SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to _______________.
Commission file number 0-9477
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FIRST COMMERCIAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2693725
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
865 Howe Avenue, Sacramento, California 95825
(address of principal executive offices) (Zip Code)
(916) 641-3288
(Registrant's telephone number, including area code)
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X_ No ____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class April 30, 1996
----- --------------
Common Stock, $.01 par value 69,675,110
<PAGE>
FIRST COMMERCIAL BANCORP, INC.
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 1996
and December 31, 1995 -2-
Consolidated Statements of Income for the three
months ended March 31, 1996 and 1995 -4-
Consolidated Statements of Cash Flows for the three
months ended March 31, 1996 and 1995 -5-
Notes to Consolidated Financial Statements -6-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations -10-
PART II OTHER INFORMATION
Item 6. Exhibits -18-
Signatures -19-
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
First Commercial Bancorp, Inc.
Consolidated Balance Sheets (unaudited)
(dollars expressed in thousands, except per share data)
March 31, December 31,
1996 1995
ASSETS
------
Cash and cash equivalents:
<S> <C> <C>
Cash and due from banks $ 7,321 9,768
Federal funds sold 7,000 9,000
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Total cash and cash equivalents 14,321 18,768
------- ------
Investment securities:
Available for sale, at fair value 51,205 63,291
Held to maturity at amortized cost (estimated fair
value of $7,057 and $11,005 at March 31, 1996
and December 31, 1995, respectively) 7,013 10,958
------ ------
Total investment securities 58,218 74,249
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Loans:
Commercial, financial and agricultural 30,361 33,752
Real estate construction and development 2,285 4,094
Real estate mortgage 41,658 32,857
Consumer and installment 8,154 3,508
------- -------
Total loans 82,458 74,211
Unearned discount (146) (196)
Allowance for possible loan losses (5,804) (5,388)
------- ------
Net loans 76,508 68,627
------ ------
Lease receivable, net 964 991
Bank premises and equipment, net of accumulated depreciation 2,188 2,247
Accrued interest receivable 1,759 1,429
Other real estate owned 1,349 1,380
Other assets 2,592 1,844
-------- -------
Total assets $157,899 169,535
======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST COMMERCIAL BANCORP, INC.
Consolidated Balance Sheets (unaudited)
(dollars expressed in thousands, except per share data)
(continued)
March 31 December 31,
1996 1995
LIABILITIES
Deposits:
Demand:
<S> <C> <C>
Non-interest bearing $ 24,717 27,517
Interest bearing 19,674 19,367
Savings 36,766 36,968
Time:
Time deposits of $100 or more 13,575 18,764
Other time deposits 51,417 53,530
-------- ---------
Total deposits 146,149 156,164
-------- ---------
Accrued interest payable 445 487
Accrued and other liabilities 2,370 2,805
12% convertible debentures 6,500 6,500
-------- ---------
Total liabilities 155,464 165,956
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STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 5,000,000 shares authorized;
no shares issued and outstanding
Common stock, $.01 par value, 250,000,000 shares
authorized; 69,675,110 shares issued and outstanding 697 697
Capital surplus 33,251 33,251
Retained deficit (31,471) (30,311)
Net fair value adjustment for securities available for sale (42) (58)
-------- ---------
Total stockholders' equity 2,435 3,579
-------- --------
Total liabilities and stockholders' equity $157,899 169,535
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
FIRST COMMERCIAL BANCORP, INC.
Consolidated Statements of Income (unaudited)
(dollars expressed in thousands, except per share data)
Three months ended
March 31,
---------
1996 1995
---- ----
Interest income:
<S> <C> <C>
Interest and fees on loans 1,650 2,896
Investment securities 961 259
Federal funds sold and other 125 621
------ ------
Total interest income 2,736 3,776
----- -----
Interest expense:
Deposits:
Interest-bearing demand 90 106
Savings 245 352
Time deposits of $100 or more 211 279
Other time deposits 773 702
Other borrowings 238 13
------ -------
Total interest expense 1,557 1,452
----- -----
Net interest income 1,179 2,324
Provision for possible loan losses 600 -
----- ---------
Net interest income after provision for possible loan losses 579 2,324
----- ------
Noninterest income:
Service charges on deposit accounts and customer service fees 217 264
Loan servicing fees, net - 12
Other income 20 148
------ -----
Total noninterest income 237 424
------ -----
Noninterest expense:
Salaries and employee benefits 683 1,225
Occupancy, net of rental income 179 339
Furniture and equipment 116 160
Federal Deposit Insurance Corporation premiums 114 177
Postage, printing and supplies 128 72
Data processing fees 121 17
Legal, examination and professional fees 278 226
Communications 13 20
Losses and expenses on foreclosed real estate, net of gains 277 1,219
Other expenses 397 332
------ ------
Total noninterest expense 2,306 3,787
----- -----
Loss before benefit for income taxes (1,490) (1,039)
Benefit for income taxes (330) -
-------- ------
Net loss $ (1,160) (1,039)
======== =====
Loss per common share (.02) (.22)
======== ======
Weighted average shares of common stock and common stock
equivalents outstanding (in thousands) 69,675 4,675
====== ======
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
FIRST COMMERCIAL BANCORP, INC.
