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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File No. 0-9477
___________________
FIRST COMMERCIAL BANCORP, INC.
(Exact Name of registrant as specified in its charter)
Delaware 94-2683725
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
865 Howe Avenue, Sacramento, California, 95825
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (916) 641-3288
__________________________
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value of $0.01
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the closing price of the Common Stock on the NASDAQ Small
Cap Market System on March 19, 1996, was $731,655. For purposes of this
computation, officers, directors and 5% beneficial owners of the Registrant are
deemed to be affiliates. Such determination should not be deemed an admission
that such directors, officers or 5% beneficial owners are, in fact, affiliates
of the Registrant.
At March 19, 1996 there were 69,675,110 shares of the registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended
December 31, 1995 (Annual Report) are incorporated by reference into Parts I and
II.
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PART I
Item 1. Business
General
First Commercial Bancorp, Inc. (FCB or the Company) is a Sacramento,
California-based bank holding company which reincorporated in Delaware in 1990
and conducts its operations through First Commercial Bank (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 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 (FRB). The Bank is
operating under the terms of an Federal Deposit Insurance Corporation (FDIC)
Cease and Desist Order and a State Banking Department (SBD) Final Order
(collectively the Orders), and also is subject to 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. The SBD Final Order also
requires the Bank to increase its tangible stockholders' equity to 7.00% by
December 31, 1995 and maintain such ratio during the life of the Order. 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 FDICIA. However, as more fully discussed in Management's,
Discussion and Analysis - General, in the Annual Report, and incorporated herein
by reference, the regulatory capital of the Bank has improved to "adequately
capitalized" at December 31, 1995 as a result of the capital infusion from First
Banks, Inc., a Missouri corporation, (First Banks) pursuant to a Standby Stock
Purchase Agreement entered as of June 30, 1995 and an Amended and Restated Stock
Purchase Agreement entered into on August 8, 1995 into among FCB, the Bank,
First Banks, and James F. Dierberg, Chairman of the Board, President and Chief
Executive Officer of First Banks (collectively the Stock Purchase Agreement).
The Company and the Bank remain subject to significant operating restrictions,
including limitations on the payment of dividends. For additional information,
see "Regulatory Agreements" and "Supervision and Regulation" contained in this
Form 10-K.
The Company grew substantially during the 1980', 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. At December 31, 1993, the Company's assets reached
$349.8 million with $83.7 million or 42.9% of the Company's gross loans in real
estate construction and real estate secured loans, and with $86.5 million or
26.73% of its deposits in title and escrow accounts, and $237.2 million in all
other deposits.
The Company reported net losses in 1995, 1994 and 1993 of $7.43 million,
$18.19 million and $7.31 million, respectively, due primarily to deterioration
in its real estate lending portfolio and resultant write-downs and increased
loan loss provisions. As a result, at June 30, 1995, the Company's capital was
reduced to $(398,000) million and the Company and the Bank's Tier I leverage
ratios declined to (0.23)% and 1.08%, respectively.
In response to these losses and resulting capital base and as more fully
described in Management's Discussion and Analysis section of the Annual Report,
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. As of December 31, 1994, the
Company had consolidated total assets, deposits and stockholders' equity of
$239.3 million, $233.5 million and $4.35 million, respectively. At December 31,
1995, the Company had consolidated total assets, deposits and stockholders'
equity of $169.5 million, $156.2 million and $3.58 million, respectively.
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 February 1, 1996, the Company
filed Amendment Number One to its Registration Statement initially filed May 31,
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1995 with the Securities and Exchange Commission for a rights offering to its
existing stockholders other than First Banks, a limited offering to the public,
and a dividend exchange offering (Offering). See Management's Discussion and
Analysis - Capital and Note 19 of the consolidated financial statements, of the
Annual Report, incorporated herein by reference, for a further discussion of the
Offering. If fully subscribed, the Offering will result in a additional $6.0
million of new capital to FCB and will increase the Bank's capital to levels
beyond the regulatory requirements. The SBD has allowed the Bank to attain the
7.0% capital requirement through the proceeds of this Offering.
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 4.82% and 12.12%, respectively. First Banks has agreed that, upon the
conclusion of the Rights Offering and any Public Offering, to be a Standby
Purchaser, if necessary, for such number of shares of Common Stock remaining
unsold in the Offering, at the Subscription Price, as may be required to
increase the Bank's Tier I capital level to 7.0%.
As of December 31, 1995, the Company believes it has achieved substantial
compliance with the requirements of the Company's MOU, the Orders 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 the 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 "Management's Discussion and Analysis - General", of the Annual
Report, incorporated herein by reference, and "Regulatory Agreements" and
"Supervision and Regulation" contained in this Form 10-K.
On December 27, 1995, the stockholders of the Company approved the Stock
Purchase Agreement and 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. Pursuant to the Stock Purchase Agreement, the Board
of Directors of FCB have elected Messrs. James F. Dierberg, Allen H. Blake and
Donald W. Williams, who are affiliated with First Banks, to serve as directors
until the next Annual Meeting of the Shareholders of FCB. In addition, FCB
currently plans to retain at least two directors who are unaffiliated with First
Banks on the Board of Directors. The issuance of common stock of FCB to First
Banks, pursuant the Stock Purchase Agreement, has significantly diluted the
percentage ownership and voting power held by the other holders of FCB common
stock. At December 31, 1995, First Banks owned 93.29% of the outstanding voting
stock of FCB. If the aforementioned Offering is fully subscribed, First Banks'
ownership interest in FCB would be reduced to 50.25% prior to the conversion of
the debentures held by First Banks, or 66.9%, if the debentures are immediately
converted.
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 to be 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%.
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 since 1991 because a significant amount of the Bank's loans are
secured by real estate. During the last part of 1994 and continuing into 1995,
the Northern California region appears to have experienced a slight economic
recovery. At December 31, 1995, the unemployment rate for the Sacramento and San
Francisco Bay Area regions had improved to 5.9% and 5.0%, respectively, from
7.1% and 6.0% at December 31, 1993, respectively.
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.
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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 additional sources of noninterest income.
Lending Activities
Lending activities are conducted pursuant to a written loan policy which
has been adopted by the Bank. Each loan officer has a defined lending authority
and loans made by each such officer must be reviewed by a loan committee of the
Bank or Bank's board of directors depending upon the amount of the loan request.
Generally, loans are limited to borrowers residing or doing business in the
market area of the Bank. The Bank's policy is to meet the quality loan demand
and credit needs of its local community before it considers the purchase of loan
participations, including loan participations with affiliates of First Banks.
The Company offers the following types of loans: commercial, financial,
agricultural, municipal and industrial development, real estate construction and
development, commercial and residential real estate, consumer and installment
loans. The loan portfolio composition for the five years ended December 31, 1995
is included on page 12 of the Annual Report and is incorporated herein by this
reference. For additional loan portfolio and related credit risk information,
see "Management's Discussion and Analysis - Lending and Credit Management", at
page 11 through 15 of the Annual Report.
Investments
The Bank has established a written investment policy which is reviewed
annually. The investment policy identifies investment criteria and states
specific objectives in terms of risk, interest rate sensitivity, and liquidity.
Among the criteria the investment policy directs the management of the Bank to
consider are the quality, term, and marketability of the securities acquired for
their respective investment portfolios. The Bank does not engage in the practice
of trading securities for the purpose of generating portfolio gains. The
investment portfolio composition is included on pages 30 through 32 of the
Annual Report and is incorporated herein by this reference. See also
"Management's, Discussion and Analysis - Investment Securities, Interest Rate
Risk and Liquidity" at page 15 through 18 of the Annual Report.
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 December 31, 1995, the Bank had no brokered or telemarketing
deposits, significant volatile liabilities, escrow or title industry deposits. A
table summarizing the distribution of the Company's deposit accounts and the
weighted average nominal interest rates on each category of deposits for the
three years ending December 31, 1995 is included on page 15 of the Annual Report
and is incorporated herein by this reference. See "Management's Discussion and
Analysis - Liquidity" at page 17 through 18 of the Annual Report, incorporated
herein by reference, for additional information regarding the Bank's deposits.
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, 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.
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Supervision and Regulation
General
The Company and the Bank are extensively regulated under federal and state
law. These laws and regulations are intended to protect depositors, not
shareholders. To the extent that the following information describes statutory
or regulatory provisions, it is qualified in its entirety by reference to the
particular statutory and regulatory provisions. Any change in applicable laws or
regulations may have a material effect on the business and prospects of the
Company. The operations of the Company may be affected by legislative changes
and by the policies of various regulatory authorities. The Company is unable to
predict the nature or the extent of the effects on its business and earnings
that fiscal or monetary policies, economic controls or new federal or state
legislation may have in the future.
The Company is a registered bank holding company under the Bank Holding
Company Act (BHC Act), and, as such, is subject to regulation, supervision and
examination by the Board of Governors of the FRB. The Company's majority
stockholder, First Banks, is both a registered bank holding company and a
registered savings and loan holding company under the Home Owners' Loan Act of
1934, as amended (HOLA), and, as such, is also subject to regulations,
supervision and examination by the Office of Thrift Supervision (OTS). The
Company is required to file annual reports with the FRB and provide the FRB such
additional information as they may require.
The Bank, as a California state-licensed 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
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.
Recent and Pending Legislation
The enactment of the legislation described below has significantly affected
the banking industry generally and will have an ongoing effect on the Company
and the Bank in the future.
Financial Institutions Reform, Recovery, and Enforcement Act of 1989. The
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)
reorganized and reformed the regulatory structure applicable to financial
institutions generally. Among other things, FIRREA enhanced the supervisory and
enforcement powers for the federal bank regulatory agencies; required insured
financial institutions to guaranty repayment of losses incurred by the FDIC in
connection with the failure of an affiliated financial institution; required
financial institutions to provide their primary federal regulator with notice,
under certain circumstances, of changes in senior management and broadened
authority for bank holding companies to acquire savings institutions.
Under FIRREA, federal bank regulators were granted expanded enforcement
authority over "institution-affiliated parties" (i.e., officers, directors,
controlling stockholders, as well as attorneys, appraisers or accountants who
knowingly or recklessly participate in wrongful action likely to have an adverse
effect on an insured institution). Federal banking regulators have greater
flexibility to bring enforcement actions against insured institutions and
institution-affiliated parties, including cease and desist orders, prohibition
orders, civil money penalties, termination of insurance and the imposition of
operating restrictions and capital plan requirements. In general, these
enforcement actions may be initiated for violations of laws and regulations and
unsafe or unsound practices. Since the enactment of FIRREA, the federal bank
regulators have significantly increased the use of written agreements to correct
compliance deficiencies with respect to applicable laws and regulations and to
ensure safe and sound practices. Violations of such written agreements are
grounds for initiation of cease-and-desist proceedings. FIRREA granted the FDIC
back-up enforcement authority to recommend enforcement action to an appropriate
federal banking agency and to bring such enforcement action against a financial
institution or an institution-affiliated party if such federal banking agency
fails to follow the FDIC's recommendation. In addition, FIRREA requires, except
under certain circumstances, public disclosure of final enforcement actions by
the federal banking agencies.
FIRREA also established a cross guarantee provision (Cross Guarantee)
pursuant to which the FDIC may recover from a depository institution losses that
the FDIC incurs in providing assistance to, or paying off the depositors of, any
of such depository institution's affiliated insured banks or thrifts. The Cross
Guarantee thus enables the FDIC to assess a holding company's healthy Bank
Insurance Fund (BIF) members and Savings Association Insurance Fund (SAIF)
members for the losses of any of such holding company's failed BIF and SAIF
members. Cross Guarantee liabilities are generally superior in priority to
obligations of the depository institution to its stockholders due solely to
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their status as stockholders and obligations to other affiliates. Cross
Guarantee liabilities are generally subordinated to deposit liabilities, secured
obligations or any other general or senior liabilities, and any obligations
subordinate to depositors or other general creditors.
FIRREA required a financial institution or holding company thereof to give
30 days' prior written notice to its primary federal regulator of any proposed
director or senior executive officer if the institution has been chartered or
has undergone a change in control within the preceding two years or is not in
compliance with the minimum capital requirements or otherwise is in troubled
condition. The regulator would have the opportunity to disapprove any such
appointment. The federal banking agencies have adopted rules to implement the
foregoing provisions that broadly define "senior executive officer" to include
the president, chief financial officer, chief lending officer, chief investment
officer, general counsel, or their functional equivalents, or any individual who
exercises significant influence over, or participates in, major policy making
decisions without regard to title, salary or compensation. The term "senior
executive officer" also includes any employee of another entity hired to perform
the functions of positions listed above. The term "troubled condition" with
respect to a financial institution means an institution: (i) that has received a
composite rating of 4 or 5 (i.e., one of the two lowest examination ratings) in
its most recent examination; (ii) that is the subject of a capital directive or
formal enforcement action or proceeding or written agreement entered into with
the federal banking agency relating to safety or soundness or financial
viability; or (iii) that is informed in writing by such agency that it has been
deemed to be in troubled condition.
The Federal Deposit Insurance Corporation Improvement Act of 1991. The
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) was
adopted to recapitalize the BIF and impose certain supervisory and regulatory
reforms on insured depository institutions. In general, FDICIA includes
provisions, among others, to: (i) increase the FDIC's line of credit with the
U.S. Treasury in order to provide the FDIC with additional funds to cover the
losses of federally insured banks; (ii) reform the deposit insurance system,
including the implementation of risk-based deposit insurance premiums;
(iii) establish a format for closer monitoring of financial institutions to
enable prompt corrective action by banking regulators when a financial
institution begins to experience financial difficulty; (iv) establish five
capital levels for financial institutions ("well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized") that would impose more scrutiny and restrictions
on less capitalized institutions; (v) require the banking regulators to set
operational and managerial standards for all insured depository institutions and
their holding companies, including limits on excessive compensation to executive
officers, directors, employees and principal stockholders, and establish
standards for loans secured by real estate; (vi) adopt certain accounting
reforms and require annual on-site examinations of federally insured
institutions, including the ability to require independent audits of banks and
thrifts; (vii) revise risk-based capital standards to ensure that they (a) take
adequate account of interest-rate changes, concentration of credit risk and the
risks of nontraditional activities, and (b) reflect the actual performance and
expected risk of loss of multi-family mortgages; and (viii) restrict
state-chartered banks from engaging in activities not permitted for national
banks unless they are adequately capitalized and have FDIC approval. Further,
FDICIA permits the FDIC to make special assessments on insured depository
institutions, in amounts determined by the FDIC to be necessary to give it
adequate assessment income to repay amounts borrowed from the U.S. Treasury and
other sources or for any other purpose the FDIC deems necessary. FDICIA also
grants authority to the FDIC to establish semiannual assessment rates on BIF and
SAIF member banks so as to maintain these funds at the designated reserve
ratios.
As noted above, FDICIA authorizes and, under certain circumstances,
requires the federal banking agencies to take certain actions against
institutions that fail to meet certain capital-based requirements. Under FDICIA,
the federal banking agencies are required to establish five levels of insured
depository institutions based on leverage limit and risk-based capital
requirements established for institutions subject to their jurisdiction, plus,
in their discretion, individual additional capital requirements for such
institutions. Under the final rules that have been adopted by each of the
federal banking agencies, an institution will be designated:
(i) well-capitalized if the institution has a total risk-based capital ratio of
10% or greater, a core risk-based capital ratio of 6% or greater, and a leverage
ratio of 5% or greater, and the institution is not subject to an order, written
agreement, capital directive, or prompt corrective action directive to meet and
maintain a specific capital level for any capital measure; (ii) adequately
capitalized if the institution has a total risk-based capital ratio of 8% or
greater, a core risk-based capital ratio of 4% or greater, and a leverage ratio
of 4% or greater (or a leverage ratio of 3% or greater if the institution is
rated composite 1 in its most recent report of examination);
(iii) undercapitalized if the institution has a total risk-based capital ratio
that is less than 8%, a core risk-based capital ratio that is less than 4%, or a
leverage ratio that is less than 4% (or a leverage ratio that is less than 3% if
the institution is rated composite 1 in its most recent report of examination);
(iv) significantly undercapitalized if the institution has a total risk-based
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capital ratio that is less than 6%, a core risk-based capital ratio that is less
than 3%, or a leverage ratio that is less than 3%; and (v) critically
undercapitalized if the institution has a ratio of tangible equity to total
assets that is equal to or less than 2%.
Undercapitalized institutions are required to submit capital restoration
plans to the appropriate federal banking agency and are subject to certain
operational restrictions. Moreover, companies controlling an undercapitalized
institution are required to guarantee the subsidiary institution's compliance
with the capital restoration plan subject to an aggregate limitation of the
lesser of 5% of the institution's assets or the amount of the capital deficiency
when the institution first failed to meet the plan.
Significantly or critically undercapitalized institutions and
undercapitalized institutions that did not submit or comply with acceptable
capital restoration plans will be subject to regulatory sanctions. A forced sale
of shares or merger, restriction on affiliate transactions and restrictions on
rates paid on deposits are required to be imposed by the banking agency unless
it is determined that they would not further capital improvement. FDICIA
generally requires the appointment of a conservator or receiver within 90 days
after an institution becomes critically undercapitalized. The federal banking
agencies have adopted uniform procedures for the issuance of directives by the
appropriate federal banking agency. Under these procedures, an institution will
generally be provided advance notice when the appropriate federal banking agency
proposes to impose one or more of the sanctions set forth above. These
procedures provide an opportunity for the institution to respond to the proposed
agency action or, where circumstances warrant immediate agency action, an
opportunity for administrative review of the agency's action.
As described in "Management's Discussion and Analysis - Capital", at page
17 of the Annual Report, and incorporated herein by reference, the Company's and
the Bank's capital ratios were as follows:
Risk-Based Capital Ratios
--------------------------
Total Tier 1 Leverage Ratio
----- ------ --------------
1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
Company ..... 4.99% 4.27% 3.68% 2.97% 2.14% 1.87%
Bank ........ 12.66 4.81 11.35 3.52 6.58 2.22
Minimum capital
requirement- .. 8.00 8.00 4.00 4.00 4.00 4.00
In addition to the aforementioned minimum capital requirements, the
California 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. According the California Financial Code, the contributed capital of a
bank, defined as all stockholders equity other than retained earnings, is deemed
to be impaired whenever such bank has deficit retained earnings in an amount
exceeding 40% of such contributed capital. The Bank's capital is considered
impaired under the California Financial Code and it continues to receive such
notices from the SBD, most recently as of March 15, 1996, that its contributed
capital is impaired. Upon completion of the recapitalization of FCB and the
Bank, pursuant to the Stock Purchase Agreement and the aforementioned Offering,
and other conditions as set forth by the Superintendent of the SBD, FCB and the
Bank will request regulatory approval to affect a quasi-reorganization which
would bring the Bank into compliance with the SBD. A quasi-reorganization is an
accounting procedure which results in restating the carrying values of FC's
assets and liabilities to current fair values, and eliminating the accumulated
retained deficit by offsetting it against contributed capital. It is the policy
of the Superintendent of the SBD 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 is expected to continue to do so in the future. In addition, as
previously discussed in Item 1 Business - General in this Form 10-K, the SBD
Final Order requires the Bank to increase its tangible stockholders' equity,
which was 6.58% at December 31, 1995, to 7.00% by December 31, 1995. The SBD has
allowed the Bank to attain the 7.00% capital requirement through the proceeds of
the Offering.
Pursuant to FDICIA, the FRB and the other federal banking agencies adopted
real estate lending guidelines pursuant to which each insured depository
institution is required to adopt and maintain written real estate lending
policies in conformity with the prescribed guidelines. Under these guidelines,
each institution is expected to set loan to value ratios not exceeding the
supervisory limits set forth in the guidelines. A loan to value ratio is
generally defined as the total loan amount divided by the appraised value of the
property at the time the loan is originated. The guidelines require that the
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institution's real estate policy also require proper loan documentation, and
that it establish prudent underwriting standards. These guidelines became
effective on March 19, 1993. These rules have had no material adverse impact on
the Company.
