Employment Arrangements and Agreements....................................................................
Compensation Committee Interlocks and Insider Participation in Compensation Decisions.....................
401(k) and Profit Sharing Plan............................................................................
Employee Stock Ownership Plan.............................................................................
Director Compensation.....................................................................................
Directors' Stock Option Plan..............................................................................
Certain Transactions and Indebtedness of Management.......................................................
PRINCIPAL STOCKHOLDERS.............................................................................................
Principal Stockholders....................................................................................
DESCRIPTION OF SECURITIES..........................................................................................
General .................................................................................................
Capital Stock.............................................................................................
Common Stock..............................................................................................
The Dividend Rights.......................................................................................
Restrictions on Resales by Affiliates.....................................................................
Provisions of Certificate of Incorporation................................................................
FEDERAL INCOME TAX CONSEQUENCES....................................................................................
Impact of Receipt of Stockholder Rights and Exercise Thereof..............................................
Receipt of the Dividend Exchange Shares...................................................................
Receipt of the Appreciation Rights........................................................................
Cash Distributions on the Shares and the Dividend Exchange Shares.........................................
Redemption................................................................................................
Sale of the Shares........................................................................................
Backup Withholding........................................................................................
Foreign Withholding.......................................................................................
PLAN OF DISTRIBUTION...............................................................................................
SUPERVISION AND REGULATION.........................................................................................
The Company and First Banks...............................................................................
The Bank .................................................................................................
Change in Control.........................................................................................
Capital Adequacy Requirements.............................................................................
Payment of Dividends......................................................................................
</TABLE>
-9-
<PAGE> 13
<TABLE>
<S> <C>
Impact of Federal and California Tax Laws.................................................................
Impact of Monetary Policies...............................................................................
Recent and Proposed Legislation...........................................................................
Other.....................................................................................................
REGULATORY AGREEMENTS AND ORDERS...................................................................................
FDIC and State Banking Department Regulatory Orders.......................................................
State Capital Impairment Orders...........................................................................
Federal Reserve MOU.......................................................................................
1995 Regulatory Examinations..............................................................................
LEGAL PROCEEDINGS..................................................................................................
LEGAL MATTERS......................................................................................................
EXPERTS............................................................................................................
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.........................................................................
</TABLE>
-10-
<PAGE> 14
PROSPECTUS SUMMARY
The following is a selective summary of certain information contained
in this Prospectus and is qualified in its entirety by the information and
financial statements appearing elsewhere herein. Prospective purchasers are
urged to read the entire Prospectus carefully, and to give particular attention
to the section entitled "RISK FACTORS" before making any decision to purchase
any of the shares offered hereby.
THE COMPANY AND THE BANK
First Commercial Bancorp, Inc. (the "Company") is a Sacramento,
California-based bank holding company which reincorporated in Delaware in 1990
and which conducts its operations through its sole subsidiary, First Commercial
Bank, a California state-chartered bank (the "Bank"). The Bank commenced
operations in 1979. The Bank operates a general commercial banking business
through its headquarters and 6 branch offices located in Sacramento, Roseville
(2 branches), San Francisco, Concord and Campbell, California. Deposits in the
Bank are insured by the Federal Deposit Insurance Corporation ("FDIC") to the
maximum extent permitted by law.
The Company is operating under the terms of a Memorandum of
Understanding ("MOU") with the Federal Reserve Bank of San Francisco (the
"FRB"). The Bank is operating under the terms of a Cease and Desist order ("FDIC
Cease and Desist Order") issued by the FDIC and a second amended final order
("SBD Final Order") issued by the California State Banking Department ("SBD")
(collectively, the "Orders") and also is subject to capital impairment orders
dated August 3, 1994, November 3, 1994, February 17, March 13, May 15 and August
7, 1995 issued by the SBD (the "Capital Impairment Orders"). The MOU and the
Orders have placed significant operating and dividend restrictions on the
Company and the Bank. In addition, the FDIC notified the Bank that as of July
30, 1995, the Bank was considered "critically undercapitalized" under the Prompt
Corrective Action ("PCA") provisions of the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). However, as a result of the
capital infusion represented by the First Debenture, the Bank was upgraded to
"undercapitalized" as of October 31, 1995 and, as of December 31, 1995, as a
result of the infusion of $1.5 million provided by First Banks' purchase of
15,000,000 shares of Common Stock and the proceeds of the Second Debenture, the
Bank would be considered "adequately capitalized" under such law. The Company
and the Bank remain subject to significant operating restrictions, however,
including limitations on the payment of dividends. For a full description of the
foregoing, see "RISK FACTORS - Failure to Meet Capital Adequacy Requirements and
Regulatory Orders" and "REGULATORY AGREEMENTS AND ORDERS."
The Company grew substantially during the 1980's, primarily through the
acquisition of thirteen branches from California Canadian Bank and the
acquisition of Citizens Bank of Roseville. Between 1988 and 1992, the Company
focused its lending activities on real estate construction loans and through
June of 1994, on loans to small and medium-sized businesses. For deposits, the
Company focused on title insurance and escrow companies as well as on
small-to-medium- sized business depositors. The focused lending and
deposit-generation strategy which the Company pursued during this time period
involved certain risk attributes generally not present in a more diversified
lending and deposit strategy. See "RISK FACTORS - Recent Losses and Risk of
Continued Losses." At December 31, 1993, the Company's assets reached
$349,777,000 with $83,682,000 or 42.9% of the Company's gross loans in real
estate construction and real estate secured loans, and with $86,549,000 or
26.73% of its deposits in title and escrow accounts, and $237,247,000 in all
other deposits. As of December 31, 1994, the Company had consolidated total
assets, deposits and stockholders' equity of $239,306,000, $233,536,000 and
$4,355,000, respectively. At September 30, 1995, the Company had consolidated
total assets, deposits and stockholders' equity of $172,923,000, $167,239,000
and $(1,435,000), respectively.
-11-
<PAGE> 15
The Company reported net losses in 1992, 1993 and 1994 of $(3,518,000),
$(7,311,000) and $(18,190,000), respectively, due primarily to deterioration in
its real estate lending portfolio and resultant write-downs and increased loan
loss provisions. The Company reported a net loss of $(6,301,000) for the nine
months ended September 30, 1995 due primarily to the continued write-down of,
and other expenses associated with, real estate acquired through foreclosure or
Other Real Estate Owned ("OREO"), further deterioration in the loan portfolio
and the reduction in interest on loans resulting from the decrease in the amount
of loans outstanding. As a result, at September 30, 1995, the Company's capital
was reduced to $(1,435,000) and the Company and the Bank's Tier I leverage
ratios declined to (0.83)% and 2.41%, respectively.
During the second quarter of 1995, the Bank took substantial write-offs
and write-downs of loans and other assets. The most significant write-off
resulted from the bankruptcy of one of the Bank's largest borrowers. As a
result, the Company's Tier I capital was reduced to (0.23)% at June 30, 1995,
and the Bank's Tier I capital would have been reduced to 0.27%, but for the
investment of $1.5 million in Bank nonvoting noncumulative preferred stock (the
"Bank Preferred Stock") by James F. Dierberg, Chairman, President and Chief
Executive Officer of First Banks, pursuant to the terms of the Standby Stock
Purchase Agreement. See "THE STOCK PURCHASE AGREEMENT AND CHANGE IN CONTROL OF
THE COMPANY." As discussed further below, Dierberg's investment was made under
emergency circumstances to forestall possible closure of the Bank by its
regulatory authorities.
In response to these losses, the Company developed a restructuring plan
to redirect the lending and deposit strategy of the Bank. The restructuring plan
had six elements: (a) reduce total assets, (b) reduce operating expenses and
staffing levels, (c) reduce nonperforming loans and increase reserve coverage of
such loans, (d) maintain the commercial and industrial lending portfolio, but
significantly reduce real estate construction lending, (e) eliminate volatile
deposits and close non-strategic branch offices, and (f) maintain high levels of
liquidity to facilitate the asset and deposit dispositions. Implementation of
this plan began during the third quarter of 1994 and, as of September 30, 1995,
has had the following results:
- Total assets were reduced 51% from $349,777,000 at December 1993
to $172,923,000.
- Nonperforming assets have been reduced 79% over the same period
from $35,321,000 to $7,401,000 and the loan loss reserve coverage
of nonperforming loans reached 90.48%.
- The nonowner occupied construction loan portfolio was reduced by
86%, from $32,432,000 to $4,479,000.
- Core monthly operating expenses were reduced 40% from $1,123,000
to $675,000.
-12-
<PAGE> 16
- Escrow and title industry deposits were reduced 99% from
$86,549,000 at December 31, 1993 to $1,148,000.
- Staffing has been reduced 48% from 185 to 97 employees as of
September 30, 1995. By December 31, 1995, the FTE staff was
reduced to 63 employees.
- The Bank's liquidity ratio has been maintained above 30%.
- The San Diego branch office was sold in January of 1995, and the
Santa Rosa branch office was closed during April 1995.
At December 31, 1995, the Company's loan portfolio was concentrated in
twenty (20) loans, one (1) of which exceeded the Bank's secured and unsecured
lending limit at that date. Commitments to these borrowers represent $31.2
million or 42% of the Bank's total loan portfolio at December 31, 1995.
Outstanding balances to these borrowers at December 31, 1995 were $23.6 million
or 32% of the Bank's loan portfolio. Four (4) of these loans, representing $7.4
million or 10% of the Bank's total loan portfolio, have been classified by the
Bank as "Substandard." One (1) loan in the amount of $754,000 is on nonaccrual
status.
At December 31, 1995 the Bank's unsecured lending limit was
approximately $2.5 million and its combined secured and unsecured lending limit
was approximately $4.1 million. At December 31, 1995, the Bank had one (1) loan,
representing $3.8 million, which exceeded its unsecured lending limit and one
(1) loan, representing $5.5 million that exceeded 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.
On August 7, 1995, the Company entered into an Amended and Restated
Stock Purchase Agreement (the "Stock Purchase Agreement") with First Banks,
Inc., a Missouri corporation ("First Banks"), pursuant to which First Banks has
acquired 65,000,000 shares of Common Stock of the Company at a total purchase
price of $6,500,000. Previously, James F. Dierberg, Chairman, President and
Chief Executive Officer of First Banks, provided interim financing for the
Company's subsidiary, First Commercial Bank (the "Bank"), by purchasing $1.5
million of nonvoting, noncumulative preferred stock of the Bank (the "Bank
Preferred Stock") on June 30, 1995, thus forestalling possible closure of the
Bank by the FDIC. However, notwithstanding Dierberg's $1.5 million investment in
Bank stock, the Bank's Tier I capital ratio at June 30, 1995 remained below 2.0%
and, as a result, the Bank was classified as "critically undercapitalized" at
July 30, 1995 and became subject to the FDIC's PCA regulations for critically
undercapitalized institutions. The Company and the Bank thus were required by
FDICIA to seek sufficient capital to bring the Bank's Tier I capital ratio above
2% or face the possible imposition of a conservatorship or receivership within
90 days. Dierberg's investment occurred pursuant to a Standby Stock Purchase
Agreement entered into between the Company, the Bank, Dierberg and First Banks
as of June 30, 1995 (the "Standby Stock Purchase Agreement"), which was later
amended and restated to become the Stock Purchase Agreement.
-13-
<PAGE> 17
Subsequently, and pursuant to the Stock Purchase Agreement, on August
23, 1995, First Banks purchased 116,666,666 shares of common stock of the Bank
(the "Bank Common Stock") at a price of $0.03 per share, the book value of the
Bank Common Stock on August 22, 1995, for a total purchase price of $3.5
million. On August 22, 1995, Dierberg transferred to First Banks all of the
shares of Bank Preferred Stock owned by him. The shares of Bank Preferred Stock
and Bank Common Stock were exchanged by First Banks for 50,000,000 shares of
Company Common Stock on December 28, 1995, pursuant to the terms of the Stock
Purchase Agreement. The infusion by First Banks of $3.5 million on August 23,
1995 raised the Bank's Tier I capital level to 2.60%, as a result of which the
Bank would have been considered "significantly undercapitalized." As described
further below, at October 31, 1995, the Bank used the $1.5 million proceeds from
sale of a 12% convertible debenture to raise its Tier I capital level above 3.0%
and, as a result, the Bank would have been considered "undercapitalized" under
the PCA regulations.
Pursuant to the Stock Purchase Agreement, which was amended by the
Additional Investment Agreement dated October 31, 1995 (the "Additional
Investment Agreement"), First Banks has loaned to the Company a total of
$6,500,000, in exchange for the issuance of two 5-year 12% convertible
debentures (the "Debentures"), pursuant to which the Company agrees to issue to
First Banks a total of 65,000,000 shares of Common Stock in respect of the
principal amount of the Debentures and pursuant to which any unpaid and accrued
interest amount is convertible into up to additional 39,000,000 shares of Common
Stock at the rate of $0.10 per share. The Debentures are secured by all of the
shares of Bank common stock held by the Company. The initial Debenture (the
"First Debenture") was issued on October 31, 1995 and conversion of the
principal and any unconverted interest amount is due on October 31, 2000. The
subsequent Debenture (the "Second Debenture") was issued on December 28, 1995
and will mature on December 28, 2000, at which time conversion of the principal
amount and any unconverted interest amount is due. The principal and interest
amounts of each of the First and Second Debentures is payable in shares of
Common Stock or cash. However, cash can be paid 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 all applicable regulatory requirements, including
receipt of all necessary approvals. Management believes it is unlikely that
approval for such cash payments would be received from the FRB in the
foreseeable future. The Company must give First Banks 10 days prior written
notice of any intention to make a payment on the Debentures. The Company
contributed all but $250,000 of the proceeds of the Debentures to the Bank.
On December 28, 1995, pursuant to the Stock Purchase Agreement, which
was amended by the Standby Agreement dated December 28, 1995 (the "Standby
Agreement," Additional Investment Agreement and the Stock Purchase Agreement,
are collectively referred to herein as the "Stock Purchase Agreement"), after
issuance of the Second Debenture and in order to raise the Bank's Tier I capital
to the level required by the Orders, First Banks purchased 15,000,000 shares of
Company Common Stock at a price of $0.10 per share, for a total of $1.5 million.
As a result of First Banks' purchase of 15,000,000 shares and the issuance of
the Second Debenture, at December 31, 1995, the Bank's Tier I capital level
reached 6.58% and, accordingly, the Bank would continue to be considered
"adequately capitalized" under the FDIC's PCA regulations. As of that date, the
Bank would have been considered "well capitalized" under the PCA regulations but
for the existence of the Orders, which while outstanding limit the Bank to being
considered "adequately capitalized." See "SUPERVISION AND REGULATION." However,
the Company and the Bank remain subject to significant operating restrictions
and no assurance can be given that the Bank will not suffer future additional
losses which will erode the capital condition of the Bank. The Company
contributed all of the proceeds of the stock sale to the Bank. See "RISK
FACTORS," "THE STOCK PURCHASE AGREEMENT AND CHANGE IN CONTROL OF THE COMPANY"
and "REGULATORY AGREEMENTS AND ORDERS."
As of December 31, 1995, while the Bank met the 6.5% Tier I capital
requirement of the FDIC Cease and Desist Order, differences in the method of
calculating capital for purposes of the SBD's regulations resulted in the Bank
attaining
-14-
<PAGE> 18
a Tier I capital level, as calculated by the SBD, of 6.45%, thus falling short
of the 7.0% capital requirement of the SBD Final Order. On a pro forma basis, at
December 31, 1995, the Bank would have required approximately an additional
$1,009,000 in capital in order to meet the 7.0% capital requirement of the SBD
Final Order. However, the SBD has allowed the Bank to attain the 7.0% capital
requirement through the proceeds of this Offering. Unless specified, the Tier I
capital numbers for the Bank presented herein have been calculated in accordance
with the FDIC's regulations and methodology. See "REGULATORY AGREEMENTS AND
ORDERS" and "SUPERVISION AND REGULATION."
As a result of the foregoing, as of the date of this Prospectus, First
Banks owns 65,000,000 shares of Company Common Stock, or 93.29% of the
outstanding shares. Assuming the sale to the Rights Holders and
Dividend-Eligible Stockholders of all of the Underlying Shares and Dividend
Exchange Shares offered hereby, First Banks would control approximately 50.25%
of the outstanding shares of Common Stock of the Company and may acquire up to a
total of 104,000,000 additional shares upon conversion of the principal and
interest amounts subject to the Debentures. Assuming that all of the principal
and interest amounts of the Debentures is converted to Company Common Stock on
October 31, 2000 and December 28, 2000, and assuming the sale of all the shares
offered hereby to the aforementioned purchases and no interim issuances of
Common Stock by the Company, First Banks would control approximately 72.42% of
the then outstanding shares of Common Stock. See "THE STOCK PURCHASE AGREEMENT
AND CHANGE IN CONTROL OF THE COMPANY."
Additionally, as a result of the consummation of the transactions
contemplated by the Stock Purchase Agreement, as of December 31, 1995, the Tier
I leverage capital levels of the Company and the Bank were 2.14% and 6.58%,
respectively. As of that date, the Company and the Bank had risk-based capital
levels of 4.99% and 12.66%, respectively. First Banks has agreed that, upon the
conclusion of the Rights Offering and any Public Offering, First Banks will
purchase, if necessary, as a Standby Purchaser and at the Subscription Price,
such number of shares of Common Stock remaining unsold in the Offering as may be
required to increase the Bank's Tier I capital level to 7.0%. Such issuance of
Common Stock may further dilute the voting power and earnings per share, if any,
of the Company's stockholders, other than First Banks. See "RISK FACTORS --
Potential Dilution of Voting Power and Earnings Per Share." However, no
assurance can be given that the Bank will not experience further operating
losses which will erode the capital levels of the Bank or that the Bank will be
able to maintain such capital levels at any time after December 31, 1995. See
"THE STOCK PURCHASE AGREEMENT AND CHANGE IN CONTROL OF THE COMPANY."
As of December 31, 1995, the Company believes it has achieved
substantial compliance with the requirements of the Company's MOU, the FDIC
Cease and Desist Order and the SBD Final Order, except for compliance with the
7.0% Tier I capital requirement of the SBD Final Order. Further compliance with
the Company's MOU and the Orders is contemplated to occur through this Offering,
including any necessary participation by First Banks. As of December 31, 1995,
the Bank had not complied with the Capital Impairment Orders, subjecting the
Bank Common Stock to assessment. See "REGULATORY AGREEMENTS AND ORDERS."
On December 27, 1995, the stockholders of the Company approved an
amendment to the Company's Certificate of Incorporation authorizing an increase
in the number of authorized shares of Common Stock to 250,000,000. The Company
currently has 69,675,110 shares of Common Stock outstanding.
If all shares of Common Stock offered pursuant to the Rights Offering,
Public Offering and Dividend Exchange Offering (collectively, the "Offering")
are sold, the resulting outstanding Common Stock would be 129,363,985 shares.
-15-
<PAGE> 19
Additionally, if the maximum number of shares are converted pursuant to the
Debentures, the resulting outstanding Common Stock would be 233,363,985 shares.
Stockholders other than First Banks, whether or not exercising their Stockholder
Rights, may experience substantial dilution in the voting power and earnings per
share, if any, of their Common Stock holdings. See "RISK FACTORS - Potential
Dilution of Voting Power and Earnings Per Share" and "THE STOCK PURCHASE
AGREEMENT AND CHANGE IN CONTROL OF THE COMPANY."
THE OFFERING
The Rights Offering
<TABLE>
<S> <C>
General........................................... Each record holder (a "Rights Holder") of Common Stock at the close of
business on October 6, 1995 (the "Rights Record Date") will receive
non-transferable subscription rights (the "Stockholder Rights") to
purchase shares of Common Stock. The Stockholder Rights will entitle
the Rights Holder to purchase from the Company 10.695 shares of Common
Stock (the "Underlying Shares") for each share of Common Stock held on
the Rights Record Date, at a cash price of $0.10 per share (the
"Subscription Price") on the terms and conditions of the Offering. The
number of shares of Common Stock issuable upon exercise of Stockholder
Rights will be rounded up to the nearest whole number. See "THE
OFFERING." The ratio of 10.695 Underlying Shares per share of Common
Stock (the "Rights Ratio") was determined by the Board of Directors
based on the recently consummated Stock Purchase Agreement, the
financial condition of the Company and the Bank, the trading history
and per share book value of the Common Stock and other relevant
information. See "DETERMINATION OF OFFERING PRICE." After
April 12, 1996 (the "Rights Expiration Date"), the Stockholder
Rights will no longer be exercisable and will have no value, unless
terminated earlier or extended by the Company's Board of Directors in
its sole discretion for up to two (2) consecutive periods of up to 30 days
each, or until not later than June 11, 1996.
Basic Subscription Privilege...................... Rights Holders are entitled to purchase, at the Subscription Price,
10.695 Underlying Shares per share of Common Stock held on the Rights
Record Date, subject to reduction by the Company under certain
circumstances (the "Basic Subscription Privilege"). No fractional
shares will be issued in connection with the Rights Offering. See "THE
OFFERING."
Oversubscription Privilege........................ Each Rights Holder who elects to exercise its, his or her Basic
Subscription Privilege in full may also subscribe at the Subscription
Price for additional Underlying Shares (the "Excess Shares") available
after satisfaction of the Basic Subscription Privilege (the
"Oversubscription Privilege"), up to the greater of (a) an additional
one million shares, or $100,000, or (b) an additional 10.695 shares for
each share of Common Stock held on the Rights Record Date. Shares
subscribed for pursuant to the Oversubscription Privilege are subject
to proration and reduction by the Company under certain circumstances.
</TABLE>
-16-
<PAGE> 20
<TABLE>
<S> <C>
There can be no assurance that there will be Excess Shares sufficient
to satisfy all exercises of the Oversubscription Privilege. If an
insufficient number of Excess Shares is available to satisfy fully all
exercises of the Oversubscription Privilege, then the Excess Shares
will be prorated among Rights Holders who exercise their
Oversubscription Privilege based upon the number of shares held on the
Rights Record Date. See "THE OFFERING."
Procedure For Exercising
Stockholder Rights................................ The Basic Subscription Privilege and the Oversubscription Privilege may
be exercised by properly completing the appropriate Subscription Right
Certificate and forwarding it (or following the Guaranteed Delivery
Procedures), with payment of the Subscription Price for each Underlying
Share subscribed for, to the Subscription Agent, which must receive
such Subscription Right Certificate or Notice of Guaranteed Delivery
and payment at or prior to the Rights Expiration Date. If Subscription
Right Certificates are sent by mail, Rights Holders are urged to use
insured, registered mail. See "THE OFFERING - How to Subscribe."
The Public Offering............................... Upon the expiration of the Rights Offering, and provided that
sufficient shares of Common Stock are available, the Company may offer
and sell to the public only in California at the Subscription Price up
to 10,000,000 Underlying Shares not sold pursuant to the Basic or
Oversubscription Privileges. The expiration date of the Public Offering
is April 12, 1996, unless extended in the sole discretion of the
Board of Directors of the Company for up to two (2) consecutive periods of up
to 30 days each, or no later than June 11, 1996. Shares may be subscribed for
in the Public Offering by properly completing the General Subscription
Application and Agreement and forwarding it (or following the Guaranteed
Delivery Procedures), with payment of the Subscription Price for each Underlying
Share subscribed for, to the Subscription Agent, which must receive such General
Subscription Application and Agreement or Notice of Guaranteed Delivery and
payment at or prior to the Public Offering Expiration Date. See "THE OFFERING -
How to Subscribe."
Participation by First Banks...................... First Banks has committed to purchase in the Offering and at the
Subscription Price, upon completion of the Rights Offering and any
Public Offering, if necessary, such number of shares as would be
required to raise the Bank's Tier I capital level to 7.0%, as
calculated by the SBD. First Banks will only purchase such shares as a
"Standby Purchaser" if the proceeds received from the Rights Offering
and any Public Offering are insufficient to raise the Bank's Tier I
capital level to 7.0%. Any such additional purchase by First Banks may
result in substantial further dilution of the voting power and earnings
per share, if any, of the Company's stockholders, other than First
Banks. See "RISK FACTORS - Potential Dilution of Voting Power and
Earnings Per Share." The Offering will remain open for five (5)
business days after the later of the Rights Expiration Date and the
Public Offering Expiration Date to allow First Banks to make any
purchases as "Standby Purchaser."
</TABLE>
-17-
<PAGE> 21
<TABLE>
<S> <C>
The Dividend Exchange Offer
Dividend Rights and Dividend
Exchange Shares .................................. Each person who was a record holder of Common Stock at the close of
business on June 15, 1992 or September 14, 1992 (the "Dividend Record
Dates") will receive a transferable dividend subscription right (the
"Dividend Right") exchangeable for shares of Common Stock valued at
$0.10 per share (the "Dividend Exchange Shares"). Each Dividend Right
will entitle the holder (the "Dividend Rights Holder") to receive one
share of Common Stock for each $0.10 of dividend and accrued interest
amount exchanged (the "Dividend Right Exchange Ratio"). In lieu of
fractional shares, the number of shares issued on exercise of Dividend
Rights will be rounded up to the nearest whole number. The Dividend
Exchange Shares are being offered in exchange for two dividends,
declared by the Board of Directors during 1992, each in the amount of
$0.08 per share, which remain unpaid as of the date of this Prospectus,
together with accrued interest thereon, (the "1992 Dividends"), which,
on December 31, 1995, aggregated $968,887.44, or $0.2073 per share.
Dividend-Eligible Stockholders may elect to receive a portion only of
their Dividend Rights in the form of Dividend Exchange Shares. See "THE
OFFERING - General - The Dividend Exchange Offer" and "FEDERAL INCOME
TAX CONSEQUENCES."
Procedure For Exercising Dividend
Rights............................................ Dividend Rights may be exercised by properly completing the Exchange
Offer Certificate and forwarding it (or following the Guaranteed
Delivery Procedures) to the Subscription Agent, which must receive such
Exchange Offer Certificate or Notice of Guaranteed Delivery at or prior
to the Dividend Rights Expiration Date. If Exchange Offer Certificates
are sent by mail, Dividend Rights Holders are urged to use insured,
registered mail. See "THE OFFERING - How to Subscribe."
General
Subscription Price................................ $0.10 per share for each Underlying Share.
Common Stock Outstanding prior to
the Offering...................................... 69,675,110 shares at December 31, 1995.
</TABLE>
-18-
<PAGE> 22
<TABLE>
<S> <C>
Preferred Stock Outstanding prior
to the Offering................................... None.
Common Stock to be Outstanding
upon Completion of the Offering................... 129,363.985 shares.
Common Stock to be Outstanding
upon Maximum Conversion of
Debentures into Common Stock ..................... 233,363,985 shares, assuming no interim issuances of Common Stock. See
"THE STOCK PURCHASE AGREEMENT AND CHANGE IN CONTROL OF THE COMPANY."
Expiration Dates.................................. The Rights Expiration Date, the Dividend Rights Expiration Date and the
Public Offering Expiration Date (the "Offering Expiration Date") is
April 11, 1996, unless terminated or extended by the Company's Board of
Directors, in its sole discretion for up to two (2) consecutive periods of
up to 30 days each, or not later than June 11, 1996. See "THE OFFERING."
Information Agent................................. Carpenter & Company
2600 Michelson Drive, Suite 300
Irvine, CA 92715
Attention: Edward Carpenter or John Flemming
Tel: (800) 528-8580
Transfer Agent and Subscription
Agent............................................. The First National Bank of Boston
435 Tasso, Suite 250
Palo Alto, CA 94301
Tel: (415) 853-0404
See "THE OFFERING -- Subscription Agent."
</TABLE>
USE OF PROCEEDS
The Company intends to use the net proceeds from the Offering to
increase its regulatory capital levels and the regulatory capital levels of the
Bank. Such proceeds are expected to constitute Tier I capital for Bank
regulatory purposes. The Bank will use the proceeds contributed to it from the
Company for general corporate purposes. See "USE OF PROCEEDS." No assurance can
be given, however, that the capital of the Bank will not be eroded thereafter if
the Bank
-19-
<PAGE> 23
continues to experience operating losses. See "RISK FACTORS." The Company
intends to retain the remaining net proceeds of the Offering, if any, for
general corporate purposes, including payment of operating expenses. The Company
estimates that the expenses of the Offering will total $444,000. See "USE OF
PROCEEDS."
STOCK PURCHASE AGREEMENT; CHANGE IN CONTROL; POTENTIAL DILUTION OF VOTING POWER
AND EARNINGS PER SHARE
On August 7, 1995, the Company entered into the Stock Purchase
Agreement pursuant to which First Banks has purchased from the Company at the
Subscription Price 65,000,000 shares of Common Stock and has loaned to the
Company an additional $1.5 million and $5.0 million in exchange, respectively,
for issuance of two the Debentures. Certain provisions of the Stock Purchase
Agreement were amended on October 31, 1995 by the Additional Investment
Agreement and on December 28, 1995 by the Standby Agreement (collectively, the
"Stock Purchase Agreement").
On June 30, 1995, James F. Dierberg provided emergency interim
financing for the Bank pursuant to the Standby Stock Purchase Agreement through
the purchase of $1.5 million in shares of Bank Preferred Stock. On August 22,
1995, First Banks received approval for a change in control of the Company and
the Bank from the Federal Reserve Bank of St. Louis and the SBD. On August 22,
1995, Dierberg sold the shares of Bank Preferred Stock to First Banks.
Subsequently, First Banks also purchased 116,666,666 shares, or $3.5 million, of
Bank Common Stock on August 23, 1995. The terms of the Stock Purchase Agreement
and the Debentures are fully described at "THE STOCK PURCHASE AGREEMENT AND
CHANGE IN CONTROL OF THE COMPANY."
The stockholders of the Company approved the terms of the Stock
Purchase Agreement at the 1995 Special Meeting. Pursuant to the Stock Purchase
Agreement, on December 28, 1995, First Banks exchanged the shares of Bank
Preferred Stock originally acquired by Dierberg and the $3.5 million in shares
of Bank Common Stock acquired by First Banks pursuant to the Stock Purchase
Agreement for 50,000,000 shares of Company Common Stock.
In addition, First Banks has loaned to the Company a total of
$6,500,000 in exchange for the issuance of the Debentures. The Company may issue
to First Banks a total of 65,000,000 shares of Common Stock in respect of the
principal amount of the Debentures and up to an additional 39,000,000 shares of
Common Stock in respect of any unpaid and accrued interest amount. The
Debentures are convertible at any time at the option of First Banks into a
maximum of 104,000,000 shares if the total principal and interest amounts of the
Debentures are converted by First Banks into Common Stock. Finally, on December
28, 1995, First Banks purchased an additional $1,500,000 of Company Common Stock
at the Subscription Price, or 15,000,000 shares, which enabled the Bank to meet
the 6.5% Tier I capital requirement of the FDIC Cease and Desist Order as of
December 31, 1995. For a complete description of the terms of the Stock Purchase
Agreement, see "THE STOCK PURCHASE AGREEMENT AND CHANGE IN CONTROL OF THE
COMPANY."
The foregoing issuances of Common Stock and the Debentures to First
Banks pursuant to the Stock Purchase Agreement have significantly diluted the
percentage of ownership of the Company held by holders of the Company's Common
Stock, other than First Banks. However, while consummation of the Stock Purchase
Agreement resulted in such dilution, one purpose of this Offering is to mitigate
such dilution by providing the stockholders, other than First Banks, with the
opportunity to subscribe for additional shares of Common Stock. Notwithstanding
this Offering, however, the voting power the Company's stockholders will be
subsequently materially diluted through the issuance of between 65,000,000 and
-20-
<PAGE> 24
104,000,000 additional shares of Common Stock upon conversion of the principal
and/or interest amounts of the Debentures, respectively, and through the
possible issuance of additional shares to First Banks acting as "Standby
Purchaser." See "RISK FACTORS - Potential Dilution of Voting Power and Earnings
Per Share" and "THE STOCK PURCHASE AGREEMENT AND CHANGE IN CONTROL OF THE
COMPANY."
In the event that the Offering is successful and the stockholders of
the Company and the public subscribe for all of the 50,000,000 shares offered
hereby (such that First Banks is not required to act as "Standby Purchaser"),
and assuming that all of the 9,688,875 shares offered pursuant to Dividend
Exchange Rights are issued, then, (1) the stockholders of the Company (other
than First Banks) will own 33.12% of the outstanding Common Stock of the
Company, assuming that only the principal amount of the Debentures is converted
into Common Stock or (2) the stockholders of the Company (other than First
Banks) will own 27.58% of the outstanding Common Stock, assuming that the entire
principal and interest amount of the Debentures is converted into Common Stock.
Excluding the effect of conversion of the Debentures, successful completion of
the Offering would immediately reduce First Banks' proportionate ownership from
93.29% to 50.25% of the outstanding shares of the Common Stock.
In addition, First Banks' conversion of any portion of the principal or
interest amounts of the Debentures could have a dilutive effect on the book
value of the Common Stock, if the book value per share rises above $0.10, as
well as a significant dilutive effect on the stockholders' equity of
stockholders other than First Banks. Similarly, the aforementioned proportionate
share holdings of the Company's stockholders would be adversely affected by any
purchase of shares by First Banks as Standby Purchaser in the Offering. Under
applicable Delaware and Missouri laws, ownership by First Banks of more than 90%
of the Common Stock would permit a so-called "short-form" merger between First
Banks and the Company such that the Company could be merged into First Banks
without the approval of the Company's stockholders. However, in any such
short-form merger, the Company's stockholders would have appraisal rights under
Delaware law. First Banks has informed the Company that it has not considered
whether or not to effect a short-form merger with the Company if First Banks
holds in excess of 90% of the Common Stock after the Offering.
DETERMINATION OF OFFERING PRICE
The right of shareholders to purchase shares of Common Stock at the
$0.10 per share Subscription Price in the Offering was determined by the Board
of Directors of the Company based on information which the Board of Directors
deemed to be relevant, including the price per share at which the Common Stock
was sold to First Banks pursuant to the Stock Purchase Agreement and an opinion
from the Company's financial advisor as to the fairness to stockholders of the
terms of the Stock Purchase Agreement, including the $0.10 per share
Subscription Price in this Offering. See "DETERMINATION OF OFFERING PRICE" and
"THE OFFERING -- Financial Advisor." Pursuant to the Stock Purchase Agreement,
First Banks purchased shares of Common Stock at $0.10 per share, and the
principal and accrued but unpaid interest amounts of the Debentures are
convertible into Common Stock at a rate of $0.10 per share. See "THE STOCK
PURCHASE AGREEMENT AND CHANGE IN CONTROL OF THE COMPANY." On February 14, 1996,
the per share bid price of the Common Stock was $0.344 and the per share ask
price was $0.375. See "MARKET INFORMATION." No assurance can be given that the
trading price per share of the Common Stock will remain above the Subscription
Price at any time during or following completion of this Offering.
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A
SIGNIFICANT DEGREE OF INVESTMENT RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY
CONSIDER, IN ADDITION TO THE MATTERS SET FORTH ELSEWHERE IN THIS PROSPECTUS, THE
FOLLOWING FACTORS RELATING TO THE BUSINESS OF THE COMPANY AND THE BANK AND TO
THE OFFERING.
RECENT LOSSES AND RISK OF CONTINUED LOSSES
The Company reported net losses of $(3,518,000), $(7,311,000) and
$(18,190,000) for the years ended December 31, 1992, 1993 and 1994,
respectively. The Company also reported net losses of $(6,301,000) for the nine
month period ended September 30, 1995. The per share net losses for 1994 and the
nine month period ended September 30, 1995 were $(3.89) and $(1.35) per share,
respectively. See "SELECTED FINANCIAL AND OTHER DATA" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." The
Company also expects to report a loss for the fourth quarter of 1995.
The Company's recent net losses were associated with the emphasis which
the Company 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
-21-
<PAGE> 25
sector. These losses resulted primarily from nonperforming real estate
construction and development loans and the Company's efforts during 1995 to
reduce the level of its nonperforming assets. At September 30, 1995,
nonperforming assets totaled $7,401,000, a reduction of 57.43% from $17,387,000
at December 31, 1994. This reduction was due to substantial write-offs and
write-downs of loans and other assets during the second quarter of 1995. These
nonperforming assets consisted primarily of $4,738,000 in nonaccruing loans and
$2,054,000 in OREO. The OREO expense was also a significant contributor to the
Company's losses and includes costs incurred in holding such assets, valuation
adjustments and net losses or gains on disposition of such assets. Such expenses
were $6,035,000 for the year ended December 31, 1994 and $2,410,000 for the nine
month period ended September 30, 1995.
The ability of the Company to reverse the trend of its net losses is
dependent on the quality and level of its earning assets and the reduction in
the level of its nonperforming assets, the interest rate environment and the
adequacy of its allowance for loan losses. The real estate market and the
overall economy in the Company's primary service area and Northern California is
likely to continue to have a significant effect on the quality and level of the
Company's assets in the future. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "BUSINESS - Economic Trends."
Pursuant to this Offering, management is attempting to recapitalize the
Company and the Bank in order to obtain greater assurance that the Company and
the Bank will be able to meet, on an ongoing basis, their minimum capital
requirements and the conditions of Orders to which the Company and the Bank are
subject. The intention of the Offering is to raise up to $4,556,000 in net
proceeds, assuming no Dividend Rights are exercised. Even if the Company
receives net proceeds of $4,556,000 from the Offering, however, there can be no
assurance that the Bank will not incur additional losses and make additional
provisions to its allowance for possible loan losses such that the Company and
the Bank could continue to fail to meet applicable regulatory capital
requirements, which might lead regulatory authorities to take additional formal
administrative actions against the Company and the Bank in addition to those
already imposed by the Orders and the MOU. See "REGULATORY AGREEMENTS AND
ORDERS."
LIMITATION ON PAYMENT OF DIVIDENDS
The Company's ability to pay cash dividends is subject to various
restrictions, including the provisions of the MOU, which prohibit the Company
from paying any cash dividend without the prior written approval of the FRB. In
addition, the Debentures contain provisions prohibiting the Company from paying
any dividend or making any other distribution to stockholders (other than as
contemplated by the Stock Purchase Agreement) so long as the Debentures are
outstanding. Furthermore, the ability of the Company to pay a cash dividend
depends on the Bank's ability to pay a cash dividend to the Company. Currently,
the Company does not have sufficient cash to pay dividends and the Company does
not anticipate that it will receive sufficient cash to pay any dividends as a
result of this Offering. The MOU prohibits the Company from taking a cash
dividend from the Bank without providing prior written notice to the FRB.
Furthermore, any cash raised in this Offering and retained by the Company may be
used, in addition to other general corporate purposes, to pay corporate expenses
and, at the sole discretion of the Board of Directors, subject to receipt of
regulatory approval, outstanding interest on the Company's Debentures prior to
the payment of any dividends. Interest on the Debentures, if paid in cash, would
reach $780,000 per year during the five year term of the Debentures. See also
"Potential Dilution of Voting Power and Earnings Per Share," herein. There are
statutory and other regulatory restrictions, including the Orders, on the Bank's
and the Company's respective abilities to pay cash dividends without the prior
written approval of the FRB, FDIC and SBD. The Company does not anticipate
receiving approval to pay a cash dividend in the foreseeable future. See
"REGULATORY AGREEMENTS AND ORDERS" for a discussion of the restriction on the
payment of dividends and Note 17 of the Notes to Consolidated Financial
Statements for the year ended December 31, 1994.
-22-
<PAGE> 26
On December 31, 1991, the Board of Directors of the Company declared a
$0.32 per share cash dividend payable in four installments of $0.08 per share to
stockholders of record on January 10, 1992, March 16, 1992, June 15, 1992 and
September 14, 1992. The Company paid the first two installments and, on July 9,
1992, the Company suspended payment of the third and fourth installments which
totaled $.16 per share based upon the Common Stock then outstanding. The Company
has reserved 9,688,875 shares of Common Stock to be offered to stockholders of
record as of the Dividend Record Dates in exchange for the declared and unpaid
1992 Dividends. The Company's obligation to pay the 1992 Dividends in cash to
Dividend-Eligible Stockholders will be extinguished to the extent that such
Dividend-Eligible Stockholders exercise Dividend Rights. Should the
Dividend-Eligible Stockholders fail to exercise Dividend Rights, then, based on
all of the above, it is not likely that in the foreseeable future the Company
would have sufficient funds or would receive the required regulatory approvals
to pay the 1992 Dividends in cash. For further information with respect to the
terms of the Dividend Exchange Offer, see "THE OFFERING - General - The Dividend
Exchange Offer."
POTENTIAL DILUTION OF VOTING POWER AND EARNINGS PER SHARE
Rights Holders, whether or not they exercise their Basic Subscription
Privilege in full, may suffer substantial dilution in their voting rights and
their proportional interest in any future net earnings of the Company to the
extent that the Debentures are converted into shares of Common Stock. Similarly,
Rights Holders may suffer further substantial dilution in their voting rights
and proportional interest in any future net earnings of the Company to the
extent that Dividend-Eligible Stockholders accept the Dividend Exchange Offer,
and/or to the extent that First Banks acts as "Standby Purchaser" in the
Offering. See "THE OFFERING."
As is described further at "THE STOCK PURCHASE AGREEMENT AND CHANGE IN
CONTROL OF THE COMPANY - Terms of the Debentures and Future Dilution of Voting
Power and Earnings Per Share," the principal amounts of the Debentures are
immediately mandatorily convertible at the option of First Banks into shares of
Common Stock on the basis of $0.10 per share until maturity. Although the
Company, in its sole discretion, may pay the interest on the Debentures in cash,
to the extent that the Company has cash sufficient to make such payments and
assuming appropriate regulatory approvals are obtained, the Company currently
does not have sufficient cash to make such payments. Accordingly, Management
believes it is unlikely that approval for such cash payments would be received
from the FRB in the foreseeable future. In any event, any conversion of the
principal or interest amounts of the Debentures to Common Stock at $0.10 per
share, if First Banks so elects, will further dilute stockholders' (other than
First Banks) per share equity and future earnings per share, if any. In
addition, due to the uncertainty in predicting future earnings, if any, the
substantial debt service requirements in connection with the Debentures and the
importance of maintaining the capital position of the Bank, the Company is
unable to predict when and if it will have sufficient cash available to make any
cash interest payment on the Debentures. No assurance can be given that the FRB
will permit the Company to make any cash interest payments on the Debentures at
any time.