Consolidated Statements of Cash Flows (unaudited)
(dollars expressed in thousands)
Three months ended
March 31,
1996 1995
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ (1,160) (1,039)
Adjustments to reconcile net income (loss) to net cash:
Depreciation and amortization of bank premises and equipment 86 157
Amortization, net of accretion (178) 72
Provision for possible loan losses 600 -
(Increase) decrease in accrued interest receivable 329 225
Interest accrued on liabilities 1,557 1,452
Payments of interest on liabilities (1,599) (1,449)
Benefit for income taxes (330) -
Other (1,484) 28
--------- ---------
Net cash provided by (used in) operating activities (2,178) (554)
--------- ----------
Cash flows from investing activities:
Maturities of investment securities 37,077 1,093
Purchases of investment securities (20,851) -
Net (increase) decrease in loans (8,475) 16,352
Recoveries of loans previously charged off 44 154
Purchases of bank premises and equipment (26) (28)
Other investing activities (23) 477
Net cash provided by (used in) investing activities 7,746 18,048
---------- ---------
Cash flows from financing activities:
Increase (decrease) in deposits (10,015) (39,538)
-------- ---------
Net cash provided by (used in) financing activities (10,015) (39,538)
------- ---------
Net increase (decrease) in cash and cash equivalents (4,447) (22,044)
Cash and cash equivalents, beginning of period 18,768 86,259
--------- ---------
Cash and cash equivalents, end of period $ 14,321 64,215
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
FIRST COMMERCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying consolidated financial statements of First Commercial
Bancorp, Inc. (FCB) are unaudited and should be read in conjunction with the
consolidated financial statements contained in the 1995 annual report on Form
10K. In the opinion of management, all adjustments, consisting of normal
recurring accruals considered necessary for a fair presentation of the results
of operations for the interim periods presented herein, have been included.
Operating results for the three months ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1996.
The consolidated financial statements include the accounts of First
Commercial Bancorp, Inc. and its sole subsidiary, First Commercial Bank (Bank).
As more fully described in Note 2, FCB executed an Amended and Restated Stock
Purchase Agreement (Stock Purchase Agreement) as of August 7, 1995, with First
Banks, Inc., St. Louis, Missouri (First Banks) and Mr. James F. Dierberg,
Chairman, President and Chief Executive Officer of First Banks, to provide for
the recapitalization of FCB and the Bank. As a result, First Banks owned 93.29%
of the outstanding voting stock of FCB at March 31, 1996 and December 31, 1995.
As more fully described in note 2, on February 16, 1996, the
Securities and Exchange Commission declared effective an Amended Registration
Statement of FCB for an offering to its existing shareholders other than First
Banks, of an aggregate of 50 million shares of newly-issued common stock, of
which a maximum of 10 million shares, if not otherwise subscribed to, may be
offered to individuals who are not shareholders of FCB. In addition, 9.69
million shares of common stock is being offered in exchange for certain
outstanding dividend obligations and accrued interest thereon of FCB. The
offering price is $0.10 per share.
The net loss per share has been computed using the weighted average
number of shares of common stock outstanding during the period. The outstanding
stock options and the conversion of the outstanding convertible debentures have
not been included in the computation as they are antidilutive.
(2) Recapitalization
On August 7, 1995, FCB 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 FCB and the
Bank. The Stock Purchase Agreement amended a previous agreement under which Mr.
Dierberg had provided interim financing for the Bank in the form of a purchase
of $1.5 million of nonvoting preferred stock. The Stock Purchase Agreement, and
subsequent amendments entered into with First Banks, resulted in a series of
transactions as follows:
a. On August 22, 1995, First Banks acquired the Bank preferred stock from
Mr. Dierberg for $1.5 million.
b. On August 23, 1995, First Banks purchased 116,666,667 shares of Bank
common stock for an additional $3.5 million.
c. On October 31, 1995, First Banks purchased a convertible debenture of FCB
for $1.5 million.
d. Upon the completion of the Special Shareholders' Meeting on December 27,
1995, the shares of Bank preferred and common stock held by First Banks
were exchanged for 50,000,000 shares of FCB common stock. In addition, First
Banks purchased a convertible debenture of FCB for $5.0 million.
e. On December 28, 1995, First Banks purchased an additional 15,000,000
shares of FCB common stock for $1.5 million.
<PAGE>
The proceeds from these transactions, with the exception of $250,000
retained by the parent company for corporate expenses and certain offering
expenses incurred in the above transactions, were used to increase the capital
of the Bank. As a result of these transactions, the capital ratios of FCB and
the Bank as of March 31, 1996 and December 31, 1995 were as follows:
<TABLE>
<CAPTION>
FCB Bank
--- ----
March 31, December 31, March 31, December 31,
1996 1995 1996 1995
----- ----- ----- ----
<S> <C> <C> <C> <C>
Total risk-based capital ratio 3.77% 4.99% 11.50% 12.66%
Tier I risk-based capital ratio 2.46 3.68 10.20 11.35
Leverage ratio 1.49 2.14 6.16 6.58
</TABLE>
On February 16, 1996, after its Amended Registration Statement was
declared effective by the Securities and Exchange Commission, FBC commenced an
offering of an aggregate of 59.69 million shares of newly-issued common stock.
The offering was composed of: (a) an offering to its existing shareholders,
other than First Banks, of 50 million shares at $.10 per share (the Rights
Offering); (b) an offering to individuals who are not shareholders of FCB of a
maximum of 10 million of the shares available in the Rights Offering which are
not otherwise subscribed (the Public Offering); and (c) an offering of 9.69
million shares in exchange for certain outstanding dividend obligations and
accrued interest thereon of FCB (the Dividend Exchange Offering). As of May 1,
1996, approximately 4.16 million shares of common stock had been subscribed
pursuant to this offering. On May 10, 1996, the Board of Directors of FCB
extended the expiration of the Dividend Exchange Offering to June 7, 1996. The
Rights Offering and the Public Offering expired on May 10, 1996. If the
aggregate offering is fully subscribed, First Banks' ownership could be reduced
to 50.25% prior to the conversion of the debentures, or 70.40% if the debentures
had been converted as of March 31, 1996.
