Bingham McCutchen LLP
Three Embarcadero Center
San Francisco, CA 94111
thomas.reddy@bingham.com
415-393-2188
October 27, 2004
Via Hand Delivery & EDGAR
Mr. Todd Schiffman
Division of Corporate Finance
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: Valley Commerce Bancorp
Form SB-2
File No. 333-118883
Filed September 9, 2004
Dear Mr. Schiffman:
On behalf of Valley Commerce Bancorp (the "Company"), this letter sets forth
responses to the staff comments contained in your letter dated October 8, 2004
relating to the Company's registration statement on Form SB-2 (the "Registration
Statement"). The Company's responses to the accounting staff's comments have
been prepared in consultation with the Company's independent auditors,
Perry-Smith LLP. Each staff comment is noted in bold below, and the Company's
response follows beneath each comment. Concurrently with the submission of this
letter, the Company has filed Amendment No. 1 to the Registration Statement,
three copies of which are enclosed herewith.
Prospectus Cover Page
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1. Revise to use bold type for the cross-reference to the risk factors.
The Word formatted version of the Registration Statement has bold text for
this cross-reference. The commercial printer the Company is using advises
us that the ASCII format in which the Registration Statement is submitted
to you does not indicate bold type. The Company assures you that the
printed prospectus will have bold type for this item. Mr. Clampitt advised
us that this would be acceptable.
2. With regard to the last paragraph and the statement therein that "there is
no minimum", revise to indicate the minimum. In this regard, use the number
of shares the underwriter is committed to take as the minimum.
The Company has revised the Registration Statement throughout to indicate
that the minimum will be 300,000 shares.
Prospectus Summary
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Growing-Market Area - page 3
- ----------------------------
3. Revise the last paragraph on page 3 to explain how the bank is "expanding
our efforts".
The Company has revised the Registration Statement on page 3 in response
to your comment.
Our strategic goals - page 4
- ----------------------------
4. Revise the first paragraph to describe the expansion plans. Does the
Company plan on adding branches in the next 12 months? If so, indicate the
number expected to be added and the cost. If not, so indicate.
The Company has revised the Registration Statement in response to your
comment. It has no immediate concrete plans either to open or acquire
a branch.
5. Revise the Core Deposit paragraph to indicate the growth for the 6 months
ended June 30, 2004 and the year ended December 31, 2003.
The Company has revised the Registration Statement in response to your
comment.
6. Likewise, revise the Net Interest Margin and Efficiency ratio discussions
to disclose the numbers for the 6 months ended June 30, 2004 and December
31, 2003.
The Company has revised the Registration Statement in response to your
comment.
7. Revise to condense the last paragraph on page 4 and all of page 5 into a
brief paragraph discussing the service first concept and the local
management team. The remainder of the disclosure should be moved to the
business section. In addition, add the address of the executive officers
and a phone number as required by Item 503(b) of Regulation S-B.
We have revised the last paragraph on page 4 and all of page 5 as requested
and moved a portion of the text to "Description of Business."
On the inside front cover, we have clarified that the address shown is the
address for the executive offices. We have added the telephone number for
the executive offices.
The Offering - page 6
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8. Revise the narrative for the number of shares both before and after the
offering to indicate they do not include any shares that might be sold in
the overallotment option.
Our situation is unusual in that the 600,000 shares shown on the cover
includes the shares available to the underwriter in the overallotment
option. The Registration includes disclosures to this effect.
Risk Factors - page 9 General
- -----------------------------
9. Revise to use bold type for the captions of each risk factor.
The Word formatted version of the Registration Statement has bold text for
the risk factor captions. The commercial printer the Company is using
advises us that the ASCII format in which the Registration Statement is
submitted to you does not indicate bold type. The Company assures you that
the printed prospectus will have bold type for these items. Mr. Clampitt
advised us that this would be acceptable.
10. Revise each caption to state the particularized risk, such as, "Our
directors and Executive Officers have substantial control over the
Company's actions and their interests may not coincide with shareholders
who purchase shares in this offering", or a similar caption.
The Company has revised the Registration Statement in response to your
comment.
Risks related to our Company and its stock - page 9
- ---------------------------------------------------
11. Revise to briefly discuss the limited trading activity by referring to
average trades per day/week or month during the last 12 months.
The Company has revised the Registration Statement on page 9 in response
to your comment.