FDICIA also contained the Truth in Savings Act, which requires clear and
uniform disclosure of the rates of interest payable on deposit accounts by
depository institutions and the fees assessable against deposit accounts, so
that consumers can make a meaningful comparison between the competing claims of
financial institutions with regard to deposit accounts and products.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. In
September 1994, Congress enacted the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (Interstate Act). Beginning in September 1995,
bank holding companies have the right to expand, by acquiring existing banks,
into all states, even those which had theretofore restricted entry. The
legislation also provides that, subject to future action by individual states, a
holding company will have the right, commencing in 1997, to convert the banks
which its owns in different states to branches of a single bank. A state is
permitted to "opt out" of the law which will permit conversion of separate banks
to branches, but is not permitted to "opt out" of the law allowing bank holding
companies from other states to enter the state. The federal legislation also
establishes limits on acquisitions by large banking organizations, providing
that no acquisition may be undertaken if it would result in the organization
having deposits exceeding either 10% of all bank deposits in the United States
or 30% of the bank deposits in the state in which the acquisition would occur.
Pending Legislation. Because of concerns relating to competitiveness and
the safety and soundness of the banking industry, Congress is considering a
number of wide-ranging proposals for altering the structure, regulation and
competitive relationships of the nation's financial institutions. Among such
bills are proposals to merge the BIF and the SAIF insurance funds, to eliminate
the federal thrift charter, to alter the statutory separation of commercial and
investment banking and to further expand the powers of banks, bank holding
companies and competitors of banks. It cannot be predicted whether or in what
form any of these proposals will be adopted or the extent to which the business
of the Company may be affected thereby.
Bank Holding Company and Bank Regulation
BHC Act. Under the BHC Act, the activities of a bank holding company are
limited to business so closely related to banking, managing or controlling banks
as to be a proper incident thereto. The Company is also subject to capital
requirements applied on a consolidated basis in a form substantially similar to
those required of the Subsidiary Banks. The BHC Act also requires a bank holding
company to obtain approval from the FRB before: (i) acquiring, directly or
indirectly, ownership or control of any voting shares of another bank or bank
holding company if, after such acquisition, it would own or control more than 5%
of such shares (unless it already owns or controls the majority of such shares);
(ii) acquiring all or substantially all of the assets of another bank or bank
holding company; or (iii) merging or consolidating with another bank holding
company. The FRB will not approve any acquisition, merger or consolidation that
would have a substantially anticompetitive result, unless the anticompetitive
effects of the proposed transaction are clearly outweighed by a greater public
interest in meeting the convenience and needs of the community to be served. The
FRB also considers capital adequacy and other financial and managerial factors
in reviewing acquisitions or mergers.
The BHC Act also prohibits a bank holding company, with certain limited
exceptions: (i) from acquiring or retaining direct or indirect ownership or
control of more than 5% of the voting shares of any company which is not a bank
or bank holding company; or (ii) from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks, or
providing services for its subsidiaries. The principal exceptions to these
prohibitions involve certain non-bank activities which, by statute or by FRB
regulation or order, have been identified as activities closely related to the
business of banking or of managing or controlling banks. In making this
determination, the FRB considers whether the performance of such activities by a
bank holding company can be expected to produce benefits to the public such as
greater convenience, increased competition or gains in efficiency in resources,
which can be expected to outweigh the risks of possible adverse effects such as
decreased or unfair competition, conflicts of interest or unsound banking
practices. FIRREA, which is described in more detail above, made a significant
addition to this list of permitted non-bank activities for bank holding
companies by providing that bank holding companies may acquire thrift
institutions upon approval by the FRB and the applicable regulatory authority
for the thrift institutions.
Insurance of Accounts. The FDIC provides insurance, through the BIF and the
SAIF, to depository institutions to a maximum of $100,000 for each insured
depositor. The Bank's deposits consist solely of BIF deposits.
Through December 31, 1992, all FDIC-insured institutions, whether members
of the BIF, the SAIF or both, paid the same premium (23 cents per $100 of
<PAGE>
domestic deposits) under a flat-rate system mandated by law. FDICIA required the
FDIC to raise the reserves of the BIF and the SAIF, implement a risk-related
premium system and adopt a long-term schedule for recapitalizing the BIF.
Effective January 1, 1993, the FDIC amended its regulations regarding insurance
premiums to provide that a bank or thrift would pay an insurance assessment
within a range of 23 cents to 31 cents per $100 of domestic deposits, depending
on its risk classification.
The FDIC has recently adopted an amendment to the BIF risk-based assessment
schedule which effectively eliminated deposit insurance assessments for most
commercial banks and other depository institutions with deposits insured by the
BIF. At the same time, the FDIC has indicated it anticipates that the assessment
rate for SAIF-insured institutions in even the lowest risk-based premium
category will not fall below the current 0.23% of insured deposits before the
year 2002. Under the FDIC amendment, the assessment rates for BIF-insured
institutions range from 0.27% of insured deposits for the most financially
troubled BIF members to 0% of insured deposits for most the well-capitalized
institutions, including over 90% of BIF-insured institutions. The FDIC amendment
became effective on January 1, 1996 and will remain in effect at least through
June 30, 1996. The FDIC amendment continues a substantial disparity in the
deposit insurance premiums paid by BIF and SAIF members and may place
institutions with significant SAIF-insured deposits at a significant competitive
disadvantage relative to institutions that have little or no SAIF-insured
deposits.
The Bank's assessment rate at December 31, 1995 was 27 cents for each
$100.00 of insured deposits.
Regulations Governing Capital Adequacy. The federal bank regulatory
agencies use capital adequacy guidelines in their examination and regulation of
bank holding companies and banks. If the capital falls below the minimum levels
established by these guidelines, the bank holding company or bank may be denied
approval to acquire or establish additional banks or nonbank businesses or to
open facilities.
The FRB and the FDIC adopted risk-based capital guidelines for banks and
bank holding companies. The risk-based capital guidelines are designed to make
regulatory capital requirements more sensitive to differences in risk profile
among banks and bank holding companies, to account for off-balance sheet
exposure and to minimize disincentives for holding liquid assets. Assets and
off-balance sheet items are assigned to broad risk categories, each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance sheet items. The FRB
has noted that bank holding companies contemplating significant expansion
programs should not allow expansion to diminish their capital ratios and should
maintain ratios well in excess of the minimums. Under these guidelines, all bank
holding companies and federally regulated banks must maintain a minimum
risk-based total capital ratio equal to 8% of which at least 4% must be Tier 1
capital. Pursuant to FDICIA, banking regulators are to revise the risk-based
capital standards to take into account interest rate risk, concentration of
credit risk and the risks of nontraditional activities and multi-family
mortgages.
The FRB also has implemented a leverage ratio, which is Tier 1 capital to
total assets, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank holding company may leverage its equity capital
base. The FRB requires a minimum leverage ratio of 3%. For all but the most
highly-rated bank holding companies and for bank holding companies seeking to
expand, however, the FRB expects that additional capital sufficient to increase
the ratio by at least 100 to 200 basis points will be maintained.
As previously discussed, the Bank was adequately capitalized at December
31, 1995. Management of the Company believes that the risk-weighting of assets
and the risk-based capital guidelines do not have a material adverse impact on
the Company's operations or on the Bank.
Community Reinvestment Act. The Community Reinvestment Act of 1977 (CRA)
requires that, in connection with examinations of financial institutions within
their jurisdiction, the federal banking regulators must evaluate the record of
the financial institutions in meeting the credit needs of their local
communities, including low and moderate income neighborhoods, consistent with
the safe and sound operation of those banks. These factors are also considered
in evaluating mergers, acquisitions and applications to open a branch or
facility. The CRA is likely to be the subject of regulatory reform in the next
few years, and proposed rules have been published for comment by the four
regulatory agencies noted above. Although it is not possible to predict the
extent to which the CRA will be modified, these changes may change the process
by which a financial institution, such as the Company and the Subsidiary Bank,
is able to grow through acquisitions or establish new branches.
Regulations Governing Extensions of Credit. The Bank is subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to the
bank holding company or its subsidiaries, or investments in their securities and
on the use of their securities as collateral for loans to any borrowers. These
regulations and restrictions may limit the Company's ability to obtain funds
from the Bank for its cash needs, including funds for acquisitions and for
payment of dividends, interest and operating expenses. Further, under the BHC
Act and certain regulations of the FRB, a bank holding company and its
<PAGE>
subsidiaries or its affiliates are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services. For example, Banks may not generally require
a customer to obtain other services from an affiliated Bank, and may not require
the customer to promise not to obtain other services from a competitor, as a
condition to an extension of credit to the customer.
Banks are also subject to certain restrictions imposed by the Federal
Reserve Act on extensions of credit to executive officers, directors, principal
stockholders or any related interest of such persons. Extensions of credit (i)
must be made on substantially the same terms, including interest-rates and
collateral as, and following credit underwriting procedures that are not less
stringent than, those prevailing at the time for comparable transactions with
persons not covered above and who are not employees; and (ii) must not involve
more than the normal risk of repayment or present other unfavorable features.
Banks are also subject to certain lending limits and restrictions on overdrafts
to such persons. A violation of these restrictions may result in the assessment
of substantial civil monetary penalties on the Bank or any officer, director,
employee, agent or other person participating in the conduct of the affairs of
the Bank or the imposition of a cease and desist order.
Reserve Requirements. The FRB requires all depository institutions to
maintain reserves against their transaction accounts and non-personal time
deposits. Reserves of 3% must be maintained against total transaction accounts
of $51.9 million or less (subject to adjustment by the FRB) and an initial
reserve of $1,557,000 plus 10% (subject to adjustment by the FRB to a level
between 8% and 14%) must be maintained against that portion of total transaction
accounts in excess of such amount. The balances maintained to meet the reserve
requirements imposed by the FRB may be used to satisfy liquidity requirements.
Institutions are authorized to borrow from the Federal Reserve Bank
"discount window," but FRB regulations require institutions to exhaust other
reasonable alternative sources of funds before using this borrowing authority.
Restrictions on Thrift Acquisitions. The Company is prohibited from
acquiring, without prior approval of the Director of the OTS, (i) control of any
other savings institution or savings and loan holding company or substantially
all the assets thereof; or (ii) more than 5% of the voting shares of a savings
institution or holding company thereof which is not a subsidiary. Furthermore,
such an acquisition would require the Company itself to become registered as a
savings and loan holding company subject to all applicable regulations of the
OTS.
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 December 31, 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. In addition and as discussed in Note 11 of the consolidated
financial statement, at page 37 of the Annual Report, FCB suspended the payment
of declared but unpaid dividends on July 9, 1992. The accrued dividends and
accrued but unpaid interest was approximately $969,000 at December 31, 1995.
The principal sources of cash revenue to the Company have been interest
payments on a mandatory 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.
In addition, dividends payable by the Bank to the Company are further
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.
Usury Laws. The maximum legal rate of interest which the Bank charges on a
particular loan depends on a variety of factors such as the type of borrower,
the purpose of the loan, the amount of the loan and the date the loan is made.
There are several state and federal statutes which set maximum legal rates of
interest for various kinds of loans. If a loan qualifies under more than one
statute, a bank may often charge the highest rate for which the loan is
eligible.
Regulatory Agreements
For each of the three years ended December 31, 1995, the Company has
incurred substantial losses from operations. These losses were associated
primarily 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 sector. Because of the magnitude
of problem assets which arose and the reduction of the Company's and the Bank's
capital due to the losses, the Company has been operating under the terms of a
MOU issued by the FRB and the Bank has been operating under the terms of Orders
issued by the FDIC and SBD. The MOU and the Orders have placed significant
<PAGE>
restrictions on the Company and the Bank including payment of dividends, as more
fully discussed in Note 11 to the consolidated financial statement, at page 37
of the Annual Report, incorporated herein by reference, requirements of
specified capital levels, as more fully discussed in the Supervision and
Regulation section of this Form 10-K, and reduction of classified assets.
The Company and the Bank entered into a Stock Purchase Agreement as more
fully discussed in Item 1. Business - General of this Form 10-K and Note 2 of
the consolidated financial statements, at page 29 through 30 of the Annual
Report, incorporated herein by reference. This resulted in a substantial
recapitalization of the Company and the Bank during 1995. In addition, as more
fully discussed in Item 1. Business - General of this Form 10-K and Note 19 to
the consolidated financial statements, at page 43 of the Annual Report,
incorporated herein by reference, subsequent to December 31, 1995, the Company
has commenced an offering of its common stock, to existing stockholders other
than First Banks, and in exchange for dividends owed to certain stockholders.
However, the Company has continued to incur losses from operations through
December 31, 1995. Furthermore, the effect of a large portfolio of problem
assets and the potential of a substantial interest cost associated with the
Debenture issued to First Banks under the Stock Purchase Agreement may impair
the Company's ability to generate sufficient future profitability to satisfy all
of the Company's and the Bank's regulatory agreements. As a result of the
recapitalization, combined with numerous other actions which have been taken,
FCB and the Bank believe that they are in substantial compliance with most of
the requirements of the MOU and the Orders. However, full compliance,
particularly with certain capital requirements, has not yet been achieved and
the Bank continues to be designated a problem bank and is considered "troubled"
for all regulatory purposes.
Monetary Policy and Economic Control
The commercial banking business in which the Company engages is affected
not only by general economic conditions, but also by the monetary policies of
the FRB. Changes in the discount rate on member bank borrowing, availability of
borrowing at the "discount window," open market operations, the imposition of
changes in reserve requirements against member banks deposits and assets of
foreign branches, and the imposition of and changes in reserve requirements
against certain borrowings by banks and their affiliates are some of the
instruments of monetary policy available to the FRB. These monetary policies are
used in varying combinations to influence overall growth and distributions of
bank loans, investments and deposits, and this use may affect interest rates
charged on loans or paid on deposits. The monetary policies of the FRB have had
a significant effect on the operating results of commercial banks and are
expected to do so in the future. The monetary policies of the FRB are influenced
by various factors, including inflation, unemployment, short-term and long-term
changes in the international trade balance and in the fiscal policies of the
U.S. Government. Future monetary policies and the effect of such policies on the
future business and earnings of the Bank cannot be predicted.
Employees
At December 31, 1995, the Company employed 63 full-time equivalent
employees. None of the employees are subject to a collective bargaining
agreement.
Executive Officers of the Registrant
Information regarding executive officers is contained in Item 10 of
Part III hereof (General Instruction G) and is incorporated herein by this
reference.
<PAGE>
Item 2. Properties
The Company's branch network is concentrated in the greater Sacramento and San
Francisco Bay areas and is summarized as follows:
Facility Square
Name Address Owned/Leased Footage
---- ------- ------------ -------
CAPITOL ............. 2450 Venture Oaks Way
Sacramento, CA 95833 Leased 7,577
CAMPBELL ........... 94 San Tomas Aquino Rd.
Campbell, CA 95008 . Leased 6,000
CONCORD ............ 2395 Willow Pass Rd.
Concord, CA 94520 .. Leased 5,856
ROSEVILLE .......... 201 Vernon Street
Roseville, CA 95678 Leased 8,590
ROSEVILLE .......... 1625 Douglas Blvd.
Roseville, CA 95661 Owned 10,760
SACRAMENTO ......... 865 Howe Avenue
Sacramento, CA 95825 Leased 5,498
SAN FRANCISCO ...... 1000 Taraval Street
San Francisco, CA 94116 Leased 5,000
Item 3. Legal Proceedings
The Company and the Bank are, from time to time, parties to various legal
actions arising in the normal course of business. Management believes that there
is no proceeding threatened or pending against the Company or Bank which, if
determined adversely, would have a material adverse effect on the business or
financial position of the Company or the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
A special meeting of stockholders of the Company was held on December 27,
1995. At such meeting, the Company's stockholders approved the Amended and
Restated Stock Purchase Agreement with First Banks, Inc. and Mr. James F.
Dierberg, and an amendment to the Certificate of Incorporation of First
Commercial Bancorp to increase the number of shares of Common Stock which the
Company has authority to issue to 250 million. Mr. Dierberg is Chairman of the
Board, President and Chief Executive Officer of First Banks, Inc.
With respect to the approval of the Amended and Restated Purchase
Agreement, of the 4,675,110 shares of Common Stock entitled to vote, 2,356,702
shares voted in favor of the proposal, 37,226 shares voted against the proposal,
and 19,184 shares abstained.
With respect to the approval of the Amendment to the Company's Certificate
of Incorporation, of the 4,675,110 shares of Common Stock entitled to vote,
2,356,356 shares voted in favor of the proposal, 43,458 shares voted against the
proposal, and 13,298 shares abstained.
Immediately after the approval of the stockholders was received, in
accordance with the terms of the Stock Purchase Agreement, First Banks exchanged
the $5 million in Common and Preferred Stock of First Commercial Bank, which it
had previously purchased, for 50 million shares of First Commercial Bancorp
Common Stock at a rate of $0.10 per share, and purchased a 12% convertible
debenture from First Commercial Bancorp for $5 million. The $5 million
debenture, and a $1.5 million convertible debenture purchased by First Banks on
October 31, 1995, are secured by all of the Common Stock of the Bank held by
First Commercial Bancorp, and may be converted by First Banks into Company
Common Stock at a conversion rate of $0.10 per share.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information. The Company's common stock was traded on the NASDAQ
National Market System under the symbol of "FCOB" until July 1, 1995. The
Company's common stock is currently listed on the NASDAQ Small Cap Market. There
are thirteen market makers for the Company's common 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
<PAGE>
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 asked 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 Small Cap Market System. At December 31, 1995, there were approximately
1,100 holders of record of FCB common stock.
On July 9, 1992, the Company made the decision to suspend payment of the
third and fourth quarter dividend declared as of December 31, 1991, which
totaled $.16 per share. The Company has and 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, respectively. The payment of the accrued dividends and declaration of
subsequent dividends is subject to approval of the FRB.
See Part I - Item 1 Business - "Supervision and Regulation - Dividends"
herein for a discussion of the restrictions on the payments of dividends and
Note 19 of the consolidated financial statements, at page 43 of the Annual
Report for further discussion of the Offering of Company common stock in
exchange for accrued and unpaid dividends.
Information regarding the number of stockholders and the market prices for
the Company's common stock since January 1, 1994 is set forth on page 44 of the
Annual Report and is incorporated herein by reference.
Item 6. Selected Financial Data
Selected Consolidated Financial Data, included on page 3 in the Annual, is
incorporated herein by this reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations, included on pages 4 through 19 in the Annual Report, is incorporated
herein by this reference.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements, included in the Annual
Report, are incorporated herein by this reference.
Annual Report
Statement Reference
Independent Auditors' Report 21
Consolidated Balance Sheets -December 31, 1995 and 1994 22
Consolidated Statements of Income -Years Ended December 31,
1995, 1994 and 1993 24
Consolidated Statements of Changes in Stockholders'
Equity - Years Ended December 31, 1995, 1994 and 1993 25
Consolidated Statements of Cash Flows - Years Ended
December 31, 1995, 1994 and 1993 26
Notes to Consolidated Financial Statements 27
The Independent Auditors' Report of Arthur Andersen LLP on the consolidated
financial statements of the Company and the Bank for 1994 and 1993 is included
herein.
<PAGE>
Report of Independent Public Accountants
To the Stockholders and 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 the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the two years in the period ended December 31, 1994
as restated (see Note 16). 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 the results of their operations and
their cash flows for each of the two 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 Notes 2, 15 and 19 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 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 Notes 2, 15 and 19. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/Arthur Andersen LLP
- ----------------------
Arthur Andersen LLP
San Francisco, California
March 29, 1995
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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 LLP, St. Louis, Missouri, as the Company's
independent accountant. The appointment of KPMG Peat Marwick LLP was effective
immediately.
Arthur Andersen LLP's report on the consolidated 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 raised 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 Anderson 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.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Company's Board of Directors consisted of five (5) members at December
31, 1995. 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.
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.
<TABLE>
<CAPTION>
Director Position with the Shares Percent of
Name Age Since Company or Beneficially Class
---- --- ----- with the Bank Owned ---------
---------------- ------------
<S> <C> <C> <C> <C> <C>
Michael P. Morris 48 1995 Director of the Company and -0- 0.00%
Class "A" the Bank
Manuel Perry, Jr. 63 1983 Former Chairman of the Board 21,150 (1) 0.03%
Class "C" (4) of Directors of the Company
James F. Dierberg 58 1995 Director of the Company and 130,000,000 (2) 96.53%
Class "B" 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 Acting Chairman of the -0- 0.00%
Class "A" Board, President, Chief
Executive Officer and
Director of the Company and
Chairman of the Board, Chief
Executive Officer and
Director 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.
(3) Includes 10,000 shares subject to options presently exercisable under
the Company's Directors Stock Option Plan.
(4) Mr. Perry resigned as Chairman of the Board and Director of the
Company, effective March 18, 1996.
