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Problem Assets Might Create Problems in $7 Million Acquisition

The pending acquisition of 1st Pacific Bank of California by First Business Bank may be scuttled if 1st Pacific, which is being acquired, doesn’t reduce problem assets by the end of the year.

According to the agreement, 1st Pacific has to meet a number of thresholds before the transaction can be completed, including cutting its levels of problem loans and foreclosed real estate.

As of June 30, 1st Pacific reported holding $12.7 million in problem assets on its books, or 3 percent of assets.

However, industry sources say the bank’s problem loans have increased in the third quarter to a point that they now exceed levels spelled out in the agreement.

In July, First Business Bank agreed to pay $1.40 per share, or $7 million, for 1st Pacific. FBB also agreed to pay out two-thirds of possible recoveries from charge offs or bad loans the bank has written off, and a lawsuit involving another bank, but those recoveries cannot exceed $4 million.


Reducing Assets

Among the thresholds that must be met before the sale can be completed are reducing 1st Pacific’s assets to $400 million, something that should be fairly easy to achieve. It held $429 million in assets as of June 30. Other criteria require minimum levels of deposits, capital ratios, and maximum amounts of classified assets the bank holds.

A classified asset is a broader term used to describe problem loans. Nonperforming loans are those not paying interest or principal, while classified assets include loans that are categorized as substandard, doubtful, special mention and criticized, among a few of the terms used in the agreement.

Also detailed in the agreement is the bank’s amount of foreclosed real estate, or real estate owned, which cannot exceed 1.5 percent of total assets. As of June 30, 1st Pacific had $3.4 million in REO, 0.8 percent of its assets.

Ron Carlson, chief executive of 1st Pacific, declined to say whether the bank’s problem loans and REO rose during the quarter that ends this month.

“One of the problems when you’re dealing with this is you’re usually taking two steps forward and one step back,” Carlson said. “We’re working on it, focusing on reducing the REO and problem loans, and we’ve been making progress But I couldn’t even tell you how much of a reduction (in problem assets) there has been.”

Carlson said the sale is on track to be completed by the end of December. Should the bank fail to meet prescribed conditions, the two banks could agree to extend the contract into next year, he said.


Some Grumbling

At least one longtime 1st Pacific shareholder raised objections to the lack of information the bank has provided, saying that while there are references to exhibits in the agreement, the document contains no exhibits to view.

Carlson said except for this shareholder, he’s not heard from any shareholders who strongly object to the transaction that’s paying 1st Pacific shareholders a third of the stock’s $4.36 book value as of June 30. Book value is the bank’s shareholders’ equity divided by outstanding shares.

1st Pacific is delaying until Dec. 16 a special shareholders meeting to approve its sale to First Business. The date had been set for Nov. 18. Proxy statements will be mailed out a month before the meeting date, Carlson said.

A majority of 1st Pacific shareholders have to approve the deal, as do most First Business Bank shareholders. But the buyer bank is 90 percent owned by Ernest Auerbach, a local developer who is putting up $15 million to consummate the acquisition.

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