First Banks has agreed, pursuant to the Stock Purchase Agreement, that
it will purchase in the offering, as a standby purchaser, such number of shares
of common stock as may be required to raise the Bank's Tier I capital ratio to
7.00%, the minimum required by the Capital Impairment Order of the State Banking
Department of California discussed below.
(3) Regulatory Agreements
For each of the four years ended December 31, 1995, as well as the
three months ended March 31, 1996, FCB 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, FCB has been operating
under the terms of a Memorandum of Understanding with the Federal Reserve Bank
of San Francisco (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 of California and several
Capital Impairment Orders (collectively the "Orders"). The MOU and the Orders
have placed significant restrictions on FCB and the Bank including restrictions
on the payment of dividends, requirements of specified capital levels and
reductions of classified assets. As a result of the recapitalization described
in Note 2 and numerous actions taken by FCB, management believes that FCB is in
substantial compliance with the MOU and the Orders. However, full compliance,
particularly with certain capital requirements, has not yet been achieved.
As a result of the completion of the transactions pursuant to the Stock
Purchase Agreement with First Banks and Mr. James F. Dierberg, FCB and the Bank
were substantially recapitalized in 1995. The stock offering commenced in
February 1996, described in Note 2, and the standby purchase agreement with
First Banks is expected to place the Bank in compliance with its various capital
requirements. However, FCB has continued to incur losses from operations through
March 31, 1996. Furthermore, the effect of a large portfolio of problem assets
<PAGE>
and the substantial interest cost associated with the convertible debentures
issued to First Banks may impair FCB's ability to generate sufficient future
profitability to satisfy all of FCB's regulatory agreements. Consequently, there
can be no assurance that: (1) FCB will not incur substantial additional losses
in the liquidation of its portfolio of problem assets; (2) continued losses will
not adversely affect FCB's ability to comply with the requirements of the MOU
and the Orders; or (3) because of the preceding, FCB and the Bank may not be
required to raise additional capital or have additional regulatory agreements
imposed upon them in the future.
(4) Income Taxes
FCB and the Bank filed a consolidated federal income tax return for the
period prior to their respective acquisitions by First Banks. Due to the
structure of the transaction described in Note 2, current income tax regulations
prohibit FCB and the Bank from continuing to file a consolidated income tax
return for the period after August 23, 1995 because the acquisition by First
Banks of the Bank stock caused its disaffiliation with FCB for tax purposes.
However, subsequent to the exchange of Bank stock and the acquisition of
additional FCB stock by First Banks, both FCB and the Bank will file a
consolidated federal income tax return with First Banks for those periods in
which First Banks continues to own more than 80% of FCB.
If the stock offering described in Note 2 causes First Banks' ownership
of FCB to decrease below 80%, FCB and the Bank would be disaffiliated from First
Banks, and neither FCB nor the Bank would be permitted to be included in the
consolidated return of First Banks thereafter for five years. Concurrently, the
Bank, which was disaffiliated from FCB on August 22, 1995, would not be
permitted to file a consolidated return with FCB for five years. However,
regulations allow FCB to request permission from the Internal Revenue Service to
join in filing a consolidated return with the Bank. In order to receive this
permission, FCB would be required to request a waiver from the Internal Revenue
Service in the form of a private letter ruling, prior to the due date of the
consolidated return. There can be no assurance that a waiver to allow such a
reaffiliation would be granted.
(5) Transactions with Related Parties
The Bank has $15.6 million in whole loans and loan participations
outstanding at March 31, 1996, that were purchased from affiliated banks. There
were no whole loans or loan participations from affiliates outstanding at
December 31, 1995.
The Bank has entered into a management services agreement with First
Banks and a cost sharing agreement with First Bank & Trust, Irvine, California,
a wholly owned subsidiary of First Banks. The management services 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 return preparation and assistance, accounting and other
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.
Because of its affiliation through First Banks and the geographic
proximity of certain of their banking offices, the Bank and First Bank & Trust
share the cost of certain personnel and services which are used by both banks.
This includes the salaries and benefits of certain loan and administrative
personnel. The banks have entered into a cost sharing agreement for the purpose
of allocating these expenses between them. Expenses associated with loan
origination personnel are allocated based on the relative loan volume between
the banks. Costs of other personnel are allocated on an hourly basis.
The Bank also entered into a data processing agreement with First Serv,
Inc., a wholly owned data processing subsidiary of First Banks, beginning in
December 1995. The fees for such services are substantially less than the Bank
had incurred in connection with its previous data processing operation or that
it would incur with non-affiliated vendors.
<PAGE>
The aggregate fees paid by the Bank in connection with the management
services agreement, the cost sharing agreement and the data processing agreement
were $262,000 for the three months ended March 31, 1996. No such fees were
incurred during the three months ended March 31, 1995.
The Bank purchases certain services and supplies from or through First
Banks or one of its subsidiaries. This includes insurance policies, office
supplies and other commonly used banking products which can be acquired in this
manner 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 material to FCB's consolidated financial
position or results of operations.
As discussed in Note 2, in 1995, First Banks purchased convertible
debentures from FCB totaling $6.5 million which bear interest at 12% annually.