Any accrued and unpaid interest amount on the Debentures is convertible
at any time during the term of the Debentures into Common Stock on the basis of
$0.10 per share. Accordingly, assuming that all of the shares offered pursuant
to Stockholder Rights and Dividend Exchange Rights are sold and issued to Rights
Holders and Dividend-Eligible Stockholders, and assuming no additional issuances
of shares by the Company after December 28, 1995, the Company would have
outstanding 129,363,985 shares of Common Stock upon completion of the Offering,
of which 65,000,000, or 50.25%, would be held by First Banks. In addition, the
Company may issue to First Banks up to a total of 104,000,000 additional
-23-
<PAGE> 27
shares of Common Stock in respect of principal and interest payable under the
Debentures. In that event, there would be outstanding 233,363,985 shares of
Common Stock, of which 169,000,000 shares, or 72.42%, would be held by First
Banks. Accordingly, stockholders of the Company (other than First Banks) may
experience substantial additional dilution as a result of the issuance of shares
of Common Stock pursuant to the Debentures.
Because the success of this Offering and the number of shares which
will be purchased by Rights Holders and the public are unknown, the Company is
unable to predict whether First Banks will be required by the Stock Purchase
Agreement to act as Standby Purchaser and, if so, the number of shares of Common
Stock First Banks will be required to purchase in order to raise the Bank's Tier
I capital level to 7.0%. If First Banks is called upon to act as Standby
Purchaser in the Offering, First Banks' proportionate ownership of Common Stock
will be increased, resulting in potential substantial additional dilution of
voting power and the earnings per share, if any, of Company stockholders, other
than First Banks. On a pro forma basis, as of December 31, 1995, the Company
estimates that a total of $1,009,000 would be required to be raised in order to
raise the Bank's Tier I capital level to 7.0% and thereby obviate the need for
any participation by First Banks in the Offering as Standby Purchaser. However,
no assurance can be given that the Bank will not suffer additional losses which
would increase the amount of proceeds required for the Bank to reach the 7.0%
Tier I capital level or that the Bank will be able to maintain such capital
level at any time thereafter.
OTHER REAL ESTATE OWNED AND NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The credit quality of the Bank's loan portfolio deteriorated
significantly during 1992, 1993 and 1994, primarily as a result of the recession
in California and particularly the downturn in the market for real estate which
adversely affected a significant segment of the Bank's customers. However,
modest improvement in the credit quality of the Bank's loan portfolio occurred
during the nine month period ended September 30, 1995. The Bank's nonperforming
assets, which include loans 90 days or more past due and still accruing,
nonaccrual loans, restructured loans and the real estate included within the
OREO classification totaled $7,401,000, or 4.28% of the Bank's total assets at
September 30, 1995, a reduction of 57.43% from December 31, 1994. At September
30, 1995, the Bank had three restructured loans, as defined in Statement of
Financial Accounting Standards No. 15, with an outstanding balance of $609,000.
The following table summarizes the Bank's nonperforming assets at the
dates indicated.
<TABLE>
<CAPTION>
September 30, December 31,
------------- --------------------------------------------------------
(Dollar amounts in thousands) 1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Total loans outstanding $82,089 $130,415 $194,921 $235,646 $296,472 $304,151
======= ======== ======== ======== ======== ========
Accrual loans past due 90 days
or more $ -- $ 22 $ 50 $ 300 $ 22,284 $ 1,875
Nonaccrual loans 4,738 11,433 21,100 26,605 7,822 2,393
Restructured loans 609 710 1,000 1,000 0 0
------- -------- -------- -------- -------- --------
Nonperforming loans 5,347 12,165 22,150 27,905 30,106 4,268
Other real estate 2,054 5,222 13,171 17,994 6,560 2,268
-------- -------- -------- -------- -------- --------
Total nonperforming assets $ 7,401 $ 17,387 $ 35,321 $ 45,899 $ 36,666 $ 6,536
======== ======== ======== ======== ======== ========
Loans past due 30 to 89 days $ 1,133 $ 4,514 $ 536 $ 4,942 $ 10,463 $ 1,709
======== ======== ======== ======== ======== ========
</TABLE>
-24-
<PAGE> 28
<TABLE>
<CAPTION>
September 30, December 31,
------------- -----------------------------------------------------
(Dollar amounts in thousands) 1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratios:
Nonperforming loans to total
loans outstanding 6.51% 9.33% 11.36% 11.84% 10.15% 1.40%
Allowance for loan losses to total
nonperforming loans 90.48% 61.13% 33.12% 19.65% 16.62% 71.46%
Nonperforming assets to loans
and other real estate 8.80% 12.82% 16.97% 18.10% 12.10% 2.13%
</TABLE>
Although economic indicators during 1995 began to appear more favorable
than during 1994, management cannot foresee when the current conditions
adversely affecting the regional real estate market will end. Lengthy
continuation or worsening of these conditions could increase the amount of the
Bank's nonperforming assets and, in addition, could have an adverse effect on
the Bank's efforts to collect its nonperforming loans or otherwise liquidate its
nonperforming assets on terms favorable to the Bank. The Bank's current policy
is not to make any speculative real estate loans, such as construction loans in
certain categories. The Bank's strategy to address the problems created by its
asset quality includes the reduction of real estate construction loans
outstanding as well as the overall reduction of loans which are adversely
classified. However, there can be no assurance that the Bank will not experience
additional increases in the amount of its nonperforming assets or experience
significant additional losses in attempting to collect the nonperforming loans
or otherwise to liquidate the nonperforming assets that are currently reflected
on the Bank's balance sheet. Moreover, the Bank has been incurring substantial
asset-carrying expenses in connection with such nonperforming assets, such as
expenses of maintaining and operating OREO properties, and the Bank will
continue to incur asset-carrying expenses in connection with such loans and
assets until its nonperforming loans and assets are collected, liquidated or
otherwise resolved. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Asset Quality, Provision for Loan Losses
and Loan Loss Experience."
CREDIT QUALITY WEAKNESSES
Federal regulations require banks to review their assets on a regular
basis and to classify them if any asset quality 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
evaluates 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, OREO and performing
loans that exhibit credit quality weaknesses, including those classified by the
Bank's regulators. The table below outlines the Bank's classified assets as of
September 30, 1995:
-25-
<PAGE> 29
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
---------------------------------------------
<S> <C>
Performing loans(1) $21,029
Nonperforming loans 5,347
Other real estate owned 2,054
-------
Total classified assets $28,430
=======
</TABLE>
- ---------------
(1) Includes substandard loans totalling $17,950,000, and loans on the
Bank's watch list totalling $3,072,000.
Management of the Bank reviews classified assets to determine the
inherent risk of loss, including the fact most are, in the opinion of
management, adequately collateralized. This risk is then taken into
consideration in evaluating the allowance for possible loan losses and the need
for an increased allowance for possible loan losses. Management has adopted a
conservative approach, reserving for 20% of all substandard loans.
The Bank has been required by the Orders 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 OREO. 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. However, because
approximately 25% of these classified asset reductions have occurred through the
write-off or write-down of loans, and because the amount of classified assets
represents 177.35% of the Bank's Tier I capital at December 31, 1995, those
asset quality weaknesses could adversely effect the Bank's earnings and cause
the Bank to fail to meet regulatory capital requirements in the future because
of the significant exposure which such credit quality weaknesses present.
PROVISION FOR POSSIBLE LOAN LOSSES AND RISK OF ADDITIONAL PROVISIONS
During 1994, 1993 and 1992, the Bank provided $9,809,000, $8,100,000
and $7,260,000, respectively, to its allowance for possible loan losses. At
September 30, 1995, the allowance for possible loan losses was $4,838,000, or
5.89% of total loans and 90.48% of nonperforming loans. During the third quarter
of 1995, the Bank provided $100,000 to the allowance for possible loan losses.
The provisions made during 1992, 1993, 1994 and 1995 resulted from a decision by
the Board of Directors of the Bank, in conjunction with the Bank's regulatory
examinations, to provide for specific charged-off loans, as well as to recognize
the decline in the value of the real estate securing many of the Bank's loans.
In addition, these provisions were based upon the levels of nonperforming
assets, costs incurred in maintaining and administering such nonperforming
assets and were made, in part, in response to the Orders issued by the FDIC and
the SBD. 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, including recommendations by the Company's regulatory
authorities. There can be no assurance that the Company will not continue to
make substantial additional provisions for loan losses in the future, which
provisions could adversely impact the Company's results of operations. In
addition, no assurance can be given that the Bank will not sustain loan losses
in excess of present or future levels of the allowance for possible loan losses.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Provision for Loan Losses."
As of September 30, 1995, the level of the Bank's nonperforming assets
was $7,401,000 or 4.28% of total assets and the level of its adversely
classified assets (see "Credit Quality Weaknesses," herein) was $28,430,000, or
33.8% of total assets. The Bank's nonperforming and classified assets are
subject to intense scrutiny by both the Bank's and Company's regulatory
authorities. There can be no assurance that such regulatory authorities will not
require the allowance to be increased as a result of future examinations, or
require the Bank to write-down or write-off a substantial amount of these loans.
In its efforts to reduce its portfolio of classified loans to more acceptable
levels, the Bank could incur additional substantial losses. Also, no assurance
can be given that the Bank will be able to sustain the incurrence of any such
additional write-downs or write-offs without suffering further impairments to
the Bank's capital thereby subjecting the Bank to further administrative action
as more fully described herein at "REGULATORY AGREEMENTS AND ORDERS."
-26-
<PAGE> 30
CONSTRUCTION AND REAL ESTATE SECURED LENDING
As of September 30, 1995, the Bank's real estate construction loans,
which include owner builder loans, totaled $7,398,000, or 9.01% of total loans
outstanding. The Bank's real estate secured loans totaled $33,982,000, or 41.40%
of total loans outstanding. Total construction and real estate secured loans of
$41,380,000 included $2,935,000 in nonaccrual loans, or 3.58% of total loans.
The risks of making construction loans include the possibility of failure by
contractors to complete, or to complete on a timely basis, construction of such
properties, substantial cost overruns, which exceed original estimates and
financing, market deterioration pending construction and the lack of permanent
take-out financing, among other things. Loans secured by such properties may
also involve additional risk because such properties have no operating history
and because loan funds are advanced upon the security of the project under
construction, which is of uncertain value prior to completion of construction,
and the operating cash flow to be generated by the project. There is no
assurance that such properties will be sold or leased so as to generate the cash
flow anticipated by the borrower. Such considerations have affected certain
borrowers' ability to repay their obligations to the Bank and the value of the
Bank's security interest in the past and may continue to have an adverse impact
in the future. See "BUSINESS - Lending Activities."
In considering whether to make a loan on or secured by an unimproved
property, the Bank utilizes an appraisal with respect to such property. However,
because an appraisal is only an estimate of the value of the property at the
time the appraisal is made, there can be no assurance that upon sale of the
property the borrower will realize an amount equal to the value determined by
such appraisal, which could adversely affect the ability of the borrower to
repay its obligation to the Bank. Further, the ability of the borrower to repay
a land loan may be adversely affected by various factors, including the
borrower's inability to obtain governmental approval for subdividing the
property and changes in the market needs for the intended use of the property.
CONCENTRATION OF REAL ESTATE IN THE SACRAMENTO VALLEY AREA
Historically, the Bank's lending operations have been concentrated
primarily in the greater Sacramento Valley area and, accordingly, real estate
securing such lending activity has been principally located in the Sacramento
Valley area. At September 30, 1995, commercial and industrial loans secured by
first deeds of trust and subordinate deeds of trust represented 12.17% of the
Bank's total loans. At the time these commercial and industrial loans were made,
repayment was expected to be made from the borrowers' cash flow and other assets
and not from the sale of underlying real estate collateral. However, the recent
recession materially and adversely affected the ability of many of these
borrowers to repay their loans out of cash flow. Consequently, the real estate
collateral securing these commercial and industrial loans as a source of
repayment has assumed greater importance.
In addition, a significant number of loans have been made to real
estate investors and developers and others with significant investments in real
estate. These loans represented 20.26% of the Bank's loan portfolio at September
30, 1995. The ability of such borrowers to repay their loans is dependent upon
conditions in the real estate market in the Sacramento Valley area, including
general or local economic conditions and neighborhood characteristics, real
estate tax rates, the cost of operating the properties, governmental regulations
and fiscal policies, acts of nature including earthquakes and floods (which may
result in uninsured losses), and other factors which are beyond the control of
such borrowers. Such conditions have had a significant adverse impact on certain
borrowers' ability to repay their obligations to the Bank and the value of the
Bank's collateral and may continue to have an adverse impact in the future. A
larger bank typically would have a more
-27-
<PAGE> 31
diversified type and geographical location of collateral, which could limit the
potential adverse impact of such conditions. See "BUSINESS."
It has been announced that McClellan Air Force Base in Sacramento was
placed on the list of the bases which are being closed by the federal
government. It is estimated that during 1994 McClellan Air Force Base employed
approximately 11,000 people residing in the greater Sacramento area.
The median price of home resales in the 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 throughout
California and defense spending cut-backs have lowered consumer confidence,
deterred business expansion and lowered real estate values. See "BUSINESS -
Economic Trends."
CONCENTRATION OF LARGE BORROWERS
As of December 31, 1995, the Company's loan portfolio was concentrated
in twenty (20) loans, one (1) of which exceeded the Bank's secured and unsecured
lending limit at that date. Commitments to these borrowers represent $31.2
million or 41% of the Bank's total loan portfolio at December 31, 1995.
Outstanding balances to these borrowers at December 31, 1995 were $23.6 million
or 32% of the Bank's loan portfolio. Four (4) of these loans, representing $7.4
million or 10% of the Bank's total loan portfolio, have been classified by the
Bank as "Substandard." One (1) loan in the amount of $754,000 is on nonaccrual
status.
At December 31, 1995 the Bank's unsecured lending limit was
approximately $2.5 million and its combined secured and unsecured lending limit
was approximately $4.1 million. The Bank currently has one (1) loan,
representing $3.8 million, which exceeds its unsecured lending limit and one (1)
loan, representing $5.5 million that exceeds 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.
FAILURE TO MEET CAPITAL ADEQUACY REQUIREMENTS AND REGULATORY ORDERS
Pursuant to federal law, the Company is subject to the capital
guidelines of the FRB and the Bank is subject to the FDIC's regulations
governing capital adequacy for banks that are not members ("nonmember banks") of
the Federal Reserve System. The regulatory capital requirements of the FRB and
FDIC are discussed in detail at "SUPERVISION AND REGULATION." Due to net losses
incurred by the Company for the year ended December 31, 1994, the Company and
the Bank failed to meet the capital adequacy requirements applicable to bank
holding companies and to nonmember banks and continued to fail to meet such
capital adequacy requirements through September 30, 1995. At September 30, 1995,
the
- --------------
(1) "Economic Profile Greater Sacramento Area," Real Estate and Land Use
Institute, California State University, Sacramento, January 1995.
-28-
<PAGE> 32
Company's and the Bank's Tier I leverage capital ratios were (0.83)% and 2.41%,
respectively. However, following the purchase by First Banks of the First
Debenture on October 31, 1995, First Banks' purchase of the Second Debenture on
December 28, 1995 and First Banks' purchase of $1,500,000 of Company Common
Stock on December 28, 1995, the Bank's Tier I capital levels increased to 6.58%
at December 31, 1995. As a result, the Bank and the Company would have been
classified as "adequately capitalized" institutions as of December 31, 1995
under the FDIC's PCA regulations. However, as of December 31, 1995, while the
Bank met the 6.5% Tier I capital requirement of the FDIC Cease and Desist Order,
differences in the method of calculating capital for purposes of the SBD's
regulations resulted in the Bank attaining a Tier I capital level of 6.45%, thus
falling short of the 7.0% capital requirement of the SBD Final Order. On a pro
forma basis, at December 31, 1995, the Bank would have required approximately an
additional $1,009,000 in capital to meet the 7.0% Tier I capital requirement of
the SBD Final Order. However, the SBD has allowed the Bank to attain the 7.0%
capital requirement through the proceeds of this Offering. Unless specified, the
Tier I capital numbers for the Bank presented herein have been calculated in
accordance with the FDIC's regulations and methodology. See "SUPERVISION AND
REGULATION" and "REGULATORY AGREEMENTS AND ORDERS."
The Company and the Bank are deemed to be troubled institutions for all
regulatory purposes and are ineligible to be considered "well capitalized" under
the FDIC's PCA regulations. Accordingly, the Company and the Bank are subject to
significant operating restrictions, including the payment of dividends. See
"RISK FACTORS - Limitation on Payment of Dividends" and "SUPERVISION AND
REGULATION - Federal Deposit Insurance Corporation Improvement Act of 1991." The
Orders, agreements and restrictions outlined below are discussed in further
detail at "REGULATORY AGREEMENTS AND ORDERS." In addition, no assurance can be
given that the Company will meet or continue to be able to meet its capital
compliance objectives, subjecting the Company and the Bank to continuing
operating restrictions.
MEMORANDUM OF UNDERSTANDING
As a result of the Company's and the Bank's failure to meet its minimum
capital requirements, on October 17, 1994, the Company entered into the MOU with
the FRB, the primary purposes of which are to require the capital restoration of
the Company and the hiring of executive management for the Company and the Bank
and to establish adequate internal oversight procedures. For a more complete
description of the terms of the MOU and the Company's compliance therewith, see
"REGULATORY AGREEMENTS AND ORDERS."
CEASE AND DESIST ORDERS
As a result of an examination of the Bank by the FDIC and SBD as of
March 6, 1992, the Bank consented to enter into the FDIC Cease and Desist Order
with the FDIC dated August 11, 1992, which was later amended on July 27, 1993.
Similarly, the Bank consented on September 1, 1992 to the entrance of the SBD
Final Order, which was amended on July 6, 1993 and was further amended on March
30, 1995. Under the terms of the Orders, the Bank agreed, among other things, to
retain qualified management, to increase tangible shareholders' equity (Tier I
capital) to 6.5% or more of the Bank's tangible assets by June 30, 1995 and,
under the SBD Final Order, to 7.0% or more of tangible assets by December 31,
1995, to charge-off certain classified assets and to establish an adequate
internal oversight function. On August 9, 1995, the SBD agreed to an extension
to October 31, 1995 of the deadline to increase the Bank's Tier I capital ratio
to 6.5%. The SBD subsequently lowered the Bank's Tier I capital requirement to
3.0% at October 31, 1995, provided that the Bank obtained a $1.5 million capital
infusion from First Banks, which was effected through the First Debenture. As of
December 31, 1995, the Bank met the 6.5% Tier I capital requirement of the FDIC
Cease and Desist Order but, as described above, not the 7.0% Tier I capital
requirement of the SBD Final Order. However, the Bank received oral advice from
the SBD that the deadline for meeting the 7.0% Tier I capital requirements of
the SBD Final Order would be extended on the basis of the structure of this
Offering, including any purchases of Common Stock by First Banks acting as
"Standby Purchaser" in the Offering. See "THE OFFERING." Except where specified
herein, Tier I capital figures used throughout this Prospectus relate to Tier I
capital as calculated pursuant to the FDIC regulations. For a more complete
description of the terms of the Orders, see "REGULATORY AGREEMENTS AND ORDERS."
-29-
<PAGE> 33
The Bank continues to be designated a problem bank and is considered
"troubled" for all regulatory purposes.
PROMPT CORRECTIVE ACTION NOTIFICATION
On July 7, 1994, the Bank was notified by the FDIC that it was
considered "undercapitalized" under the PCA regulations of the FDIC imposed by
FDICIA. Further, on March 9, 1995, the Bank was notified by the FDIC that its
capital ratios had deteriorated such that the Bank was considered "significantly
undercapitalized" under the PCA regulations and, on August 4, 1995, as a result
of the Bank's Tier I capital ratio falling below 2% as of June 30, 1995, the
Bank was notified that it was considered "critically undercapitalized" under the
PCA regulations (collectively, the "PCA Notifications"). However, as of December
31, 1995 and as a result of all of First Banks' infusions of capital to the
Company and the Bank, including the issuance of the Debentures, the Company's
and the Bank's capital levels would meet the standards to be classified as
"adequately capitalized" under the PCA regulations. For a description of the
operating restrictions imposed by the PCA regulations, see "SUPERVISION AND
REGULATION."
In response to the first PCA Notification, management of the Bank
prepared and filed with the FDIC a Capital Plan to define an appropriate range
of capital ratios within which the Bank could operate in a safe and sound manner
and execute an appropriate strategy to ensure that the Bank maintains capital
within a minimum desirable range. The Capital Plan was approved by the FDIC on
January 30, 1995. As a condition of the FDIC's approval of the Capital Plan, the
Company agreed to guarantee the Bank's compliance with the Capital Plan until
the Bank has met its minimum capital requirements on average during each of four
consecutive calendar quarters. The Company's liability under the guarantee is
limited to the lesser of 5% of the Bank's total assets at the time it became
undercapitalized ($14,182,000), or the amount that would have been necessary to
bring the Bank into compliance with all of its capital requirements as of the
time it failed to comply. See "REGULATORY AGREEMENTS AND ORDERS." THE COMPANY
CURRENTLY DOES NOT HAVE SUFFICIENT FUNDS TO SATISFY THE GUARANTEE, AND WOULD BE
IN DEFAULT THEREUNDER IF CALLED UPON TO DO SO.
It should be noted that the key capital ratios are those of the Bank,
as the Company has no activities other than holding stock of the Bank.
Moreover, the FRB looks to First Banks, as the first tier holding company,
rather than the Company as the source of strength for the Bank.
Set forth below are the Company's and the Bank's risk-based and
leverage capital ratios as of September 30, 1995:
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 I risk-based capital (2) $ (1,431) (1.40)% $ 4,163 4.09%
Tier I risk-based capital minimum 4,075 4.00% 4,075 4.00%
requirement (2) ----------- ----------- ----------- -----------
Excess/(Deficiency) $ (5,506) (5.40)% $ 88 0.09%
=========== =========== =========== ===========
Total risk-based capital (3) $ (112) (0.11)% $ 5,481 5.38%
Total risk-based 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>
- --------------
-30-
<PAGE> 34
(1) As a result of the purchase of $1.5 million in Company Common Stock and
the $6.5 million Debentures by First Banks and the contribution of the
proceeds thereof to the Bank, the Bank's Tier 1 capital ratio reached
6.58% at December 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 PCA provisions of the FDICIA.
Institutions subject to an agreement or order issued by a federal
regulatory agency are disqualified from being considered "well
capitalized" under the PCA regulations.
-31-
<PAGE> 35
Risk-Based and Leverage Capital Ratios as of December 31, 1995
<TABLE>
<CAPTION>
Company Bank
------------------------------- ---------------------------
(Dollar amounts in thousands) Amount Ratio Amount Ratio
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Tier I risk-based capital (1) $ 3,566 3.68 % $ 10,973 11.35%
Tier I risk-based capital minimum 3,872 4.00 % 3,867 4.00%
requirement (1) ----------- ----------- ----------- ----------
Excess/(Deficiency) $ (306) (0.32)% $ 7,106 7.35%
=========== =========== =========== ===========
Total risk-based capital (2) 4,828 4.99 % $ 12,233 12.66%
Total risk-based capital minimum requirement 7,744 8.00 % 7,733 8.00%
----------- ----------- ----------- -----------
Excess/(Deficiency) $ (2,916) (3.01)% $ 4,500 4.66%
=========== =========== =========== ===========
Risk-adjusted assets $ 96,796 $ 96,655
=========== ===========
Leverage capital ratio (3) 2.14 % 6.58%
=========== ==========
Total average assets $ 166,870 $ 166,870
=========== ===========
</TABLE>
- --------------
(1) Includes common stockholders' equity.
(2) Includes common stockholders' equity and allowance for loan losses,
subject to certain limitations.
(3) 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 PCA provisions of the FDICIA.
Institutions subject to an agreement or order issued by a federal
regulatory agency are disqualified from being considered "well
capitalized" under the PCA regulations.
STATE 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" of a bank, 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.
The Bank received notices from the SBD dated August 3, 1994, November
3, 1994, February 17, 1995, March 13, 1995, May 15, 1995 and August 7, 1995 that
its contributed capital is impaired (the "Capital Impairment Orders"). As of
December 31, 1995, the Bank had contributed capital of $40.39 million and
deficit retained earnings of approximately $30.31 million, or approximately
75.04% 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
$14.15 million. THE BANK HAS NOT COMPLIED WITH THE CAPITAL IMPAIRMENT ORDERS.
See "REGULATORY AGREEMENTS AND ORDERS."
-32-
<PAGE> 36
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 applicable banking
laws, and inadequate capital. Management believes none of the alleged violations
of law were material, and that the matters concerning such alleged violations
have been resolved. 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 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 quarter 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 STATUS
As of December 31, 1995, the Company believes it has achieved
substantial compliance with the requirements of the Company's MOU, the FDIC
Cease and Desist Order and the SBD Final Order, except for compliance with the
6.5% and 7.0% Tier I capital requirements of the SBD Final Order. Further
compliance with the Company's MOU and the Orders is contemplated to occur as a
result of this Offering. The Bank, as yet, has not made a final decision whether
to restate its FDIC call reports for December 1994 and March 1995. As of
December 31, 1995, the Bank had not complied with the Capital Impairment Orders.
See "REGULATORY AGREEMENTS AND ORDERS."
Verification of the Bank's compliance with the Orders is subject to
review by the FDIC and the SBD while the Company's compliance with the MOU is
subject to review by the FRB. No assurance can be given that capital, in
addition to that raised pursuant to this Offering, can be raised if the Bank
requires such additional capital to remain in compliance with capital adequacy
requirements. In the event that the FRB, the FDIC or the SBD otherwise
determines that the Company or the Bank is engaging in unsafe or unsound
practices in conducting their businesses or violating any law, rule or
regulation, each regulatory agency would have available various remedies,
including certain enforcement actions. Additionally, the Company's inability to
serve as a source of strength to the Bank could serve as a basis for additional
regulatory action against the Company. See "SUPERVISION AND REGULATION."
-33-
<PAGE> 37
RECENT CHANGES IN KEY PERSONNEL
The Company and the Bank operated without a permanent President and
Chief Executive Officer from June 1, 1994 through October 24, 1995. Mr. James E.
Culleton, who acted as Interim President of the Bank from June 1, 1994, was
elected on October 24, 1995 to serve as the President and Chief Operating
Officer of the Bank. On October 24, 1995, the Board of Directors of the Bank
elected Donald W. Williams to serve as Chief Executive Officer of the Bank and
on December 27, 1995 as Chairman of the Board of Directors of the Bank. Mr.
Culleton served as Interim President until December 27, 1995, when Mr. Williams
commenced to serve as President and Chief Executive Officer of the Company. Mr.
Williams has received all required regulatory approvals to serve in his
capacities with the Bank and the Company. Ms. Anne H. Long, previously the Chief
Financial Officer of the Company and the Bank, tendered her resignation
effective December 6, 1995. It is intended that First Banks will provide
resources to support the Company's and the Bank's accounting function until a
new Chief Financial Officer can be employed. In this regard, on November 28,
1995, the Boards of Directors of the Company and the Bank appointed Allen H.
Blake, Chief Financial Officer of First Banks, to serve as Interim Chief
Financial Officer of the Company and the Bank. Mr. Blake has received all
required approvals to serve in this capacity.
Important to the Bank's recapitalization and restructuring efforts is
the restaffing of the Bank's lending function, which has experienced significant
turnover during the past several months. The Bank has retained the services of
Mr. Terrance McCarthy to become the Senior Vice President and Chief Credit
Officer of the Bank upon the receipt of the necessary regulatory approvals. Upon
approval, Mr. McCarthy will be employed by the Bank and will function in a
similar capacity for First Bank & Trust, Santa Ana, California, a wholly-owned
subsidiary of First Banks, with his salary and benefits being allocated between
the Bank and First Bank & Trust. The Bank also has retained, on an interim
basis, Mr. Norm Broyer as a loan workout specialist. Mr. Broyer currently is a
consultant for Queen City Bank, N.A., Long Beach, California, a subsidiary of
First Banks. Mr. Gary Sanders, also the Regional President at First Bank &
Trust, is employed as the Bank's Senior Vice President in charge of loan
production. The successful implementation of the Company's and the Bank's
strategic initiatives and the resulting operating profits anticipated therefrom
are, and for the foreseeable future will be, dependent upon the services of
these and certain other executive officers and directors of the Company and the
Bank. The Bank has entered into an employment agreement with Mr. Culleton. The
compensation arrangements with Messrs. Williams, McCarthy, Blake, Broyer and
Sanders are subject to the terms of a Management Services Agreement and a Cost
Sharing Agreement with First Banks or its affiliates. See "MANAGEMENT."
EFFECT OF DELISTING FROM NASDAQ SMALLCAP MARKET SYSTEM AND EFFECT ON LIQUIDITY
OF THE COMMON STOCK; PENNY STOCK
The Company has been informed that the Common Stock will be delisted
from the NASDAQ Small Cap Market System unless the Company meets the
requirements for continued listing within ninety (90) days of January 25, 1996.
These requirements are (i) a minimum bid price of $1.00 per share of Common
Stock or (ii) capital and surplus of $2,000,000 and a market price of public
float of $1,000,000. Based upon market information as of February 14, 1996, the
Common Stock was trading at a bid price of $0.344 and an ask price of $0.375
per share, resulting in a market value of public float of approximately
$1,617,000, and accordingly the Common Stock presently meets both requirements
for listing set forth in (ii) above. However, because of the $0.10 per share
Subscription Price in this Offering, no assurance can be given that the Common
Stock will continue to qualify for listing on NASDAQ. See "MARKET INFORMATION"
and "RECENT CHANGES."
Delisting from the NASDAQ Small Cap System could cause the Common
Stock to become significantly less liquid, with a possible negative impact on
its value. Moreover, delisting could also cause the Common Stock to be
classified as "Penny Stock" which, if certain disclosure and broker or dealer
qualifications are not met, could further restrict the market for resale of the
Common Stock to only such persons as are deemed to be suitable investors of
such stock, such as institutional investors, or directors, officers, or owners
of 5% or more of the Company's Common Stock.
CERTAIN ANTI-TAKEOVER PROVISIONS
For a description of certain anti-takeover provisions of the Company's
Certificate of Incorporation and Bylaws, see "DESCRIPTION OF SECURITIES -
Provisions of Certificate of Incorporation." Such anti-takeover provisions may
make the Company a less attractive target for a takeover bid or merger, thereby
potentially depriving stockholders of an opportunity to sell their shares at a
premium over prevailing market prices as a result of any such takeover bid or
merger.
GOVERNMENT REGULATION AND COMPETITION
-34-
<PAGE> 38
Bank holding companies and banks are subject to extensive governmental
supervision, regulation and control, which have, in the past, materially
affected the business of financial institutions. In recent years, the
regulations applicable to bank holding companies and banks have changed
dramatically. Future legislation and government policy could adversely affect
the banking industry, including the Company and the Bank. For a description of
certain of the potentially significant changes, see "SUPERVISION AND
REGULATION."
The Bank faces substantial competition for deposits and loans
throughout its market area, and expects to face substantial competition for its
contemplated financial investment products and services. Competition for
deposits comes primarily from other commercial banks, savings institutions,
credit unions, thrift and loans, money market and mutual funds and other
investment alternatives. Competition for loans comes from other commercial
banks, savings institutions, mortgage banking firms, credit unions, thrift and
loans and other financial intermediaries. The Bank faces competition for
deposits and loans throughout its market not only from local institutions but
also from out-of-state financial intermediaries which have opened low end
production offices or which solicit deposits in its market area. Many of the
financial intermediaries operating in the Bank's market area offer certain
services, such as trust, investment and international banking services, which
the Bank does not offer directly. Additionally, banks and other financial
institutions with larger capitalization and financial intermediaries not subject
to bank regulatory restrictions have larger lending limits and are thereby able
to serve the credit and investment needs of larger customers.
In addition, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 may have an effect on the Bank's competitive position.
See "SUPERVISION AND REGULATION - Recent and Proposed Legislation."
-35-
<PAGE> 39
SELECTED FINANCIAL AND OTHER DATA
The tables below set forth certain selected consolidated financial data
of the Company for the nine month periods ended September 30, 1995 and 1994 and
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 included elsewhere
herein.
<TABLE>
<CAPTION>
(Unaudited)
For the Nine Months Ended
September 30,
-------------------------
(Dollar amounts in thousands, except per share data and ratios) 1995 1994
--------- ---------
<S> <C> <C>
Statement of Operations Data:
Interest income $ 10,651 $ 13,888
Interest expense 4,639 4,233
--------- ---------
Net interest income 6,012 9,655
Provision for loan losses 3,345 9,057
--------- ---------
Net interest income after provision for loan losses 2,667 598
Non-interest income 1,131 1,711
Non-interest expense 10,097 14,561
--------- ---------
Loss before income taxes (6,299) (12,252)
Provision for income taxes 2 1,926
--------- ---------
Net loss $ (6,301) $ (14,178)
========= =========
Per Share Data(1):
Net loss $ (1.35) $ (3.03)
Book value per share $ (0.31) $ 1.87
Weighted average shares outstanding 4,675 4,675
Balance Sheet Data:
Total loans $ 82,089 $ 156,468
Total assets 172,923 280,461
Demand accounts 33,162 77,700
Retained deficit (29,181) (18,868)
Total stockholders' equity (1,435) 8,741
Selected Financial Ratios:
Return on average assets (4.35%) (6.46%)
Return on average stockholders' equity (216.18%) (99.32%)
Average stockholders' equity to average assets 2.01% 6.50%
Dividend payout -- --
Net interest margin 4.77% 5.31%
Non-interest expense to average assets 6.98% 6.63%
Net charge-offs on loans to average loans 7.26% 5.92%
Allowance for loan losses to total loans outstanding 5.89% 5.31%
Allowance for loan losses to total nonperforming loans 90.48% 61.52%
Total tier 1 capital to average assets (leverage) (0.83%) 3.07%
Total risk-based capital to risk-adjusted assets (0.11%) 5.84%
</TABLE>
- ------------------
-36-
<PAGE> 40
(1) Per share data is based upon the weighted average Common Stock
outstanding as of and for the years indicated.
-37-
<PAGE> 41
SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------------------
(Dollar amounts 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: (1)
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:
Temporary cash investments and securities $ 85,189 $ 113,701 $ 46,224 $ 83,543 $ 43,005
Total loans 130,415 194,921 235,646 296,472 304,151
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 accounts 177,053 188,835 185,637 263,867 261,404
Retained earnings (deficit) (22,880) (4,690) 2,621 6,157 6,029
Total stockholders' equity 4,355 23,144 30,444 33,909 33,637
</TABLE>
- --------------
(1) Per share data is based upon the weighted average Common Stock
outstanding as of or for the years indicated.
-38-
<PAGE> 42
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------------
(Dollar amounts in thousands, except per share data and ratios) 1994 1993 1992 1991 1990
------ ------ ------- ----- -----
<S> <C> <C> <C> <C> <C>
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 nonperforming loans 64.92% 33.69% 19.65% 16.62% 71.46%
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%
</TABLE>
RECENT CHANGES
This section discusses certain financial information of the Company
and the Bank as of and for the year ended December 31, 1995. THIS FINANCIAL
INFORMATION IS UNAUDITED, BUT IN THE OPINION OF MANAGEMENT REFLECTS ALL
ADJUSTMENTS NECESSARY FOR A FAIR PRESENTATION OF THE INFORMATION PROVIDED.
HOWEVER, NO ASSURANCE CAN BE GIVEN THAT A SUBSEQUENT AUDIT WILL NOT REQUIRE
ADJUSTMENTS OR RESTATEMENT THAT COULD RESULT IN A CHANGE IN THE DECEMBER 31,
1995 INFORMATION PRESENTED.
RECENT LOSSES AND RISK OF CONTINUED LOSSES
As discussed elsewhere in this Prospectus, the Company experienced
losses for the years ended December 31, 1992, 1993, and 1994, and for the nine
month period ended September 30, 1995. The Company will also report a loss for
the fourth quarter of 1995. Although the audit of the Company's financial
statements as of and for the year ended December 31, 1995 is still ongoing, it
is anticipated that the losses for the fourth quarter will be approximately
$1,130,000, resulting in total losses in 1995 of approximately $7,431,000.
The ability of the Company to reverse the trend of its net losses is
dependent on the quality and level of its earning assets and the reduction in
the level of its nonperforming assets, the interest rate environment and the
adequacy of its allowance for loan losses. Additionally, the real estate market
and the overall economy in the Company's primary service area and Northern
California is likely to continue to have a significant effect on the quality
and level of the Company's assets in the future.
In order to expedite the process of reducing its level of classified
assets, the Bank has taken a more aggressive approach to working with its
problem credits. This has included requiring additional collateral and/or
meaningful reductions in principal as a condition to renewing loans when they
are due, actively pursuing guarantors and initiating foreclosure proceedings
quickly when borrowers fail to perform in accordance with the loan conditions.
This process has resulted in accelerating the incidence of loans becoming
nonperforming. Consequently, total nonperforming assets increased from
$7,401,000 at September 30, 1995 to $8,155,000 at December 31, 1995.
However, this process has also increased the pressure on borrowers to
strengthen or refinance their credit positions with the Bank. This has
assisted the Bank in achieving a reduction of total classified assets from
$28,430,000 at September 30, 1995 to $20,593,619 at December 31, 1995. The
Bank views this reduction in classified assets as particularly important to its
future financial condition since this represents the most probable source for
additional nonperforming assets to arise. Consequently, by decreasing its
total classified assets, it is also decreasing the probability of incurring
added nonperforming assets.
See "RISK FACTORS - Recent Losses and Risk of Continued Losses,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," and "BUSINESS - Economic Trends."
CAPITAL ACCOUNTS AND RATIOS
The consolidated capitalization of the Company was as follows:
CONSOLIDATED CAPITALIZATION
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
As of December 31,
1995
------------------
<S> <C>
Long-Term Debt:
12% Convertible Debentures, maturing in 2000 $ 6,500
------------
Stockholders' Equity:
Preferred Stock: $.01 par value
Authorized: 5,000,000 shares
Issued and outstanding: none ---
Common Stock: $.01 par value
Authorized: 250,000,000 shares
Issued and outstanding: Actual 69,675,110 shares 697
Additional paid-in capital 33,251
Retained deficit (30,311)
Unrealized losses on securities available for sale (58)
------------
Total Stockholders' Equity 3,579
------------
Total Capitalization $ 10,079
============
Shares of common stock outstanding 69,675,110
Book value per share $ 0.05
Consolidated average assets $ 166,870
Consolidated Tier I leverage ratio 2.14%
</TABLE>
Set forth below are the Company's and the Bank's risk-based and
leverage ratios:
Risk-Based and Leverage Capital Ratios as of December 31, 1995
(unaudited)
<TABLE>
<CAPTION>
Company Bank
------------------------ -----------------------
(Dollar amounts in thousands) Amount Ratio Amount Ratio
----------- -------- ---------- -------
<S> <C> <C> <C> <C>
Tier I risk-based capital (1) $ 3,566 3.68 % $ 10,973 11.35%
Tier I risk-based capital minimum 3,872 4.00 % 3,867 4.00%
----------- -------- ---------- -------
requirement (1)
Excess/(Deficiency) $ (306) (0.32)% $ 7,106 7.35%
=========== ======== ========== =======
Total risk-based capital (2) 4,828 4.99 % $ 12,233 12.66%
Total risk-based capital minimum 7,744 8.00 % 7,733 8.00%
----------- -------- ---------- -------
requirement
Excess/(Deficiency) $ (2,916) (3.01)% $ 4,500 4.66%
=========== ======== ========== =======
Risk-adjusted assets $ 96,796 $ 96,655
=========== ==========
Leverage capital ratio (3) 2.14% 6.58%
======= =======
Total average assets $ 166,870 $ 166,870
=========== ==========
</TABLE>
__________________
(1) Includes common stockholders' equity.
(2) Includes common stockholders' equity and allowance for loan losses,
subject to certain limitations.
(3) 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 PCA provisions of the
FDICIA. Institutions subject to an agreement or order issued by a
federal regulatory agency are disqualified from being considered "well
capitalized" under the PCA regulations.
See "RISK FACTORS - Failure to Meet Capital Adequacy Requirements and
Regulatory Orders," "CAPITALIZATION," and "REGULATORY AGREEMENTS AND ORDERS."
ASSET QUALITY
OTHER REAL ESTATE OWNED AND NON-ACCRUAL, PAST DUE AND
RESTRUCTURED LOANS
The credit quality of the Bank's loan portfolio deteriorated
significantly during 1992, 1993 and 1994, primarily as a result of the
recession in California and particularly the downturn in the market for real
estate which adversely affected a significant segment of the Bank's customers.
However, modest improvement in the credit quality of the Bank's loan portfolio
occurred during the year ended December 31, 1995. The Bank's nonperforming
assets, which include loans 90 days or more past due and still accruing,
nonaccrual loans, restructured loans and the real estate included within the
OREO classification totaled $8,155,000, or 4.81% of the Bank's total assets at
December 31, 1995, a reduction of 51.10% from December 31, 1994, and an
increase of 10.19% from September 30, 1995. The increase in nonperforming
loans from September 30, 1995 to December 31, 1995 is principally due to the
more aggressive approach which the Bank has taken in addressing problem assets.
At December 31, 1995, the Bank had two restructured loans, as defined in
Statement of Financial Accounting Standards No. 15, with an outstanding balance
of $533,000.
