<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration Nos. 333-58355 and
333-58355-01
PROSPECTUS
1,600,000 PREFERRED SECURITIES
FIRST AMERICA CAPITAL TRUST
8.50% CUMULATIVE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $25 PER PREFERRED SECURITY)
GUARANTEED, AS DESCRIBED HEREIN, BY
FIRST BANKS AMERICA, INC.
------------------
$40,000,000 8.50% SUBORDINATED DEBENTURES OF
FIRST BANKS AMERICA, INC.
------------------
The 8.50% Cumulative Trust Preferred Securities (the "Preferred
Securities") offered hereby represent preferred undivided beneficial interests
in the assets of First America Capital Trust, a statutory business trust
created under the laws of the State of Delaware ("the Trust"). First Banks
America, Inc., a Delaware corporation ("FBA" or the "Company"), will own
all of the common securities (the "Common Securities" and, together with the
Preferred Securities, the "Trust Securities") representing undivided
beneficial interests in the assets of the Trust.
(continued on next page)
The Preferred Securities have been approved for listing on the New York
Stock Exchange (the "NYSE") under the symbol "FBAPrT."
--------------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 8 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
--------------------------------
THE SECURITIES OFFERED BY THIS PROSPECTUS ARE NOT SAVINGS OR DEPOSIT
ACCOUNTS, ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANKING OR NON-
BANKING AFFILIATE OF THE COMPANY (EXCEPT TO THE EXTENT THAT PREFERRED
SECURITIES ARE GUARANTEED BY THE COMPANY AS DESCRIBED HEREIN), ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENT AGENCY AND INVOLVE INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF PRINCIPAL. THE SECURITIES
OFFERED BY THIS PROSPECTUS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY FIRST BANKS, INC.
--------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
========================================================================================================================
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC COMMISSION<F1> THE TRUST<F2>
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Preferred Security............................... $25.00 0.9375<F2> $25.00
- ------------------------------------------------------------------------------------------------------------------------
Total<F3>............................................ $40,000,000 1,500,000<F2> $40,000,000
========================================================================================================================
<FN>
<F1>The Trust and the Company have each agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
<F2>In view of the fact that the proceeds of the sale of the Preferred Securities will be invested in
the Subordinated Debentures, the Company has agreed to pay the Underwriters as compensation for
their arranging the investment therein of such proceeds $0.9375 per Preferred Security, or
$1,500,000 in the aggregate ($1,725,000 if the over-allotment option is exercised in full). See
"Underwriting." The Company has also agreed to pay the expenses of the offering estimated to be
$250,000.
<F3>The Trust has granted the Underwriters an option exercisable within 30 days from the date of this
Prospectus to purchase up to 240,000 additional Preferred Securities on the same terms and
conditions set forth above to cover over-allotments, if any. If all such additional
Preferred Securities are purchased, the total Price to Public and Proceeds to the Trust will be
$46,000,000.
</TABLE>
-----------------------------------------
The Preferred Securities are offered by the Underwriters subject to receipt
and acceptance by them, prior sale and the Underwriters' right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the Preferred Securities will be made
on or about July 21, 1998.
STIFEL, NICOLAUS & COMPANY HOEFER & ARNETT
INCORPORATED INCORPORATED
July 15, 1998
<PAGE> 2
(continued from previous page)
State Street Bank and Trust Company is the Property Trustee (as defined
herein) of the Trust. The Trust exists for the purpose of issuing the Preferred
Securities and investing the proceeds thereof in an equivalent amount of 8.50%
Subordinated Debentures (the "Subordinated Debentures") of the Company. The
Subordinated Debentures will mature on June 30, 2028, which date may be (i)
shortened to a date not earlier than June 30, 2003, or (ii) extended to a date
not later than June 30, 2037, in each case if certain conditions are met
(including, in the case of shortening the Stated Maturity (as defined herein),
the Company having received prior approval of the Board of Governors of the
Federal Reserve System ("Federal Reserve") to do so if then required under
applicable capital guidelines or policies of the Federal Reserve). The
Preferred Securities will have a preference under certain circumstances with
respect to cash distributions and amounts payable on liquidation, redemption or
otherwise over the Common Securities. See "Description of the Preferred
Securities--Subordination of Common Securities."
Holders of Preferred Securities are entitled to receive preferential
cumulative cash distributions, at the annual rate of 8.50% of the liquidation
amount of $25 per Preferred Security (the "Liquidation Amount"), accruing
from July 21, 1998, the date of original issuance, and payable quarterly in
arrears on the last day of March, June, September and December of each year,
commencing September 30, 1998 (the "Distributions"). The Company has the right,
so long as no Debenture Event of Default (as defined herein) has occurred and
is continuing, to defer payment of interest on the Subordinated Debentures at
any time or from time to time for a period not to exceed 20 consecutive
quarters with respect to each deferral period (each, an "Extension Period");
provided that no Extension Period may extend beyond the Stated Maturity of the
Subordinated Debentures. Upon the termination of any such Extension Period and
the payment of all amounts then due, the Company may elect to begin a new
Extension Period subject to the requirements set forth herein. If interest
payments on the Subordinated Debentures are so deferred, Distributions on the
Preferred Securities will also be deferred, and the Company will not be
permitted, subject to certain exceptions described herein, to declare or pay
any cash distributions with respect to its capital stock or debt securities
that rank pari passu with or junior to the Subordinated Debentures. WHILE THE
COMPANY INTENDS TO TAKE THE POSITION THAT THE SUBORDINATED DEBENTURES WILL NOT
BE DEEMED TO BE ISSUED WITH ORIGINAL ISSUE DISCOUNT ("OID"), DURING AN
EXTENSION PERIOD, INTEREST ON THE SUBORDINATED DEBENTURES WILL CONTINUE TO
ACCRUE (AND THE AMOUNT OF DISTRIBUTIONS TO WHICH HOLDERS OF THE PREFERRED
SECURITIES ARE ENTITLED WILL ACCUMULATE) AT THE RATE OF 8.50% PER ANNUM,
COMPOUNDED QUARTERLY, AND HOLDERS OF THE PREFERRED SECURITIES WILL BE REQUIRED
TO INCLUDE INTEREST INCOME AS OID IN THEIR GROSS INCOME FOR UNITED STATES
FEDERAL INCOME TAX PURPOSES IN ADVANCE OF RECEIPT OF THE CASH DISTRIBUTIONS
WITH RESPECT TO SUCH DEFERRED INTEREST PAYMENTS. A HOLDER OF PREFERRED
SECURITIES WHO DISPOSES OF ITS PREFERRED SECURITIES BETWEEN RECORD DATES FOR
PAYMENTS OF DISTRIBUTIONS (AND CONSEQUENTLY DOES NOT RECEIVE A DISTRIBUTION
FROM THE TRUST FOR THE PERIOD PRIOR TO SUCH DISPOSITION) WILL NEVERTHELESS BE
REQUIRED TO INCLUDE ACCRUED BUT UNPAID INTEREST OR OID, IF ANY, ON THE
SUBORDINATED DEBENTURES THROUGH THE DATE OF DISPOSITION IN ORDINARY INCOME AND
TO ADD THE AMOUNT OF ANY ACCRUED OID TO ITS ADJUSTED TAX BASIS IN ITS PRO RATA
SHARE OF THE UNDERLYING SUBORDINATED DEBENTURES DEEMED DISPOSED OF. See
"Description of the Subordinated Debentures--Option to Extend Interest Payment
Period," "Certain Federal Income Tax Consequences--Potential Extension of
Interest Payment Period and Original Issue Discount" and "--Disposition of
Preferred Securities."
The Company and the Trust believe that, taken together, the obligations of
the Company under the Guarantee, the Trust Agreement, the Subordinated
Debentures, the Indenture and the Expense Agreement (each as defined herein)
provide, in the aggregate, a full, irrevocable and unconditional guarantee, on
a subordinated basis, of all of the obligations of the Trust under the
Preferred Securities. See "Relationship Among the Preferred Securities, the
Subordinated Debentures and the Guarantee--Full and Unconditional Guarantee."
The Guarantee of the Company guarantees the payment of Distributions and
payments on liquidation or redemption of the Preferred Securities, but only in
each case to the extent of funds held by the Trust, as described herein. See
"Description of the Guarantee--General." If the Company does not make
interest payments on the Subordinated Debentures held by the Trust, the Trust
will have insufficient funds to pay Distributions on the Preferred Securities.
The Guarantee does not cover payments of Distributions when the Trust does not
have sufficient funds to pay such Distributions. In such event, a
(continued on next page)
<PAGE> 3
(continued from previous page)
holder of Preferred Securities may institute a legal proceeding directly
against the Company pursuant to the terms of the Indenture to enforce payments
of amounts equal to such Distributions to such holder. See "Description of the
Subordinated Debentures--Enforcement of Certain Rights by Holders of the
Preferred Securities." The obligations of the Company under the Guarantee and
the Preferred Securities are subordinate and junior in right of payment to all
Senior Debt, Subordinated Debt and Additional Senior Obligations (each as
defined herein) of the Company. The Subordinated Debentures are unsecured
obligations of the Company and are subordinated to all Senior Debt,
Subordinated Debt and Additional Senior Obligations of the Company.
The Preferred Securities are subject to mandatory redemption, in whole or
in part, upon repayment of the Subordinated Debentures at maturity or their
earlier redemption. Subject to Federal Reserve approval, if then required under
applicable capital guidelines or policies of the Federal Reserve, the
Subordinated Debentures are redeemable prior to maturity at the option of the
Company (i) on or after June 30, 2003, in whole at any time or in part from
time to time, or (ii) at any time, in whole (but not in part), within 180 days
following the occurrence of a Tax Event, a Capital Treatment Event or an
Investment Company Event (each as defined herein), in each case at a redemption
price equal to the accrued and unpaid interest on the Subordinated Debentures
so redeemed to the date fixed for redemption, plus 100% of the principal amount
thereof. See "Description of the Preferred Securities--Redemption."
The Company has the right at any time to dissolve, wind-up or terminate the
Trust, subject to the Company having received prior approval of the Federal
Reserve to do so if then required under applicable capital guidelines or
policies of the Federal Reserve. In the event of the voluntary or involuntary
dissolution, winding up or termination of the Trust, after satisfaction of
liabilities to creditors of the Trust as required by applicable law, the
holders of Preferred Securities will be entitled to receive a Liquidation
Amount of $25 per Preferred Security, plus accumulated and unpaid Distributions
thereon to the date of payment, which may be in the form of a Subordinated
Debenture having an aggregate principal amount equal to the Liquidation Amount
of such Preferred Securities (and carrying with it accumulated interest in an
amount equal to the accumulated and unpaid Distributions then due on such
Preferred Securities), subject to certain exceptions. See "Description of the
Preferred Securities--Redemption" and "--Liquidation Distribution Upon
Termination."
--------------------------------
The Company will provide Quarterly Reports containing unaudited financial
statements to the holders of Preferred Securities if such reports are furnished
to the holders of the Company's common stock, and Annual Reports containing
financial statements audited by the Company's independent auditors. The Company
will also furnish Annual Reports on Form 10-K and Quarterly Reports on Form
10-Q free of charge to holders of Preferred Securities who so request in
writing addressed to the Secretary of the Company.
--------------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE PREFERRED
SECURITIES. SUCH TRANSACTIONS MAY INCLUDE OVER-ALLOTMENT, STABILIZING
TRANSACTIONS, THE PURCHASE OF PREFERRED SECURITIES TO COVER SHORT POSITIONS AND
THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF SUCH ACTIVITIES, SEE
"UNDERWRITING." SUCH STABILIZING TRANSACTIONS, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
<PAGE> 4
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES
MAP OF LOCATIONS
[MAP OF USA]
- -------------------------------------------------------------------------------
BANKTEXAS N.A.
HAS 6 BRANCHES SERVING HOUSTON
AND DALLAS, TEXAS . . .
- --------------------------------
(DALLAS)
Abrams
Irving--Las Colinas
McKinney
(HOUSTON)
Allen Parkway
Northside
Westheimer
- --------------------------------
PENDING ACQUISITION . . .
Redwood Bank
FIRST BANK OF CALIFORNIA
HAS 11 BRANCHES SERVING
NORTHERN CALIFORNIA . . .
- --------------------------------
Campbell
Concord
Fairfield
Rancho Cordova
Roseville (3)
Sacramento
San Francisco
San Pablo
Vallejo
CORPORATE OFFICE . . .
- --------------------------------
FIRST BANKS AMERICA, INC.
135 NORTH MERAMEC AVENUE
ST. LOUIS, MISSOURI 63105
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere (or incorporated by reference) in this
Prospectus. Unless otherwise indicated, the information in this Prospectus
assumes that the Underwriters' over-allotment option will not be exercised.
Prospective investors should carefully consider the information set forth under
the heading "Risk Factors."
THE COMPANY
GENERAL
First Banks America, Inc. ("FBA" or the "Company") is a bank holding
company with two wholly-owned banking subsidiaries, First Bank of California
("FB California"), a bank chartered by the State of California, and BankTEXAS
National Association, a national banking association ("BankTEXAS")
(collectively, the "Subsidiary Banks"). FBA, through FB California and
BankTEXAS, operates a total of eleven banking locations in the San
Francisco-Sacramento corridor of Northern California and a total of six banking
locations in Houston, Dallas, Irving and McKinney, Texas. As of March 31, 1998,
FBA had approximately $692.4 million in total assets, $444.1 million in total
loans, net of unearned discount, $600.6 million in total deposits and $56.8
million in total stockholders' equity. Since 1994, FBA has been controlled by
First Banks, Inc., a $4.3 billion bank holding company headquartered in
St. Louis, Missouri ("First Banks").
In an effort to enhance its banking franchise, FBA places emphasis upon
acquiring other financial institutions as a means of accelerating its growth in
order to expand its presence in a given market, to increase the scope of its
market area or to enter new or noncontiguous market areas. After an acquisition
is consummated, FBA endeavors to enhance the franchise of the acquired entity
by supplementing the acquired entity's marketing and business development
efforts in order to broaden customer bases, strengthen particular business
segments or fill voids in its overall market coverage. In addition, the
acquisition program enables FBA to further leverage the operational support
services available to it through First Banks and to provide the products and
services typically available only through such a larger organization. FBA's
management philosophy is to centralize overall corporate policies, procedures
and administrative functions and to provide operational support functions for
the Subsidiary Banks. Primary responsibility for implementation of such
policies and management of the Subsidiary Banks resides with the officers and
directors of the respective Subsidiary Banks.
After First Banks' 1994 acquisition of control of FBA, FBA embarked on a
business strategy to improve its operating performance and strengthen its asset
quality as prerequisites to initiating an effective acquisition program. The
initial stages of this strategy involved substantial restructuring of assets
and liabilities and reduction of operating expenses, resulting in significant
losses in the sale of investment securities and the establishment of
substantial provisions for loan losses. The loan losses related primarily to
problems with FBA's portfolio of indirect automobile loans. The losses also
included significant nonrecurring expenses in connection with the reduction of
non-interest expenses, including personnel and employee benefits, occupancy,
data processing and other expenses. Following net losses of $4.8 million and
$905,000 for the fiscal years ended December 31, 1995 and 1994, respectively,
reflecting the implementation of the new strategy, FBA returned to
profitability in 1996, with consolidated net income of $691,000, representing a
0.15% return on average assets. FBA's profitability has continued to improve.
FBA has reported consolidated net income of $3.5 million for the fiscal year
ended December 31, 1997 and consolidated net income of $1.1 million for the
three months ended March 31, 1998.
Selected consolidated financial data of FBA and its subsidiaries, including
the Subsidiary Banks, as of and for the five years ended December 31, 1997 and
the three months ended March 31, 1998 and 1997 are set forth below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------------ -----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)............... $ 1,100 484 3,533 691 (4,814) (905) 219
Stockholders' equity............ 56,841 38,013 45,091 38,195 40,965 39,714 14,952
Total assets.................... 692,409 530,023 643,664 529,087 468,486 331,790 368,608
Return on average assets........ 0.67%<F1> 0.37%<F1> 0.65% 0.15% (1.28)% (0.25)% 0.07%
Return on average equity........ 8.13 <F1> 5.11 <F1> 8.90 1.71 (12.06) (3.66) 1.49
<FN>
- --------
<F1>Ratios as of March 31, 1998 and 1997 are annualized.
</TABLE>
2
<PAGE> 6
The Subsidiary Banks offer a broad range of commercial and personal banking
services, including certificates of deposit, individual retirement and other
time deposit accounts, checking and other demand deposit accounts, and interest
checking, savings and money market accounts. Loan product offerings include
commercial and financial, commercial and residential real estate, real estate
construction and development and consumer loans. Other financial services
include mortgage banking, automatic teller machines, telephone banking, lockbox
deposits, cash management services, sweep accounts, credit-related insurance
and safe deposit boxes. FBA and the Subsidiary Banks purchase certain services
and supplies, including data processing services, internal auditing, loan
review, income tax preparation and assistance, accounting, asset/liability
management and investment services, loan servicing and other management and
administrative services from First Banks and its affiliates.
The following table provides general information regarding FB California
and BankTEXAS as of March 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF TOTAL LOANS, NET OF TOTAL
LOCATIONS ASSETS UNEARNED DISCOUNT DEPOSITS
--------- ------ ----------------- --------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
FB California........................... 11 $415,806 270,713 365,405
BankTEXAS............................... 6 271,902 173,386 235,215
</TABLE>
While FBA initially focused its acquisition efforts within its primary
market areas of Houston and Dallas, Texas and the immediately surrounding
areas, increased prices for potential acquisition candidates in the Texas
market generally reduced the suitability to FBA of potential acquisition
candidates based in such areas. Accordingly, FBA broadened its target market to
include California, where FBA perceived pricing to be more attractive. The
economic advantages of the California market were enhanced by the geographic
proximity of various offices of First Bank & Trust, a subsidiary of First
Banks. Between October 1996 and February 1998, FBA completed four acquisitions
of banks located in northern California, which banks were subsequently merged
together to form FB California. See "Management's Discussion and
Analysis--Acquisitions" for a discussion of FBA's recent acquisitions.
PENDING ACQUISITION
On June 8, 1998, FBA announced the signing of an Agreement in Principle to
acquire Redwood Bancorp ("Redwood"), and its wholly owned subsidiary, Redwood
Bank, for cash consideration of $26 million. Redwood is headquartered in San
Francisco, California and operates four banking locations in the San Francisco
Bay area. As of March 31, 1998, Redwood had approximately $152.0 million in
total assets, $120.1 million in total loans, net of unearned discount, $130.1
million in total deposits and $17.8 million in total stockholder's equity. The
transaction is subject to various conditions, including the negotiation of a
definitive agreement and the receipt of regulatory approvals and the approval
of Redwood's sole shareholder. FBA anticipates the transaction will be
consummated at the end of the fourth quarter of 1998. See "Use of Proceeds"
and "Pro Forma Financial Information."
Selected consolidated financial data of Redwood and its subsidiaries, as of
and for the two years ended December 31, 1997 and the three months ended March
31, 1998 and 1997 are set forth below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
-------------------- --------------------
1998 1997 1997 1996
---- ---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income (loss)....................... $ 425 250 1,420 3,307
Stockholders' equity.................... 17,826 16,127 17,472 15,943
Total assets............................ 152,006 133,157 145,472 134,061
Return on average assets................ 1.14%<F1> 0.75%<F1> 1.02% 2.63%
Return on average equity................ 9.62 <F1> 6.24 <F1> 8.50 23.02
<FN>
- --------
<F1>Ratios as of March 31, 1998 and 1997 are annualized.
</TABLE>
3
<PAGE> 7
RECENT DEVELOPMENTS
On July 13, 1998, FBA issued a press release reporting its unaudited
financial data for the three month period and six month period ended June 30,
1998. FBA reported net income of $1.02 million or $0.20 per share on a diluted
basis, for the quarter ended June 30, 1998 compared to $986,000 or $0.24 per
share on a diluted basis for the quarter ended June 30, 1997. FBA reported net
income for the six months ended June 30, 1998 and 1997 of $2.12 million and
$1.47 million, or $0.42 and $0.36 per share on a diluted basis, respectively.
Net income for the period ended June 30, 1998 included expenses associated with
converting data processing and back office operations of Surety Bank and
Pacific Bay Bank (as hereinafter defined) to FBA's systems and procedures.
Results for the six months ended June 30, 1998 include a net charge after
related income taxes of $225,000, or $0.04 per share on a diluted basis, in
settlement of litigation. At June 30, 1998, FBA had consolidated assets of
approximately $675.0 million.