12. Revise to move the last paragraph on page 9 and the first 6 paragraphs on
page 10 to elsewhere in the prospectus, such as the Business section, as
these are generic to all bank holding companies. Alternatively, revise to
make the discussions particularized to the Company.
The Company has revised the Registration Statement to relocate the subject
paragraphs as you propose in response to your comment.
13. Revise the management's expertise paragraph to indicate the presence or
absence of employment agreements.
The Company has revised the Registration Statement on page 11 in response
to your comment to indicate the absence of employment agreements.
Risks related to our industry - page 11
- ---------------------------------------
14. Move the paragraph on regulation and legislation to elsewhere in the
prospectus after the risk factors. See comment 13 above.
The Company has revised the Registration Statement in response to your
comment by moving the paragraph on regulation and supervision to the
"Business" section.
Use of Proceeds
- ---------------
15. Disclose the plans with regard to adding branches, e.g., none are expected
to be added in the next 12 months, and indicate the expected cost of each
branch addition.
The Company has revised the Registration Statement in response to your
comment. It has no immediate concrete plans either to open or acquire a
branch.
Market Price for Common Equity
- ------------------------------
16. Revise to provide some numbers with regard to the trading volume, e.g.,
daily, weekly or monthly volume of how many shares.
The Company has revised the Registration Statement on page 16 in response
to your comment.
Dilution
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17. Revise to include the information required by paragraph (a) of Item 506 of
Regulation S-B.
The Company has revised the Registration Statement on page 19 in response
to your comment.
Business General
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18. Expand the discussion to cover the last three years developments as
required by Item 101 (a) of Regulation S-B. In this regard, growth in
assets, deposits, capital, number of branches and other material items
should be addressed in the three-year context.
The Company has added a brief discussion of its most recent three years of
operations with emphasis on the items you listed above. There has been no
material change in the loan, deposit or other banking products or services
in the last three years. The bank have been in operation for eight years.
The most material developments in this period has been formation of the
holding company and the expansion into Fresno County, which are discussed
in several sections. We have a complete two-year MD&A. We are not aware of
other material development in the past three years.Please note that the
Company has also added a section entitled Recent Developments on page 8
following Selected Financial Data to reflect highlights of results of
operations for the period ended September 30, 2004.
19. Revise to disclose the information required by Item 101 (c) of Regulation
S-B.
The Company has revised the Registration Statement on page 70 in response
to your comment. In several places in the registration statement the
Company has added financial information about the Fresno branch purchase as
a historical reference.
Our strategic goals
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20. Revise the first paragraph to include whether or not there are any
agreements or commitments to purchase any branches from other institutions
and, if so, indicate the expected costs and timeframe for the purchase.
Likewise, disclose the timeframes for expansion of loan offices and new
branches as well as the expected costs.
The Company has revised the Registration Statement on page 44 in response
to your comment.
Management
Employment Agreements
- ---------------------
21. Revise to disclose and briefly discuss the Supplemental Compensation
Agreements filed as exhibits.
The Company has revised the Registration Statement on page 61 in response
to your comment.
Part II
Undertakings
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22. Revise to include the undertakings required by paragraphs (d) and (f) of
Item 512 of Regulation S-B.
We believe the original Registration Statement included the substance of
the undertakings requested in this comment. The Company has revised the
Registration Statement in Part II to more closely follow the language of
Regulation S-B for these undertakings.
Exhibits
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23. File exhibits 1.1, 4.3, and 5.1 in the next amendment or revise the index
to indicate they will be filed in the future.
The Company has filed exhibits 4.3 (renumbered as 4.1) with Amendment No. 1
to the Registration Statement. The Company has revised the exhibit index to
indicate that exhibits 1.1 and 5.1 will be filed in the future.
Selected Financial Data - page 7
- --------------------------------
24. Revise your column headings in the table on page 8 to reflect the proper
dates and columns. Your heading for 2003 is aligned improperly and may be
confusing to the reader.
The Company has revised the Registration Statement on page 8 in response
to your comment.
Capitalization - page 18
- ------------------------
25. Please revise to present the pro forma capitalization data for both the
minimum and maximum amount of shares sold or confirm in your disclosure
that the data properly represents the minimum and maximum amount of shares
sold.
The Company has revised the Registration Statement on page 18 in response
to your comment.
Dilution - page 19
- ------------------
26. Please revise to quantify and clearly define how you determined the
increase attributable to new investors in your dilution per share
calculation as of June 30, 2004.
The Company has revised the Registration Statement on page 19 in response
to your comment.