Classified assets include nonperforming loans, OREO and performing
loans that exhibit credit quality weaknesses including those classified by the
Bank's regulators as substandard. The table below outlines the Bank's
classified assets as of September 30, 1995 and December 31, 1995:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
September 30, December 31,
(Dollar amounts in thousands) 1995 1995
------------------------------------------------------------------------
<S> <C> <C>
Performing loans (1) $ 21,029 $ 12,439
Nonperforming loans 5,347 6,775
Other real estate owned 2,054 1,380
--------- ---------
Total classified assets (2) $ 28,430 $ 20,594
========= =========
</TABLE>
- --------------------
(1) The Bank's performing loans reported as classified at September 30,
1995 included loans totaling $3,072,000 which were designated as watch
list loans. These loans are generally of less credit risk and are not
normally considered as classified assets. At December 31, 1995,
classified performing loans included only loans considered to be
classified assets. All such loans were classified as substandard and
there were no performing loans classified as doubtful or loss.
(2) There were no loans classified as loss included in classified assets.
[/R]
Management of the Bank reviews classified assets to determine the
inherent risks of loss, including the fact that most are, in the opinion of
management, adequately collateralized. This risk is then taken into
consideration in evaluating the allowance for possible loan losses and the need
for an increased allowance for possible loan losses. Management has adopted a
conservative approach, reserving for 20% of all substandard loans.
The following table summarizes the Bank's nonperforming assets for the
years ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
December 31,
------------------------------
(Dollar amounts in thousands) (unaudited) 1995 1994
---- ----
<S> <C> <C>
Total loans outstanding $ 74,211 $ 130,415
Accrual loans past due 90 days or more $ 2,249 $ 22
Nonaccrual loans 4,001 11,433
Restructured loans 525 710
------------ -----------
Nonperforming loans 6,775 12,165
Other real estate 1,380 5,222
Total nonperforming assets $ 8,155 $ 17,387
============ ===========
Loans past due 30 to 89 days $ 3,015 $ 4,514
============ ===========
Ratios:
Nonperforming loans to total loans outstanding 9.13% 9.33%
Allowance for loan losses to total nonperforming 79.53% 61.13%
loans
Nonperforming assets to loans and other real estate 10.79% 12.82%
</TABLE>
As noted above, since December 31, 1994, outstanding loans have decreased while
the total nonperforming loans and loans past due 30- 89 days have decreased.
Moreover, the ratio of allowance for loan losses to total nonperforming loans
has increased.
The changes to the allowance for loan losses between September 30,
1995 and December 31, 1995 are presented in the following table:
<TABLE>
<CAPTION>
December 31,
(Dollar amounts in thousands) (unaudited) 1995
<S> <C>
Balance at beginning of period $ 4,838
Charge-offs:
Commercial ---
Real estate construction ---
Real estate secured 26
Installment 9
--------
35
--------
Recoveries:
Commercial ---
Real estate construction 36
Real estate secured ---
Installment 9
--------
45
--------
Net charge-offs (recoveries) on loans (10)
Additions to allowance charged to operating expense 540
Reduction in allowance for loan losses transferred with branch ---
--------
sale
Balance at end of period $ 5,388
========
Net charge-offs on loans to average loans (1) N/A
Allowance for loan losses to total loans outstanding 7.26%
</TABLE>
----------------------
(1) For the period covered, the Bank had net recoveries of $10,000.
Although economic indicators during 1995 began to appear more
favorable than during 1994, management cannot foresee when the current
conditions adversely affecting the regional real estate market will end.
Lengthy continuation or worsening of these conditions could increase the amount
of the Bank's nonperforming assets and, in addition, could have an adverse
effect on the Bank's efforts to collect its nonperforming loans or otherwise
liquidate its nonperforming assets on terms favorable to the Bank. The Bank's
current policy is not to make any speculative real estate loans, such as
construction loans in certain categories. The Bank's strategy to address the
problems created by its asset quality includes the reduction of real estate
construction loans outstanding as well as the overall reduction of loans which
are adversely classified. However, there can be no assurance that the Bank
will not experience additional increases in the amount of its nonperforming
assets or experience significant additional losses in attempting to collect the
nonperforming loans or otherwise to liquidate the nonperforming assets that are
currently reflected on the Bank's balance sheet. Moreover, the Bank has been
incurring substantial asset-carrying expenses in connection with such
nonperforming assets, such as expenses of maintaining and operating OREO
properties, and the Bank will continue to incur asset-carrying expenses in
connection with such loans and assets until its nonperforming loans and assets
are collected, liquidated or otherwise resolved. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Asset Quality,
Provision for Loan Losses and Loan Loss Experience."
See "RISK FACTORS - Other Real Estate Owned and Non-accrual, Past Due
and Restructured Loans" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Asset Quality, Provision for Loan Losses
and Loan Loss Experience."
CONCENTRATION OF BORROWERS
As of December 31, 1995, the Company's loan portfolio was concentrated
in twenty (20) loans, one (1) of which exceeded the Bank's secured and
unsecured lending limit at that date. Commitments to these borrowers
represented $31.2 million or 41% of the Bank's total loan portfolio at
December 31, 1995. Outstanding balances to these borrowers at December 31,
1995 were $23.6 million or 32% of the Bank's loan portfolio. Four (4) of these
loans, representing $7.4 million or 10% of the Bank's total loan portfolio,
have been classified by the Bank as "Substandard." One (1) loan in the amount
of $754,000 is on nonaccrual status.
At December 31, 1995 the Bank's unsecured lending limit was
approximately $2.5 million and its combined secured and unsecured lending limit
was approximately $4.1 million. The Bank currently has one (1) loan,
representing $3.8 million, which exceeds its unsecured lending limit and one
(1) loan, representing $5.5 million that exceeds 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.
See "RISK FACTORS - Concentration of Large Borrowers" and "BUSINESS -
Lending Activities."
INVESTMENT SECURITIES
The relatively small size of the Bank's investment portfolio is the
mirror image of the substantial federal funds holdings maintained throughout
1994 and 1995 to facilitate the decrease in total asset size. The Bank
anticipates more fully investing those funds primarily in U.S. government
agency securities. As of December 31, 1995, following the investment of an
additional $30,000,000 of the Bank's liquid funds in agency securities with
average maturities of 7 months, the investment portfolio reached approximately
$74,249,000.
<TABLE>
<CAPTION>
At December 31, 1995 (in thousands)
-----------------------------------
(unaudited)
Market Amortized
Value Cost Gain/(Loss)
----- ---- -----------
<S> <C> <C> <C>
Available for Sale $ 63,291 $ 63,285 $ 6
Held-to-Maturity 11,069 10,958 111
------------- ------------- -------------
Total $ 74,360 $ 74,243 $ 117
============= ============= =============
</TABLE>
See "BUSINESS - Investments."
POTENTIAL DELISTING FROM NASDAQ SMALLCAP MARKET SYSTEM
The Company has been informed that the Common Stock will be delisted
from the NASDAQ SmallCap Market System unless the Company meets the
requirements for continued listing within ninety (90) days of January 25, 1996.
These requirements are (i) a minimum bid price of $1.00 per share of Common
Stock or (ii) capital and surplus of $2,000,000 and a market price of public
float of $1,000,000. Based upon market information as of February 14, 1996,
the Common Stock was trading at a bid price of $0.344 and an ask price of
$0.375 per share, resulting in a market value of public float of approximately
$1,617,000, and accordingly the Common Stock presently meets both requirements
for listing set forth in (ii) above. However, because of the $0.10 per share
Subscription Price in this Offering, no assurance can be given that the Common
Stock will continue to qualify for listing on the NASDAQ SmallCap Market
System. See "RISK FACTORS - Effect of Delisting from NASDAQ SmallCap Market
System and Effect on Liquidity of the Common Stock; Penny Stock" and "MARKET
INFORMATION."
-39-
<PAGE> 43
MARKET INFORMATION
TRADING HISTORY
The Company's Common Stock is publicly traded in the over-the-counter
market and is quoted on the NASDAQ SmallCap Market System under the symbol
"FCOB." The Common Stock was involuntarily delisted from the NASDAQ- National
Market System as of July 7, 1995 as a result of the Company's failure to meet
tangible asset requirements for continued listing and was immediately listed on
the NASDAQ SmallCap Market.
The Company has been informed that the Common Stock will be delisted
from the NASDAQ SmallCap Market System unless the Company meets the
requirements for continued listing within ninety (90) days of January 25,
1996. These requirements are (i) a minimum bid price of $1.00 per share of
Common Stock or (ii) capital and surplus of $2,000,000 and a market value of
public float of $1,000,000. Based upon market information as of February 14,
1996, the Common Stock was trading at a bid price of $0.344 and an ask price of
$0.375 per share, resulting in a market value of public float of approximately
$1,617,000, and accordingly the Common Stock presently meets both requirements
for listing set forth in (ii) above. However, because of the $0.10 per share
Subscription Price in this Offering, no assurance can be given that the Common
Stock will continue to qualify for listing on the NASDAQ SmallCap Market
System. See "RISK FACTORS -- Effect of Delisting from NASDAQ SmallCap Market
System and Effect on Liquidity of the Common Stock; Penny Stock" and "RECENT
CHANGES."
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>
1995 1994 1993
---- ---- ----
Quarter High Low High Low High Low
------- ------ ----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
First $1 1/4 $1 $5 1/2 $3 3/4 $6 3/4 $4
Second 1 1/4 1 4 3/4 2 3/4 6 3/4 4
Third 19/32 7/16 3 1/2 2 5 1/4 3 1/2
Fourth 5/16 1/16 2 1/8 7/8 4 1/4 3 1/4
</TABLE>
At October 6, 1995, there were approximately 1,129 holders of record
of the Common Stock. Trading activity during 1994 was 3,631,113 shares, for the
first quarter of 1995 was 775,806 shares, for the second quarter of 1995 was
556,976 shares, for the third quarter of 1995 was 1,009,645 and for the fourth
quarter was 2,134,757, as reported by NASDAQ. On December 29, 1995, the last
sales price for the Common Stock was $0.219, as reported by NASDAQ.
DIVIDENDS
On December 31, 1991, the Board of Directors of the Company declared a
$0.32 per share cash dividend payable in four installments of $0.08 per share to
stockholders of record on January 10, 1992, March 16, 1992, June 15, 1992 and
September 14, 1992. The Company paid the first two installments and, on July 9,
1992, the Company suspended payment of the third and fourth installments which
totaled $.16 per share based upon the Common Stock then outstanding. The Board
of Directors of the Company has not declared any dividends since the 1992
Dividends. The Company has and will continue to accrue interest on the 1992
Dividends at the current legal rate, which is 5% above the Federal Reserve
Discount Rate, until such time as the dividends are finally paid or until
Dividend-Eligible Stockholders exchange their Dividend Rights for shares of
Common Stock in this Offering. The payment of the 1992 Dividends and declaration
of subsequent dividends is subject to approval of the FRB. At December 31, 1995,
the Company's 1992 Dividend liability plus accrued interest totalled
$968,874.44. By letter dated June 21, 1995, the FRB raised no objection to the
Company's proposal to exchange shares of Common Stock for Dividend Rights.
-40-
<PAGE> 44
The Company's ability to pay cash dividends is subject to various
restrictions, including the provisions of the MOU, which prohibit the Company
from paying any cash dividend without the prior written approval of the FRB. In
addition, the Debentures contain provisions prohibiting the Company from paying
any dividend or making any other distribution to stockholders (other than as
contemplated by the Stock Purchase Agreement) so long as the Debentures are
outstanding. Furthermore, the ability of the Company to pay a cash dividend
depends on the Bank's ability to pay a cash dividend to the Company. Currently,
the Company does not have sufficient cash to pay dividends and the Company does
not anticipate that it will receive sufficient cash to pay any dividends as a
result of this Offering. The MOU prohibits the Company from taking a cash
dividend from the Bank without providing prior written notice to the FRB. There
are statutory and other regulatory restrictions, including the Orders, on the
Company's and the Bank's respective abilities to pay cash dividends without the
prior written approval of the FRB, and the FDIC and SBD. See "REGULATORY
AGREEMENTS AND ORDERS," herein, for a discussion of the restriction on the
payment of dividends and Note 17 of the Notes to Consolidated Financial
Statements for the year ended December 31, 1994.
The Company has reserved 9,688,875 shares of Common Stock in this
Offering to be offered to stockholders of record as of the Dividend Record Dates
in exchange for the declared and unpaid 1992 Dividends. The terms of the
Dividend Exchange Offer have been reviewed by the FRB. The entitlement to
receive shares of Common Stock in the Dividend Exchange Offer is referred to
herein as a "Dividend Right." For further information with respect to the terms
of the Dividend Exchange Offer, see "THE OFFERING - General - The Dividend
Exchange Offer."
THE OFFERING
GENERAL
The Company is hereby Offering:
- 50,000,000 shares of Common Stock to stockholders of the Company
as of the Rights Record Date, pursuant to the exercise of Stockholder Rights,
10,000,000 shares of which may be offered and sold to the public in the State of
California if not purchased by stockholders pursuant to the exercise of
Stockholder Rights; and
- Up to 9,688,875 shares of Common Stock, to stockholders of the
Company of record on June 15, 1992 or September 14, 1992, in exchange for
Dividend Rights.
Pursuant to the Stock Purchase Agreement, First Banks has agreed to act
as "Standby Purchaser" in the Offering, and as such will purchase, if necessary,
the number of shares required to allow the Company to raise the Bank's Tier I
capital level to 7.0% upon completion of the Rights Offering and any Public
Offering.
In addition, the Company may in the future distribute shares of Common
Stock pursuant to the exercise of Appreciation Rights, as contemplated by the
Stock Purchase Agreement. See "THE STOCK PURCHASE AGREEMENT AND CHANGE IN
CONTROL OF THE COMPANY - Issuance of Appreciation Rights."
-41-
<PAGE> 45
STOCKHOLDER RIGHTS: THE BASIC AND OVERSUBSCRIPTION PRIVILEGES
Basic Subscription Privilege
Pursuant to the Basic Subscription Privilege, each Stockholder Right
entitles the holder thereof to purchase at the Subscription Price 10.695
Underlying Shares for each share of Common Stock held on the Rights Record Date,
subject to reduction by the Company under certain circumstances. See "Regulatory
Limitation" and "Tax Limitation," herein. Each Rights Holder is entitled to
subscribe for all, or any portion of, the Underlying Shares subject to
Stockholder Rights to which he, she or it is entitled.
Oversubscription Privilege
Subject to the allocation and possible reduction described below and
elsewhere in this Prospectus, Rights Holders who exercise the Basic Subscription
Privilege in full will be eligible to subscribe, at the Subscription Price, for
additional shares of Common Stock available after satisfaction of all
subscriptions pursuant to the Basic Subscription Privilege, up to the greater of
an additional (a) 1,000,000 shares of Common Stock, or $100,000, or (b) 10.695
shares of Common Stock for each share held on the Rights Record Date.
Shares of Common Stock will be available for purchase pursuant to the
Oversubscription Privilege only to the extent that any Underlying Shares are not
subscribed for through the Basic Subscription Privilege. If the Underlying
Shares not subscribed for through the Basic Subscription Privilege are not
sufficient to satisfy all subscriptions pursuant to the Oversubscription
Privilege, the Excess Shares will be allocated pro rata (subject to the
elimination of fractional shares) among the Rights Holders exercising the
Oversubscription Privilege in proportion to the number of Underlying Shares a
Rights Holder exercising the Oversubscription Privilege held on the Rights
Record Date. Exercises of the Oversubscription Privilege also may be subject to
reduction under certain circumstances. See "Tax Limitation" and "Regulatory
Limitation," herein.
To exercise the Oversubscription Privilege, banks, brokers and other
nominee Rights Holders who exercise the Oversubscription Privilege on behalf of
beneficial owners of Stockholder Rights will be required to certify to the
Subscription Agent and the Company the aggregate number of Underlying Shares
thereby subscribed for by each beneficial owner of Stockholder Rights on whose
behalf such nominee holder is acting.
The Stockholder Rights will be evidenced by non-transferable
Subscription Right Certificates, which are being distributed to each Rights
Holder contemporaneously with the delivery of this Prospectus. See "THE OFFERING
- - How to Subscribe" for a discussion of how to exercise the Basic and
Oversubscription Privileges.
-42-
<PAGE> 46
IT IS THE PRESENT INTENTION OF PRESENT DIRECTORS AND OFFICERS TO
EXERCISE RIGHTS AND/OR EXERCISE OVERSUBSCRIPTION PRIVILEGE FOR APPROXIMATELY
100,000 SHARES OR 0.2% OF THE SHARES BEING OFFERED.
SALE OF SHARES TO THE PUBLIC
The Company reserves the right to offer and sell to the public in only
California up to 10,000,000 shares of Common Stock pursuant to general
subscriptions. The Public Offering will occur after the exercise of the Basic
Subscription Privilege and the Oversubscription Privilege. The Public Offering
will be conducted on a best efforts basis by the officers and directors of the
Company. Stockholders of the Company are not entitled to participate in the
Public Offering, if conducted.
THE DIVIDEND EXCHANGE OFFER
The Company is distributing transferable Dividend Rights to
Dividend-Eligible Stockholders. If exercised, the Company will issue Dividend
Exchange Shares to the exercising Dividend Rights Holder, thus discharging the
Company of its obligation to the Dividend-Eligible Stockholder to receive the
1992 Dividends in cash. See "THE OFFERING - How to Subscribe" for a discussion
of how to exercise the Dividend Rights.
Each Dividend Right is exchangeable for Dividend Exchange Shares valued
at $0.10 per share. In lieu of fractional shares, the number of shares of Common
Stock receivable upon exercise of Dividend Rights will be rounded up to the next
whole number. Each Dividend Right will entitle the Dividend Rights Holder to
receive one share of Common Stock for each $0.10 of the 1992 Dividends and
accrued interest exchanged. Dividend Rights Holders may elect to receive
Dividend Exchange Shares in lieu of their right to receive the 1992 Dividends in
cash payment, in which case the Company's obligation to pay the 1992 Dividends
in cash to such Dividend-Eligible Stockholder will be extinguished.
Dividend-Eligible Stockholders may elect to receive a portion only of their
Dividend Rights in the form of Dividend Exchange Shares, provided that only a
whole number of Dividend Exchange Shares will be issued.
PARTICIPATION BY FIRST BANKS AS STANDBY PURCHASER
Pursuant to the terms of the Stock Purchase Agreement, First Banks has
agreed to act, if necessary, as "Standby Purchaser" in the Offering. First Banks
will act in that capacity only to the extent that proceeds received by the
Company from the Rights Offering and any Public Offering are insufficient to
raise the Bank's Tier I capital level to 7.0%. The Company estimates that on a
pro forma basis as of December 31, 1995, proceeds of $1,009,000, net of Offering
expenses, will be required to be raised in the Offering in order for the Bank's
Tier I capital level to reach or exceed 7.0% and to obviate the need for First
Banks' participation as Standby Purchaser. However, no assurance can be given
that such factors as continued losses or an increase in assets will not increase
the amount of capital necessary to achieve the 7.0% capital ratio. First Banks
will make any required purchase of shares as Standby Purchaser only upon the
expiration of Stockholder Rights and conclusion of any Public Offering on the
terms set forth herein. The Offering will remain open for a period of five (5)
business days after the later of the Rights Expiration Date or the Public
Offering Expiration Date to allow First Banks to make any required standby
purchases.
-43-
<PAGE> 47
HOW TO SUBSCRIBE:
Persons ("Subscribers") may exercise their Stockholder Rights and/or
Dividend Exchange Rights, or subscribe for shares in the Public Offering, by
delivering to The First National Bank of Boston, the Subscription Agent, at the
address specified below, at or prior to the applicable Expiration Date, the
following properly completed and executed certificate(s) or applications, with
any signatures guaranteed as required.
- Stockholders exercising Stockholder Rights must complete and
return a SUBSCRIPTION RIGHTS CERTIFICATE;
- Subscribers exercising Dividend Rights must complete and return an
EXCHANGE OFFER CERTIFICATE; and
- Subscribers participating in the Public Offering must complete and
return a GENERAL SUBSCRIPTION APPLICATION AND AGREEMENT.
Stockholder Rights Certificates and General Subscription Applications
and Agreements must be accompanied by payment in full of the Subscription Price
for each Underlying Share subscribed for pursuant to the Basic Subscription
Privilege, Oversubscription Privilege or pursuant to general subscriptions.
Payment may be made only (i) by check or bank draft drawn upon a U.S. bank, or
postal, telegraphic or express money order, payable to The First National Bank
of Boston, as Subscription Agent or (ii) by wire transfer of funds to the
account maintained by the Company and the Subscription Agent for the purpose of
accepting subscriptions at State Street Bank and Trust Company (specify:
Subscriber's name, for further credit to First Commercial Bancorp, Inc. Rights
Offering. The Subscription Price will be deemed to have been received by the
Subscription Agent only upon (i) clearance of any uncertified check, (ii)
receipt by the Subscription Agent of any certified check or bank draft drawn
upon a U.S. bank or any postal, telegraphic or express money order or (iii)
receipt of collected funds in the Subscription Agent's account designated above.
Funds paid by uncertified personal check may take as much as five business days
to clear. Accordingly, Subscribers who wish to pay the Subscription Price by
means of uncertified personal check are urged to make payment sufficiently in
advance of the applicable Expiration Date to ensure that such payment is
received and clears by such time and are urged to consider in the alternative
payment by means of certified check, bank draft, money order or wire transfer of
funds. All funds received in payment of the Subscription Price shall be held in
an escrow account by the Escrow Agent (defined below) and invested at the
direction of the Company in short-term certificates of deposit, short-term
obligations of the United States or any state or any agency thereof, repurchase
agreements fully secured by such obligations or money market funds investing in
the foregoing instruments. THE ACCOUNT IN WHICH SUCH FUNDS WILL BE HELD MIGHT
NOT BE INSURED BY THE FDIC. Any interest earned on such funds will be retained
by the Company.
The Oversubscription Privilege must be exercised by Rights Holders at
the time the Basic Subscription Privilege is exercised. The Basic Subscription
Privilege must be exercised in full in order to exercise the Oversubscription
Privilege.
Stockholder Rights are not transferable and no attempted transfer
thereof will be recorded on the books of the Company.
-44-
<PAGE> 48
SUBSCRIPTION PRICE
The Subscription Price is $0.10 per Underlying Share, whether
subscribed for pursuant to Stockholder Rights or the Public Offering.
EXPIRATION DATES
The Stockholder Rights will expire at the Rights Expiration Date, 5:00
p.m., Eastern time, on April 12, 1996, subject to extension in the discretion of
the Company for up to two (2) consecutive periods of up to 30 days each, or no
later than June 11, 1996. The Company does not currently contemplate any
extensions. After the Rights Expiration Date, unexercised Stockholder Rights
will be null and void.
The Dividend Rights will expire at the Dividend Rights Expiration Date,
5:00 p.m., Eastern time, on April 12, 1996, subject to extension in the
discretion of the Company for up to two (2) consecutive periods of up to 30 days
each, or no later than June 11, 1996. The Company does not currently contemplate
any extensions. After the Dividend Rights Expiration Date, unexercised Dividend
Rights will be null and void.
The Public Offering, if conducted, will expire at the Public Offering
Expiration Date, 5:00 p.m., Eastern time, on April 12, 1996, subject to
extension in the discretion of the Company for up to two (2) consecutive periods
of up to 30 days each no later than June 11, 1996. The Company does not
currently contemplate any extensions.
The Offering will remain open for five (5) business days after the
later of the Rights Expiration Date or Public Offering Expiration Date, as the
same may be extended, to allow First Banks to make any required purchases as
"Standby Purchaser."
After the applicable Expiration Date, the Company will not be obligated
to honor any purported subscription received by the Subscription Agent,
regardless of when the documents relating to that exercise were sent, except
pursuant to the Guaranteed Delivery Procedures described below. The Company may
extend one or more Expiration Dates by giving oral or written notice to the
Subscription Agent on or before said Expiration Date, followed by a press
release no later than 9:00 a.m. Eastern time on the next business day after the
previously scheduled Expiration Date.
NO REVOCATION
NO CANCELLATION OR REVOCATION OF ANY SUBSCRIPTION WILL BE PERMITTED
AFTER RECEIPT THEREOF BY THE COMPANY, TOGETHER WITH ANY APPLICABLE PAYMENT.
-45-
<PAGE> 49
NO FRACTIONAL SHARES
No fractional shares of Common Stock or cash in lieu thereof will be
issued or paid in the Offering. Instead, the number of shares issuable upon
exercise of Stockholder Rights or Dividend Rights will be rounded up to the
nearest whole number. A depository, bank, trust company or securities broker or
dealer holding shares of Common Stock on the Rights Record Date or Dividend
Rights Record Date for more than one beneficial owner may, upon delivery to the
Subscription Agent of the Certification and Request for additional Rights form
available from the Information Agent, exchange a Subscription Right Certificate
or Exchange Offer Certificate to obtain a Subscription Right Certificate or
Exchange Offer Certificate for the number of Stockholder Rights or Dividend
Rights to which all such beneficial owners in the aggregate would have been
entitled had each been a holder on the applicable Record Date. No other
Subscription Right Certificate or Exchange Offer Certificate may be so divided
as to increase the number of rights to which the original recipient was
entitled. The Company reserves the right to refuse to issue any Subscription
Right Certificate or Exchange Offer Certificate if such issuance would be
inconsistent with the principle that each beneficial owner's holdings will be
rounded up to the nearest whole number of shares. The Subscription Agent must
receive the certification and Request for Additional Rights no later than 5:00
p.m., Eastern time on April 5, 1996, after which time no new certificates will
be issued. However, subscribers should allow sufficient time for the exercise
of Rights and delivery to the Subscription Agent prior to the applicable
Expiration Date. Neither the Company nor the Subscription Agent shall have any
liability if Certificates are not received in time for exercise or sale prior
to the applicable Expiration Date.
Because the number of shares issuable on exercise of Stockholder Rights
and Dividend Rights will be rounded up to the nearest whole number, beneficial
owners of Common Stock who are also the record holders of their shares will
receive more Stockholder Rights or Dividend Rights under certain circumstances
than beneficial owners of Common Stock who are not the record holders of their
shares and who do not obtain (or cause the holder of their shares of Common
Stock to obtain) a separate Subscription Right Certificate or Exchange Offer
Certificate with respect to the shares beneficially owned by them, including
shares held in an investment advisory or similar account. To the extent that
record holders or beneficial owners of Common Stock who obtain a separate
Subscription Right Certificate or Exchange Offer Certificate receive more
rights, they will be able to subscribe for more shares. Beneficial owners of
Common Stock who are not the record holders thereof may obtain a separate
Subscription Right Certificate or Exchange Offer Certificate upon request to the
nominee holder.
The Company will pay the fees and expenses of the Subscription Agent
and has also agreed to indemnify the Subscription Agent from certain liabilities
which it may incur in connection with the Offering.
GUARANTEED DELIVERY PROCEDURES
If a Subscriber wishes to exercise Stockholder Rights, Dividend Rights
or to subscribe for shares in the Public Offering, but time will not permit such
holder to cause the appropriate subscription certificate(s) or application(s) to
reach the Subscription Agent prior to the applicable Expiration Date, such
Subscriber may nevertheless subscribe for Underlying Shares if all of the
following conditions (the "Guaranteed Delivery Procedures") are met:
(i) the Subscriber (in the Rights Offering and the Public
Offering) has caused payment in full of the Subscription Price for each
Underlying Share being subscribed for to be received (in the manner set forth
above) by the Subscription Agent at or prior to the applicable Expiration Date;
-46-
<PAGE> 50
(ii) the Subscription Agent receives, at or prior to the
applicable Expiration Date, a guarantee notice (a "Notice of Guaranteed
Delivery"), substantially in the form provided with this Prospectus, from a
member firm of a registered national securities exchange or a member of the
National Association of Securities Dealers, Inc. (the "NASD"), or from a
commercial bank or trust company having an office or correspondent in the
United States (each, an "Eligible Institution"), stating the name of the
Subscriber, the number of Underlying Shares being subscribed for and
guaranteeing the delivery to the Subscription Agent of the appropriate
certificate(s) and/or applications within 48 hours following the date of the
Notice of Guaranteed Delivery; and
(iii) the properly completed Subscription Right
Certificate(s), Exchange Offer Certificate(s) and/or General Subscription
Application(s), with any signatures guaranteed as required, is received by the
Subscription Agent within 48 hours following the date of the Notice of
Guaranteed Delivery relating thereto. The Notice of Guaranteed Delivery may be
delivered to the Subscription Agent in the same manner as Subscription Right
Certificates at the address set forth below or may be transmitted to the
Subscription Agent by telegram or facsimile transmission. Additional copies of
the form of Notice of Guaranteed Delivery are available upon request from the
Information Agent, whose address and telephone number is set forth below. See
"Information Agent."
OTHER SUBSCRIPTION INFORMATION
The Rights Offering
If an exercising Rights Holder does not indicate the number of shares
as to which Stockholder Rights are being exercised, or does not forward full
payment of the aggregate Subscription Price for the number of shares being
subscribed for, then the Rights Holder will be deemed to have exercised the
Basic Subscription Privilege with respect to the maximum whole number of
Underlying Shares that may be purchased from the aggregate payment delivered by
the Rights Holder and, to the extent that the aggregate payment delivered by
the Rights Holder exceeds the product of the Subscription Price multiplied by
the number of Underlying Shares being purchased as evidenced by the
Subscription Right Certificates delivered by the Rights Holder (such excess
being the "Subscription Excess"), the Rights Holder will be deemed to have
exercised the Oversubscription Privilege to purchase, to the extent available
and permitted pursuant hereto, that number of whole Excess Shares equal to the
quotient obtained by dividing the Subscription Excess by the Subscription
Price. Any amount remaining after application of the foregoing procedures
shall be returned to the Rights Holder promptly by mail without interest or
deduction.
Funds received in payment of the Subscription Price for Excess Shares
subscribed for pursuant to the Oversubscription Privilege will be held in an
account maintained by the Escrow Agent (defined below). THE ACCOUNT IN WHICH
SUCH FUNDS WILL BE HELD MIGHT NOT BE INSURED BY THE FDIC, depending upon the
instruments in which the funds are invested. If a Rights Holder exercising the
Oversubscription Privilege is allocated less than all of the Excess Shares for
which that Rights Holder subscribed pursuant to the Oversubscription Price, any
amount remaining for shares not allocated to such Rights Holder shall be
returned by mail without interest or deduction as soon as practicable after the
Rights Expiration Date and after all prorations contemplated by the terms of the
Offering have been effected.
-47-
<PAGE> 51
If the number of Underlying Shares issuable by the Company as a result
of exercise of Stockholder Rights (pursuant to the Basic Subscription Privilege
or the Oversubscription Privilege) to any Rights Holders is reduced pursuant to
the terms of the Offering, the Subscription Price for shares not issued to such
Rights Holders shall be returned by mail without interest or deduction as soon
as practicable after such reductions have been effected.
A Rights Holder who subscribes for fewer than all of the shares
represented by the Rights Holder's Subscription Rights Certificates may, under
certain circumstances, receive from the Subscription Agent a new Subscription
Right Certificate representing the remaining Stockholder Rights. A Rights
Holder's election to exercise the Oversubscription Privilege must be made at
the time the Basic Subscription Privilege is exercised. The Basic Subscription
Privilege must be exercised in full in order to exercise the Oversubscription
Privilege.
After the Stockholder Rights Expiration Date, no new Subscription
Right Certificates will be issued. Accordingly, after such time and date, a
new Subscription Right Certificate will be issued to a submitting Holder upon
the partial exercise or sale of Stockholder Rights only if the Subscription
Agent receives a properly endorsed Certificate no later than the Stockholder
Rights Expiration Date. A Holder exercising less than all of his, her or its
rights thus may lose the power to exercise his, her or its remaining rights.
New Subscription Right Certificates will be sent by first class mail to the
submitting holder if the Subscription Agent receives the properly completed
Certificate by 5:00 p.m. Eastern time, on April 5, 1996. However, Subscribers
should allow sufficient time for the exercise of Stockholder Rights and delivery
to the Subscription Agent prior to the Stockholder Rights Expiration Date.
Neither the Company nor the Subscription Agent shall have any liability if
certificates are not received in time for exercise prior to the applicable
Expiration Date. Unless the Subscriber makes other arrangements with the
Subscription Agent, new Certificates issued after 5:00 p.m. Eastern time on
April 5, 1996, will be held for pick-up by the Subscriber at the Subscription
Agent's address provided above. All deliveries of newly issued Certificates
will be at the risk of the Subscriber.
Unless a Subscription Rights Certificate (i) provides that the
Underlying Shares to be issued pursuant to the exercise of the Stockholder
Rights represented thereby are to be issued to the holder of such Stockholder
Rights or (ii) is submitted for the account of an Eligible Institution,
signatures on each Subscription Right Certificate must be guaranteed by an
Eligible Institution.
The Public Offering
Failure to include the full Subscription Price with the General
Subscription Application shall give the Company the right to disregard the
subscription. Alternatively, the Subscriber in the Public Offering may be
deemed to have subscribed for the maximum whole number of Underlying Shares
that may be purchased from the aggregate payment delivered. Any amount
remaining after application of the foregoing procedure shall be returned to the
Subscriber promptly by mail without interest or deduction.
General subscriptions submitted in the Public Offering are subject to
rejection or reduction in accordance with the terms of this Offering. See "Tax
Limitation" and "Regulatory Limitation," herein. The Company will notify a
purchaser of the acceptance or rejection of his, her or its General
Subscription Application as soon as practicable after the Company's receipt
thereof.
-48-
<PAGE> 52
Subscribers in the Public Offering should consider carefully
regulatory provisions governing a change in control of the Company. See
"SUPERVISION AND REGULATION - Change in Control."
The Dividend Exchange Offer
If an exercising Dividend Rights Holder does not indicate the number
of Dividend Rights being exercised, then the Dividend Rights Holder will be
deemed to have exercised the Dividend Rights in full.
Other General Information
Persons who hold shares of Common Stock for the account of others, such
as brokers, trustees or depositories for securities, should contact the
respective beneficial owners of such shares as soon as possible to ascertain
these beneficial owners' intentions and to obtain instructions with respect to
their Stockholder Rights and/or Dividend Rights. If a beneficial owner so
instructs, the record date holder of that beneficial owners' Stockholder Rights
and/or Dividend Rights should complete appropriate Certificate(s) and submit
them to the Subscription Agent with the proper payment, if required. In
addition, beneficial owners of Stockholder Rights and/or Dividend Rights through
such a nominee holder should contact the nominee holder and request the nominee
holder to effect transactions in accordance with the beneficial owners'
instructions. If a beneficial owner wishes to obtain a separate Subscription
Right Certificate or Exchange Offer Certificate, he, she or it should contact
the nominee as soon as possible and request that a separate Certificate be
issued. A nominee may request any Certificate held by it to be split into such
smaller denominations as it wishes, provided that the Certificate is received by
the Subscription Agent, properly endorsed, no later than 5:00 p.m., Eastern
time, on April 1, 1996. No assurance can be given that delivery of Certificates
to the Subscription Agent for subdivision on or before April 1, 1996 will allow
sufficient time for the exercise of Rights prior to the applicable Expiration
Date.
The Subscription Right Certificate and Exchange Offer Certificate and
accompanying forms for exercise should be read carefully and followed in
detail. EXCHANGE OFFER CERTIFICATES, AND SUBSCRIPTION RIGHT CERTIFICATES WITH
PAYMENT, SHOULD BE SENT TO THE SUBSCRIPTION AGENT. DO NOT SEND CERTIFICATES TO
THE COMPANY.
THE METHOD OF DELIVERY OF CERTIFICATES, APPLICATIONS AND PAYMENT OF
THE SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE ELECTION AND
RISK OF THE SUBSCRIBER. IF CERTIFICATES AND PAYMENTS ARE SENT BY MAIL,
SUBSCRIBERS ARE URGED TO SEND SUCH MATERIALS BY REGISTERED MAIL, PROPERLY
INSURED, WITH RETURN RECEIPT REQUESTED, AND ARE URGED TO ALLOW A SUFFICIENT
NUMBER OF DAYS TO ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF
PAYMENT PRIOR TO THE EXPIRATION TIME. BECAUSE UNCERTIFIED CHECKS MAY TAKE AS
MUCH AS FIVE BUSINESS DAYS TO CLEAR, SUBSCRIBERS ARE STRONGLY URGED TO PAY, OR
ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED CHECK, BANK DRAFT, MONEY ORDER OR
WIRE TRANSFER OF FUNDS.
-49-
<PAGE> 53
All questions concerning the timeliness, validity, form and
eligibility of any exercise of Stockholder Rights or Dividend Rights or any
subscription in the Public Offering will be determined by the Company, whose
determination will be final and binding. The Company, in its sole discretion,
may waive any defect or irregularity, or permit a defect or irregularity to be
corrected within such time as it may determine, or reject the purported
exercise of any rights or of any submitted subscription application.
Certificates and applications will not be deemed to have been received or
accepted until all irregularities have been waived or cured within such time as
the Company determines, in its sole discretion. Neither the Company nor the
Subscription Agent will be under any duty to give notification of any defect or
irregularity in connection with the submission of any subscription or incur any
liability for failure to give such notification. The Company reserves the
right to reject any exercise if such exercise is not in accordance with the
terms of the Offering or not in proper form or if the acceptance thereof or the
issuance of the Common Stock pursuant thereto could be deemed unlawful. See
also "Tax Limitation" and "Regulatory Limitation," herein.
All questions or requests for assistance concerning the method of
exercising rights or subscribing for Underlying Shares and requests for
additional copies of this Prospectus or the Notice of Guaranteed Delivery
should be directed to the Information Agent at the address and telephone number
set forth below. See "The Information Agent."
METHOD OF TRANSFERRING DIVIDEND RIGHTS
Dividend Rights may be purchased or sold through usual investment
channels. It is not anticipated that the Dividend Rights will trade on the
NASDAQ SmallCap Market. There has been no prior trading in the Dividend
Rights, and it is not expected that a trading market will develop therefor.
Dividend Rights evidenced by a single Exchange Offer Certificate may
be transferred in whole by endorsing the Exchange Offer Certificate for
transfer in accordance with the accompanying instructions. A portion of the
Dividend Rights evidenced by a single Exchange Offer Certificate (but no
fractional Dividend Rights) may be transferred by delivering to the
Subscription Agent an Exchange Offer Certificate properly endorsed for
transfer, with instructions to register that portion of the Dividend Rights
indicated therein in the name of the transferee and to issue a new Exchange
Offer Certificate to the transferor evidencing the transferred Rights. In that
event, a new Exchange Offer Certificate evidencing the balance of the Dividend
Rights will be issued to the Dividend Rights Holder or, if the Dividend Rights
Holder so instructs, to an additional transferee.
Holders wishing to transfer all or a portion of their Dividend Rights
(but not fractional rights) should allow a sufficient amount of time prior to
the Dividend Rights Expiration Date for (i) the transfer instructions to be
received by and processed by the Subscription Agent, (ii) new Certificates to
be issued and transmitted to the transferee or transferees with respect to
transferred Dividend Rights, and to the transferor with respect to retained
Dividend Rights, if any, and (iii) the Dividend Rights evidenced by the new
Certificates to be exercised or sold by the recipients thereof. Such amount of
time could range from two to four business days, depending upon the method by
which delivery of the Certificates and payment is made and the number of
transactions which the Subscription Agent is instructed to effect. Neither the
Company nor the Subscription Agent shall have any liability to a transferee or
transferor of Dividend Rights if Certificates are not received in time for
exercise or sale prior to the Dividend Rights Expiration Date.
-50-
<PAGE> 54
After the applicable Expiration Date, no new Certificates will be
issued. Accordingly, after such time and date, a new Exchange Offer Certificate
will be issued to a submitting holder upon the partial exercise or sale of
rights only if the Subscription Agent receives a properly endorsed Certificate
no later than the Dividend Rights Expiration Date. A Dividend Rights Holder
exercising less than all of his, her or its rights will lose the power to sell
or exercise his, her or its remaining rights. New Exchange Offer Certificates
will be sent by first class mail to the submitting holder if the Subscription
Agent receives the properly completed Certificate by 5:00 p.m. Eastern time, on
April 5, 1996. However, subscribers should allow sufficient time for the
exercise of Dividend Rights and delivery to the Subscription Agent by the
Dividend Rights Expiration Date. Neither the Company nor the Subscription Agent
shall have any liability if Certificates are not received in time for exercise
or sale prior to the Dividend Rights Expiration Date. Unless the Subscriber
makes other arrangements with the Subscription Agent, new Certificates issued
after 5:00 p.m. Eastern time on April 5, 1996, will be held for pick-up by the
Subscriber at the Subscription Agent's address provided above. All deliveries
of newly issued Certificates will be at the risk of the Subscriber.
Except for the fees charged by the Subscription Agent (which will be
paid by the Company as described herein), all commissions, fees and other
expenses (including brokerage commissions and transfer terms) incurred in
connection with the purchase, sale or exercise of Stockholder Rights or
Dividend Rights will be for the account of the transferor, and none of such
commissions, fees or expenses will be paid by the Company or the Subscription
Agent.
FINANCIAL ADVISOR
The Company's Board of Directors retained Seapower Carpenter Capital,
Inc., d.b.a. Carpenter & Company ("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 (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 were
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.
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
27, 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
Company's Capital Restoration Plan. 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
Common Stock. Carpenter also reviewed the Proxy Statement distributed in
connection with the 1995 Special Meeting and drafts of this Prospectus, 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
-51-
<PAGE> 55
idered 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 was 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 received additional fees in the amount of $185,000 upon the
completion of First Banks' investment of $10.0 million into the Company. In
addition, Carpenter will be paid a success fee of 4.5% of the gross proceeds,
if any, of the Rights Offering. Carpenter also received normal out-of-pocket
expenses and reimbursement of attorneys' fees and was provided with
indemnification for certain actions. Carpenter formerly assisted the Company
in connection with the preparation of its Capital Plan.