FBA's principal executive office is located at 135 North Meramec, St. Louis,
Missouri 63105, and its telephone number is (314) 854-4600.
THE TRUST
The Trust is a statutory business trust formed under Delaware law pursuant
to (i) a trust agreement, dated as of June 18, 1998, executed by the Company,
as depositor, and the trustees of the Trust (together with the Property
Trustee, the "Trustees"), and (ii) a certificate of trust filed with the
Secretary of State of the State of Delaware on June 18, 1998. The initial trust
agreement will be amended and restated in its entirety (as so amended and
restated, the "Trust Agreement") substantially in the form filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.
The Trust Agreement will be qualified as an indenture under the Trust Indenture
Act of 1939, as amended (the "Trust Indenture Act"). Upon issuance of the
Preferred Securities, the purchasers thereof will own all of the Preferred
Securities. The Company will acquire all of the Common Securities which will
represent an aggregate liquidation amount equal to at least 3% of the total
capital of the Trust. The Common Securities will rank pari passu, and payments
will be made thereon pro rata, with the Preferred Securities, except that upon
the occurrence and during the continuance of an Event of Default (as defined
herein) under the Trust Agreement resulting from a Debenture Event of Default,
the rights of the Company as holder of the Common Securities to payment in
respect of Distributions and payments upon liquidation, redemption or otherwise
will be subordinated to the rights of the holders of the Preferred Securities.
See "Description of the Preferred Securities--Subordination of Common
Securities." The Trust exists for the exclusive purposes of (i) issuing the
Trust Securities representing undivided beneficial interests in the assets of
the Trust, (ii) investing the gross proceeds of the Trust Securities in the
Subordinated Debentures issued by the Company, and (iii) engaging in only those
other activities necessary, advisable, or incidental thereto. The Subordinated
Debentures and payments thereunder will be the only assets of the Trust and
payments under the Subordinated Debentures will be the only revenue of the
Trust. The Trust has a term of 55 years, but may terminate earlier as provided
in the Trust Agreement. The principal executive office of the Trust is 135
North Meramec, St. Louis, Missouri 63105, and its telephone number is
(314) 854-4600.
The number of Trustees will, pursuant to the Trust Agreement, initially be
five. Three of the Trustees (the "Administrative Trustees") will be persons
who are employees or officers of, or who are affiliated with, the Company. The
fourth trustee will be a financial institution that is unaffiliated with the
Company, which trustee will serve as institutional trustee under the Trust
Agreement and as indenture trustee for the purposes of compliance with the
provisions of the Trust Indenture Act (the "Property Trustee"). State Street
Bank and Trust Company, a state chartered trust company organized under the
laws of the Commonwealth of Massachusetts, will be the Property Trustee until
removed or replaced by the holder of the Common Securities. For purposes of
compliance with the provisions of the Trust Indenture Act, State Street Bank
and Trust Company will also act as trustee (the "Guarantee Trustee") under
the Guarantee and as Debenture Trustee (as defined herein) under the Indenture.
The fifth trustee will be an entity that maintains its principal place of
business in the State of Delaware (the "Delaware Trustee"). Wilmington Trust
Company, a Delaware chartered trust company, will act as Delaware Trustee.
The Property Trustee will hold title to the Subordinated Debentures for the
benefit of the holders of the Trust Securities and in such capacity will have
the power to exercise all rights, powers and privileges under the Indenture.
The Property Trustee will also maintain exclusive control of a segregated
non-interest-bearing bank account (the "Property Account") to hold all
payments made in respect of the Subordinated Debentures for the benefit of the
4
<PAGE> 8
holders of the Trust Securities. The Property Trustee will make payments of
Distributions and payments on liquidation, redemption and otherwise to the
holders of the Trust Securities out of funds from the Property Account. The
Guarantee Trustee will hold the Guarantee for the benefit of the holders of the
Preferred Securities. The Company, as the holder of all the Common Securities,
will have the right to appoint, remove or replace any Trustee and to increase
or decrease the number of Trustees. The Company will pay all fees and expenses
related to the Trust and the offering of the Trust Securities.
The rights of the holders of the Preferred Securities, including economic
rights, rights to information and voting rights, are set forth in the Trust
Agreement, the Delaware Business Trust Act (the "Trust Act") and the Trust
Indenture Act. See "Description of the Preferred Securities."
THE OFFERING
<TABLE>
<S> <C>
Securities Offered................ 1,600,000 Preferred Securities having a Liquidation Amount of $25 per Preferred
Security. The Preferred Securities represent preferred undivided beneficial
interests in the assets of the Trust, which assets will consist solely of the
Subordinated Debentures and payments thereunder. The Trust has granted the
Underwriters an option, exercisable within 30 days after the date of this
Prospectus, to purchase up to an additional 240,000 Preferred Securities at the
initial offering price, solely to cover over-allotments, if any.
Distributions..................... The Distributions payable on each Preferred Security will be fixed at a rate per
annum of 8.50% of the Liquidation Amount of $25 per Preferred Security, will be
cumulative, will accrue from July 21, 1998, the date of original issuance of the
Preferred Securities, and will be payable quarterly in arrears, on March 31,
June 30, September 30 and December 31 of each year, commencing September 30,
1998. See "Description of the Preferred Securities--Distributions--Payment of
Distributions."
Option to Extend Interest Payment
Period.......................... The Company has the right, at any time, so long as no Debenture Event of Default
has occurred and is continuing, to defer payments of interest on the Subordinated
Debentures for a period not exceeding 20 consecutive quarters; provided, that no
Extension Period may extend beyond the Stated Maturity of the Subordinated
Debentures. As a consequence of the extension by the Company of the interest
payment period, quarterly Distributions on the Preferred Securities will be de-
ferred (though such Distributions would continue to accrue with interest thereon
compounded quarterly, since interest will continue to accrue and compound on the
Subordinated Debentures) during any such Extension Period. During an Extension
Period, the Company will be prohibited, subject to certain exceptions described
herein, from declaring or paying any cash distributions with respect to its
capital stock or debt securities that rank pari passu with or junior to the
Subordinated Debentures. Upon the termination of any Extension Period and the
payment of all amounts then due, the Company may commence a new Extension Period,
subject to the foregoing requirements. See "Description of the Preferred
Securities--Distributions--Extension Period" and "Description of the Subordi-
nated Debentures--Option to Extend Interest Payment Period."
Should an Extension Period occur, holders of Preferred Securities will be
required to include deferred interest income in their gross income for United
States federal income tax purposes in advance of receipt of the cash
distributions with respect to such deferred interest payments. See "Certain
Federal Income Tax Consequences--Potential Extension of Interest Payment Period
and Original Issue Discount."
Optional Redemption............... The Preferred Securities are subject to mandatory redemption, in whole or in
part, upon repayment of the Subordinated Debentures at maturity or their earlier
5
<PAGE> 9
redemption. Subject to Federal Reserve approval, if then required under applica-
ble capital guidelines or policies of the Federal Reserve, the Subordinated
Debentures are redeemable prior to maturity at the option of the Company (i) on
or after June 30, 2003, in whole at any time or in part from time to time, or
(ii) at any time, in whole (but not in part), within 180 days following the
occurrence of a Tax Event, a Capital Treatment Event or an Investment Company
Event, in each case at the redemption price equal to 100% of the principal amount
of the Subordinated Debentures, together with any accrued but unpaid interest to
the date fixed for redemption. See "Description of the Subordinated
Debentures--Redemption."
Distribution of Subordinated
Debentures...................... The Company has the right at any time to terminate the Trust and cause the
Subordinated Debentures to be distributed to holders of Preferred Securities in
liquidation of the Trust, subject to the Company having received prior approval
of the Federal Reserve to do so if then required under applicable capital
guidelines or policies of the Federal Reserve. See "Description of the Preferred
Securities--Redemption" and "Description of the Preferred
Securities--Liquidation Distribution Upon Termination."
Guarantee......................... The Company has guaranteed the payment of Distributions and payments on
liquidation or redemption of the Preferred Securities, but only in each case to
the extent of funds held by the Trust, as described herein. The Company and the
Trust believe that, taken together, the obligations of the Company under the
Guarantee, the Trust Agreement, the Subordinated Debentures, the Indenture and
the Expense Agreement provide, in the aggregate, a full, irrevocable and
unconditional guarantee, on a subordinated basis, of all of the obligations of
the Trust under the Preferred Securities. The obligations of the Company under
the Guarantee and the Preferred Securities are subordinate and junior in right of
payment to all Senior Debt, Subordinated Debt and Additional Senior Obligations
of the Company. If the Company does not make principal or interest payments on
the Subordinated Debentures, the Trust will not have sufficient funds to make
distributions on the Preferred Securities; in such event, the Guarantee will not
apply to such Distributions until the Trust has sufficient funds available
therefor. See "Description of the Guarantee."
Voting Rights..................... The holders of the Preferred Securities will have no voting rights except in
limited circumstances. The affirmative consent of the holders of at least 66 2/3%
of the outstanding Preferred Securities will be required by the Trust for
amendments to the Trust Agreement that would adversely affect the rights or
privileges of the holders of the Preferred Securities. See "Description of the
Preferred Securities--Voting Rights; Amendment of Trust Agreement."
Use of Proceeds................... The proceeds from the sale of the Preferred Securities offered hereby will be
used by the Trust to purchase the Subordinated Debentures issued by the Company.
The Company intends to use the net proceeds from the sale of the Subordinated
Debentures to repay outstanding indebtedness to First Banks under the terms of a
revolving promissory note payable, for general corporate purposes, for acquisi-
tions (including the pending acquisition of Redwood), and the possible repurchase
of common stock from time to time. The portion of the net proceeds from the sale
of Subordinated Debentures which is not used to repay existing obligations will
be invested in short term investment securities pending its use for the purposes
described above. See "Use of Proceeds" and "Management's Discussion and
Analysis--Acquisitions."
New York Stock Exchange........... The Preferred Securities have been approved for listing on the NYSE under the
symbol "FBAPrT".
</TABLE>
6
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL DATA<F1>
The consolidated financial data below, insofar as it relates to the five
years ended December 31, 1997, is derived from the audited consolidated
financial statements of FBA. The data for the three month periods ended March
31, 1998 and 1997 has been derived from unaudited interim financial statements;
however, in the opinion of the Company, such unaudited interim statements
include all adjustments (consisting of normal recurring accruals) necessary to
fairly present the data for such periods. The results of operations for the
three month period ended March 31, 1998 are not necessarily indicative of
results to be achieved for the full year. Such data is qualified in its
entirety by reference to the consolidated financial statements of FBA included
elsewhere in this Prospectus or incorporated by reference and should be read in
conjunction with such financial statements and related notes thereto and
"Management's Discussion and Analysis." See "Available Information" and
"Incorporation of Certain Documents by Reference."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------ ------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income......... $ 12,996 9,611 42,517 33,382 26,556 22,649 21,966
Interest expense........ 5,899 4,508 19,155 15,533 13,134 11,072 9,750
-------- ------- ------- ------- ------- ------- -------
Net interest income..... 7,097 5,103 23,362 17,849 13,422 11,577 12,216
Provision for possible
loan losses........... 300 550 2,000 2,405 6,416 1,258 490
-------- ------- ------- ------- ------- ------- -------
Net interest income
after provision for
possible loan
losses................ 6,797 4,553 21,362 15,444 7,006 10,319 11,726
Noninterest income...... 1,150 871 3,287 3,585 129 (4,511) 3,068
Noninterest expense..... 6,057 4,493 17,677 17,737 14,148 16,174 14,575
-------- ------- ------- ------- ------- ------- -------
Income (loss) before
provision (benefit)
for income taxes and
minority interest in
(income) loss of
subsidiary............ 1,890 931 6,972 1,292 (7,013) (10,366) 219
Provision (benefit) for
income tax expense.... 790 361 3,145 470 (2,188) (9,461) --
-------- ------- ------- ------- ------- ------- -------
Net income (loss) before
minority interest in
(income) loss of
subsidiary............ 1,100 570 3,827 822 (4,825) (905) 219
Minority interest in
(income) loss of
subsidiary............ -- (86) (294) (131) 11 -- --
-------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ 1,100 484 3,533 691 (4,814) (905) 219
======== ======= ======= ======= ======= ======= =======
DIVIDENDS:
Common stock............ $ -- -- -- -- -- -- --
Ratio of total dividends
declared to net
income................ --% --% --% --% --% --% --%
PER SHARE DATA:
Earnings (loss) per
share:
Basic............... $ 0.22 0.12 0.87 0.16 (1.19) (0.41) 0.17
Diluted............. 0.22 0.12 0.86 0.16 (1.19) (0.41) 0.14
Weighted average common
stock outstanding (in
thousands)............ 4,911 4,082 4,069 4,225 4,032 2,181 1,290
BALANCE SHEET DATA (AT
PERIOD END):
Investment securities... $141,131 139,682 148,181 125,139 113,586 61,400 160,158
Loans, net of unearned
discount.............. 444,099 327,015 431,455 336,371 266,588 203,314 167,732
Total assets............ 692,409 530,023 643,664 529,087 468,486 331,790 368,608
Total deposits.......... 600,557 452,455 556,527 455,942 405,427 241,570 242,897
Promissory note
payable............... 13,450 14,000 14,900 14,000 1,054 1,054 1,054
Stockholders' equity.... 56,841 38,013 45,091 38,195 40,965 39,714 14,952
EARNINGS RATIOS:
Return on average total
assets<F2>............ 0.67% 0.37% 0.65% 0.15% (1.28)% (0.25)% 0.07%
Return on average
stockholders'
equity<F2>............ 8.13 5.11 8.90 1.71 (12.06) (3.66) 1.49
ASSET QUALITY RATIOS:
Allowance for possible
loan losses to
loans................. 2.72 3.32 2.64 3.19 3.98 1.36 1.57
Nonperforming loans to
loans<F3>............. 1.35 0.75 0.66 0.88 1.90 0.14 0.37
Allowance for possible
loan losses to
nonperforming
loans<F3>............. 200.95 444.66 400.81 363.10 209.18 940.61 423.95
Nonperforming assets to
loans and foreclosed
assets<F4>............ 1.51 1.06 0.80 1.17 2.78 0.90 2.22
Net loan charge-offs to
average loans<F2>..... 0.49 0.52 0.40 1.69 1.45 0.62 0.52
CAPITAL RATIOS:
Average stockholders'
equity to average
total assets.......... 8.25 7.32 7.34 8.86 10.64 6.80 4.40
Total risk-based capital
ratio................. 9.08 6.94 6.88 6.62 9.64 17.50 8.47
Leverage ratio.......... 6.77 4.22 4.96 4.46 5.98 11.97 4.27
RATIO OF EARNINGS (LOSS)
TO FIXED CHARGES<F5>:
Including interest on
deposits.............. 1.31x 1.20x 1.35x 1.08x 0.50x 0.11x 1.02x
Excluding interest on
deposits.............. 3.35 2.17 3.00 1.53 (1.13) (1.28) 1.09
<FN>
- ----------
<F1>The comparability of the selected data presented is affected by FBA's
acquisitions of Pacific Bay Bank, Surety Bank and Sunrise Bank of
California on February 2, 1998, December 1, 1997 and November 1, 1996,
respectively. These acquisitions were accounted for as purchases and,
accordingly, the selected data includes the financial position and results
of operations of each acquired entity only for the periods subsequent to
its date of acquisition. In addition, on February 2, 1998, FBA completed
its acquisition of First Commercial Bancorp, Inc. and its subsidiary, First
Commercial Bank. As discussed in Note 2 to the consolidated financial
statements of FBA, the selected data has been restated to reflect First
Banks, Inc.'s interest in First Commercial Bancorp, Inc. for the periods
subsequent to August 23, 1995.
<F2>Ratios for the three month periods are annualized.
<F3>Nonperforming loans consist of nonaccrual loans and loans with restructured
terms.
<F4>Nonperforming assets consist of nonperforming loans and foreclosed assets.
<F5>For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before taxes plus interest and rent expense.
Fixed charges consist of interest and rent expense.
</TABLE>
7
<PAGE> 11
RISK FACTORS
Prospective investors should carefully consider, together with the other
information contained and incorporated by reference in this Prospectus, the
following risk factors in evaluating the Company and its business and the Trust
before purchasing the Preferred Securities offered hereby. Prospective
investors should note, in particular, that this Prospectus contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Act of 1934, as amended (the "Exchange Act"), and that actual
results could differ materially from those contemplated by such statements. The
considerations listed below represent certain important factors the Company
believes could cause such results to differ. These considerations are not
intended to represent a complete list of the general or specific risks that may
affect the Company and the Trust. It should be recognized that other risks may
be significant, presently or in the future, and that the risks set forth below
may affect the Company and the Trust to a greater extent than indicated.
RISK FACTORS RELATING TO THE PREFERRED SECURITIES
RANKING OF SUBORDINATED OBLIGATIONS UNDER THE GUARANTEE AND THE SUBORDINATED
DEBENTURES
The obligations of the Company under the Guarantee issued for the benefit
of the holders of Preferred Securities and under the Subordinated Debentures
are unsecured and rank subordinate and junior in right of payment to all Senior
Debt, Subordinated Debt and Additional Senior Obligations of the Company,
whether now existing or hereafter incurred. At March 31, 1998, the aggregate
outstanding Senior Debt, Subordinated Debt and Additional Senior Obligations of
the Company was approximately $23.4 million. Because the Company is a holding
company, the right of the Company to participate in any distribution of assets
of any Subsidiary Bank upon such Subsidiary Bank's liquidation or
reorganization or otherwise (and thus the ability of holders of the Preferred
Securities to benefit indirectly from such distribution) is subject to the
prior claims of creditors of that Subsidiary Bank, except to the extent that
the Company may itself be recognized as a creditor of that Subsidiary Bank. The
Subordinated Debentures, therefore, will be effectively subordinated to all
existing and future liabilities of the Subsidiary Banks and holders of
Subordinated Debentures and Preferred Securities should look only to the assets
of the Company for payments on the Subordinated Debentures. Neither the
Indenture, the Guarantee nor the Trust Agreement places any limitation on the
amount of secured or unsecured debt, including Senior Debt, Subordinated Debt
and Additional Senior Obligations, that may be incurred by the Company. See
"Description of the Guarantee--Status of the Guarantee" and "Description of
the Subordinated Debentures--Subordination."
The ability of the Trust to pay amounts due on the Preferred Securities is
dependent solely upon the Company making payments on the Subordinated
Debentures as and when required.
OPTION TO EXTEND INTEREST PAYMENT PERIOD, TAX CONSEQUENCES; MARKET PRICE
CONSEQUENCES
The Company has the right under the Indenture, so long as no Debenture
Event of Default has occurred and is continuing, to defer the payment of
interest on the Subordinated Debentures at any time or from time to time for a
period not exceeding 20 consecutive quarters with respect to each Extension
Period; provided that no Extension Period may extend beyond the Stated Maturity
of the Subordinated Debentures. As a consequence of any such deferral,
quarterly Distributions on the Preferred Securities by the Trust will be
deferred (and the amount of Distributions to which holders of the Preferred
Securities are entitled will accumulate additional Distributions thereon at the
rate of 8.50% per annum, compounded quarterly from the relevant payment date
for such Distributions) during any such Extension Period. During any such
Extension Period, the Company may not (i) declare or pay any dividends or
distributions on, or redeem, purchase, acquire, or make a liquidation payment
with respect to, any of the Company's capital stock (other than (a) dividends
or distributions in common stock of the Company, any declaration of a non-cash
dividend in connection with the implementation of a shareholder rights plan, or
the issuance of stock under any such plan in the future, or the redemption or
repurchase of any such rights pursuant thereto, and (b) purchases of common
stock of the Company related to the rights under any of the Company's benefit
plans for its directors, officers or employees), (ii) make any payment of
principal, interest or premium, if any, on or repay, repurchase or redeem any
debt securities of the Company that rank pari passu with or junior in interest
to the Subordinated Debentures or make any guarantee payments with respect to
any guarantee by the Company of the debt securities of any subsidiary of the
Company if such guarantee ranks pari passu with or junior in interest to the
Subordinated Debentures (other than payments under the Guarantee), or (iii)
redeem, purchase or acquire less than all of the Subordinated Debentures or any
of the Preferred Securities. Prior to the termination of any such Extension
Period, the Company may further defer the payment of interest; provided that no
Extension Period may exceed 20
8
<PAGE> 12
consecutive quarters or extend beyond the Stated Maturity of the Subordinated
Debentures. Upon the termination of any Extension Period and the payment of all
interest then accrued and unpaid (together with interest thereon at the annual
rate of 8.50% compounded quarterly, to the extent permitted by applicable
law), the Company may elect to begin a new Extension Period, subject to the
above requirements. Subject to the foregoing, there is no limitation on the
number of times the Company may elect to begin an Extension Period. See
"Description of the Preferred Securities--Distributions--Extension Period"
and "Description of the Subordinated Debentures--Option to Extend Interest
Payment Period."