Management's Discussion and Analysis
- ------------------------------------
Overview - page 20
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27. Please revise to describe more clearly the acquisition of the branch
facilities and deposits of the Fresno branch of Humboldt Bank.
The Company has revised the Registration Statement on page 20 in response
to your comment.
28. Please revise to provide a brief discussion of the primary components that
make up your general operating expenses in your business.
The Company has revised the Registration Statement on page 20 in response
to your comment.
Critical Accounting Policies - page 20
- --------------------------------------
29. Please revise your disclosures under this section to discuss how accurate
your estimates and assumptions have been in the past and how much your
actual results varied from those estimates. Revise to provide quantitative
disclosure of your sensitivity to change based on other outcomes that are
reasonably likely to occur and that would have a material effect on the
company. Refer to Section C of Release No. 33-8098/34-45907.
The Company has revised the Registration Statement on page 20 in response
to your comment.
Results of Operations - page 21
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30. In order to allow the reader to gain a better understanding of the loan
loss activity, please revise your disclosure on page 25 to more clearly
explain the primary reasons for the credit balance as of June 30, 2004,
besides the $129,000 credit recorded in the provision for loan losses in
June 30, 2004.
The Company has revised the Registration Statement in response to your
comment.
31. Please revise to more clearly describe the underlying facts and
circumstances that led to the net loan charge-offs in 2002 as discussed on
page 30.
The Company has revised the Registration Statement on page 25 in response
to your comment.
32. Please revise to discuss the nature and underlying factors relating to the
changes in your loan volume and product mix in order to allow the reader to
gain a better understanding of your lending business.
The Company has revised the Registration Statement in response to your
comment.
33. Please revise page 37 to explain in further detail the procedures you used
in determining the amount of unallocated reserve. Please clarify how the
unallocated reserve is not directly measured in the determination of the
formula allowance and specific allowance but is included as an element of
measurement when determining the level of the allowance for loan losses.
Revise to explain why you refer to unallocated portions of your reserves on
page 37 but your allocation table on page 38 indicates that you have no
unallocated amounts as of the dates presented.
The Company has revised the Registration Statement in response to your
comment. Although a portion of the allowance is determined by reference to
factors not attributable to specific loans, we have concluded that the
reference to "unallocated reserve" is not appropriate.
34. Please revise your commitments and contingencies discussion on page 39 to
quantify the amounts of all such items.
The Company has revised the Registration Statement in response to your
comment.
Liquidity - page 42
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35. Please revise to disclose the material effects on your liquidity resulting
from the following:
o Provide an explanation of any significant changes in your
statement of cash flows such as the activity in your
available-for-sale securities;
o Discuss the amount of your redemption requirements on the trust
preferred securities and FHLB advances due in each of the next
five years;
o Discuss pertinent matters that could affect the extent of funds
required relating to your short-term and long-term objectives;
o Identify any known trends or circumstances and associated risks
which are reasonably likely to result in material increases or
decreases in the liquidity in the near future;
o Describe any anticipated changes between equity, debt and any
off-balance sheet financing arrangements; and
o Discuss the impact of your acquisition of the Fresno Branch from
Humboldt Bank. Quantify the impact on your current cash flow and
future cash commitments. Discuss the impact of any deposit
run-off expected to occur over the next twelve months.
Refer to Item 303 of Regulation S-B.
The Company has revised the Registration Statement in response to your
comment.
Experts - page 69
- -----------------
36. We-note your disclosures here regarding your change in independent
accountants. Please revise to include a separate section for Item 23 of
Form SB-2, Changes In and Disagreements with Accountants on Accounting and
Financial Disclosures. In addition to the disclosures already provided,
please specifically disclose whether the former accountant resigned,
declined to stand for re-election or was dismissed and the date thereof.
Specifically disclose whether the decision to change accountants was
recommended or approved by any audit, similar committee of the board of
directors or the board of directors. Provide an updated letter from your
former accountant that acknowledges these, changes. Refer to Item 304 of
Regulation S-B.
The Company has revised the Registration Statement in response to your
comment. The Company did not use the term "dismissed" but rather indicated
that the audit committee elected not to "renew the engagement" without
going through a process to consider other auditors.
Condensed Consolidated Interim Financial Statements
- ---------------------------------------------------
37. Please revise your interim financial statements to address the comments
raised below on your annual financial statements as applicable.
The Company does not believe this comment requires any revision in addition
to those made in response to other comments.