SUBSCRIPTION AGENT
The Company has entered into a Subscription Agent Agreement with the
Subscription Agent, pursuant to which the Company has agreed to indemnify the
Subscription Agent against certain liabilities which may arise in connection
with this Offering. The Subscription Agent will receive fees of $15,000 for
acting in such capacity in connection with the Offering, as well as
reimbursement of costs and expenses, and may receive additional fees upon any
extension of the Offering. The Subscription Agent also will receive fees of
$10.50 per subscription submitted in the Offering for the first 1,000
subscriptions, $8.00 per subscription for the next 2,000 subscriptions
submitted and $5.00 per subscription submitted thereafter.
Exchange Offer Certificates, Subscription Right Certificates, General
Subscription Applications and payment of the Subscription Price or, if
applicable, Notices of Guaranteed Delivery or Oversubscription Exercise Forms
must be delivered, whether by mail, hand or overnight courier, to the
Subscription Agent at the addresses set forth below. See "Subscription
Delivery Information."
SUBSCRIPTION DELIVERY INFORMATION
Subscriptions should be mailed or delivered to:
By Mail: The First National Bank of Boston
Shareholder Services Division
P.O. Box 1889
Mail Stop 45-01-19
Boston, Massachusetts 02105
By Facsimile Transmission: (617) 575-2232
-52-
<PAGE> 56
(617) 575-2233
(for Eligible Institutions Only)
Confirm by Telephone
(617) 575-3120
By Hand: BancBoston Trust Company of New York
55 Broadway, Third Floor
New York, New York
By Wire Transfer: The First National Bank of Boston
100 Federal Street
Boston, Massachusetts 02105
Attn: Paul Eori
ABA# 011000390
By Overnight Courier: The First National Bank of Boston
Shareholder Services Division
Mail Stop 45-01-19
150 Royall Street
Canton, Massachusetts 02021
INFORMATION AGENT
The Company has appointed Carpenter & Company as Information Agent for
the Offering. Any questions or requests for assistance concerning the method
of exercising Stockholder Rights or Dividend Rights, or for additional copies
of this Prospectus or the Notice of Guaranteed Delivery may be directed to the
Information Agent at the address and telephone number below:
Carpenter & Company
2600 Michelson Drive, Suite 300
Irvine, CA 92715
Attention: Edward Carpenter or John Flemming
Tel: (800) 528-8580
The Company will pay the fees and expenses of the Information Agent
and also has agreed to indemnify the Information Agent from certain liabilities
which it may incur in connection with the Offering. See "Financial Advisor,"
herein.
ESCROW AGENT
-53-
<PAGE> 57
The Company has entered into an Escrow Agreement with State Street
Bank and Trust Company, Boston, Massachusetts, as Escrow Agent, for the
investment of subscription funds until such funds are disbursed to the Company.
Subscription funds relating to the exercise of the Basic Subscription Privilege
will be disbursed by the Escrow Agent periodically to the Company, while funds
held in respect of the exercise of the Oversubscription Privilege will be held
in the escrow account pending determination of any necessary prorations or
reductions, in accordance with the terms of this Prospectus. The Escrow Agent
will return to the Subscription Agent for return to subscribers any funds
tendered with respect to rejected, reduced or prorated subscriptions, without
interest thereon. The Escrow Agent will disburse to the Company the proceeds
of the Public Offering and any purchase by First Banks of Common Stock as
Standby Purchaser promptly upon receipt thereof in accordance with the terms of
the Escrow Agreement.
The subscription funds while in the escrow account will be invested in
short-term certificates of deposit, short-term obligations of the United States
or any State or any agency thereof or money market mutual funds investing in the
foregoing instruments. Depending on the type of investment, THE ESCROW ACCOUNT
IN WHICH SUCH FUNDS MAY BE HELD MIGHT NOT BE INSURED BY THE FDIC. The Escrow
Agent will receive fees of $2,500, as well as reimbursement of costs and
expenses, for acting in such capacity with respect to the Offering.
DELIVERY OF COMMON STOCK CERTIFICATES
Certificates representing shares of Common Stock subscribed for and
issued pursuant to the Basic Subscription Privilege will be mailed as soon as
practicable after the corresponding Stockholder Rights have been validly
exercised and all reductions contemplated by the terms of the Offering have
been effected. Certificates representing shares of Common Stock subscribed for
and issued pursuant to the Oversubscription Privilege will be mailed as soon as
practicable after all prorations and reductions contemplated by the terms of
the Offering have been effected. Certificates representing shares of Common
Stock subscribed for and issued pursuant to the Dividend Exchange Offer and the
Public Offering shall be mailed as soon as practicable after the applicable
Expiration Date.
OTHER OFFERING INFORMATION
The Company may, in its sole and absolute discretion, terminate this
Offering at any time, without delivering notice to any person. Early
termination of the Offering will not affect the status of subscriptions
theretofore accepted by the Company. Additionally, the Company reserves the
right to cancel all or any portion of the Offering at any time. In the event
the Company cancels the Stockholder Rights Offering, the Company will refund
without interest the entire amount remitted pursuant to the exercise of
Stockholder Rights pursuant to the Basic Subscription or Oversubscription
Privileges. Alternatively, the Company may cancel the Dividend Exchange Offer,
rendering any exercise of Dividend Rights null and void, or may cancel the
Public Offering, in which case the Company will refund the entire amount
remitted pursuant to General Subscriptions. In the event this Offering is
terminated or canceled by the Company, the expenses of the Offering will be
borne by the Company.
-54-
<PAGE> 58
TAX LIMITATION
The Company will not be required to sell or issue shares of Common
Stock in the Offering to any person or entity if such sale or issuance would
result in a Section 382 limitation, as defined below. The Board of Directors
of the Company shall have the sole and absolute discretion to determine whether
a sale or issuance of shares pursuant to the Offering would result in a Section
382 limitation.
SECTION 382 LIMITATION
Generally, Section 382 of the Internal Revenue Code of 1986 (the
"Code") provides that following an "ownership change" of a corporation with net
operating loss ("NOL") carryovers or certain other tax attributes (a "Loss
Corporation"), the annual amount of post-ownership change taxable income that
can be offset by pre-ownership change NOLs cannot exceed the "Section 382
limitation." The Section 382 limitation is the product of (a) the value of the
corporation immediately before the ownership change (subject to various
adjustments) and (b) the long-term tax-exempt rate prescribed monthly by the
Internal Revenue Service ("IRS"). The Section 382 limitation is increased by
certain "recognized built-in gains," while certain "built-in losses" also are
subject to the Section 382 limitation. Similar rules apply to limit other
corporate tax attributes following an ownership change, including, but not
limited to, alternative minimum tax credits and general business tax credits.
As a result of Section 382 of the Code ("Section 382") and analogous
provisions of the Code, if an ownership change occurs with respect to the
Company or the Bank, the ability to utilize any NOL and other tax attributes
could be restricted significantly.
OWNERSHIP CHANGE TRIGGERING SECTION 382 LIMITATION
Generally, an "ownership change" occurs with respect to a Loss
Corporation if any shareholders who own, directly or indirectly, 5% or more of
the Loss Corporation's stock ("5% shareholders") increase their aggregate
percentage ownership of such stock by more than 50 percentage points over the
lowest percentage of stock owned by those shareholders at any time during a
prescribed testing period (generally three years).
Under Section 382(g)(4) and the Treasury regulations promulgated
thereunder, certain persons who are not themselves 5% shareholders are grouped
together as one 5% shareholder (a "Public Group") for purposes of identifying
5% shareholders and testing their percentage ownership change. In the case of
certain distinct events such as a public offering of stock, however, the Public
Group may be segregated into one or more public groups. For example, in the
case of a stock offering, the Public Group may be divided into a pre-issuance
Public Group (the "Old Public Group") and a post-issuance Public Group (the
"New Public Group"). Generally, there is a presumption that there is no
cross-ownership between the Old Public Group and the New Public Group. Thus,
the New Public Group is presumed to acquire all shares issued other than those
issued to 5% shareholders (unless rebutted with actual knowledge to the
contrary). These rules have the effect of increasing the likelihood of a
public offering resulting in an ownership change.
-55-
<PAGE> 59
In 1993, the IRS issued final regulations establishing a cash issuance
exception to the segregation rules. Under the final regulations, if a Loss
Corporation issues stock solely for cash, the segregation rules do not apply to
a percentage of stock issued equal to one-half of the percentage of stock owned
by the Old Public Group (or Groups) immediately before the issuance.
Accordingly, the final regulations limit the percentage ownership increase
attributed to the New Public Group. The amount of stock exempted for cash
issuances is limited to the amount of stock issued in the issuances, less the
amount of that stock owned by any 5% Shareholders (other than a pre-issuance
Public Group) immediately after the stock issuance.
The Loss Corporation may treat the Old Public Group as acquiring in
the aggregate more stock than they are treated as acquiring under the cash
issuance exception, but only if the corporation has actual knowledge that the
aggregate amount is higher. The cash issuance exception may apply to the
issuance of stock on the exercise of an option such as the Stockholder Rights.
The regulations require the Loss Corporation to take subsequent transfers of
options into account, however, in applying the actual knowledge exception upon
the exercise of the option. Therefore, even though the Stockholder Rights are
distributed pro rata to members of an Old Public Group, the Company can utilize
the actual knowledge exception only to the extent that the Company actually
knows that the persons acquiring stock on exercise of the Stockholder Rights
are members of the Old Public Group.
CALIFORNIA LIMITATION
California has substantially adopted the Section 382 limitation on the
use of NOLs following an ownership change. Generally, California has
incorporated the federal NOL provisions, subject to significant modifications
for most corporations. See "SUPERVISION AND REGULATION - Impact of Federal and
California Tax Laws."
IMPACT OF SECTION 382 RULES ON THE BANK AND THE COMPANY
As of December 31, 1994, the Company had a cumulative NOL for federal
income tax purposes of $10.8 million, and a cumulative NOL for California
income tax purposes of $10.2 million.
As a result of various transactions with First Banks, the NOLs and
other tax attributes of the Company and the Bank are subject to the Section 382
limitation. Therefore, the ability of the Company and the Bank to utilize the
NOL and other tax attributes to offset future taxable income is severely
limited.
First, the NOL attributable to the Bank (which represents
substantially all of the combined NOL) is subject to the Section 382 limitation
because of First Banks' acquisition of the Bank Common Stock on August 23,
1995. When First Banks acquired the Bank Common Stock, the Bank was treated as
leaving the Company's consolidated tax group. As a result, under the technical
consolidated tax return rules, substantially all of the consolidated NOL was
apportioned to the Bank. Thus, the Bank is a "Loss Corporation" for purposes
of Section 382. First Banks' acquisition of the Bank Common Stock was an
ownership change because First Banks acquired at that time substantially more
than 50% of the value of the Bank. However, First Banks did not acquire voting
control of the Bank.
-56-
<PAGE> 60
Second, the portion of the NOL (if any) remaining with the Company
also is subject to the Section 382 limitation because of First Banks'
acquisition on December 28, 1995 of 50,000,000 shares of Common Stock in
exchange for the shares of Bank Common Stock and Bank Preferred Stock. As a
result of this exchange, First Banks acquired substantially more than 50% of
the value of the Company. Accordingly, the Company's NOL is subject to the
Section 382 limitation.
It is not expected that the Offering will result in an ownership
change. However, the Offering may increase significantly the likelihood that
relatively small issuances of, and transactions in, shares of Common Stock or
any other equity securities of the Company within the next three years could
result in an ownership change of the Company (or the Bank).
LIMIT ON FILING CONSOLIDATED TAX RETURNS
If, as a result of the Offering, First Banks decreases its ownership
of the Company below 80%, the Company and the Bank may not be able to file
consolidated tax returns. As noted above, when First Banks acquired the Bank
Common Stock on August 23, 1995, the Company and the Bank no longer were
eligible to file consolidated tax returns. When First Banks acquired the
shares of Common Stock on December 28, 1995, the Company and the Bank became
part of First Banks' consolidated group. If, however, the Offering results in
First Banks reducing its ownership of the Company below 80%, then the Company
and the Bank would no longer be included in First Banks' consolidated tax
return. In that case, the Company and the Bank would not be permitted to file
consolidated tax returns for 60 months unless they receive permission of the
IRS. It is not certain that the IRS would grant this permission. If the
Company and the Bank were not allowed to file a consolidated tax return, the
Company's expenses (including interest on the debentures) could not be offset
against taxable income of the Bank.
TAX CONSEQUENCES OF THE RECEIPT OF DIVIDEND EXCHANGE SHARES AND
PURCHASE OF SHARES OF COMMON STOCK
For a discussion of certain federal income tax consequences which may
be realized by persons acquiring the Dividend Exchange Shares, shares of Common
Stock or the Appreciation Rights, see "FEDERAL INCOME TAX CONSEQUENCES."
REGULATORY LIMITATION
The Company will not be required to issue shares of Common Stock
pursuant to the Offering to any person or Rights Holder who, in the Company's
sole judgment and discretion, is required to obtain prior clearance, approval
or nondisapproval from any state or federal bank regulatory authority to own or
control such shares unless, prior to the applicable Expiration Date evidence of
such clearance, approval or nondisapproval has been provided to the Company.
If the Company elects not to issue shares in such case, such shares of Common
Stock will become available to satisfy subscriptions pursuant to the
Oversubscription Privilege, or General Subscriptions from members of the public
as to whom such conditions do not apply.
-57-
<PAGE> 61
The Federal Change in Bank Control Act of 1978 prohibits a person or
group of persons "acting in concert" from acquiring "control" of a bank holding
company unless the Board of Governors of the Federal Reserve System ("Federal
Reserve") has been given 60 days' prior written notice of such proposed
acquisition and within that time period the Federal Reserve has not issued a
notice disapproving the proposed acquisition or extending for up to another 30
days the period during which such a disapproval may be issued. An acquisition
may be made prior to the expiration of the disapproval period if the Federal
Reserve issues written notice of its intent not to disapprove the action. Under
a rebuttable presumption established by the Federal Reserve, the acquisition of
more than 10% of a class of voting stock of a bank holding company with a class
of securities registered under Section 12 of the Securities Exchange Act of
1934, as amended (such as the Common Stock), would, under the circumstances set
forth in the presumption, constitute the acquisition of control.
Under the Financial Code, no person shall, directly or indirectly,
acquire control of a California licensed bank or a bank holding company unless
the SBD has approved such acquisition of control. A person would be deemed to
have acquired control of the Company under this state law if such person,
directly or indirectly, has the power (i) to vote 25% or more of the voting
power of the Company or (ii) to direct or cause the direction of the management
and policies of the Company. For purposes of this law, a person who directly
or indirectly owns or controls 10% or more of the Common Stock would be
presumed to control the Company.
In addition, any "company" would be required to obtain the approval of
the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the
"BHC Act"), before acquiring 25% (5% in the case of an acquiror that is, or is
deemed to be, a bank holding company) or more of the outstanding Common Stock
of, or such lesser number of shares as constitute control over, the Company.
First Banks obtained all of the required approvals or notices of
non-disapproval in connection with the transactions consummated pursuant to the
terms of the Stock Purchase Agreement.
USE OF PROCEEDS
The Company intends to use the net proceeds from the Offering to
increase its regulatory capital levels and the regulatory capital levels of the
Bank. Secondarily, the Company will use any proceeds not contributed to the
Bank for general business purposes, including payment of operating expenses.
The Company will receive no direct cash proceeds from the issuance of
Dividend Exchange Shares in exchange for Dividend Rights, other than relief
from the obligation to pay the 1992 Dividends (plus accrued interest thereon)
in cash, to the extent that Dividend Rights are exercised for Dividend Exchange
Shares, which will cause a corresponding increase in the Company's
stockholders' equity and its regulatory capital levels. The aggregate amount
of 1992 Dividends and accrued interest is $968,887.44 at December 31, 1995.
The Company's expenses in connection with this Offering are
anticipated to aggregate $444,000, including legal fees, accounting fees, the
fees of other financial consultants and advisors, printing costs and mailing
costs, of which $416,000 are attributable to the Rights Offering and $28,000
are attributable to the Dividend Exchange Offer.
-58-
<PAGE> 62
DETERMINATION OF OFFERING PRICE
The Subscription Price for the shares of Common Stock was determined
by management and approved by the Board of Directors based upon information
which they believed to be relevant, specifically, the recently consummated
Stock Purchase Agreement and an opinion from Carpenter as financial advisor
that the terms of the transactions contemplated by the Stock Purchase Agreement
are fair to the existing holders of the Common Stock. Pursuant to the Stock
Purchase Agreement, First Banks purchased shares of Common Stock at $0.10 per
share, and the principal and accrued but unpaid interest amounts of the
Debentures are convertible into Common Stock at a rate of $0.10 per share.
Management and the Board of Directors also considered the recent trading
history of the Common Stock, the Company's and the Bank's financial condition,
as well as the per share book value of the Common Stock. See "MARKET
INFORMATION" and "THE OFFERING - Financial Advisor."
The primary objectives in establishing the Subscription Price were to
maximize net proceeds obtainable from the Offering, to ensure the success of
the Offering and to provide Rights Holders with an opportunity to make an
investment in the Company to partially offset the effects of the dilution of
their proportionate ownership position in the Company which resulted from
consummation of the Stock Purchase Agreement. See "THE STOCK PURCHASE
AGREEMENT AND CHANGE IN CONTROL OF THE COMPANY."
The Company determined the value of the Dividend Exchange Shares for
purposes of the exchange for Dividend Rights by considering the Subscription
Price, including those factors which the Board of Directors reviewed to
determine the Subscription Price, as well as the length of time the 1992
Dividends have been an outstanding obligation of the Company and the legal rate
of interest accrued by the Company with respect thereto.
No assurance can be given that the market price of the Common Stock
will not decline during the Offering to a level equal to or below the
Subscription Price or that, following the issuance of the Stockholder Rights,
Underlying Shares, Dividend Rights or Dividend Exchange Shares, a stockholder
will be able to sell shares purchased in the Offering at a price equal to or
greater than the Subscription Price.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of December 31, 1995, which includes the effects of the transactions
related to the Stock Purchase Agreement, and the pro forma capitalization of
the Company as of December 31, 1995, adjusted to give retroactive effect to:
(a) completion of the Rights Offering and Public Offering resulting in the sale
of 50,000,000 shares of Common Stock for $5,000,000, less related offering
expenses of $416,000; and (b) the completion of the Dividend Exchange Offering
resulting in the exchange of 9,688,875 shares in satisfaction of dividend
obligations and accrued interest of $968,887.44, less the related offering
expenses of $28,000. No assurance can be given that any number of shares of
Common Stock will be sold in the Offering in excess of the number of shares
which First Banks has committed to purchase as Standby Purchaser.
-59-
<PAGE> 63
PRO FORMA CONSOLIDATED CAPITALIZATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Pro Forma
Pro Forma As Adjusted for
Actual as of As Adjusted for Stockholder, Public
December 31, Stockholder and and Dividend
1995 Public Offering Exchange Offering
-------------- ----------------- -------------------
<S> <C> <C> <C>
Long-Term Debt:
12% Convertible Debentures,
maturing in 2000 $ 6,500 $ 6,500 $ 6,500
-------- -------- --------
Stockholders' Equity:
Preferred stock: $.01 par value
Authorized: 5,000,000 shares
Issued and outstanding: none --- --- ---
Common Stock: $.01 par value
Authorized: 250,000,000 shares
Issued and outstanding:
Actual 69,675,110 shares;
as adjusted for Stockholder and Public
Offering 119,675,110;
as adjusted for Stockholder, Public and
Dividend Exchange Offering
129,363,985 shares 697 1,197 1,294
Additional paid-in capital 33,251 37,335 38,179
Retained deficit (30,311) (30,311) (30,311)
Unrealized losses on securities available
for sale (58) (58) (58)
-------- -------- --------
Total Stockholders' Equity 3,579 8,163 9,104
-------- -------- --------
Total Capitalization $ 10,079 $ 14,663 $ 15,604
-------- -------- --------
Shares of common stock outstanding 69,675,110 119,675,110 129,363,985
Book value per share $ 0.05 $ 0.07 $ 0.07
Consolidated average assets $166,870 $171,454 $171,454
Consolidated Tier I leverage ratio 2.14% 4.76% 5.31%
======== ======== ========
Bank Tier I leverage ratio 6.58% 9.07% 9.62%
======== ======== ========
</TABLE>
-60-
<PAGE> 64
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 the three years ended December 31, 1994, 1993 and
1992 and should be read in conjunction with the Consolidated Financial
Statements, and accompanying notes included elsewhere herein.
GENERAL
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 the 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 AND ORDERS."
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 I leverage capital ratio decreasing to (0.83%). On August
23, 1995, the Bank was infused with an additional $3,500,000 in capital by
First Banks, 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 were deemed "critically
undercapitalized" and "undercapitalized," respectively, under the prompt
corrective action provisions of FDICIA as of such date. See "SUPERVISION AND
REGULATION." As of October 31, 1995, the Bank's Tier 1 capital ratio reached
3.19%, as a result of the purchase of the First Debenture by First Banks and by
the Company's contribution of $1.5 million in proceeds to the Bank.
LENDING AND CREDIT MANAGEMENT
-61-
<PAGE> 65
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 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 provisions of the 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 in
1994. 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.
-62-
<PAGE> 66
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 write-down and other expenses associated with
Other Real Estate Owned ("OREO") 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 third quarter, compared
to 7.5% for the same quarter in 1994. Yield on earning assets increased to
8.28% compared to 7.91% for the same period in 1994. 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 in 1994. In
addition to this compression 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 in 1994, 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 in 1994, 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
in 1994, 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 in 1994, 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 in 1994, 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 in 1994 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 OREO totaling $2,054,000 compared
to $11,073,000 for the same period in 1994 and $5,222,000 at December 31, 1994.
Included in OREO 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
-63-
<PAGE> 67
activity in OREO 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 1995, the Bank foreclosed on
four properties totaling $1,158,000 which were included in OREO 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 in 1994, 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 in 1994, 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 in 1994, 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 in 1994. 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 in 1994. Yield on
earning assets increased to 8.17%, compared to 7.46% for the same period in
1994. 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 in 1994. As a result, the Bank's net interest margin was 4.77% compared
to 5.31% for the same period in 1994.
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.
-64-
<PAGE> 68
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/SBD 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 in 1994. 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 in 1994. 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 in 1994.
Additionally, the loan loss reserve as a percentage of nonperforming assets,
which includes OREO, was 65.37% at September 30, 1995, compared to 42.77% for
the same period in 1994.
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 in 1994. 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 in
1994 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
the same quarter in 1994 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 in 1994 due to the closing of the
mortgage loan division effective April, 1994.
-65-
<PAGE> 69
Included in other non-interest income for the quarter ended September
30, 1995 are net gains on sales of OREO totaling $33,000. Included in this
category for the quarter ended September 30, 1994, are net gains on sales of
OREO 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 in 1994, 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 a 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 OREO 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 OREO 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 OREO write-downs and other OREO expenses,
reflecting a decrease in OREO 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%. OREO
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, compared to a
write-down of two properties totaling $788,000 and expenses of $358,000 for the
quarter ended September 30, 1994.
In July of 1994, the Company charged-off $992,000 of unamortized
deferred costs associated with the 1988 acquisition of the Citizens Bank 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 in 1994.
-66-
<PAGE> 70
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 in 1994. 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 in 1994.
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% for the
quarter ended September 30, 1995 from the quarter ended September 30, 1994.
This decrease is primarily due to a reduction in staff. At September 30, 1995,
the Bank had 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 $30,000 per month.
Occupancy and equipment expense was $465,000 for the quarter ended
September 30, 1995, compared to $582,000 for the same period in 1994, a
decrease of $117,000 or 20.1%. This decrease is primarily due to the selling
of the San Diego branch office in January 1995 and the closure of the Santa
Rosa branch office in April 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>
</TABLE>
-67-
<PAGE> 71
<TABLE>
<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 in 1994, a
decrease of $2,463,000 or 32.57%. This decrease is primarily attributable to
OREO 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 in 1994, a
decrease of $736,000. OREO related expenses for the first nine months of 1995
consisted of write-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
in 1994.
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, stationery and supplies of $82,000,
travel and business development of $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 above.
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 in 1994, 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.
-68-
<PAGE> 72
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.
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
OVERVIEW
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. 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 for the 1994 year was primarily due to the
write-downs and other expenses of $6,035,000 associated with OREO properties,
the increase of $9,809,000 to the provision for loan losses, as well as the
write-off of previously recorded income tax benefits of $2,407,000.
The provision for loan losses for the year ended December 31, 1994 was
$9,809,000, compared to $8,100,000 for the year ended December 31, 1993. The
provision for loan losses for the year ended December 31, 1992 was $7,260,000.
The increased provisions reflect management's assessment of the then prevailing
economic conditions and the impact those conditions have had and may have on
the Company's loan portfolio, as well as the results of regulatory
examinations.
Net interest income for the year ended December 31, 1994 was
$12,446,000, compared to $13,730,000 for the same period in 1993. Net interest
income for the year ended December 31, 1992 was $15,632,000. The decreases
were due primarily to declines in the volume of interest-earning assets.
Non-interest income for the year ended December 31, 1994 was
$1,973,000, compared to $2,995,000 for the same period in 1993. Non-interest
income for the year ended December 31, 1992 was $2,502,000.
Non-interest expense for the year ended December 31, 1994 was
$20,393,000, compared to $19,703,000 for the same period in 1993, an increase
of $690,000 or 3.5%. This increase can be primarily attributed to an increase
in OREO expense of $1,230,000. Non-interest expense for the year ended
December 31, 1992 was $16,264,000.
-69-
<PAGE> 73
NET INTEREST INCOME
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 year ended December 31, 1993, 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 year
ended December 31, 1993. Rates paid on interest-bearing liabilities decreased
slightly to 3.18% for the 1994 year, compared to 3.22% for the 1993 year. The
Bank's net interest margin increased to 5.27% for the year ended December 31,
1994, compared to 5.19% for the year ended December 31, 1993. The Bank's prime
rate averaged 7.32% for the year ended December 31, 1994, compared to 6.50% for
the same period the year before.
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 in 1993, 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 in 1993, a decrease of $17,938,000
or 15.92%.
Included in real estate loans are loans for the construction of
nonowner-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 in 1993, a
decrease of $17,038,000 or 41.80%. At December 31, 1994, nonowner-occupied
real estate construction loans were $10,813,000, compared to $32,432,000 at
December 31, 1993, a reduction of 67%.
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 in 1993, 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 for the year ended December 31, 1994. At December 31,
1994, nonaccrual loans totaled $11,433,000 compared to $21,100,000 for the same
period in 1993, a decrease of $9,667,000 or 45.82%.
OREO properties averaged $15,367,000 for the year ended December 31,
1994, compared to $16,971,000 for the fiscal year ended 1993. At December 31,
1994, the Bank had OREO 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 for the year ended December 31, 1994.
The decrease in nonperforming loans and OREO properties were the
direct result of collection and marketing efforts of management and the Board
of Directors of the Bank.
-70-
<PAGE> 74
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 fiscal year ended 1993. 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 of 7.77% for the year ended December 31, 1994,
compared to 7.60% for the same period in 1993.
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 in 1993. 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 the prime rate
increased by 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 during
1993.
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 in 1992, 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 $11,347,000 or 9.15%.
The average level of nonearning assets (nonaccrual loans and OREO) 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.
OREO 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 OREO 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 for the year ended December 31, 1994.
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.
-71-
<PAGE> 75
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 1993, and a 12.69% decrease in brokered and jumbo time
deposits (see "Liquidity").
PROVISION FOR LOAN LOSSES
1994 Compared to 1993
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 in 1993. The 1994
provision took into consideration loan write-offs and OREO write-downs totaling
$3,208,000 identified as "Loss" and $966,000 in loans identified as "Doubtful"
by management in conjunction with the 1994 FDIC/SBD joint examination. In
addition, management identified $2,986,000 in write-downs on OREO 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 - to "Notes to Consolidated Financial Statements" for the year ended
December 31, 1994.
1993 Compared to 1992
The provision for loan losses for the year ended December 31, 1993 was
$8,100,000 compared to $7,260,000 for the same period in 1992. In connection
with the 1993 joint FDIC/SBD examination, the Board of Directors approved a
provision for loan losses of $5,200,000 for the quarter ended March 31, 1993.
This provision took into consideration loans classified as "loss" and new
factors for specific reserve calculations that were a result of this
examination. In addition, management identified $2,900,000 in write-downs on
OREO which were accounted for in the allowance for loan losses.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES
AND INTEREST DIFFERENTIAL
The following table 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.
-72-
<PAGE> 76
<TABLE>
<CAPTION>
Average Balances, Yields and Rates
---------------------------------
1994 1993 1992
----------------------------- --------------------------- ---------------------------
Interest Rates Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
(dollar amounts 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
======== ======== ========
</TABLE>
-73-
<PAGE> 77
<TABLE>
<CAPTION>
Average Balances, Yields and Rates
---------------------------------
1994 1993 1992
----------------------------- --------------------------- ---------------------------
Interest Rates Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
(dollar amounts in thousands) Balance Expense Paid Balance Expense Paid Balance Expense Paid
------- ------- ---- ------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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.
-74-
<PAGE> 78
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
-------------------------- ---------------------------
(Dollar amounts 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.
-75-
<PAGE> 79
NON-INTEREST INCOME
The Bank's non-interest income consists 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 ending 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 in 1993 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% in 1994 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 lawsuits totaling $915,000.
1993 Compared to 1992
Non-interest income was $2,995,000 for the year ending 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 to 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 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.
[Rest of page intentionally left blank.]
-76-
<PAGE> 80
NON-INTEREST EXPENSE
The following table summarizes the significant components of
non-interest expense for 1994, 1993 and 1992:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
DOLLAR PERCENTAGE
(Dollar amounts 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)
OREO Write-down/expense 6,035 4,805 1,230 25.60
Other 5,417 5,397 20 .37
------- ------- ------
Total $20,393 $19,703 $ 690 3.50%
======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
DOLLAR PERCENTAGE
(Dollar amounts in thousands) 1994 1993 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
OREO Write-down/expense 4,805 1,203 3,602 299.42
Other 5,397 5,901 (504) (8.54)
------- ------- ------
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 in 1993, 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 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, reduced this level to 110 at
April 30, 1995, resulting in a total reduction in full-time equivalents of 41%
from December 31, 1993.
OREO write-down/expense representing the second largest component of
non-interest expense in 1994 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 OREO properties of $656,000. This compares to write-downs of
OREO properties totaling $2,960,000, expenses of $1,746,000 and net loss on
sale of OREO properties of $99,000 for the same period in 1993.
-77-
<PAGE> 81
Occupancy and Equipment expense was $2,373,000 for the year ended
December 31, 1994, compared to $2,550,000 for the same period in 1993, 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.
Included in other non-interest expense for 1994 was the write-off of
deferred acquisition costs. During the course of an examination by the FRB in
the third quarter of 1994, the regulators concluded that there was no future
value to the Citizens Bank of Roseville intangible in accordance with SFAS No.
44. As a result, the book value of $992,000 was written off.
During the year ended December 31, 1994, the Bank provided certain
banking services to its escrow and title industry 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 is 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 1993. The Bank discontinued providing
banking services to escrow and title industry depositors in September, 1994.
See Note 13 of Notes to Consolidated Financial Statements for the year ended
December 31, 1994 and "Liquidity" herein for further discussion of escrow and
title industry 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.
OREO write-downs/expense, representing the second largest component of
non-interest expense in 1993, totaled $4,805,000, consisting of write-downs of
OREO properties totaling $2,960,000, expenses of $1,746,000 and net loss on
sale of OREO properties of $99,000. This compares to write-downs of thirteen
OREO properties totaling $567,000 and expenses of $636,000 for 1992.
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
-78-
<PAGE> 82
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.
The decrease in other non-interest expense for the year ended December
31, 1993 compared to the year ended December 31, 1992 can be primarily
attributed to 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 escrow and title industry 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 $72,000 or 9.07%.
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 to net merchant credit card processing.
The cost of services provided to escrow and title industry 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%.
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 Statement of Financial
Accounting Standards 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 the year ended December
31, 1994 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.
-79-
<PAGE> 83
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."
[Rest of page intentionally left blank.]
-80-
<PAGE> 84
The following tables show the interest rate sensitivity of the Bank at September
30, 1995 and December 31, 1994:
(Dollars in thousands, except ratios) At September 30, 1995
<TABLE>
<CAPTION>
Immediately Six Over Six Over One
Adjustable Months or Months to Year to Over
Rates Less One Year Two Years Two Years Total
----- ---- -------- --------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Selected assets:
Federal funds sold/repos $ 42,500 $ 0 $ 0 $ 0 $ 0 $ 42,500
Investment securities 0 8,065 12,059 5,027 5,522 30,673
Loans and leases (1) 59,139 1,569 3,789 3,228 10,617 78,342
-------- -------- -------- -------- -------- --------
Total Selected Assets 101,639 9,634 15,848 8,255 16,139 151,515
-------- -------- -------- -------- -------- --------
Selected Liabilities:
Interest-bearing transaction
and savings accounts 61,294 0 0 0 0 61,294
Time accounts, $100,000 or
more 1,075 10,955 5,422 308 0 17,760
Other time accounts 7,735 32,846 13,382 833 230 55,026
-------- -------- -------- -------- -------- --------
Total Selected Liabilities 70,104 $ 43,801 $ 18,804 $ 1,141 $ 230 $134,080
-------- -------- -------- -------- -------- --------
Rate Gap $ 31,535 $(34,167) $ (2,956) $ 7,114 $ 15,909 $ 17,435
======== ======== ======== ======== ======== ========
Cumulative Rate Gap $ 31,535 $ (2,632) $ (5,588) $ 1,526 $ 17,435
======== ======== ======== ======== ========
Cumulative Ratio of Rate
Sensitive Assets to Rate
Sensitive Liabilities (2) 1.45 .98 .96 1.01 1.13
</TABLE>
- -----------
(1) The tables above identify 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 tables.
(2) Ratios greater than 1.0 indicate a net asset sensitive position. Ratios
less than 1.0 indicate a liability sensitive position. A ratio of 1.0
indicates a risk neutral position.
[Rest of page intentionally left blank.]
-81-
<PAGE> 85
<TABLE>
At December 31, 1994
(Dollars in thousands, except ratios)
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Immediately Six Over Six Over One
Adjustable Months or Months to Year to Over
Rates Less One Year Two Years Two Years Total
----- ---- -------- --------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Selected Assets:
Federal funds sold/repos $ 67,200 $ -- $ -- $ -- $ -- $ 67,200
Interest-bearing deposits with
other financial institutions -- 299 -- -- -- 299
Investment securities -- 1,006 1,011 8,111 7,562 17,690
Loans and leases (1) 96,902 1,316 1,511 8,346 13,948 120,021
-------- -------- -------- -------- -------- --------
Total Selected Assets 164,102 2,621 2,522 14,467 21,508 205,210
-------- -------- -------- -------- -------- --------
Selected Liabilities:
Interest-bearing transaction
and savings accounts $ 92,470 -- -- -- -- $ 92,470
Time accounts, $100,000 or more 955 15,020 9,656 542 100 26,473
Other time accounts 8,250 32,366 18,206 1,111 113 60,046
-------- -------- -------- -------- -------- --------
Total Selected Liabilities 101,675 47,885 28,062 1,653 213 178,989
-------- -------- -------- -------- -------- --------
Rate Gap $ 62,427 $(47,765) $(25,540) $12,804 $ 21,295 $ 26,221
======== ======== ======== ======== ======== ========
Cumulative Rate Gap $ 62,427 $ 17,662 $ (7,878) $ 4,926 $ 26,221
======== ======== ======== ======== ========
Cumulative Ratio of Rate
Sensitive Assets to Rate
Sensitive Liabilities (2) 1.61 1.12 .96 1.03 1.15
</TABLE>
(1) The tables above identify 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 tables.
(2) Ratios greater than 1.0 indicate a net asset sensitive position. Ratios
less than 1.0 indicate a liability sensitive position. A ratio of 1.0
indicates a risk neutral position.
As shown in the tables above, on a cumulative basis, the Bank is
generally asset sensitive in most time horizons. 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 tables do 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.
-82-
<PAGE> 86
LOANS
The composition of the Company's loan portfolio is summarized as
follows:
<TABLE>
<CAPTION>
September 30, December 31,
-------------------- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollar amounts in thousands) 1995 1994 1994 1993 1992 1991 1990
--------- --------- --------- --------- --------- --------- ---------
Commercial $ 37,075 $ 86,907 $ 69,597 $ 103,949 $ 119,115 $ 132,928 $ 116,849
Real Estate Construction 7,398 25,190 16,386 39,879 59,228 112,714 139,479
Real Estate Secured 33,982 38,324 38,439 43,803 48,060 40,303 35,517
Installment 3,634 6,047 5,993 7,290 9,243 10,527 12,306
--------- --------- --------- --------- --------- --------- ---------
Total gross loans 82,089 156,468 130,415 194,921 235,646 296,472 304,151
Unearned income (170) (368) (243) (544) (723) (711) (1,137)
Allowance for loan losses (4,838) (8,314) (7,437) (7,337) (5,484) (5,003) (3,050)
--------- --------- --------- --------- --------- --------- ---------
Net loans $ 77,081 $ 147,786 $ 122,735 $ 187,040 $ 229,439 $ 290,758 $ 299,964
========= ========= ========= ========= ========= ========= =========
</TABLE>
See Note 5 of the "Notes to Consolidated Financial Statements" for
the year ended December 31, 1994 for additional information concerning the
Bank's loan portfolio.
ASSET QUALITY, PROVISION FOR LOAN LOSSES AND LOAN LOSS EXPERIENCE
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 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 basis and establishing the
allowance for loan losses, the allowance is an estimate which is indirectly
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,
accurately maintained and regularly monitored. 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. In addition, the reserve is determined based upon
the following factors including: the delinquency status of the loan portfolio,
inherent risk by type of loans, historical loss trends derived from experience,
industry statistical data, recommendations made by the Bank's regulatory
authorities and the current economic environment.
-83-
<PAGE> 87
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 both external
auditors and regulatory authorities.
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. Net loan charge-offs for the year ended December 31,
1994 were $9,709,000 compared to $6,247,000 for the year ended December 31,
1993. The ratio of net charge-offs to average total loans was 5.62% for the year
ended 1994, compared to 2.86% for the year ended 1993. 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/SBD 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 of 1994. 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 in 1994. 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 OREO, was 65.37% at September
30, 1995, compared to 42.77% for the same period in 1994.
[Rest of the page intentionally left blank.]
-84-
<PAGE> 88
The changes to the allowance for loan losses consisted of the following
for the periods shown:
<TABLE>
<CAPTION>
Nine Months Ended Years Ended
September 30, December 31,
----------------- -------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollar amounts in thousands) 1995 1994 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- -------
Balance at beginning of year $ 7,437 $ 7,337 $ 7,337 $ 5,484 $ 5,003 $ 3,050 $ 2,398
Charge-offs:
Commercial 4,880 2,772 3,712 2,455 503 1,270 751
Real estate construction 430 4,740 5,591 3,831 5,991 1,574 --
Real estate secured 644 654 661 164 354 11 --
Installment 281 51 59 59 136 204 196
------- ------- ------- ------- ------- ------- -------
Total charge-offs 6,235 8,217 10,023 6,509 6,984 3,059 947
------- ------- ------- ------- ------- ------- -------
Recoveries:
Commercial 306 129 176 219 182 140 132
Real estate construction -- -- 125 -- -- -- --
Real estate secured -- -- -- 1 -- -- --
Installment 12 8 13 42 23 52 37
------- ------- ------- ------- ------- ------- -------
Total recoveries 318 137 314 262 205 192 169
------- ------- ------- ------- ------- ------- -------
Net charge-offs on loans 5,917 8,080 9,709 6,247 6,779 2,867 778
------- ------- ------- ------- ------- ------- -------
Reduction in allowance for loan
losses transferred with branch
sale (27) -- -- -- -- -- --
Additions to allowance charged
to operating expense 3,345 9,057 9,809 8,100 7,260 4,820 1,430
------- ------- ------- ------- ------- ------- -------
Balance at end of year $ 4,838 $ 8,314 $ 7,437 $ 7,337 $ 5,484 $ 5,003 $ 3,050
======= ======= ======= ======= ======= ======= =======
Net charge-offs on loans to
average loans 7.26% 5.92% 5.62% 2.86% 2.58% .94% .29%
Allowance for loan losses to
total loans outstanding 5.89% 5.31% 5.70% 3.76% 2.33% 1.69% 1.00%
</TABLE>
-85-
<PAGE> 89
The following table 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.
Allocation of Allowance
by Loan Type
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------------------
(dollar amounts in thousands)
1994 1993 1992 1991
----------------------- ------------------------ ------------------------- ------------------------
Allocation of Loans as% Allocation of Loans as% Allocation of Loans as % Allocation of Loans as%
Allowance of Total Allowance of Total Allowance of Total Allowance of Total
Balance Loans Balance Loans Balance Loans Balance Loans
------- ------ ------- ----- ------- ----- ------- -----
<S> <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%
Real estate construction 971 12.56 3,950 20.46 3,624 25.13 2,496 38.02
Real estate secured 1,315 29.47 353 22.47 134 20.40 303 13.59
Installment 75 4.60 63 3.74 113 3.92 44 3.55
------ ------ ------ ------ ------ ------ ------ ------
$7,437 100.00% $7,337 100.00% $5,484 100.00% $5,003 100.00%
====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
1990
------------------------
Allocation of Loans as%
Allowance of Total
Balance Loans
------ -----
<S> <C> <C>
Commercial $2,084 38.42%
Real estate construction 486 45.86
Real estate secured 384 11.67
Installment 96 4.05
------ ------
$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.
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.