Interest is payable when, at the discretion of the Board of Directors, it is
prudent to do so, and it is permitted by regulatory authorities. Interest
accrued with respect to these debentures was $195,000 for the three months ended
March 31, 1996.
<PAGE>
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
FCB is a registered Sacramento, California-based bank holding company
which reincorporated in Delaware in 1990 and conducts business through the Bank,
a California state chartered bank. The Bank commenced operations in 1979, and
operates a commercial banking business through its headquarters office and six
branch offices located in Sacramento (headquarters and one branch), Roseville
(two branches), San Francisco, Concord and Campbell, California. At March 31,
1996, FCB had approximately $157.9 million in total assets, $82.3 million in
total loans, net of unearned discount, $146.1 million in total deposits, and
$2.44 million in total stockholders' equity.
Through the Bank, FCB 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, real estate
construction and development, residential real estate and consumer and
installment loans. Other financial services include credit-related insurance,
automatic teller machines and safe deposit boxes.
General
FCB has reported losses from operations for each of the four years
ended December 31, 1995, as well as the three months ended March 31, 1996. As a
result of these losses, FCB and the Bank have been operating under the terms of
a Memorandum of Understanding (MOU) and under certain regulatory orders (Orders)
which have placed significant restrictions on their operations, including
restrictions on the payment of dividends, requirements for the attainment of
specified capital levels and reductions of classified assets. Through the
recapitalization of FCB in 1995 and the offering of common stock to its existing
shareholders which commenced in February 1996, combined with numerous other
actions which have been taken, FCB and the Bank believe they are in substantial
compliance with most of the requirements of the MOU and the Orders. However, FCB
and the Bank continue to experience operating losses and an excessive level of
problem assets. As a result, the Bank is designated a problem bank and
considered "troubled" for all regulatory purposes. For these reasons, the need
to restore FCB and the Bank to sound financial condition and to improve its
profitability is a significant influence on all of the activities of the
organization.
In 1995, FCB and the Bank pursued a strategy of reducing its size in
order to decrease expenses and optimize its capital position, while endeavoring
to attract a substantial infusion of new capital. In August 1995, FCB and the
Bank entered into a Stock Purchase Agreement with First Banks, Inc. (First
Banks) and Mr. James F. Dierberg, which ultimately resulted in the purchase of
$6.5 million of newly-issued common stock of FCB and $6.5 million of convertible
debentures by First Banks. These transactions, which were completed in December
1995, recapitalized FCB, providing it with the opportunity to discontinue its
strategy of asset diminution. Consequently, in 1996, FCB has focused on the
continued reduction of its portfolio of classified assets and the rebuilding of
its profitability.
To accomplish these objectives, the Bank strengthened its allowance for
possible loan losses by providing $600,000 for possible loan losses during the
three months ended March 31, 1996, thereby increasing the allowance to $5.8
million at March 31, 1996 from $5.4 million at December 31, 1995. At the same
time, the Bank pursued its problem borrowers to reduce its exposure to further
losses. This resulted in an increase of its classified assets from $20.59
million at December 31, 1995 to $20.83 million at March 31, 1996. It also caused
the Bank to incur loss of interest income on nonperforming assets, legal and
other expenses in the collection of loans and losses on foreclosure and
subsequent sale of collateral.
These factors were significant in the changes in the financial
condition of FCB and in the results of operations for the three months ended
March 31, 1996.
<PAGE>
Financial Condition
FCB's total assets were $157.9 million and $169.5 million at March 31,
1996 and December 31, 1995, respectively. As the Bank has endeavored to reduce
its problem assets, it has maintained a generally conservative environment in
considering new credits. This, combined with attrition of marginal credits from
the Bank, has contributed to an ongoing reduction of the Bank's loan portfolio.
Since loans typically carry interest rates which are higher than alternative
uses of the Bank's funds, such as investment securities and federal funds sold,
this has tended to reduce the Bank's net interest income. To replenish its
portfolio with high quality loans, more effectively use a portion of the
liquidity which had been increasing in the Bank and contribute toward improving
the Bank's net interest income, in March 1996, the Bank purchased $15.6 million
of whole loans and loan participations from its affiliate banks, principally
First Bank and Trust. While this had little effect on net income for the three
months ended March 31, 1996, it is the primary reason that total loans, net of
unearned discount, increased from $74.0 million at December 31, 1995 to $82.3
million at March 31, 1996. The principal source of funds for the loan purchases
was the Bank's investment securities portfolio which decreased from $74.2
million at December 31, 1995 to $58.2 million at March 31, 1996.
Because of the attrition occurring in the Bank's loan portfolio and the
substantial liquidity which was being generated, the Bank elected to
conservatively price its deposit products during the three months ended March
31, 1996. Consequently, total deposits decreased from $156.2 million at December
31, 1995 to $146.1 million at March 31, 1996, a decrease of $10.1 million. The
most significant part of this was a decrease in the amount of time deposits of
$100,000 or more which decreased to $13.6 million at March 31, 1996 from $18.8
million at December 31, 1995. Since the interest rate differentials between
these time deposits and investment securities were not adequate to provide for
costs of operations and a reasonable profit, the Bank has not aggressively
pursued these deposits as a principal funding source.