Should an Extension Period occur, each holder of Preferred Securities will
be required to accrue and recognize income (in the form of original issue
discount ("OID")) in respect of its pro rata share of the interest accruing
on the Subordinated Debentures held by the Trust for United States federal
income tax purposes. A holder of Preferred Securities must, as a result,
include such income in gross income for United States federal income tax
purposes in advance of the receipt of cash, and will not receive the cash
related to such income from the Trust if the holder disposes of the Preferred
Securities prior to the record date for the payment of the related
Distributions. See "Certain Federal Income Tax Consequences--Potential
Extension of Interest Payment Period and Original Issue Discount."
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the
Subordinated Debentures. Should the Company elect, however, to exercise such
right in the future, the market price of the Preferred Securities is likely to
be adversely affected. A holder that disposes of its Preferred Securities
during an Extension Period, therefore, might not receive the same return on its
investment as a holder that continues to hold its Preferred Securities. As a
result of the existence of the Company's right to defer interest payments, the
market price of the Preferred Securities may be more volatile than the market
prices of other securities on which OID accrues that are not subject to such
optional deferrals.
TAX EVENT, CAPITAL TREATMENT EVENT OR INVESTMENT COMPANY EVENT; REDEMPTION
The Company has the right to redeem the Subordinated Debentures in whole
(but not in part) within 180 days following the occurrence of a Tax Event, a
Capital Treatment Event or an Investment Company Event (whether occurring
before or after June 30, 2003), and, therefore, cause a mandatory redemption of
the Preferred Securities. The exercise of such right is subject to the Company
having received prior approval of the Federal Reserve to do so if then required
under applicable capital guidelines or policies of the Federal Reserve. See
"--Redemption; Exchange of Preferred Securities for Subordinated Debentures."
"Tax Event" means the receipt by the Trust of an opinion of counsel
rendered by a law firm having a recognized tax and securities law practice to
the effect that, as a result of any amendment to, or change (including any
announced prospective change) in the laws (or any regulations thereunder) of
the United States or any political subdivision or taxing authority thereof or
therein, or as a result of any official administrative pronouncement or
judicial decision interpreting or applying such laws or regulations, which
amendment or change is effective or which pronouncement or decision is
announced on or after the date of issuance of the Preferred Securities under
the Trust Agreement, there is more than an insubstantial risk that (i) the
Trust is, or will be within 90 days of the date of such opinion, subject to
United States federal income tax with respect to income received or accrued on
the Subordinated Debentures, (ii) interest payable by the Company on the
Subordinated Debentures is not, or, within 90 days of such opinion, will not
be, deductible by the Company, in whole or in part, for United States federal
income tax purposes, or (iii) the Trust is, or will be within 90 days of the
date of the opinion, subject to more than a de minimis amount of other taxes,
duties or other governmental charges. The Company must request and receive an
opinion with regard to such matters within a reasonable period of time after it
becomes aware of the possible occurrence of any of the events described in
clauses (i) through (iii) above.
According to a petition recently filed in the United States Tax Court by a
corporation unrelated to the Company and the Trust, the Internal Revenue
Service has challenged the deductibility for United States federal income tax
purposes of interest payments on certain purported debt instruments for United
States federal income tax purposes where the holders of the debt instruments,
in turn, issued preferred securities to investors. Although the overall
structure of the financing arrangement involved in that case is somewhat
similar to the financing structure for the Subordinated Debentures and the
Trust, the relevant facts in that case appear to differ significantly from
those relating to the Subordinated Debentures and the Trust. Whether the
Internal Revenue Service would attempt to challenge the deductibility of
interest on the Subordinated Debentures cannot be predicted. The Company
intends to
9
<PAGE> 13
take the position that interest payments on the Subordinated Debentures will be
deductible by the Company for United States federal income tax purposes. See
"Certain Federal Income Tax Consequences--Classification of the Subordinated
Debentures." Adverse developments relating to the deductibility of interest,
whether arising in connection with the case currently pending in the United
States Tax Court or not, could give rise to a Tax Event. Consequently, there
can be no assurance that a Tax Event will not occur. If the Internal Revenue
Service successfully challenged the deductibility of interest on the
Subordinated Debentures, and the Subordinated Debentures were determined to
constitute equity rather than indebtedness of the Company, the Company would
not be entitled to deduct the stated interest payments thereon and thus, the
Company's federal income tax liability would likely increase. Consequently, the
Company might have less cash on hand with which to make distributions and
amounts payable on liquidation, redemption or otherwise, to the holders of the
Preferred Securities.
"Capital Treatment Event" means the receipt by the Trust of an opinion of
counsel rendered by a law firm having a recognized banking law practice to the
effect that, as a result of any amendment to or any change (including any
announced prospective change) in the laws (or any regulations thereunder) of
the United States or any political subdivision thereof or therein, or as a
result of any official administrative pronouncement or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or which proposed change, pronouncement or decision is announced on
or after the date of issuance of the Preferred Securities under the Trust
Agreement, there is more than an insubstantial risk of impairment of the
Company's ability to treat the aggregate Liquidation Amount of the Preferred
Securities (or any substantial portion thereof) as "Tier 1 Capital" (or the
then equivalent thereof) for purposes of the capital adequacy guidelines of the
Federal Reserve, as then applicable to the Company, provided, however, that the
inability of the Company to treat all or any portion of the Liquidation Amount
of the Preferred Securities as Tier 1 Capital shall not constitute the basis
for a Capital Treatment Event if such inability results from the Company having
cumulative preferred capital in excess of the amount which may qualify for
treatment as Tier 1 Capital under applicable capital adequacy guidelines of the
Federal Reserve.
"Investment Company Event" means the receipt by the Trust of an opinion
of counsel rendered by a law firm having a recognized tax and securities law
practice to the effect that, as a result of the occurrence of a change in law
or regulation or a change in interpretation or application of law or regulation
by any legislative body, court, governmental agency or regulatory authority,
the Trust is or will be considered an "investment company" that is required
to be registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), which change becomes effective on or after the
date of original issuance of the Preferred Securities. See "--Risk Factors
Relating to the Preferred Securities--Recent Tax Legislation" for a discussion
of certain legislative proposals that, if adopted, could give rise to a Tax
Event, which may permit the Company to cause a redemption of the Preferred
Securities prior to June 30, 2003.
SHORTENING OR EXTENSION OF STATED MATURITY OF SUBORDINATED DEBENTURES
The Company has the right, at any time, to shorten the maturity of the
Subordinated Debentures to a date not earlier than June 30, 2003. The exercise
of such right is subject to the Company having received prior approval of the
Federal Reserve if then required under applicable capital guidelines or
policies of the Federal Reserve. The Company also has the right to extend the
maturity of the Subordinated Debentures (whether or not the Trust is terminated
and the Subordinated Debentures are distributed to holders of the Preferred
Securities) to a date no later than June 30, 2037, a date approximately 39
years after the initial issuance of the Preferred Securities. Such right may
only be exercised, however, if at the time such election is made and at the
time of such extension (i) the Company is not in bankruptcy, otherwise
insolvent or in liquidation, (ii) the Company is not in default in the payment
of any interest or principal on the Subordinated Debentures, and (iii) the
Trust is not in arrears on payments of Distributions on the Preferred
Securities and no deferred Distributions are accumulated. See "Description of
the Subordinated Debentures--General."
RIGHTS UNDER THE GUARANTEE
The Guarantee guarantees to the holders of the Preferred Securities, to the
extent not paid by the Trust, (i) any accrued and unpaid Distributions required
to be paid on the Preferred Securities, to the extent that the Trust has funds
available therefor at such time, (ii) the Redemption Price (as defined herein)
with respect to any Preferred Securities called for redemption, to the extent
that the Trust has funds available therefor at such time, and (iii) upon a
voluntary or involuntary dissolution, winding-up or liquidation of the Trust
(other than in connection with the
10
<PAGE> 14
distribution of Subordinated Debentures to the holders of Preferred Securities
or a redemption of all of the Preferred Securities), the lesser of (a) the
amount of the Liquidation Distribution (as defined herein), to the extent the
Trust has funds available therefor at such time, and (b) the amount of assets
of the Trust remaining available for distribution to holders of the Preferred
Securities in liquidation of the Trust. The holders of not less than a majority
in Liquidation Amount of the Preferred Securities have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Guarantee Trustee in respect of the Guarantee or to direct the exercise of
any trust power conferred upon the Guarantee Trustee under the Guarantee. Any
holder of the Preferred Securities may institute a legal proceeding directly
against the Company to enforce its rights under the Guarantee without first
instituting a legal proceeding against the Trust, the Guarantee Trustee or any
other Person (as defined in the Guarantee). If the Company were to default on
its obligation to pay amounts payable under the Subordinated Debentures, the
Trust would lack funds for the payment of Distributions or amounts payable on
redemption of the Preferred Securities or otherwise, and, in such event,
holders of Preferred Securities would not be able to rely upon the Guarantee
for such amounts. In the event, however, that a Debenture Event of Default has
occurred and is continuing and such event is attributable to the failure of the
Company to pay interest on or principal of the Subordinated Debentures on the
payment date on which such payment is due and payable, then a holder of
Preferred Securities may institute a legal proceeding directly against the
Company for enforcement of payment to such holder of the principal of or
interest on such Subordinated Debentures having a principal amount equal to the
aggregate Liquidation Amount of the Preferred Securities of such holder (a
"Direct Action"). The exercise by the Company of its right, as described
herein, to defer the payment of interest on the Subordinated Debentures does
not constitute a Debenture Event of Default. In connection with such Direct
Action, the Company will have a right of set-off under the Indenture to the
extent of any payment made by the Company to such holder of Preferred
Securities in the Direct Action. Except as described herein, holders of
Preferred Securities will not be able to exercise directly any other remedy
available to the holders of the Subordinated Debentures or assert directly any
other rights in respect of the Subordinated Debentures. See "Description of
the Subordinated Debentures--Enforcement of Certain Rights by Holders of
Preferred Securities," "Description of the Subordinated Debentures--Debenture
Events of Default" and "Description of the Guarantee." The Trust Agreement
provides that each holder of Preferred Securities by acceptance thereof agrees
to the provisions of the Guarantee and the Indenture.
The Company and the Trust believe that, taken together, the obligations of
the Company under the Guarantee, the Trust Agreement, the Subordinated
Debentures, the Indenture and the Expense Agreement provide in the aggregate, a
full, irrevocable and unconditional guarantee, on a subordinated basis, of all
of the obligations of the Trust under the Preferred Securities. See
"Relationship Among the Preferred Securities, the Subordinated Debentures and
the Guarantee--Full and Unconditional Guarantee."
NO VOTING RIGHTS EXCEPT IN LIMITED CIRCUMSTANCES
Holders of Preferred Securities will have no voting rights except in
limited circumstances relating only to the modification of the Preferred
Securities and the exercise of the rights of the Trust as holder of the
Subordinated Debentures and the Guarantee. The affirmative consent of the
holders of at least 66 2/3% of the outstanding Preferred Securities will be
required by the Trust for amendments to the Trust Agreement or the Guarantee
that would adversely affect the rights or privileges of the holders of the
Preferred Securities. Holders of Preferred Securities will not be entitled to
vote to appoint, remove or replace the Property Trustee or the Delaware
Trustee, as such voting rights are vested exclusively in the holder of the
Common Securities (except upon the occurrence of certain events described
herein). The Property Trustee, the Administrative Trustees and the Company may
amend the Trust Agreement without the consent of holders of Preferred
Securities to ensure that the Trust will be classified for United States
federal income tax purposes as a grantor trust even if such action adversely
affects the interests of such holders. See "Description of the Preferred
Securities--Voting Rights; Amendment of Trust Agreement" and "Description of
the Preferred Securities--Removal of the Trust Trustees."
RECENT TAX LEGISLATION
Certain legislative proposals were made in 1996 and 1997 which, if enacted,
could have adversely affected the ability of the Company to deduct interest
paid on the Subordinated Debentures. These proposals were not, however,
incorporated into the legislation enacted on August 5, 1997 as the Taxpayer
Relief Act of 1997. Nevertheless, there can be no assurance that other
legislation enacted after the date hereof will not otherwise adversely affect
the ability
11
<PAGE> 15
of the Company to deduct the interest payable on the Subordinated Debentures.
Consequently, there can be no assurance that a Tax Event will not occur. A Tax
Event would permit, but not require, the Company, upon approval of the Federal
Reserve if then required under applicable capital guidelines or policies of the
Federal Reserve, to cause a redemption of the Preferred Securities before, as
well as after, June 30, 2003. See "Description of the Subordinated
Debentures--Redemption" and "Description of the Preferred
Securities--Redemption--Tax Event Redemption, Capital Treatment Event
Redemption or Investment Company Event Redemption" and "Certain Federal
Income Tax Consequences--Effect of Recent Changes in Tax Laws."
REDEMPTION; EXCHANGE OF PREFERRED SECURITIES FOR SUBORDINATED DEBENTURES
The Company has the right at any time to dissolve, wind-up or terminate the
Trust and cause the Subordinated Debentures to be distributed to the holders of
the Preferred Securities in exchange therefor in liquidation of the Trust. The
exercise of such right is subject to the Company having received prior approval
of the Federal Reserve if then required under applicable capital guidelines or
policies of the Federal Reserve. The Company will have the right, in certain
circumstances, to redeem the Subordinated Debentures in whole or in part, in
lieu of a distribution of the Subordinated Debentures by the Trust, in which
event the Trust will redeem the Trust Securities on a pro rata basis to the
same extent as the Subordinated Debentures are redeemed by the Company. Any
such distribution or redemption prior to the Stated Maturity will be subject to
prior approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve. See "Description of the
Preferred Securities--Redemption--Tax Event Redemption, Capital Treatment Event
Redemption or Investment Company Event Redemption."
Under current United States federal income tax law, a distribution of
Subordinated Debentures upon the dissolution of the Trust would not be a
taxable event to holders of the Preferred Securities. If, however, the Trust
were to be recharacterized as an association taxable as a corporation at the
time of the dissolution of the Trust, the distribution of the Subordinated
Debentures may constitute a taxable event to holders of Preferred Securities.
Moreover, upon occurrence of a Tax Event, a dissolution of the Trust in which
holders of the Preferred Securities receive cash may be a taxable event to such
holders. See "Certain Federal Income Tax Consequences--Receipt of Subordinated
Debentures or Cash Upon Liquidation of the Trust."
There can be no assurance as to the market prices for the Preferred
Securities or the Subordinated Debentures that may be distributed in exchange
for Preferred Securities upon a dissolution or liquidation of the Trust. The
Preferred Securities or the Subordinated Debentures may trade at a discount to
the price that the investor paid to purchase the Preferred Securities offered
hereby. Because holders of Preferred Securities may receive Subordinated
Debentures, prospective purchasers of Preferred Securities are also making an
investment decision with regard to the Subordinated Debentures and should
carefully review all the information regarding the Subordinated Debentures
contained herein.
If the Subordinated Debentures are distributed to the holders of Preferred
Securities upon the liquidation of the Trust, the Company will use its best
efforts to list the Subordinated Debentures on the NYSE or such stock
exchanges, if any, on which the Preferred Securities are then listed.
TRADING PRICE; ABSENCE OF PRIOR PUBLIC MARKET FOR THE PREFERRED SECURITIES
The Preferred Securities may trade at prices that do not fully reflect the
value of accrued but unpaid interest with respect to the underlying
Subordinated Debentures. A holder of Preferred Securities that disposes of its
Preferred Securities between record dates for payments of Distributions (and
consequently does not receive a Distribution from the Trust for the period
prior to such disposition) will nevertheless be required to include accrued but
unpaid interest on the Subordinated Debentures through the date of disposition
in income as ordinary income and to add such amount to its adjusted tax basis
in its pro rata share of the underlying Subordinated Debentures deemed disposed
of. Such holder will recognize a capital loss to the extent the selling price
(which may not fully reflect the value of accrued but unpaid interest) is less
than its adjusted tax basis (which will include all accrued but unpaid
interest). Subject to certain limited exceptions, capital losses cannot be
applied to offset ordinary income for United States federal income tax
purposes. See "Certain Federal Income Tax Consequences--Disposition of
Preferred Securities."
There is no current public market for the Preferred Securities. Although
the Preferred Securities have been approved for listing on the NYSE, there can
be no assurance that an active public market will develop for the
12
<PAGE> 16
Preferred Securities or that, if such market develops, the market price
will equal or exceed the public offering price set forth on the cover page of
this Prospectus. The public offering price for the Preferred Securities has
been determined through negotiations between the Company and the Underwriters.
Prices for the Preferred Securities will be determined in the marketplace and
may be influenced by many factors, including prevailing interest rates, the
liquidity of the market for the Preferred Securities, investor perceptions of
the Company and general industry and economic conditions.
PREFERRED SECURITIES ARE NOT INSURED
The Preferred Securities are not insured by the Bank Insurance Fund (the
"BIF") or the Savings Association Insurance Fund (the "SAIF") of the
Federal Deposit Insurance Corporation (the "FDIC") or by any other
governmental agency.
RISK FACTORS RELATING TO THE COMPANY
HISTORY OF LOSSES OF FBA
Prior to 1996, FBA experienced several years of significant operating
losses caused by economic conditions in its markets, loan losses and asset
quality deterioration, high overhead and operational problems. Consequently,
FBA's positive earnings record occurred only during the period from January
1996 through the present. There can be no assurance that a recurrence of some
or all of the problems which led to earlier losses will not cause similar
problems in the future, or that FBA will be able to sustain the favorable
recent earnings trends.
OPERATING REQUIREMENTS ASSOCIATED WITH GEOGRAPHIC DISPERSION
Because of the geographic distance between the offices of BankTEXAS and FB
California, various operating requirements are placed on FBA's management which
are not present in other organizations operating in contiguous markets. These
include: (1) the operation of data processing and item processing functions at
remote locations; (2) the control of correspondent accounts, reserve balances
and wire transfers, particularly where differences in time zones are involved;
(3) providing administrative support, including accounting, human resources,
loan servicing, internal audit and credit review, at significant distances and
(4) establishing and monitoring compliance with corporate policies and
procedures. This geographic distance adds to the cost of management, and such
additional costs could limit the profitability which might otherwise be
expected by investors in FBA.
DEPENDENCE ON FUTURE GROWTH THROUGH ACQUISITIONS
FBA believes that a business strategy of growth through acquisitions is
necessary in order for FBA to achieve the size necessary to compete with larger
competitors in the banking industry. There are several risks associated with
such a strategy, including the following:
(1) There is a general trend toward consolidation among financial
institutions, and there are a large number of potential competitors for
acquisitions viewed favorably by FBA's management, including, in some
cases, much larger organizations with substantially more resources than
FBA.
(2) The prices at which acquisitions may be made fluctuates with market
conditions, and there is no assurance that FBA will continue to identify
acquisition prospects at prices which its management and Board of
Directors believe are reasonable. To the extent that FBA is able to
identify acquisitions that may be made using securities of FBA rather than
cash, the prospects for acquisitions without dilution of FBA's
stockholders will also depend to some extent on the market for FBA's
securities, which is beyond FBA's control and may fluctuate over time.
(3) The managerial and operational requirements for completing
acquisitions and realizing the benefits therefrom can be burdensome and
time-consuming. There is no assurance that FBA will realize the benefits
of particular acquisitions in a timely manner or without unanticipated
costs.
13
<PAGE> 17
UNCERTAINTIES ARISING FROM YEAR 2000
FBA and the Subsidiary Banks are subject to risks associated with the
"Year 2000" problem, a term which refers to uncertainties about the ability
of various data processing hardware and software systems to interpret dates
correctly after the beginning of the year 2000. Since most of these systems are
common with those of First Banks, FBA has been working with First Banks to
address this problem. Most of the software used by FBA is purchased from
outside vendors. Consequently, FBA has been working with these vendors to
determine whether these issues are being adequately addressed.