-86-
<PAGE> 90
The following table shows the maturity distribution of the Bank's loans:
<TABLE>
<CAPTION>
September 30, 1995
-------------------------------------------------------------
Maturing
-------------------------------------------------------------
Within From 1 to Five or
(dollar amounts in thousands) One Year 5 Years More Years Total %
-------- ------- ---------- ----- -
<S> <C> <C> <C> <C> <C>
Commercial:
Fixed $ 831 $ 1,449 $ 513 $ 2,793 7.92%
Variable 20,807 7,853 3,825 32,485 92.08
------- ------- ------- ------- ------
Total 21,638 9,302 4,338 35,278 100.00%
------- ------- ------- ------- ------
Real Estate Construction:
Fixed 464 41 -- 505 8.31%
Variable 5,475 95 -- 5,570 91.69
------- ------- ------- ------- ------
Total 5,939 136 -- 6,075 100.00%
------- ------- ------- ------- ------
Real Estate Secured:
Fixed 3,033 7,163 3,089 13,285 41.04%
Variable 1,094 9,832 8,159 19,085 58.96
------- ------- ------- ------- ------
Total 4,127 16,995 11,248 32,370 100.00%
------- ------- ------- ------- ------
Installment:
Fixed 219 1,265 -- 1,484 40.90%
Variable 2,067 51 26 2,144 59.10
------- ------- ------- ------- ------
Total 2,286 1,316 26 3,628 100.00%
------- ------- ------- ------- ------
Total:
Fixed 4,547 9,918 3,602 18,067 23.36%
Variable 29,443 17,831 12,010 59,284 76.64
------- ------- ------- ------- ------
Total $33,990 $27,749 $15,612 $77,351 100.00%
======= ======= ======= ======= ======
</TABLE>
Note: Nonaccrual loans and unearned income have been excluded from the table.
-87-
<PAGE> 91
<TABLE>
<CAPTION>
December 31, 1994
-------------------------------------------------------------------
Maturing
-------------------------------------------------------------------
Within From 1 to Five or
(dollar amounts in thousands) One Year 5 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 2,347 15,995 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.
LIQUIDITY
Liquidity refers to the Company's ability to maintain a cash flow
adequate to fund both on- and off-balance sheet requirements 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.
-88-
<PAGE> 92
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 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 for the
three months ended 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 reflects the implementation of
the strategy to reduce the 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 office in January 1995 and closed the Santa Rosa branch office in April
1995. Included in the third quarter 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
-89-
<PAGE> 93
$100,000; and $2,702,000 in time accounts more than $100,000. The additional
decreases in all deposit categories except 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.
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.
To augment possible short-term liquidity needs, the Bank has a secured
borrowing arrangement with the FRB. 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 at September 30, 1995, 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 estate
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.
-90-
<PAGE> 94
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.
At December 31, 1994, the Company had a liquidity ratio of 41.78%,
compared to 38.20% 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 of the
periods shown:
<TABLE>
<CAPTION>
1994 1995
-------------- --------------------------------------------
(dollar amounts in thousands) Fourth Quarter First Quarter Second Quarter Third Quarter
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Demand (excludes title co. accounts) $ 51,603 $ 40,657 $ 32,266 $ 30,968
Core escrow and title demand accounts 5,081 3,073 1,540 1,062
Interest-bearing transaction and savings accounts 96,974 76,851 65,863 61,760
Time accounts, less than $100,00 47,752 47,624 60,075 57,052
-------- -------- -------- --------
Total core deposit accounts 201,410 168,205 159,744 150,842
Public time accounts 297 69 -- --
Time accounts, more than $100,000 26,310 22,546 21,474 17,953
National certificates of deposits 14,801 4,573 -- --
-------- -------- -------- --------
Total deposit accounts $242,818 $195,393 $181,218 $168,795
======== ======== ======== ========
</TABLE>
Escrow and title industry deposits at December 31, 1994 were $5,775,000
compared to $86,549,000 at December 31, 1993, a decrease of 93.33%. Average
escrow and title industry 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, escrow and title industry balances had been further
reduced further 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 any expenses associated with escrow and title industry 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 "Non-Interest
Expense" herein.
The decrease in interest-bearing transaction accounts was primarily due
to higher yielding investment alternatives in the market place
(disintermediation - i.e., mutual funds, bond market, stock market, etc.). In
order to strengthen the Bank's short-term liquidity in the event of a potential
deposit runoff, and to serve as a source of liquidity while the Bank reduced
-91-
<PAGE> 95
its reliance on escrow and title industry deposits, 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 were $14,063,000 and
represented 5.31% of total Bank deposits. As of September 30, 1995, all of these
deposits had been eliminated. The Bank has no brokered deposits. See "REGULATORY
AGREEMENTS AND ORDERS."
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 office in January 1995 and closed the Santa Rosa branch office in April
1995. 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.
-92-
<PAGE> 96
The following table 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.
<TABLE>
<CAPTION>
Average for the Years Ended December 31,
---------------------------------------------------------------------------------
1994 1993 1992
---------------------------------------------------------------------------------
(Dollar amounts
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>
The volatile liability dependency ratio is defined as time accounts
greater than $100,000, Federal funds purchased, other short-term borrowings and
excess escrow and title industry 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.
BUSINESS
THE COMPANY AND THE BANK
The Company is a Sacramento, California-based bank holding company
which reincorporated in Delaware in 1990 and which conducts its operations
through the Bank, its sole subsidiary. The Bank commenced operations in 1979.
The Bank operates a general commercial banking business through its headquarters
and 6 branch offices located in Sacramento, Roseville (2 branches), San
Francisco, Concord and Campbell, California. Deposits in the Bank are insured by
the FDIC to the maximum extent permitted by law.
-93-
<PAGE> 97
The Company is operating under the terms of the MOU with the FRB. The
Bank is operating under the terms of the FDIC Cease and Desist Order and the SBD
Final Order, and also is subject to the Capital Impairment Orders issued by the
SBD. The MOU and the Orders have placed significant operating and dividend
restrictions on the Company and the Bank. In addition, the FDIC notified the
Bank that as of July 30, 1995, the Bank was considered "critically
undercapitalized" under the PCA provisions of the FDICIA. However, as a result
of the capital infusion represented by the First Debenture, the Bank was
upgraded to "undercapitalized" as of October 31, 1995 and, as of December 31,
1995, as a result of the infusion of $1,500,000 provided by First Banks'
purchase of 15,000,000 shares of Common Stock and the proceeds of the Second
Debenture, the Bank would be considered "adequately capitalized" under such law.
The Company and the Bank remain subject to significant operating restrictions,
however, including limitations on the payment of dividends. For a full
description of the foregoing, see "RISK FACTORS - Failure to Meet Capital
Adequacy Requirements and Regulatory Orders," "REGULATORY AGREEMENTS AND ORDERS"
and "SUPERVISION AND REGULATION."
The Company grew substantially during the 1980's, primarily through the
acquisition of thirteen branches from California Canadian Bank and the
acquisition of Citizens Bank of Roseville. Between 1988 and 1992, the Company
focused its lending activities on real estate construction loans and through
June of 1994, on loans to small and medium-sized businesses. For deposits, the
Company focused on title insurance and escrow companies as well as on
small-to-medium- sized business depositors. The focused lending and
deposit-generation strategy which the Company pursued during this time period
involved certain risk attributes generally not present in a more diversified
lending and deposit strategy. See "RISK FACTORS - Recent Losses and Risk of
Continued Losses." At December 31, 1993, the Company's assets reached
$349,777,000 with $83,682,000 or 42.9% of the Company's gross loans in real
estate construction and real estate secured loans, and with $86,549,000 or
26.73% of its deposits in title and escrow accounts, and $237,247,000 in all
other deposits. As of December 31, 1994, the Company had consolidated total
assets, deposits and stockholders' equity of $239,306,000, $233,536,000 and
$4,355,000, respectively. At September 30, 1995, the Company had consolidated
total assets, deposits and stockholders' equity of $172,923,000, $167,239,000
and $(1,435,000), respectively.
The Company reported net losses in 1992, 1993 and 1994 of $(3,518,000),
$(7,311,000) and $(18,190,000), respectively, due primarily to deterioration in
its real estate lending portfolio and resultant write-downs and increased loan
loss provisions. The Company reported a net loss of $(6,301,000) for the nine
months ended September 30, 1995 due primarily to the continued write-down of,
and other expenses associated with, OREO, further deterioration in the loan
portfolio and the reduction in interest on loans resulting from the decrease in
the amount of loans outstanding. As a result, at September 30, 1995, the
Company's capital was reduced to $(1,435,000) and the Company and the Bank's
Tier I leverage ratios declined to (0.83)% and 2.41%, respectively.
During the second quarter of 1995, the Bank took substantial write-offs
and write-downs of loans and other assets. The most significant write-off
resulted from the bankruptcy of one of the Bank's largest borrowers. As a
result, the Company's Tier I capital was reduced to (0.23)% at June 30, 1995,
and the Bank's Tier I capital would have been reduced to 0.27%, but for the
investment of $1.5 million in Bank Preferred Stock by James F. Dierberg,
Chairman, President and Chief Executive Officer of First Banks, pursuant to the
terms of the Standby Stock Purchase Agreement. See "THE STOCK PURCHASE AGREEMENT
AND CHANGE IN CONTROL OF THE COMPANY." As discussed further below, Dierberg's
investment was made under emergency circumstances to forestall possible closure
of the Bank by its regulatory authorities.
In response to these losses, the Company developed a restructuring plan
to redirect the lending and deposit strategy of the Bank. The restructuring plan
had six elements: (a) reduce total assets, (b) reduce operating expenses and
staffing levels, (c) reduce nonperforming loans and increase reserve coverage of
such loans, (d) maintain the commercial and
-94-
<PAGE> 98
industrial lending portfolio, but significantly reduce real estate construction
lending, (e) eliminate volatile deposits and close non-strategic branch offices,
and (f) maintain high levels of liquidity to facilitate the asset and deposit
dispositions. Implementation of this plan began during the third quarter of 1994
and, as of September 30, 1995, has had the following results:
- Total assets were reduced 51% from $349,777,000 at December 1993
to $172,923,000.
- Nonperforming assets have been reduced 79% over the same period
from $35,321,000 to $7,401,000 and the loan loss reserve coverage
of nonperforming loans reached 90.48%.
- The nonowner occupied construction loan portfolio was reduced by
86%, from $32,432,000 to $4,479,000.
- Core monthly operating expenses were reduced 40% from $1,123,000
to $675,000.
- Escrow and title industry deposits were reduced 99% from
$86,549,000 at December 31, 1993 to $1,148,000.
- Staffing has been reduced 48% from 185 to 97 employees as of
September 30, 1995. By October 31, 1995, the full-time equivalent
(FTE) staff was further reduced to 80. At December 31, 1995, the
FTE staff was reduced to 63 employees.
- The Bank's liquidity ratio has been maintained above 30%.
- The San Diego branch office was sold in January of 1995, and the
Santa Rosa branch office was closed during April 1995.
At December 31, 1995, the Company's loan portfolio was concentrated in
twenty (20) loans, one (1) of which exceed the Bank's secured and unsecured
lending limit at that date. Commitments to these borrowers represent $31.2
million or 42% of the Bank's total loan portfolio at December 31, 1995.
Outstanding balances to these borrowers at December 31, 1995 were $23.6 million
or 32% of the Bank's loan portfolio. Four (4) of these loans, representing $7.4
million or 10% of the Bank's total loan portfolio, have been classified by the
Bank as "Substandard." One (1) loan in the amount of $754,000 is on nonaccrual
status.
-95-
<PAGE> 99
At December 31, 1995 the Bank's unsecured lending limit was
approximately $2.5 million and its combined secured and unsecured lending limit
was approximately $4.1 million. At December 31, 1995, the Bank had one (1) loan,
representing $3.8 million, which exceeded its unsecured lending limit and one
(1) loan, representing $5.5 million that exceeded 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.
On August 7, 1995, the Company entered into the Stock Purchase
Agreement with First Banks, pursuant to which First Banks has acquired
65,000,000 shares of Common Stock of the Company at a total purchase price of
$6,500,000. Previously, James F. Dierberg, Chairman, President and Chief
Executive Officer of First Banks, provided interim financing for the Bank by
purchasing $1.5 million of Bank Preferred Stock on June 30, 1995, thus
forestalling possible closure of the Bank by the FDIC. However, notwithstanding
Dierberg's $1.5 million investment in Bank stock, the Bank's Tier I capital
ratio at June 30, 1995 remained below 2.0% and, as a result, the Bank was
classified as "critically undercapitalized" at July 30, 1995 and became subject
to the FDIC's PCA regulations for critically undercapitalized institutions. The
Company and the Bank thus were required by FDICIA to seek sufficient capital to
bring the Bank's Tier I capital ratio above 2% or face the possible imposition
of a conservatorship or receivership within 90 days. Dierberg's investment
occurred pursuant to a Standby Stock Purchase Agreement entered into between the
Company, the Bank, Dierberg and First Banks as of June 30, 1995 (the "Standby
Stock Purchase Agreement"), which was later amended and restated to become the
Stock Purchase Agreement.
Subsequently, and pursuant to the Stock Purchase Agreement, on August
23, 1995, First Banks purchased 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, for a total purchase price of $3.5 million. On August 22, 1995, Dierberg
had transferred to First Banks all of the shares of Bank Preferred Stock owned
by him. The shares of Bank Preferred Stock and Bank Common Stock were exchanged
by First Banks for 50,000,000 shares of Company Common Stock on December 28,
1995, pursuant to the terms of the Stock Purchase Agreement. The infusion by
First Banks of $3.5 million on August 23, 1995 raised the Bank's Tier I capital
level to 2.60%, as a result of which the Bank would have been considered
"significantly undercapitalized." As described further below, at October 31,
1995, the Bank used the $1.5 million proceeds from the First Debenture to raise
its Tier I capital level above 3.0% and, as a result, the Bank would have been
considered "undercapitalized" under the PCA regulations.
Pursuant to the Stock Purchase Agreement, First Banks has loaned to the
Company a total of $6,500,000, in exchange for the issuance of the Debentures,
pursuant to which the Company agrees to issue to First Banks a total of
65,000,000 shares of Common Stock in respect of the principal amount of the
Debentures and pursuant to which any unpaid and accrued interest amount is
convertible into up to an additional 39,000,000 shares of Common Stock at the
rate of $0.10 per share. The Debentures are secured by all of the shares of Bank
Common Stock held by the Company. The First Debenture was issued on October 31,
1995 and conversion of the principal and any unconverted interest amount is due
on October 31, 2000. The Second Debenture was issued on December 28, 1995 and
will mature on December 28, 2000, at which time conversion of the principal
amount and any unconverted interest amount is due. The principal and interest
amounts of each of the First and Second Debentures are payable in shares of
Common Stock or cash. However, cash can be paid 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 all applicable regulatory requirements, including
receipt of all necessary approvals. Management believes it is unlikely that
approval for such cash payments would be received from the FRB in the
foreseeable future. The Company is required to give prior written notice to
First Banks of any intention to make a payment on the Debentures. The Company
contributed all but $250,000 of the proceeds of the Debentures to the Bank.
-96-
<PAGE> 100
On December 28, 1995, in order to raise the Bank's Tier I capital to
the level required by the Orders, First Banks purchased 15,000,000 shares of
Common Stock at a price of $0.10 per share, for a total of $1.5 million. As a
result of First Banks' purchase of 15,000,000 shares and the issuance of the
Second Debenture, at December 31, 1995, the Bank would be considered "adequately
capitalized" under the FDIC's PCA regulations. As of that date, the Bank would
have been considered "well capitalized" under the PCA regulations but for the
existence of the Orders, which while outstanding limit the Bank to being
considered "adequately capitalized." See "SUPERVISION AND REGULATION." However,
the Company and the Bank remain subject to significant operating restrictions
and no assurance can be given that the Bank will not suffer future additional
losses which will erode the capital condition of the Bank. The Company
contributed all of the proceeds of the stock sale to the Bank. See "THE STOCK
PURCHASE AGREEMENT AND CHANGE IN CONTROL OF THE COMPANY" and "REGULATORY
AGREEMENTS AND ORDERS."
As of December 31, 1995, while the Bank met the 6.5% Tier I capital
requirement of the FDIC Cease and Desist Order, differences in the method of
calculating capital for purposes of the SBD's regulations resulted in the Bank
attaining a Tier I capital level of 6.45%, thus falling short of the 7.0%
capital requirement of the SBD Final Order. On a pro forma basis, at December
31, 1995, the Bank would have required approximately an additional $1,009,000 in
capital in order to meet the 7.0% capital requirement of the SBD Final Order.
However, the SBD has allowed the Bank to attain the 7.0% capital requirement
through the proceeds of this Offering. Unless specified, the Tier I capital
numbers for the Bank presented herein have been calculated in accordance with
the FDIC's regulations and methodology. See "SUPERVISION AND REGULATION" and
"REGULATORY AGREEMENTS AND ORDERS."
As a result of the foregoing, as of the date of this Prospectus, First
Banks owns 65,000,000 shares of Company Common Stock, or 93.29% of the
outstanding shares. Assuming the sale to the Rights Holders and
Dividend-Eligible Stockholders of all of the Underlying Shares and Dividend
Exchange Shares offered hereby, First Banks would control approximately 50.25%
of the outstanding shares of Common Stock and may acquire up to a total of
104,000,000 additional shares of Common Stock upon conversion of the principal
and interest amounts subject to the Debentures. Assuming that all of the
principal and interest amounts of the Debentures is converted to Common Stock on
October 31, 2000 and December 28, 2000, and assuming the sale of all the shares
offered hereby to the aforementioned purchases and no interim issuances of
Common Stock by the Company, First Banks would control approximately 72.42% of
the then outstanding shares of Common Stock. See "THE STOCK PURCHASE AGREEMENT
AND CHANGE IN CONTROL OF THE COMPANY."
Additionally, as a result of the consummation of the transactions
contemplated by the Stock Purchase Agreement, as of December 31, 1995, the Tier
I leverage capital levels of the Company and the Bank were 2.14% and 6.58%,
respectively. As of that date, the Company and the Bank had risk-based capital
levels of 4.99% and 12.66%, respectively. First Banks has agreed that, upon the
conclusion of the Rights Offering and any Public Offering, First Banks will
purchase, if necessary, as a Standby Purchaser and at the Subscription Price,
such number of shares of Common Stock remaining unsold in the Offering as may be
required to increase the Bank's Tier I capital level to 7.0%. Such issuance of
Common Stock may further dilute the voting power and earnings per share, if any,
of the Company's stockholders, other than First Banks. See "RISK FACTORS -
Potential Dilution of Voting Power and Earnings Per Share." However, no
assurance can be given that the Bank will not experience further operating
losses which will erode the capital levels of the Bank or that the Bank will be
able to maintain such capital levels at any time after December 31, 1995. See
"CAPITALIZATION" and "THE STOCK PURCHASE AGREEMENT AND CHANGE IN CONTROL OF THE
COMPANY."
-97-
<PAGE> 101
As of December 31, 1995, the Company believes it has achieved
substantial compliance with the requirements of the Company's MOU, the FDIC
Cease and Desist Order and the SBD Final Order, except for compliance with the
7.0% Tier I capital requirement of the SBD Final Order. Further compliance with
the Company's MOU and the Orders is contemplated to occur through this Offering,
including any necessary participation by First Banks. As of December 31, 1995,
the Bank had not complied with the Capital Impairment Orders, subjecting the
Bank Common Stock to assessment. See "REGULATORY AGREEMENTS AND ORDERS."
On December 27, 1995, the stockholders of the Company approved an
amendment to the Company's Certificate of Incorporation authorizing an increase
in the number of authorized shares of Common Stock to 250,000,000. The Company
currently has 69,675,110 shares of Common Stock outstanding.
If all shares of Common Stock offered pursuant to the Offering are
sold, the resulting outstanding Common Stock would be 129,363,985 shares.
Additionally, if the maximum number of shares are converted pursuant to the
Debentures, the resulting outstanding Common Stock would be 233,363,985 shares.
Stockholders other than First Banks, whether or not exercising their Stockholder
Rights, may experience substantial dilution in the voting power and earnings per
share, if any, of their Common Stock holdings. See "RISK FACTORS - Potential
Dilution of Voting Power and Earnings Per Share" and "THE STOCK PURCHASE
AGREEMENT AND CHANGE IN CONTROL OF THE COMPANY."
ECONOMIC TRENDS
The Bank's business and consumer customers are located in Northern
California. 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. McClellan Air Force Base in Sacramento also has been
placed on a list of the bases which are being closed by the federal government.
During 1994, McClellan Air Force Base employed approximately 11,000 people
residing in the greater Sacramento area.
The median price of home resales in the 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
cut-backs 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 1992, 1993 and 1994 because a significant amount of the
Bank's loans are secured by real estate. The Bank's strategic business plan
forecasts a reduction in 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 reduction of nonperforming assets.
- --------------
(1) "Economic Profile Greater Sacramento Area," Real Estate and Land Use
Institute, California State University, Sacramento, January 1995.
-98-
<PAGE> 102
During the last part of 1994, the Northern California region appeared
to experience 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 was expected to expand during the first six months of 1995,
predominantly in the areas of state government, manufacturing and
high-technology industries.(3)
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 seven 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
PORTFOLIO COMPOSITION
The Bank concentrates its lending activities in commercial, real
estate, and installment loans made primarily to businesses, professionals and
individuals throughout California. At September 30, 1995, the Bank had total
loans outstanding of $82,089,000. This amount represents approximately 49.09% of
the Bank's total deposits and approximately 47.47% of the consolidated total
assets of the Company. At September 30, 1995, commercial and industrial loans
comprised $37,075,000, or approximately 45% of total loans outstanding. Real
estate construction loans made up $7,398,000, or 9% of total loans outstanding,
and real estate secured loans comprised approximately $33,982,000, or 41% of
total loans outstanding. Consumer loans were approximately $3,634,000, or 5%, of
the portfolio. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" and Note 5 of the "Notes to Consolidated Financial
Statements" for additional information regarding the Bank's loan portfolio.
As of December 31, 1995, the Company's loan portfolio is concentrated
in twenty (20) loans, one (1) of which exceeds 25% of the Bank's capital as of
that date. Commitments to these borrowers represent $31.2 million or 42% of the
Bank's
- --------------
(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.
-99-
<PAGE> 103
total loan portfolio at December 31, 1995. Outstanding balances to these
borrowers at December 31, 1995 were $23.6 million or 32% of the Bank's loan
portfolio. Four (4) of these loans, representing $7.4 million or 10% of the
Bank's total loan portfolio, have been classified by the Bank as substandard.
One (1) loan in the amount of $754,000 is on nonaccrual status.
CREDIT RISK
The Bank manages the credit risk interest in the loan portfolio through
the lending policies and procedures established by management and approved by
the Board of Directors, by a system of risk measurement of the portfolio and by
periodic independent loan reviews. 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. At that time, a revised credit risk management program was
established for the Bank which had as its cornerstone the assignment of a risk
category to every loan in the portfolio based on the type of loan, the nature of
the collateral, the financial capacity and payment history of the borrower and
the viability of the entity receiving the loan. Each loan is monitored over its
life by the loan officer, with the related risk rating adjusted periodically
based on changes as they occur. Independent loan reviews are then assigned the
task of separately evaluating the risk rating as well as evaluating the ability
of the loan officers in monitoring the loans. This risk measurement system then
provides a basis for controlling the overall risk of the loan portfolio and
evaluating the adequacy of the allowance for loan losses.
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. Currently, the Directors'
Loan and Discount Committee is 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 September 30, 1995, the Bank had $37,075,000 in
commercial loans, which represented approximately 45% of the total loan
portfolio. Approximately 92% of these loans had a floating rate of interest
based on the Bank's prime rate. Approximately 61% 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 do secured loans. However,
management believes that its underwriting controls, cash flow analysis and loan
review process provide the appropriate information to 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.
-100-
<PAGE> 104
REAL ESTATE CONSTRUCTION LOANS
The Bank finances the construction of primarily residential properties.
In order to reduce the Bank's exposure resulting from further declines in real
estate values, real estate construction loans outstanding were reduced during
1994 and 1995 from $39,879,000 as of December 31, 1993 to $7,398,000 at
September 30, 1995, an 81% reduction from 1993 levels. At September 30, 1995,
real estate construction loans represented only 9% of the Bank's loan portfolio.
Undisbursed real estate construction commitments stood at $3,420,000 at
September 30, 1995. At September 30, 1995, the Bank had residential construction
loans comprising $6,433,000, or 87% of the construction loan portfolio. The
total residential construction portfolio consists of single family construction
on owner occupied properties totaling $2,919,000, or 45%, single-family homes
totaling $1,287,000, or 20%, single-family lot development totaling $1,964,000,
or 31%, and a land loan totaling $263,000, or 4%, at September 30, 1995. 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 OREO
during 1994, 1993 and 1992, 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 loan portfolio, the Bank has restricted such
lending to owner-builder construction loans. No assurance can be given that
future economic conditions may not continue to adversely affect the collateral
values of such loans. See "RISK FACTORS - Construction and Real Estate Secured
Lending."
Construction loans for five commercial properties totaled $965,000, or
13% of the Bank's construction loan portfolio at September 30, 1995. At
September 30, 1995, these loans consisted of two commercial construction loans
totaling $770,000, or 80%, two land loans totaling $100,000, or 10%, and the
building of one commercial property totaling $95,000, or 10%.
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 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
qualify 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 has a current
independent appraisal and that the loan-to-appraised value ratio falls 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. At September 30, 1995, the Bank had $33,982,000 in real estate secured
loans, which represented 41% of the total loan portfolio. These loans consist of
equity lines of credit of $14,889,000, and loans
-101-
<PAGE> 105
secured by first deeds of trust on commercial and residential properties.
Approximately 59% of these loans bear interest at a floating rate tied to the
Bank's prime rate, with approximately 65% 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. See "RISK FACTORS - Construction and Real Estate Secured Lending."
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 the Bank's 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 September 30, 1995, the Bank had $3,634,000 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 59%
of all installment loans have floating rates tied to the Bank's prime rate with
the remainder having fixed interest rates.
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 September 30, 1995, the Bank had $75,000 in loan commitments to
directors and executive officers with an aggregate outstanding balance of
$4,000. Commitments to directors and executive officers represented 1.80% of
total Bank stockholders' equity at September 30, 1995. At December 31, 1995, the
Bank had no outstanding loan commitments to directors or executive officers.
INVESTMENTS
At September 30, 1995, the Company's investment security portfolio
consisted primarily of U.S. Treasury and other federal government agency
securities with a book value of $30,678,000. The balance of the Company's
investments totaling $42,500,000 were in the overnight investments in repurchase
agreements and federal funds.
<TABLE>
<CAPTION>
Market Amortized
At September 30, 1995 (in thousands) Value Cost Gain/(Loss)
- ------------------------------------ ------- --------- -----------
<S> <C> <C> <C>
Available for Sale $19,705 $19,724 $ (19)
Held-to-Maturity 11,061 10,968 93
------- ------- -------
</TABLE>
-102-
<PAGE> 106
<TABLE>
<S> <C> <C> <C>
Total $30,766 $30,692 $ 74
======= ======= =======
</TABLE>
The relatively small size of the Bank's investment portfolio is the
mirror image of the substantial federal funds holdings maintained throughout
1994 and 1995 to facilitate the decrease in total asset size. On a go-forward
basis, the Bank anticipates more fully investing those funds primarily in U.S.
government agency securities. As of December 31, 1995, following the investment
of an additional $30,000,000 of the Bank's liquid funds in agency securities
with average maturities of 7 months, the investment portfolio reached
approximately $74,249,000.
<TABLE>
<CAPTION>
Market Amortized
At December 31, 1995 (in thousands) Value Cost Gain/(Loss)
- ----------------------------------- ------- --------- -----------
<S> <C> <C> <C>
Available for Sale $63,291 $63,285 $ 6
Held-to-Maturity 11,069 10,958 111
------- ------- -------
Total $74,360 $74,248 $ 117
======= ======= =======
</TABLE>
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. The Bank has a diversified deposit base. A
mix of demand and other deposits associated with the Bank's lending relationship
is supplemented by retail deposits generated by the Bank's northern California
branch network. At September 30, 1995, the Bank had no brokered or telemarketing
deposits, significant volatile liabilities, escrow or title industry deposits.
At September 30, 1995, non-interest bearing deposits made up 20% of the
Bank's total deposit base, savings accounts made up 11%, and transaction
accounts 26%. Certificates of deposit under $100,000 accounted for 33% of total
deposits and certificates of deposit over $100,000, which are originated
entirely through the Bank's branch offices, made up 10% of the total deposits.
Total deposits were at $167,239,000 at September 30, 1995.
At December 31, 1994, the Bank had 15,758 deposit accounts with average
balances of $16,843. Deposits by individuals represented 78% of the total
accounts and 70% of total deposits. The balance of deposit accounts was
attributable to commercial and industrial accounts with the Bank.
At September 30, 1995, time accounts of $100,000 or more included
$14,013,000 in time accounts obtained from individuals and $3,746,000 from
businesses with established banking relationships.
-103-
<PAGE> 107
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Liquidity" for further information regarding the Bank's
deposits.
PREMISES
The Company's branch network is concentrated in the greater Sacramento
and San Francisco Bay areas.
Branch Location
<TABLE>
<CAPTION>
Deposits
Facility September Square
Name Address 1995 ($000's) Owned/Leased Footage
- ---- ------- ------------- ------------ -------
<S> <C> <C> <C> <C>
CAPITOL 2450 Venture Oaks Way
Sacramento, CA 95833 $24,116 Leased 7,577
CAMPBELL 94 San Tomas Aquino Rd.
Campbell, CA 95008 22,027 Leased 6,000
CONCORD 2395 Willow Pass Rd.
Concord, CA 94520 24,348 Leased 5,856
ROSEVILLE 201 Vernon Street
Roseville, CA 95678 22,473 Leased 8,590
ROSEVILLE 1625 Douglas Blvd.
Roseville, CA 95661 22,519 Owned 10,760
SACRAMENTO 865 Howe Avenue
Sacramento, CA 95825 9,889 Leased 5,498
SAN 1000 Taraval Street
FRANCISCO San Francisco, CA 94116 39,612 Leased 5,000
</TABLE>
EMPLOYEES
At December 31, 1994, the Company employed 156 persons consisting of
133 full-time and 23 part-time employees, which equates to 150 full-time
equivalent employees. As of September 30, 1995, full-time equivalent employees
were reduced to 97. As of December 31, 1995, full-time equivalent employees were
further reduced to 63.
COMPETITION
In California and in the Bank's primary service area, major banks
dominate the commercial banking industry. Among the advantages which these banks
may have over the Bank are their ability to finance wide-ranging advertising
campaigns and to allocate their investment assets, including loans, to regions
of higher yield and demand. By virtue of their larger capital bases, such
institutions have substantially greater lending limits than the Bank and perform
certain functions,
-104-
<PAGE> 108
including trust services and international banking services, which are not
presently offered directly by the Bank but are offered indirectly by the Bank
through correspondent institutions. The Bank also competes for loans and
deposits with savings and loan associations, finance companies, money market
funds, brokerage houses, credit unions and non-financial institutions.
In order to compete with other financial institutions in its primary
service area, the Bank relies principally upon direct personal contact by
directors, officers, employees, stockholders, and specialized promotion-oriented
services.
From time to time, legislation is proposed or enacted which has the
effect of increasing the cost of doing business, limiting permissible activities
or affecting the competitive balance between banks and other financial
institutions. It is impossible to predict the competitive impact these and other
changes in legislation will have on commercial banking in general or on the
business of the Bank in particular. See "SUPERVISION AND REGULATION - Recent and
Proposed Legislation."
[Rest of page intentionally left blank.]
-105-
<PAGE> 109
THE STOCK PURCHASE AGREEMENT
AND CHANGE IN CONTROL OF THE COMPANY
General
On July 25, 1995, the Boards of Directors of the Company and the Bank
unanimously approved entering into the Stock Purchase Agreement with First
Banks as a crucial element in the recapitalization of the Company and the Bank
and the return of the Bank to earnings through profitable operations. The
Stock Purchase Agreement was executed by the parties on August 7, 1995. The
stockholders of the Company approved the terms of the Stock Purchase Agreement
at the 1995 Special Meeting on December 27, 1995.
On June 30, 1995, pursuant to the Standby Stock Purchase Agreement,
the predecessor agreement which was amended and restated to become the Stock
Purchase Agreement, Mr. James F. Dierberg, the Chairman, Chief Executive
Officer and President of First Banks, purchased $1.5 million in shares of Bank
Preferred Stock. The purchase of the Bank Preferred Stock was effected on an
emergency basis in order to forestall possible closure of the Bank by the FDIC
within 90 days of the Bank being classified as "critically undercapitalized"
under the FDIC's PCA regulations. However, immediately after Dierberg's
investment, the Bank was informed that as a result of the then- ongoing joint
examination of the Bank by the FDIC and the SBD, the 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 I capital ratio to fall below 2.0% as of June
30, 1995 and the Company's capital account to fall to a negative $(398,000) as
of June 30, 1995. Institutions whose Tier I capital ratio falls below 2% are
immediately subject to stringent operating restrictions and potential further
regulatory action, including the possible imposition of a conservator or
receiver. In addition, the Bank's Tier I capital ratio as of June 30, 1995 was
significantly below the 6.5% level required by the Orders to which the Bank is
subject. See "SUPERVISION AND REGULATION - Federal Deposit Insurance
Corporation Improvement Act of 1991" and "REGULATORY AGREEMENTS AND ORDERS."
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 shares of Bank Common Stock. On August 21, 1995 and
August 22, 1995, First Banks received the approval of the Federal Reserve Bank
of St. Louis and the SBD, respectively, for a change in control of the Bank.
Thus, on August 23, 1995, First Banks purchased 116,666,666 shares of Bank
Common Stock at a price of $0.03 per share, the book value of the Bank Common
Stock as of August 22, 1995. These shares of Bank Common Stock were subject to
the terms of an irrevocable proxy agreement allowing the Company to vote such
shares of Bank Common Stock, which agreement terminated upon the approval of
the Stock Purchase Agreement by the Company's stockholders at the 1995 Special
Meeting. In addition, on August 22, 1995, Mr. Dierberg transferred to First
Banks all of the shares of Bank Preferred Stock.
On October 31, 1995, and in accordance with provisions of the Stock
Purchase Agreement which provide First Banks with the discretion to make
additional capital contributions to the Bank or the Company to permit the Bank
to meet the requirements of the SBD Final Order at October 31, 1995 and
December 31, 1995, respectively, First Banks loaned to the Company $1.5 million
in exchange for issuance of the First Debenture. The Company contributed all
of the proceeds of the First Debenture to the Bank. Contribution of the
proceeds of the First Debenture to the Bank resulted in a Bank Tier I capital
ratio of 3.19% at October 31, 1995. The SBD permitted the Bank to attain the
3.0% Tier I capital
-106-
<PAGE> 110
level rather than the 6.5% Tier I level required by the SBD Final Order at
October 31, 1995 because of First Banks' commitment to infuse the funds.
On December 28, 1995, pursuant to the terms of the Stock Purchase
Agreement, upon receiving the approval of the Stock Purchase Agreement by the
Company's stockholders at the 1995 Special Meeting, the Company issued to First
Banks 50,000,000 shares of Company Common Stock in exchange for the shares of
Bank Preferred Stock and Bank Common Stock held by First Banks. On December
28, 1995, First Banks loaned to the Company $5.0 million in exchange for the
issuance by the Company of the Second Debenture. The Company retained $250,000
of the $5.0 million loan and contributed the remainder of the proceeds thereof
to the Bank.
Finally, on December 28, 1995, First Banks purchased 15,000,000 shares
of Common Stock at a purchase price per share of $0.10, for a total of
$1,500,000. The Company contributed all of the proceeds of the stock sale to
the Bank, which, together with the proceeds of the Second Debenture, raised the
Tier I capital level of the Bank to 6.58%, allowing the Bank to meet the
capital requirements of the FDIC Cease and Desist Order at December 31, 1995.
As of December 31, 1995, while the Bank met the 6.5% Tier I capital
requirement of the FDIC Cease and Desist Order, differences in the method of
calculating capital for purposes of the SBD's regulations resulted in the Bank
attaining a Tier I capital level, as calculated by the SBD, of 6.45%, thus
falling short of the 7.0% capital requirement of the SBD Final Order. On a pro
forma basis, at December 31, 1995, the Bank would have required approximately
an additional $707,000 in capital in order to meet the 7.0% capital requirement
of the SBD Final Order. However, the SBD has allowed the Bank to attain the
7.0% capital requirement through the proceeds of this Offering. Unless
specified, the Tier I capital numbers for the Bank presented herein have been
calculated in accordance with the FDIC's regulations and methodology. See
"REGULATORY AGREEMENTS AND ORDERS" and "SUPERVISION AND REGULATION."
First Banks' investments in the Company and the Bank resulted in an
increase in the Bank's capital levels above the minimum amounts required by
applicable regulation. As mentioned, at December 31, 1995, the Bank's Tier I
capital ratio was 6.58%, up from 2.41% at September 30, 1995. Similarly, at
December 31, 1995, the Bank's risk- based capital ratio was 12.66%, up from
5.38% at September 30, 1995. While the Bank expects to meet the capital
requirements of the SBD Final Order through this Offering, including any
purchases by First Banks as "Standby Purchaser," the Bank does not expect to
cure its capital impairment even if all of the shares of Common Stock are sold
in the Offering. See "REGULATORY AGREEMENTS AND ORDERS."
OPTION TO MAKE FUTURE CAPITAL INFUSIONS
The Stock Purchase Agreement gave First Banks the option to make
additional capital infusions through the purchase of Company Common Stock or
Bank Common Stock in the event that the Bank's capital ratios did not meet the
minimums required by the Orders on or before the dates required thereby. The
Bank was required by the Orders to attain a 6.5% Tier I capital ratio by
October 31, 1995. However, the SBD modified this requirement to the 3.0%
capital level contingent upon the Bank receiving a $1.5 million capital
infusion from First Banks. Accordingly, the Company issued to First Banks the
First Debenture in exchange for a loan of $1.5 million. Similarly, in order to
assist the Bank in meeting the 7.0% Tier I capital requirement of the SBD Final
Order, the Stock Purchase Agreement was amended to allow First
-107-
<PAGE> 111
Banks to act as "Standby Purchaser" in the Offering, and as such to purchase, if
necessary, at the Subscription Price, the number of shares of Common Stock
necessary to raise the Bank's Tier I capital level to 7.0%. First Banks'
obligation to act as Standby Purchaser will arise only at the conclusion of the
Rights Offering and any Public Offering and only in the event that the proceeds
thereof, net of Offering expenses, are insufficient to allow the Bank to meet
the 7.0% Tier I capital level. The SBD Final Order requires the Bank to meet the
7.0% Tier I capital requirement by December 31, 1995, but the Bank has received
from the SBD an oral extension of the date for compliance based on the structure
of the Offering and First Banks' agreement to act as Standby Purchaser.
TERMS OF THE DEBENTURES AND FUTURE DILUTION OF VOTING POWER AND EARNINGS PER
SHARE
The First Debenture was entered into by the Company on October 31,
1995 in exchange for a loan from First Banks of $1.5 million. The Second
Debenture was entered into on December 28, 1995 in exchange for a loan of $5.0
million. The $1.5 million and $5.0 million principal amounts of the respective
Debentures are convertible at the option of First Banks at any time into a
total of 15,000,000 and 50,000,000 shares of Common Stock, respectively. The
Company is required to give First Banks 10 days prior written notice of an
intention to make any cash payments on the Debentures. The Debentures are
secured by all of the 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"). The maturity date of the First Debenture
is October 31, 2000 while the maturity date of the Second Debenture is December
28, 2000. Pursuant to the Stock Purchase Agreement, the Company contributed to
the Bank all of the proceeds of the First Debenture and all but $250,000 of the
proceeds of the Second Debenture. Upon maturity, any unconverted principal
amounts of the Debentures will convert automatically into Common Stock at a
rate of $0.10 per share. Pursuant to the Debentures, First Banks may foreclose
on the Bank Common Stock held by the Company only in the event that the Company
is insolvent, in bankruptcy or 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.
In addition, the Company has agreed to pay to First Banks interest at
the rate of 12% per annum on the outstanding unconverted principal balances of
the Debentures, 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, including receipt of required
regulatory approvals; provided, however, if and to the extent the Company has
not previously paid interest or principal on the Debentures, then (i) prior to
the applicable maturity date, the holder of the Debentures shall have the right
to convert unpaid interest and principal into shares of the 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
Debentures shall be payable and convert into the Common Stock at the rate of
$0.10 per share. Due to the Bank's current unprofitable condition and the
history of losses at the Company and the Bank, 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 Debentures in cash. Neither is it
currently anticipated that the Company's regulatory authorities would permit
the Company to pay interest on the Debentures in cash 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. The Company anticipates making cash payments of interest on the
Debentures to the extent that sufficient cash is available to the Company for
this purpose and upon receiving the required FRB approval. As of the date of
this Prospectus, the Company has not applied to the FRB for permission to make
any cash interest payment on the Debentures. However, the Company is not
foreclosed from applying for authority to pay interest in cash in the future.
-108-
<PAGE> 112
\
Accordingly, in the event that the Company elects not to pay any
interest amount on either of the Debentures in cash, the Company may issue to
First Banks up to a total of 9,000,000 shares and 30,000,000 shares of Common
Stock in respect of annual interest payments on the First and Second
Debentures, respectively, assuming that First Banks does not elect to convert
any principal amounts prior to maturity. The issuance of such additional
shares, together with the issuance of a total of 15,000,000 shares of Common
Stock in respect of the principal amount of the First Debenture and 50,000,000
shares of Common Stock in respect of the principal amount of the Second
Debenture, will result in the substantial dilution of the voting power and
earnings per share of the present stockholders of the Company, other than First
Banks. For example, assuming that 50,000,000 shares of Common Stock are sold
to stockholders and that 9,688,875 Dividend Exchange Shares are issued in this
Offering, and assuming that no other shares are issued by the Company through
December 28, 2000, the issuance of a total of 104,000,000 shares of Common
Stock at the maturity of the Debentures would result in a reduction in
stockholders' ownership of the Common Stock from 49.75% to approximately
27.58%. In addition, First Banks' conversion of any portion of the principal
or interest amounts of the Debentures could have a dilutive effect on the book
value of the Common Stock as well as a significant dilutive effect on the
stockholders' equity and earnings per share, if any, of stockholders other than
First Banks. Finally, any purchase of Common Stock by First Banks as "Standby
Purchaser" may have an additional substantial dilutive effect on the
stockholders' equity and earnings per share, if any, of the Company's
stockholders. See "RISK FACTORS - Potential Dilution of Voting Power and
Earnings Per Share."