Results of Operations
Net Income
The net loss for the three months ended March 31, 1996 was $1.16
million in comparison to a net loss of $1.04 million for the same period in
1995. Although there does not appear to be substantial difference in the loss
for these comparable periods, the factors contributing to them are significantly
different. In January 1995, the Bank sold its San Diego branch office, and in
April 1995, closed its Santa Rosa branch office. At the same time, the Bank was
reducing its reliance on title and escrow deposits, shrinking its loan portfolio
and decreasing its staff and other operating costs. Consequently, while total
assets were $199.2 million at March 31, 1995, they had been reduced to $157.9
million at March 31, 1996. This reduction in the size of the Bank achieved the
immediate objective which was to reduce assets in order to optimize the Bank's
capital base and decrease expenses. However, it also reduced the assets on which
the Bank earned interest. Consequently, the Bank's primary source of
profitability, its net interest income was reduced from $2.3 million for the
three months ended March 31, 1995 to $1.2 million for the same period in 1996.
At the same time, the Bank has been following a practice of
consistently strengthening its allowance for possible loan losses. This is
apparent in that for the three months ended March 31, 1995 the Bank made no
provision for possible loan losses, while during the three months ended March
31, 1996, it provided $600,000.
The reduction in interest income and increase in the provision for
possible loan losses was further exacerbated by a decrease in noninterest
income. This primarily reflects the effects of the smaller customer base which
exists in 1996, providing a more limited opportunity to earn service charges on
deposit accounts and other fee income.
<PAGE>
Recognizing the prospect of a significantly smaller income base, the
Bank also focused on expense reduction during 1995. This included not only the
expenses associated with the closed branches, but significant staff reductions
in continuing branches and the home office. Headquarters office space was
subleased, data processing services were transferred to First Banks' system, and
a conscientious cost reduction process was enforced. This resulted in a
reduction of noninterest expense from $3.8 million for the three months ended
March 31, 1995 to $2.3 million for the same period in 1996.
Finally, FCB has benefited from its inclusion in the consolidated
income tax return of First Banks. For the three months ended March 31, 1995, no
tax benefit of the losses was available, since any recognition of benefits was
dependent upon the ability of FCB and the Bank to generate sufficient future
taxable income. However, for the three months ended March 31, 1996, FCB and the
Bank are included in the consolidated return of First Banks, allowing them to
receive the benefit of any losses incurred which can be offset against the
taxable income of First Banks. For the three months ended March 31, 1996, this
resulted in the recognition of $330,000 of tax benefits, whereas no similar
benefit was available in the comparable period in 1995.
Net Interest Income
Net interest income was $1.18 million, or 3.11% of average
interest-earning assets, for the three months ended March 31, 1996, compared to
$2.32 million, or 5.23% for the same period in 1995. Interest and fees earned on
the loan portfolio is the primary source of income of FCB. This income was 76.7%
of total interest income for the three months ended March 31, 1995 compared to
60.3% for the three months ended March 31, 1996. 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, net of unearned discount, were $112.8 million at March 31, 1995, compared
with $82.3 million at March 31, 1996.
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 months ended March 31, 1996,
the yield on the Bank's loan portfolio was 8.92%, compared to 5.62% on its
investment portfolio.
While the reduction in the loan portfolio contributed to a substantial
decline in total interest income, the decrease in cost of the Bank's funding
sources was less significant. Total interest expense was $1.45 million for the
three months ended March 31, 1995, or 3.82% of average interest-bearing
liabilities, compared with $1.56 million for the three months ended March 31,
1996, or 4.74%. The decrease in interest expense associated with the decline in
deposit balances was offset by increases in interest rates during 1995 that
continued into 1996 and the interest cost of the 12% convertible debentures
issued in connection with the recapitalization of FCB. Interest expense on the
debentures totaled $195,000 for the three months ended March 31, 1996. FCB's
recapitalization is more fully described in note 2 to the accompanying
consolidated financial statements. This combination of substantially reduced
income from the loan portfolio and the recapitalization of FCB produced the
narrowing of net interest income referred to above.
<PAGE>
<TABLE>
<CAPTION>
The following table sets forth, on a tax-equivalent basis, certain
information relating to FCB's average balance sheet, and reflects the average
yield earned on interest-earning assets, the average cost of interest-bearing
liabilities and the resulting net interest income for the three month periods
ended March 31:
1996 1995
---- ----
Interest Interest
Average income/ Yield Average income/ Yield/
balance expense rate balance expense rate
------- ------- ---- ------- ------- -----
(dollars expressed in thousands)
Assets
Interest-earning assets
<S> <C> <C> <C> <C> <C> <C>
Loans: $ 74,405 1,650 8.92% $ 19,226 2,896 9.85%
Investment securities 68,796 961 5.62 17,723 259 5.93
Federal funds sold and other 9,423 125 5.34 43,318 621 5.81
--------- ------ ------- ------
Total interest-earning assets 152,624 2,736 7.21 180,267 3,776 8.50
----- -----
Nonearning assets 9,790 20,884
-------- -------
Total assets $ 162,414 $ 201,151
======== =======
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing demand deposits $ 38,456 234 2.45% $58,895 339 2.33%
Savings deposits 16,691 224 5.40 19,811 119 2.44
Time deposits of $100 or more 14,923 211 5.69 22,807 279 4.96
Other time deposits 54,736 650 4.78 52,005 702 5.47
------- ----- ------- ------
Total interest-bearing deposits 124,806 1,319 4.25 153,518 1,439 3.77
Notes payable and other 7,319 238 13.01 748 13 7.05
-------- ------ ----- -------- -------
Total interest-bearing
liabilities 132,125 1,557 4.74 154,266 1,452 3.82
----- -----
Noninterest-bearing liabilities:
Demand deposits 25,058 41,875
Other liabilities 2,216 401
-------- --------
Total liabilities 159,399 196,542
Stockholders' equity 3,015 4,609
-------- -------
Total liabilities and
stockholders' equity $162,414 $201,151
======= ========
Net interest income 1,179 2,324
===== =====
Net interest margin 3.11% 5.23%
===== =====
</TABLE>
Provision for Possible Loan Losses
The provision for possible loan losses was $600,000 for the three
month period ended March 31, 1996. There was no provision for the same period in
1995. The provision reflects the substantial inventory of unresolved problem
loans remaining which have the potential of generating additional losses.