<PAGE>
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>
Donald W. Williams 48 Acting Chairman of the Board, President and 1995
Chief Executive Officer of the Company and
Chairman of the Board and Chief Executive
Officer of the Bank
Allen H. Blake 53 Interim Chief Financial Officer of the 1995
Company and Bank
</TABLE>
(1) 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 the Company's subsidiary 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. 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., Houston, Texas, 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.,
headquartered in Houston, Texas. Mr. Dierberg is also a director of First Bank &
Trust, 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.
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 LLP, a worldwide CPA firm. While with KPMG Peat Marwick LLP,
Mr. Morris specialized as a banking audit partner with extensive experience
auditing community banks in Northern California. Mr. Morris joined KPMG Peat
Marwick LLP in 1978.
MANUEL PERRY, JR. was the Chairman of the Board of Directors of the Company
until his resignation on March 18, 1996. He has been an agent with New York Life
Insurance Company since 1957.
DONALD W. WILLIAMS has been Senior Vice President and Chief Credit Officer
of First Banks since March, 1993. Mr. Williams is Chairman of the Board, Chief
Executive Officer of the Bank. 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., BankTEXAS N. A., both of which are
headquartered in Houston, Texas, 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. and First Banks, Inc.
each have 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 with
First Banks.
<PAGE>
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 consisted of Mr. Perry as
Chairman, and Mr. Morris as a member for 1995. 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 accounting and reporting; (4) to
oversee the internal audit functions; and (5) to monitor and analyze the results
of internal and regulatory examinations.
The responsibilities of the Compensation Committee of the Board are
fulfilled 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.
Item 11. Executive Compensation
The following table sets forth the compensation for the named executive
officer for the last three years, or for the shorter period during which they
have been involved in such a capacity by the Company.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- Awards
Name and principal position Year Salary ($)(1) Bonus ($) Other Annual Securities Underlying All Other
- --------------------------- ---- ------------- ----- Compensation Options (#) Compensation ($)
($)(2) --------------------- ----------------
------
<S> <C> <C> <C> <C> <C> <C>
James E. Culleton 1995 $ 156,405 -0- -0- -0- $ 0
President , First
Commercial Bank (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
Acting Chairman of the
Board,
President and Chief
Executive Officer (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(6)
Former Executive Vice
President and Chief
Financial Officer (5)
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 assumed the
position of Acting Chairman of the Board of the Company effective
March 18, 1996 upon Mr. Perry's resignation,. 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) Ms. Long resigned effective December 6, 1995.
(6) 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 her employment agreement with
the Company. See "Employment Arrangements and Agreements" herein.
<PAGE>
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 783,000 shares of its Common Stock reserved for
issuance as stock options under the Option Plan.
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 $100,000. Shares
subject to options under the Employee Plan may be purchased for cash or in
exchange for shares of the Common Stock or other valid consideration.
Unless otherwise provided by the Board, an option granted under the
Employee Plan and not exercised within ten years expires, and the shares subject
to the option become available for future grants. The Committee determines to
whom options will be granted and the terms of each option granted, including the
exercise price, number of shares subject to the option, the vesting provisions
thereof, and whether the option will be an incentive or non-statutory option.
The Employee Plan may be amended, suspended or terminated by the Board, but no
such action may impair rights under a previously granted option. Each option is
generally exercisable during the lifetime of the optionee only so long as the
optionee remains employed by the Company. No option is transferable by the
optionee other than by will or the laws of descent and distribution. The
Employee Plan will expire in March 1997 unless terminated earlier by the Board
of Directors.
There were no options granted under the Employee Plan during the 1995
fiscal year to any of the executive officers of the Company or the Bank.
The following table sets forth the aggregated option exercises for the year
ended December 31, 1995 and option values at December 31, 1995, for the named
executive officer, or for the shorter period during which they have been
involved in such a capacity by the Company.
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of securities Value of unexercised
underlying unexercised in-the-money options
options at fiscal year-end at fiscal year-end ($)
(#)
Shares Value Exercisable/ Exercisable/
Name acquired on Realized unexercisable unexercisable
---- exercise (#) ($) ------------- -------------
------------ ---
<S> <C> <C> <C> <C>
James E. Culleton, President None N/A 33,000/12,000(1) -0-/-0-(2)
First Commercial Bank
Donald W. Williams, Acting None N/A -0-/-0- -0-/-0-
Chairman of the Board, Chief
Executive Officer and
President of the Company
Anne H. Long, Former None N/A 8,350/2,650 (3) -0-/-0-(2)
Executive Vice President and
Chief Financial Officer of
the Company
</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, the exercise price of the options granted to
Mr. Culleton and Ms. Long exceeded 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 expired on March 7,
1996.
<PAGE>
Employment Arrangements and Agreements
Arrangement with Donald W. Williams
Donald W. Williams is serving as the Acting Chairman of the Board, 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 independent 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. 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 independent
of his services to the Company. First Banks is 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 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.
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, at the discretion of the Board 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
<PAGE>
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 (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 (Participants). Participants may
elect to defer 1% to 15% of their annual salary up to the maximum dollar
limitation as established by the IRS (Participant Contributions). A
Participant's interest in his or her Participant Contribution is fully vested
immediately.
The Company may elect to contribute 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 made matching contributions (on
a quarterly basis) of approximately $105,000 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 employee' 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 the Offering in early
1996, 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 (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 two, are eligible to receive options in
accordance with a specific formula under the Directors' Plan.
<PAGE>
Options granted under the Directors' Plan are non-statutory options. Three
former directors of the Company who resigned effective August 29, 1995, three
former directors who resigned effective December 27, 1995 and one director who
resigned effective March 18, 1996, 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 from the date of resignation. Mr. Morris 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.
Item 12. Security Ownership of Certain Beneficial Owners and Management
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:
Percentage of
Name and Address of Amount and Nature Outstanding Shares
Beneficial Owner of Beneficial Ownership Beneficially Owned
---------------- ----------------------- ------------------
First Banks, Inc.
135 North Meramec
Clayton, MO 63105 130,000,000(1) 96.53%(1)
__________________
(1) Includes 65,000,000 shares which First Banks has the right to obtain
upon conversion of the entire principal amounts of the Debentures into shares of
Common Stock. In addition, 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.
Item 13. Certain Relationships and Related 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 entered into the Standby Stock Purchase Agreement
with First Banks and Mr. Dierberg, which was later amended and restated as the
Stock Purchase Agreement, as well as the related Additional Investment and
Standby Agreements. 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 December 31, 1995, 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 previously, 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.
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. Both 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 Bank paid $16,466 in fees pursuant to the Management Services
Agreement. No fees were paid as of December 31, 1995 in respect of the Cost
Sharing Agreement.
<PAGE>
The Bank 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 the expenses previously incurred by the Bank in its internal data
processing operations. The Bank paid to FirstServ, Inc. a one-time conversion
training fee of $30,000.
Indebtedness of Directors and Executive 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.
At December 31, 1995, the Bank had no outstanding loans to directors or
executive officers.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements: The Financial Statements
listed under Item 8 to this Report are set forth at
pages 22 through 26, and the Notes to Consolidated
Financial Statements are set forth at pages 27 through
43, of the Annual Report (See Exhibit 13 under
Paragraph (a)3 of this Item 14).
2. Financial Statement Schedules: None
3. Exhibits: The following exhibits listed in the Exhibit
Index are filed with this Report:
Exhibit 13 Annual Report to Shareholders for 1995.
The Annual Report to Shareholders for
1995 is being filed as an Exhibit solely
for the purpose of incorporating certain
provisions thereof by reference. Portions
of the Annual Report to Shareholders
for 1995 not specifically incorporated
by reference are not deemed "filed" for the
purposes of the Securities Exchange Act of
1934, as amended.
Exhibit 21 Subsidiary of the Registrant.
Exhibit 23.1 Consent of Arthur Andersen LLP
Exhibit 27 Financial Data Schedule (EDGAR only)
(b) Reports on Form 8-K during the quarter ended December 31, 1995:
(1) On November 20, 1995, the Company filed a Current Report
on Form 8-K reporting, pursuant to Item 4 thereof, a "Change
in the Registrant's Certifying Accountants."
(2) On December 28, 1995, the Company filed a Current
Report on Form 8-K reporting, pursuant to Item 5 thereof, a
"Changes in Control of Registrant."
(c) See the Exhibit Index attached hereto at pages 24 through 25.
.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Donald W. Williams
----------------------
Donald W. Williams
Acting Chairman of the Board
of Directors, President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Allen H. Blake
------------------
Allen H. Blake
Interim Chief Financial Officer,
and Director
(Principal Financial and
Accounting Officer)
Date: March 26, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the date indicated.
Signature and Title Date
------------------- ----
/s/ James F. Dierberg March 26, 1996
--------------------- --------------
James F. Dierberg, Director
/s/ Allen H. Blake March 26, 1996
------------------ --------------
Allen H. Blake, Interim Chief Financial Officer and
Director.
/s/ Donald W. Williams March 26, 1996
---------------------- --------------
Donald W. Williams, Acting Chairman of the
Board, President and Chief Executive Officer
/s/ Michael P. Morris March 26, 1996
--------------------- --------------
Michael P. Morris, Director
<PAGE>
EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table of Item
601 of Regulation S-K.
Exhibit
Number Description
------------------
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)
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, d.b.a. Carpenter &
Company (6)
<PAGE>
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)
13. 1995 Annual Report to Stockholders -- filed herewith. Portions not
specifically incorporated by reference in this Report are not deemed
"filed" for the purposes of the Securities Exchange Act of 1934.
21. Subsidiaries (5)
23(a) Consent of Arthur Andersen LLP
27. Financial Data Schedule (EDGAR only)
__________
(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) Files 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 and 10.14.
<PAGE>
EXHIBIT 13
<PAGE>
1995
ANNUAL REPORT
First Commercial Bancorp, Inc.
<PAGE>
Table of Contents
Page
----
Letter to Shareholders........................................... 1
Selected Consolidated and Other Financial Data................... 3
Management's Discussion and Analysis............................. 4
Quarterly Condensed Financial Data - Unaudited................... 20
Independent Auditors' Report..................................... 21
Financial Statements:
Consolidated Balance Sheets...................................... 22
Consolidated Statements of Operations............................ 24
Consolidated Statements of Changes in Stockholders' Equity....... 25
Consolidated Statements of Cash Flows............................ 26
Notes to Consolidated Financial Statements....................... 27
Investor Information ............................................ 44
Corporate Directory.............................................. 45
<PAGE>
Letter To Shareholders
Dear Valued Shareholders, Customers, and Friends:
It has been a challenging year for our Company as we worked diligently to
enhance the performance of our organization for the benefit of both our
customers and our shareholders. We are pleased with the tremendous efforts made
in 1995 which have resulted in significant benefits for the future success of
First Commercial Bancorp, Inc.
Entering the year 1995, the Company's strategic plan included the infusion of
new capital which has been imperative for the survival of First Commercial
Bancorp. It was with great pleasure that we entered into a Stock Purchase
Agreement in 1995 with First Banks, Inc., a $3.6 billion multibank holding
company headquartered in St. Louis, Missouri, which ultimately provided $6.5
million of new equity capital and $6.5 million of debt financing. The proceeds
of this agreement, with the exception of $250,000 retained by First Commercial
Bancorp, was provided to First Commercial Bank to improve its regulatory
capital. Effective in this regard and now considered adequately capitalized, the
Company is pleased to report that the leverage capital ratio of First Commercial
Bank at December 31, 1995 was 6.58% compared to 2.22% at year-end 1994.
A clear focus for 1995 also included the reduction of assets and operating
expenses. In order to optimize the utilization of its capital resources, the
Company elected to close one branch and sell another which served to reduce
assets, deposits, and staff expenses. The Company also subleased its corporate
space, moving to more modest, less expensive quarters. In addition, the Company
was successful in its efforts to systematically streamline its operations and
has pared its noninterest expenses. In December, First Commercial Bancorp closed
its data processing operations and converted to the system available through
First Banks, Inc. which served to reduce the expenses of our operation by
approximately 50%.
Consistent with the 1995 strategic plan, the Company has been aggressively
addressing its asset quality issues. Nonperforming assets which represented
$17.4 million at December 31, 1994 were reduced significantly to $8.2 million at
December 31, 1995. Similarly, the level of classified assets was reduced from
$24.5 million at year-end 1994 to $20.6 million at year-end 1995. While
substantial improvements were accomplished in the restructuring, refinancing,
repayment and strengthening of credits, approximately $7.3 million of loans and
other real estate was charged-off during the year. While the Company is
confident these necessary actions will have a substantial effect on the future
earnings potential of the Bank, the Company experienced a negative effect on the
1995 operating results, incurring a net loss of $7.43 million for the year.
While it is not possible for us to be proud of the struggle and obstacles we
have endured at First Commercial Bancorp in recent years and the effects of
these deterrents to earnings, we are quite proud of the efforts we made in 1995
to rebuild the Company for future success. We are now more ideally poised to
re-establish the presence of First Commercial Bank in the communities we are
proud to serve. We have restaffed the Bank's corporate business development area
with an experienced team of highly skilled lending officers who are serving to
re-introduce the "new" First Commercial Bank to our existing customers and
prospects. With the conversion to the new data system in December, the staff has
been updated on system enhancements and is ready to deliver new products and
enhanced services for the benefit of our valued customers. Additionally, we are
acting on opportunities to continue to build capital strength. In this regard,
the Company filed an Amended Registration Statement with the Securities and
Exchange Commission for a rights offering to its existing shareholders, other
than First Banks, a limited offering to the public, and a dividend exchange
offering. If fully subscribed, these offerings would result in an additional
$6.0 million in new capital to First Commercial Bancorp, bolstering capital
levels of the Bank above regulatory guidelines. The Registration Statement was
declared effective on February 16, 1996, and the Prospectuses were recently
mailed to eligible shareholders.
<PAGE>
Having set in motion a new positive direction for the Company, Manuel Perry,
Jr., Chairman of the Board, announced his resignation in March 1996. Mr. Perry's
contributions and dedication to the recovery of First Commercial Bank have been
both admired and appreciated, and it is with the greatest of respect that we bid
farewell to Manuel's wisdom, leadership and untiring enthusiasm for the Company.
While we must continue to work in problem areas which have troubled the Bank in
the past, it is with renewed enthusiasm and confidence that we now face the
opportunities which await us. At this time, we would like to extend our
sincerest appreciation to our dedicated employees, customers, shareholders and
friends who have provided us with unwaivering support. And it is to each of you
that we pledge our commitment to maintaining the momentum we have established to
meet our long-term objective of a progressive and profitable new First
Commercial Bancorp.
Sincerely,
/s/Donald W. Williams
- ---------------------
Donald W. Williams
Acting Chairman of the Board,
President and Chief Executive Officer
March 20, 1996
<PAGE>
First Commercial Bancorp, Inc. and Subsidiary
Selected Consolidated and Other Financial Data
<TABLE>
<CAPTION>
The following table presents selected consolidated financial information for First Commercial Bancorp,
Inc. and subsidiary (FCB or the Company) for each of the years in the five-year period ended December 31, 1995.
Year ended December 31,
-----------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Statement of operations data:
<S> <C> <C> <C> <C> <C>
Interest income $ 13,750 18,356 20,100 24,605 38,214
Interest expense 6,136 5,910 6,370 8,973 16,090
----- ----- ----- ----- ------
Net interest income 7,614 12,446 13,730 15,632 22,124
Provision for possible loan losses 3,885 9,809 8,100 7,260 4,820
----- ----- ----- ----- -----
Net interest income after provision
for loan losses 3,729 2,637 5,630 8,372 17,304
Noninterest income 1,328 1,973 2,995 2,502 2,212
Noninterest expense 12,589 20,393 19,703 16,264 17,377
------ ------ ------ ------ ------
Income (loss) before income taxes (7,532) (15,783) (11,078) (5,390) 2,139
Provision for (benefit of) income taxes (101) 2,407 (3,767) (1,872) 536
------ ----- ------ ------ ---
Net income (loss) $ (7,431) (18,190) (7,311) (3,518) 1,603
======= ======= ====== ====== =====
Per share data:
Net income (loss) $ (.33) (3.89) (1.56) (.75) .34
Book value per share .16 .93 4.95 6.51 7.38
Weighted average shares outstanding 22,826 4,675 4,675 4,663 4,754
Balance sheet data:
Investment securities, federal funds
sold and other short-term earning
assets $ 83,249 85,189 113,701 46,224 83,543
Total loans, net of unearned discount 74,015 130,172 194,377 234,923 295,761
Total assets 169,535 239,306 349,777 332,426 423,295
Non-interest-bearing deposits 27,517 56,483 134,961 114,109 122,050
Interest-bearing deposits 128,647 177,053 188,835 185,637 263,867
Retained (deficit) earnings (30,311) (22,880) (4,690) 2,621 6,157
Total stockholders' equity 3,579 4,355 23,144 30,444 33,909
Selected financial ratios:
Return on average assets (4.09)% (6.42) (2.30) (.98) .41
Return on average stockholders' equity (205.11) (112.01) (26.57) (10.29) 4.42
Average stockholders' equity to
average assets 1.99 5.73 8.65 9.48 9.35
Net charge-offs on loans to average loans 6.04 5.62 2.86 2.58 .94
Allowance for possible loan losses to
total loans outstanding 7.28 5.71 3.77 2.33 1.69
Allowance for possible loan losses to
total nonperforming loans 119.05 61.25 33.20 19.87 63.96
Total Tier 1 capital to average assets
(leverage) 2.14 1.87 6.61 8.48 8.10
Total risk-based capital to risk-adjusted
assets 4.99 4.27 10.16 11.89 11.12
Total regulatory risk-based capital
requirement 8.00 8.00 8.00 8.00 7.25
</TABLE>
<PAGE>
First Commercial Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis
General
First Commercial Bancorp, Inc. (FCB or the Company) is a Sacramento,
California-based bank holding company which reincorporated in Delaware in 1990
and conducts its business through its sole subsidiary, First Commercial Bank, a
California state chartered bank (the Bank). The Bank commenced operations in
1979. The Bank 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 December 31, 1995, the Company had $169.5 million in total
assets, $74.0 in total loans, net of unearned discount, $156.2 million in total
deposits, and $3.6 million in total stockholders' equity.
The Bank 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. The Bank's lending
services include commercial and industrial, agricultural, real estate
construction and development, residential real estate and consumer loans. Other
financial services include credit-related insurance, automatic teller machines
and safe deposit boxes.
FCB grew substantially during the 1980s, primarily through the acquisition
of 13 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 loans to small- and
medium-sized businesses. FCB funded a substantial portion of its lending
activities through deposits from title insurance and escrow companies, and from
small- to medium-sized businesses. By December 31, 1993, FCB's total assets had
reached $349.8 million. Included in this were $83.7 million of real estate
construction and real estate secured loans, which represented 42.9% of the loan
portfolio. This asset growth was funded by $323.8 million of deposits, of which
$86.5 million, or 26.7% were title and escrow accounts. This focused lending and
deposit generation strategy involved certain risks which contributed
significantly to FCB's financial performance in recent years.
FCB reported losses of $3.5 million, $7.3 million, $18.2 million and $7.4
million for the years ended December 31, 1992, 1993, 1994 and 1995,
respectively. As a result of these substantial losses, FCB and the Bank have
been operating under the terms of a Memorandum of Understanding (MOU) and under
certain regulatory orders (Orders), respectively, 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. As a result of the recapitalization discussed
below, combined with numerous other actions which have been taken, FCB and the
Bank believe that they are in substantial compliance with most of the
requirements of the MOU and the Orders. However, full compliance, particularly
with certain capital requirements, has not yet been achieved and the Bank
continues to be designated a problem bank and is considered "troubled" for all
regulatory purposes. See the Capital section of Management's Discussion and
Analysis for additional information regarding FCB's and the Bank's regulatory
capital positions.
In response to the MOU and the Orders, and recognizing its continuing
losses and declining capital, management has focused its efforts upon
restructuring and recapitalizing FCB and the Bank during 1995. In addition to
the primary objective of obtaining a source of substantial new capital, the
strategy was to: (1) reduce total assets; (2) reduce operating expenses and
staffing levels; (3) reduce nonperforming assets, while increasing the reserve
coverage of the remaining nonperforming assets; (4) reduce the portfolio of real
estate construction loans; (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 accompanying consolidated financial
statements.