FBA's process of evaluating potential effects of Year 2000 issues on
customers of the Subsidiary Banks is in its early stages, and it is therefore
impossible to quantify the potential adverse effects of incompatible systems on
customers of the Subsidiary Banks. The failure of a commercial bank customer to
prepare adequately for Year 2000 compatibility could have a significant adverse
effect on such customer's operations and profitability, in turn inhibiting its
ability to repay loans in accordance with their terms or requiring the use of
its deposited funds. Until sufficient information is accumulated from customers
of the banks to enable FBA to assess the degree to which customers' operations
are susceptible to potential problems, FBA will be unable to quantify the
potential effect on its commercial customers. In addressing the uncertainty,
FBA has revised its methodology with respect to the adequacy of its allowance
for possible loan losses to include an allocation for the estimated risks
associated with the Year 2000 issue.
ADVERSE CHANGES IN INTEREST RATES
With banking as its principal business, FBA has exposure to changes in
interest rates, as its assets and liabilities will not necessarily reprice at
the same time in a changing interest rate environment. In addition, changes in
interest rates may impact the Company with respect to its ability to attract
deposits. FBA believes its existing balance sheet structure is appropriate and
will allow it to maintain acceptable interest margins in various interest rate
environments. However, there can be no assurance that competitive factors will
not result in a change in the composition of the balance sheet, or that
interest rate movements will not negatively impact the financial condition or
results of operations of the Company. Further, should its ability to attract
deposits be diminished because of movements in interest rates, FBA would be
required to access secondary funding sources, which would be likely to
negatively impact its net interest margin.
CREDIT RISKS
FBA, as a financial institution, is exposed to the risk that customers to
whom the Subsidiary Banks have made loans will be unable to repay those loans
according to their terms and that collateral securing such loans, if any, may
not be sufficient in value to assure repayment. Credit losses could have a
material adverse effect on FBA's operating results. See "Management's
Discussion and Analysis--Provision for Possible Loan Losses."
GOVERNMENT REGULATION
Banking organizations are subject to extensive federal and state regulation
and supervision. These regulations and laws are primarily intended to protect
depositors and the FDIC, not shareholders or other creditors. Regulations and
laws affecting the financial institutions industry are undergoing continuous
change, and the ultimate effect of such changes cannot be predicted.
Regulations and laws affecting FBA and the Subsidiary Banks may be modified at
any time, and new legislation affecting financial institutions may be proposed
and enacted. There is no assurance that such modifications or new laws will not
materially and adversely affect the business, condition or operations of FBA
and the Subsidiary Banks or benefit competing entities which may not be subject
to the same regulation and supervision. See "Supervision and
Regulation--Recent and Pending Legislation."
COMPETITION
The banking business is highly competitive. The Subsidiary Banks compete
with other commercial banks, savings and loan associations, credit unions,
mortgage banking companies, securities brokerage companies, insurance
companies, and money market mutual funds. Many of these competitors have
substantially greater resources than FBA and the Subsidiary Banks and offer
certain services that FBA and the Subsidiary Banks do not currently
14
<PAGE> 18
provide. Such competitors may also have greater lending limits than the
Subsidiary Banks. The number of competitors may increase as a result of the
easing of restrictions on interstate banking effected under the Riegle-Neal
Interstate Banking and Efficiency Act of 1994. Non-bank competitors are also
generally not subject to the extensive regulations applicable to FBA and the
Subsidiary Banks. See "Business--Competition and Branch Banking" and
"Supervision and Regulation--Recent and Pending Legislation."
DIVIDENDS FROM SUBSIDIARY BANKS
The ability of FBA to pay interest on the Subordinated Debentures is
largely dependent on its receipt of dividends from the Subsidiary Banks. The
amount of dividends that the Subsidiary Banks may pay to FBA is limited by
various state and federal laws and by the regulations promulgated by their
respective primary regulators, which impose certain minimum capital
requirements.
POTENTIAL LIABILITY FOR UNDERCAPITALIZED SUBSIDIARY BANK
Under federal law, a bank holding company may be required to guarantee a
capital plan filed by an undercapitalized bank or thrift subsidiary with its
primary regulator. If the subsidiary defaults under the plan, the holding
company may be required to contribute to the capital of the subsidiary bank an
amount equal to the lesser of 5% of the bank's assets at the time it became
undercapitalized or the amount necessary to bring the bank into compliance with
applicable capital standards. It is, therefore, possible that the Company would
be required to contribute capital to a Subsidiary Bank or any other bank it may
acquire in the event that a Subsidiary Bank or such other bank becomes
undercapitalized.
CONTROL OF FBA BY FIRST BANKS, INC.
FBA is controlled by First Banks, which exercises effective control over
the management and policies of FBA and the election of most or all of the
directors of FBA. Furthermore, executive officers of First Banks have
significant management responsibility for FBA's business activities, and First
Banks performs numerous management and other services for FBA pursuant to
contracts between the two companies. Holders of FBA common stock who are not
satisfied with the policies and decisions made by the Board of Directors and
management of FBA would therefore have less of an opportunity to change such
policies through the exercise of voting rights than would stockholders in a
comparable corporation with no controlling stockholder.
The agreement by which First Banks became the majority stockholder of FBA
provides certain anti-dilutive rights which allow First Banks to acquire
additional shares of Class B common stock if its ownership is reduced below 55%
of the total outstanding voting stock of FBA. In that event, First Banks has
the right to purchase sufficient additional shares of Class B common stock to
maintain 55% ownership, at 106.7% of the then current tangible book value per
share. This right will remain effective until August 1999, after which a
comparable right will exist to maintain the same level of ownership by
purchasing shares at 113% and 120% of the then current tangible book value per
share through August 2000 and February 2002, respectively. Thereafter, First
Banks' anti-dilutive right will lapse.
All of 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, Chairman of the Board, President and Chief Executive Officer of First
Banks, and members of his immediate family. Mr. Dierberg, therefore, controls
the management and policies of First Banks and FBA and the election of their
directors by and through these trusts.
15
<PAGE> 19
USE OF PROCEEDS
The proceeds from the sale of the Preferred Securities offered hereby will
be used by the Trust to purchase the Subordinated Debentures issued by the
Company. The Company intends to use the net proceeds from the sale of the
Subordinated Debentures to repay outstanding indebtedness to First Banks under
the terms of a revolving promissory note (the "First Banks Note"), for
general corporate purposes, for acquisitions (including the pending acquisition
of Redwood), and for the possible repurchase of common stock from time to time.
The amounts borrowed under the First Banks Note have been used by FBA for the
acquisitions of Sunrise Bank of California, Surety Bank and Pacific Bay Bank,
and for purchases of treasury stock. The First Banks Note bears interest at one
quarter of one percent below the prime rate of interest as announced from time
to time in The Wall Street Journal (8.25% as of March 31, 1998). Principal and
accrued interest on the First Banks Note are due and payable on October 31,
2001. The portion of the net proceeds from the sale of Subordinated Debentures
which is not used to repay existing obligations will be invested in short term
investment securities pending its use for the purposes described above.
MARKET FOR THE PREFERRED SECURITIES
Although the Preferred Securities have been approved for listing on the NYSE
under the symbol "FBAPrT", there can be no assurance that an active and liquid
trading market will develop or, if developed, that such a market will continue.
The offering price and distribution rate have been determined by negotiations
among representatives of the Company and the Underwriters, and the offering
price of the Preferred Securities may not be indicative of the market price
following the offering. See "Underwriting."
ACCOUNTING TREATMENT
The Trust will be treated, for financial reporting purposes, as a
subsidiary of the Company and, accordingly, the accounts of the Trust will be
included in the consolidated financial statements of FBA. The Preferred
Securities will be presented as a separate line item in the consolidated
balance sheet of the Company under the caption "Guaranteed Preferred
Beneficial Interests in the Company's Subordinated Debentures," and
appropriate disclosures about the Preferred Securities, the Guarantee and the
Subordinated Debentures will be included in the notes to consolidated financial
statements of FBA. The Company will record Distributions payable on the
Preferred Securities as a noninterest expense in its consolidated statements of
operations for financial reporting purposes.
All future reports of the Company filed under the Exchange Act while the
Preferred Securities are outstanding will (a) present the Trust Securities
issued by the Trust on the balance sheet as a separate line item entitled
"Guaranteed preferred beneficial interests in the Company's subordinated
debentures," (b) include in a footnote to the financial statements disclosure
that the sole assets of the Trust are the Subordinated Debentures (including
the outstanding principal amount, interest rate and maturity date of such
Subordinated Debentures), and (c) include in a footnote to the financial
statements disclosure that the Company owns all of the Common Securities of the
Trust, the sole assets of the Trust are the Subordinated Debentures, and the
back-up obligations, in the aggregate, constitute a full and unconditional
guarantee by the Company of the obligations of the Trust under the Preferred
Securities.
16
<PAGE> 20
CAPITALIZATION
The following table assumes that the Underwriters' over-allotment option
was not exercised and sets forth (i) the unaudited consolidated capitalization
of the Company at March 31, 1998, (ii) the unaudited consolidated
capitalization of the Company giving effect to the issuance of the Preferred
Securities hereby offered by the Trust and the receipt by the Company of the
net proceeds from the corresponding sale of the Subordinated Debentures to the
Trust (the "Offering"), as if the Offering had been consummated on March 31,
1998, and (iii) the unaudited consolidated capitalization of the Company giving
effect to the Offering and the Redwood acquisition as if each had been
consummated on March 31, 1998.
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------------------------------
AS ADJUSTED
FOR OFFERING
AND PENDING
AS ADJUSTED ACQUISITION
ACTUAL FOR OFFERING OF REDWOOD
------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
LONG TERM DEBT:
Promissory note payable................................. $13,450 -- 1,200
12% convertible debentures.............................. 6,500 6,500 6,500
------- ------- -------
Total long-term debt............................ 19,950 6,500 7,700
------- ------- -------
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S
SUBORDINATED DEBENTURES:
Guaranteed preferred beneficial interests in the
Company's subordinated debentures..................... -- 40,000 40,000
Less expenses relating to the issuance of the Preferred
Securities............................................ -- (1,750) (1,750)
------- ------- -------
Net proceeds from the sale of guaranteed
preferred beneficial interests in the
Company's subordinated debentures:............ -- 38,250 38,250
------- ------- -------
STOCKHOLDERS' EQUITY:
Common stock:
Common stock, $0.15 par value; 6,666,666 shares
authorized; 3,238,417 shares issued at March 31,
1998.................................................. 486 486 486
Class B common stock, $.15 par value; 4,000,000 shares
authorized; 2,500,000 shares issued and outstanding... 375 375 375
Capital surplus......................................... 60,173 60,173 60,173
Retained earnings, since elimination of accumulated
deficit of $259,117 effective December 31, 1994....... 2,183 2,183 2,183
Common treasury stock, at cost; 496,056 shares at March
31, 1998.............................................. (6,814) (6,814) (6,814)
Net fair value adjustment for securities available for
sale.................................................. 438 438 438
------- ------- -------
Total stockholders' equity...................... 56,841 56,841 56,841
------- ------- -------
Total capitalization............................ $76,791 101,591 102,791
======= ======= =======
CAPITAL RATIOS:
Stockholders' equity to total assets.................... 8.21% 7.91 6.66
Leverage ratio<F1><F2><F4>.............................. 6.77 9.98 6.27<F4>
Risk-based capital ratios:<F2><F3>
Tier 1 capital to risk-weighted assets.............. 7.82 11.41 7.09
Total risk-based capital to risk-weighted assets.... 9.08 16.47 11.19
<FN>
- --------
<F1>The leverage ratio is Tier 1 capital divided by average quarterly assets,
after deducting intangible assets and net deferred tax assets in excess of
regulatory limits.
<F2>The capital ratios are computed including the total estimated net proceeds
from the sale of the Preferred Securities, in a manner consistent with
Federal Reserve calculation guidelines.
<F3>Federal Reserve guidelines for calculation of Tier 1 capital to
risk-weighted assets limit the amount of cumulative preferred stock which
can be included in Tier 1 capital to 25% of total Tier 1 core capital
elements (including the cumulative preferred stock). Approximately $18.8
million of the aggregate amount of the Preferred Securities offered hereby
will be included as Tier 1 capital for the Company.
<F4>For purposes of this calculation, Redwood balances are assumed to be
outstanding for the entire quarter.
</TABLE>
17
<PAGE> 21
SELECTED CONSOLIDATED AND OTHER FINANCIAL DATA<F1>
The selected consolidated financial data set forth below, insofar as it
relates to the five years ended December 31, 1997, is derived from the audited
consolidated financial statements of FBA. The data for the three month periods
ended March 31, 1998 and 1997 has been derived from unaudited interim financial
statements; however, in the opinion of FBA, such unaudited interim statements
include all adjustments (consisting of normal recurring accruals) necessary to
fairly present the data for such periods. The results of operations for the
three month period ended March 31, 1998 are not necessarily indicative of
results to be achieved for the full year. Such data is qualified by reference
to the consolidated financial statements of FBA included elsewhere in this
Prospectus or incorporated by reference and should be read in conjunction with
such financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
--------------- ------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income................................ $ 12,996 9,611 42,517 33,382 26,556 22,649 21,966
Interest expense............................... 5,899 4,508 19,155 15,533 13,134 11,072 9,750
-------- ------- ------- ------- ------- ------- -------
Net interest income............................ 7,097 5,103 23,362 17,849 13,422 11,577 12,216
Provision for possible loan losses............. 300 550 2,000 2,405 6,416 1,258 490
-------- ------- ------- ------- ------- ------- -------
Net interest income after provision for
possible loan losses......................... 6,797 4,553 21,362 15,444 7,006 10,319 11,726
Noninterest income............................. 1,150 871 3,287 3,585 129 (4,511) 3,068
Noninterest expense............................ 6,057 4,493 17,677 17,737 14,148 16,174 14,575
-------- ------- ------- ------- ------- ------- -------
Income (loss) before provision (benefit) for
income taxes and minority interest in
(income) loss of subsidiary.................. 1,890 931 6,972 1,292 (7,013) (10,366) 219
Provision (benefit) for income tax expense..... 790 361 3,145 470 (2,188) (9,461) --
-------- ------- ------- ------- ------- ------- -------
Net income (loss) before minority interest in
(income) loss of subsidiary.................. 1,100 570 3,827 822 (4,825) (905) 219
Minority interest in (income) loss of
subsidiary................................... -- (86) (294) (131) 11 -- --
-------- ------- ------- ------- ------- ------- -------
Net income (loss).............................. $ 1,100 484 3,533 691 (4,814) (905) 219
======== ======= ======= ======= ======= ======= =======
DIVIDENDS:
Common stock................................... $ -- -- -- -- -- -- --
Ratio of total dividends declared to net
income....................................... --% --% --% --% --% --% --%
PER SHARE DATA:
Earnings (loss) per share:
Basic...................................... $ 0.22 0.12 0.87 0.16 (1.19) (0.41) 0.17
Diluted.................................... 0.22 0.12 0.86 0.16 (1.19) (0.41) 0.14
Weighted average common stock outstanding (in
thousands)................................... 4,911 4,082 4,069 4,225 4,032 2,181 1,290
BALANCE SHEET DATA (AT PERIOD END):
Investment securities.......................... $141,131 139,682 148,181 125,139 113,586 61,400 160,158
Loans, net of unearned discount................ 444,099 327,015 431,455 336,371 266,588 203,314 167,732
Total assets................................... 692,409 530,023 643,664 529,087 468,486 331,790 368,608
Total deposits................................. 600,557 452,455 556,527 455,942 405,427 241,570 242,897
Promissory note payable........................ 13,450 14,000 14,900 14,000 1,054 1,054 1,054
Stockholders' equity........................... 56,841 38,013 45,091 38,195 40,965 39,714 14,952
EARNINGS RATIOS:
Return on average total assets<F2>............. 0.67% 0.37% 0.65% 0.15% (1.28)% (0.25)% 0.07%
Return on average stockholders' equity<F2>..... 8.13 5.11 8.90 1.71 (12.06) (3.66) 1.49
ASSET QUALITY RATIOS:
Allowance for possible loan losses to loans.... 2.72 3.32 2.64 3.19 3.98 1.36 1.57
Nonperforming loans to loans<F3>............... 1.35 0.75 0.66 0.88 1.90 0.14 0.37
Allowance for possible loan losses to
nonperforming loans<F3>...................... 200.95 444.66 400.81 363.10 209.18 940.61 423.95
Nonperforming assets to loans and foreclosed
assets<F4>................................... 1.51 1.06 0.80 1.17 2.78 0.90 2.22
Net loan charge-offs to average loans<F2>...... 0.49 0.52 0.40 1.69 1.45 0.62 0.52
CAPITAL RATIOS:
Average stockholders' equity to average total
assets....................................... 8.25 7.32 7.34 8.86 10.64 6.80 4.40
Total risk-based capital ratio................. 9.08 6.94 6.88 6.62 9.64 17.50 8.47
Leverage ratio................................. 6.77 4.22 4.96 4.46 5.98 11.97 4.27
RATIO OF EARNINGS (LOSS) TO FIXED CHARGES<F5>:
Including interest on deposits................. 1.31x 1.20x 1.35x 1.08x 0.50x 0.11x 1.02x
Excluding interest on deposits................. 3.35 2.17 3.00 1.53 (1.13) (1.28) 1.09
<FN>
- ----------
<F1>The comparability of the selected data presented is affected by FBA's
acquisitions of Pacific Bay Bank, Surety Bank and Sunrise Bank of
California on February 2, 1998, December 1, 1997 and November 1, 1996,
respectively. These acquisitions were accounted for as purchases and,
accordingly, the selected data includes the financial position and results
of operations of each acquired entity only for the periods subsequent to
its date of acquisition. In addition, on February 2, 1998, FBA completed
its acquisition of First Commercial Bancorp, Inc. and its subsidiary, First
Commercial Bank. As discussed in Note 2 to the consolidated financial
statements of FBA, the selected data has been restated to reflect First
Banks, Inc.'s interest in First Commercial Bancorp, Inc. for the periods
subsequent to August 23, 1995.
<F2>Ratios for the three month periods are annualized.
<F3>Nonperforming loans consist of nonaccrual loans and loans with restructured
terms.
<F4>Nonperforming assets consist of nonperforming loans and foreclosed assets.
<F5>For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before taxes plus interest and rent expense.
Fixed charges consist of interest and rent expense.
</TABLE>
18
<PAGE> 22
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined condensed balance sheet as of
March 31, 1998 and unaudited pro forma combined condensed statements of
operations for the three months ended March 31, 1998 and 1997, and for the year
ended December 31, 1997, have been prepared to reflect the effects on the
historical results of FBA of the proposed acquisition of Redwood and its wholly
owned subsidiary, Redwood Bank. The unaudited pro forma combined condensed
balance sheet has been prepared as if the acquisition of Redwood occurred on
March 31, 1998. The unaudited pro forma combined condensed statements of
operations have been prepared assuming the acquisition of Redwood occurred on
January 1, 1997. In addition, the unaudited pro forma combined condensed
statements of operations reflect the acquisitions of Surety Bank, completed on
December 1, 1997, and of the minority stockholders' interest in the net assets
of FCB, completed on February 2, 1998, as if the transactions occurred on
January 1, 1997. The unaudited pro forma combined condensed statements of
operations for the year ended December 31, 1997 and for the three months ended
March 31, 1997 also reflect the restatement of FBA's results of operations for
its acquisition of First Banks' interest in FCB completed on February 2, 1998.
The pro forma financial information set forth below is unaudited and not
necessarily indicative of the results that will occur in the future.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET<F1>
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------------------------------------
PRO FORMA
ADJUSTMENTS - PRO FORMA
FBA REDWOOD REDWOOD COMBINED
--- ------- ------------- ---------
ASSETS (DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Cash and cash equivalents:
Cash and due from banks........................ $ 32,651 6,034 -- 38,685
Interest bearing deposits...................... 2,271 -- -- 2,271
Federal funds sold............................. 42,250 3,000 -- 45,250
-------- ------- ----- -------
Total cash and cash equivalents........ 77,172 9,034 -- 86,206
-------- ------- ----- -------
Investment securities--available for sale, at fair
value............................................ 141,131 16,667 -- 157,798
Loans:
Commercial and financial....................... 113,312 14,893 -- 128,205
Real estate construction and development....... 96,035 9,762 -- 105,797
Real estate mortgage........................... 166,160 82,848 -- 249,008
Consumer and other............................. 71,017 13,069 -- 84,086
-------- ------- ----- -------
Total loans............................ 446,524 120,572 -- 567,096
Unearned discount.............................. (2,425) (512) -- (2,937)
Allowance for possible loan losses............. (12,063) (1,180) -- (13,243)
-------- ------- ----- -------
Net loans.............................. 432,036 118,880 -- 550,916
-------- ------- ----- -------
Bank premises and equipment, net................... 11,382 784 -- 12,166
Intangibles associated with the purchase of
subsidiaries..................................... 8,794 3,920 8,174<F6> 20,888
Foreclosed property, net........................... 725 -- -- 725
Deferred tax assets................................ 13,739 1,460 -- 15,199
Other assets....................................... 7,430 1,261 -- 8,691
-------- ------- ----- -------
Total assets........................... $692,409 152,006 8,174 852,589
======== ======= ===== =======
</TABLE>
See notes to pro forma combined condensed financial statements.