Under applicable Delaware and Missouri laws, ownership by First Banks
of more than 90% of the Common Stock would permit a so-called "short-form"
merger between First Banks and the Company such that the Company could be
merged into First Banks without the approval of the Company's stockholders.
However, in any such short-form merger, the Company's stockholders would have
appraisal rights under Delaware law. First Banks has informed the Company that
it has not considered whether or not to effect a short-form merger with the
Company if First Banks holds in excess of 90% of the Common Stock after the
Offering.
ISSUANCE OF APPRECIATION RIGHTS
The Stock Purchase Agreement contains provisions designed to give the
stockholders of the Company as of October 6, 1995 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"), after certain
adjustments. The Stock Purchase Agreement contains formulas (the "Measurement
Formulas") which 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, a reasonable reserve for pending or threatened litigation related to the
resolution of the Specified Assets or certain stockholder litigation and other
factors, including Company earnings. The outcome of the Measurement Formulas
will be used to determine whether the Appreciation Rights will entitle the
stockholders to receive cash or shares of Company Common Stock if and as
declared by the Board of Directors. The Stock Purchase Agreement provides that
calculations pursuant to the Measurement Formula will occur and distributions
of shares or cash, if any, may occur as of three dates: June 30, 1996,
December 31, 1997 and October 31, 1998. The Board of Directors may determine
in its sole discretion (subject to regulatory approval) whether cash or stock
will be distributed on the second and third distribution dates, while only
stock may be distributed on the first distribution date. No stock or cash will
be distributed if the outcome of the Measurement Formulas is negative. The
Appreciation Rights, if exercisable, will be exercisable for no additional
consideration.
RIGHT TO NOMINATE DIRECTORS
Pursuant to the Stock Purchase Agreement, the Board of Directors of the
Company has elected James F. Dierberg, Allen H. Blake and Donald W. Williams to
serve as directors until the next Annual Meeting of Stockholders of the Company.
Similarly, the Board of Directors of the Bank has elected Messrs. Dierberg,
Blake and Williams to serve as directors of the Bank. Finally, the Company has
agreed to use reasonable efforts to retain at least two (2)
-109-
<PAGE> 113
directors who are unaffiliated with First Banks on the Board of Directors
through June 30, 1996. Directors Perry and Morris are unaffiliated with First
Banks. See "MANAGEMENT."
PROVISION AFFECTING RIGHTS OFFERING
Pursuant to the Stock Purchase Agreement, the Company and First Banks
agreed that the Rights Offering shall not exceed $5.0 million and that the
Public Offering component of the Offering shall not exceed $1.0 million of the
$5.0 million total. Further, the Company and First Banks agreed that the
shares of Common Stock shall be offered and sold in the Offering at the same
price which First Banks paid for the shares of Common Stock pursuant to the
Stock Purchase Agreement. Finally, the Stock Purchase Agreement contains
provisions requiring First Banks to act as "Standby Purchaser" in the Offering
to the extent that the proceeds of the Rights Offering and any Public Offering
are insufficient to raise the Bank's Tier I capital ratio to 7.0%. See "THE
OFFERING."
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. As a result of the financial condition of the Company
and the Bank at the time preceding execution of the Stock Purchase Agreement,
the Board of Directors agreed to amend the Rights Agreement (the "Amendment")
to exempt the transactions contemplated by the Stock Purchase Agreement from
triggering the operation of the Rights Agreement. 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
$0.10 per share, in exchange for the aggregate amount of such redemption.
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 at 135 North Meramec, Clayton, Missouri 63105, telephone (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, the holding company of which is First Banks America, Inc.; St.
-110-
<PAGE> 114
Charles Federal Savings and Loan Association, headquartered in St. Charles,
Missouri; Queen City Bank, N.A., headquartered in Long Beach, 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 New York Stock Exchange under the symbol "FBA." Information regarding
First Banks and the Subsidiary Financial Institutions was provided to the
Company by First Banks.
EFFECT OF THE STOCK PURCHASE AGREEMENT ON ACCOUNTING AND TAX ISSUES
As of December 31, 1994, the Company had approximately $10,800,000 in
federal tax net operating losses, and other deferred federal tax deductions in
the amount of approximately $10,300,000 due to differentials between the book
and tax carrying values of certain assets on the Company's balance sheet.
As noted previously at "THE OFFERING - Tax Limitation," because of
"ownership changes" of the Company and the Bank, the NOL and other tax
attributes of the Company and the Bank (including net unrealized built- in
losses) are subject to the "Section 382 limitation." As a result, the ability
of the Company and the Bank to utilize the NOL and other tax attributes to
offset future taxable income is severely limited.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
GENERAL
The Company's Board of Directors presently consists of five (5)
members. Pursuant to provisions of the Bylaws of the Company, directors of the
Company are elected for terms of three (3) years with approximately one-third
of the directors elected each year. The terms of office of the Class C, Class
A and Class B directors will expire at the Annual Meeting of Stockholders in
1996, 1997 and 1998, respectively. Each officer of the Company is elected by
the Board of Directors annually.
The Company did not hold an annual meeting of stockholders during 1995
and, accordingly, is in violation of applicable provisions of the Delaware
General Corporation Law.
-111-
<PAGE> 115
The following table lists the directors of the Company, their ages,
their positions held with the Company and the Bank, and their ownership of
Common Stock as of December 31, 1995, without giving effect to any shares of
Common Stock which may be purchased in the Offering.
<TABLE>
<CAPTION>
DIRECTOR POSITION WITH THE COMPANY SHARES BENEFICIALLY PERCENT OF
NAME AGE SINCE OR WITH THE BANK OWNED Class
---- --- ----- ---------------- ----- -----
<S> <C> <C> <C> <C> <C>
Michael P. Morris 48 1995 Director of the Company -0- 0.00%
Class "A" and the Bank
Manuel Perry, Jr. 63 1983 Chairman of the Board of 21,150 (1) 0.03%
Class "C" Directors of the Company
James F. Dierberg 58 1995 Director of the Company 130,000,000 (2) 96.53%
Class "B" and the Bank
Allen H. Blake 53 1995 Interim Chief Financial -0- 0.00%
Class "B" Officer of the Company
and the Bank; Director of
the Company and the Bank
Donald W. Williams 48 1995 President, Chief Executive -0- 0.00%
Class "A" Officer and Director of the
Company; Chief Executive
Officer and Chairman of
the Board of the Board of
Directors of the Bank
All Directors and
Officers as a Group
(5 in number) 130,021,150 (3) 96.54%
</TABLE>
- -----------------------------
(1) Includes 10,000 shares subject to options presently exercisable under
the Directors Stock Option Plan. See "Directors' Stock Option Plan."
(2) The voting stock of First Banks is owned by various trusts which were
created by and are administered by and for the benefit of Mr. James F.
Dierberg and members of his immediate family. Accordingly, Mr.
Dierberg controls the management and policies of First Banks and the
election of its directors and is deemed to have beneficial ownership
of 65,000,000 shares issuable to First Banks at its option upon the
conversion of the entire principal amount of the Debentures, as well
as the 65,000,000 shares of Common Stock held by First Banks. See
"THE STOCK PURCHASE AGREEMENT AND CHANGE IN CONTROL OF THE COMPANY."
(3) Includes 10,000 shares subject to options presently exercisable under
the Company's Directors Stock Option Plan.
-112-
<PAGE> 116
The following table sets forth certain information with respect to the
executive officers of the Company:
<TABLE>
<CAPTION>
POSITIONS HELD WITH THE EXECUTIVE
NAME AGE COMPANY OR THE BANK OFFICER (1) SINCE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Donald W. Williams 48 Chief Executive Officer of the Company and 1995
and the Bank; President of the Company
Allen H. Blake 53 Interim Chief Financial Officer of the 1995
Company and Bank
</TABLE>
- -----------------------------
(1) As used throughout this Prospectus, the term "executive officer" means
the president, any vice president in charge of a principal business
unit, division or function, any other officer or person who performs a
policy- making function for the Company, and any executive officer of
any of the Company's subsidiaries who performs policy-making functions
for the Company.
BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
ALLEN H. BLAKE was appointed on November 28, 1995 to serve as the
Interim Chief Financial Officer of the Company and the Bank until a permanent
Chief Financial Officer can be employed, subject to regulatory approvals which
were received on December 20, 1995. Mr. Blake also 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 Vice President, Chief Financial Officer,
Secretary and director of First Banks America, Inc., a director of First Bank,
headquartered in O'Fallon, Illinois, a director of First Bank & Trust,
headquartered in Santa Ana, California, and a director and Secretary of First
Bank, headquartered in Creve Coeur, Missouri. First Banks America, Inc. and
First Banks, Inc. each have a class of securities registered pursuant to
Section 12 of the Securities Exchange Act of 1934, as amended.
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, a director of Queen City Bank, N.A., Long
Beach, 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. First Banks America, Inc. and First Banks, Inc.
each have a class of securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended.
-113-
<PAGE> 117
MICHAEL P. MORRIS currently is, and for the past four 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 CPA firm. While with KPMG Peat Marwick, Mr.
Morris specialized as a banking audit partner with extensive experience auditing
community banks in Northern California. Mr. Morris joined KPMG Peat Marwick in
1978.
MANUEL PERRY, JR. is the Chairman of the Board of Directors of the
Company. He has been an agent with New York Life Insurance Company since 1957.
He is a member of the President's Council for New York Life Insurance Company
and a member of Sacramento Life Underwriters Association.
DONALD W. WILLIAMS has been Senior Vice President and Chief Credit
Officer of First Banks since March, 1993. On October 24, 1995, the Board of
Directors of the Bank elected Mr. Williams to serve as Chief Executive Officer
of the Bank. First Banks has filed the appropriate application with the FRB
for Mr. Williams to serve as President and Chief Executive Officer of the
Company. In addition, he is Chairman of the Board, President 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., Bank TEXAS National Association, and Queen City
Bank, N.A., Long Beach, California. 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. First Banks
America, Inc. has a class of securities registered pursuant to Section 12 of
the Securities Exchange Act of 1934, as amended.
No director or executive officer of the Company has any family
relationship with any other director or executive officer of the Company, or
director or officer of the Bank.
Except as set forth above, no director of the Company is a director of
any other company with a class of securities registered pursuant to Section 12
of the Securities Exchange Act of 1934, as amended, or subject to the
requirements of Section 15(d) of such Act or of any company registered as an
investment company under the Investment Company Act of 1940, as amended.
Messrs. Dierberg, Blake and Williams were elected to the Board of
Directors of the Company in accordance with the terms of the Stock Purchase
Agreement. See "THE STOCK PURCHASE AGREEMENT AND CHANGE IN CONTROL OF THE
COMPANY - Right to Nominate Directors."
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has established the following
standing committees, with membership as noted.
The Audit Committee of the Board of Directors is composed of Mr. Perry
as Chairman, and Mr. Morris as a member. The functions of the Audit Committee
are, among other things: (1) to recommend the appointment of and to oversee a
firm of independent certified public accountants whose duty is to audit the
books and records of the Company and the Bank for the fiscal year for which
they are appointed; (2) to monitor the Company's system of internal controls
and oversee compliance with policies; (3) to review the adequacy of the
Company's controls of regulatory and financial
-114-
<PAGE> 118
accounting and reporting; (4) to oversee the internal audit functions; and (5)
to monitor and analyze the results of internal and regulatory examinations.
The function of the Compensation Committee of the Board is performed
by the full Board of Directors. The function of the Compensation Committee is
to define Company policy with respect to executive compensation, to review
management's performance on an annual basis and to set discretionary
compensation for executive officers. In addition, the Compensation Committee
is responsible for preparing the annual Compensation Committee Report, which
appears in the Company's annual Proxy Statements.
EXECUTIVE COMPENSATION
SUMMARY OF COMPENSATION
The following table sets forth a summary of the compensation paid
during the Company's past three fiscal years to the Company's Chief Executive
Officer or person acting in a similar capacity and to each of the Company's
senior executive officers, for services rendered in all capacities, whose
annual compensation exceeded $100,000 during the Company's 1995 fiscal year.
During 1995, Mr. James E. Culleton served as Interim President of the Bank
until October 24, 1995, when he was appointed to serve as President and Chief
Operating Officer of the Bank and as Interim President of the Company through
December 27, 1995. Ms. Anne H. Long served as Executive Vice President and
Chief Financial Officer of the Company and the Bank during 1995 until her
resignation effective December 6, 1995. In addition, effective December 27,
1995, Mr. Donald W. Williams began serving as the President and Chief Executive
Officer of the Company.
-115-
<PAGE> 119
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM
ANNUAL COMPENSATION COMPENSATION
AWARDS
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($)(1) BONUS ($) COMPENSATION ($)(2) OPTIONS (#) COMPENSATION ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
James E. Culleton 1995 $ 156,405 -0- -0- -0- $ 0
Former Interim President (3)
- -----------------------------------------------------------------------------------------------------------------------------------
1994 162,937 -0- -0- -0- 5,437
- -----------------------------------------------------------------------------------------------------------------------------------
1993 154,284 -0- -0- -0- 5,505
- -----------------------------------------------------------------------------------------------------------------------------------
Donald W. Williams 1995 N/A(4) N/A N/A N/A N/A
President and C.E.O.(4)
- -----------------------------------------------------------------------------------------------------------------------------------
1994 N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
1993 N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Anne H. Long 1995 130,791 -0- -0- -0- 62,749(5)
Former E.V.P. and C.F.O.
- -----------------------------------------------------------------------------------------------------------------------------------
1994 103,251 -0- -0- -0- 5,089
- -----------------------------------------------------------------------------------------------------------------------------------
1993 93,800 -0- -0- -0- 4,995
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------------------------
(1) Includes deferred compensation.
(2) Threshold of $50,000 or 10% of total salary and bonus compensation not
met.
(3) Mr. Culleton was appointed President of the Bank on October 24, 1995
and resigned his positions with the Company effective December 27,
1995.
(4) Mr. Williams began serving as President and Chief Executive Officer of
the Company effective December 27, 1995. Mr. Williams is compensated
for such services pursuant to the terms of the Management Services
Agreement entered into between the Company and First Banks dated
December 21, 1995. See "Employment Arrangements and Agreements"
herein.
(5) Includes $249 in respect of continued health insurance coverage
through December 31, 1995 and a $62,500 payment to Ms. Long in
consideration for certain amendments to Ms. Long's employment
agreement with the Company. See "Employment Arrangements and
Agreements" herein.
STOCK OPTION GRANTS AND EXERCISES
The Company maintains the 1980 Amended and Restated Employee Stock
Option Plan (the "Employee Plan") in order for employees of the Company and the
Bank to have a greater personal interest in the success of the Company and to
provide added incentive for the continuance of and advancement in their
employment or service to the Company. The Employee Plan is administered by the
Board of Directors or a committee appointed by the Board (in either case, the
"Committee"). The Company has 778,000 shares of its Common Stock reserved for
issuance as stock options under the Option Plan.
-116-
<PAGE> 120
The Employee Plan provides for both the grant of "incentive stock
options," as defined in Section 422A of the Code, and non-statutory options
(options which do not meet the requirements of Section 422A) to employees and
officers of the Company (including any director who is also an employee). The
exercise price of any option granted under the Employee Plan may not be less
than 100% of the fair market value of the Common Stock of the Company on the
date of grant. No incentive option may be first exercisable in any year for
shares having an aggregate fair market value at the time of grant in excess of
$100,000. Shares subject to options under the Employee Plan may be purchased
for cash or in exchange for shares of the Common Stock or other valid
consideration.
Unless otherwise provided by the Board, an option granted under the
Employee Plan and not exercised within ten years expires, and the shares
subject to the option become available for future grants. The Committee
determines to whom options will be granted and the terms of each option
granted, including the exercise price, number of shares subject to the option,
the vesting provisions thereof, and whether the option will be an incentive or
non-statutory option. The Employee Plan may be amended, suspended or
terminated by the Board, but no such action may impair rights under a
previously granted option. Each option is generally exercisable during the
lifetime of the optionee only so long as the optionee remains employed by the
Company. No option is transferable by the optionee other than by will or the
laws of descent and distribution. The Employee Plan will expire in March 1997
unless terminated earlier by the Board of Directors.
There were no options granted under the Employee Plan during the 1995
fiscal year to any of the executive officers of the Company or the Bank.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
SHARES ACQUIRED ON
NAME EXERCISE (#) VALUE REALIZED($)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
James E. Culleton, Former Interim President None N/A
- ---------------------------------------------------------------------------------------
Donald W. Williams, C.E.O. and President None N/A
- ---------------------------------------------------------------------------------------
Anne H. Long, Former Executive Vice President None N/A
- ---------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END (AT FISCAL YEAR-END($)
- -------------------------------------------------------------------------------------------------
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
James E. Culleton, Former Interim President 33,000/12,000(1) -0-/-0-(2)
- -------------------------------------------------------------------------------------------------
Donald W. Williams, C.E.O. and President -0-/-0- -0-/-0-
- -------------------------------------------------------------------------------------------------
Anne H. Long, Former Executive Vice President 8,350/2,650(3) -0-/-0-(2)
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 15,000 shares granted on September 26, 1989 at $11.12 per
share; and 30,000 shares granted on March 25, 1992 at $7.38 per share.
(2) As of December 31, 1995, options granted to Mr. Culleton and Ms. Long
were out-of-the money at the closing price of $0.22 per share of
Common Stock.
(3) Includes 2,000 shares granted on March 26, 1991 at $8.44 per share;
5,000 shares granted on February 25, 1992 at $7.63 per share; and
4,000 shares granted July 28, 1992 at $5.00 per share. Ms. Long's
options will expire on March 7, 1996.
-117-
<PAGE> 121
EMPLOYMENT ARRANGEMENTS AND AGREEMENTS
ARRANGEMENT WITH DONALD W. WILLIAMS
Donald W. Williams is serving as the Chief Executive Officer of the
Bank, as well as President and Chief Executive Officer of the Company. Mr.
Williams also is a Senior Vice President and the Chief Credit Officer of First
Banks and serves in other positions for affiliates of First Banks. Mr.
Williams is compensated by First Banks independently of his services to the
Company. First Banks is reimbursed for Mr. Williams' services to the Company
and the Bank through the Management Services Agreement entered into between the
Bank and First Banks. Under the Management Services Agreement, Mr. Williams'
services are billed to the Bank on an hourly basis at rates ranging from $40 to
$65 per hour, depending on the type of service rendered. See "Certain
Transactions and Indebtedness of Management," below.
ARRANGEMENT WITH ALLEN H. BLAKE
On November 28, 1995, the Boards of Directors of the Company and the
Bank appointed Mr. Blake to serve as Interim Chief Financial Officer of the
Company and the Bank, subject to the receipt of required regulatory and other
approvals. Mr. Blake received the required regulatory approvals as of
[December 20,] 1995. Mr. Blake also is serving as Senior Vice President and
Chief Financial Officer of First Banks, as well as serving in other positions
for affiliates of First Banks. Mr. Blake is compensated by First Banks
independently of his services to the Company. First Banks will be reimbursed
for Mr. Blake's services to the Company and the Bank through the Management
Services Agreement entered into between the Bank and First Banks. Under the
Management Services Agreement, Mr. Blake's services are billed to the Bank on
an hourly basis at rates ranging from $40 to $65 per hour, depending on the
type of service rendered. See "Certain Transactions and Indebtedness of
Management," below.
EMPLOYMENT CONTRACT WITH JAMES E. CULLETON
Mr. Culleton entered into an employment agreement with the Company and
the Bank on November 19, 1991, which is amended and restated effective January
1, 1996, and pursuant to which Mr. Culleton serves as President and Chief
Operating Officer of the Bank. The amended employment contract has a three (3)
year term commencing January 1, 1996. Until January 1, 1996, Mr. Culleton's
prior employment contract provided for an annual base salary of $131,316 with
annual consumer price index adjustments of not less than 6% nor more than 10%,
and an annual net income performance bonus equal to 1% of after-tax net income
above a 5% return on the tangible equity capital of the Bank. During 1995, Mr.
Culleton's base salary under the agreement was $156,405.12. Effective January
1, 1996, Mr. Culleton's annual base salary will be $90,000, subject to periodic
review by the Board of Directors. Mr. Culleton will be entitled to receive any
bonus granted to him in the discretion of the Board of Directors. Effective
January 1, 1996, Mr. Culleton no longer served as Executive Vice President of
the Company and Mr. Culleton ceased serving as Interim President of the Company
effective December 27, 1995. Mr. Culleton is entitled to participate in all of
the benefit plans which are generally available to members of the Company's and
the Bank's senior management. In the event that Mr. Culleton's employment with
the Bank is terminated for any reason other than cause or by Mr. Culleton
himself, he will be entitled to receive a severance payment of $235,000, less
any amount of annual salary paid to him from January 1, 1996 through the date
of termination. At execution of the amended agreement, Mr. Culleton was paid
for accrued but unused vacation time at his then-current salary rate.
-118-
<PAGE> 122
EMPLOYMENT CONTRACT WITH ANNE H. LONG
Ms. Long entered into an employment agreement, effective September 1,
1994, as Executive Vice President and Chief Financial Officer of the Company
and the Bank which was amended effective November 8, 1995, for an employment
term of three years. Ms. Long tendered her resignation effective December 6,
1995. Under the amended terms of the agreement, Ms. Long would have been paid
a base salary of $70,000 per year. Ms. Long would have been entitled to
receive an annual bonus, in the discretion of the Boards of Directors and
subject to any required regulatory reviews and/or approvals. Ms. Long received
a payment of $62,500 in respect of certain benefits, including severance, which
she agreed to forego under the revised agreement. Ms. Long will receive
medical insurance coverage for six months following her cessation of employment.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
As mentioned above, the full Board of Directors performed the
functions of the Company's Compensation Committee during 1995. Mr. Fred L.
Harris, Mr. Michael Denton, Mr. Michael E. Spinetti, Mr. Perry, Mr. Manuel
Barandas, Mr. Harry Curry, Mr. Earl Nichols and Ms. Dorothy Mahaffee comprised
the full Board of Directors from January 1, 1995 through June 30, 1995, the
date of Ms. Mahaffee's resignation from the Board of Directors. Messrs.
Barandas, Curry and Nichols resigned as directors of the Company effective
August 29, 1995 and Messrs. Denton, Spinetti and Harris resigned effective
December 27, 1995. Mr. Michael P. Morris was elected to serve as a director of
the Company effective August 29, 1995. Messrs. Dierberg, Blake and Williams
are executive officers of First Banks and Messrs. Dierberg and Blake are
executive officers of First Banks America, Inc. During 1995, as members of the
Board of Directors of First Banks, Messrs. Dierberg and Blake participated in
compensation decisions for First Banks, and as directors of First Banks
America, Inc., Messrs. Dierberg, Blake and Williams participated in
compensation decisions for First Banks America, Inc.
Effective December 27, 1995, the full Board of Directors was composed
of Messrs. Dierberg, Williams, Blake, Perry and Morris. Messrs. Dierberg,
Williams and Blake did not participate in any compensation decisions during the
last three business days of fiscal year 1995. Messrs. Williams and Blake are
executive officers of the Company. See "Certain Transactions and Indebtedness
of Management," below for a description of the transactions between First
Banks, voting control of which is held by various trusts created by and
administered by and for the benefit of Mr. Dierberg and members of his
immediate family, and the Company.
401(K) AND PROFIT SHARING PLAN
The Bank's Profit Sharing Plan, established in January 1980, is
intended to provide deferred compensation benefits to all employees of the
Company and the Bank via contributions to the plan by the Company. In March
1989, the Bank and the Company adopted an amendment to the Profit Sharing Plan
to include a 401(k) provision (the "401(k) Plan"). 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 401(k) 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 IRS
(the "Participant Contributions"). A Participant"s interest in his or her
Participant Contribution is fully vested immediately.
-119-
<PAGE> 123
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 salary to the total salary. Participant's interests in such
Company contributions vest on a five (5) year schedule according to years of
service rendered. During 1994, the Bank matched (on a quarterly basis)
approximately $109,000 to the 401(k) Plan. Matching contributions by the Company
were suspended as of January 1, 1995.
EMPLOYEE STOCK OWNERSHIP PLAN
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
subsidiaries with an opportunity to acquire an ownership interest in the
Company. The Trustee of the ESOP Trust appointed by the Board of Directors is
presently Mechanics Bank of Richmond, and a committee appointed by the Board of
Directors administers the ESOP for the exclusive benefit of participants and
their beneficiaries. Under the terms of the ESOP, the amount of contributions
made is within the sole discretion of the Board of Directors. Contributions to
the ESOP are allocated among eligible employees' accounts in relation to their
compensation as shares of Company Common Stock are acquired and 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 year 1995, no
shares were contributed by the Company to the ESOP.
DIRECTOR COMPENSATION
All directors' fees were discontinued as of June 28, 1994. Prior to
June 28, 1994, each outside member of the Board of Directors received $200 per
Board and committee meeting attended and a retainer fee in the amount of $800
per month. It is expected that, following the completion of this Offering, the
Company and the Bank will seek the necessary approvals from their respective
regulatory authorities to reinstate compensation for outside directors. No
assurance can be given that the Company or the Bank will receive such approvals
or in what amounts such compensation may be paid, if approved.
DIRECTORS' STOCK OPTION PLAN
On September 26, 1989, 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 at the Annual Meeting of
Stockholders on May 23, 1990. There are presently reserved for issuance under
the Directors' Plan 250,000 shares of the Common Stock. Only non-employee
directors of the Company, of which there are currently three (3), are eligible
to receive options in accordance with a specific formula under the Directors'
Plan.
Options granted under the Directors' Plan are non-statutory options.
Three former directors of the Company who resigned effective August 29, 1995 and
three former directors who resigned effective December 27, 1995 each hold an
option to purchase 10,000 shares of Common Stock at an option price of $11.12
per share, which will expire one year
-120-
<PAGE> 124
from the date of resignation. Directors Morris and Dierberg may be eligible to
receive the grant of an option under the Directors' Plan in September 1997. No
options were granted in 1995 pursuant to the Directors' Plan.
CERTAIN TRANSACTIONS AND INDEBTEDNESS OF MANAGEMENT
CERTAIN TRANSACTIONS
There have been no transactions since January 1, 1995, nor are there
any currently proposed transactions, to which the Company or the Bank was or is
to be a party, in which the amount involved exceeds $60,000 and in which any
director, executive officer, nominee as a director, five percent (5%)
stockholder or member of the immediate family of any of the foregoing persons
had, or will have, a direct or indirect material interest, except as described
below.
The Company and the Bank have entered into the Standby Stock Purchase
Agreement with First Banks and James F. Dierberg, which was later amended and
restated as the Stock Purchase Agreement, as well as the related Additional
Investment and Standby Agreements. James F. Dierberg is the Chairman, President
and Chief Executive Officer of First Banks. The voting stock of First Banks is
owned by various trusts which were created by and are administered by and for
the benefit of Mr. Dierberg and members of his immediate family. Accordingly,
Mr. Dierberg controls the management and policies of the Company and the
election of its directors. As of the date of this Prospectus, First Banks owns
beneficially approximately 96.53% of the Common Stock. On December 27, 1995, Mr.
Dierberg was appointed to serve as a director of the Company. Pursuant to the
Stock Purchase Agreement, Mr. Allen H. Blake and Mr. Donald W. Williams also
have been appointed as directors of the Company. Messrs. Blake and Williams also
render services as executive officers to the Company and the Bank as well as to
First Banks and its affiliates. As described above, Messrs. Blake and Williams
are compensated independently for their services to First Banks and its
affiliates, and First Banks will be reimbursed for their services to the Company
and the Bank pursuant to the Management Services Agreement. The Management
Services Agreement is described further below. See also "Employment Arrangements
and Agreements" herein. For a full description of the transactions between the
Company, the Bank, First Banks and Mr. Dierberg, see "THE STOCK PURCHASE
AGREEMENT AND CHANGE IN CONTROL OF THE COMPANY."
The Company and the Bank have entered into a Cost Sharing Agreement
dated December 21, 1995 with First Bank & Trust, a wholly-owned subsidiary of
First Banks. The Cost Sharing Agreement is designed to allow the Company and the
Bank to share the benefits, services and costs of certain personnel employed by
First Bank & Trust, including services in the areas of lending, human resources
and branch administration. Similarly, the Bank has entered into a Management
Services Agreement dated December 21, 1995 with First Banks, pursuant to which
First Banks or certain subsidiaries of First Banks may provide the Bank with
services in the areas of lending, human resources, corporate audit, general
accounting, asset/liability management, investments, planning and budgets,
branch administration and purchasing and accounts payable. Each of the Cost
Sharing Agreement and the Management Services Agreement contain provisions
requiring services rendered to the Bank to be provided on the same terms and
conditions, including audit standards, that are substantially the same, or at
least as favorable to the Bank, as then prevailing at the time for comparable
transactions with, or not involving, other nonaffiliated companies. In the
absence of comparable transactions, the agreements require the services to be
rendered on terms and under conditions, including audit standards, that in good
faith would be offered to, or would apply to, nonaffiliated companies. For
December 1995, the only month for which such information is available, the Bank
paid $16,466 in fees pursuant to the Management Services Agreement. No fees were
accrued or paid as of December 31, 1995 in respect of the Cost Sharing
Agreement.
-121-
<PAGE> 125
The Bank has entered into a Service Agreement dated December 8, 1995
with FirstServ, Inc., a wholly-owned subsidiary of First Banks, pursuant to
which FirstServ, Inc. provides data processing and item processing to the Bank.
FirstServ, Inc. provides such services through a facilities management agreement
with First Services, L.P., a limited partnership indirectly owned by Mr.
Dierberg and his children. The Bank anticipates paying approximately $28,000 per
month for basic services pursuant to the Service Agreement, which fees are
comparable to those charged the Bank under its previous service contract. The
Bank paid to FirstServ, Inc. a one-time conversion training fee of $30,000.
INDEBTEDNESS OF MANAGEMENT
Some of the directors and executive officers of the Company and members
of their immediate families and the companies with which they have been
associated have been customers of, and have had banking transactions with, the
Bank in the ordinary course of the Bank's business since January 1, 1995, and
the Bank expects to have such banking transactions in the future. All loans and
commitments to lend included in such transactions were made in the ordinary
course of business, on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
other persons and, in the opinion of the Bank, did not involve more than the
normal risk of collectibility or present other unfavorable features.
PRINCIPAL STOCKHOLDERS
PRINCIPAL STOCKHOLDERS
As of December 31, 1995, and without giving effect to the Offering, no
person or group known to the Company owned beneficially more than five percent
(5%) of the outstanding shares of its Common Stock, except as set forth below:
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME AND ADDRESS OF AMOUNT AND NATURE OUTSTANDING SHARES
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP BENEFICIALLY OWNED
- --------------------------------------------------------------------------------
<S> <C> <C>
First Banks, Inc.
135 North Meramec
Clayton, MO 63105 130,000,000(1) 96.53%(1)
</TABLE>
- ------------------
(1) Includes 65,000,000 shares which First Banks has the right to obtain upon
conversion of the entire principal amounts of the First and Second
Debentures into shares of Common Stock, 50,000,000 shares of Common Stock
issued to First Banks in exchange for the shares of Bank Preferred Stock and
Bank Common Stock held by First Banks and 15,000,000 shares issued to First
Banks on December 28, 1995. First Banks also has the right to receive
interest on the Debentures at a 12% annual rate, which is convertible into
shares of Common Stock. See "THE STOCK PURCHASE AGREEMENT AND CHANGE IN
CONTROL OF THE COMPANY."
-122-
<PAGE> 126
DESCRIPTION OF SECURITIES
GENERAL
The authorized capital stock of the Company consists of 250,000,000
shares of Common Stock, $.01 par value, and 5,000,000 shares of preferred stock,
$.01 par value. As of December 31, 1995, there were issued and outstanding
69,675,110 shares of Common Stock, which are fully paid, nonassessable and not
subject to redemption. The Company's Common Stock is publicly traded and is
quoted on the NASDAQ Small-Cap Market under the symbol "FCOB". As of December
31, 1995, there were no shares of preferred stock issued and outstanding.
Although the Company has not issued preferred stock to date, the
Company is authorized to issue preferred stock without obtaining the approval of
the holders of the Common Stock. Issuance of preferred stock in the future could
adversely affect the voting power of the holders of the Common Stock.
In conjunction with the Company's reincorporation in Delaware, the
stockholders of the Company adopted a stockholders' rights plan (the "Rights
Plan") at the 1990 Special Meeting of Stockholders. The Rights Plan provides
that the holders of each outstanding share of 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 Common
Stock outstanding and no separate Rights Certificates have been distributed. The
Rights will separate from the 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 Plan) (an "Acquiring Person") has acquired, or obtained the right to
acquire, beneficial ownership of twenty (20%) percent or more of the outstanding
shares of 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 Common Stock. The Rights Plan provides that Rights
are not exercisable until 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 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 Plan 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 Common Stock except pursuant to an
offer for all outstanding shares of 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 Common Stock is not changed
or exchanged, each holder of a Right will have the right to receive, upon
exercise, 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 Plan) were, beneficially owned by any
Acquiring Person will be null and void.
In addition, the Rights Plan 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 Common
Stock is
-123-
<PAGE> 127
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.
In conjunction with approval by the stockholders of the Stock Purchase
Agreement, the Rights Plan was amended ("Amendment No. 1"), which contains
provisions in order to exclude the applicability of the Rights Plan from the
transactions contemplated by the Stock Purchase Agreement. Amendment No. 1
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 Plan also excludes
all the transactions contemplated by the Stock Purchase Agreement from the
definition of Triggering Event.
In addition, Amendment No. 1 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 Plan 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.
CAPITAL STOCK
The designations and powers, preferences and rights and the
qualifications, limitations or restrictions of the securities being offered by
the Company are described below. This section is qualified in its entirety,
however, by reference to the specific provisions of the Company's Certificate of
Incorporation and Bylaws, as amended to date, which are available upon request
of the Company.
The Company is a legal entity separate and distinct from the Bank and
neither the Common Stock nor the other securities being offered hereby
represents an interest in the Bank. The right of the Company, and thus the right
of the Company's creditors and stockholders, to participate in any distribution
of the assets or earnings of the Bank is subject to the prior claims of
creditors of the Bank, except to the extent that claims, if any, of the Company
itself as a creditor may be recognized. In addition, the Company and the Bank
are subject to the regulations of the FRB, and the FDIC and the SBD,
respectively, relating to the maintenance of appropriate levels of capital.
Compliance with such regulations could further limit the amount of dividends
which the Bank may pay to the Company, and the amount of dividends which the
Company may pay to its stockholders. The Bank presently is prohibited from
paying any dividend to the Company under the terms of the Orders, and the
Company is prohibited under the terms of the MOU from paying dividends without
the prior written approval of the FRB. In addition, the Debentures contain
restrictions on the payment of dividends by
-124-
<PAGE> 128
the Company without the prior written approval of First Banks. As described
under "SUPERVISION AND REGULATION," there are also legal limitations on the
extent to which the Bank can supply funds to the Company or its subsidiaries
through loans, other extensions of credit or purchases of assets.
COMMON STOCK
VOTING RIGHTS
All voting rights with respect to the Company are presently vested in
the holders of the Common Stock. Each share of Common Stock is entitled to one
vote at any meeting of stockholders and in the election of directors.
Stockholders have no cumulative voting rights in the election of directors.
Further, if the Company issues additional classes or series of preferred stock
in the future, such stock may have voting rights, and the voting rights of the
holders of the Common Stock may be affected thereby.
DIVIDENDS
The holders of the Common Stock are entitled to receive dividends when
and as declared by the Company's Board of Directors, out of funds legally
available therefor, subject to the dividend preference, if any, on preferred
stock that may be outstanding and also subject to the restrictions set forth in
the Delaware General Corporation Law. The Delaware General Corporation Law
provides that a corporation may make stock repurchases or redemptions that do
not impair capital, and may pay dividends to its stockholders out of any surplus
account or out of net profits of the current and preceding fiscal years, subject
to certain limitations. The ability of the Company to pay dividends and/or to
repurchase or redeem Common Stock is also subject to regulatory and supervisory
limitations. See "RISK FACTORS - Limitation on Payment of Dividends," "MARKET
INFORMATION Dividends," "SUPERVISION AND REGULATION - Payment of Dividends" and
"REGULATORY AGREEMENTS AND ORDERS."
The ability of the Bank to pay dividends to the Company is subject to
restrictions set forth in the California banking law and is presently subject to
the approval of the SBD and the FDIC. The ability of the Bank to pay dividends
to the Company also is subject to restrictions set forth in federal banking law
and the regulations of the Federal Reserve thereunder. See "SUPERVISION AND
REGULATION - Payment of Dividends."
ASSESSMENT OF SHARES
The Company's Certificate of Incorporation does not authorize
assessment of the Common Stock. In the absence of such a provision, the
stockholders are not personally liable for payment of the Company's debts except
as they may be liable by reason of their own conduct or acts. There are no
conversion rights, redemption provisions or sinking fund provisions applicable
to shares of the Common Stock.
DISSOLUTION
The holders of Common Stock will be entitled to share equally in the
net assets of the Company in the event of liquidation or dissolution, subject to
the preferential rights, if any, of the holders of senior securities, such as
preferred stock, that may be outstanding.
-125-
<PAGE> 129
PREEMPTIVE RIGHTS
Holders of Common Stock have no preemptive rights, which are rights to
subscribe to a pro rata amount of any shares or other securities which the
Company may offer in the future. Therefore, shares of Common Stock or other
securities may be offered in the future to the investing public or to existing
stockholders at the discretion of the Board of Directors.
THE STOCKHOLDER RIGHTS
The Company is registering a total of 50,000,000 shares of Common Stock
in the Rights Offering, purchasable through the exercise of Stockholder Rights.
The Company is conducting the Rights Offering by distributing to stockholders of
record as of the Record Date nontransferable Stockholder Rights to purchase
10.695 shares of Common Stock for each share held on the Record Date, subject to
possible reduction. In addition, any stockholder exercising the Basic
Subscription Privilege also would be entitled to exercise an Oversubscription
Privilege to the extent of the greater of (a) 1,000,000 additional shares or
$100,000, or (b) an additional 10.695 shares for each share held on the Rights
Record Date, subject to pro ration and reduction under certain circumstances.
See "THE OFFERING." The exercise price for each share of Common Stock is $0.10
per share. Stockholder Rights will be exercisable for a period of 57 days, or
until April 12, 1996, unless extended by the Company in its sole discretion for
up to two (2) consecutive periods of up to 30 days each, after which time they
will expire. Any shares not subscribed for pursuant to Stockholder Rights will
become available for sale in the Public Offering, subject to the $1.0 million
limitation.
THE DIVIDEND RIGHTS
The Company is registering 9,688,875 shares of Common Stock for
issuance pursuant to the exercise of Dividend Rights. The Dividend Rights are
being distributed to stockholders of record of the Company as of the Dividend
Record Dates and entitle each Dividend-Eligible Stockholder to receive one share
of Common Stock for each $0.10 of accrued dividend and interest amount payable
to such stockholder. Dividend Rights may be exercised in whole or in part
(subject to elimination of fractional shares); however, the Company's obligation
to pay the 1992 Dividends in cash will be extinguished to the fullest extent of
such exercise. Dividend Rights will be exercisable for a period of 57 days, or
until April 12, 1996, unless extended by the Company in its sole discretion for
up to two (2) consecutive periods of up to 30 days each, after which time they
will expire. Dividend-Eligible Stockholders not exercising Dividend Rights will
remain entitled to receive the 1992 Dividends from the Company in cash, subject
to the Company's financial and regulatory ability to pay such 1992 Dividends.
NONE OF THE ABOVE-DESCRIBED SECURITIES OF THE COMPANY ARE SAVINGS
ACCOUNTS OR DEPOSITS AND, THUS, THEY ARE NOT INSURED BY THE FDIC.
RESTRICTIONS ON RESALES BY AFFILIATES
The Common Stock (other than the shares issued to date to First Banks
and the shares issuable under the Debentures) has been registered under the
Securities Act of 1933, as amended (the "Securities Act"), but this registration
does not cover resales of shares acquired by any Company stockholder who is
deemed to be an "affiliate" of the Company, that is one who directly or
indirectly through one or more intermediaries controls or is controlled by or is
under common
-126-
<PAGE> 130
control with the Company. Affiliates may not sell their shares except pursuant
to an effective registration statement under the Securities Act or pursuant to
an exemption from the registration requirements of the Securities Act.
PROVISIONS OF CERTIFICATE OF INCORPORATION
Certain provisions of the Company's Certificate of Incorporation and
Bylaws may have the effect of delaying, deferring or preventing a change in
control of the Company in certain circumstances. Certain of these provisions,
which do not contemplate a specific or particular attempt to gain control of the
Company, are described below. The Certificate of Incorporation and the Bylaws,
as amended to date, are available upon request of the Company and the following
discussion is qualified in its entirety by the specific provisions of each.
CLASSIFICATION OF BOARD OF DIRECTORS
The Company's Certificate of Incorporation provides for a classified
Board of Directors as permitted (but not required) under Delaware law. Under a
classified Board of Directors, the terms of the directors are staggered so that
one-third of the directors are elected each year for a term of three (3) years.
See "MANAGEMENT." It may require at least two (2) annual meetings of
stockholders to elect a majority of directors to a board which is classified or
otherwise effect a change in control of the board, since only a minority of the
directors will be elected at each meeting. The most significant purpose of a
classified board is to deter non-negotiated takeover attempts because of the
delay the acquiror would experience in replacing a majority of the directors.
The Company's Certificate of Incorporation provides that the number of
directors shall be specified in the Company's Bylaws and, thus, both the actual
size of the board and the range may be changed either by the Board or by the
stockholders. However, any such amendment by the stockholders requires the
affirmative vote of two-thirds (66-2/3%) of the outstanding shares entitled to
vote thereon.