During the year ended December 31, 1995, FCB reduced its total assets 29.2%
to $169.5 million and its deposits 33.1% to $156.2 million. 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 1995. The
liquidity necessary to dispose of these two branches was partially provided by
FCB's reduction in its commercial and real estate loan portfolios. For the year
ended December 31, 1995, FCB's commercial loan portfolio decreased by 51.5% to
$33.8 million and the real estate loan portfolio decreased by 32.6% to $37.0
million.
Recapitalization
FCB continued to incur losses throughout 1995. As a result, by June 30,
1995, FCB's leverage capital ratio had decreased to (.23)%, reflecting its
negative capital position, and the Bank's leverage capital ratio had decreased
to 1.08%. The Bank's capital level caused it to be classified as "critically
undercapitalized" for regulatory purposes, subjecting it to the Prompt
Corrective Action (PCA) provisions of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 and requiring it to seek additional capital
<PAGE>
or face the possible imposition of a conservatorship or receivership within 90
days. Mr. James F. Dierberg, President and Chief Executive Officer of First
Banks, Inc., a Missouri corporation (First Banks), had provided interim
financing for the Bank by purchasing $1.5 million of Bank nonvoting preferred
stock on June 30, 1995. On August 7, 1995, FCB entered into an Amended and
Restated Stock Purchase Agreement (Stock Purchase Agreement) with First Banks
and Mr. Dierberg. The Stock Purchase Agreement, and subsequent agreements
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 116,666,666 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, the proceeds of which were used to increase
the capital of the Bank.
d. Following the completion of a Special Stockholders' Meeting on
December 27, 1995, the shares of Bank preferred stock and Bank 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, the proceeds of which, except for
$250,000 retained by FCB, were contributed to the capital of the
Bank.
e. On December 28, 1995, First Banks purchased an additional 15,000,000
shares of FCB common stock for $1.5 million, the proceeds of which
were used to increase the capital of the Bank.
As a result of these transactions, the leverage capital ratios of FCB and
the Bank as of December 31, 1995 have increased to 2.14% and 6.58%,
respectively. Although FCB continues to be considered "significantly
undercapitalized" for regulatory purposes, the Bank is considered "adequately
capitalized." As of December 31, 1995, First Banks owned 93.29% of the issued
and outstanding common stock of FCB.
Financial Condition and Average Balances
FCB's average total assets were $181.7 million at December 31, 1995,
compared with $283.6 million and $318.2 million at December 31, 1994 and 1993,
respectively. This reduction in average assets reflects FCB's strategy to reduce
assets to compensate for its eroding capital base over this time period, and to
reduce title and escrow deposits to better control FCB's dependence on volatile
liabilities. Included in the reduction in 1995 was the sale of the San Diego
branch in January 1995, which had $16.6 million of total deposits at the date of
the sale, and the closing of the Santa Rosa branch in April 1995, which had
total deposits of approximately $9.0 million at the date of closing.
The reduction in deposits was partially funded by corresponding reductions
in loans, net of unearned discount, which were $74.0 million at December 31,
1995, compared with $130.2 million and $194.4 million at December 31, 1994 and
1993, respectively. This reduction reflects FCB's efforts to reduce its level of
problem assets, and in particular, the efforts to reduce its concentration in
real estate construction and development and in commercial real estate loans.
Construction and development loans decreased to $4.1 million at December 31,
1995, from $16.4 million and $39.9 million at December 31, 1994 and 1993,
respectively. Other loans secured by real estate have been reduced to $32.9
million at December 31, 1995, compared with $38.4 million and $43.8 million at
December 31, 1994 and 1993, respectively.
<PAGE>
The following table sets forth certain information relating to FCB's
average balance sheets, and reflects the average yield earned on
interest-earning assets, the average cost of interest-bearing liabilities and
the resulting net interest income for the periods indicated.
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1995 1994 1993
---- ---- ----
Interest Interest Interest
Average income/ Yield/ Average income/ Yield/ Average income/ Yield
Assets balance expense rate balance expense rate balance expense rate
- ------ ------- ------- ---- ------- ------- ---- ------- ------- ----
(dollars expressed in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans (1) (2) (3) $ 97,875 9,734 9.95% $166,866 15,126 9.07% $211,772 17,787 8.40%
Investment securities (3) 32,994 1,981 6.00 20,696 1,109 5.36 19,831 1,286 6.48
Federal funds sold and
repurchase agreements 34,946 2,035 5.82 46,249 2,026 4.38 29,470 898 3.05
Other 10 0 - 2,560 95 3.71 3,418 129 3.77
------ ----- ----- ----- ----- ---
Total interest-earning
assets 165,825 13,750 8.29 236,371 18,356 7.77 264,491 20,100 7.60
------ ==== ------ ==== ------ ====
Nonearning assets 15,859 47,202 53,713
------ ------ ------
Total assets $181,684 $283,573 $318,204
======== ======== ========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 48,036 1,082 2.25% 82,088 1,989 2.42% 88,002 2,405 2.73%
Savings deposits 18,188 481 2.65 24,032 589 2.45 24,846 723 2.91
Time deposits of $100
or more 19,863 1,054 5.31 29,281 1,123 3.84 38,159 1,131 2.96
Other time deposits 55,492 3,366 6.07 49,919 2,157 4.32 45,453 2,026 4.46
------ ----- ------ ----- ------ -----
Total interest-bearing
deposits 141,579 5,983 4.23 185,320 5,858 3.16 196,460 6,285 3.20
Notes payable and other
borrowings 1,566 153 9.77 747 52 6.96 1,234 85 6.89
----- ----- --- -- ----- --
Total interest-bearing
liabilities 143,145 6,136 4.29 186,067 5,910 3.18 197,694 6,370 3.22
------- ----- ==== ----- ==== ----- ====
Noninterest-bearing liabilities:
Demand deposits 34,096 79,340 91,966
Other liabilities 820 1,618 1,030
------ ------ ------
Total liabilities 178,061 267,025 290,690
Stockholders' equity 3,623 16,548 27,514
------- ------- -------
Total liabilities and
stockholders' equity $ 181,684 $283,573 $318,204
========== ======== ========
Net interest income $ 7,614 $ 12,446 $ 13,730
========= ========= ========
Net interest margin 4.59% 5.27% 5.19%
==== ==== ====
</TABLE>
_______________
(1) For purposes of these computations, nonaccrual loans are included in the
average loan amounts.
(2) Interest income on loans includes loan fees.
(3) FCB has no tax-exempt income.
<PAGE>
The following table indicates the changes in interest income and interest
expense which are attributable to changes in average volume and changes in
average rates, in comparison with the same period in the preceding year. The
change in interest due to the combined rate/volume variance has been allocated
to rate and volume changes in proportion to the dollar amounts of the change in
each.
<TABLE>
<CAPTION>
Increase (decrease) attributable to change in
---------------------------------------------
December 31, 1995 compared December 31, 1994 compared
to December 31, 1994 to December 31, 1993
-------------------- --------------------
Net Net
Volume Rate Change Volume Rate Change
------ ---- ------ ------ ---- ------
(dollars expressed in thousands)
Interest earned on:
<S> <C> <C> <C> <C> <C> <C>
Loans (1) (2) $ (7,045) 1,653 (5,392) (3,905) 1,244 (2,661)
Investment securities (3) 726 146 872 53 (230) (177)
Federal funds sold and
repurchase agreements (1,480) 1,489 9 675 453 1,128
Other (127) 32 (95) (32) (2) (34)
------ ----- ------ ----- ------ -----
Total interest income (7,926) 3,320 (4,606) (3,209) 1,465 (1,744)
------ ----- ------ ------ ----- ------
Interest paid on:
Interest-bearing demand deposits (776) (131) (907) (155) (261) (416)
Savings deposits (163) 55 (108) (23) (111) (134)
Time deposits of $100 or more (425) 356 (69) (298) 290 (8)
Other time deposits 241 968 1,209 196 (65) 131
Other borrowed funds 74 27 101 (33) 0 (33)
----- ----- ----- ---- ---- ---
Total interest expense (1,049) 1,275 226 (313) (147) (460)
------ ----- --- ---- ---- ----
Net interest income $ (6,877) 2,045 (4,832) (2,896) 1,612 (1,284)
====== ===== ====== ====== ===== ======
</TABLE>
________________________
(1) For purposes of these computations, nonaccrual loans are included in
the average loan amounts. (2) Interest income on loans includes loan fees. (3)
FCB has no tax-exempt income.
Net Interest Income
The primary source of FCB's income is net interest income, which is the
difference between the interest earned on assets and the interest paid on
liabilities. Net interest income was $7.61 million, or 4.59% of average earning
assets, for the year ended December 31, 1995, compared with $12.45 million, or
5.27% of average earning assets, and $13.73 million, or 5.19% of average earning
assets, for the years ended December 31, 1994 and 1993, respectively.
The decrease in net interest income for the three-year period ended
December 31, 1995 is primarily attributable to the decrease in average
interest-earning assets during this period and, to a lesser degree, a shift in
the composition of such assets from loans, which provide substantially more net
interest income, to investment securities and cash and cash equivalents. The
decrease in average interest-earning assets and the change in the composition of
interest-earning assets is consistent with FCB's recapitalization strategy.
Comparison of Results of Operations for 1995 and 1994
Net Loss
Net loss for the year ended December 31, 1995 was $7.43 million in
comparison to a net loss of $18.19 million for the same period in 1994. The
improvement in the operating results for 1995, in comparison to 1994, is
attributable to reductions in the provision for possible loan losses and
noninterest expenses, partially offset by a reduction in net interest income. As
previously discussed, net interest income was $7.61 million, or 4.59% of average
earning assets, for 1995, compared to $12.45 million, or 5.27% of average
earning assets, for 1994.
<PAGE>
Provision for Possible Loan Losses
The provision for possible loan losses was $3.89 million and $9.81 million
for the years ended December 31, 1995 and 1994, respectively. Net loan
charge-offs were $5.91 million and $9.71 million for the years ended December
31, 1995 and 1994, respectively. The allowance for possible loan losses was
$5.39 million, or 7.28% of loans, net of unearned discount, at December 31,
1995, compared to $7.44 million, or 5.71% of loans, net of unearned discount, at
December 31, 1994. The reduction in the allowance for possible loan losses
reflects the decrease in the amount of nonperforming and criticized loans during
the year as well as the overall decline in the total loans outstanding. However,
the allowance for possible loan losses as a percentage of loans increased in
recognition of the disproportionate affect which the amount of nonperforming and
criticized loans has on a decreasing portfolio. As more fully discussed in the
Financial Condition and Average Balances and Lending and Credit Management
sections of Management's Discussion and Analysis, the decrease in the provision
for possible loan losses during 1995 is primarily attributable to this reduction
in the loan portfolio, including nonperforming loans, and the stabilizing market
values of real estate within FCB's market area.
Noninterest Income and Expense
Noninterest income decreased by $640,000 to $1.33 million from $1.97
million for the years ended December 31, 1995 and 1994, respectively.
Service charges on deposit accounts and customer service fees decreased by
$479,000 to $801,000 from $1.28 million for the years ended December 31, 1995
and 1994, respectively. The decrease is primarily attributable to the sale of
the San Diego branch in January 1995 and the closure of the Santa Rosa branch in
April 1995, which resulted in a reduction in accounts on which service charges
could be assessed.
Mortgage brokerage activities of FCB were discontinued in April 1994.
Mortgage brokerage fee income for the year ended December 31, 1994 was $68,000.
In addition, FCB discontinued its in-house credit card program during the second
quarter of 1995, resulting in a decrease in related fee income of $49,000 to
$19,000 from $68,000 for the years ended December 31, 1995 and 1994,
respectively.
The following table summarizes noninterest expense for the years ended
December 31, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
Increase (Decrease)
-------------------
1995 1994 Amount Percent
---- ---- ------ -------
(dollars expressed in thousands)
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 4,117 6,568 (2,451) (37.32)%
Occupancy, net of rental income 1,603 1,443 160 11.09
Furniture and equipment 581 930 (349) (37.53)
Federal Deposit Insurance Corporation
premiums 629 820 (191) (23.29)
Postage, printing and supplies 297 372 (75) (20.16)
Legal, examination and professional fees 1,164 725 439 60.55
Data processing 145 80 65 81.25
Communications 210 82 128 156.10
Write-downs of foreclosed real estate 1,391 4,961 (3,570) (71.96)
Expenses associated with holding
foreclosed real estate 1,383 418 965 230.86
Net loss (gain) upon sale of foreclosed
real estate (143) 656 (799) (121.80)
Amortization and write-off of acquisition
intangibles - 1,047 (1,047) (100.00)
Other 1,212 2,291 (1,079) (47.10)
------ ------ ------
Total noninterest expense $12,589 20,393 (7,804) (38.27)
====== ====== ====== ======
</TABLE>
Noninterest expense decreased by $7.80 million to $12.59 million from
$20.39 million for the years ended December 31, 1995 and 1994, respectively.
While virtually each functional area of FCB has experienced reductions in
noninterest expense, the decrease is primarily attributable to reductions in
salaries and employee benefits, losses and expenses on foreclosed real estate
and amortization and write-off of acquisition intangibles.
<PAGE>
The decrease in salaries and employee benefits of $2.45 million to $4.12
million from $6.57 million for the years ended December 31, 1995 and 1994,
respectively, relates primarily to reductions in staff. FC's staff was reduced
to 63 full-time equivalent employees at December 31, 1995, from 150 full-time
equivalent employees at December 31, 1994. The decrease is attributable to the
sale and closure of the San Diego and Santa Rosa branches, respectively, and in
December 1995, FCB's conversion to First Banks' data processing and centralized
operations. Offsetting the decrease in salaries and employee benefits for 1995
was $299,000 of severance costs. Those severance costs are associated with the
realignment of staff in connection with the aforementioned conversion and
centralization of certain operating functions, as well as an overall
reevaluation of FCB's personnel requirements considering other services and
personnel available through First Banks.
Contributing further to the decrease in noninterest expense was a decrease
of $3.41 million in losses and expenses on foreclosed property to $2.63 million
from $6.04 million for the years ended December 31, 1995 and 1994, respectively.
The reductions in write-downs reflect the decreasing volume of foreclosed real
estate and the stabilizing market values of properties that were previously
foreclosed upon. The increase in the expenses associated with holding foreclosed
real estate is primarily attributable to the accrual of estimated costs to be
incurred in connection with improvements to an undeveloped residential real
estate project. The resulting net gains upon sales are reflective of the
stabilizing market values for the properties sold during 1995.
In addition, furniture and equipment decreased $349,000 to $581,000 from
$930,000 for the years ended December 31, 1995 and 1994, respectively. The
decrease is primarily due to the reduction in depreciation expense related to
data processing equipment which was fully depreciated during 1994.
Amortization and write-off of acquisition intangibles was $1.05 million for
the year ended December 31, 1994, which included the write-off of the remaining
intangible of $992,000 initially recorded in 1988 upon FCB's acquisition of
three branches of Citizens Bank of Roseville.
Offsetting the decrease in noninterest expense was an increase in occupancy
expenses of $160,000 to $1.60 million from $1.44 million for the year ended
December 31, 1995 and 1994, respectively. The increase is primarily attributable
to a nonrecurring adjustment to write-off the remaining leasehold improvements
of the Santa Rosa branch, which was closed during 1995, and the former
administrative offices vacated in September 1995 to more economical offices
available at FCB's Howe Avenue branch.
Income Taxes
The accompanying consolidated statement of operations reflects a current
income tax benefit of $101,000 for the year ended December 31, 1995. This
compares to a $2.41 million provision for income taxes for the same period in
1994. For 1995, FCB realized a tax benefit of $101,000 resulting from its
inclusion in the consolidated tax return of First Banks for the period
subsequent to August 22, 1995, during which First Banks owned more than 80% of
the outstanding stock of the Bank. If First Banks' ownership were to decrease
below 80%, any subsequent tax benefits to be realized by FCB would be dependent
on the ability of FCB to generate taxable income. As more fully described in
Note 19 to the accompanying consolidated financial statements, First Banks'
ownership interest in FCB may fall below 80% depending on the results of the
Rights Offering and Dividend Exchange offer commenced after December 31, 1995.
The provision for income taxes for the year ended December 31, 1994
reflects the write-off of previously recorded deferred income tax assets. In
recognition of the substantial loss reported for the year ended December 31,
1994, FCB concluded that it no longer met the realization standards for its
income tax assets as embodied in Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes (SFAS 109). See Note 8 to the accompanying
consolidated financial statements for additional information regarding income
taxes.
Comparison of Results of Operations for 1994 and 1993
Net Loss
Net loss for the year ended December 31, 1994 was $18.19 million, compared
with a net loss of $7.31 million for the year ended December 31, 1993. The
operating results for 1994 reflect the additional provision for possible loan
losses and write-downs and other expenses incurred in connection with the
increasing levels of foreclosed real estate. These valuation adjustments became
pronounced during 1994 as foreclosures increased and the economic values of the
collateral securing FCB's real estate loan portfolio, including real estate
development projects, continued to decline.
As previously discussed, net interest income was $12.45 million, or 5.27%
of average earning assets, for 1994, compared to $13.73 million, or 5.19% of
average earning assets, for 1993.
<PAGE>
Provision for Possible Loan Losses
The provision for possible loan losses was $9.81 million for the year ended
December 31, 1994, compared to $8.10 million for 1993. Net loan charge-offs
increased to $9.71 million for 1994, compared to $6.25 million for 1993. The
provision for possible loan losses reflects FCB management's assessment of the
credit quality of its loan portfolio, recognizing particularly the amount of
nonperforming and criticized loans in the loan portfolio and the effects which
regional economic conditions might have on the performance of the remainder of
the portfolio. The allowance for possible loan losses at December 31, 1994
increased to $7.44 million, or 5.71% of loans, net of unearned discount, from
$7.34 million, or 3.77% of loans, net of unearned discount, at December 31,
1993.
Noninterest Income and Expense
Noninterest income was $1.97 million for the year ended December 31, 1994,
compared to $3.0 million for the same period in 1993, representing a decrease of
$1.03 million. The decrease is attributable to reduced service charges on
deposit accounts of $144,000, primarily attributable to the decrease in the
number of deposit accounts. Contributing further to the decrease was FCB's
decision to discontinue its mortgage brokerage division in April 1994. Mortgage
brokerage fee income decreased by $277,000 to $68,000 for the year ended
December 31, 1994, from $345,000 for the same period in 1993. In addition,
noninterest income for the year ended December 31, 1993 included $915,000 from
the settlement of three outstanding lawsuits, in comparison to $290,000 from the
settlement of a lawsuit during 1994.
The following table summarizes noninterest expense for the years ended
December 31, 1994 and 1993, respectively.
<TABLE>
<CAPTION>
Increase (Decrease)
-------------------
1994 1993 Amount Percent
---- ---- ------ -------
(dollars expressed in thousands)
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 6,568 6,951 (383) (5.51)%
Occupancy, net of rental income 1,443 1,475 (32) (2.17)
Furniture and equipment 930 1,075 (145) (13.49)
Federal Deposit Insurance Corporation
premiums 820 866 (46) (5.31)
Postage, printing and supplies 372 527 (155) (29.41)
Legal, examination and professional fees 725 843 (118) (14.00)
Data processing 80 72 8 11.11
Communications 82 162 (80) (49.38)
Write-downs of foreclosed real estate 4,961 2,960 2,001 67.60
Expenses associated with holding foreclosed
real estate 418 1,746 (1,328) (76.06)
Net loss upon sale of foreclosed real estate 656 99 557 562.63
Amortization and write-off of acquisition
intangibles 1,047 73 974 1,334.25
Other 2,291 2,854 (563) (19.73)
------ ----- ----
Total noninterest expense $ 20,393 19,703 690 3.50
====== ====== === ====
</TABLE>
Noninterest expense increased by $690,000 to $20.39 million for the year
ended December 31, 1994, from $19.70 million for the year ended December 31,
1993. Although most expense areas decreased during this period, reflecting the
general reduction in the Bank's scope of operations, this overall decrease was
offset by significant increases in expenses primarily affected by the Bank's
asset quality problems. Salaries and employee benefits decreased by $383,000
during 1994 in comparison to 1993. The decrease is primarily attributable to
reductions in staff throughout 1994 to 150 full-time equivalent employees from
185 full-time equivalent employees at December 31, 1994 and 1993, respectively.
Expenses related to furniture and equipment decreased by $145,000 to
$930,000 from $1.08 million for the years ended December 31, 1994 and 1993,
respectively. The decrease is primarily due to the reduction in depreciation
expense related to data processing equipment which was fully depreciated in July
1994.