19
<PAGE> 23
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET<F1> (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------------------------------------
PRO FORMA
ADJUSTMENTS - PRO FORMA
FBA REDWOOD REDWOOD COMBINED
--- ------- ------------- ---------
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
LIABILITIES
Deposits:
Demand:
Non-interest-bearing..................... $101,270 26,232 -- 127,502
Interest-bearing......................... 73,433 28,080 -- 101,513
Savings....................................... 158,625 25,108 -- 183,733
Time deposits:
Time deposits of $100 or more............ 57,725 19,864 -- 77,589
Other time deposits...................... 209,504 30,827 -- 240,331
-------- ------- ------- -------
Total deposits......................... 600,557 130,111 -- 730,668
Short-term borrowings.............................. 3,453 2,910 -- 6,363
Promissory note payable............................ 13,450 -- (12,250)<F7> 1,200
Deferred tax liabilities........................... 1,049 695 -- 1,744
Accrued expenses and other liabilities............. 10,559 464 -- 11,023
12% convertible debentures......................... 6,500 -- -- 6,500
-------- ------- ------- -------
Total liabilities...................... 635,568 134,180 (12,250) 757,498
-------- ------- ------- -------
Guaranteed preferred beneficial interests in FBA's
subordinated debentures.......................... -- -- 38,250 <F7> 38,250
-------- ------- ------- -------
STOCKHOLDERS' EQUITY
Common stock:
Common stock................................... 486 833 (833)<F6> 486
Class B common stock........................... 375 -- -- 375
Capital surplus.................................... 60,173 10,640 (10,640)<F6> 60,173
Retained earnings.................................. 2,183 6,412 (6,412)<F6> 2,183
Treasury stock..................................... (6,814) -- -- (6,814)
Accumulated other comprehensive income............. 438 (59) 59 <F6> 438
-------- ------- ------- -------
Total stockholders' equity............. 56,841 17,826 (17,826) 56,841
-------- ------- ------- -------
Total liabilities and stockholders'
equity............................... $692,409 152,006 8,174 852,589
======== ======= ======= =======
</TABLE>
See notes to pro forma combined condensed financial statements.
20
<PAGE> 24
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS<F1>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1998
------------------------------------------------------
PRO FORMA
ADJUSTMENTS - PRO FORMA
FBA REDWOOD REDWOOD & FCB COMBINED
--- ------- ------------- ---------
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans.......................... $10,568 2,701 -- 13,269
Investment securities............................... 2,033 309 -- 2,342
Federal funds sold and other........................ 395 28 -- 423
------- ----- ----- ------
Total interest income........................... 12,996 3,038 -- 16,034
------- ----- ----- ------
Interest expense:
Interest on deposits................................ 5,362 1,072 -- 6,434
Note payable and other borrowings................... 537 6 (321)<F3><F8> 222
------- ----- ----- ------
Total interest expense.......................... 5,899 1,078 (321) 6,656
------- ----- ----- ------
Net interest income............................. 7,097 1,960 321 9,378
Provision for possible loan losses...................... 300 -- -- 300
------- ----- ----- ------
Net interest income after provision for
possible loan losses.......................... 6,797 1,960 321 9,078
------- ----- ----- ------
Noninterest income:
Service charges on deposit accounts................. 739 63 -- 802
Other income........................................ 411 175 -- 586
------- ----- ----- ------
Total noninterest income........................ 1,150 238 -- 1,388
------- ----- ----- ------
Noninterest expense:
Salary and employee benefits........................ 2,135 800 -- 2,935
Occupancy, furniture and equipment.................. 838 234 -- 1,072
Other noninterest expense........................... 3,084 403 1,056<F2><F8> 4,543
------- ----- ----- ------
Total noninterest expense....................... 6,057 1,437 1,056 8,550
------- ----- ----- ------
Income before provision for income tax
expense....................................... 1,890 761 (735) 1,916
Provision for income tax expense (benefit).............. 790 336 (199) 927
------- ----- ----- ------
Net income...................................... $ 1,100 425 (536) 989
======= ===== ===== ======
Weighted average common stock outstanding
(in thousands)........................................ 4,911 -- 365<F9> 5,276
======= ===== ===== ======
Earnings per common share:
Basic............................................... $ 0.22 0.19
Diluted............................................. 0.22 0.19
======= ======
</TABLE>
See notes to pro forma combined condensed financial statements.
21
<PAGE> 25
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS<F1>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1997
-----------------------------------------------------------------------------------
PRO FORMA
ADJUSTMENTS - PRO FORMA
FCB & PRO FORMA ADJUSTMENTS - PRO FORMA
FBA SURETY SURETY COMBINED REDWOOD REDWOOD COMBINED
--- ------ ------ --------- ------- ------------- ---------
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans.... $7,453 1,145 -- 8,598 2,404 -- 11,002
Investment securities......... 1,781 182 -- 1,963 197 -- 2,160
Federal funds sold............ 377 -- -- 377 68 -- 445
------ ----- ----- ------ ----- ----- ------
Total interest income..... 9,611 1,327 -- 10,938 2,669 -- 13,607
------ ----- ----- ------ ----- ----- ------
Interest expense:
Interest on deposits.......... 3,963 607 -- 4,570 907 -- 5,477
Note payable and other
borrowings.................. 545 2 (126)<F3><F5> 421 -- (249)<F8> 172
------ ----- ----- ------ ----- ----- ------
Total interest expense.... 4,508 609 (126) 4,991 907 (249) 5,649
------ ----- ----- ------ ----- ----- ------
Net interest income....... 5,103 718 126 5,947 1,762 249 7,958
Provision for possible loan
losses.......................... 550 35 -- 585 -- -- 585
------ ----- ----- ------ ----- ----- ------
Net interest income after
provision for possible
loan losses............. 4,553 683 126 5,362 1,762 249 7,373
------ ----- ----- ------ ----- ----- ------
Noninterest income:
Service charges on deposit
accounts.................... 575 101 -- 676 57 -- 733
Other income.................. 296 156 (5)<F4> 447 151 -- 598
------ ----- ----- ------ ----- ----- ------
Total noninterest
income.................. 871 257 (5) 1,123 208 -- 1,331
------ ----- ----- ------ ----- ----- ------
Noninterest expense:
Salary and employee
benefits.................... 1,550 434 -- 1,984 931 -- 2,915
Occupancy, furniture and
equipment................... 838 90 2<F4> 930 227 -- 1,157
Other noninterest expense..... 2,105 309 73<F2><F4> 2,487 346 1,047<F8> 3,880
------ ----- ----- ------ ----- ----- ------
Total noninterest
expense................. 4,493 833 75 5,401 1,504 1,047 7,952
------ ----- ----- ------ ----- ----- ------
Income before provision
for income tax expense
and minority interest in
income of subsidiary.... 931 107 46 1,084 466 (798) 752
Provision for income tax
expense......................... 361 43 42 446 216 (224) 438
------ ----- ----- ------ ----- ----- ------
Income before minority
interest in income of
subsidiary.............. 570 64 4 638 250 (574) 314
Minority interest in income of
subsidiary...................... (86) -- 86<F2> -- -- -- --
------ ----- ----- ------ ----- ----- ------
Net income................ $ 484 64 90 638 250 (574) 314
====== ===== ===== ====== ===== ===== ======
Weighted average common stock
equivalents outstanding (in
thousands)...................... 4,082 265<F9> 1,093<F9> 5,440 -- -- 5,440
====== ===== ===== ====== ===== ===== ======
Earnings per common share:
Basic......................... $ 0.12 0.12 0.06
Diluted....................... 0.12 0.12 0.06
====== ====== ======
</TABLE>
See notes to pro forma combined condensed financial statements.
22
<PAGE> 26
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS<F1>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------------------------
PRO FORMA
ADJUSTMENTS - PRO FORMA
FCB & PRO FORMA ADJUSTMENTS - PRO FORMA
FBA SURETY SURETY COMBINED REDWOOD REDWOOD COMBINED
--- ------ ------------- --------- ------- ------------- ---------
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans.... $33,393 4,338 -- 37,731 10,418 -- 48,149
Investment securities......... 7,870 699 -- 8,569 1,018 -- 9,587
Federal funds sold............ 1,254 -- -- 1,254 244 -- 1,498
------- ----- ----- ------ ------ ------ ------
Total interest income..... 42,517 5,037 -- 47,554 11,680 -- 59,234
------- ----- ----- ------ ------ ------ ------
Interest expense:
Interest on deposits.......... 16,716 2,297 -- 19,013 3,863 -- 22,876
Note payable and other
borrowings.................. 2,439 16 (504)<F3><F5> 1,951 1 (995)<F8> 957
------- ----- ----- ------ ------ ------ ------
Total interest expense.... 19,155 2,313 (504) 20,964 3,864 (995) 23,833
------- ----- ----- ------ ------ ------ ------
Net interest income....... 23,362 2,724 504 26,590 7,816 995 35,401
Provision for possible loan
losses.......................... 2,000 255 -- 2,255 -- -- 2,255
------- ----- ----- ------ ------ ------ ------
Net interest income after
provision for possible
loan losses............. 21,362 2,469 504 24,335 7,816 995 33,146
------- ----- ----- ------ ------ ------ ------
Noninterest income:
Service charges on deposit
accounts.................... 2,239 369 -- 2,608 373 -- 2,981
Other income.................. 1,048 952 (20)<F4> 1,980 28 -- 2,008
------- ----- ----- ------ ------ ------ ------
Total noninterest
income.................. 3,287 1,321 (20) 4,588 401 -- 4,989
------- ----- ----- ------ ------ ------ ------
Noninterest expense:
Salary and employee
benefits.................... 6,226 2,151 -- 8,377 3,362 -- 11,739
Occupancy, furniture and
equipment................... 3,315 360 8<F4> 3,683 934 -- 4,617
Other noninterest expense..... 8,136 1,580 293<F2><F4> 10,009 1,345 4,184<F8> 15,538
------- ----- ----- ------ ------ ------ ------
Total noninterest
expense................. 17,677 4,091 301 22,069 5,641 4,184 31,894
------- ----- ----- ------ ------ ------ ------
Income (loss) before
provision for income tax
expense (benefit) and
minority interest in
income of subsidiary.... 6,972 (301) 183 6,854 2,576 (3,189) 6,241
Provision for income tax expense
(benefit)....................... 3,145 (120) 167 3,192 1,156 (897) 3,451
------- ----- ----- ------ ------ ------ ------
Income before minority
interest in income of
subsidiary.............. 3,827 (181) 16 3,662 1,420 (2,292) 2,790
Minority interest in income of
subsidiary...................... (294) -- 294<F2> -- -- -- --
------- ----- ----- ------ ------ ------ ------
Net income................ $ 3,533 (181) 310 3,662 1,420 (2,292) 2,790
======= ===== ===== ====== ====== ====== ======
Weighted average common stock
equivalents outstanding (in
thousands)...................... 4,069 265<F9> 1,093<F9> 5,427 -- -- 5,427
======= ===== ===== ====== ====== ====== ======
Earnings per common share:
Basic......................... $ 0.87 0.67 0.51
Diluted....................... 0.86 0.67 0.51
======= ====== ======
</TABLE>
See notes to pro forma combined condensed financial statements.
23
<PAGE> 27
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(1) The unaudited pro forma combined condensed balance sheet has been
prepared based on the historical financial statements of FBA and Redwood as if
the pending acquisition of Redwood had occurred on March 31, 1998. The
unaudited pro forma combined condensed statements of operations set forth the
results of operations of FBA as if the pending acquisition of Redwood had
occurred as of January 1, 1997. In addition, the unaudited pro forma combined
condensed statements of operations reflect the acquisitions of Surety Bank and
of the minority stockholders' interest in the net assets of FCB as if these
transactions were completed on January 1, 1997. The unaudited pro forma
combined condensed statements of operations for the year ended December 31,
1997 and for the three months ended March 31, 1997 also reflect the restatement
of FBA's results of operations for its acquisition of First Banks' interest in
FCB completed on February 2, 1998. For further discussion of FBA's acquisition
activities, see "--Management's Discussion and Analysis--Acquisitions" and
"Note 2" to the accompanying consolidated financial statements of FBA. No
adjustments have been made for any operational synergies that may occur as a
result of these transactions. The pro forma financial information is unaudited
and not necessarily indicative of the results that will occur in the future.
ACQUISITION OF THE MINORITY STOCKHOLDERS' INTEREST IN FCB:
(2) The application of the purchase method of accounting gives rise to
purchase adjustments to reflect the fair value of assets acquired and
liabilities assumed. Intangibles associated with the purchase of subsidiaries
includes $1.63 million of goodwill for the acquisition of the minority
stockholders' interest in the net assets of FCB. This amount represents the
difference between the minority stockholders' interest in the net assets of FCB
as of February 2, 1998 of $2.85 million and the estimated market value of that
interest. The pro forma combined condensed statements of operations have been
adjusted to include the amortization of goodwill generated by this transaction,
amortized over a 15 year period using the straight-line method, and the
elimination of minority interest in income of subsidiary.
(3) The pro forma combined condensed statements of operations have been
adjusted to reflect the reduction in interest expense from the exchange of $10
million of the First Banks Note for 804,000 shares of FBA common stock as of
February 2, 1998. The First Banks Note carries an interest rate equal to 25
basis points below the prime rate. During 1998 and 1997, the average prime rate
of interest was approximately 8.50% and 8.375%, respectively.
ACQUISITION OF SURETY:
(4) Intangibles associated with the purchase of subsidiaries include $2.77
million in goodwill generated by the transaction between FBA and Surety,
representing the difference between the purchase price and the fair value of
the net assets acquired. The fair value of the net assets acquired reflects
increases of $200,000 and $210,000 relating to bank premises and mortgage
servicing rights (MSRs), respectively, offset by the accrual of $389,000 in
estimated acquisition costs. The deferred tax effects of these adjustments were
recorded using an effective tax rate of 35%. The pro forma combined condensed
statements of operations for the year ended December 31, 1997 and for the three
months ended March 31, 1997 have been adjusted to include the amortization of
goodwill generated by the transaction, amortized over a 15 year period using
the straight-line method, and the additional depreciation and amortization
relating to the increases in bank premises and MSRs.
(5) The pro forma combined condensed statements of operations for the year
ended December 31, 1997 and for the three months ended March 31, 1997 have been
adjusted to reflect the amount of interest expense which would have been paid
on the advance under the First Banks Note to fund the cash portion of the
acquisition. The First Banks Note carries an interest rate equal to 25 basis
points below the prime rate. During 1997, the average prime rate of interest
was approximately 8.375%.
PENDING ACQUISITION OF REDWOOD:
(6) The pro forma combined condensed balance sheet has been adjusted to
reflect the application of the purchase method of accounting. Adjustments to
intangibles associated with the purchase of subsidiaries result in $12.1 million
of goodwill for the pending acquisition of Redwood. This amount represents the
difference between the assumed purchase price of $26.0 million and the fair
value of the net assets acquired.
24
<PAGE> 28
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(7) The pro forma combined condensed financial statements reflect the
assumed issuance of $40 million of Preferred Securities as of January 1, 1997.
The proceeds of the offering, net of estimated issuance costs, are assumed to
be $38.3 million. The proceeds will be used by the Trust to purchase the
Subordinated Debentures issued by FBA. FBA intends to use the proceeds from the
sale of the Subordinated Debentures to repay outstanding indebtedness under the
First Banks Note, for general corporate purposes, for acquisitions (including
the pending acquisition of Redwood), and the possible repurchase of common
stock from time to time. See "Use of Proceeds."
(8) The pro forma combined condensed statements of operations have been
adjusted to include the reduction in interest expense under the First Banks
Note, the amortization of goodwill generated by this pending transaction,
amortized over a 15 year period using the straight-line method, and the cost of
the Subordinated Debentures at an estimated rate of 8.75%, including the
amortization of estimated issuance costs.
EARNINGS PER SHARE:
(9) Pro forma earnings per share were calculated based upon FBA's weighted
average shares outstanding plus 289,552 shares issued for the acquisition of
the minority stockholders' interest in the fair value of the net assets of FCB,
804,000 shares issued in exchange for $10.0 million of the First Banks Note and
264,622 shares issued in the transaction between FBA and Surety.
25
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS
The discussion set forth in Management's Discussion and Analysis contains
certain forward-looking statements with respect to the financial condition,
results of operations and business of the Company. These forward-looking
statements are subject to certain risks and uncertainties, not all of which can
be predicted or anticipated. Factors that may cause actual results to differ
materially from those contemplated by the forward-looking statements herein
include general market conditions as well as conditions specifically affecting
the banking industry generally and factors having a specific impact on the
Company, including, but not limited to, the specific risks and uncertainties
identified in the section of this Prospectus entitled "RISK FACTORS--Risk
Factors Relating to the Company." Readers should therefore not place undue
reliance on forward-looking statements appearing herein.
ACQUISITIONS
FBA believes in order for a financial institution to prosper in the current
environment of rapid restructuring and consolidation in the banking industry,
and intense competition both within the industry and from non-banking entities,
it must achieve a size sufficient to enable it to take advantage of many of the
efficiencies available to its much larger competitors. FBA further believes
failure to achieve this growth would place FBA at a competitive disadvantage
relative to those larger competitors with respect to its costs of operation
which, over time, will be an increasingly difficult obstacle to overcome. FBA
projects internal growth alone will not be sufficient to advance FBA to the
size which is necessary within an acceptable time frame and, accordingly, views
a combination of internal growth and acquisitions as the means by which FBA
will achieve its growth objectives.
Although FBA originally viewed Texas, particularly the Dallas and Houston
areas, as its primary acquisition area, during 1995 and 1996 prices for
acquisitions escalated sharply in those areas. Acquisitions at the prices
required to successfully consummate these transactions would have caused
substantial diminution in the economic benefits which FBA envisioned would be
available in its acquisition program. This diminution in benefits resulted in
FBA's evaluation of California for acquisition candidates, where acquisition
pricing was considerably more favorable, and subsequently led to FBA's
acquisition of Sunrise Bank of California, Roseville, California ("Sunrise
Bank") in November 1996 and Surety Bank, Vallejo, California in December 1997,
as well as the acquisitions of First Commercial Bancorp, Inc., Sacramento,
California, ("FCB"), the holding company parent of First Commercial Bank
("First Commercial"), and Pacific Bay Bank, San Pablo, California ("Pacific
Bay Bank") in February 1998.
In enhancing its banking franchise, FBA places emphasis upon acquiring
other financial institutions as a means of accelerating its growth to
significantly expand its presence in a given market, to increase the extent of
its market area or to enter new or noncontiguous market areas. After an
acquisition is consummated, FBA expects to enhance the franchise of the
acquired entity by supplementing the marketing and business development efforts
to broaden the customer bases, strengthening particular segments of the
business or filling voids in the overall market coverage. In addition, the
acquisition program enables FBA to further leverage the operational support
services available to it through First Banks and its affiliates and to provide
the products and services typically available only through such a larger
organization. FBA will utilize cash, borrowings and the issuance of additional
common stock to meet its growth objectives under the acquisition program.
In November 1996, FBA completed its acquisition of Sunrise Bank for $17.5
million in cash. At the time of the transaction, Sunrise Bank had $110.8
million in total assets, $17.7 million in investment securities, $61.1 million
in total loans, net of unearned discount, and $91.1 million in deposits.
Sunrise Bank conducted its business through two banking locations in Roseville
and Rancho Cordova, California. Sunrise Bank was merged into FB California.
On December 1, 1997, FBA completed its acquisition of Surety Bank for $3.8
million in cash and 264,622 shares of FBA common stock. At the time of the
transaction, Surety Bank had $72.8 million in total assets, $11.8 million in
investment securities, $54.4 million in total loans, net of unearned discount,
and $67.5 million in deposits. Surety Bank conducted its banking business
through two banking locations in Vallejo and Fairfield, California. On December
1, 1997, Surety Bank was merged into FB California.