38. Please revise to provide a table presenting the detailed components of your
securities portfolio in a footnote, as well as the gross unrealized gains
and losses for each category as of the interim dates presented.
The Company has revised the Registration Statement in response to your
comment.
Note 3. Loans - page F-7
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39. Please revise your interim footnotes to provide a rollforward of your
allowance for loan losses.
The Company has revised the Registration Statement in response to your
comment.
40. We note your MD&A disclosure on page 25 that appears to indicate that your
Credit to the provision for loan losses was actually due to gains on
foreclosed assets.
o Please revise your footnotes to better reflect these
transactions.
o Supplementally provide us with the details of such transactions.
o Tell us why you believe it is appropriate to record the gains on
the foreclosed real estate in your Provision for loan losses
rather than in a separate line item given the timing you
described on page 25. Tell us the GAAP literature on which you
relied for this treatment.
o Tell us how you considered the guidance of paragraph 37 of SFAS
144 as it applies to your circumstances.
In response to your first bullet point, the Company has revised the
footnotes in the Registration Statement as requested. In response to your
second bullet, point, appended to this letter as Exhibit A is a summary
that provides the details of the transactions and discusses the
justification for the Company's accounting treatment. With respect to your
third bullet point, the Company has advised us that it reversed only a
portion of the provision in June 2004. The sale of the subject property was
completed in September 2004, and the Company booked the gain on sale in
September 2004 as a separate line item. The Company believes this treatment
is consistent with the intent of your comment. With respect to your fourth
bullet point, the Company believes that the only sentence in Paragraph 37
of SFAS 144 that might apply to this situation reads, "A gain or loss not
previously recognized that results from the sale of a long-lived asset
(disposal group) shall be recognized at the date of sale." The Company
believes it has complied with this guidance. The Company believed the
reversal of the previously taken provision was appropriate as of June 30
because of the strength of the purchase offer. The Company did not book a
gain on sale until the sale was actually completed in the third quarter.
Note 4. Commitments and Contingencies -page F-7
- ------------------------------------------------
41. Please revise Note 4 to clearly explain how you determined the fair values
you recorded under FIN 45 for your guarantees outstanding. Quantify those
amounts recorded.
The Company has revised the Registration Statement in response to your
comment. The fair values the Company recorded under FIN 45 for the
Company's outstanding guarantees were not considered to be material for
recognition as a liability at June 30, 2004 or December 31, 2003 and have
therefore not been quantified.
Consolidated Financial Statements
- ---------------------------------
Note 3. Summary of Significant Accounting Policies - F-19
- ----------------------------------------------------------
42. Please revise your disclosures regarding Investment Securities to explain
your policies for determining when an other-than-temporary impairment has
occurred and how such an impairment would be measured.
The Company has revised the Registration Statement in response to your
comment.
43. Please revise your Loan policy disclosures to confirm that you use the
interest-method to recognize interest income.
The Company has revised the Registration Statement in response to your
comment.
44. We note your disclosure on page 48 regarding your origination of loans with
the participation of other lenders as well as your servicing of
participated loans. Please revise your footnotes to address the following
in order to provide clear and comprehensive disclosure of your loan
participations.
o Clearly describe the underlying transactions and specifically
define the extent to which you originate the loans involved.
Disclose whether you actually originate the full amount and sell
off the participations or whether you only originate a fraction
of the total.
o Clearly describe your accounting policies and procedures for loan
participations in a clear and concise manner, and discuss the
accounting treatment for loan transfers. For transactions where
you are getting sale treatment under SFAS 140, please revise Note
3 to confirm in your disclosure that you meet each of the
criteria required by paragraph 9 of SFAS 140. Disclose each of
those criteria.
o Revise to quantify in tabular fashion the amount of loans
transferred versus retained during the periods presented.
o Disclose the underlying terms and conditions of the loan
participation agreements such as recourse obligations.
o Please provide the disclosures by paragraph 17(e) of SFAS No. 140
for servicing assets and liabilities and paragraphs 13(d) and
A52(b) of FIN 45 for any recourse obligations. For additional
information, refer to paragraphs 104106 and paragraph 13 of SFAS
No. 140.
The Company has revised the Registration Statement in response to your
comment.
45. Revise to discuss your policy of recording an allowance for credit losses
on loan commitments that is separate from your allowance for loan losses.
Disclose the amount recorded for such amounts.
The Company has revised the Registration Statement in response to your
comment.