<PAGE>
Offsetting the aforementioned decreases was an increase in losses and
expenses on foreclosed real estate of $1.23 million to $6.04 million from $4.81
million for the years ended December 31, 1994 and 1993, respectively. The
write-downs reflect the increased volume of foreclosed real estate and the
continued declines in market value that FCB experienced after the properties
were foreclosed. The decrease in the expenses associated with holding foreclosed
real estate is consistent with the decrease in other real estate to $5.22
million from $13.17 million at December 31, 1994 and 1993, respectively. The
resulting net losses upon sales are reflective of FCB's decision to aggressively
dispose of these properties.
Amortization and write-off of acquisition intangibles increased to $1.05
million for the year ended December 31, 1994, compared with $73,000 for the year
ended December 31, 1993, or by $977,000. The increase is attributable to the
write-off of the remaining intangible of $992,000 initially recorded in 1988
upon the acquisition of three branches of Citizens Bank of Roseville.
Income Taxes
The provision for income taxes for the year ended December 31, 1994
reflects the write-off of previously recorded deferred income tax assets. In
recognition of the substantial loss reported for the year ended December 31,
1994, FCB concluded that it no longer met the realization standards for its
income tax assets as embodied in SFAS 109.
The benefit for income taxes for the year ended December 31, 1993 was $3.77
million and consisted of $2.68 million of income tax benefits available from the
carryback of the operating loss incurred during 1993 to prior years and the
recognition of a deferred tax asset of $1.09 million.
See Note 8 to the accompanying consolidated financial statements for
additional information regarding income taxes.
Lending and Credit Management
The primary source of income for FCB is the interest and fees earned on its
loan portfolio. This income was 70.79% and 82.40% of total interest income for
the years ended December 31, 1995 and 1994, respectively. The reduction in
interest income reflects the overall decrease in the amount of loans
outstanding, particularly in the commercial and industrial and real estate
construction portfolios, along with the changing composition of interest-earning
assets from loans to investment securities and other short-term investments.
Loans, net of unearned discount, were $74.0 million at December 31, 1995,
compared with $130.2 million at December 31, 1994.
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 year ended December 31, 1995, the
average yield on the Bank's loan portfolio was 9.95%, compared to 6.00% 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 income.
FCB's strategy for addressing 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. This required the lending
staff to focus its efforts on the collection, strengthening and restructuring of
loans considered problems, rather than on the origination of new loans to
replace them. The effects of this were further compounded during 1995 by the
resignation of a majority of the Bank's loan officers.
With the completion of a substantial recapitalization of the Bank, and the
continued reduction in the level of problem assets, management of the Bank has
initiated a plan for the renewal of business development efforts within its
markets and the rejuvenation of its commercial banking business. A critical
element of these efforts is the restaffing of the lending organization, which
has now been substantially completed.
Management believes that the remaining elements required to return the Bank
to a satisfactory condition are: (1) the rapid reduction in the portfolio of
problem assets to a more acceptable level; (2) relief from all or most of the
Orders; (3) the rebuilding of the Bank's loan portfolio by developing new, high
quality business; and (4) the continued reduction of noninterest expense.
Consequently, the measures taken to regenerate a quality loan portfolio are an
integral part of this process.
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
<PAGE>
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 other real estate 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.
The following table shows the composition of the loan portfolio by major
category and the percent of each to the total portfolio as of the dates
presented:
<TABLE>
<CAPTION>
December 31,
------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(dollars expressed in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and financial $ 33,752 45.6% $ 69,597 53.5% $ 103,949 53.5% $ 119,115 50.7% $ 132,928 45.0%
Real estate construction
and development 4,094 5.5 16,386 12.6 39,879 20.5 59,228 25.2 112,714 38.1
Real estate mortgage 32,857 44.4 38,439 29.5 43,803 22.5 48,060 20.5 40,303 13.6
Consumer and in-
stallment, net of
unearned discount 3,312 4.5 5,750 4.4 6,746 3.5 8,520 3.6 9,816 3.3
------- ---- ----- --- ----- --- ----- --- ----- -----
Total loans $ 74,015 100.0% $130,172 100.0% $ 194,377 100.0% $ 234,923 100.0% $ 295,761 100.0%
======== ===== ======== ===== ========= ===== ========= ===== ========= =====
</TABLE>
Loans at December 31, 1995 mature as follows:
<TABLE>
<CAPTION>
Over one year
through five years Over five years
------------------ ---------------
One year Fixed Floating Fixed Floating
or less rate rate rate rate Total
------- ---- ---- ---- ---- -----
(dollars expressed in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial and financial $ 21,037 1,377 6,923 500 3,915 33,752
Real estate construction
and development 4,006 - 88 - - 4,094
Real estate mortgage 5,899 7,798 9,425 3,050 6,685 32,857
Consumer and installment 1,375 1,122 667 42 106 3,312
----- ----- ----- ----- --- -----
$ 32,317 10,297 17,103 3,592 10,706 74,015
========= ====== ====== ===== ====== ======
</TABLE>
<PAGE>
The following table is a summary of loan loss experience for the five years
ended December 31, 1995:
<TABLE>
<CAPTION>
December 31,
------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(dollars expressed in thousands)
Allowance for possible loan losses,
<S> <C> <C> <C> <C> <C>
beginning of period $ 7,437 7,337 5,484 5,003 3,050
-------- ----- ----- ----- -----
Loans charged off:
Commercial and financial (4,880) (3,712) (2,455) (503) (1,270)
Real estate construction and
development (430) (5,591) (3,831) (5,991) (1,574)
Real estate mortgage (670) (661) (164) (354) (11)
Consumer and installment (290) (59) (59) (136) (204)
------ ------- ----- ------ -----
Total charge-offs (6,270) (10,023) (6,509) (6,984) (3,059)
------ ------- ------ ------ ------
Recoveries of loans previously charged off:
Commercial and financial 306 176 219 182 140
Real estate construction and
development 36 125 - - -
Real estate mortgage - - 1 - -
Consumer and installment 21 13 42 23 52
----- ----- ----- ----- -----
Total recoveries 363 314 262 205 192
----- ------ ----- ------ ------
Net loans charged-off (5,907) (9,709) (6,247) (6,779) (2,867)
------ ------ ------ ------ ------
Provision for possible loan losses 3,885 9,809 8,100 7,260 4,820
------ ----- ----- ----- -----
Reduction in allowance for possible
loan losses transferred with
branch sale (27) 0 0 0 0
--- --- ---- - -
Allowance for possible loan losses,
end of period $ 5,388 7,437 7,337 5,484 5,003
======== ===== ===== ===== =====
Loans outstanding:
Average $ 97,875 172,758 218,427 262,752 305,000
End of period 74,015 130,172 194,377 234,923 295,761
====== ======= ======= ======= =======
Ratio of allowance for possible
loan losses to loans outstanding:
Average 50% 4.30% 3.36% 2.09% 1.64%
End of period 7.28 5.71 3.77 2.33 1.69
Ratio of net charge-offs to average
loans outstanding 6.04 5.62 2.86 2.58 0.94
==== ==== ==== ==== ====
Allocation of allowance for possible loan
losses at end of period:
Commercial and financial $ 2,125 5,076 2,971 1,613 2,160
Real estate construction and
development 1,128 971 3,950 3,624 2,496
Real estate mortgage 1,866 1,315 353 134 303
Consumer and installment 269 75 63 113 44
------ ----- ----- ----- -----
Total $ 5,388 7,437 7,337 5,484 5,003
======= ===== ===== ===== =====
Percent of categories to loans,
net of unearned discount:
Commercial and financial 45.60% 53.47% 53.48% 50.70% 44.94%
Real estate construction and
development 5.53 12.59 20.52 25.21 38.11
Real estate mortgage 44.39 29.53 22.54 20.46 13.63
Consumer and installment 4.48 4.41 3.46 3.63 3.32
------ ------ ------ ------ ------
Total 100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
</TABLE>
<PAGE>
Nonperforming assets include nonaccrual loans and foreclosed property. The
following table presents the categories of nonperforming assets and loans past
due 30 days or more for the past five years:
<TABLE>
<CAPTION>
December 31,
------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(dollars expressed in thousands)
Nonperforming loans:
<S> <C> <C> <C> <C> <C>
Commercial and financial - nonaccrual $ 2,371 5,968 3,324 2,405 314
Real estate construction and development -
nonaccrual 484 3,921 16,184 24,166 7,486
Real estate mortgage:
Nonaccrual 1,146 1,355 1,592 9 -
Restructured 525 710 1,000 1,000 -
Consumer and installment -
nonaccrual - 189 - 25 22
----- ----- ------ ------ -------
Total nonperforming loans 4,526 12,143 22,100 27,605 7,822
Foreclosed property, net 1,380 5,222 13,171 17,994 6,560
----- ----- ------ ------ -----
Total nonperforming assets $ 5,906 17,365 35,271 45,599 14,382
===== ====== ====== ====== ======
Loans, net of unearned discount $ 74,015 130,172 194,377 234,923 295,761
====== ======= ======= ======= =======
Loans past due:
Over 30 days to 90 days $ 3,015 4,514 536 4,942 10,463
Over 90 days and still accruing 2,249 22 50 300 22,284
-- ----- -- -- --- ----- ------
Total past-due loans $ 5,264 4,536 586 5,242 32,747
===== ===== === ===== ======
Allowance for possible loan losses to loans 7.28% 5.71% 3.77% 2.33% 1.69%
Nonperforming loans to loans 6.11 9.33 11.37 11.75 2.64
Allowance for possible loan losses
to nonperforming loans 119.05 61.25 33.20 19.87 63.96
Nonperforming assets to total loans
and foreclosed property 7.83 12.83 16.99 18.03 4.76
==== ===== ===== ===== ====
</TABLE>
As of December 31, 1995 and 1994, $11.94 million and $18.62 million,
respectively, of loans not included in the table above were identified by
management as having potential credit problems which raised doubts as to the
ability of the borrowers to comply with the present loan repayment terms.
FCB does not lend funds for foreign loans. Additionally, FCB does not have
any concentrations of loans exceeding 10% of total loans which are not otherwise
disclosed in the loan portfolio composition table. FCB does not have a material
amount of other interest-bearing assets which would have been included in
nonaccrual, past due or restructured loans if such assets were loans.
FCB's loan portfolio is concentrated in 20 loans, of which one loan
exceeded 25% of the Bank's capital, at December 31, 1995. Outstanding balances
and unfunded loan commitments to these borrowers were $23.6 million and $7.6
million, respectively, and represented 32.2% of all loans and commitments at
December 31, 1995. Four of these loans totaling $7.4 million have been
identified as having potential credit problems which raised doubts as to the
ability of the borrowers to comply with the present loan repayment terms. One
loan for $754,000 is on nonaccrual status.
FCB's credit management policy and procedures focus on identifying and
managing credit exposure. FCB utilizes a lender-initiated system of rating
credits, which is subsequently tested by internal loan review and bank
regulators. Adversely rated credits are included on a watch list, and are
reviewed at least every four months. Loans may be added to the watch list for
reasons which are temporary and correctable, such as the absence of current
financial statements of the borrower, or a deficiency in loan documentation.
Other loans are added as soon as any problem is detected which might affect the
borrower's ability to meet the terms of the loan. This could be initiated by the
delinquency of a scheduled loan payment, a deterioration in the borrower's
financial condition identified in a review of periodic financial statements, a
decrease in the value of the collateral securing the loan, or a change in the
economic environment within which the borrower operates.
<PAGE>
In addition to the rating system, the credit administration coordinates the
periodic credit reviews and provides management with information on risk levels,
trends, delinquencies and portfolio concentrations.
The allowance for possible loan losses is based on past loan loss
experience, FCB management's evaluation of the quality of the loans in the
portfolio and the anticipated effect of national and local economic conditions
relative to the ability of loan customers to repay. Each month, the allowance
for possible loan losses is reviewed relative to the watch list and other data
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
consolidated statements of operations.
Investment Securities
As of January 1, 1994, FCB adopted Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities (SFAS 115). SFAS 115 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, net of the
related tax effects, as a separate component of stockholders' equity. As of
January 1, 1994, a security with an amortized cost of $2.09 million and a market
value of $2.10 million was classified as "held-to-maturity." Securities with an
amortized cost of $42.34 million and a market value of $42.68 million were
classified as "available-for-sale." The effect of adopting SFAS 115 was to
record an unrealized gain of $342,000 which was reported, net of the related tax
effects, as an increase in stockholders' equity as of January 1, 1994. At
December 31, 1995 and 1994, FCB's investments and stockholders' equity reflected
an adjustment for the unrealized losses of $58,000 and $599,000, respectively.
Investment securities increased by $56.56 million to $74.25 million from
$17.69 million at December 31, 1995 and 1994, respectively. The increase is
attributable to the reduction in loans and a shift from federal funds sold and
securities purchased under agreements to resale to short term available-for-sale
securities as they provided a more consistent and attractive return.
Deposits
Deposits are the primary source of funds for FCB. The following table sets
forth the distribution of FCB's deposit accounts at the dates indicated and the
weighted average interest rates by category of deposit:
<TABLE>
<CAPTION>
December 31,
------------
1995 1994 1993
---- ---- ----
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
(dollars expressed in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand $ 27,517 -% $ 56,483 -% $ 134,961 -%
Interest-bearing demand and
money market accounts 39,646 2.43 68,840 2.39 85,081 2.49
Savings 16,707 2.50 21,695 2.44 24,611 2.69
Time deposits of $100 or more 18,764 5.81 25,317 4.52 30,862 3.59
Public funds 650 5.68 200 5.64 3,300 4.21
Other time 52,880 5.94 61,001 5.10 44,981 3.65
------- ==== ------ ==== ------ ====
Total deposits $ 156,164 $233,536 $ 323,796
======= ======== ==========
</TABLE>
Interest Rate Risk Management
In financial institutions, the maintenance of a satisfactory level of net
interest income is a primary factor in achieving acceptable income levels.
However, the maturity and repricing characteristics of the institution's loan
and investment portfolios, relative to those within its deposit structure, may
differ significantly. Furthermore, the ability of borrowers to repay loans and
depositors to withdraw funds prior to stated maturity dates introduces divergent
option characteristics which operate primarily as interest rates change. This
<PAGE>
causes various elements of the institution's balance sheet to react in different
manners and at different times relative to changes in interest rates, thereby
leading to increases or decreases in net interest income over time. Depending
upon the nature and velocity of interest rate movements and their effect on the
specific components of the institution's balance sheet, the effects on net
interest income can be substantial. Consequently, a fundamental requirement in
managing a financial institution is establishing effective control of the
exposure of the institution to changes in interest rates.
FCB manages its interest rate risk by: (1) maintaining an Asset Liability
Committee (ALCO) responsible to FCB's Board of Directors to review the overall
interest rate risk management activity and approve actions taken to reduce risk;
(2) maintaining an effective monitoring mechanism to determine FCB's exposure to
changes in interest rates; and (3) coordinating the lending, investing and
deposit-generating functions to control the assumption of interest rate risk.
The objective of these procedures is to limit the adverse impact which changes
in interest rates may have on net interest income.
The ALCO has overall responsibility for the effective management of
interest rate risk and the approval of policy guidelines. The ALCO includes
senior executives of investments, credit, retail banking and finance, and
certain other officers. The ALCO is supported by the Asset Liability Management
Group which monitors interest rate risk, prepares analyses for review by the
ALCO and implements actions which are either specifically directed by the ALCO
or established by policy guidelines. To measure the effect of interest rate
changes, FCB recalculates its net income over a one-year horizon on a pro forma
basis assuming instantaneous, permanent parallel and non-parallel shifts in the
yield curve, in varying amounts both upward and downward.
In addition to the simulation model employed by FCB, a more traditional
interest rate sensitivity position is prepared and reviewed in conjunction with
the results of the simulation model. The following table presents the projected
maturities and periods to repricing of FCB's rate sensitive assets and
liabilities as of December 31, 1995, adjusted to account for anticipated
prepayments:
<TABLE>
<CAPTION>
Over three Over six
Three through through Over one Over
months six twelve through five
Immediate or less months months five years years Total
--------- ------- ------ ------ ---------- ----- -----
(dollars expressed in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans and lease receivable (1) $ 10,136 4,054 6,081 11,150 42,571 1,014 75,006
Investment securities 14,606 8,520 21,910 24,344 4,869 - 74,249
Federal funds sold 9,000 - - - - - 9,000
------ ----- ------ ------ ------ ----- -----
Total interest-earning assets 33,742 12,574 27,991 35,494 47,440 1,014 158,255
------ ------ ------ ------ ------ ----- -------
Interest-bearing liabilities:
Interest-bearing demand accounts - 7,166 4,454 2,905 2,130 2,711 19,366
Money market demand accounts 20,280 - - - - - 20,280
Savings accounts - 2,840 2,339 2,005 2,840 6,683 16,707
Time deposits - 39,159 9,037 20,082 4,016 - 72,294
12% convertible debenture - - - - 6,500 - 6,500
-- ------ ------ ------ ------ ----- ----- -----
Total interest-bearing liabilities 20,280 49,165 15,830 24,992 15,486 9,394 135,147
------ ------ ------ ------ ------ ----- -------
Interest-sensitivity gap:
Periodic $ 13,462 (36,591) 12,161 10,502 31,954 (8,380) 23,108
======
Cumulative 13,462 (23,129) (10,968) (466) 31,488 23,108
====== ======= ======= ==== ====== ======
Ratio of interest-sensitive assets
to interest-sensitive liabilities:
Periodic 1.66% 0.26 1.77 1.42 3.06 0.11 1.17
====
Cumulative 1.66 0.67 0.87 0.99 1.25 1.17
==== ==== ==== ==== ==== ====
</TABLE>
______________________
(1) Loans presented net of unearned discount
Management makes certain assumptions in preparing the table above. These
assumptions include: loans will repay at historic repayment speeds;
mortgage-backed securities, included in investment securities, will repay at
projected repayment speeds; interest-bearing demand accounts and savings
accounts are interest-sensitive at a rate of 37% and 17%, respectively, of the
remaining balance for each period presented; and fixed maturity deposits will
not be withdrawn prior to maturity.
At December 31, 1995, FCB was liability-sensitive on a cumulative basis
through the twelve-month time horizon by $465,000, or .27% of total assets,
<PAGE>
which compares to a liability-sensitive position on a cumulative basis over the
same time horizon of $5.99 million, or 2.50% of total assets, at December 31,
1994. The reduced liability-sensitive position is consistent with FCB's
restructuring strategy.
The interest-sensitivity position is one of several measurements of the
impact of interest rate changes on net interest income. Its usefulness in
assessing the effect of potential changes in net interest income varies with the
constant change in the composition of FCB's assets and liabilities. For this
reason, FCB places greater emphasis on a simulation model for monitoring its
interest rate risk exposure.
Capital
For each of the three years ended December 31, 1994, FCB and the Bank
incurred substantial operating losses related primarily to asset quality
problems. These problems continued throughout 1995, resulting in the elimination
of FCB's stockholders' equity, and the substantial reduction of the Bank's
stockholders' equity, by June 30, 1995. The Bank's reduced capital level caused
it to be classified as"critically undercapitalized" for regulatory purposes,
subjecting it to the PCA provisions of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989. These provisions required it to seek
additional capital or face the possible imposition of a conservatorship or
receivership within 90 days. As more fully discussed in the Recapitalization
section of Management's Discussion and Analysis and Note 2 to the accompanying
consolidated financial statements, in order to achieve the capital levels
required, on August 7, 1995, FCB and the Bank entered the Stock Purchase
Agreement with First Banks and Mr. Dierberg. As a result of the Stock Purchase
Agreement and subsequent agreements entered into with First Banks, Tier 1
capital ratios of FCB and the Bank as of December 31, 1995 have increased to
2.14% and 6.58%, respectively. Although FCB continues to be considered
"significantly undercapitalized" for regulatory purposes, the Bank is considered
"adequately capitalized." As of December 31, 1995, First Banks owned 93.29% of
the issued and outstanding common stock of FCB.
In addition, and as more fully described in Note 19 to the accompanying
consolidated financial statements, subsequent to December 31, 1995, FCB has
commenced an offering, to its stockholders, other than First Banks, of an
aggregate of $5.0 million of newly-issued common stock at $.10 per share. A
maximum of $1.0 million of this, if not otherwise subscribed to, may be offered
to individuals who are not stockholders 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. If this offering is fully subscribed, the
capital of FCB and the Bank would exceed regulatory requirements. In addition,
First Banks' ownership in FCB would be reduced to 50.25%, prior to the
conversion of the debentures, or 66.95%, if the debentures are immediately
converted. First Banks has committed that it will purchase on the Offering as a
standby-purchaser, after the expiration of the Rights Offering and Dividend
Exchange Offer, if necessary, such number of shares as may be required to raise
the Bank's Tier 1 capital ratio to 7% as required by the Capital Impairment
Order of the SBD.