On February 2, 1998, FBA completed two acquisitions, FCB and its wholly
owned subsidiary, First Commercial, and Pacific Bay Bank. FCB operated through
First Commercial, which had six banking locations located in Sacramento,
Roseville (2), Concord, Campbell and San Francisco, California. At the time of
the acquisition, FCB had $192.5 million in total assets, $64.4 million in
investment securities, $118.9 million in total loans, net of unearned
26
<PAGE> 30
discount, and $173.1 million in deposits. Consideration paid for FCB consisted
of approximately 752,000 shares of FBA common stock. Additionally, $6.5 million
in convertible debentures of FCB owned by First Banks were exchanged for $6.5
million in convertible debentures of FBA. Pacific Bay Bank had one banking
location in San Pablo, California and one loan production office in Lafayette,
California. At the time of the acquisition, Pacific Bay Bank had $38.3 million
in total assets, $2.2 million in total interest-bearing deposits with other
financial institutions, $29.7 million in total loans, net of unearned discount,
and $35.2 million in deposits. Consideration paid for Pacific Bay consisted of
approximately $4.2 million in cash. Both First Commercial and Pacific Bay Bank
were merged into FB California.
RESTATEMENT OF FINANCIAL INFORMATION
In connection with FBA's acquisition of FCB and its wholly owned
subsidiary, First Commercial, as of February 2, 1998, FBA's financial
information for the period from August 23, 1995 to February 2, 1998 has been
restated to include the ownership interest of First Banks, FBA's majority
owner, in FCB consistent with the accounting treatment applicable to entities
under common control. First Banks' ownership interest in FCB was approximately
96.1% from August 23, 1995 to May 1996 and 61.5% from June 1996 to February 2,
1998. The remaining interest in FCB acquired by FBA is reflected in the
consolidated financial statements of FBA as minority interest for the period
from August 23, 1995 to February 2, 1998. Accordingly, Management's Discussion
and Analysis of Financial Condition and Results of Operations and the
accompanying consolidated financial statements of FBA are presented as if FBA
and FCB had been consolidated for all periods after August 23, 1995.
FINANCIAL CONDITION AND AVERAGE BALANCES
FBA's average total assets were $665.2 million and $524.4 million for the
three months ended March 31, 1998 and 1997, respectively. The increase is
primarily attributable to the acquisitions of Pacific Bay Bank and Surety Bank,
and internal loan growth resulting from the expansion of the commercial
business development staff.
FBA's average total assets were $540.8 million, $456.7 million and $375.1
million for the years ended December 31, 1997, 1996 and 1995, respectively. For
1997, total average assets increased by $84.1 million compared to 1996
primarily due to the acquisitions of Surety Bank and Sunrise Bank on December
1, 1997 and November 1, 1996, respectively, and internal loan growth resulting
from the expansion of the business development staff. For 1996, total average
assets increased by $81.6 million from 1995. The increase for 1996 is primarily
attributable to including the average assets of FCB for the full year in 1996,
or $153.7 million, compared to an average of $56.8 million for 1995. As
previously discussed under "--Restatement of Financial Information," the
historical financial information of FBA was retroactively restated to include
FCB as if the acquisition was completed on August 23, 1995. Partially
offsetting this increase were reductions in BankTEXAS' consumer indirect
automobile loan and investment securities portfolios consistent with strategies
employed during 1995.
Loans, net of unearned discount, averaged $438.4 million and $326.5 million
for the three months ended March 31, 1998 and 1997, and $343.3 million, $273.1
million and $230.5 million for the years ended December 31, 1997, 1996 and
1995, respectively. During 1995, average loans increased by $47.6 million,
reflecting FBA's acquisition of FCB and the prior emphasis on indirect
automobile lending. As more fully discussed under "--Net Interest Income,"
during the second quarter of 1995, FBA elected to reduce the level of
originations of indirect automobile loans. Accordingly, indirect automobile
loans, which initially increased from $147.7 million at December 31, 1994 to
$159.5 million at June 30, 1995, have subsequently decreased to $59.0 million
at March 31, 1998 and $61.4 million, $86.6 million and $130.3 million at
December 31, 1997, 1996 and 1995, respectively. At the same time, FBA expanded
its corporate banking activities, resulting in the increase of the commercial
and financial, commercial real estate and real estate construction loan
portfolios to $314.8 million at March 31, 1998 and $296.7 million and $203.1
million at December 31, 1997 and 1996, respectively, including the loans
provided by the acquisition of Surety Bank and Sunrise Bank, from $102.1
million at December 31, 1995.
Investment securities previously increased to an average of $141.7 million
for the year ended December 31, 1994 from an investment strategy which FBA
implemented during 1992. Under this strategy, funds were borrowed, principally
through repurchase agreements and advances from the Federal Home Loan Bank
("FHLB"), which were in turn used to purchase investment securities,
primarily mortgage-backed securities. As more fully discussed under "--Net
Interest Income," this strategy resulted in a declining net interest income
and net interest margin.
27
<PAGE> 31
Recognizing the need to improve the net interest income and net interest
margin, during 1994 FBA commenced the process of restructuring its investment
portfolio. The restructuring process consisted initially of hedging the
existing investment security portfolio in an attempt to reduce the overall
interest rate risk to a more acceptable level. At the same time, FBA began
disposing of securities which had greater interest rate risk and reducing the
level of short-term borrowings. Remaining funds generated in this process were
invested in shorter-term U.S. Treasury and U.S. Government Agency securities
which generally have less interest rate risk. The restructuring of the
investment security portfolio was completed during 1995 and resulted in a
reduction of $51.8 million in the average balance of investment securities to
$89.9 million for the year ended December 31, 1995.
The average balance of investment securities was $136.5 million and $125.5
million for the three months ended March 31, 1998 and 1997 and $129.9 million
and $107.2 million for the years ended December 31, 1997 and 1996,
respectively. The increases are attributable to the securities acquired through
the acquisitions of Pacific Bay Bank, Surety Bank and Sunrise Bank.
Deposits are the primary funding source for FBA and are acquired from a
broad base of local markets, including both individual and corporate customers.
The average balance of deposits was $573.3 million and $449.3 million for the
three months ended March 31, 1998 and 1997, respectively. The increase is
attributable to the acquisitions of Pacific Bay Bank and Surety Bank, which
provided deposits of $35.2 million and $67.5 million, respectively, and to
internal growth resulting from FBA's promotional efforts. For 1997, average
deposits were $461.3 million, an increase of $67.1 million, from $394.2 million
for 1996. Average deposits increased $94.3 million during 1996, from $299.9
million for the year ended December 31, 1995. These increases are primarily
attributable to the acquisitions of Surety Bank, Sunrise Bank and FCB.
The average balance of promissory notes payable and short-term borrowings
decreased to $26.8 million and $13.8 million for the years ended December 31,
1997 and 1996, respectively, from $31.5 million for 1995. The decrease in the
average balance during 1996 is attributable to a strategic decision to reduce
FBA's dependence on short-term borrowings as a funding source for its
investment securities portfolio. The increase in the average balance for 1997
is attributable to borrowings under the First Banks Note to facilitate its
funding of the acquisition of Sunrise Bank as of December 1, 1996. For the
three months ended March 31, 1998 and 1997, promissory notes payable and
short-term borrowings averaged $24.6 million and $24.4 million, respectively.
Stockholders' equity averaged $54.9 million and $38.4 million for the three
months ended March 31, 1998 and 1997, respectively. The increase is primarily
attributable to net income, to the conversion of $10.0 million of the First
Banks Note for common stock and to the issuance of common stock in connection
with the acquisition of Surety Bank in December 1997 and the publicly-owned
portion of FCB in February 1998. The increase was partially offset by the
repurchase of $2.5 million of common stock for treasury during the three months
ended March 31, 1998. Stockholders' equity averaged $39.7 million, $40.5
million and $39.9 million for the years ended December 31, 1997, 1996 and 1995,
respectively. These fluctuations are primarily attributable to the repurchases
of common stock for treasury, repurchases of an outstanding warrant and an
option to purchase common stock, and a net loss of $4.8 million for the year
ended December 31, 1995, partially offset by net income of $3.5 million and
$691,000 for the years ended December 31, 1997 and 1996, respectively.
In addition, effective December 31, 1994, stockholders' equity includes the
impact of implementing an accounting adjustment referred to as a
"quasi-reorganization" as approved by the Board of Directors of FBA. In
accordance with the accounting provisions applicable to a quasi-reorganization,
the assets and liabilities of FBA were adjusted to fair value and the
accumulated deficit was eliminated. Fair value adjustments included a reduction
in the carrying value of bank premises and equipment of $4.4 million and the
elimination of the net fair value adjustment for securities available for sale
of $1.1 million. As a result of implementing the quasi-reorganization,
stockholders' equity was reduced by $3.1 million. The implementation of the
quasi-reorganization did not have a significant impact on the results of
operations of FBA.
28
<PAGE> 32
The following table sets forth certain information relating to FBA's
average balance sheets, and reflects the average yield earned on
interest-bearing assets, the average cost of interest-bearing liabilities and
the resulting net interest income for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------------
1998 1997
----------------------------- -----------------------------
INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- -------- ------- ------- -------- -------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Time deposits with banks.......................... $ 1,985 $ 28 5.72% $ 624 $ 11 7.15%
Investment securities<F2><F3>..................... 136,501 2,033 6.04 125,544 1,781 5.75
Federal funds sold and securities purchased under
agreements to resell............................ 26,077 367 5.71 28,736 366 5.17
Loans<F1><F2>..................................... 438,421 10,568 9.78 326,474 7,453 9.26
-------- ------- -------- ------
Total earning assets.......................... 602,984 12,996 8.74 481,378 9,611 8.10
------- ------
Nonearning assets..................................... 62,166 43,064
-------- --------
Total assets.................................. $665,150 $524,442
======== ========
Interest-bearing liabilities:
Interest-bearing demand and savings deposits...... $224,528 1,803 3.26 $166,263 1,120 2.73
Time deposits of $100 or more..................... 51,594 775 6.09 39,465 529 5.44
Other time deposits............................... 205,975 2,784 5.48 171,480 2,314 5.47
-------- ------- -------- ------
Total interest-bearing deposits............... 482,097 5,362 4.51 377,208 3,963 4.26
Promissory notes payable and short-term
borrowings<F3>.................................. 24,602 537 8.85 24,393 545 9.06
-------- ------- -------- ------
Total interest-bearing liabilities............ 506,699 5,899 4.72 401,601 4,508 4.55
------- ------
Non-interest-bearing liabilities:
Demand deposits................................... 91,230 72,129
Other liabilities................................. 12,360 12,312
-------- --------
Total liabilities............................. 610,289 486,042
Stockholders' equity.................................. 54,861 38,400
-------- --------
Total liabilities and stockholders' equity.... $665,150 $524,442
======== ========
Net interest income................................... $ 7,097 $5,103
======= ======
Interest rate spread.................................. 4.02 3.55
Net interest margin................................... 4.77 4.30
==== ====
<FN>
- ---------
<F1>Nonaccrual loans are included in the average loan amounts.
<F2>FBA has no tax-exempt income.
<F3>Includes the effect of an interest rate exchange agreement.
</TABLE>
29
<PAGE> 33
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------- ------------------------------------- -------------------------------------
INTEREST INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
- ------- -------- ------- ------- -------- ------- ------- -------- -------
(DOLLARS EXPRESSED IN THOUSANDS)
<C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 1,019 $ 58 5.69% $ 19,813 $ 1,062 5.36% $ 4,693 $ 319 6.80%
129,865 7,870 6.06 107,211 6,257 5.84 89,860 5,426 6.04
22,058 1,196 5.42 17,347 926 5.34 12,801 724 5.66
343,329 33,393 9.73 273,063 25,137 9.21 230,451 20,087 8.72
- -------- ------- -------- ------- -------- -------
496,271 42,517 8.57 417,434 33,382 8.00 337,805 26,556 7.86
------- ------- -------
44,498 39,295 37,336
- -------- -------- --------
$540,769 $456,729 $375,141
======== ======== ========
$175,117 5,145 2.94 $134,091 3,575 2.67 $ 99,596 2,967 2.98
39,126 2,144 5.48 36,586 2,008 5.49 29,073 1,610 5.54
168,795 9,427 5.59 152,812 8,353 5.47 116,919 6,258 5.35
- -------- ------- -------- ------- -------- -------
383,038 16,716 4.36 323,489 13,936 4.31 245,588 10,835 4.41
26,755 2,439 9.12 13,769 1,597 11.60 31,548 2,299 7.29
- -------- ------- -------- ------- -------- -------
409,793 19,155 4.67 337,258 15,533 4.61 277,136 13,134 4.74
------- ------- -------
78,222 70,739 54,288
13,043 8,247 3,807
- -------- -------- --------
501,058 416,244 335,231
39,711 40,485 39,910
- -------- -------- --------
$540,769 $456,729 $375,141
======== ======== ========
$23,362 $17,849 $13,422
======= ======= =======
3.90 3.39 3.12
4.71 4.28 3.97
==== ===== ====
</TABLE>
30
<PAGE> 34
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 CHANGES IN:
----------------------------------------------------------------------------------------
MARCH 31, 1998 COMPARED DECEMBER 31, 1997 COMPARED DECEMBER 31, 1996 COMPARED
TO MARCH 31, 1997 TO DECEMBER 31, 1996 TO DECEMBER 31, 1995
----------------------------- ---------------------------- ---------------------------
NET NET NET
VOLUME RATE CHANGE VOLUME RATE CHANGE VOLUME RATE CHANGE
------ ---- ------ ------ ---- ------ ------ ---- ------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets:
Time deposits with banks.......... $ 19 (2) 17 (1,074) 70 (1,004) 795 (52) 743
Investment securities<F1><F2>..... 160 92 252 1,365 248 1,613 1,001 (170) 831
Federal funds sold and securities
purchased under agreements to
resell.......................... (8) 9 1 256 14 270 240 (38) 202
Loans<F2>......................... 2,677 438 3,115 6,761 1,495 8,256 3,865 1,185 5,050
------ --- ----- ------ ----- ------ ------- ------- -----
Total interest income......... 2,848 537 3,385 7,308 1,827 9,135 5,901 925 6,826
------ --- ----- ------ ----- ------ ------- ------- -----
Interest-bearing liabilities:
Interest-bearing demand and
savings deposits................ 440 243 683 1,175 395 1,570 868 (260) 60
Time deposits of $100 or more..... 177 69 246 139 (3) 136 412 (14) 398
Other time deposits............... 466 4 470 884 190 1,074 1,955 140 2,095
Notes payable and short-term
borrowings<F1>.................. 5 (13) (8) 1,089 (247) 842 13,968 (14,670) (702)
------ --- ----- ------ ----- ------ ------- ------- -----
Total interest expense........ 1,088 303 1,391 3,287 335 3,622 17,203 (14,804) 2,399
------ --- ----- ------ ----- ------ ------- ------- -----
Net interest income........... $1,760 234 1,994 4,021 1,492 5,513 (11,302) 15,729 4,427
====== === ===== ====== ===== ====== ======= ======= =====
<FN>
- ----------
<F1>Includes the effect of an interest rate exchange agreement.
<F2>FBA has no tax-exempt income.
</TABLE>
NET INTEREST INCOME
The primary source of FBA'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 $7.1 million, or 4.8% of average earnings
assets, compared to $5.1 million, or 4.3% of average earnings assets, for the
three months ended March 31, 1998 and 1997, respectively. For the year ended
December 31, 1997, net interest income was $23.4 million, or 4.7% of average
earning assets, compared with $17.8 million, or 4.3% of average earning assets,
and $13.4 million, or 4.0% of average earning assets, for the years ended
December 31, 1996 and 1995, respectively.
FBA's loan portfolio, which represents its primary interest-earning asset
and primary source of net interest income, previously consisted primarily of
fixed rate indirect automobile loans. As interest rates began to increase
during 1994, the yield on this fixed rate portfolio remained relatively
constant. Furthermore, intense competition for automobile loans, particularly
from nonbank entities, caused market rates to increase more slowly than
interest rates in general. Consequently, both the amounts and rates at which
new loans were originated were less than anticipated. The combination of these
factors and the continued repayments of the older loans caused the yield on the
loan portfolio to increase by only 41 basis points to 8.7% for the year ended
December 31, 1995, compared with 8.3% for the year ended December 31, 1994. At
the same time, FBA's cost of interest-bearing deposits, the principal source of
funding for the loan portfolio, increased by 77 basis points to 4.4% for the
year ended December 31, 1995 from 3.6% for the year ended December 31, 1994.
During this same time frame, FBA was following an investment strategy
whereby funds were borrowed on a short-term basis and were invested in
mortgage-backed securities. While these instruments initially generated an
incremental spread, as interest rates increased in 1994, the contribution to
net interest margin of this investment strategy was substantially reduced.
31
<PAGE> 35
The following is a comparison of the yield earned on the investment
portfolio and the cost of short-term borrowings for the years ended December
31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Average yield on investment securities............ 6.04% 4.91%
Average cost of borrowings........................ 7.29 4.35
----- ----
Interest spread................................... (1.25)% 0.56%
===== ====
</TABLE>
Concerned with its interest rate risk profile and the overall impact of
further increases in interest rates, FBA began the process of restructuring its
investment securities portfolio and repositioning its loan portfolio in the
latter part of 1994. The restructuring process included sales of investment
securities of $71.0 million and $113.9 million, resulting in net losses of $3.0
million and $7.1 million for the years ended December 31, 1995 and 1994,
respectively. To reposition the loan portfolio, FBA significantly expanded its
ability to originate commercial and financial, commercial real estate and real
estate construction and development loans while maintaining a presence in the
indirect automobile lending business. The current composition of the loan
portfolio and the changes are presented under "--Loans and Allowance for
Possible Loan Losses."
The culmination of FBA's efforts in repositioning its loan portfolio,
including the expansion into the San Francisco-Sacramento corridor of northern
California and the restructuring of the investment securities portfolio, has
resulted in an improvement of the net interest margin to 4.7% of average
interest-earning assets for the year ended December 31, 1997, from 4.3% and
4.0% for the years ended December 31, 1996 and 1995, respectively. This
improvement is attributable to the increase in the average yield on the loan
portfolio to 9.7% for 1997 from 8.7% for 1995, while the overall cost of funds
decreased by approximately four basis points from 1995 to 1997.
For the three months ended March 31, 1998, the increase in net interest
income over the same period in 1997 is primarily attributable to the net
interest-earning assets provided by the acquisitions of Surety Bank and Pacific
Bay Bank, the improved yield on BankTEXAS' repositioned loan portfolio and the
effect of the exchange of $10.0 million of the First Banks Note for common
stock of FBA.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1997
NET INCOME. Net income was $1.1 million, or $0.22 per share on a diluted
basis, for the three months ended March 31, 1998, compared to $484,000 or $0.12
per share on a diluted basis, for the same period in 1997. The improved
operating results of FBA reflect the improved performance of both BankTEXAS and
FB California. BankTEXAS' net income increased to $753,000 from $629,000 for
the three month periods ended March 31, 1998 and 1997, respectively. FB
California recorded net income of $739,000 for the three month period ended
March 31, 1998, in comparison to $395,000 for the same period in 1997. The
results for the first quarter of 1998 include a net charge after related income
taxes of $225,000, or $0.05 per share on a diluted basis, in settlement of
certain litigation. Excluding this charge, earnings per share on a diluted
basis for the first quarter of 1998 would have been $0.27. As previously
discussed, net interest income increased by $2.0 million to $7.1 million, or
4.8% of average interest-earning assets, from $5.1 million, or 4.3% of average
interest-earnings assets, for the same period in 1997.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses
was $300,000 and $550,000 for the three month periods ended March 31, 1998 and
1997, respectively. The decrease in the provision for possible loan losses for
the first quarter of 1998, compared to the same period in 1997, is primarily
attributable to improved asset quality of FBA's existing loan portfolio, as
determined by management's review and evaluation of the credit quality of the
loans in the portfolio and its assessment of the adequacy of the allowance for
possible loan losses.
Net loan charge-offs were $529,000 for the three month period ended March
31, 1998, compared to $422,000 for the same period in 1997. The increase in net
loan charge-offs is primarily attributable to the loans obtained through the
acquisitions of Surety Bank and Pacific Bay Bank. The acquired allowance for
possible loan losses for Pacific Bay Bank totaled $885,000 at the acquisition
date. See "--Lending and Credit Management" for a summary of nonperforming
loans and a summary of loan loss experience.