BUSINESS COMBINATIONS
The Company's Certificate of Incorporation includes provisions
permitted by the Delaware General Corporation Law, which restrict certain
"Business Combinations" with "Related Persons," as those terms are defined
therein. A Business Combination with a Related Person, defined in the
Certificate of Incorporation to include, among other things, a merger,
consolidation, recapitalization, transfer, sale, exchange, pledge, disposition
or issuance of shares or assets, generally must be approved by the vote of 75%
of the Company's voting stock, unless certain conditions exist. This provision
may have the effect of delaying, deferring or preventing a change in control of
the Company.
CONSIDERATION OF FACTORS OTHER THAN PRICE
The Company's Certificate of Incorporation provides that, when
evaluating any proposed tender or exchange offer for the Company's voting stock
or any proposed transaction with any other person which would constitute a
"Business Combination," the Board of Directors may consider the best interests
of the Company as a whole, including without limitation: giving due
consideration to the interests of the Company's stockholders; whether the
proposed transaction might violate applicable laws; not only the consideration
being offered in the proposed transaction in relation to the then current market
price for the Company's stock, but also the market price for such stock over a
period of years,
-127-
<PAGE> 131
the estimated price which might be achieved in a negotiated sale of the Company
as a whole or in part or through liquidation, the premiums over market price for
the securities of other corporations in similar transactions, current political,
economic and other factors bearing on securities prices and the Company's
financial condition and future prospects; and the social, economic and legal
effects on the employees, customers, suppliers and other constituents of the
Company and on the communities in which the Company conducts its business.
This provision could, under certain circumstances, permit the Board of
Directors to disapprove a tender offer or other business combination transaction
that might otherwise be beneficial to the stockholders of the Company,
particularly if such a transaction would have a strong adverse impact on the
employees of the Company or the communities in which the Company or the Bank has
operations.
SHAREHOLDER APPROVAL OF CERTAIN BUSINESS COMBINATIONS
Under Section 203 of the Delaware General Corporation Law ("Section
203"), certain "Business Combinations" with "Interested Stockholders," as such
terms are defined in Section 203, of Delaware corporations are subject to a
three-year moratorium unless specified conditions are met. Section 203 only
applies to Delaware corporations which have a class of voting stock that is
listed on a national securities exchange or the NASDAQ National Market System or
is held of record by more than 2,000 stockholders. However, a Delaware
corporation may elect to opt out of Section 203 by a provision in its original
Certificate of Incorporation or an amendment thereto. The Company has not and
does not intend to elect to opt out of Section 203. However, Section 203
presently does not apply to the Company because of the delisting of the Common
Stock from the NASDAQ National Market System effective July 7, 1995. So long as
the constitutionality of Section 203 is upheld, and to the extent it is
applicable to the Company, the Company believes that it will have the effect of
encouraging any potential acquiror to negotiate with the Company's Board of
Directors. Section 203 should also discourage certain potential acquirors
unwilling to comply with its provisions. Because the acquisition by First Banks
of more than 15% of the voting control of the Company was approved by the Board
of Directors (which occurred prior to the delisting of the Common Stock), First
Banks is not subject to certain restrictions which otherwise would be imposed
pursuant to Section 203 of the Delaware General Corporation Law.
The Company's Certificate of Incorporation contains similar super
majority voting requirements to those contained in Section 203 for Business
Combinations with Interested Stockholders. See "Business Combinations," above.
ISSUANCE OF ADDITIONAL SECURITIES
As described above, the Certificate of Incorporation permits the Board
of Directors to issue shares of preferred stock without the prior approval of
the holders of the Common Stock. The issuance of preferred stock or such other
securities as permitted by the Certificate of Incorporation at some future date
may have the effect of delaying, deferring or preventing a change in control of
the Company.
AMENDMENT OF THE CERTIFICATE OF INCORPORATION AND BYLAWS
The Certificate of Incorporation provides that changes or amendments to
it and the Company's Bylaws are subject to Board and shareholder approval
requirements in addition to those required under applicable law. In general,
amendments to certain sections of the Certificate of Incorporation require the
approval of at least two-thirds (66-2/3%) of the Company's voting stock. An
amendment to the section of the Certificate of Incorporation regarding "Business
Combinations" generally requires the approval of 75% of the outstanding shares
entitled to vote, exclusive of stock beneficially owned by a "Related Person."
Amendment of the Bylaws by the shareholders requires the affirmative vote of
two-thirds (66-2/3%) of the outstanding shares. These provisions may prevent a
person who has acquired control of
-128-
<PAGE> 132
more than 50% of the voting power of the Company from effecting amendments to
the Company's governing documents and thereby exerting control over the
management and policies of the Company.
Other provisions of the Company's Certificate of Incorporation or
Bylaws or of the Delaware General Corporation Law as applied to the Company may
have the effect of deterring, delaying or preventing a change in control of the
Company.
FEDERAL INCOME TAX CONSEQUENCES
The following is a brief description of certain federal income tax
consequences which may be realized by persons acquiring the shares of Common
Stock and the Dividend Exchange Shares. 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 holders
of the shares of Common Stock or the Dividend Exchange Shares. Such holders
should consult their own tax advisers as to the tax consequences to them of a
purchase of the shares of Common Stock or the receipt of the Dividend Exchange
Shares, including the applicability of state, local and other tax laws.
The following discussion was prepared by Lillick & Charles LLP, tax
counsel to the Company. Portions of the discussion summarize Lillick &
Charles' LLP opinion as to the material federal income tax consequences to
investors in the Common Stock and recipients of the Dividend Exchange Shares to
the extent presented herein.
IMPACT OF RECEIPT OF STOCKHOLDER RIGHTS AND EXERCISE THEREOF
The receipt of the Stockholder Rights by a stockholder will not be
included in gross income under Section 305(a).
If the purchasers acquire Common Stock for $.10 per share, and that
price is below the then fair market value of the shares, there would be a
constructive distribution of Common Stock. However, such a distribution will
not be included in gross income under Section 305(a).
RECEIPT OF THE DIVIDEND EXCHANGE SHARES
A stockholder will receive a "distribution" on the receipt of the
Dividend Exchange Shares in exchange for the principal amount of the 1992
Dividends on the Common Stock (the "Dividend Amount"). Under Section 305(b)(1)
of the Code and IRS regulations promulgated thereunder, if the stockholders of
the Company have the option to receive a distribution payable either in stock
or property (including cash), the issuance of the stock is treated as a
distribution of property. Accordingly, the stockholders will be treated as
receiving a distribution equal to the fair market value of the Dividend
Exchange Shares allocable to the Dividend Amount, and the distribution will be
treated in a manner similar to a cash distribution on the shares and Dividend
Exchange Shares described below. The distribution will be treated as a dividend
taxable as ordinary income to the extent of the stockholder's share of the
Company's current or accumulated earnings and profits (computed for federal tax
purposes.) The Company does not currently have accumulated earnings and
profits. If the Company has earnings and profits for the current tax year in
excess of all distributions for the year, the distribution will be a dividend.
If the Company does not have earnings and profits for the current tax year, the
distribution will not be a dividend. The determination of current earnings and
profits is made as of the close of the taxable year of the distribution.
Because counsel cannot project whether the Company will have earnings and
profits for the current tax year, no determination can be made as of the date
of this Prospectus whether the distribution will be taxed as a dividend.
To the extent a stockholder receives Dividend Exchange Shares in
exchange for interest on the 1992 Dividend, the stockholder will have taxable
interest income.
-129-
<PAGE> 133
This page intentionally left blank.
-130-
<PAGE> 134
CASH DISTRIBUTIONS ON THE SHARES AND THE DIVIDEND EXCHANGE SHARES
Cash distributions paid on the shares of Common Stock or the Dividend
Exchange Shares 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 holder'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 shares of Common Stock or the
Dividend Exchange Shares to the holder and increasing the amount of gain (or
reducing the amount of loss) which may be realized by the holder upon sale or
exchange of the shares or the Dividend Exchange Shares. Any distribution which
exceeds the sum of the dividend amount and the adjusted basis of the shares or
the Dividend Exchange Shares to the holder will be treated as capital gain, if
the shares or Dividend Exchange Shares are held as a capital asset. In that
case, if the shares or Dividend Exchange Shares are held by an individual
stockholder for more than one year, the capital gain will be treated as a
long-term capital gain eligible for favorable federal income tax treatment.
Dividends deemed to have been paid out of earnings and profits will be
eligible for the 70% dividends received deduction allowable to corporations
under Code Section 243, subject to the 45-day or 90-day holding period
requirement and debt financed portfolio stock limitations contained in Code
Sections 246 and 246A. Corporate holders also should consider the application of
the "extraordinary dividend" rules of Code Section 1059 as well as the possible
reduction or elimination of the benefit of the dividends received deduction by
the corporate alternative minimum tax.
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.
REDEMPTION
Generally, a redemption by the Company of the shares of Common Stock or
Dividend Exchange Shares for cash will be taxable as a dividend to the extent of
the Company's current or accumulated earnings and profits unless the redemption
(1) is "not essentially equivalent to a dividend" with respect to the
stockholder (that is, unless the redemption results in a meaningful reduction of
the stockholder's proportionate interest in the Company), (2) is "substantially
disproportionate" with respect to the stockholder, or (3) results in a "complete
termination" of the stockholder's stock interest in the Company. If a redemption
is treated as a dividend, holders of shares of Common Stock or Dividend Exchange
Shares will recognize ordinary income in the amount of cash or the fair market
value of property received, and any basis in the shares of Common Stock or
Dividend Exchange Shares will be transferred to the holder's remaining holdings
in the Company. If the redemption is not treated as a dividend, the holder of
the shares of Common Stock or Dividend Exchange Shares will recognize gain or
loss based on the difference between the amount realized and the holder's tax
basis in the shares of Common Stock or Dividend Exchange Shares redeemed.
Provided that the shares of
-131-
<PAGE> 135
Common Stock or Dividend Exchange Shares are held as a capital asset, this gain
or loss will be capital gain or loss (and will be long-term capital gain or loss
if held for more than one year).
SALE OF THE SHARES
If a holder sells its shares of Common Stock or Dividend Exchange
Shares, the seller will realize a gain or loss equal to the difference between
the amount realized on the sale and the seller's tax basis in the shares or
Dividend Exchange Shares sold. If the shares of Common Stock or Dividend
Exchange Shares are held as a capital asset, this gain or loss will be capital
gain or loss.
BACKUP WITHHOLDING
A holder of shares of Common Stock or Dividend Exchange Shares may be
subject to federal backup withholding at the rate of 31% on dividends or the
proceeds of a sale of the shares or Dividend Exchange Shares if (1) the payee
fails to furnish a taxpayer identification number ("TIN") to the payor; (2) the
IRS notifies the payor that the TIN furnished by the payee is incorrect; (3)
there has been a "notified payee under reporting;" or (4) there has been a
failure of the payee to certify under penalty of perjury that the payee 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 shares of Common Stock or Dividend Exchange Shares or, in certain
cases, from the proceeds of a sale of the shares or Dividend Exchange Shares.
FOREIGN WITHHOLDING
If a holder of the shares of Common Stock or the Dividend Exchange
Shares is a foreign individual or foreign corporation not engaged in business in
the U.S., such holder may be subject to a 30% withholding tax on any dividend
received with respect to those shares or Dividend Exchange Shares. The
withholding tax may be decreased if the holder qualifies for a reduced
withholding rate on dividends under an applicable U.S. tax treaty.
PLAN OF DISTRIBUTION
The Underlying Shares are being offered by the Company directly to
holders of the Common Stock. The Dividend Rights and Dividend Exchange Shares
are being offered by the Company directly to Dividend-Eligible Stockholders.
Certain officers, directors and employees of the Company and the Bank may
solicit responses from stockholders, Rights Holders and Dividend Rights Holders,
but such employees will not receive any commissions or compensation for such
services other than their normal employment compensation. Further, the officers
and directors of the Company may solicit sales in the Public Offering on a best
efforts basis.
-132-
<PAGE> 136
SUPERVISION AND REGULATION
THE COMPANY AND FIRST BANKS
The Company and First Banks, as bank holding companies, are subject to
regulation under the Bank Holding Company Act of 1956, as amended (the "BHC
Act") and are registered with and subject to the supervision of the Board of
Governors of the Federal Reserve System ("Federal Reserve"). It is the policy of
the Federal Reserve that each bank holding company serve as a source of
financial and managerial strength to its subsidiary banks. The Federal Reserve
has the authority to examine the Company, the Bank, First Banks and its
subsidiary banks.
The BHC Act requires the Company and First Banks to obtain the prior
approval of the Federal Reserve before acquisition of all or substantially all
of the assets of any bank or ownership or control of the voting shares of any
bank if, after giving effect to such acquisition, the Company or First Banks
would own or control, directly or indirectly, more than 5% of the voting shares
of such bank. However, amendments to the BHC Act effected by the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 ("Riegle-Neal"), which
is discussed further below, expand the circumstances under which a bank holding
company may acquire control of or all or substantially all of the assets of a
bank located outside the State of California.
Neither the Company nor First Banks may engage in any business other
than managing or controlling banks or furnishing services to its subsidiaries,
with the exception of certain activities which, in the opinion of the Federal
Reserve, are so closely related to banking or to managing or controlling banks
as to be incidental to banking. The Company and First Banks are also generally
prohibited from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company unless that company is engaged in such
activities and unless the Federal Reserve approves the acquisition.
The Company, First Banks and their respective subsidiaries are
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit, sale or lease of property or provision of services. For
example, with certain exceptions, the Bank may not condition an extension of
credit on a customer obtaining other services provided by it, the Company or any
other subsidiary, or on a promise by the customer not to obtain other services
from a competitor. In addition, federal law imposes certain restrictions on
transactions between the Bank and its affiliates. As affiliates of the Bank, the
Company and First Banks are subject, with certain exceptions, to the provisions
of federal law imposing limitations on and requiring collateral for loans by the
Bank to any affiliate.
On October 17, 1994, the Company entered into an MOU with the FRB. See
"REGULATORY AGREEMENTS AND ORDERS" for a description of the terms of the MOU.
THE BANK
As a California state-licensed bank, the Bank is subject to regulation,
supervision and periodic examination by the SBD and the FDIC. The Bank is not a
member of the Federal Reserve System, but is nevertheless subject to certain
-133-
<PAGE> 137
regulations of the FRB. The Bank's deposits are insured by the FDIC to the
maximum amount permitted by law, which is currently $100,000 per depositor in
most cases.
The regulations of these state and federal bank regulatory agencies
govern most aspects of the Bank's business and operations, including but not
limited to, the scope of its business, its investments, its reserves against
deposits, the nature and amount of any collateral for loans, the timing of
availability of deposited funds, the issuance of securities, the payment of
dividends, bank expansion and bank activities, including real estate development
activities, and the maximum rates of interest allowed on certain deposits.
Under state law, the Bank may invest in capital stock, obligations or
other securities of corporations. However, as a result of federal legislation
enacted during 1991, the Bank will be prohibited from relying on these
provisions of state law in the future. See "Recent and Proposed Legislation,"
herein.
The Bank is subject to the terms of the Orders issued by the FDIC and
the SBD. See "REGULATORY AGREEMENTS AND ORDERS."
CHANGE IN CONTROL
The Holding Company Act and the Change in Bank Control Act of 1978, as
amended (the "Change in Control Act"), together with regulations of the Federal
Reserve, require that, depending on the particular circumstances, either Federal
Reserve approval must be obtained or notice must be furnished to the Federal
Reserve and not disapproved prior to any person or company acquiring "control"
of a bank holding company, such as the Company, subject to exemptions for
certain transactions. Control is conclusively presumed to exist if an individual
or company acquires 25% or more of any class of voting securities of the bank
holding company. Control is rebuttably presumed to exist if a person acquires
10% or more but less than 25% of any class of voting securities and either the
company has registered securities under Section 12 of the Exchange Act, or no
other person will own a greater percentage of that class of voting securities
immediately after the transaction. The Financial Code also contains approval
requirements for the acquisition of 10% or more of the securities of a person or
entity which controls a California licensed bank. Finally, the Hart-Scott-Rodino
Antitrust Improvement Act of 1976, as amended (the "Hart-Scott Act"), together
with regulations of the Federal Trade Commission, may require certain filings to
be made with the Federal Trade Commission and the United States Department of
Justice, and certain waiting periods to expire, prior to consummation of an
acquisition of a company's voting securities.
Investors are advised to consult their legal advisors concerning the
status of their acquisition of shares of Common Stock under the Holding Company
Act, the Change in Control Act and the Hart-Scott Act.
CAPITAL ADEQUACY REQUIREMENTS
The Company is subject to the Federal Reserve's capital guidelines for
bank holding companies and the Bank is subject to the FDIC's regulations
governing capital adequacy for nonmember banks. As noted below, the federal
banking agencies have proposed regulations which would impose additional capital
requirements on banks based on the market risk in foreign exchange and commodity
activities and in the trading of debt and equity investments. In addition, the
Bank is subject to specific capital requirements imposed by the FDIC and the
SBD. See "REGULATORY AGREEMENTS AND ORDERS."
-134-
<PAGE> 138
THE FEDERAL RESERVE AND FDIC
The Federal Reserve 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 guidelines apply
on a consolidated basis to bank holding companies with consolidated assets of
$150 million or more.
The Federal Reserve 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 I capital(4/) and
"supplemental capital elements," or Tier 2 capital(5/). The maximum amount of
supplemental capital elements which qualifies as Tier 2 capital is limited to
one-hundred percent (100%) of Tier I 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 I
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 FRB to those assets.
The Federal Reserve and the FDIC have established a minimum leverage
ratio of three percent (3%) Tier I 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 for a minimum
of four percent (4%) or five percent (5%). See "RISK FACTORS - Failure to Meet
Capital Adequacy Requirements and Regulatory Orders - Prompt Corrective Action
Notification" for further information concerning the Company's and the Bank's
risk-based or leverage capital ratios as of September 30, 1995.
- --------------------
(4) Tier I 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.
(5) 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.
-135-
<PAGE> 139
Recently adopted regulations by the federal banking agencies have
revised the risk-based capital standards to take adequate account of
concentrations of credit and the risks of non-traditional activities.
Concentrations of credit refers to situations where a lender has a relatively
large proportion of loans involving one borrower, industry, location, collateral
or loan type. Non-traditional activities are considered those that have not
customarily been part of the banking business but that start to be conducted as
a result of developments in, for example, technology or financial markets. The
regulations require institutions with high or inordinate levels of risk to
operate with higher minimum capital standards. The federal banking agencies also
are authorized to review an institution's management of concentrations of credit
risk for adequacy and consistency with safety and soundness standards regarding
internal controls, credit underwriting or other operational and managerial
areas.
Further, the banking agencies recently have adopted modifications to
the risk-based capital regulations to include standards for interest rate risk
exposures. Interest rate risk is the exposure of a bank's current and future
earnings and equity capital arising from adverse movements in interest rates.
While interest risk is inherent in a bank's role as financial intermediary, it
introduces volatility to bank earnings and to the economic value of the bank.
Yhe banking agencies have addressed this problem by implementing changes to the
capital standards to include a bank's exposure to declines in the economic value
of its capital due to changes in interest rates as a factor that the banking
agencies will consider in evaluating an institution's capital adequacy. Bank
examiners will consider a bank's historical financial performance and its
earnings exposure to interest rate movements as well as qualitative factors such
as the adequacy of a bank's internal interest rate risk management. The banking
agencies also have proposed an inter-agency policy statement to establish a
minimum capital charge for interest rate risk.
In certain circumstances, the FDIC or the Federal Reserve may determine
that the capital ratios for an FDIC-insured bank or a bank holding company must
be maintained at levels which are higher than the minimum levels required by the
guidelines or the regulations. Pursuant to the terms of the FDIC Cease and
Desist Order, the Bank agreed to maintain adjusted Tier I capital equal to or
exceeding 6.5% of the Bank's total assets. 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 to ensure the maintenance
of required capital levels. Further, the SBD has notified the Bank that the
Bank's capital is impaired and has issued Orders pursuant to Financial Code
Section 662. See "REGULATORY AGREEMENTS AND ORDERS."
CALCULATION OF CAPITAL FOR FDIC AND SBD PURPOSES
The FDIC Tier I capital ratio is calculated by dividing tangible
capital by tangible quarterly average assets. Tangible capital is the end of
period stockholders' equity minus any intangible assets, such as those created
in connection with acquisitions, on the institution's balance sheet. Likewise,
tangible quarterly average assets is average assets for the quarter minus
intangible assets on the institution's balance sheet. Finally, the FDIC allows
the addition (or deletion) to capital of the "unrealized gains/losses on
securities available-for-sale," which is reported as a separate component of
stockholders' equity under generally accepted accounting principles.
The SBD Tier I capital ratio is calculated by dividing tangible capital
by end-of-period tangible assets. Tangible capital is the end-of-period
stockholders' equity minus intangible assets on the institution's balance sheet.
End-of-period tangible assets equals total assets on the last day of the period
minus intangible assets on the institution's balance sheet.
-136-
<PAGE> 140
The SBD requires institutions to calculate the Tier I capital ratio using
generally accepted accounting principles. As a result, capital is not adjusted
for the effect of the "unrealized gains/losses on securities
available-for-sale."
As a result of these differences in the calculation of capital ratios,
the Tier I capital ratios reported under the FDIC regulations and the SBD
regulations differ. The following table illustrates the effects of these
differences as of December 31, 1995.
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Bank Tier I Capital
December 31, 1995 FDIC SBD
(Dollar amounts in thousands) Calculation Calculation
------------------------------------------------------------------------
<S> <C> <C>
Stockholders' Equity $ 10,986 $ 10,986
Add: Loss on AFS Securities 58
Less: Intangible (71) (71)
-------- --------
Tier I Capital $ 10,973 $ 10,915
======== ========
Adjusted Tier I Assets
FDIC - Average Assets for Quarter $166,941
SBD - End-of-Period Assets $169,406
Less: Intangible (71) (71)
-------- --------
Adjusted Tier I Assets $166,870 $169,335
======== ========
Tier I Leverage Ratios 6.58% 6.45%
</TABLE>
PAYMENT OF DIVIDENDS
The stockholders of the Company are entitled to receive dividends when
and as declared by its Board of Directors, out of funds legally available,
subject to the dividends preference, if any, on preferred shares that may be
outstanding and also subject to the restrictions of the Delaware General
Corporation Law. At September 30, 1995, there were no outstanding shares of
preferred stock. The Company is prohibited from paying any dividends to
stockholders without the prior written approval of the FRB pursuant to the terms
of the MOU. See "REGULATORY AGREEMENTS AND ORDERS."
The principal sources of cash revenue to the Company have been interest
payments on a mandatorily convertible subordinated note and dividends received
from the Bank. The Company converted the note on June 1, 1994. The Bank's
ability to make dividend payments to the Company is subject to state and federal
regulatory restrictions and the prohibitions of the Orders, which require the
prior written approval of the FDIC and SBD. See "REGULATORY AGREEMENTS AND
ORDERS."
-137-
<PAGE> 141
Dividends payable 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 SBD, 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.
The FDIC has broad authority to prohibit a bank from engaging in
banking practices which it considers to be unsafe or unsound. It is possible,
depending upon the financial condition of the bank in question and other
factors, that the FDIC may assert that the payment of dividends or other
payments by the Bank is considered an unsafe or unsound banking practice and
therefore, implement corrective action to address such a practice.
In addition to the regulations concerning minimum uniform capital
adequacy requirements discussed above, the FDIC has established guidelines
regarding the maintenance of an adequate allowance for loan and lease losses.
Therefore, the future payment of cash dividends by the Bank to the Company will
generally depend, in addition to regulatory approval, upon the Bank's earnings
during any fiscal period, the assessment of the respective Boards of Directors
of the capital requirements of such institutions and other factors, including
the maintenance of an adequate allowance for loan and lease losses and any
regulatory restrictions under which the institutions are operating.
IMPACT OF FEDERAL AND CALIFORNIA TAX LAWS
The following are the more significant federal and California income
tax provisions affecting commercial banks.
CORPORATE TAX RATES
The federal corporate tax rate is 34% up to $10 million of taxable
income, and 35% for taxable income over $10 million. The 1% differential is
phased out between $15 million and $18 million so that corporations with over
approximately $18.3 million of taxable income are taxed at a flat rate of 35%.
CORPORATE ALTERNATIVE MINIMUM TAX
Generally, a corporation will be subject to an alternative minimum tax
("AMT") to the extent the tentative minimum tax exceeds the corporation's
regular tax liability. The tentative minimum tax is equal to (a) 20 percent of
the excess of a corporation's "alternative minimum taxable income" ("AMTI") over
an exemption amount, less (b) the alternative minimum foreign tax credit.
Generally, AMTI is defined as taxable income computed with special adjustments
and increased by the amount of tax preference items for a tax year. A
corporation's net operating loss (computed for AMT purposes), if any, can be
utilized only up to 90% of AMTI, with the result that a corporation with current
year taxable income will pay some tax.
BAD DEBT DEDUCTION
The Tax Reform Act of 1986 (the "1986 Act") required a bank with
average adjusted bases of all assets exceeding $500 million ("large bank") to
compute its bad debt deduction using the specific charge-off method. Under that
method, a deduction is taken at the
-138-
<PAGE> 142
time the debt becomes partially or wholly worthless. Under prior law, a large
bank could also use one of two reserve methods, under which a bad debt deduction
was computed according to the amount added to a reserve set aside for bad debts.
The 1986 Act, as modified by the Revenue Reconciliation Act of 1990 (the "1990
Act"), continued to permit a bank not meeting the definition of a large bank
to use either the specific charge-off method or the "experience" reserve
method, under which the addition to bad debt reserve is based on the bank's
actual loss experience for the current year and five preceding years.
The U.S. Treasury has promulgated regulations which permit a bank to
elect to establish a conclusive presumption that a debt is worthless, based on
applying a single set of standards for both regulatory and tax accounting
purposes.
INTEREST INCURRED FOR TAX-EXEMPT OBLIGATIONS
Generally, taxpayers are not allowed to deduct interest on indebtedness
incurred to purchase or carry tax-exempt obligations. Prior to the 1986 Act,
this provision generally did not apply to interest paid by banks or other
financial institutions with respect to debts incurred in the ordinary course of
the bank's business. Banks were subject, however, to a 20 percent disallowance
of such interest in certain cases.
After the 1986 Act, a bank is denied a deduction for the portion of the
bank's interest that is allocable to tax-exempt obligations acquired by the bank
after August 7, 1986. The 20 percent disallowance of pre-1986 Act law continues
to apply to tax-exempt obligations acquired between January 1, 1983 and August
7, 1986. A special exception applies to a "qualified tax-exempt obligation"
which includes any tax-exempt obligation that (a) is not a private activity bond
and (b) is issued by an issuer that reasonably anticipates it will issue not
more than $10 million of tax-exempt obligations (other than certain private
activity bonds) during the calendar year. Qualified tax-exempt obligations are
treated as acquired before August 8, 1986; thus, interest expense allocable to
such bonds continues to be deductible, subject to the 20 percent disallowance.
NET OPERATING LOSSES
Under the 1986 Act, a bank is permitted to carry a net operating loss
("NOL") back to the prior three tax years and forward to the succeeding fifteen
tax years, as opposed to the ten-year carryback and five-year carryforward
periods of prior law. The prior law periods were retained, however, to the
extent the NOL of a commercial bank is attributable to a bad debt deduction
taken under the specific charge-off method. This special rule applies to NOLs
for tax years beginning after December 31, 1986, and before January 1, 1994. The
1990 Act clarified that a commercial bank's bad debt loss is treated as a
separate NOL to be taken into account after the remaining portion of the NOL for
the year.
AMORTIZATION OF INTANGIBLE ASSETS INCLUDING BANK DEPOSIT BASE
Prior to the Revenue Reconciliation Act of 1993 (the "1993 Act"),
there was considerable controversy regarding the amortization (depreciation) of
certain intangible assets, such as customer lists and similar items. Generally,
the issue involved whether the intangible asset represented nonamortizable
goodwill or a separate and distinct asset which could be amortized over its
useful life.
The 1993 Act provides that certain intangible property acquired by a
taxpayer must be amortized over a 15 year period. For this purpose, acquired
assets required to be amortized include goodwill and the deposit base or any
similar asset acquired by a financial institution (such as checking and savings
accounts, escrow accounts and similar items). The 15 year amortization rule
generally applies to property acquired after August 10, 1993.
-139-
<PAGE> 143
MARK-TO-MARKET RULES
The 1993 Act introduced certain "mark-to-market" tax accounting rules
for "dealers in securities." Under these rules, certain "securities" held at the
close of a taxable year must be marked to fair market value, and the unrealized
gain or loss inherent in the security must be recognized in that year for
federal income tax purposes. Under the definition of a "dealer", a bank or
financial institution that regularly purchases or sells loans may be subject to
the new rules. The rules generally are effective for tax years ending on or
after December 31, 1993.
Certain securities are excepted from the mark-to-market rules provided
the taxpayer timely complies with certain identification rules. The principal
exceptions affecting banks are for (1) any security held for investment and (2)
any note, bond, or other evidence of indebtedness acquired or originated in the
ordinary course of business and which is not held for sale. If a taxpayer timely
and properly identifies loans and securities as being excepted from the
mark-to-market rules, these loans and securities will not be subject to these
rules. Generally, a financial institution may make the identification of an
excepted debt obligation in accordance with normal accounting practices, but no
later than 30 days after acquisition.
CALIFORNIA TAX LAWS
A commercial bank is subject to the California franchise tax, which for
calendar income year 1995 is 11.3%.
California has substantially adopted the federal AMT, subject to
certain modifications. Generally, a bank is subject to California AMT in an
amount equal to the sum of (a) seven percent of AMTI (computed for California
purposes) over an exemption amount and (b) the excess of the bank tax rate over
the general corporation tax rate applied against net income for the taxable
year, unless the bank's regular tax liability is greater.
California permits a bank to compute its deduction for bad debt losses
under either the specific charge-off method or according to the amount of a
reasonable addition to a bad debt reserve.
California has incorporated the federal NOL provisions, subject to
significant modifications for most corporations. First, NOLs arising in income
years beginning before 1987 are disregarded. Second, no carryback is permitted,
and NOLs may be carried forward only five years. Third, in most cases, only
fifty percent of the NOL for any income year may be carried forward. Fourth, NOL
carryover deductions are suspended for income years beginning in calendar years
1991 and 1992, although the carryover period is extended by one year for losses
sustained in income years beginning in 1991 and by two years for losses
sustained in income years beginning before 1991. Finally, the special federal
NOL rules regarding bad debt losses of commercial banks do not apply for
California purposes.
Finally, in 1994, California enacted legislation conforming to the
federal tax treatment of amortization of intangibles and goodwill, with certain
modifications. No deduction is allowed under this provision for any income year
beginning prior to 1994.
The various laws discussed herein contain other changes that could have
a significant impact on the banking industry. The effect of these changes is
uncertain and varied, and it is unclear to what extent any of these changes may
influence the Company's or the Bank's operations or the banking industry
generally.
-140-
<PAGE> 144
In addition, there are several tax bills currently pending before
Congress which could have a significant impact on the banking industry. As of
the date of this Prospectus, it is uncertain whether these bills will be enacted
and what impact these bills will have on the Company or the Bank.
IMPACT OF MONETARY POLICIES
The earnings and growth of the Bank and the Company are subject to the
influence of domestic and foreign economic conditions, including inflation,
recession and unemployment. The earnings of the Bank and, therefore, the
Company, are affected not only by general economic conditions but also by the
monetary and fiscal policies of the United States and federal agencies,
particularly the Federal Reserve. The Federal Reserve can and does implement
national monetary policy, such as seeking to curb inflation and combat
recession, by its open market operations in United States Government securities
and by its control of the discount rates applicable to borrowings by banks from
the Federal Reserve System. The actions of the Federal Reserve in these areas
influence the growth of bank loans, investments and deposits and affect the
interest rates charged on loans and paid on deposits. As demonstrated recently
by the Federal Reserve's actions regarding interest rates, its policies have had
a significant effect on the operating results of commercial banks and are
expected to continue to do so in the future. The nature and timing of any future
changes in monetary policies are not predictable.
RECENT AND PROPOSED LEGISLATION
Federal and state laws applicable to financial institutions have
undergone significant changes in recent years. The most significant recent
federal legislative enactments are the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("Riegle-Neal") and the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA").
RIEGLE-NEAL INTERSTATE BANKING AND BRANCHING EFFICIENCY ACT OF 1994
In September 1994, President Clinton signed Riegle-Neal, which amends
the BHC Act and the Federal Deposit Insurance Act ("FDIA") to provide for
interstate banking, branching and mergers. Subject to the provisions of certain
state laws and other requirements, on September 29, 1995, one year after the
date of its enactment, Riegle-Neal allows a bank holding company that is
adequately capitalized and adequately managed to acquire a bank located in a
state other than the holding company's home state regardless of whether or not
the acquisition is expressly authorized by state law. Similarly, beginning on
June 1, 1997, the federal banking agencies may approve interstate merger
transactions, subject to applicable restrictions and state laws. Further, a
state may elect to allow out of state banks to open de novo branches in that
state. Riegle-Neal includes several other provisions which may have an impact on
the Company's and the Bank's business. The provisions include, among other
things, a mandate for review of regulations to equalize competitive
opportunities between U.S. and foreign banks, evaluation on a bank-wide,
state-wide and, if applicable, metropolitan area basis of the Community
Reinvestment Act compliance of banks with interstate branches, and, in the event
the FDIC is appointed as conservator or receiver of a financial institution, the
revival of otherwise expired causes of action for fraud and intentional
misconduct resulting in unjust enrichment or substantial loss to an institution.
Many of the nation's state bank regulators, including the SBD, have
adopted uniform guidelines for the supervision of state chartered banks which
operate across state lines. Under the guidelines, the "home state" regulator of
a multi-state bank will assume the primary responsibility over such banks,
including determining the safety and soundness of the institution. It will also
handle applications for new facilities, mergers, new powers and corporate
-141-
<PAGE> 145
matters, and will consult with "host state" regulators on these matters, as well
as coordinating the bank's supervision with the host state and the bank's
federal regulator.
The changes effected by Riegle-Neal may increase the competitive
environment in which the Company and the Bank operate in the event that out of
state financial institutions directly or indirectly enter the Bank's market
area. It is expected that Riegle-Neal will accelerate the consolidation of the
banking industry as a number of the largest bank holding companies attempt to
expand into different parts of the country that were previously restricted.
However, at this time, it is not possible to predict what specific impact, if
any, Riegle-Neal will have on the Company and the Bank, the competitive
environment in which the Company and the Bank operate, or the impact on the
Company and the Bank of any regulations to be proposed under Riegle-Neal.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
("FDICIA")
General
FDICIA primarily addresses the safety and soundness of the deposit
insurance funds, supervision of and accounting by insured depository
institutions and prompt corrective action by the federal bank regulatory
agencies with respect to troubled institutions. FDICIA gives the FDIC, in its
capacity as federal insurer of deposits, broad authority to promulgate
regulations to assure the viability of the deposit insurance funds, including
regulations concerning safety and soundness standards. FDICIA also places
restrictions on the activities of state-chartered institutions and on
institutions failing to meet minimum capital standards and provides enhanced
enforcement authority for the Federal banking agencies. FDICIA also strengthened
Federal Reserve Act regulations regarding insider transactions.
Prompt Corrective Action
FDICIA amended the FDIA to establish a format for closer monitoring of
insured depository institutions and to enable prompt corrective action by
regulators when an institution begins to experience difficulty. The general
thrust of these provisions is to impose greater scrutiny and more restrictions
on institutions as they descend the capitalization ladder.
-142-
<PAGE> 146
FDICIA establishes five capital categories for insured depository
institutions: (a) Well Capitalized;(6) (b) Adequately Capitalized;(7) (c)
Undercapitalized;(8) (d) Significantly Undercapitalized;(9) and (e) Critically
Undercapitalized.(10) All insured institutions (e.g., the Bank) are barred
from making capital distributions or paying management fees to a controlling
person (e.g., the Company) if to do so would cause the institution to fall into
any of the three undercapitalized categories. As of December 31, 1995, the Bank
qualified as an "adequately capitalized" institution under Section 38 of the
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 of the FDIA, 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
- --------------------
(6) Well Capitalized means a financial institution with a total risk-based
ratio of 10% or more, a Tier 1 risk-based ratio of 6% or more and a leverage
ratio of 5% or more, so long as the institution is not subject to any written
agreement or order issued by the FDIC.
(7) Adequately Capitalized means a total risk-based ratio of 8% or more, a
Tier 1 risk-based ratio of 4% or more and a leverage ratio of 4% or more (3% or
more if the institution has received the highest composite rating in its most
recent report of examination) and does not meet the definition of a Well
Capitalized institution.
(8) Undercapitalized means a total risk-based capital ratio of less than
8%, a Tier I risk-based capital ratio of less than 4% or a leverage ratio of
less than 4%.
(9) Significantly Undercapitalized means a financial institution with a
total risk-based ratio of less than 6%, a Tier 1 risk-based ratio of less than
3% or a leverage ratio of less than 3%.
(10) Critically Undercapitalized means a financial institution with a ratio
of tangible equity to total assets that is equal to or less than 2%.
-143-
<PAGE> 147
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.
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.
In addition to all of the above restrictions, 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 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
-144-
<PAGE> 148
a critically undercapitalized institution. FDICIA also provides that if an
institution is in an unsafe or unsound condition or is engaging in an unsafe or
unsound practice, its capital category may be downgraded to achieve a higher
level of regulatory scrutiny.
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 I capital ratio increased above 2% or a
determination was made that a different action was more appropriate. As a result
of First Banks' purchase of 116,666,666 shares of Bank Common Stock on August
23, 1995, and of the First Debenture on October 31, 1995, the Bank's Tier I
capital ratio was 3.19%, and, accordingly, the Bank would have been deemed
"undercapitalized." First Banks' additional infusions of $5.0 million pursuant
to the Second Debenture and the purchase of $1.5 million of Company Common Stock
would have allowed the Company to be considered "adequately capitalized" as of
December 31, 1995.
Other Provisions of FDICIA
FDICIA required the federal banking agencies to adopt regulations or
guidelines with respect to safety and soundness standards. The agencies have
adopted uniform Guidelines which are used, primarily in connection with
examinations, to identify and address problems at insured depository
institutions before capital becomes impaired. The federal bank regulatory
agencies recently proposed asset quality and earnings standards which would be
added to the safety and soundness Guidelines.
FDICIA restricts the acceptance of brokered deposits by insured
depository institutions that are not well capitalized. It also places
restrictions on the interest rate payable on brokered deposits and the
solicitation of such deposits. An undercapitalized institution will not be
allowed to solicit brokered deposits by offering rates of interest that are
significantly higher than the prevailing rates of interest on insured deposits
in the particular institution's normal market areas or in the market area in
which such deposits would otherwise be accepted. In addition to these
restrictions on acceptance of brokered deposits, FDICIA provides that no
pass-through deposit insurance will be provided to employee benefit plan
deposits accepted by an institution which is ineligible to accept brokered
deposits under applicable law and regulations.
FDICIA also adds grounds to the previously existing list of reasons for
appointing a conservator or receiver for an insured depository institution.
Pursuant to FDICIA, the FDIC has established a risk-based assessment
system for depository institutions. This risk-based system is used to calculate
a depository institution's semiannual deposit insurance assessment based on the
probability that the deposit insurance fund will incur a loss with respect to
the institution.
FDICIA also places restrictions on insured state bank activities and
equity investments, interbank liabilities and extensions of credit to insiders
and transactions with affiliates.
-145-
<PAGE> 149
Finally, the federal banking agencies recently have proposed
regulations establishing new capital requirements for general market risk and
specific risk as they pertain to the trading activities of a banking
organization and to the organization's other foreign exchange and commodities
activities. Because these and other proposed regulations are subject to change
before they are adopted in final form, their ultimate impact on the Company and
the Bank cannot yet be determined.
OTHER
Other legislation which has been or may be proposed to the United
States Congress and the California Legislature and regulations which may be
proposed by the Federal Reserve, the FDIC and the SBD may affect the business of
the Company or the Bank. It cannot be predicted whether any pending or proposed
legislation or regulations will be adopted or the effect such legislation or
regulations may have upon the business of the Company or the Bank.
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 on August
11, 1992 to enter into the FDIC Cease and Desist Order. Similarly, the Bank
consented on September 1, 1992 to the entrance of the SBD Final Order which was
amended on July 6, 1993 and March 30, 1995. The Orders remain in effect.
During the second quarter of 1995, the FDIC and SBD conducted a joint
examination of the Bank which 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 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, under the SBD Final Order, increase such ratio
to 7.0% by December 31, 1995 and maintain such 7.0% ratio during the life of the
Orders; (i) make no distributions to any stockholder without prior written
consent; (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.
-146-
<PAGE> 150
With respect to acceptable management, as of June 1, 1994, James E.
Culleton, then 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. On October 24, 1995, Mr. Culleton was
elected to serve as the permanent President and Chief Operating Officer of the
Bank, and Donald W. Williams was elected on October 24, 1995 to serve as Chief
Executive Officer of the Bank. Effective December 27, 1995, Mr. Williams also
commenced to serve as President and Chief Executive Officer of the Company. On
November 28, 1995, Allen H. Blake was appointed to serve as Interim Chief
Financial Officer of the Company and the Bank until a permanent Chief Financial
Officer can be employed, and he began to serve in this capacity on December 20,
1995, upon receipt of the required regulatory approvals. 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 and for Gary Sanders to be appointed as Senior
Vice President in charge of loan production.
The Bank also agreed, pursuant to the FDIC Cease and Desist Order, to
maintain adjusted Tier I 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
7.0% at December 31, 1995.
In response to its capital deficiency, the Bank submitted its Capital
Plan to the FDIC on August 23, 1994, 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. In January 1995, the Bank
consummated the sale of its San Diego branch office to the Bank of Commerce, and
in April 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.