Risk-based capital guidelines for financial institutions are designed to
relate regulatory capital requirements to the risk profiles of the specific
institutions and to provide more uniform requirements among the various
regulators. FCB and the Bank are required to maintain a minimum risk-based
capital to risk-weighted assets ratio of 8.0%, with at least 4.0% being "Tier 1"
capital. Tier 1 capital is composed of total stockholders' equity less
intangible assets. In addition, a minimum leverage ratio (Tier 1 capital to
total assets) of 3.00% plus an additional cushion of 100 to 200 basis points is
expected.
At December 31, 1995 and 1994, FCB's and the Bank's capital ratios were as
follows:
Risk-Based Capital Ratios
-------------------------
Total Tier 1 Leverage Ratio
----- ------ --------------
1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
FCB 4.99% 4.27% 3.68% 2.97% 2.14% 1.87%
Bank 12.66 4.81 11.35 3.52 6.58 2.22
Liquidity
The liquidity of FCB and the Bank is the ability to maintain a cash flow
which is adequate to fund operations and meet obligations and other commitments
on a timely basis. The Bank receives funds for liquidity from customer deposits,
loan payments, maturities, and sales of investments and earnings. In addition,
the Bank may avail itself of more volatile sources of funds through issuance of
certificates of deposit in denominations of $100,000
<PAGE>
or more, federal funds borrowed, securities sold under agreements to repurchase
and other borrowings. The aggregate funds acquired from these sources, which
consisted of certificates of deposits in denominations of $100,000 or more, were
$18.8 million and $25.3 million at December 31, 1995 and 1994, respectively. The
decrease is consistent with FCB's decision to reduce its reliance on such
sources of funds.
The following table presents the maturity structure of certificates of
deposit of $100,000 and over at December 31, 1995:
(dollars expressed in thousands)
3 months or less $ 8,571
Over 3 months through 6 months 4,308
Over 6 months through 12 months 5,203
Over 12 months 682
------
Total $ 18,764
========
Management believes the available liquidity and operating results, upon
completion of the recapitalization of the Bank, should be adequate to provide
funds to meet FCB's operating and debt service requirements both on a short-term
and long-term basis.
Regulation and Supervision
FCB and the Bank are extensively regulated under federal and state law.
These laws and regulations are intended to protect depositors, not stockholders.
As more fully described in the General section of Management's Discussion and
Analysis and Note 15 to the accompanying consolidated financial statements, FCB
has been operating under several regulatory agreements which have placed
significant restrictions on FCB and the Bank.
In December 1991, the Federal Deposit Insurance Corporation Improvement Act
(FDICIA) was enacted; it included many significant provisions that affect FCB's
and the Bank's operations. The Act established new and expanded reporting and
auditing standards, expanded regulatory supervision and established new consumer
provisions.
On August 8, 1995, the FDIC voted to reduce the deposit insurance premiums
paid by most members of the Bank Insurance Fund (BIF). Under the reduced
assessment rate schedule for the BIF, the best-rated institutions will pay an
annual rate of four cents per $100.00 of assessable deposits, down from the
previous rate of 23 cents per $100.00. The reduction in the BIF was effective
June 1, 1995. As a result of the continued improvement in the capitalization of
the FDIC's BIF, the assessment for the best-rated BIF members was further
reduced to the statutory annual minimum payment of $2,000, effective January 1,
1996. The weakest BIF institutions will continue to pay 27 cents per $100.00 of
assessable deposits. The Bank was assessed 27 cents per $100.00 of assessable
deposits for the three months ended December 31, 1995.
Effect of New Accounting Standards
FCB adopted the provisions of SFAS 114, Accounting by Creditors for
Impairment of a Loan, and SFAS 118, Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures, which amends SFAS 114, on January 1,
1995. SFAS 114 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. SFAS 118 amends SFAS 114 to allow a
creditor to use existing methods for recognizing interest income on an impaired
loan. FCB has elected to continue to use its existing method for recognizing
interest on impaired loans. The implementation of these statements did not have
a material effect on FCB's financial position and resulted in no additional
provision for possible loan losses.
During October 1995, the FASB issued SFAS 123, Accounting for Stock-Based
Compensation. SFAS 123 establishes financial accounting and reporting standards
for stock-based compensation plans. Those plans include all arrangements by
which employees receive shares of stock or other equity instruments of the
employer or the employer incurs liabilities to employees in amounts based on the
price of the employer's stock. Such arrangements include stock purchase plans,
stock options, restricted stock, and stock appreciation rights.
SFAS 123 defines a fair value based method of accounting for an employee
stock option or similar equity instrument and encourages all entities to adopt
that method of accounting for all of their employee stock compensation plans.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
APB Opinion No. 25, Accounting for Stock Issued to Employees (Opinion 25). The
fair value based method is preferable to the Opinion 25 method for purposes of
<PAGE>
justifying a change in accounting principle under APB Opinion No. 20, Accounting
Changes. Entities electing to remain with the accounting in Opinion 25 must make
pro forma disclosures of net income and, if presented, earnings per share, as if
the fair value based method of accounting defined in SFAS 123 has been applied.
The accounting and disclosure requirements of SFAS 123 are effective for
financial statements beginning after December 15, 1995. Management does not
believe SFAS 123 will have a material effect of the Company's financial position
or results of operations. As such, management intends to comply with the
expanded disclosure requirements, but does not expect to adopt the new
accounting method for stock options.
Effects of Inflation
Financial institutions are less affected by inflation than other types of
companies. Financial institutions make relatively few significant asset
acquisitions which are directly affected by changing prices. Instead, the assets
and liabilities are primarily monetary in nature. Consequently, interest rates
are more significant to the performance of financial institutions than the
effect of general inflation levels. While a relationship exists between the
inflation rate and interest rates, FCB believes this is generally manageable
through its interest rate risk management program.
<PAGE>
<TABLE>
<CAPTION>
Quarterly Condensed Financial Data - Unaudited
1995 Quarter Ended
------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(dollars expressed in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income $ 3,776 3,627 3,248 3,099
Interest expense 1,452 1,660 1,527 1,497
----- ----- ----- -----
Net interest income 2,324 1,967 1,721 1,602
Provision for possible loan losses - 3,245 100 540
----- ----- ----- ----
Net interest income (loss) after
provision for possible loan losses 2,324 (1,278) 1,621 1,062
Noninterest income 424 430 277 197
Noninterest expense 3,787 3,391 2,919 2,492
----- ----- ----- -----
Loss before provision (benefit)
for income taxes (1,039) (4,239) (1,021) (1,233)
Provision (benefit) for income taxes - 2 - (103)
------ ----- ------ -----
Net loss $ (1,039) (4,241) (1,021) (1,130)
======== ====== ====== ======
Net loss per share $ (0.22) (0.91) (0.04) (0.02)
======== ===== ===== =====
1994 Quarter Ended
------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(dollars expressed in thousands, except per share data)
Interest income $ 4,603 4,615 4,670 4,468
Interest expense 1,348 1,322 1,563 1,677
----- ----- ----- -----
Net interest income 3,255 3,293 3,107 2,791
Provision for possible loan losses - 8,035 1,022 752
----- ----- ----- ---
Net interest income (loss) after
provision for possible loan losses 3,255 (4,742) 2,085 2,039
Noninterest income 532 562 617 262
Noninterest expense 3,688 5,467 5,406 5,832
----- ----- ----- -----
Income (loss) before provision
for income taxes 99 (9,647) (2,704) (3,531)
Provision for income taxes 34 1,893 - 480
-- ----- ---
Net loss $ 65 (11,540) (2,704) (4,011)
======== ======= ====== ======
Net loss per share $ 0.01 (2.47) (0.58) (0.85)
======== ===== ===== =====
</TABLE>
<PAGE>
First Commercial Bancorp, Inc. and Subsidiary
Independent Auditors' Report
KPMG Peat Marwick LLP
The Board of Directors and Stockholders
First Commercial Bancorp, Inc.:
We have audited the accompanying consolidated balance sheet of First Commercial
Bancorp, Inc. and subsidiary (the Company) as of December 31, 1995, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit. The accompanying 1994 and 1993 consolidated financial statements of First
Commercial Bancorp, Inc. and subsidiary were audited by other auditors whose
report thereon dated March 29, 1995 (except with respect to the matter discussed
in Note 19, as to which the date was September 5, 1995) included an explanatory
paragraph that described the Company's uncertain ability to continue as a going
concern and the Company's various regulatory agreements with the Federal Deposit
Insurance Corporation, the California State Banking Department and the Federal
Reserve Bank of San Francisco.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1995 consolidated 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, 1995, and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
- ------------------------
KPMG Peat Marwick LLP
St. Louis, Missouri
March 8, 1996
<PAGE>
<TABLE>
<CAPTION>
First Commercial Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets (Continued)
(dollars expressed in thousands, except per share data)
December 31,
------------
Assets 1995 1994
------ ---- ----
Cash and cash equivalents:
<S> <C> <C>
Cash and due from banks $ 9,768 19,059
Federal funds sold 9,000 27,200
Securities purchased under resale agreements 0 40,000
------ ------
Total cash and cash equivalents 18,768 86,259
------ ------
Interest-bearing deposits with other financial institutions
with original maturities over three months - 299
Investment securities:
Available for sale, at market value 63,291 13,727
Held to maturity, at amortized cost (estimated market value of
$11,005 and $3,815 at December 31, 1995 and 1994, respectively) 10,958 3,963
------ -----
Total investment securities 74,249 17,690
------ ------
Loans:
Commercial and financial 33,752 69,597
Real estate construction and development 4,094 16,386
Real estate mortgage 32,857 38,439
Consumer and installment 3,508 5,993
------- -----
Total loans 74,211 130,415
Unearned discount (196) (243)
Allowance for possible loan losses (5,388) (7,437)
------ ------
Net loans 68,627 122,735
------ -------
Lease receivable, net 991 1,038
Bank premises and equipment, net 2,247 2,637
Accrued interest receivable 1,429 1,287
Other real estate 1,380 5,222
Other assets 1,844 2,139
----- -----
Total assets $ 169,535 239,306
========== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
First Commercial Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets (Continued)
(dollars expressed in thousands, except per share data)
December 31,
------------
Liabilities 1995 1994
----------- ---- ----
Deposits:
Demand:
<S> <C> <C>
Non-interest-bearing $ 27,517 56,483
Interest-bearing 39,646 68,840
Savings 16,707 21,695
Time deposits:
Time deposits of $100 or more 18,764 25,317
Other time deposits 53,530 61,201
------ ------
Total deposits 156,164 233,536
Accrued interest payable 487 335
Accrued and other liabilities 2,805 1,080
12% convertible debentures 6,500 -
----- -----
Total liabilities 165,956 234,951
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 and
15,000,000 shares authorized at December 31, 1995 and 1994,
respectively; 69,675,110 shares issued and outstanding at
December 31, 1995 and 4,775,110 shares issued and
4,675,110 shares outstanding at December 31, 1994, respectively 697 48
Capital surplus 33,251 28,495
Retained deficit (30,311) (22,880)
Treasury stock, at cost: 1995, none; 1994, 100,000 shares - (709)
Net fair value adjustment for securities available for sale (58) (599)
------ ----
Total stockholders' equity 3,579 4,355
----- -----
Total liabilities and stockholders' equity $ 169,535 239,306
========== =======
</TABLE>
<PAGE>
First Commercial Bancorp, Inc. and Subsidiary
Consolidated Statements of Operations
(dollars expressed in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1995 1994 1993
---- ---- ----
(dollars expressed in thousands, except per share data)
Interest income:
<S> <C> <C> <C>
Interest and fees on loans $ 9,734 15,126 17,787
Investment securities 1,981 1,109 1,286
Federal funds sold, securities purchased under
resale agreements and other 2,035 2,121 1,027
----- ----- -----
Total interest income 13,750 18,356 20,100
------ ------ ------
Interest expense:
Deposits:
Interest-bearing demand 1,082 1,989 2,405
Savings 481 589 723
Time deposits of $100 or more 1,054 1,123 1,131
Other time deposits 3,366 2,157 2,026
Other borrowings 153 52 85
--- -- --
Total interest expense 6,136 5,910 6,370
----- ----- -----
Net interest income 7,614 12,446 13,730
Provision for possible loan losses 3,885 9,809 8,100
----- ----- -----
Net interest income after provision for possible
loan losses 3,729 2,637 5,630
----- ----- -----
Noninterest income:
Service charges on deposit accounts and customer
service fees 801 1,282 1,426
Other income 527 691 1,569
--- --- -----
Total noninterest income 1,328 1,973 2,995
----- ----- -----
Noninterest expense:
Salaries and employee benefits 4,117 6,568 6,951
Occupancy, net of rental income 1,603 1,443 1,475
Furniture and equipment 581 930 1,075
Federal Deposit Insurance Corporation premiums 629 820 866
Postage, printing and supplies 297 372 527
Legal, examination and professional fees 1,164 725 843
Data processing 145 80 72
Communications 210 82 162
Losses and expenses on foreclosed property 2,631 6,035 4,805
Amortization and write-off of acquisition intangibles - 1,047 73
Other 1,212 2,291 2,854
----- ----- -----
Total noninterest expense 12,589 20,393 19,703
------ ------ ------
Loss before provision (benefit) for income taxes (7,532) (15,783) (11,078)
Provision (benefit) for income taxes (101) 2,407 (3,767)
---- ----- ------
Net loss $ (7,431) (18,190) (7,311)
====== ======= ======
Net loss per common share $ (.33) (3.89) (1.56)
===== ===== =====
Weighted average common stock and common stock
equivalents outstanding (in thousands) 22,826 4,675 4,675
====== ===== =====
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
First Commercial Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Three years ended December 31, 1995
(dollars expressed in thousands, except per share data)
<TABLE>
<CAPTION>
Net fair
value
adjustment Total
Retained for securities stock-
Common Capital earnings Treasury available holders'
stock surplus (deficit) stock for sale equity
----- ------- --------- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 $ 48 28,484 2,621 (709) - 30,444
Net loss - - (7,311) - - (7,311)
Exercise of stock options - 11 - - - 11
-- ------- ------ ---- --- -----
Balance, December 31, 1993 48 28,495 (4,690) (709) - 23,144
Adoption of SFAS 115 - - - - 342 342
Net loss - - (18,190) - - (18,190)
Net fair value adjustment for
securities available for sale - - - - (941) (941)
-- ------ ------- ---- ---- ------
Balance, December 31, 1994 48 28,495 (22,880) (709) (599) 4,355
Net loss - - (7,431) - - (7,431)
Retirement of treasury stock (1) (708) - 709 - -
Net fair value adjustment for
securities available for sale - - - - 541 541
Issuance of common stock
pursuant to stock purchase
agreement 650 5,464 - - - 6,114
--- ----- ------ ---- --- -----
Balance, December 31, 1995 $ 697 33,251 (30,311) - (58) 3,579
=== ==== ======= ====== ======= ==== === =====
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
First Commercial Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1995 1994 1993
---- ---- ----
(dollars expressed in thousands)
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (7,431) (18,190) (7,311)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 899 958 1,024
Provision for possible loan losses 3,885 9,809 8,100
Write-down of other real estate 1,141 4,963 2,981
Loss (gain) on disposal of assets (149) 88 36
Benefit of deferred taxes (6,081) (6,497) (1,090)
Write-off of intangible - 1,047 -
Valuation allowance for deferred taxes 6,081 8,904 -
Increase (decrease) in interest receivable
and other assets 521 3,156 (1,459)
Increase (decrease) in interest payable 275 (19) (11)
Increase (decrease) in accrued expenses and
other liabilities 1,602 (1,404) 612
----- ------ ---
Net cash provided by operating activities 743 2,815 2,882
----- ----- -----
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits with
other financial institutions 299 3,674 (308)
Proceeds from maturity of investment securities 2,168 30,982 8,160
Proceeds from the sale of investment securities 1,062 - -
Purchase of investment securities (59,451) (5,135) (30,028)
Net decrease in loans 46,423 48,082 28,452
Net decrease in deferred loan fees (47) (301) (179)
Purchases of premises and equipment (156) (222) (387)
Net decrease in lease financing 47 47 23
Proceeds from sale of other real estate 4,522 10,340 8,111
Payments to complete other real estate - (638) (487)
----- ---- ----
Net cash provided by investing activities (5,133) 86,829 13,357
------ ------ ------
Cash flows from financing activities:
Net increase (decrease) in demand and savings deposits (49,980) (97,634) 12,156
Net increase (decrease) in time deposits (10,827) 7,375 11,894
Payment from sale of deposits, net (14,541) - -
Proceeds from the issuance of common stock 6,114 - 11
Proceeds from the issuance of convertible debentures 6,133 - -
----- ------ ------
Net cash (used in) provided by
financing activities (63,101) (90,259) 24,061
------- ------- ------
Net increase (decrease) in cash
and cash equivalents (67,491) (615) 40,300
Cash and cash equivalents at beginning of year 86,259 86,874 46,574
Cash and cash equivalents at end of year $ 18,768 86,259 86,874
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 5,861 5,929 6,380
Income taxes - 17 24
===== ===== =====
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 $ 1,672 6,714 5,782
====== ===== =====
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
First Commercial Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
The accompanying consolidated financial statements of First Commercial
Bancorp, Inc. and subsidiary (FCB or the Company) have been prepared in
accordance with generally accepted accounting principles and conform to
practices prevalent among financial institutions.
As more fully discussed in Note 2, FCB executed an Amended and Restated
Stock Purchase Agreement (Stock Purchase Agreement) 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 its wholly owned subsidiary, First Commercial Bank (Bank). As a result,
First Banks owned 93.29% of the outstanding voting stock of FCB at December 31,
1995.
As provided by the Stock Purchase Agreement, First Banks initially owned
Bank preferred stock and Bank common stock which was subsequently converted into
FCB common stock on December 27, 1995. The consolidated financial statements
have been prepared as if such conversion had occurred on August 22 and 23, 1995,
respectively, and as if FCB had owned all of the outstanding stock of the Bank
throughout 1995. The Bank preferred stock was nonvoting stock and had no
dividend requirement, except to the extent dividends may be paid on Bank common
stock. The Bank common stock, during the period it was held by First Banks, was
subject to an irrevocable proxy giving the FCB Board of Directors the right to
vote such shares. Consequently, although First Banks owned approximately 99% of
the outstanding Bank common stock during this period, it did not have voting
control until its stock was converted to FCB common stock.
The following is a summary of the more significant policies followed by
FCB:
Business
FCB provides a full range of banking services to individual and corporate
customers through its subsidiary bank, First Commercial Bank, located in
Sacramento, Campbell, Concord, Roseville, and San Francisco, California. FCB and
the Bank are subject to regulations of various federal agencies and undergo
periodic examinations by these regulatory agencies.
Basis of Presentation
The consolidated financial statements of FCB have been prepared in
accordance with generally accepted accounting principles and conform to
predominant practices within the banking industry. Management of FCB has made a
number of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
the consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the parent
company and its wholly owned subsidiary. All significant intercompany accounts
and transactions have been eliminated.
Cash and Cash Equivalents
The Bank maintains deposit balances with various banks which are necessary
for check collection and account activity charges. Cash in excess of immediate
requirements is invested on a daily basis in federal funds, interest-bearing
deposits with other financial institutions and securities purchased under resale
agreements. Cash, due from banks, federal funds sold, interest-bearing deposits
with original maturities of three months or less and securities purchased under
resale agreements are considered to be cash and cash equivalents for purposes of
the consolidated statements of cash flows.
The Bank is required to maintain certain daily reserve balances in
accordance with regulatory requirements. These reserve balances maintained in
accordance with such requirements were $1.13 million and $2.34 million at
December 31, 1995 and 1994, respectively.
Investment Securities The classification of investment securities as
available for sale or held to maturity is determined at the date of purchase.
FCB does not engage in the trading of investment securities.
Investment securities designated as available for sale, which include any
security which FCB has no immediate plan to sell but which may be sold in the
future under different circumstances, are stated at fair value. Realized gains
and losses are included in noninterest income upon commitment to sell, based on
the amortized cost of the individual security sold. Unrealized gains and losses
are recorded, net of related income tax effects, in a separate component of
stockholders' equity. All previous fair value adjustments included in the
separate component of stockholders' equity are reversed upon sale.