Consequently, the Bank has undertaken to continually strengthen the allowance
for possible loan losses relative to these problem loans until such time as they
can be significantly reduced.
Net loan charge-offs were $184,000 for the three month period ended
March 31, 1996, in comparison to $587,000 for the same period in 1995. As a
result of the increased provision for possible loan losses , the allowance for
possible loan losses was $5.80 million, or 7.05% of total loans, as of March 31,
1996, compared to $5.39 million, or 7.28% of total loans, as of December 31,
1995. Tables summarizing nonperforming assets, past due loans and loan loss
experience are presented in the "Lending and Credit Management" section of this
Form 10Q.
<PAGE>
Noninterest Income
Noninterest income decreased from $424,000 to $237,000 for the three
months ended March 31, 1995 and 1996, respectively. Noninterest income consists
primarily of service charges on deposit accounts and other related fees, other
non-yield related fees and charges, and other income. Service charges on deposit
accounts decreased from $264,000 for the three months ended March 31, 1995 to
$217,000 for the same period in 1996. This decrease reflects the decrease in
deposit accounts subject to service charges as a result of the sale or closing
of branches during 1995.
Noninterest Expense
Noninterest expense was $2.31 million for the three months ended March
31, 1996, compared to $3.79 million for the same period in 1995, representing a
decrease of $1.48 million, or 39.1%. The decrease is primarily related to
salaries and employee benefits and reduced losses and expenses on foreclosed
property, net of gains.
Salaries and employee benefits decreased by $547,000 to $683,000 from
$1.23 million for the three months ended March 31, 1996 and 1995, respectively.
The decrease reflects the downsizing of the organization through the sale of one
branch in January 1995, the closure of a branch in April 1995 and the conversion
and centralization of FCB's data processing and various operating functions into
First Banks' systems in December 1995.
Losses and expenses on foreclosed real estate, net of gains decreased
by $943,000 to $277,000 from $1.22 million for the three months ended March 31,
1996 and 1995, respectively. This decrease is primarily attributable to the
overall reduction of foreclosed property from $5.22 million at December 31, 1994
to $1.38 million and $1.35 million at December 31, 1995 and March 31, 1996,
respectively.
The Federal Deposit Insurance Corporation (FDIC) voted to reduce the
deposit insurance premiums paid by most members of the Bank Insurance Fund (BIF)
and to keep existing assessment rates intact for members of the Savings
Association Insurance Fund (SAIF). Under the reduced assessment rate schedule
for the BIF, the best-rated institutions will pay the statutory annual minimum
payment of $2,000, compared to the previous rate of 23 cents per $100.00 of
assessable deposits. The weakest BIF and SAIF institutions will continue to pay
27 cents and 31 cents per $100.00 of assessable deposits, respectively. The Bank
is a BIF depository institution and was assessed 27 cents per $100.00 of
assessable deposits for the three month period ending March 31, 1996.
Lending and Credit Management
Interest earned on the loan portfolio is the primary source of income
of FCB. Total loans, net of unearned discount, represented 52.1%, 43.7% and
56.6% of total assets as of March 31, 1996, December 31, 1995 and March 31,
1995, respectively. As discussed above, FCB has experienced a decrease in its
loan portfolio due to its efforts to address its problem assets and its
conservative general approach to new credit requests. Total loans, net of
unearned discount, were $82.3 million, $74.0 million and $112.8 million at March
31, 1996, December 31, 1995 and March 31, 1995, respectively.
FCB's nonperforming loans consist of loans on a nonaccrual status and
loans on which the original terms have been restructured. Nonperforming loans
were $4.93 million and $4.53 million at March 31, 1996 and December 31, 1995,
respectively. Impaired loans, consisting of nonaccrual loans were $4.9 million
and 4.5 million at March 31, 1996 and December 31, 1995, respectively. Loans
past due 30 to 89 days or over 90 days and still accruing totaled $5.86 million
and $5.26 million at March 31, 1996 and December 31, 1995, respectively.
<PAGE>
<TABLE>
<CAPTION>
The following is a summary of nonperforming assets and past due loans
at the dates indicated:
March 31, December 31,
1996 1995
---- ----
(dollars expressed in thousands)
Nonperforming assets:
<S> <C> <C>
Nonperforming loans $ 4,934 4,526
Other real estate 1,349 1,380
----- -----
Total nonperforming assets $ 6,283 5,906
====== =====
Loans past due:
Over 30 days to 90 days $ 4,217 3,015
Over 90 days and still accruing 1,646 2,249
------- ------
Total past due loans $ 5,863 5,264
====== =====
Loans, net of unearned discount $82,312 74,015
======= ======
Allowance for possible loan losses to loans 7.05% 7.28%
Nonperforming loans to loans 5.99 6.11
Allowance for possible loan losses to
nonperforming loans 117.63 119.05
Nonperforming assets to loans and foreclosed assets 7.51 7.83
====== ======
</TABLE>
The allowance for possible loan losses is based on past loan loss
experience, on management's evaluation of the quality of the loans in the
portfolio and on the anticipated effect of national and local economic
conditions relative to the ability of loan customers to repay. Each quarter, the
allowance for possible loan losses is revised relative to FCB's internal watch
list and other data utilized to determine its adequacy. The provision for
possible loan losses is management's estimate of the amount necessary to
maintain the allowance at a level consistent with this evaluation. As
adjustments to the allowance for possible loan losses are considered necessary,
they are reflected in the results of operations.