32
<PAGE> 36
NONINTEREST INCOME AND EXPENSE. The following table summarizes noninterest
income and noninterest expense for the three months ended March 31, 1998 and
1997.
<TABLE>
<CAPTION>
INCREASE (DECREASE)
-------------------
1998 1997 AMOUNT PERCENT
---- ---- ------ -------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
Noninterest income:
Service charges on deposit accounts........... $ 739 575 164 28.5%
Other income.................................. 319 296 23 7.8
Gain on sales of securities, net.............. 92 -- 92 --
------ ----- ----- -------
Total noninterest income.................. $1,150 871 279 32.0
====== ===== ===== =======
Noninterest expense:
Salaries and employee benefits................ $2,135 1,550 585 37.7%
Occupancy, net of rental income............... 491 571 (80) (14.0)
Furniture and equipment....................... 347 267 80 30.0
Federal Deposit Insurance Corporation
premiums.................................... 43 38 5 13.2
Postage, printing and supplies................ 167 148 19 12.8
Legal, examination and professional fees...... 890 750 140 18.7
Data processing............................... 475 327 148 45.3
Communications................................ 200 164 36 22.0
Losses and expenses on sale of foreclosed
property, net of gains...................... 157 (9) 166 1,844.4
Other......................................... 1,152 687 465 67.7
------ ----- -----
Total noninterest expense................. $6,057 4,493 1,564 34.8
====== ===== ===== =======
</TABLE>
NONINTEREST INCOME. Noninterest income was $1.2 million for the three month
period ended March 31, 1998 compared to $871,000 for the same period in 1997.
Noninterest income consists primarily of service charges on deposit accounts
and customer service fees.
Service charges on deposit accounts and customer service fees increased to
$739,000 for the three month period ended March 31, 1998, in comparison to
$575,000 for the same period in 1997. This increase is primarily attributable
to the acquisitions of Surety Bank and Pacific Bay Bank.
NONINTEREST EXPENSE. Noninterest expense was $6.1 million for the three
month period ended March 31, 1998, compared to $4.5 million for the same period
in 1997. The increase is attributable to the noninterest expense of Surety Bank
and Pacific Bay Bank, nonrecurring expenses associated with those acquisitions
and the additional noninterest expense attributable to FBA's expansion of its
corporate lending and retail banking staff. Specifically, salaries and employee
benefits increased by $585,000 to $2.1 million from $1.6 million for the three
months ended March 31, 1998 and 1997, respectively. Additionally, other
noninterest expense for the three months ended March 31, 1998 includes a
$350,000 charge in settlement of certain litigation.
During these same periods, occupancy expense, net of rental income,
declined to $491,000 for the three months ended March 31, 1998 from $571,000
for the same period in 1997. This decline is the result of increased
sub-leasing of excess space within FB California's banking premises and
relocation of certain California branches.
INCOME TAXES. The accompanying consolidated statements of operations
reflect a provision for income taxes of $790,000 for the three month period
ended March 31, 1998, compared to $361,000 for the same period in 1997. At
March 31, 1998 and December 31, 1997, the accompanying consolidated balance
sheets included a deferred tax asset, net of deferred tax liabilities, of $12.7
million and $13.1 million, respectively. The deferred tax asset valuation
allowance was $7.0 million at March 31, 1998 and December 31, 1997.
33
<PAGE> 37
COMPARISON OF RESULTS OF OPERATIONS FOR YEARS ENDED 1997 AND 1996
NET INCOME. Net income for the year ended December 31, 1997 improved to
$3.5 million from $691,000 for the same period in 1996, an increase of 411%.
This improvement is primarily attributable to net interest income. As
previously discussed, net interest income increased by $5.6 million to $23.4
million, an increase of 30.9% or 4.7% of average earning assets, for 1997, from
$17.8 million, or 4.3% of average earning assets, for 1996.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses
was $2.0 million and $2.4 million for the years ended December 31, 1997 and
1996, respectively. Net loan charge-offs were $1.4 million and $4.6 million for
the years ended December 31, 1997 and 1996, respectively. The allowance for
possible loan losses was $11.4 million, or 2.6% of total loans, net of unearned
discount, at December 31, 1997, compared to $10.7 million, or 3.2% of total
loans, net of unearned discount, at December 31, 1996. Loans which were either
90 days or more past due and still accruing interest or on nonaccrual status
totaled $4.0 million and $3.6 million at December 31, 1997 and 1996,
respectively, representing 0.9% and 1.1% of total loans, net of unearned
discount, at those dates. Loans which were between 30 and 89 days past due were
$7.9 million, or 1.8% of total loans, net of unearned discount, at December 31,
1997, compared to $7.3 million, or 2.2% of total loans, net of unearned
discount, at December 31, 1996.
Although asset quality has improved, FBA has continued to provide for
possible loan losses in recognition of the overall growth in the loan portfolio
as well as its changing composition. As the portfolio changes from one with
significant preponderance in indirect automobile loans, to one having
substantial portions of commercial and financial, real estate construction and
development and commercial real estate loans, the credit risk profile also
changes. Typically, a larger group of lower balance homogeneous loans, such as
the indirect automobile loan portfolio, exhibits certain past due and loan loss
experience trends which provides FBA a basis for establishing an adequate level
of allowance for possible loan losses. While these same trends are included in
FBA's evaluation of its commercial lending activities, the overall credit risk
of this type of portfolio is heightened as the possibility of a significant
unforeseen loss occurring over time is greater. See "--Loans and Allowance for
Possible Loan Losses" for a further discussion of FBA's policies and practices
of monitoring and maintaining the allowance for possible loan losses.
NONINTEREST INCOME AND EXPENSE. The following table summarizes noninterest
income and noninterest expense for the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
INCREASE (DECREASE)
-------------------
1997 1996 AMOUNT PERCENT
---- ---- ------ -------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
Noninterest income:
Service charges on deposit accounts........... $ 2,239 2,258 (19) (0.8)%
Loan sales and servicing income............... 40 70 (30) (42.9)
Other income.................................. 932 1,072 (140) (13.1)
Gain on sales of securities, net.............. 76 185 (109) (58.9)
------- ------ ------
Total noninterest income.................. $ 3,287 3,585 (298) (8.3)
======= ====== ====== ======
Noninterest expense:
Salaries and employee benefits................ $ 6,226 5,249 977 18.6%
Occupancy, net of rental income............... 2,166 1,832 334 18.2
Furniture and equipment....................... 1,149 1,003 146 14.6
Federal Deposit Insurance Corporation
premiums.................................... 119 497 (378) (76.1)
Postage, printing and supplies................ 496 744 (248) (33.3)
Legal, examination and professional fees...... 3,241 2,777 464 16.7
Data processing............................... 1,084 735 349 47.5
Communications................................ 673 623 50 8.0
(Gain) loss on sale of foreclosed property,
net of gains................................ (350) 1,148 (1,498) (130.5)
Other......................................... 2,873 3,129 (256) (8.2)
------- ------ ------
Total noninterest expense................. $17,677 17,737 (60) (0.3)
======= ====== ====== ======
</TABLE>
34
<PAGE> 38
NONINTEREST INCOME. Noninterest income was $3.3 million for the year ended
December 31, 1997, in comparison to $3.6 million for 1996, representing a
decrease of $300,000.
Service charges on deposit accounts decreased to $2.2 million from $2.3
million for the years ended December 31, 1997 and 1996, respectively. The
decrease is primarily attributable to the deposit base of FCB, which
experienced both a reduction in the number of demand deposit accounts subject
to service charges and which reduced its minimum balance requirements in
conjunction with a promotional campaign. The decrease was substantially offset
by the additional service charges and fees provided by the acquisition of
Sunrise Bank.
Loan servicing fees decreased to $40,000 from $70,000 for the years ended
December 31, 1997 and 1996, respectively. The decrease is due to a reduction in
the amount of indirect automobile loans serviced for others as FBA is no longer
selling indirect automobile loans on a servicing retained basis.
Other income was $932,000 and $1.1 million for the years ended December 31,
1997 and 1996, respectively. For 1997, other income consists primarily of
certain legal settlements received applicable to pending litigation of the
former Sunrise Bank and a net gain of $47,000 realized upon sales of
repossessed and other assets. Other income for the year ended December 31, 1996
includes a $795,000 gain realized upon FCB's sale and assignment of certain
railroad cars and the associated leveraged leases to an unrelated party.
In addition, the decrease in noninterest income for the year ended December
31, 1997 is attributable to a gain of $76,000 recognized upon the sale of an
investment security for the year ended December 31, 1997, compared to a gain of
$185,000 for 1996.
NONINTEREST EXPENSE. Noninterest expense decreased by $60,000 to $17.7
million for the year ended December 31, 1997 compared to 1996. The decrease is
primarily attributable to a gain on sale of foreclosed property, net of
expenses, substantially offset by increases in other noninterest expense
categories including salaries and benefits, occupancy, net of rental income,
data processing and legal, examination and professional fees. These increases
are primarily attributable to the acquisitions of Surety Bank, Sunrise Bank and
FBA's expansion of its corporate lending and retail staff. In particular,
salaries and employee benefits increased by $980,000 to $6.2 million for 1997
from $5.2 million for 1996. In addition, occupancy expense, net of rental
income, and data processing expenses increased by $334,000 and $349,000 for the
year ended December 31, 1997, respectively, in comparison to 1996.
Legal, examination and professional fees increased to $3.2 million from
$2.8 million for the years ended December 31, 1997 and 1996, respectively. The
increase is primarily attributable to the costs associated with expanding FBA's
organizational capabilities to achieve both internal and external growth as
well as its overall growth in 1997.
For 1997, FBA realized a gain on sale of foreclosed property, net of
expenses, of $350,000, compared to losses and expenses on sale of foreclosed
property of $1.1 million for the same period in 1996. The improvement for 1997
is attributable to a gain realized upon sale of a foreclosed property, net of
gains, and an overall decrease in the losses and expenses of maintaining a
reduced level of foreclosed properties. In addition, for 1996, losses and
expenses on foreclosed property, net of gains, included $996,000 of valuation
write-downs.
Noninterest expense also reflects a decrease in other expense of $256,000
to $2.9 million from $3.1 million for the years ended December 31, 1997 and
1996, respectively. The decrease is primarily attributable to the noncredit
provision for possible losses within the indirect automobile dealer lending
program of $842,000 recorded in 1996, partially offset by an increase in fees
paid to First Banks and its affiliates of approximately $700,000 for 1997 in
comparison to 1996. Fees payable to First Banks and its affiliates generally
increase as FBA expands through acquisitions and internal growth, reflecting
the higher levels of service needed to operate the Subsidiary Banks. See Note
14 to the consolidated financial statements of FBA.
INCOME TAXES. The accompanying consolidated statements of operations
reflect a deferred income tax charge of $3.1 million for the year ended
December 31, 1997, compared to $470,000 in 1996. At December 31, 1997 and 1996,
the accompanying consolidated balance sheets include a deferred tax asset, net
of deferred tax liabilities, of $13.1 million and $14.6 million, respectively.
The deferred tax asset valuation allowance was $7.0 million and $6.6 million at
December 31, 1997 and 1996.
35
<PAGE> 39
COMPARISON OF RESULTS OF OPERATIONS FOR 1996 AND 1995
NET INCOME. Net income for the year ended December 31, 1996 was $691,000 in
comparison to a net loss of $4.8 million for the same period in 1995. As more
fully discussed below, the operating results for 1995 reflect an after-tax loss
of $2.1 million incurred in connection with the restructuring of FBA's
investment portfolio and a sharply higher provision for possible loan losses in
comparison to 1996. As previously discussed, net interest income was $17.8
million, or 4.3% of average earning assets, for 1996, compared to $13.4
million, or 4.0% of average earning assets, for 1995.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses
was $2.4 million and $6.4 million for the years ended December 31, 1996 and
1995, respectively. Net loan charge-offs were $4.6 million and $3.4 million for
the years ended December 31, 1996 and 1995, respectively. The allowance for
possible loan losses was $10.7 million, or 3.2% of total loans, net of unearned
discount, at December 31, 1996, compared to $10.6 million, or 4.0% of total
loans, net of unearned discount, at December 31, 1995. Loans which were either
90 days or more past due and still accruing interest or on nonaccrual status
totaled $3.6 million and $7.8 million at December 31, 1996 and 1995,
respectively, representing 1.1% and 2.9% of total loans, net of unearned
discount, at those dates. Loans which were between 30 and 89 days past due were
$7.3 million, or 2.2% of total loans, net of unearned discount, at December 31,
1996 compared to $9.7 million, or 3.6% of total loans, net of unearned
discount, at December 31, 1995.
The provision for possible loan losses for 1995 was higher than normal in
recognition of increasing loan charge-offs and delinquencies which were
experienced during 1995 within the portfolio of indirect automobile loans.
NONINTEREST INCOME AND EXPENSE. The following table summarizes noninterest
income and noninterest expense for the years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1996 1995 AMOUNT PERCENT
---- ---- ------ -------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
Noninterest income:
Service charges on deposit accounts..................... $ 2,258 1,682 576 34.2%
Loan sales and servicing income......................... 70 159 (89) (56.0)
Other income............................................ 1,072 1,284 (212) (16.5)
Gain (loss) on sales of securities, net................. 185 (2,996) 3,181 (106.2)
------- ------ -----
Total noninterest income........................ $ 3,585 129 3,456 2,679.1
======= ====== ===== =======
Noninterest expense:
Salaries and employee benefits.......................... $ 5,249 5,358 (109) (2.0)%
Occupancy, net of rental income......................... 1,832 1,615 217 13.4
Furniture and equipment................................. 1,003 895 108 12.1
Federal Deposit Insurance Corporation premiums.......... 497 493 4 0.8
Postage, printing and supplies.......................... 744 396 348 87.9
Legal, examination and professional fees................ 2,777 1,337 1,440 107.7
Data processing......................................... 735 755 (20) (2.6)
Communications.......................................... 623 619 4 0.6
Losses and expenses on foreclosed property, net of
gains................................................. 1,148 643 505 78.5
Other................................................... 3,129 2,037 1,092 53.6
------- ------ -----
Total noninterest expense....................... $17,737 14,148 3,589 25.4
======= ====== ===== =======
</TABLE>
NONINTEREST INCOME. Noninterest income was $3.6 million for the year ended
December 31, 1996 in comparison to $129,000 for 1995. As more fully discussed
under "--Net Interest Income and Interest Rate Risk Management," noninterest
income for 1995 includes a $3.0 million loss realized upon sales of investment
securities.
36
<PAGE> 40
Service charges on deposit accounts increased by $580,000 to $2.3 million
from $1.7 million for the years ended December 31, 1996 and 1995, respectively.
The increase is primarily attributable to the acquisition of FCB. See Note 2 to
the accompanying consolidated financial statements of FBA.
Loan sales and servicing income decreased to $70,000 from $159,000 for the
years ended December 31, 1996 and 1995, respectively. The decrease is due to a
reduction in the amount of indirect automobile loans serviced for others.
Other income decreased by $210,000 to $1.1 million from $1.3 million for
the years ended December 31, 1996 and 1995, respectively. Other income for the
year ended December 31, 1995 includes a nonrecurring benefit of $179,000 from
the termination of the FBA's Directors' Retirement Plan and an $802,000
nonrecurring benefit from the termination of a self-insurance trust. During
1990, FBA established a trust in lieu of purchasing officer and director
liability insurance. Since coverage is now available and in place through First
Banks, the trust was terminated and the funds were returned to FBA. For 1996,
other income includes a $795,000 gain realized upon FCB's sale and assignment
of certain railroad cars and leveraged leases to an unrelated party.
NONINTEREST EXPENSE. Noninterest expense increased by $3.6 million to $17.7
million from $14.1 million for the years ended December 31, 1996 and 1995,
respectively. The increase, as more fully discussed below, is primarily
attributable to the acquisition of FCB on August 23, 1995, offset by cost
reductions achieved through the reengineering of FBA's operations and the
centralization of various functions with First Banks' systems during 1995.
The decrease in salaries and employee benefits of $109,000 to $5.2 million
from $5.4 million for the years ended December 31, 1996 and 1995, respectively,
relates primarily to reductions in staff during 1995 substantially offset by
the acquisition of FCB. FBA's existing staff was reduced from 142 and 162
full-time equivalent employees at December 31, 1994 and 1993, respectively, to
130 full-time equivalent employees at December 31, 1995, including the addition
of 63 full-time equivalent employees from the acquisition of FCB.
Legal, examination and professional fees increased to $2.8 million from
$1.3 million for the years ended December 31, 1996 and 1995, respectively. The
increase is primarily attributable to the additional costs associated with the
reorganization of FBA and FCB and the amalgamating of acquired entities into
FBA's systems and cultures and the costs incurred in expanding FBA's
organizational capabilities to achieve its internal and external growth
objectives.
Losses and expenses on foreclosed property, net of gains, increased by
$505,000 to $1.1 million from $643,000 for the years ended December 31, 1996
and 1995, respectively. The increase is attributable to valuation write-downs
of $996,000 for 1996, compared to $116,000 for 1995.
Other expenses increased $1.1 million to $3.1 million from $2.0 million for
the years ended December 31, 1996 and 1995, respectively. The increase is
primarily attributable to the noncredit provision for possible losses within
the indirect automobile dealer lending program of $842,000 in 1996. Also
included in other expenses are fees paid to First Banks and its affiliates for
the various services rendered. These fees totaled $2.4 million and $895,000 for
the years ended December 31, 1996 and 1995, respectively. Fees payable to First
Banks and its affiliates generally increase as FBA expands through acquisitions
and internal growth, reflecting the higher levels of service needed to operate
the Subsidiary Banks.
INCOME TAXES. The accompanying consolidated statements of operations
reflect a deferred income tax charge of $470,000 for the year ended December
31, 1996. This compares to a $2.2 million deferred income tax benefit for the
same period in 1995. At December 31, 1996 and 1995, the accompanying
consolidated balance sheets include a deferred tax asset, net of deferred tax
liabilities, of $14.6 million and $13.2 million, respectively. The deferred tax
asset valuation allowance was $6.6 million and $5.6 million at December 31,
1996 and 1995, respectively.
INVESTMENT SECURITIES
FBA classifies the securities within its investment portfolio as held to
maturity or available for sale. FBA does not engage in the trading of
investment securities. As more fully described in Notes 1 and 3 of the
consolidated financial statements of FBA, the investment security portfolio
consists solely of securities designated as available-for-sale at December 31,
1997 and 1996. The investment security portfolio was $141.1 million at March
31, 1998, compared to $148.2 million and $125.1 million at December 31, 1997
and 1996, respectively. See, "--General,
37
<PAGE> 41
Financial Condition and Average Balances and Net interest Income" for further
discussion of the investment security portfolio.
LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Interest earned on the loan portfolio is the primary source of income for
FBA. Loans, net of unearned discount, represented 64.1% of total assets as of
March 31, 1998, compared to 67.0% and 63.6% as of December 31, 1997 and 1996,
respectively. At March 31, 1998 and December 31, 1997, total loans, net of
unearned discount, were $444.1 million and $431.5 million, increases of $107.7
million and $95.1 million, from $336.4 million at December 31, 1996. For 1996,
total loans, net of unearned discount, increased by $69.8 million from $266.6
million at December 31, 1995. As previously discussed under "--Acquisitions
and Financial Condition and Average Balances," the increases are attributable
to the loans provided by the acquisitions of Pacific Bay Bank, Surety Bank and
Sunrise Bank and the expansion of the commercial and financial, commercial real
estate and real estate construction and development loan portfolios, partially
offset by the decrease in the portfolio of indirect automobile loans.
The following table summarizes the changes in the loan portfolio for the
periods indicated:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
------------------------------------
FOR THE
THREE MONTHS
ENDED FOR THE YEARS ENDED
MARCH 31, DECEMBER 31,
------------ ---------------------
1998 1997 1996
---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Loans provided by acquisition:
Pacific Bay Bank........................................ $ 29,700 -- --
Surety Bank............................................. -- 54,400 --
Sunrise Bank............................................ -- -- 61,100
Internal loan volumes:
Commercial lending...................................... 3,100 71,200 48,900
Indirect automobile loans............................... (5,800) (28,600) (36,800)
Other................................................... (14,400) (1,900) (3,400)
-------- ------- -------
Total increase in loans, net of unearned
discount...................................... $ 12,600 95,100 69,800
======== ======= =======
Decrease in potential problem loans<F1>..................... $ 600 7,100 4,100
======== ======= =======
<FN>
- --------
<F1>Potential problem loans include indirect automobile loans 60 days or more
past due, loans on nonaccrual status and other loans identified by
management as having potential credit problems.