<PAGE>
Investment securities designated as held to maturity, which include any
security for which FCB has the positive intent and ability to hold to maturity,
are stated at cost, net of amortization of premium and accretion of discount
computed on the level yield method, taking into consideration the level of
current and anticipated prepayments.
Loans
Loans are carried at cost, adjusted for amortization of premiums and
accretion of discounts using a method which approximates the level yield method.
Interest and fees on loans are recognized as income using the interest method.
Loans are stated at cost as FCB has the ability and it is management's intention
to hold them to maturity.
The accrual of interest on loans is discontinued when it appears that
interest or principal may not be paid in a timely manner in the normal course of
business. Generally, payments received on nonaccrual loans are recorded as
principal reductions. Interest income is recognized after all principal has been
repaid or an improvement in the condition of the loan has occurred which would
warrant resumption of interest accruals.
FCB adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, and SFAS No.
118, Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures, which amends SFAS 114, on January 1, 1995. SFAS 114 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. SFAS 118 amends SFAS 114 to allow a creditor to use existing
methods for recognizing interest income on an impaired loan. FCB has elected to
continue to use its existing method for recognizing interest on impaired loans
as described above. The implementation of these statements did not have a
material effect on FCB's financial position and resulted in no additional
provision for possible loan losses.
Allowance for Possible Loan Losses
The allowance for possible loan losses is maintained at a level considered
adequate to provide for potential losses. The provision for possible loan losses
is based on a periodic analysis of the loan portfolio by management,
considering, among other factors, current economic conditions, loan portfolio
composition, past loan loss experience, independent appraisals, loan collateral
and payment experience. In addition to the allowance for estimated losses on
impaired loans, an overall unallocated allowance is established to provide for
unidentified credit losses which are inherent in the portfolio. As adjustments
become necessary, they are reflected in the results of operations in the periods
in which they become known.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed on the straight-line
method over the estimated useful lives of the related assets. Leasehold
improvements are capitalized and amortized over the shorter of their estimated
useful lives or the related lease terms. Bank premises are depreciated on the
straight-line method over 11 to 41 years. Furniture, fixtures and equipment are
depreciated on the straight-line method over one to seven years.
Other Real Estate
Other real estate (ORE) which includes real estate acquired through
foreclosure or by deed in lieu of foreclosure, is stated at the lower of fair
value less applicable selling costs or cost at the time the property is
acquired. The excess of cost over fair value of ORE at the date of acquisition
is charged to the allowance for possible loan losses. Subsequent reductions in
carrying value to reflect current fair value or costs incurred in maintaining
the properties are charged to expense as incurred.
<PAGE>
Intangibles
As part of the 1982 acquisition of the business of thirteen branches of
California Canadian Bank, a leasehold interest intangible asset was established
and is being amortized over the remaining lives of the leases. The unamortized
balance at December 31, 1995 and 1994 was $72,000 and $232,000, respectively,
and is included in other assets.
In 1988, FCB acquired the business of three branches of Citizens Bank of
Roseville resulting in excess cost over net assets acquired of $1.43 million.
FCB concluded that there was no future value to the intangible and, accordingly,
the remaining intangible was charged-off resulting in amortization expense for
the year ended December 31, 1994 of $1.05 million. Amortization expense for the
year ended December 31, 1993 was $73,000.
Income Taxes
FCB and its subsidiary filed a consolidated federal income tax return for
the periods preceding First Banks' acquisition of FCB and the Bank. For the
periods subsequent to First Banks' acquisition, FCB and the Bank have joined in
filing a consolidated federal income tax return with First Banks. Prior to
August 24, 1995, FCB and the Bank each paid their respective portion of federal
income taxes or received payments to the extent that tax benefits were realized.
Subsequent to the acquisition of FCB common stock by First Banks, FCB and the
Bank each pay their respective portion of federal income taxes to, or receive
payments from, First Banks to the extent that tax benefits are available within
First Banks' consolidated group. As more fully described in Note 8, should First
Banks' ownership percentage fall below 80%, any subsequent tax benefits to be
realized by FCB will be dependent on the separate profitability of FCB.
Effective January 1, 1993, FCB adopted SFAS No. 109, Accounting for Income
Taxes. SFAS 109 requires a change from the deferred method of accounting for
income taxes, pursuant to Accounting Principles Board Opinion No. 11 (APB 11),
to the asset and liability method of accounting for income taxes. Under the
asset and liability method, 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 and operating loss carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Upon adoption of SFAS 109, the one-time cumulative
effect of this change in accounting for income taxes was not material to the
financial position or results of operations of FCB. Prior years' consolidated
financial statements have not been restated to apply the provisions of SFAS 109.
Financial Instruments
A financial instrument is defined as cash, evidence of an ownership
interest in an entity, or a contract that conveys or imposes on an entity the
contractual right or obligation to either receive or deliver cash or another
financial instrument.
Net Loss Per Common and Common Equivalent Shares
Net loss per share is computed using the weighted average number of shares
outstanding during the year plus the dilutive effect, if any, of stock options.
Reclassifications
Certain 1994 and 1993 amounts have been reclassified to conform with the
1995 presentation.
(2) Recapitalization
For each of the three years ended December 31, 1994, FCB and the Bank
incurred substantial operating losses related primarily to asset quality
problems. These problems continued throughout 1995, resulting in the elimination
of FCB's stockholders' equity, and the substantial reduction of the Bank's
stockholders' equity, by June 30, 1995. Recognizing that new capital was
imperative for the Company's survival, the Board of Directors and management had
begun a concerted effort in early 1995 to replenish its capital base. However,
the rapidity with which losses were incurred during the first six months of 1995
necessitated expediting this process. As a result, as of June 30, 1995, the
Company and the Bank entered into a Stock Purchase Agreement with First Banks
and Mr. James F. Dierberg. Pursuant to the Stock Purchase Agreement, Mr.
Dierberg provided interim financing for the Bank in the form of a purchase of
$1.5 million of nonvoting preferred stock. However, in spite of this additional
capital, the leverage capital ratios of FCB and the Bank as of June 30, 1995 had
declined to (.23%) and 1.08%, respectively.
<PAGE>
The Bank's reduced capital level caused it to be classified as "critically
undercapitalized" for regulatory purposes, subjecting it to the Prompt
Corrective Action provisions of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989. These provisions required it to seek additional capital
or face the possible imposition of a conservatorship or receivership within 90
days. In order to achieve the capital levels required, on August 7, 1995, FCB
and the Bank entered into the Stock Purchase Agreement with First Banks and Mr.
Dierberg. The Stock Purchase Agreement, and subsequent agreements 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 116,666,666 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, the proceeds of which were used to increase the capital
of the Bank.
d. Following the completion of a Special Stockholders' Meeting on December 27,
1995, the shares of Bank preferred stock and Bank 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, the proceeds of which, except for $250,000 retained by First
Commercial Bancorp, Inc., were contributed to the capital of the Bank.
e. On December 28, 1995, First Banks purchased an additional 15,000,000 shares
of FCB common stock for $1.5 million, the proceeds of which were used to
increase the capital of the Bank.
As a result of these transactions, the leverage capital ratios of FCB and
the Bank as of December 31, 1995 were 2.14% and 6.58%, respectively. Although
FCB continues to be considered "significantly undercapitalized" for regulatory
purposes, the Bank is considered "adequately capitalized." A "significantly
undercapitalized" institution is one that has a total risk-based capital ratio
of less than 6%, a core risk-based capital ratio of less than 3%, or a leverage
ratio that is less than 3%. An "adequately capitalized" institution is one that
has a total risk-based capital ratio of 8% or greater, a core risk-based capital
ratio of 4% or greater, and a leverage ratio of 4% or greater. As of December
31, 1995, First Banks owned 93.29% of the issued and outstanding common stock of
FCB.
As more fully described in Note 19, subsequent to December 31, 1995, FCB
has commenced an offering, to its stockholders other than First Banks, of an
aggregate of $5.0 million of newly-issued common stock at $.10 per share. A
maximum of $1.0 million of this, if not otherwise subscribed to, may be offered
to individuals who are not stockholders 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. If this offering is fully subscribed, First
Banks' ownership in FCB could be reduced to 50.25%, prior to the conversion of
the debentures, or 66.95%, if the debentures are immediately converted.
(3) Securities Purchased Under Resale Agreements
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. There were no
securities purchased under resale agreements at December 31, 1995. On December
31, 1994, there were $40 million of such agreements outstanding which had a
maturity date of January 3, 1995.
(4) Investment Securities
As of January 1, 1994, FCB adopted SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. SFAS 115 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
<PAGE>
"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, net of related
income tax effects, as a separate component of stockholders' equity. As of
January 1, 1994, a security with an amortized cost of $2.09 million and a market
value of $2.10 million was classified as "held to maturity." Securities with an
amortized cost of $42.34 million and a market value of $42.68 million were
classified as "available for sale." The effect of adopting SFAS 115 was to
reflect an unrealized gain of $342,000 which was reported as an increase in
stockholders' equity as of January 1, 1994.
The amortized cost, unrealized gains and losses and fair value of
investment securities at December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value Yield
---- ----- ------ ----- -----
(dollar expressed in thousands)
December 31, 1995:
Available for sale:
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities $ 10,034 25 (9) 10,050 6.02%
U.S. government agencies 53,251 67 (77) 53,241 5.64
------ -- --- ------ ----
63,285 92 (86) 63,291 5.70
------ -- --- ------ ----
Held to maturity:
U.S. Treasury securities 7,018 63 - 7,081 6.51
U.S. government agencies 3,940 - (16) 3,924 4.83
----- -- --- ----- ----
10,958 63 (16) 11,005 5.90
------ --- --- ------ ----
Total $ 74,243 155 (102) 74,296 5.73
======== === ==== ====== ====
December 31, 1994:
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
Held to maturity -
U.S. Treasury agencies 3,963 - (148) 3,815 5.22
----- --- ---- ----- ----
Total $ 18,205 9 (672) 17,542 5.78
======== = ==== ====== ====
</TABLE>
The amortized cost and estimated fair value of investment securities by
contractual maturity at December 31, 1995 are summarized below. 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.
<TABLE>
<CAPTION>
Available for sale Held to maturity
------------------ ----------------
Amortized Fair Amortized Fair
cost value Yield cost value Yield
---- ----- ----- ---- ----- -----
(dollar expressed in thousands)
Maturing within one year:
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $ 10,034 10,050 6.02% $ 7,018 7,081 6.51%
U.S. government agencies 48,703 48,707 5.67 2,005 2,005 4.70
------ ------ ----- -----
Total maturing within one year 58,737 58,757 5.73 9,023 9,086 6.11
Maturing from one to five years -
U.S. government agencies 4,548 4,534 5.29 1,935 1,919 4.97
----- ----- ----- -----
Total $ 63,285 63,291 5.70 $ 10,958 11,005 5.91
======== ====== ==== ======== ====== ====
</TABLE>
<PAGE>
Proceeds from the sale of a debt security classified as available for sale
during 1995 were $1.06 million, resulting in a gain of $3,000. There were no
sales of securities for the years ended December 31, 1994 and 1993.
Investment securities with a carrying value of $18.9 million and $17.2
million at December 31, 1995 and 1994, respectively, were pledged to secure U.S.
government and other public deposits and for other purposes required or
permitted by law.
(5) Loans and Allowance for Possible Loan Losses
The changes to the allowance for possible loan losses for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(dollars expressed in thousands)
<S> <C> <C> <C> <C>
Balance, January 1 $ 7,437 7,337 5,484
- ------- ----- -----
Loans charged-off (6,270) (10,023) (6,509)
Recoveries of loans previously charged-off 363 314 262
------ --- ---
Net loans charged-off (5,907) (9,709) (6,247)
------ ------ ------
Provision charged to operations 3,885 9,809 8,100
Reduction in allowance for possible loan
losses from sale of loans (27) - -
----- ----- -----
Balance, December 31 $ 5,388 7,437 7,337
======= ===== =====
</TABLE>
Nonaccruing loans aggregated $4.00 million and $11.43 million at December
31, 1995 and 1994, respectively. At December 31, 1995, the recorded investment
in loans considered impaired was $4.53 million, representing loans on nonaccrual
status and restructured loans. The impaired loans had no valuation reserves at
December 31, 1995. The average recorded investment in impaired loans, since the
adoption of SFAS 114 and SFAS 118 on January 1, 1995, was $8.5 million. The
interest income related disclosures, including the amount of interest that would
have been recorded under the original terms of impaired loans and the amount of
income received, were not available. Such information was not practicable to
obtain due to the discontinuance of FCB's former data processing system in
December 1995.
(6) Lease Financing
FCB has an equity participation in a leveraged lease agreement. Under the
terms of the agreement, FCB'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 FCB and is secured by
first liens on the leased equipment. FCB's net investment in the leveraged lease
at December 31 was as follows:
1995 1994
---- ----
(dollars expressed in thousands)
Lease rental receivable $ 641 695
Estimated residual value 378 378
Less unearned and deferred income (28) (35)
--- ---
Investment in leverage leases $ 991 1,038
===== =====
The net income from FCB's investment in the leveraged lease was $7,100 for
each of the years ended December 31, 1995, 1994 and 1993.
<PAGE>
(7) Bank Premises and Equipment
Bank premises and equipment were comprised of the following at December 31:
1995 1994
---- ----
(dollars expressed
in thousands)
Buildings $ 616 616
Land and land improvements 894 894
Leasehold improvements 1,801 1,485
Furniture, fixtures, and equipment 4,520 4,669
----- -----
7,831 7,664
Less accumulated depreciation and amortization 5,584 5,027
----- -----
Bank premises and equipment, net $ 2,247 2,637
======= =====
Depreciation and amortization expense was $695,000, $667,000 and $875,000
for the years ended December 31, 1995, 1994 and 1993, respectively.
At December 31, 1995, the approximate minimum future lease rentals payable
under noncancellable operating leases for bank premises were as follows:
(dollars expressed in thousands)
1996 $ 563
1997 395
1998 265
1999 233
2000 236
Thereafter 95
------
Total minimum lease payments $ 1,787
=======
The net rental expense included in occupancy expense for bank premises was
$965,000, $871,000 and $844,000 for the years ended December 31, 1995, 1994 and
1993, respectively. Rental income under noncancellable subleases was $114,000,
$99,000 and $99,000 for the years ended December 31, 1995, 1994 and 1993,
respectively. At December 31, 1995, these subleases extend through 1998 and
future minimum rental income is $105,000, $99,000 and $25,000 for 1996, 1997 and
1998, respectively.
(8) Income Taxes
FCB and the Bank filed a consolidated federal income tax return for the
period prior to their respective acquisitions by First Banks. Because of the
structure of the transaction described in Note 2 to the consolidated financial
statements, current regulations of the Internal Revenue Code 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. 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
the periods First Banks owned greater than 80% of the respective entities. As
more fully discussed in Note 19, should the stock rights offering cause First
Banks' ownership percentage to fall 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 for five years. In
addition, 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 do provide procedures for FCB to request permission from the
Internal Revenue Service to join in filing a consolidated return with the Bank.
FCB would need 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, in
order to file a consolidated federal return with the bank. This is not an
automatic reaffiliation.
<PAGE>
Provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1995 1994 1993
---- ---- ----
(dollars expressed in thousands)
Current income taxes:
<S> <C> <C>
Federal $ (101) - (2,677)
State - - -
--- ----- -----
(101) - (2,677)
---- ----- ------
Deferred income tax expense (benefit):
Federal 5,386 (4,761) (1,090)
State 695 (1,736) -
--- ------ -----
6,081 (6,497) (1,090)
----- ------ ------
Valuation allowance (6,081) 8,904 -
------ ----- ------
Total $ (101) 2,407 (3,767)
======== ===== ======
</TABLE>
The effective federal income tax rates differ from amounts which would be
calculated using statutory tax rates as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1995 1994 1993
---- ---- ----
% of % of % of
pretax pretax pretax
Amount income Amount income Amount income
------ ------ ------ ------ ------ ------
(dollars expressed in thousands)
Loss before provision (benefit) for
<S> <C> <C> <C> <C> <C> <C>
income taxes $ (7,532) $(15,783) $(11,078)
======== ======== ========
Taxes on loss calculated
at statutory rates (2,636) (35.0)% (5,366) (34.0)% (3,767) (34.0)%
Effects of differences in tax reporting:
Change in the deferred tax
valuation allowance (6,081) (80.7) 8,904 56.4 - -
Change in tax attributes available
to be carried forward 8,616 114.4 - - - -
State income taxes - - (1,131) (7.2) - -
Other, net - - - - 110 -
------- ---- ------ ---- --- ----
Provision (benefit)
for income taxes $ (101) (1.3)% $ 2,407 15.2% $(3,767) (34.0)%
======== ==== ========= ==== ======= =====
</TABLE>
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities for periods
after the adoption of SFAS 109 are shown below.
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
---- ----
(dollars expressed in thousands)
Deferred tax assets:
<S> <C> <C>
Allowance for possible loan losses $ 1,648 1,377
Other real estate 654 2,981
AMT tax credit carryforwards 448 435
Depreciation on bank premises and equipment 145 83
Other 23 -
Net operating loss carryforwards (federal and state) 382 4,346
--- -----
Total gross deferred tax assets 3,300 9,222
Less valuation allowance (2,823) (8,904)
------ ------
Gross deferred tax assets, net of valuation allowance 477 318
--- ---
Deferred tax liabilities:
Leveraged leases 203 268
Accretion 10 50
State taxes 264 -
--- ---
Total gross deferred tax liabilities 477 318
--- ---
Net deferred tax assets $ 0 -
======= ===
</TABLE>
With the completion of the 1995 acquisitions of FCB and the Bank by First
Banks, the federal and state net operating loss (NOL) carryforwards generated
prior to the two transactions are subject to an annual limitation under Internal
Revenue Code (IRC) Section 382 and California Revenue and Taxation Code Section
24451, respectively, for all subsequent tax years. The federal and state annual
limitations for the Bank are $28,598. The following schedules reflect the NOL
carryforwards that will be available, after consideration of these limitations,
to offset future taxable income. If taxable income for a post-transaction year
does not equal or exceed the annual limitation, the unused limitation is carried
forward to increase the limitation amount for the succeeding years until the
excess limitation is utilized. This does not affect the original expiration
dates of the NOL. Also acquired in the acquisitions are alternative minimum tax
credits of $448,000. These credits are also subject to annual limitations.
For federal income tax purposes, FCB had NOL carryforwards of approximately
$988,000. The NOL carryforwards expire as follows:
(dollars expressed in thousands)
Year ending December 31:
2008 $ 479
2009 509
---- ---
$ 988
====
For California income tax purposes, FCB had NOL carryforwards of
approximately $353,000. The NOL carryforwards expire as follows:
(dollars expressed in thousands)
Year ending December 31:
1996 $ 89
1997 88
1998 88
1999 88
---- ---
$ 353
===
<PAGE>
Subsequent to the acquisition by First Banks, the net deferred tax assets
of FCB were evaluated to determine whether it is more likely than not that the
deferred tax assets will be recognized in the future. Due to the uncertainty of
future operating results and possible disaffiliation with respect to filing a
consolidated federal income tax return with First Banks, as previously
discussed, it was determined that the valuation allowance established for FCB
should wholly offset any net deferred tax asset.
Changes to the deferred tax assets valuation allowance are as follows:
Years ended December 31,
1995 1994
(dollars expressed in thousands)
Balance, beginning of year $ 8,904 -
Current year deferred provision, change
in deferred tax valuation allowance (6,081) 8,904
------ -----
Balance, end of year $ 2,823 8,904
======= =====
(9) 12% Convertible Debentures
Pursuant to the Stock Purchase Agreement discussed in Note 2 to the
accompanying consolidated financial statements, FCB issued to First Banks two
5-year, 12% convertible debentures in exchange for a total of $6.5 million. The
principal and any accrued but unpaid interest thereon is convertible at any time
prior to maturity, at the option of First Banks, into FCB common stock at $.10
per share. At maturity, any unpaid principal and accrued interest will be
converted into FCB common stock at $.10 per share. The initial debenture of $1.5
million was issued on October 31, 1995 and matures on October 31, 2000. The
second debenture was issued on December 28, 1995 and matures on December 28,
2000. Cash may be paid with respect to either the principal or interest on the
debentures only when, in the sole and absolute discretion of the Board of
Directors of FCB, it is determined that FCB has sufficient funds to make such
payment in accordance with all applicable regulatory requirements. The
debentures are secured by all of the shares of Bank common stock held by FCB.