The following is a summary of the loan loss experience for the three
month periods ended March 31:
1996 1995
---- ----
(dollars expressed in
thousands)
Allowance for possible loan losses, beginning of period $5,388 7,437
Loans charged-off ( 229) (740)
Recoveries of loans previously charged-off 45 153
------- ------
Net loan (charged-offs) recoveries ( 184) (587)
-------- ------
Reduction in allowance for loans transferred
with branch sale - (27)
Provision for possible loan losses 600 -
------- ------
Allowance for possible loan losses, end of period $5,804 6,823
====== ======
Interest Rate Risk Management
Managing interest rate risk is fundamental to banking. Banking
institutions manage the inherently different maturity and repricing
characteristics of the lending and deposit-taking activities to achieve a
desired interest rate sensitivity position and to limit their exposure to
interest rate risk. The maturity and repricing characteristics inherent to the
lending and deposit-taking activities tends to create a naturally
liability-sensitive interest rate risk profile.
<PAGE>
FCB's objective regarding interest rate risk management is to position
FCB such that changes in interest rates do not have a material adverse impact
upon the net market value and net interest income of FCB. To measure the impact
from interest rate changes, FCB recalculates its net market value and net
interest income on a pro forma basis over a one year horizon assuming
instantaneous, permanent parallel shifts in the yield curve, of varying amounts
of increases and decreases in rates. Larger increases or decreases in FCB's net
market value and net interest income as a result of these assumed interest rate
changes indicate greater levels of interest rate sensitivity than do smaller
increases or decreases.
Liquidity
The liquidity of FCB and the Bank is the ability to maintain a cash
flow which is adequate to fund operations, service its debt obligations and meet
other commitments on a timely basis. The primary sources of funds for liquidity
are derived from customer deposits, loan payments, maturities, sales of
investments and operations. In addition, FCB and the Bank may avail themselves
of more volatile sources of funds through issuance of certificates of deposit in
denominations of $100,000 or more, federal funds borrowed and securities sold
under agreements to repurchase. The aggregate funds, which consisted solely of
certificates of deposit in denominations of $100,000 or more, were $13.6 million
at March 31, 1996 and $18.8 million at December 31, 1995.
<PAGE>
At March 31, 1996, FCB's more volatile sources of funds mature as
follows:
(dollars expressed in thousands)
Three months or less $ 5,374
Over three months through six months 3,577
Over six months through twelve months 4,520
Over twelve months 104
-------
Total $13,575
=======
Capital
FCB and the Bank are subject to the capital guidelines of the Federal
Reserve Board and the FDIC, respectively, establishing the parameters for
capital adequacy for bank holding companies and banks. These guidelines set
total capital requirements and define capital in terms of "core capital
elements", or Tier 1 capital, and "supplemental capital elements", or Tier 2
capital. Both bank holding companies and banks are required to maintain a
minimum ratio of qualifying total capital to risk-weighted assets of eight
percent, at least one-half of which must be Tier 1 capital. Risk-weighted assets
are determined by applying risk weights assigned by the regulatory agencies to
various categories of assets and off-balance sheet exposures.
In addition to the minimum regulatory capital requirements set forth
above, the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") required supervisory or other corrective action when a bank's capital
declines below certain minimum levels. In order to be well capitalized, an
institution must have a total risk-based capital ratio of at least 10%, a Tier 1
risk-based capital ratio of at least 6%, a leverage ratio of at least 5%, and
not be subject to any written agreement or order issued by the FDIC. An
adequately capitalized institution must have a total risk-based capital ratio of
at least 8%, a Tier 1 risk-based capital ratio of at least 4% and a leverage
ratio of at least 4%. An undercapitalized institution has a total risk-based
capital ratio which is less than 8%, a Tier 1 risk-based capital ratio which is
less than 4% or a leverage ratio of less than 4%. A significantly
undercapitalized institution has a total risk-based capital ratio of less than
6%,a Tier 1 risk-based capital ratio of less than 3% or a leverage ratio of less
than 3%. Finally, a critically undercapitalized institution has a ratio of
tangible equity to total assets that is 2% or less.
<PAGE>
At March 31, 1996 and December 31, 1995, FCB's and the Bank's capital
ratios were as follows:
Risk-Based Capital Ratios
Total Tier 1 Leverage Ratio
------ ------ --------------
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
FCB 3.77% 4.99% 2.46% 3.68% 1.49% 2.14%
Bank 11.50 12.66 10.20 11.35 6.16 6.58
As a result of the above capital ratios, FCB is considered
"critically undercapitalized" and the Bank is considered "adequately
capitalized" as of March 31, 1996.
As more fully described in note 2, on February 16, 1996, the Securities
and Exchange Commission declared effective an Amended Registration Statement of
FCB for an offering to its existing shareholders other than First Banks, of an
aggregate of $5.0 million of newly-issued common stock, of which a maximum of
$1.0 million, if not otherwise subscribed to, may be offered to individuals who
are not shareholders of FCB. In addition, $969,000 of common stock is being
offered in exchange for certain outstanding dividend obligations and accrued
interest thereon of FCB. In addition, First Banks has agreed, pursuant to the
Stock Purchase Agreement, that it will purchase in the offering, as a standby
purchaser, such number of shares of common stock as may be required to raise the
Bank's Tier I capital ratio to 7.00%, the minimum required by the Capital
Impairment Order of the State Banking Department of California.