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 was required to (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 the First Debenture from the
Company, and the contribution of those funds to the Bank. Similarly, the SBD has
indicated to the Bank that attaining the 7.0% Tier I capital level through the
Offering, including through any purchase of shares of Common Stock by First
Banks as Standby Purchaser, would be acceptable to the SBD.
As a result of the losses sustained for the year ended December 31,
1994 and for the first three quarters of 1995, the Bank was not in compliance
with its mandatory capital ratios. As of September 30, 1995, the Bank's adjusted
Tier I 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. On December 31, 1995, the Bank's Tier I capital ratio was approximately
6.58%. However, due to differences in the methods of calculating Tier I capital
utilized by the FDIC and the SBD, the Bank's Tier I capital level for SBD
purposes was 6.45% at December 31, 1995. The FDIC Tier I capital ratio is
calculated by dividing tangible capital by tangible quarterly average assets.
Tangible capital is the end of period capital minus any intangible assets, such
-147-
<PAGE> 151
as "goodwill," on the institution's balance sheet. Likewise, tangible quarterly
average assets is average assets for the quarter minus intangible assets on the
institution's balance sheet. Finally, the FDIC allows the addition (or deletion)
to capital of the FASB 115 "reserve for unrealized gains/losses on securities
available-for-sale." The SBD Tier I capital ratio is calculated by dividing
tangible capital by end-of-period tangible assets. Tangible capital is the
end-of-period capital minus intangible assets on the institution's balance
sheet. End-of-period tangible assets equals total assets on the last day of the
period minus intangible assets on the institution's balance sheet. The SBD
requires institutions to calculate the Tier I capital ratio using "Generally
Accepted Accounting Principles," as a result capital is not adjusted for the
effect of the "reserve for unrealized gains/losses on securities
available-for-sale."
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 "SUPERVISION AND REGULATION - Capital Adequacy
Requirements."
STATE CAPITAL IMPAIRMENT ORDERS
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 Capital Impairment Orders from the SBD dated August
3, 1994, November 3, 1994, February 17, March 13, May 15, and August 7, 1995. As
of December 31, 1995, the Bank had contributed capital of $40.39 million and
deficit-retained earnings of approximately $30.31 million, or approximately
75.04% 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
$14.15 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. 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, 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 must levy and collect an assessment
on its common shares pursuant to Section 423 of the California Corporations
Code.
-148-
<PAGE> 152
As the sole shareholder of the Bank, the Company (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 (ALL OF WHICH ARE HELD BY THE COMPANY) 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. AS THE SOLE SHAREHOLDER OF THE BANK, THE ASSESSMENT WOULD BE MADE ON
THE COMPANY. THE COMPANY DOES NOT HAVE THE FUNDS TO SATISFY SUCH AN ASSESSMENT.
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, 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. Finally,
because a quasi-reorganization, if obtained, would require 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. Accordingly, the Company is conducting this Offering to raise funds
to be contributed to the Bank's capital. However, no assurance can be given that
the Offering will be successful or that the Superintendent will approve a
quasi-reorganization.
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 December 31, 1995, the Bank would have been required
to raise $14.15 million in new capital (exclusive 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) it has adequate management,
(c) that the problems that created past losses and the impairment of capital
have been corrected and (d) it is currently operating on a profitable basis and
will continue to do so in the future.
Management believes that, because it is anticipated that the Bank will
have higher leverage and risk-based capital ratios after the Offering, 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 Financial Code Section 134.
FEDERAL RESERVE MOU
On October 17, 1994, the Company entered into an MOU with the FRB.
Under the terms of the MOU, the Company may not declare or pay any dividends
without the prior written approval of the FRB, and may not take dividends
-149-
<PAGE> 153
from the Bank without providing prior written notice to the FRB; the Company
must submit to the FRB 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 MOU sets forth restrictions on certain transactions between the
Bank and the Company; directs the Company to prepare and submit to the FRB
certain policies and procedures and financial information; and requires the
Company to provide prior notice to the FRB 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 FRB a written Progress Report regarding the Company's
compliance with the terms of the MOU.
On August 23, 1994, the Company submitted to the FRB its Capital Plan
setting forth the Company's plans for improving and maintaining an adequate
capital position at the Company and the Bank. Management of the Company believes
that the Company is in substantial compliance with the terms of the MOU.
1995 REGULATORY EXAMINATIONS
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 OREO, apparent violations of applicable banking laws and
inadequate capital. Management believes none of the alleged violations of law
were material, and that the matters concerning such alleged violations have
been resolved. 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 fiscal year 1994 nor
its Quarterly Report on Form 10-Q for the quarter 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.
No independent verification of the Company's and the Bank's compliance
with the various regulatory agreements, as discussed above, has been performed,
and the Bank's compliance is subject to review by the FDIC and the SBD while the
Company's compliance will be reviewed by the FRB. No assurance can be given that
capital, in addition to that raised pursuant to this Offering, can be raised if
the Bank requires such additional capital to remain in compliance with capital
adequacy requirements. In the event that the FRB, the FDIC or the SBD otherwise
determines that the Company or the Bank is engaging in unsafe or unsound
practices in conducting their businesses or violating any law, rule or
regulation, each regulatory agency would have available various remedies,
including certain enforcement actions. Additionally, the Company's inability to
serve as a source of strength to the Bank could serve as a basis for
-150-
<PAGE> 154
additional regulatory action against the Company. See "RISK FACTORS - Compliance
Status" and "SUPERVISION AND REGULATION."
For information with respect to the Bank's classification under the
FDIC's PCA regulations, see "RISK FACTORS - Failure to Meet Capital Adequacy
Requirements and Regulatory Orders" and "SUPERVISION AND REGULATION - Federal
Deposit Insurance Corporation Improvement Act of 1991."
LEGAL PROCEEDINGS
In the normal course of business, the Company is occasionally made a
party to actions seeking to recover damages from the Company.
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial condition.
LEGAL MATTERS
The validity of the issuance of the Common Stock will be passed upon by
Lillick & Charles LLP, San Francisco, California, counsel to the Company and the
Bank.
EXPERTS
The consolidated financial statements of First Commercial Bancorp, Inc.
as of December 31, 1994 and 1993 and for the three years ended December 31,
1994, 1993 and 1992, included herein have been included herein in reliance upon
the report of Arthur Andersen & Co., independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
CHANGES IN THE COMPANY'S INDEPENDENT ACCOUNTANTS
On November 13, 1995, the Audit Committee of the Board of Directors of
the Company approved the recommendation of the Board of Directors of the
Company to replace Arthur Andersen LLP, San Francisco, California, as the
independent accountant chosen to audit the Company's financial statements and
approved the appointment of KPMG Peat Marwick, Sacramento, California, as the
Company's independent accountant. The appointment of KPMG Peat Marwick was
effective immediately.
Arthur Andersen LLP's report on the financial statements of the
Company for each of the last two fiscal years did not contain an adverse
opinion or a disclaimer of opinion, and was not qualified as to audit scope or
accounting principles. Their report on the Company's December 31, 1994
financial statements dated March 29, 1995 did contain an explanatory paragraph
due to certain matters which raise substantial doubt about the Company's
ability to continue as a going concern.
During the Company's two most recent fiscal years and during the
subsequent interim period preceding the date of Arthur Andersen LLP's
replacement, there has been no disagreement with Arthur Andersen LLP on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreement, if not resolved to the
satisfaction of Arthur Andersen LLP, would have caused Arthur Andersen LLP to
make a reference to the subject matter of the disagreement in connection with
its report.
The Company has provided Arthur Andersen LLP with a copy of this
Registration Statement and by letter dated February 13, 1996, Arthur Andersen
LLP has agreed with the above statements.
-151-
<PAGE> 155
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Unaudited Financial Statements
Interim Consolidated Balance Sheets as of September 30, 1995 and December 31, 1994
Interim Consolidated Statements of Operations for the three and nine months ended
September 30, 1995 and 1994
Interim Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended September 30, 1995
Interim Consolidated Statements of Cash Flows for the nine months ended
September 30, 1995 and 1994
Notes to Interim Consolidated Financial Statements
Audited Financial Statements
Consolidated Balance Sheets at December 31, 1994 and 1993
Consolidated Statements of Operations for the three years ended December 31, 1994
Consolidated Statements of Changes in Stockholders' Equity for the three years ended
December 31, 1994
Consolidated Statements of Cash Flows for the three years ended December 31, 1994
Notes to Consolidated Financial Statements
</TABLE>
-152-
<PAGE> 156
<TABLE>
<S> <C>
Report of Independent Public Accountants
</TABLE>
-153-
<PAGE> 157
FIRST COMMERCIAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
(Dollar amounts in thousands) (NOTE 2)
- -------------------------------------------------------------------------------------------------------------
<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
---------- ----------
TOTAL LIABILITIES 169,712 234,951
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, 1995, giving effect to the transaction
described in Note 2, 250,000,000 shares, issued and outstanding:
1995 and 1994, 4,675,110 shares, 1995, giving effect to the
transaction described in
Note 2, 54,675,000 shares 547 48
Additional paid-in capital 31,933 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 3,211 4,355
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 172,923 $ 239,306
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-154-
<PAGE> 158
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 (NOTE 2):
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
Proforma per share data, giving retroactive effect
to the transactions contemplated pursuant to Stock Purchase
Agreement (Note 2):
Net loss per share $ (0.02) $ (0.58) $ (0.12) $ (3.03)
Weighted average shares of common stock outstanding 54,675 4,675 54,675 4,675
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-155-
<PAGE> 159
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)
Issuance of common stock pursuant to
Stock Purchase Agreement (Note 2) 500 4,146 -- -- -- 4,646
-------- -------- -------- -------- -------- --------
BALANCES, SEPTEMBER 30, 1995 $ 547 $ 31,933 $(29,181) $ -- $ (88) $ 3,211
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-156-
<PAGE> 160
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:
Issuance of Common Stock pursuant to Stock Purchase Agreement (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.
-157-
<PAGE> 161
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 had the right to vote all of the Bank stock.
Accordingly, the accompanying consolidated financial statements have been
prepared as if the Amended and Restated Stock Purchase Agreement (the "Stock
Purchase Agreement") described in Note 2 had been approved by the Company's
shareholders and transactions contemplated thereby had been consummated on
September 30, 1995.
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. The pro
forma 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 giving
retroactive effect to the exchange of Company common stock for the shares of
Bank preferred stock and Bank common stock held by First Banks, Inc. ("First
Banks") as if such exchange had occurred at the beginning of the period
presented (see Note 2).
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.
-158-
<PAGE> 162
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 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.
-159-
<PAGE> 163
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.
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 the stock
until the earlier of the conclusion of the Shareholders' Meeting or December 31,
1995. 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.
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.
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 Shareholders' 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.
If the financial statements of the Company as of September 30, 1995 had been
prepared using the equity method of accounting for its 1.05% equity in the Bank,
the financial position, results of operation and cash flows would have been
those presented for the parent company only, except for the investment in
subsidiary and the composition of stockholders' equity. A condensed comparison
of the financial statement as of September 30, 1995 presented on the equity
basis with that on a consolidated basis, as reported herein, is as follows:
-160-
<PAGE> 164
<TABLE>
<CAPTION>
EQUITY CONSOLIDATED
(Dollar amounts in thousands) BASIS BASIS
- -----------------------------------------------------------------------------------
<S> <C> <C>
Investment in subsidiary, at equity $ 44 $ --
Total Assets $ 66 $ 172,921
Stockholders' Equity
Preferred stock $ -- $ --
Common stock 47 547
Additional paid-in capital 27,787 31,933
Retained (deficit) (28,738) (29,181)
Unrealized losses on securities available-for-sale -- (88)
--------- ---------
Total stockholders' equity $ (904) $ 3,211
========= =========
</TABLE>
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
-161-
<PAGE> 165
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,
-162-
<PAGE> 166
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.
-163-
<PAGE> 167
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>
-164-
<PAGE> 168
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.
-165-
<PAGE> 169
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
-166-
<PAGE> 170
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.
-167-
<PAGE> 171
(Page intentionally left blank)
-168-
<PAGE> 172
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.
-169-
<PAGE> 173
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.
-170-
<PAGE> 174
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.
-171-
<PAGE> 175
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.
-172-
<PAGE> 176
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.
-173-
<PAGE> 177
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>
-174-
<PAGE> 178
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.
-175-
<PAGE> 179
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>
-176-
<PAGE> 180
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).
-177-
<PAGE> 181
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.
-178-
<PAGE> 182
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."
-179-
<PAGE> 183
(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>
-180-
<PAGE> 184
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.
-181-
<PAGE> 185
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
-182-
<PAGE> 186
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
-183-
<PAGE> 187
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)
-184-
<PAGE> 188
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
All expenses of the Offering will be borne by the Company. The
following table sets forth an itemized estimate of such expenses:
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Registration Filing Fees $ 2,055
- --------------------------------------------------------------------------------
Transfer Agent Fees and Expenses 15,000 (1)
- --------------------------------------------------------------------------------
Escrow Agent Fees 2,500
- --------------------------------------------------------------------------------
Blue Sky Filing Fees and Expenses 1,500
- --------------------------------------------------------------------------------
Printing and Engraving 40,000
- --------------------------------------------------------------------------------
Legal Fees and Expenses 130,000
- --------------------------------------------------------------------------------
Accounting Fees and Expenses 15,000
- --------------------------------------------------------------------------------
Financial Advisor Fees and Expenses 225,000
- --------------------------------------------------------------------------------
Miscellaneous 12,945
- --------------------------------------------------------------------------------
Total $444,000
- --------------------------------------------------------------------------------
</TABLE>
- --------------------
(1) Does not include $7,000 payable in the event that the Company extends the
Offering, per transaction fees of $10.50 for the first 1,000 subscriptions
submitted, $8.00 for the next 2,000 subscriptions submitted and $5.00 per
subscription received thereafter, and defective subscription fees of
$10.00 per subscription.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Delaware General Corporation Law generally allows a corporation to
indemnify any person against judgments, fines, expenses and amounts paid in
settlement of any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that such person is
or was a director, officer, employee or agent of the corporation or in other
similar capacities, so long as such person acted in good faith and in a manner
he or she believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful.
Article VIII of the Company's Bylaws contains the following provisions:
II-1
<PAGE> 189
"Section 1. Right to Indemnification. Each person who was or is made a
party or is threatened to be made a party to or is involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative
("proceeding"), by reason of the fact that he or she or a person of whom he or
she is the legal representative, is or was a director, officer or employee of
the Corporation or is or was serving at the request of the Corporation as a
director, officer or employee of another corporation, or of a partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, whether the basis of such proceeding is alleged action in an
official capacity as a director, officer or employee or in any other capacity
while serving as a director, officer or employee, shall be indemnified and held
harmless by the Corporation to the fullest extent authorized by Delaware Law, as
the same exists or as hereafter amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than said Law permitted the Corporation to
provide prior to such amendment) against all expenses, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties,
amounts paid or to be paid in settlement and amounts expended in seeking
indemnification granted to such person under applicable law, this Bylaw or any
agreement with the Corporation) reasonably incurred or suffered by such person
in connection therewith and such indemnification shall continue as to a person
who has ceased to be a director, officer or employee and shall inure to the
benefit of his or her heirs, executors and administrators; provided, however,
that, except as provided in Section 2 of this Article VIII, the Corporation
shall indemnify any such person seeking indemnity in connection with an action,
suit or proceeding (or part thereof) initiated by such person only if such
action, suit or proceeding (or part thereof) was authorized by the Board of
Directors of the Corporation. Such right shall be a contract right and shall
include the right to be paid by the Corporation expenses incurred in defending
any such proceeding in advance of its final disposition; provided, however,
that, if the Delaware General Corporation Law then so requires, the payment of
such expenses incurred by a director or officer of the Corporation in his or her
capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of such proceeding, shall be made only upon delivery to
the Corporation of an undertaking, by or on behalf of such director or officer,
to repay all amounts so advanced if it should be determined ultimately that such
director or officer is not entitled to be indemnified under this Section or
otherwise.
Section 2. Right of Claimant to Bring Suit. If a claim under Section 1
is not paid in full by the Corporation within thirty (30) days after a written
claim has been received by the Corporation, the claimant may at any time
thereafter bring suit against the Corporation to recover the unpaid amount of
the claim and, if such suit is not frivolous or brought in bad faith, the
claimant shall be entitled to be paid also the expense of prosecuting such
claim. It shall be a defense to any such action (other than an action brought to
enforce a claim for expenses incurred in defending any proceeding in advance of
its final disposition where the required undertaking, if any, has been tendered
to this Corporation) that the claimant has not met the standards of conduct
which make it permissible under the Delaware General Corporation Law for the
Corporation to indemnify the claimant for the amount claimed, but the burden of
proving such defense shall be on the Corporation. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard of conduct.
Section 3. Non-Exclusivity of Rights. The rights conferred on any
person in Section 1 and 2 shall not be exclusive of any other right which such
persons may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, Bylaw, agreement, vote of stockholders or
disinterested directors or otherwise.
Section 4. Indemnification Contracts. The Board of Directors is
authorized to enter into a contract with any director, officer, employee or
agent of the Corporation, or any person serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, including employee
benefit plans, providing for indemnification rights equivalent to or, if the
Board of Directors so determines, greater than, those provided for in this
Article VIII.
Section 5. Insurance. The Corporation shall maintain insurance to the
extent that it is reasonably available and the premium costs are not
disproportionate to the amount of coverage provided, at its expense, to protect
itself and any
II-2
<PAGE> 190
such director, officer, employee or agent of the Corporation or another
corporation, partnership, joint venture, trust or other enterprise against any
such expense, liability or loss, whether or not the Corporation would have the
power to indemnify such person against such expense, liability or loss under the
Delaware General Corporation Law.
Section 6. Effect of Amendment. Any amendment, repeal or modification
of any provision of this Article VIII by the stockholders and the directors of
the Corporation shall not adversely affect any right or protection of a director
or officer of the Corporation existing at the time of such amendment, repeal or
modification.
Section 7. Settlement of Claims. The Corporation shall not be liable to
indemnify any director or executive officer under this Article VIII: (i) for any
amounts paid in settlement of any action or claim effected without the
Corporation's written consent, which consent shall not be unreasonably withheld
or (ii) for any judicial award, if the Corporation was not given a reasonable
and timely opportunity, at its expense, to participate in the defense of such
action.
Section 8. Subrogation. In the event of payment under this Article
VIII, the Corporation shall be subrogated to the extent of such payment to all
of the rights of recovery of the indemnified party who shall execute all papers
required and shall do everything that may be necessary to secure such rights,
including, without limitation, the execution of such documents necessary to
enable the Corporation effectively to bring suit to enforce such rights.
Section 9. No Duplication of Payments. The Corporation shall not be
liable under this Article VIII to make any payment in connection with any claim
made against the director or executive officer to the extent such director or
executive officer has otherwise actually received payment (under any insurance
policy, agreement, vote, or otherwise) of the amounts otherwise indemnifiable
hereunder."
Finally, the Company's Certificate of Incorporation provides that, to
the fullest extent permitted by the Delaware General Corporation Law, as the
same exists or is hereafter amended, no director of the Company shall be
personally liable to the corporation or to its stockholders for monetary damages
for breach of fiduciary duty as a director.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Pursuant to the terms of the Stock Purchase Agreement, on October 31,
1995, the Company issued the First Debenture to First Banks in consideration of
a loan in the principal amount of $1.5 million. Similarly, on December 28, 1995,
the Company issued the Second Debenture to First Banks in consideration of a
loan in the principal amount of $5.0 million. The principal amounts of the First
Debenture and the Second Debenture are convertible into 15,000,000 shares and
50,000,000 shares of Company Common Stock, respectively. On December 28, 1995,
the Company issued 15,000,000 shares of Common Stock to First Banks for a
purchase price of $1.5 million. Finally, on December 28, 1995, the Company
issued to First Banks 50,000,000 shares of Common Stock in exchange for the
shares of Bank Preferred Stock and Bank Common Stock held by First Banks.
The Company relied for the issuance of the Debentures and the shares of
Common Stock to First Banks on the exemption provided by Section 4(2) of the
Securities Act of 1933, as amended.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) See Index to Exhibits at page II-6 of this Form S-1.
II-3
<PAGE> 191
(b) In accordance with Regulation S-X, the Financial Statement
Schedules have been omitted because: (a) they are not
applicable to or required of the Company; or (b) the
information required is included in the consolidated financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
A. (1) to file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement: (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act; (ii) to
reflect in the prospectus any facts or events arising after the effective date
of the Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information in the Registration Statement; and (iii) to include any
material information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to such
information set forth in the Registration Statement; (2) that, for the purposes
of determining any liability under the Securities Act, each such post-effective
amendment shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the Offering of such securities at that time
shall be deemed to be the initial bona fide Offering thereof; and (3) to remove
from registration by means of a post-effective amendment any of the securities
being registered which remain unsold at the termination of the Offering; and
B. To supplement the prospectus, after the expiration of the
subscription period, to set forth the results of the subscription offer and the
terms of any subsequent reofferings thereof. If any public offering by the
underwriters is to be made on terms differing from those set forth on the cover
page of the prospectus, a post-effective amendment will be filed to set forth
the terms of such offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
[Rest of page intentionally left blank.]
II-4
<PAGE> 192
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Pre-Effective Amendment No. 2 to the Registration Statement on
Form S-1 (No. 33-92928) to be signed on its behalf, by the undersigned,
thereunto duly authorized, in the City of Sacramento, State of California, on
February 12, 1996.
FIRST COMMERCIAL BANCORP, INC.
/s/ Donald W. Williams
----------------------------------
By: Donald W. Williams, President
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Allen H. Blake*
- -------------------------
Allen H. Blake Interim Chief Financial Officer February 12, 1996
(principal accounting officer) and
Director
/s/ James F. Dierberg*
- -------------------------
James F. Dierberg Director February 12, 1996
/s/ Michael P. Morris*
- -------------------------
Michael P. Morris Director February 12, 1996
/s/ Manuel Perry, Jr.*
- -------------------------
Manuel Perry, Jr. Chairman of the Board of Directors February 12, 1996
/s/ Donald W. Williams
- -------------------------
Donald W. Williams President, Chief Executive February 12, 1996
Officer (principal executive officer)
and Director
/s/ Donald W. Williams
- -------------------------
*Donald W. Williams
Power of Attorney
</TABLE>
II-5
<PAGE> 193
EXHIBITS
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Exhibit Page
- ----------- ------- ----
<S> <C> <C>
3(a) Certificate of Incorporation (1)
3(b) Amendment to Certificate of Incorporation(6)
3(c) Bylaws (1)
3(d) Amendments to Bylaws(6)
5. Opinion of Lillick & Charles LLP
8. Opinion of Lillick & Charles LLP
re: Tax Matters
10.1 Amended and Restated Stock Purchase Agreement
dated August 7, 1995 by and between First Commercial
Bancorp, Inc., First Commercial Bank, First Banks, Inc.
and James F. Dierberg (2)
10.2 Additional Investment Agreement
dated October 31, 1995 (3)
10.3 Investment Debenture dated October 31, 1995 (3)
10.4 Stock Pledge Agreement dated October 31, 1995 (3)
10.5 Standby Agreement dated December 28, 1995 (4)
10.6 Management Services Agreement dated December 21,
1995 by and between First Commercial Bank and
First Banks, Inc. (3)
</TABLE>
II-6
<PAGE> 194
<TABLE>
<S> <C>
10.7 Cost Sharing Agreement dated December 21, 1995
by and between First Commercial Bancorp, Inc., First
Commercial Bank and First Bank & Trust (3)
10.8 Lease between Northrup-Howe Tower Group
and First Commercial Bank dated June 14, 1995(3)
10.9 Amendment and Restatement of Employment
Agreement by and between James E. Culleton
and First Commercial Bancorp, Inc. and
First Commercial Bank (6)
10.10 Amendment No. 1 to Employment Agreement
by and between Anne H. Long, First Commercial
Bancorp, Inc. and First Commercial Bank (3)
10.11 Agreement with Seapower Carpenter Capital,
dba Carpenter & Company (6)
10.12 Subscription Agent Agreement with The First
National Bank of Boston (6)
10.13 Escrow Agreement with State Street Bank
and Trust Company (6)
10.14 Service Agreement between First Commercial
Bank and FirstServ, Inc. dated December 8, 1995 (6)
16. Letter of Arthur Andersen LLP re change in
certifying accountant
21. Subsidiaries (5)
23(a) Consent of Lillick & Charles LLP is contained at Exhibits 5
and 8
23(b) Consent of Carpenter & Company (6)
23(c) Consent of Arthur Andersen & Co.
</TABLE>
II-7
<PAGE> 195
<TABLE>
<S> <C>
24. Power of Attorney (6)
27. Financial Data Schedules (6)
99(a) Form of Subscription Rights Certificate (6)
99(b) Form of Exchange Offer Certificate (6)
99(c) Form of Letter from First Commercial Bancorp, Inc.
re: Stockholder Rights Offering (6)
99(d) Form of Letter from brokers/dealers to First
Commercial Bancorp, Inc. Stockholders re:
Stockholder Rights Offering (6)
99(e) Form of Letter from First Commercial Bancorp, Inc.
re: Dividend Rights Offering (6)
99(f) Form of Letter from brokers/dealers to First
Commercial Bancorp, Inc. Dividend-Eligible
Stockholders re: Dividend Rights (6)
99(g) Form of General Subscription Application and Agreement (6)
</TABLE>
- --------------------
(1) Filed as Exhibits 3.1 and 3.2 to the Registrant's 1990 Annual Report on
Form 10-K and incorporated herein by reference.
(2) Filed as Exhibit 2 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995 and incorporated herein by
reference
(3) Filed as Exhibits 10(a), 10(b), 10(c), 10(g), 10(h), 10(d) and 10(f) to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995 and incorporated herein by reference.
(4) Filed as Exhibit 10(c) to the Registrant's Current Report on Form 8-K
dated December 28, 1995.
(5) Filed as Exhibit 21 to the Registrant's Registration Statement on Form
S-1 (No. 33-92928) as filed on May 31, 1995.
(6) Filed as Exhibits 3(b), 3(d), 10.9, 10.11, 10.12, 10.13, 10.14, 23(b),
24, 27, 99(a), 99(b), 99(c), 99(d), 99(e), 99(f) and 99(g) to
Pre-Effective Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (No. 33-92928) as filed on February 1, 1996.
II-8
<PAGE> 1
Exhibit 5
Lillick & Charles LLP
Two Embarcadero Center
San Francisco, California 94111
February 13, 1996
(415) 984-8339
First Commercial Bancorp, Inc.
865 Howe Avenue
Sacramento, California 95825
Gentlemen:
We are acting as your counsel in connection with the registration under
the Securities Act of 1933, as amended (the "Act"), of 59,688,875 shares (the
"Shares") of common stock, $.01 par value (the "Common Stock"), of First
Commercial Bancorp, Inc., a Delaware corporation (the "Company"). The Shares
consist of 50,000,000 shares of Common Stock of the Company issuable upon
exercise of Stockholder Rights, as defined in the Registration Statement
(defined below), of which 10,000,000 Shares may be offered and sold to the
public (the "Public Offering"), and 9,688,875 Shares issuable upon exercise of
Dividend Rights, as defined in the Registration Statement (defined below).
Pre-effective Amendment No. 2 to the Company's Registration Statement on Form
S-1 (No. 32-92928) (the "Registration Statement") will be filed under the Act
with respect to the offering of the Shares, and this opinion is proposed to be
filed as an exhibit to the Registration Statement.
In connection with the offering of the Shares, we have examined the
Registration Statement and such other documents as we have deemed necessary to
form the opinions hereinafter expressed. As to various questions of fact
material to such opinions, where relevant facts were not independently
established, we have relied upon certificates and statements of officers of the
Company. In conducting our examination, we have assumed, without investigation,
the genuineness of all signatures, the correctness of all certificates, the
authenticity of all documents submitted to us as originals, the conformity to
original documents of all documents submitted to us as certified or photostatic
copies and the authenticity of the originals of such copies.
Based upon and subject to the foregoing, after having given due regard
to such issues of law as we deemed relevant, we are of the opinion that:
assuming that (i) the Registration Statement becomes and remains effective and
all delivery procedures with respect thereto fulfill all of the requirements of
the Act through all periods relevant to this opinion, (ii) all issuances of the
<PAGE> 2
First Commercial Bancorp, Inc.
February 13, 1996
Page 2
Stockholder Rights, Dividend Rights and Shares shall be in a manner complying
with the terms of the Registration Statement and in compliance with Blue Sky
Laws of any states having jurisdiction thereof and (iii) full payment of the
purchase price is made to the Company for each Share issued upon exercise of a
Stockholder Right and upon sale in the Public Offering, the Shares, when
issued, will be validly issued, fully paid and non-assessable.
Consent is hereby given to the filing of this opinion as an exhibit to
the Registration Statement and to the reference to this firm under the caption
"Legal Matters" as having passed upon the validity of the issuance of the
Shares. In giving this consent, we do not hereby admit that we come within the
category of persons whose consent is required under the Section 7 of the Act or
the regulations of the Securities and Exchange Commission promulgated
thereunder.
This opinion is furnished solely in connection with the Registration
Statement and is not to be used for any other purpose without our prior written
consent.
Very truly yours,
LILLICK & CHARLES LLP
/s/Ronald W. Bachli
Ronald W. Bachli
<PAGE> 1
LILLICK & CHARLES LLP
Two Embarcadero Center
San Francisco, California 94111-3996
(415) 984-8200
February 15, 1996
Board of Directors
First Commercial Bancorp, Inc.
865 Howe Avenue
Sacramento, California 95825
Ladies and Gentlemen:
You have requested our opinion of the material federal income tax
consequences which may be realized by the stockholders who purchase shares of
Common Stock or who receive certain Dividend Exchange Shares. A Form S-1
Registration Statement ("Registration Statement") has been filed with the
Securities and Exchange Commission with respect to the offering of the Common
Stock and the Dividend Rights to receive Dividend Exchange Shares, and this
opinion is proposed to be filed as an exhibit to the Registration Statement.
Capitalized terms not identified herein have the meaning set forth in the
Registration Statement.
I. FACTS
The facts are set forth in the Registration Statement. Generally, in the
Offering, a stockholder will receive nontransferable Stockholder Rights to
purchase shares of Common Stock for $.10 per share. The Stockholder Rights were
created in connection with the Company's sale of Common Stock at $0.10 per share
to First Banks pursuant to the Stock Purchase Agreement. Stockholders permitted
to participate in the Stockholder Rights Offering are stockholders of record at
October 6, 1995. At that time, the value of the Common Stock did not exceed $.10
per share. At present, the shares of Common Stock have a bid price of $.34 and
an ask price of $.37 per share. The issuance of the Stockholder Rights is not
one of a series of distributions having the result of stock by some stockholders
and property or money by other shareholders.
In addition, as part of the offering, each person who was a record
holder of Common Stock on the Dividend Record Date will receive a Dividend Right
exchangeable for Dividend Exchange Shares. Each Dividend Right entitles the
holder to receive one share of Common Stock for each $0.10 dividend and accrued
interest amount exchanged. The Dividend Exchange Shares are being offered in
exchange for two dividends (the "Dividend Amount"), declared by the Board of
Directors in 1992, which remain unpaid, together with interest thereon (the
"Interest Amount"). If the holder does not exercise its Dividend Right by the
Dividend Rights Expiration Date, the holder merely retains its right to receive
a cash dividend in the future.
<PAGE> 2
Board of Directors
February 15, 1996
Page 2
The Company does not currently have accumulated earnings and profits as
determined for federal income tax purposes.
In connection with the offering of the Common Stock and Dividend
Exchange Shares, we have examined the Registration Statement and such other
documents as we have deemed necessary to form the opinions expressed herein. If
you have any information which would indicate that any of the facts set forth
herein or in the Registration Statement are incorrect, incomplete or erroneous,
please advise us, because an alteration of any of these may have the effect of
changing all or a part of the opinions expressed herein.
II. OPINION
Based on the facts set forth herein and in the Registration Statement,
we are of the opinion that the material federal income tax consequences to
stockholders who purchase shares of Common Stock or receive Dividend Exchange
Shares are as follows:
A. Receipt of Stockholder Rights. The receipt of the Stockholder Rights
by a stockholder will not be subject to federal income tax. Section 305(a).(1)
B. Receipt of Common Stock upon exercise of Stockholder Rights. If the
stockholders acquire Common Stock for $.10 per share upon exercise of the
Stockholder Rights, and that price is below the then fair market value of the
Shares, there would be a constructive distribution of Common Stock. However,
such distribution will not be included in gross income. Section 305(a).
C. Dividend Exchange Shares received for Dividend Amount. To the extent
a stockholder receives Dividend Exchange Shares in exchange for the Dividend
Amount, the stockholder will be treated as receiving a distribution of property
to which Section 301 applies. The amount of the distribution will equal the fair
market value on the date of distribution of the Dividend Exchange Shares
allocable to the Dividend Amount. Section 301(b).
i. The distribution will be treated as a dividend taxable as ordinary
income to the extent of the stockholder's share of the Company's current or
accumulated earnings and profits (computed for federal income tax purposes).
Sections 301(c)(1), 316. The Company does not currently have accumulated
earnings and profits. If the Company has earnings and profits for the current
tax year in excess of all distributions for the year, the distribution will
be a
- -------------------------
(1) All references to Section herein are to sections of the Internal Revenue
Code of 1986, as amended to the date of this letter.
<PAGE> 3
Board of Directors
February 15, 1996
Page 3
dividend. If the Company does not have earnings and profits for the current tax
year, the distribution will not be a dividend. The determination of current
earnings and profits is made as of the close of the taxable year of the
distribution. Because we cannot project whether the Company will have earnings
and profits for the current tax year, we cannot determine now whether the
distribution will be taxed as a dividend.
ii. To the extent the distribution exceeds the stockholder's
allocable share of the Company's current or accumulated earnings and profits,
the distribution will be treated as a reduction of the stockholder's adjusted
basis of the Common Stock. Section 301(c)(2). Any portion of the distribution in
excess of such stockholder's share of current or accumulated earnings and
profits which exceeds the stockholder's adjusted basis of the Common Stock will
be treated as capital gain, if the stockholder holds the Common Stock as a
capital asset. Section 301(c)(3)(A).
D. Dividend Exchange Shares received for Interest Amount. To the extent
a stockholder receives Dividend Exchange Shares in exchange for the Interest
Amount, the stockholder will have taxable interest income. Section 61.
III. DISCUSSION
A. Receipt of Stockholder Rights and Purchase of Common Stock.
Generally, a distribution of stock or stock rights to shareholders (including a
constructive distribution) is not subject to federal income tax. Section 305(a).
Thus, if the distribution of Stockholder Rights qualifies under Section 305(a),
the stockholder would not have income from receipt of the Stockholder Rights.
Similarly, if the stockholders acquire Common Stock for $.10 per share,
and that price is substantially below the then fair market value of the Shares,
there would be a constructive distribution of Common Stock. See Rev. Rul. 68-43,
1968-1 C.B. 146; Treas. reg. section 1.301-1(j). If the constructive
distribution of the Common Stock upon exercise of the Stock Right qualifies
under Section 305(a), it would not be taxable.
Notwithstanding Section 305(a), in certain cases under Section 305(b), a
distribution of stock or rights is treated as a distribution of property
(potentially subject to federal income tax). Under Section 305(b)(2), a
distribution of stock (or rights) may be treated as a distribution of property
if the distribution (or a series of distributions of which the distribution is
one) results in (1) the receipt of property (including money) by some
stockholders and (2) an increase in the proportionate interest of other
stockholders in the assets or earnings and profits of the
<PAGE> 4
Board of Directors
February 15, 1996
Page 4
corporation.(2) In that case, the distribution would be treated as a
distribution under Section 301. See III.C., below.
Based on the facts described, Section 305(b)(2) does not apply. The
determination whether there is a series of distributions for purposes of Section
305(b)(2) is a question of fact. See Treas. Reg. section 1.305-3(b). However, as
noted above, the issuance of the Stockholder Rights is not one of a series of
distributions having the result of receipt of stock by some stockholders and
property or money by other shareholders. Although the recipients on the Common
Stock may receive an increase in their proportionate interest in assets, there
will be no distribution of cash (or property) to other stockholders (e.g. First
Banks). This is because any future cash distribution is required to be prorata
to all stockholders.
Accordingly, receipt of the Stockholder Rights, and the constructive
receipt of Common Stock upon exercise of Stockholder Rights, will be excluded
from gross income under Section 305(a).
B. Tax treatment of the receipt of Dividend Exchange Shares. As noted
above, gross income does not include a distribution of stock made to
stockholders with respect to their stock. Section 305(a). However, the stock
distribution is treated as a distribution of property subject to Section 301
(potentially subject to federal income tax) if the distribution is, at the
election of any shareholder, payable either in stock or property (including
cash). Section 305(b)(1); Treas. Reg. Section 1.305-2(a). It is immaterial
whether the election is exercised or exercisable after the declaration of the
distribution, and whether the election is provided in the declaration of the
dividend or arises from the circumstances of the distribution or otherwise. Id.
A stockholder that receives Dividend Exchange Shares in exchange for
the Dividend Amount will be treated as receiving a distribution of property to
which Section 301 applies under Section 305(b)(1). Under the Dividend Rights,
the stockholders have the right to receive either Dividend Exchange Shares or a
potential cash dividend in the future.(3) The fact that the cash dividend is not
immediately payable but only may be paid in the future will not affect the
analysis.
- --------------------------
(2) None of the other exceptions in Section 305(b) apply to the receipt of
the Stock Rights or to the constructive stock distribution from
exercise of the Stock Rights.
(3) Alternatively, the transaction would be treated as a distribution of
property under Section 305(b)(2).
<PAGE> 5
Board of Directors
February 15, 1996
Page 5
See Fisher v. Commissioner, 62 TC 73 (1974) (contingent right to cash dividend
did not preclude application of predecessor of Section 305(b)(1)).(4)
In contrast, Sections 305 and 301 do not apply to stock received by a
stockholder in a capacity other than as a shareholder (e.g. as a creditor). See
Treas. Reg. Sections 1.301-1(c). Accordingly, to the extent a stockholder
receives Dividend Exchange Shares in exchange for the Interest Amount, the
stockholder will have taxable interest income. Section 61.
C. Tax treatment of the distribution of Dividend Exchange Shares for
the Dividend Amount. Even though the receipt of the Dividend Exchange Shares in
exchange for the Dividend Amount is a distribution of property under Section
301, the stockholders may not be subject to tax on receipt of those Shares.
The amount of the distribution subject to Section 301 is the fair
market value of the Dividend Exchange Shares allocable to the Dividend Amount on
the date of distribution. Section 301(b). Section 301 characterizes this
distribution into three categories. First, the distribution will be treated as a
dividend taxable as ordinary income to the extent of the stockholder's share of
the Company's current or accumulated earnings and profits. Sections 301(c)(1),
316. The determination of current earnings and profits is made as of the close
of the taxable year of the distribution. Section 316(a)(2); Treas. reg. section
1.316-1(a)(1). Because the Company does not have accumulated earnings and
profits, and we cannot project whether the Company will have earnings and
profits for the current tax year, we cannot determine now whether the
distribution will be taxed as a dividend. Second, to the extent the distribution
exceeds the stockholder's allocable share of the Company's current or
accumulated earnings and profits, the distribution will be treated reduction of
the stockholder's adjusted basis of the Common Stock. Section 301(c)(2).
Finally, any distribution in excess of such stockholder's share of current or
accumulated earnings and profits which exceeds the stockholder's adjusted basis
of the Common Stock will be treated as capital gain, if the Common Stock is held
as a capital asset. Section 301(c)(3)(A).
The opinions expressed herein are effective as of the date hereof, and
are based upon and limited to the foregoing facts as set forth herein and in the
Registration Statement. In addition, the opinions expressed herein are based
upon the existing provisions of the Internal Revenue Code of 1986, as amended,
the Treasury Regulations promulgated thereunder, current positions of the IRS
contained in published revenue rulings and revenue procedures, and existing
judicial
- -----------------------
(4) In contrast, if the stockholders have virtually no opportunity to
receive cash in the future, then the distribution would not be subject
to Section 305(b)(1). See Rev. Rul. 80-154, 1980-1 C.B. 68.
<PAGE> 6
Board of Directors
February 15, 1996
Page 6
decisions, all of which are subject to change with or without retroactive
effect. Although we believe that the opinions set forth herein are based on
reasonable interpretations of existing laws, it is possible that the IRS may
disagree with our views, and may successfully challenge them.
We have expressed our opinions only as to matters expressly set forth
herein, and no other opinions are being rendered as to any other matter. Consent
is hereby given to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to this firm under the caption "Federal Income
Tax Consequences" as having opined on the material federal income tax
consequences to investors in the Common Stock and recipients of the Dividend
Exchange Shares. In giving this consent, we do not hereby admit that we come
within the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the regulations of the Securities and
Exchange Commission promulgated thereunder.
This opinion is furnished solely in connection with the Registration
Statement and is not to be used for any other purpose without our prior written
consent.
Very truly yours,
LILLICK & CHARLES LLP
/s/ Benjamin Berk
---------------------
Benjamin Berk
<PAGE> 1
Exhibit 16
February 13, 1996
Office of the Chief Accountant
SECPS Letter File
Securities and Exchange Commission
Mail Stop 9-5
450 Fifth Street, N.W.
Washington, D.C. 20549
Sir:
We have read the Section entitled "Experts" included in Pre-Effective Amendment
No. 2 to Registration Statement No. 33-92928 to be filed with the Securities
and Exchange Commission by First Commercial Bancorp, Inc. and are in agreement
with the statements contained therein.
Very truly yours,
ARTHUR ANDERSEN LLP
By: /s/ Patrick M. Mathiesen
-------------------------
Patrick M. Mathiesen
PMM/SECLTR3
Enclosure(s)
2
<PAGE> 1
Exhibit 23(c)
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
/s/ ARTHUR ANDERSEN LLP
- -----------------------
San Francisco, California
February 13, 1996