Accrued and unpaid interest on the debentures was $37,667 at December 31,
1995. At that date, the principal and accrued interest on the debentures could
have been converted into an aggregate of 65,376,670 shares of FCB common stock.
(10) Commitments and Contingent Liabilities
Off-Balance Sheet Financial Instruments
In the ordinary course of business, FCB 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.
FCB's loans, and related credit risks, are primarily concentrated in
Northern California. The cities and surrounding metropolitan areas where the
majority of FCB's loan customers reside are Sacramento, Roseville, San
Francisco, Concord, and Campbell, 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. FCB typically receives a fee
for providing a commitment. FCB evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
FCB 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 trade transactions. They represent a
substitution of FCB's credit for the customer's credit.
<PAGE>
The contractual amounts of commitments to extend credit and standby 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 financial instruments with off-balance-sheet
risk at December 31, 1995 and 1994:
1995 1994
(dollars expressed in thousands)
Commitments to extend credit $ 22,578 41,504
Standby letters of credit 2,078 3,329
Real estate construction loan commitments were $637,000 and $3.43 million
at December 31, 1995 and 1994, respectively, and are included in commitments to
extend credit in the schedule above.
Litigation
FCB is 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
of FCB.
(11) Dividends
The stockholders of FCB will be entitled to receive dividends, when and as
declared by the 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, 1995 and 1994, there were no outstanding shares of preferred stock.
On December 31, 1991, the Board of Directors of FCB 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. FCB 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. As of December 31, 1995, the
aggregate accrued dividends and accrued but unpaid interest thereon was
approximately $969,000. The payment of the accrued dividends and declaration of
subsequent dividends is subject to approval by the Federal Reserve Bank of San
Francisco (see Note 15). In connection with its offering to stockholders
commenced subsequent to December 31, 1995, as described in Note 19, FCB is
offering, to those individuals eligible to receive the accrued and unpaid 1992
dividends, one share of FCB common stock for each $.10 of dividends and accrued
interest, in satisfaction of that obligation.
Dividends by the Bank to FCB 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. Further, FCB and the Bank are restricted from paying
dividends under the terms of certain regulatory agreements (see Note 15). During
1995, 1994 and 1993, the Bank paid no dividends to FCB. As of December 31, 1995,
the retained deficit of the Bank was approximately $30.31 million.
(12) Stock Option Plans
In 1987, the Board of Directors amended and restated the Company's employee
stock option plan (the Employee Plan) for full-time salaried officers and
employees who have substantial responsibility for the successful operation of
FCB and the Bank. The Employee Plan provides for the grant of "incentive stock
options," as defined in Section 422A of the Internal Revenue Code. The Employee
Plan reserved an aggregate of 783,000 shares of FCB common stock. Options may be
granted at an exercise price not less than the fair market value of the stock at
the date of grant and vest at a rate of 20% per year for a period of five years
from date of grant. Options expire ten years from date of grant and may be
exercised with shares of FCB stock or other valuable consideration. Options may
be granted, pursuant to the Employee Plan, until its expiration on March 11,
1997.
<PAGE>
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 for the three years ended December 31, 1995 related to the
Employee Plan was as follows:
Options outstanding
-------------------
Shares available Price
for grant Shares per share
--------- ------ ---------
Balance, January 1, 1993 119,552 523,700 $ 4.38 - 11.12
Options granted (15,000) 15,000 4.00 - 5.88
Options cancelled 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 cancelled 328,900 (328,900) 4.00 - 11.12
Options exercised - - -
------- ------- -----------
Balance, December 31, 1994 455,452 185,800 4.25 - 11.12
Options granted - - -
Options cancelled 90,500 (90,500) 5.00 - 8.44
Options exercised - - -
------- ------- ------------
Balance, December 31, 1995 545,952 95,300 4.25 - 11.12
=== ==== ======= ====== ==== =====
At December 31, 1995, options for 82,140 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 FCB 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 preceding any
such transaction, to exercise any unvested and unexercised portion of said
optionee's options. Although the transactions with First Banks pursuant to the
Stock Purchase Agreement provided optionees this right, the exercise prices on
options currently outstanding are substantially in excess of market prices.
Consequently, no options were exercised as a result of those transactions.
On September 26, 1989 (Commencement Date), the Board of Directors of FCB
adopted the First Commercial Bancorp, Inc., Directors' Stock Option Plan
(Directors' Plan), which was approved by the stockholders of FCB at its Annual
Stockholders' Meeting held on May 23, 1990. There are presently reserved for
issuance under the Directors' Plan 250,000 shares of FCB's common stock. Only
non-employee directors of FCB are eligible to receive options in accordance with
the Directors' Plan. As of December 31, 1995, only two directors are eligible to
participate in the Directors' Plan.
One present director of FCB 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 FCB shall vest and become exercisable at the rate of 20% of the shares per
year from the exercise date and may be exercised by the optionee during a period
of 10 years.
The Directors' Plan will expire on September 26, 1998, unless terminated
earlier by the Board of Directors. At December 31, 1995, options for 70,000
vested shares under the Directors' Plan were exercisable at a price of $11.12
per share.
<PAGE>
(13) Employee Benefit Plans
FCB's profit-sharing plan is a self-administered savings and incentive
plan, which qualifies under Section 401(k) of the Internal Revenue Code,
covering substantially all employees. Under the plan, employer matching
contributions are determined annually by FCB's Board of Directors. An employee's
interest in such contributions vest on a 5-year schedule according to years of
service rendered. Employee contributions are limited to 15% of an employee's
compensation, not to exceed $9,500 for 1995, and vest immediately. The employer
matching contributions were suspended as of January 1, 1995. Total employer
contributions under the plan were $105,000 and $116,000 for the years ended
December 31, 1994 and 1993, respectively. For these same three years, the Bank
paid for the plan's administrative, accounting and legal expenses of
approximately $16,000, $20,000 and $33,000, respectively.
FCB adopted an Employee Stock Ownership Plan (ESOP) for all eligible
employees. 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 are allocated among eligible
employees' accounts in relation to their compensation as shares of stock of FCB
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. There
were no contributions to the ESOP for the years ended December 31, 1995, 1994
and 1993.
Postretirement benefits other than pensions and postemployment benefits are
generally not provided for FCB's employees.
(14) Fair Value of Financial Instruments
Fair values for financial instruments are management's estimate of the
values at which the instruments could be exchanged in a transaction between
willing parties. These estimates are subjective and may vary significantly from
amounts that would be realized in actual transactions. In addition, other
significant assets are not considered financial assets including, deferred tax
assets and bank premises and equipment. Further, the tax ramifications related
to the realization of the unrealized gains and losses can have a significant
effect on the fair value estimates and have not been considered in any of the
estimates.
The estimated fair values of FCB's financial instruments at December 31
were as follows:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
----------------- -----------------
(dollars expressed in thousands) Carrying Estimated Carrying Estimated
amount fair value amount fair value
------ ---------- ------ ----------
Assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 18,768 18,768 86,259 86,259
Interest-bearing deposits with
other financial institutions
with original maturities
over three months - - 299 299
Investment securities 74,249 74,296 17,690 17,541
Loans, net 68,627 68,681 122,735 116,315
Lease financing, net 991 991 1,038 1,038
Accrued interest receivable 1,429 1,429 1,287 1,287
Liabilities:
Demand and savings deposits 83,870 83,870 147,018 147,018
Time deposits 72,294 72,371 86,518 86,769
12% convertible debentures 6,500 6,500 - -
Accrued interest payable 487 487 335 335
Off balance sheet -
unfunded loan commitments - - - -
</TABLE>
<PAGE>
The following methods and assumptions were used in estimating fair values
for financial instruments: Financial Assets:
Cash and cash equivalents, interest-bearing deposits, lease financing and
accrued interest receivable: The carrying values reported in the consolidated
balance sheets approximate fair value.
Investment securities: Fair value for investment securities is based upon
quoted market prices. If quoted market prices are not available, fair values are
based upon quoted market prices of comparable instruments.
Net loans: The fair values for most loans held for investment are estimated
utilizing discounted cash flow calculations that apply interest rates currently
being offered for similar loans to borrowers with similar risk profiles. The
carrying values for loans are net of the allowance for possible loan losses and
unearned discount. Financial Liabilities:
Deposits: The fair value disclosed for deposits generally payable on demand
(i.e., non-interest-bearing and interest-bearing demand, savings and money
market accounts) are considered equal to their respective carrying amounts as
reported in the consolidated balance sheets. The fair value disclosed for demand
deposits does not include the benefit that results from the low-cost funding
provided by deposit liabilities compared to the cost of borrowing funds in the
market. Fair values for certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered on
similar certificates to a schedule of aggregated monthly maturities of time
deposits.
Convertible debentures and accrued interest payable: The carrying value
reported in the consolidated balance sheets approximates fair value. Off-Balance
Sheet:
Credit commitments: The majority of the commitments to extend credit and
commercial and standby letters of credit contain variable interest rates and
credit deterioration clauses and, therefore, the carrying value of these credit
commitments approximates fair value.
(15) Regulatory Agreements
For each of the three years ended December 31, 1995, FCB has incurred
substantial losses from operations. These losses were associated primarily with
the emphasis which FCB 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 FCB'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 FDIC, 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 FCB
and the Bank including restrictions on the payment of dividends, requirements of
specified capital levels and reduction of classified assets. As a result of the
recapitalization and numerous actions taken by FCB, management believes FCB is
in substantial compliance with the MOU and the Orders. However, full compliance,
particularly with certain capital requirements, has not yet been achieved.
FCB and the Bank entered into a Stock Purchase Agreement with First Banks
and James F. Dierberg as outlined in Note 2, which resulted in a substantial
recapitalization of FCB and the Bank during 1995. In addition, as more fully
described in Note 19, subsequent to December 31, 1995, FCB has commenced an
offering of its common stock to existing stockholders in exchange for dividends
owed to certain stockholders. However, FCB has continued to incur losses from
operations through December 31, 1995. Furthermore, the effect of a large
portfolio of problem assets and the potential of a substantial interest cost
associated with the Debenture issued to First Banks under the Stock Purchase
Agreement 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 effect FCB's ability to comply with the requirement of the MOU and the
Orders; or (3) because of any of the preceding, FCB and the Bank may not be
required to raise additional capital or have additional regulatory agreements
imposed upon it in the future.
<PAGE>
(16) Restatement of Consolidated Financial Statements
During the second quarter of 1994, FCB became aware of the existence of
certain previously unknown information which affected the reported carrying
value of certain assets included in FCB's December 31, 1993 and 1992 financial
statements. FCB believes that had this information been known at December 31,
1992, FCB would have written off certain assets and recognized a loss at that
time. Thus, FCB's financial statements for the fiscal years ended December 31,
1993 and 1992 have been restated to reflect the effects of these charge-offs and
losses. The effect of this restatement for 1994 was to decrease ORE by $3.90
million, increase the allowance for possible loan losses by $974,000 for a
charge-off recorded 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 $4.89 million to the allowance for possible loan losses
and establish a corresponding addition to the provision for possible loan
losses. In addition, interest income was reversed by $18,000 and a tax benefit
was recorded for $1.72 million. The net of these transactions increased
previously reported net loss and retained deficit in 1992 by $3.19 million.
(17) 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, Irvine, 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 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 this affiliation through First Banks and the geographic
proximity of certain of these banking offices, the Bank and First Bank & Trust
plan 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. The banks have entered into a cost sharing agreement
for the purpose of allocating these expenses between them. 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.
The Bank also entered into a data processing agreement with FirstServ,
Inc., a wholly owned data processing subsidiary of First Banks, on December 8,
1995. Under this agreement, FirstServ, Inc. began providing data processing and
item processing to the Bank 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 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. Fees paid by the Bank under any of these agreements
totaled $99,000 for the year ended December 31, 1995.
In addition, the Bank may purchase certain services and supplies from or
through First Banks as 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 FCB's consolidated
financial position or results of operations.
In connection with the recapitalization of FCB, and as more fully discussed
in Notes 2 and 9 to the accompanying consolidated financial statements, First
Banks purchased convertible debentures of FCB of $1.5 million and $5.0 million
on October 31, 1995 and December 28, 1995, respectively. The related interest
expense for these debentures was $37,667 for the year ended December 31, 1995.
<PAGE>
(18) Parent Company Only Financial Statements
Condensed Balance Sheets
1995 1994
---- ----
(dollars expressed
in thousands)
Assets:
Cash $ 200 22
Investment in First Commercial Bank 10,987 5,219
Other assets 413 -
------ -----
Total assets $ 11,600 5,241
====== =====
Liabilities and stockholders' equity:
Dividends payable $ 748 748
12% convertible debentures 6,500 -
Accrued expenses and other liabilities 773 138
----- ---
Total liabilities 8,021 886
Stockholders' equity 3,579 4,355
----- -----
Total liabilities and stockholders' equity $ 11,600 5,241
====== =====
Condensed Statements of Operations
Year ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
(dollars expressed in thousands)
Income:
Interest income $ 1 95 224
Other income - - 1
- -- ---
Total income 1 95 225
- -- ---
Expense:
Management fee - 56 14
Other 716 1,182 591
--- ----- ---
Total expense 716 1,238 605
--- ----- ---
Loss before income tax
expense (benefit) and
equity in undistrib-
uted loss of subsidiary (715) (1,143) (380)
Income tax expense (benefit) 4 (9) (108)
--- ----- ----
Loss before equity in
undistributed loss
of subsidiary (719) (1,134) (272)
Equity in undistributed loss of subsidiary (6,712) (17,056) (7,039)
------ ------- ------
Net loss $ (7,431) (18,190) (7,311)
====== ======= ======
<PAGE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
(dollars expressed in thousands)
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (7,431) (18,190) (7,311)
Adjustments to reconcile net loss
to net cash (used in) provided
by operating activities:
Depreciation and amortization - 1,047 73
Equity in undistributed loss of
subsidiary 6,712 17,056 7,039
(Increase) decrease in other assets (46) 308 (118)
Increase in liabilities 351 33 97
--- -- --
Net cash (used in) provided
by operating activities (414) 254 (220)
---- --- ----
Cash flows from investing activities -
contributions to subsidiary (7,325) (1,404) -
------ ------ -------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,500 - 11
Proceeds from issuance of debentures 6,133 - -
Proceeds from advances from subsidiary 284 - -
----- ----- -----
Net cash provided by
financing activities 7,917 - 11
----- ----- --
Net increase (decrease) in
cash and cash equivalents 178 (1,150) (209)
Cash and cash equivalents at beginning of year 22 1,172 1,381
--- ----- -----
Cash and cash equivalents at end of year $ 200 22 1,172
==== == =====
Noncash financing activities - exchange
of Company common stock for Bank
common stock (see Note 2) $ 6,500 - -
======= ===== =====
</TABLE>
(19) Subsequent Events
In January 1996, FCB filed an Amended Registration Statement with the
Securities and Exchange Commission for a rights offering to its existing
stockholders other than First Banks, of an aggregate of $5.0 million of
newly-issued common stock at $.10 per share. A maximum of $1.0 million of this,
if not otherwise subscribed to, may be offered to individuals who are not
stockholders 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. If this offering is fully subscribed, the capital of FCB and the
Bank would exceed regulatory requirements. In addition, First Banks' ownership
in FCB would be reduced to 50.25%, prior to the conversion of the debentures, or
66.95%, if the debentures are immediately converted.
First Banks has agreed, pursuant to the Stock Purchase Agreement, that it
will purchase on the offering as a standby-purchaser, after the expiration of
the rights offering and dividend exchange offer, if necessary, such number of
shares as may be required to raise the Bank's Tier 1 capital ratio to 7.00% as
required by the SBD's capital impairment order.
The offering was declared effective by the Securities and Exchange
Commission on February 16, 1996, and the Prospectuses were recently mailed to
eligible stockholders.
<PAGE>
Form 10-K
FCB's Annual Report on Form 10-K, as filed with the Securities and Exchange
Commission, is available without charge to any stockholder upon written request.
Requests should be directed to the following address:
First Commercial Bancorp, Inc.
865 Howe Avenue
Sacramento, California 95825
Common Stock
The common stock of FCB was traded on the NASDAQ National Market System
under the symbol of "FCOB" until July 1, 1995. FCB's Common stock is currently
listed on the NASDAQ Small Cap 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 the minimum bid price is less than $1.00
per share, no assurance can be given that the common stock will continue to
qualify for listing on the NASDAQ SmallCap Market System. At December 31, 1995,
there were approximately 1,100 holders of record of the common stock.
Common stock price range:
1995 1994
---- ----
High Low High Low
---- --- ---- ---
First quarter $1-11/32 29/32 5-1/2 3-3/4
Second quarter 1-1/4 1 4-3/4 2-3/4
Third quarter 1-3/8 1/4 3-1/2 2
Fourth quarter 3/4 1/6 2-1/8 7/8
Common Stock Transfer Agent and Registrar
First National Bank of Boston
435 Tasso, Suite 250
Palo Alto, CA 94301
Telephone: (415) 853-0404
Information
For information concerning First Commercial Bancorp, Inc., contact:
Allen H. Blake Mr. James E. Culleton
Chief Financial Officer and Secretary Corporate Secretary
11901 Olive Boulevard 865 Howe Avenue
St. Louis, Missouri 63141 Sacramento, California
Telephone: 314/995-8700 Telephone: (916) 641-3288
<PAGE>
Directors of First Commercial Bancorp, Inc. and First Commercial Bank
James F. Dierberg
Chairman of the Board, President and Chief Executive Officer - First Banks,Inc.
Allen H. Blake
Senior Vice President and Chief Financial Officer - First Banks, Inc.
Interim Chief Financial Officer - First Commercial Bancorp, Inc.
Fred L. Harris
Attorney-At-Law
Michael P. Morris
Certified Public Accountant
Chief Financial Officer, Nugget Market
Donald W. Williams
Senior Vice President and Chief Credit Officer - First Banks, Inc.
Acting Chairman of the Board, President and Chief Executive Officer -
First Commercial Bancorp, Inc.
Corporate Officers
Donald W. Williams
Acting Chairman of the Board, President and Chief Executive Officer - First
Commercial Bancorp, Inc.
Allen H. Blake
Interim Chief Financial Officer - First Commercial Bancorp, Inc.
James E. Culleton
President and Corporate Secretary - First Commercial Bank
Gary M. Sanders
Senior Vice President and Senior Lending Officer - First Commercial Bank
<PAGE>
EXHIBIT 23(a)
<PAGE>
Consent of Independent Public Accountants
Arthur Andersen LLP
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K, into the Company's previously filed
Registration Statements File No 33-18459 and No. 33-35131.
/s/Arthur Andersen LLP
- ----------------------
Arthur Andersen LLP
San Francisco, California
March 22, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000315547
<NAME> First Commercial Bancorp, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1995
<PERIOD-START> Jan-01-1995
<PERIOD-END> Dec-31-1995
<CASH> 9,768
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 9,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 63,291
<INVESTMENTS-CARRYING> 10,958
<INVESTMENTS-MARKET> 0
<LOANS> 74,211
<ALLOWANCE> (5,388)
<TOTAL-ASSETS> 169,535
<DEPOSITS> 156,164
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,292
<LONG-TERM> 6,500
0
0
<COMMON> 697
<OTHER-SE> 2,882
<TOTAL-LIABILITIES-AND-EQUITY> 169,535
<INTEREST-LOAN> 9,734
<INTEREST-INVEST> 1,981
<INTEREST-OTHER> 2,035
<INTEREST-TOTAL> 13,750
<INTEREST-DEPOSIT> 5,983
<INTEREST-EXPENSE> 6,136
<INTEREST-INCOME-NET> 7,614
<LOAN-LOSSES> 3,885
<SECURITIES-GAINS> 3
<EXPENSE-OTHER> 12,589
<INCOME-PRETAX> (7,532)
<INCOME-PRE-EXTRAORDINARY> (7,532)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,431)
<EPS-PRIMARY> (.33)
<EPS-DILUTED> (.33)
<YIELD-ACTUAL> 4.59
<LOANS-NON> 4,001
<LOANS-PAST> 525
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 11,940
<ALLOWANCE-OPEN> 7,437
<CHARGE-OFFS> (6,270)
<RECOVERIES> 363
<ALLOWANCE-CLOSE> 5,388
<ALLOWANCE-DOMESTIC> 5,388
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