Regulatory Agreements
Due to its operating losses and excessive levels of classified
assets, in 1993, the Bank consented to enter into an amended Cease and Desist
Order with the FDIC and a Final Order with the State Banking Department of the
State of California (SBD and the Orders). The Orders establish certain
restrictions and requirements relative to the operation of the Bank, including:
(a) maintaining management acceptable to the supervisory agencies; (b) receiving
prior notification before adding an individual to the Board of Directors; (c)
reducing assets classified in the examination; (d) developing and implementing a
profit plan and budget; (e) implementing a strategic plan to return the Bank to
profitability; (f) increasing tangible shareholders' equity to specified levels
as of certain dates; and (g) refraining from the payment of distributions to any
shareholder without the prior written consent of the FDIC and the SBD. The
Orders remain in effect.
Management believes that the Bank is in substantial compliance with
the Orders. However, full compliance, particularly with certain capital
requirements, has not yet been achieved. Under the Final Order of the SBD, the
Bank was required to achieve a ratio of shareholders' equity to tangible assets
of 7.0% at December 31, 1995. Although the Bank was not in compliance with this
requirement, the SBD waived this requirement until the completion of the
Offering to shareholders which commenced on February 16, 1996. In waiving this
requirement, the SBD relied upon the commitment of First Banks to act as a
standby purchaser in the Offering to the extent necessary to increase this
capital ratio to 7.0%.
The Bank continues to be designated as a problem bank and is
considered "troubled" for all regulatory purposes. Accordingly, the Bank is
required to provide prior notice to the FDIC of the employment of any senior
officer or appointment of a director. 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.
The California Financial Code deems the capital of a bank "impaired"
whenever it has a retained deficit in an amount exceeding 40% of its
"contributed capital". Contributed capital is defined as all capital other than
retained earnings or deficit. The Bank has received notices from the SBD that
its capital is impaired, most recently on March 15, 1996. The Bank has not
complied with the Capital Impairment Orders. As long as the Bank's contributed
capital remains impaired, the SBD is authorized to take possession of the
property and business of the Bank, to close the Bank or to order the Bank to
correct the captial impairment through a levy to FCB, the sole shareholder of
the Bank.
<PAGE>
The Superintendent of the SBD has the authority to take certain
appropriate regulatory action with respect to a bank having impaired contributed
capital. Subject to the approval of its shareholders and the Superintendent, the
bank may readjust its accounts in a quasi-reorganization, which includes
eliminating its retained deficit. It is the policy of the Superintendent not to
authorize a quasi-reorganization unless a bank can establish that: (a) it has
adequate capital; (b) the problems that created past losses and the impairment
of capital have been corrected; and (c) it is currently operating on a
profitable basis and will continue to do so in the future. 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. Furthermore,
because a quasi-reorganization requires that a Bank reduce its assets and
liabilities to fair value at the time of the reorganization, the Bank's capital
could be further reduced from its present level as a result of such an
adjustment.
In addition to the Orders, FCB has entered into a Memorandum of
Understanding with the Federal Reserve Bank of San Francisco (MOU). Among other
requirements, under the terms of the MOU: (a) FCB may not declare or pay any
dividends without the prior written approval of, and may not take dividends from
the Bank without providing prior written notice to, the Federal Reserve Bank;
(b) FCB must submit a written plan to improve and maintain adequate capital at
FCB and the Bank; and (c) certain transactions between FCB and the Bank are
restricted.
PART II - OTHER INFORMATION
Item 6 - Exhibit
The exhibit is numbered in accordance with the Exhibit Table of Item 601 of
Regulation S-K.
Exhibit
Number Description
27 Article 9 - Financial Data Schedule
(EDGAR only)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST COMMERCIAL BANCORP, INC.
Registrant
Date: May 10, 1996 By: /s/Donald W. Williams
---------------------
Donald W. Williams
Chairman, President
and Chief Executive
Officer
Date: May 10, 1996 By: /s/Allen H. Blake
-----------------
Allen H. Blake
Chief Financial Officer
and Secretary
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-31-1996
<PERIOD-END> Mar-31-1996
<CASH> 7,321
<INT-BEARING-DEPOSITS> 7,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 51,205
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 82,458
<ALLOWANCE> (5,804)
<TOTAL-ASSETS> 157,899
<DEPOSITS> 146,149
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,816
<LONG-TERM> 6,500
0
0
<COMMON> 697
<OTHER-SE> 1,738
<TOTAL-LIABILITIES-AND-EQUITY> 157,899
<INTEREST-LOAN> 1,650
<INTEREST-INVEST> 961
<INTEREST-OTHER> 125
<INTEREST-TOTAL> 2,736
<INTEREST-DEPOSIT> 1,319
<INTEREST-EXPENSE> 1,557
<INTEREST-INCOME-NET> 1,179
<LOAN-LOSSES> 600
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,306
<INCOME-PRETAX> (1,490)
<INCOME-PRE-EXTRAORDINARY> (1,490)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,160)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
<YIELD-ACTUAL> 7.21
<LOANS-NON> 4,934
<LOANS-PAST> 1,646
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 11,775
<ALLOWANCE-OPEN> 5,388
<CHARGE-OFFS> (229)
<RECOVERIES> 45
<ALLOWANCE-CLOSE> 5,804
<ALLOWANCE-DOMESTIC> 5,804
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