46. We note your statement on page F-25 that the deconsolidation of Valley
Commerce Trust I "appears to be an unintended consequence of FIN 46."
However, such disclosure could be confusing to investors. Please revise to
delete these statements or to better clarify your intended meaning.
The Company has revised the Registration Statement in response to your
comment.
47. Please revise your discussion on page F-25 regarding the impact of SFAS 149
and SFAS 133 to clarify whether you have participated in any derivative
transactions during the periods presented. If so, revise to quantify their
impact.
The Company has revised the Registration Statement in response to your
comment.
Note 4. Available-for-Sale Investment Securities -page F-26
- ------------------------------------------------------------
48. Please revise your disclosures regarding your unrealized losses at the
bottom of page F-27 to confirm that you have the intent and ability to hold
these debt securities that are in an unrealized loss position to the
earlier of recovery or maturity.
The Company has revised the Registration Statement in response to your
comment.
Note 8. Borrowing Arrangements - page F-31
- ------------------------------------------
49. Please revise your discussions of your long-term FHLB advances to quantify
the amount of such borrowings that are subject to early call or redemption
features. Revise to describe the nature of such features.
The Company has revised the Registration Statement in response to your
comment.
Note 9. Junior Subordinated Deferrable Interest Debentures - page F-32
- -----------------------------------------------------------------------
50. Please revise your description of the Valley Commerce Trust I and its
related trust preferred securities to address the following:
o Discuss how you account for dividends not currently declared or
paid, but which will be payable under the mandatory redemption
features (e.g., dividends that will be payable out of future
earnings).
The Company has revised the Registration Statement in response to your
comment.
o Revise to confirm that you own 100% of the common stock of the
Trust. Refer to Rule 3-10(b) of Regulation S-X.
The Company has revised the Registration Statement in response to your
comment.
Note 14. Related Party Transactions - page F-42
- ------------------------------------------------
51. Please revise Note 14 to discuss any other related party transactions,
including your lease agreements with certain directors as discussed on page
63. Discuss the terms of the lease and quantify the amounts expensed under
such agreements during the periods presented.
The Company has revised the Registration Statement in response to your
comment.
Please do not hesitate to contact me if you have any questions or require any
additional information.
Sincerely yours,
/s/ Thomas G. Reddy
- -------------------
Thomas G. Reddy
cc: Roy Estridge
Francis Sarena
Jeff Clair, Perry-Smith LLP
Exhibit A
1. The Shoshone loan had been in nonaccrual since July 2001. A specific
allowance for loss had been identified on this loan commencing in 2001. The
specific allowance was footnoted in the annual financial statements as
follows: 12/31/01 - $380,000; 12/31/02 - $178,000; 12/31/03 - $177,000. The
decrease in the specific allowance in 2002 reflected the exercise of a 50%
SBA guarantee. The ALL was reevaluated quarterly.
2. The collateral underlying the loan was foreclosed on June 28, 2004.
Management had two accounting tasks to accomplish. First, to properly book
the Other Real Estate. Second, to review the current level of the Allowance
for Loan Losses as of June 30, 2004 in light of the transfer of the
nonaccrual loan to ORE.
3. The GAAP requirement for booking the Other Real Estate is to record it at
carrying value or FMV less estimated selling costs. The FMV was not firmly
established at the date of foreclosure. Management intended to support the
appropriate FMV of the asset through an independent, professional appraisal
to determine the proper transfer amount to OREO and if any related write
down of the asset and LLR was necessary. Management began actively
marketing the property in early July 2004 and almost immediately received
an offer to purchase the property, with escrow closing in late September
2004. This offer was of sufficient strength to preclude the need for an
appraisal and supported a FMV in excess of the carrying amount of the
asset. Due to receipt of this offer, management concluded that there would
be full recovery of the carrying amount of the Shoshone loan. Accordingly,
the asset was transferred to ORE at its carrying value of $765,000. On
September 28, 2004, the Company received the proceeds from the sale of the
property, eliminated the ORE and recorded a gain in other income of
$240,000.
4. After transferring the Shoshone loan to ORE, management reevaluated the
current level of the ALL compared to the existing risk exposure within the
portfolio. The circumstances described in the preceding paragraph supported
that there was no need for a charge-off of any portion of the Shoshone
loan. As a result of management's assessment of the ALL, management
recorded a credit to the provision for loan losses sufficient to adjust the
ALL to the level considered necessary to reflect the probable losses
inherent in the loan portfolio at June 30, 2004.