</TABLE>
FBA's lending strategy stresses quality, growth and diversification by
collateral, geography and industry. A common credit underwriting structure is
in place throughout FBA. The commercial lenders focus principally on small to
middle-market companies. Retail lenders focus principally on residential loans,
including home equity loans, automobile financing and other consumer financing
needs arising out of FBA's branch banking network.
Commercial and financial loans include loans that are made primarily based
on the borrowers' general credit strength and ability to generate repayment
cash flows from income sources even though such loans and bonds may also be
secured by real estate or other assets. Real estate construction and
development loans, primarily relating to residential properties and smaller
commercial properties, represent interim financing secured by real estate under
construction. Real estate mortgage loans consist primarily of loans secured by
single-family owner-occupied properties and various types of commercial
properties on which the income from the property is the intended source of
repayment. Consumer and installment loans are loans to individuals and consist
primarily of loans secured by automobiles. Loans held for sale are generally
fixed and adjustable rate residential loans pending sale in the secondary
mortgage market in the form of a mortgage-backed security, or to various
private third-party investors.
38
<PAGE> 42
The following table shows the composition of the loan portfolio by major
category and the percent of each category to the total portfolio as of the
dates presented:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------------------------------- ------------------------------------------------------
1998 1997 1997 1996 1995
---------------- ---------------- ---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ - ------ - ------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and financial.......... $113,312 25.5% $ 82,978 25.4% $109,763 25.8% $ 80,781 24.0% $ 48,807 18.3%
Real estate construction and
development..................... 96,035 21.6 58,922 18.0 93,454 22.0 58,045 17.3 30,142 11.3
Real estate mortgage.............. 166,160 37.4 92,070 28.1 149,951 35.2 93,864 27.9 45,530 17.1
Consumer and installment, net of
unearned discount............... 68,592 15.5 93,045 28.5 72,579 17.0 103,681 30.8 142,109 53.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans, excluding loans
held for sale............... 444,099 100.0% 327,015 100.0% 425,747 100.0% 336,371 100.0% 266,588 100.0%
===== ===== ===== ===== =====
Loans held for sale............... -- -- 5,708 -- --
-------- -------- -------- -------- --------
Total loans................... $444,099 $327,015 $431,455 $336,371 $266,588
======== ======== ======== ======== ========
<CAPTION>
DECEMBER 31,
-----------------------------------
1994 1993
---------------- ----------------
AMOUNT % AMOUNT %
------ - ------ -
<S> <C> <C> <C> <C>
Commercial and financial.......... $ 14,556 7.4% $ 7,653 5.2%
Real estate construction and
development..................... 13,793 7.0 9,072 6.2
Real estate mortgage.............. 14,796 7.6 12,862 8.8
Consumer and installment, net of
unearned discount............... 152,916 78.0 117,116 79.8
-------- ----- -------- -----
Total loans, excluding loans
held for sale............... 196,061 100.0% 146,703 100.0%
===== =====
Loans held for sale............... 7,253 21,029
-------- --------
Total loans................... $203,314 $167,732
======== ========
</TABLE>
Loans at December 31, 1997 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.......................... $ 95,695 10,013 1,584 427 2,044 109,763
Real estate construction and development.......... 92,476 118 419 94 347 93,454
Real estate mortgage.............................. 109,325 14,130 9,686 6,331 10,479 149,951
Consumer and installment, net of unearned
discount........................................ 9,315 55,356 150 7,758 -- 72,579
Loans held for sale............................... 5,708 -- -- -- -- 5,708
-------- ------ ------ ------ ------ -------
Total loans................................... $312,519 79,617 11,839 14,610 12,870 431,455
======== ====== ====== ====== ====== =======
</TABLE>
39
<PAGE> 43
The following table is a summary of loan loss experience for the three
months ended March 31, 1998 and 1997 and for the five years ended December 31,
1997:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------------ -----------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period............................ $ 11,407 10,744 10,744 10,616 2,756 2,637 3,044
Acquired allowances for possible loan losses.............. 885 -- 30 2,338 4,797 -- --
-------- ------- ------- ------- ------- ------- -------
12,292 10,744 10,774 12,954 7,553 2,637 3,044
-------- ------- ------- ------- ------- ------- -------
Loans charged off:
Commercial and financial.............................. (376) (64) (966) (2,286) -- (7) (268)
Real estate construction and development.............. -- -- (15) (164) (2) -- --
Real estate mortgage.................................. (465) (43) (244) (786) (153) (375) (8)
Consumer and installment.............................. (218) (875) (2,430) (3,818) (4,018) (1,876) (1,622)
-------- ------- ------- ------- ------- ------- -------
Total loans charged-off....................... (1,059) (982) (3,655) (7,054) (4,173) (2,258) (1,898)
-------- ------- ------- ------- ------- ------- -------
Recoveries of loans previously charged off:
Commercial and financial.............................. 299 151 926 1,271 223 184 164
Real estate construction and development.............. 25 58 68 15 1 -- --
Real estate mortgage.................................. 30 73 195 109 36 258 154
Consumer and installment.............................. 176 278 1,099 1,044 560 677 683
-------- ------- ------- ------- ------- ------- -------
Total recoveries of loans previously charged
off........................................ 530 560 2,288 2,439 820 1,119 1,001
-------- ------- ------- ------- ------- ------- -------
Net loans charged-off......................... (529) (422) (1,367) (4,615) (3,353) (1,139) (897)
-------- ------- ------- ------- ------- ------- -------
Provision for possible loan losses........................ 300 550 2,000 2,405 6,416 1,258 490
-------- ------- ------- ------- ------- ------- -------
Balance at end of period.................................. $ 12,063 10,872 11,407 10,744 10,616 2,756 2,637
======== ======= ======= ======= ======= ======= =======
Loans outstanding:
Average............................................... $438,421 326,474 343,329 273,063 230,451 182,922 171,889
End of period......................................... 444,099 327,015 431,455 336,371 266,588 203,314 167,732
Ratio of allowance for possible loan losses to loans
outstanding:
Average........................................... 2.75% 3.33% 3.32% 3.93% 4.61% 1.51% 1.53%
End of period..................................... 2.72 3.32 2.64 3.19 3.98 1.36 1.57
Ratio of net charge-offs to average loans
outstanding......................................... 0.49 0.52 .40 1.69 1.45 0.62 0.52
======== ======= ======= ======= ======= ======= =======
Allocation of allowance for possible loan losses at end of
period:
Commercial and financial.............................. $ 2,525 3,458 2,552 3,417 2,534 197 229
Real estate construction and development.............. 2,108 1,336 1,680 1,320 1,835 187 237
Real estate mortgage.................................. 3,218 3,688 3,536 3,645 2,210 201 720
Consumer and installment.............................. 1,297 2,390 1,539 2,362 4,037 2,171 1,451
Unallocated........................................... 2,915 -- 2,100 -- -- -- --
-------- ------- ------- ------- ------- ------- -------
Total......................................... $ 12,063 10,872 11,407 10,744 10,616 2,756 2,637
======== ======= ======= ======= ======= ======= =======
Percent of categories to loans, net of unearned discount:
Commercial and financial.............................. 25.5% 25.4% 25.4% 24.0% 18.3% 7.1% 4.6%
Real estate construction and development.............. 21.6 18.0 21.7 17.3 11.3 6.8 5.4
Real estate mortgage.................................. 37.4 28.1 34.8 27.9 17.1 7.3 7.7
Consumer and installment.............................. 15.5 28.5 16.8 30.8 53.3 75.2 69.8
Loans held for sale................................... -- -- 1.3 -- -- 3.6 12.5
-------- ------- ------- ------- ------- ------- -------
Total......................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======= ======= ======= ======= ======= =======
</TABLE>
40
<PAGE> 44
Nonperforming assets include nonaccrual loans, restructured loans and
foreclosed property. The following table presents the categories of
nonperforming assets and certain ratios as of the dates indicated:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------------ -----------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Nonperforming loans............................ $ 6,003 2,445 2,846 2,959 5,075 293 622
Foreclosed property, net....................... 725 1,035 601 977 2,393 1,553 3,171
-------- ------- ------- ------- ------- ------- -------
Total nonperforming assets......... $ 6,728 3,480 3,447 3,936 7,468 1,846 3,793
======== ======= ======= ======= ======= ======= =======
Loans, net of unearned discount................ $444,099 327,015 431,455 336,371 266,588 203,314 167,732
======== ======= ======= ======= ======= ======= =======
Loans past due:
Over 30 days to 90 days.................... $ 12,428 6,781 7,866 7,302 9,664 1,368 1,571
Over 90 days and still accruing............ 672 672 1,158 615 2,766 183 803
-------- ------- ------- ------- ------- ------- -------
Total past-due loans............... $ 13,100 7,453 9,024 7,917 12,430 1,551 2,374
======== ======= ======= ======= ======= ======= =======
Allowance for possible loan losses to loans.... 2.72% 3.32% 2.64% 3.19% 3.98% 1.36% 1.57%
Nonperforming loans to loans................... 1.35 0.75 0.66 0.88 1.90 0.14 0.37
Allowance for possible loan losses to
nonperforming loans.......................... 200.95 444.66 400.81 363.10 209.18 940.61 423.95
Nonperforming assets to loans and
foreclosed property.......................... 1.51 1.06 0.80 1.17 2.78 0.90 2.22
======== ======= ======= ======= ======= ======= =======
</TABLE>
Nonperforming loans, consisting of loans on nonaccrual status and
restructured loans, were $6.0 million at March 31, 1998 in comparison to $2.8
million and $2.4 million at December 31, 1997 and March 31, 1997, respectively.
The increase is primarily attributable to the loans obtained through the
acquisition of Pacific Bay Bank. The acquired allowance for possible loan
losses totaled $885,000 at the acquisition date.
As of March 31, 1998 and December 31, 1997 and 1996, $5.3 million, $5.9
million and $13.0 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.
FBA's credit management policy and procedures focus on identifying,
measuring and controlling credit exposure. These procedures employ a
lender-initiated system of rating credits, which is ratified in the loan
approval process and subsequently tested in internal loan reviews, external
audits and regulatory bank examinations. Basically, the system requires rating
all loans at the time they are made, except for homogeneous categories of
loans, such as residential real estate mortgage loans and indirect automobile
loans. These homogeneous loans are assigned an initial rating based on FBA's
experience with each type of loan. Adjustments to these ratings are based on
payment experience subsequent to their origination.
Adversely rated credits, including loans requiring close monitoring which
would not normally be considered criticized credits by regulators, are included
on a monthly loan watch list. 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 whenever any adverse circumstance is detected which might affect the
borrower's ability to meet the terms of the loan. Such circumstances include
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. Loans on the watch
list require detailed loan status reports prepared by the responsible officer
every four months, which are then discussed in formal meetings with the loan
review and credit administration staffs. Downgrades of loan risk ratings may be
initiated by the responsible loan officer at any time. However, upgrades of
risk ratings may only be made with the concurrence of the loan review and
credit administration staffs generally at the time of the formal watch list
review meetings.
Each month, the credit administration department provides FBA's management
with detailed lists of loans on the watch list and summaries of the entire loan
portfolio of each Subsidiary Bank by risk rating. These are coupled with
analyses of changes in the risk profiles of the portfolios, changes in past due
and nonperforming loans and changes in watch list and classified loans over
time. In this manner, the overall increases or decreases in the levels of risk
in the portfolios are monitored continually. Factors are applied to the loan
portfolios for each category of loan
41
<PAGE> 45
risk to determine acceptable levels of allowance for possible loan losses.
These factors are derived primarily from the actual loss experience of the
Subsidiary Banks and from published national surveys of norms in the industry.
The calculated allowances required for the portfolios are then compared to the
actual allowance balances to determine the provisions necessary to maintain the
allowances at appropriate levels. In addition, management exercises judgment in
its analysis of determining the overall level of the allowance for possible
losses. In its analysis, management considers the change in the portfolio,
including growth and composition, and the economic conditions of the regions in
which FBA operates.
Based on this quantitative and qualitative analysis, the allowance for
possible loan losses is adjusted. Such adjustments are reflected in the
consolidated statements of operations.
FBA does not engage in lending in foreign countries or based on activities
in foreign countries. Additionally, FBA does not have any concentrations of
loans exceeding 10% of total loans which are not otherwise disclosed in the
loan portfolio composition table and Note 4 to the accompanying consolidated
financial statements of FBA. FBA does not have any interest-bearing assets
which would have been included in nonaccrual, past due or restructured loans if
such assets were loans.
DEPOSITS
Deposits are the primary source of funds for FBA. FBA's deposits consist
principally of core deposits from its local market areas. FBA does not accept
brokered deposits. The following table sets forth the distribution of FBA's
average deposit accounts at the dates indicated and the weighted average
interest rates by category of deposit:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
MARCH 31, ---------------------------------------------------------
1998 1997 1996 1995
--------------- --------------- --------------- ---------------
BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
------- ---- ------- ---- ------- ---- ------- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand.................. $ 91,230 --% $ 78,222 --% $ 70,739 --% $ 54,288 --%
Interest-bearing demand...................... 73,291 1.93 66,687 2.10 43,048 1.76 24,020 2.41
Savings...................................... 151,237 3.90 108,430 3.46 91,043 3.10 75,576 3.16
Time deposits of $100 or more................ 51,594 6.09 39,126 5.48 36,586 5.49 29,073 5.54
Other time................................... 205,975 5.48 168,795 5.59 152,812 5.47 116,919 5.35
-------- ==== -------- ==== -------- ==== -------- ====
Total average deposits........... $573,327 $461,260 $394,228 $299,876
======== ======== ======== ========
</TABLE>
CAPITAL
In 1996, FBA purchased an outstanding warrant to acquire 131,336 shares of
FBA common stock at $0.75 per share from the FDIC for an aggregate amount of
$1.3 million. The purchase of the warrant was applied as a reduction of capital
surplus.
FBA issued 264,622 shares of common stock in connection with its
acquisition of Surety Bank, resulting in an increase to stockholders' equity of
$4.8 million. The increase represents the fair value of the net assets
exchanged for FBA common stock, as determined by the market value of FBA common
stock at the date of exchange.
On February 2, 1998, FBA completed its acquisition of FCB. As described
under "--Acquisitions" and in Note 2 of the accompanying consolidated
financial statements of FBA, in connection with the acquisition, FBA issued
approximately 1,555,728 shares of common stock, of which 1,266,176 were issued
to First Banks. The consolidated statements of changes in stockholders' equity
reflect the accounts of FBA as if the common stock issued to acquire First
Banks' interest in FCB had been outstanding since August 23, 1995.
The Board of Directors has authorized the purchase of up to a cumulative
total of 816,906 shares of common stock for treasury during 1995 through 1998.
Aggregate shares purchased for treasury totaled 496,056, 386,458 and 280,430,
at an aggregate cost of $6.8 million, $4.4 million and $2.8 million as of March
31, 1998 and December 31, 1997 and 1996, respectively.
42
<PAGE> 46
At March 31, 1998 and December 31, 1997, FBA's and the Subsidiary Banks'
capital ratios were as follows:
<TABLE>
<CAPTION>
RISK-BASED CAPITAL RATIOS
------------------------------------
TOTAL TIER 1 LEVERAGE RATIO
---------------- ---------------- ----------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
FBA................................................. 9.08% 6.88% 7.82% 5.62% 6.77% 4.96%
BankTEXAS........................................... 12.99 12.26 11.73 11.00 9.24 8.90
FB California....................................... 13.18 12.19 11.91 10.93 11.12 10.40
</TABLE>
Management believes as of December 31, 1997 and March 31, 1998, each of the
Subsidiaries was "well capitalized" as defined by the Federal Deposit
Insurance Corporation Improvement Act of 1991.
INTEREST RATE RISK MANAGEMENT
For 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. These characteristics are influenced by the nature of the
loan and deposit markets within which such institution operates, as well as its
objectives for business development within those markets at any point in time.
In addition, 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. These factors
cause 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 over the
exposure of the institution to changes in interest rates.
FBA manages its interest rate risk by: (1) maintaining an Asset Liability
Committee ("ALCO") responsible to FBA's Board of Directors to review the
overall interest rate risk management activity and approve actions taken to
reduce risk; (2) maintaining an effective simulation model to determine FBA's
exposure to changes in interest rates; (3) coordinating the lending, investing
and deposit-generating functions to control the assumption of interest rate
risk; and (4) employing various off-balance-sheet financial instruments to
offset inherent interest rate risk when it becomes excessive. 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 the
Chairman and Chief Executive Officer, the senior executives of investments,
credit, retail banking, commercial 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.
The objective and primary focus of interest sensitivity management is to
optimize earnings results, while managing, within internal policy constraints,
interest rate risk. FBA's policy on rate sensitivity is to manage exposure to
potential risks associated with changing interest rates by maintaining a
balance sheet posture in which annual net interest income is not significantly
impacted by reasonably possible near-term changes in interest rates. To measure
the effect of interest rate changes, FBA recalculates its net income over two
one-year horizons on a pro forma basis. The analysis assumes various scenarios
for increases and decreases in interest rates including both instantaneous and
gradual and parallel and non-parallel shifts in the yield curve, in varying
amounts. For purposes of arriving at reasonably possible near-term changes in
interest rates, FBA includes a forecast based on actual changes in interest
rates which have occurred over a two year period, simulating both a declining
and rising interest rate scenario. Consistent with the table presented on page
45, which indicates FBA is "asset-sensitive," FBA's simulation model
indicates a loss of projected net income should interest rates decline. While a
decline in interest rates of less than 10% has a diminutive effect on the
earnings of FBA, a significant decline in interest rates, resembling the actual
decline which occurred over a two-year period commencing in March 1991,
indicates a loss of net income equivalent to approximately 7% of net interest
income for the year ended December 31, 1997.
43
<PAGE> 47
FBA utilizes off-balance-sheet derivative financial instruments to assist
in the management of interest rate sensitivity and to modify the repricing,
maturity and option characteristics of on-balance-sheet assets and liabilities.
Derivative financial instruments held by FBA at March 31, 1998 and December 31,
1997 and 1996 consist of an interest rate cap agreement with a notional amount
of $10.0 million and credit exposure of $146,000, $222,000 and $335,000,
respectively. The notional amount of the interest rate cap agreement does not
represent amounts exchanged by the parties and, therefore, is not a measure of
FBA's credit exposure through its use of derivative financial instruments. The
amounts actually exchanged are determined by reference to the notional amounts
and the other terms of the agreement.
FBA's interest rate cap agreement limits the interest expense associated
with certain of its interest-bearing liabilities. In exchange for an initial
fee, the interest rate cap agreement entitles FBA to receive interest payments
when a specified index rate exceeds a predetermined rate. The agreement
outstanding at March 31, 1998 and December 31, 1997 and 1996 effectively limits
the interest rate to 5.0% on $10.0 million of interest-bearing liabilities from
October 15, 1997 to May 15, 2000.
Previously, FBA sold interest rate futures contracts and purchased options
on interest rate futures contracts to hedge the interest rate risk of its
available-for-sale securities portfolio. Interest rate futures contracts are
commitments either to purchase or sell designated financial instruments at a
future date for a specified price and may be settled in cash or through
delivery of such financial instruments. Options on interest rate futures
contracts confer the right to purchase or sell financial futures contracts at a
specified price and are settled in cash. There were no outstanding interest
rate futures contracts or options on interest rate futures contracts at
December 31, 1995 and no activity subsequent to December 31, 1995.
During 1995, as interest rates declined, FBA incurred losses on the
interest rate futures contracts of $5.9 million, of which $806,000 was
amortized to income as a yield adjustment to the investment security portfolio
and $5.1 million was included in the cost basis in determining the gain or loss
upon the sale of the securities. The losses incurred on the interest rate
futures contracts were partially offset by gains in the available-for-sale
securities portfolio. The overall net loss in net market value of these
positions was attributable to an increase in the projected prepayments of
principal underlying the available-for-sale securities portfolio. These
increased prepayment projections disproportionately shortened the expected
lives of the available-for-sale securities portfolio in comparison to the
effective maturity created with the hedge position. As a result, beginning in
the second quarter of 1995, FBA began to reduce its hedge position to coincide
with the current expected life of the available-for-sale securities portfolio
by decreasing the number of outstanding interest rate futures contracts. FBA
continued to reduce its hedge position during the third and fourth quarters of
1995 as a result of the further declines in interest rates. In addition, on
November 3, 1995, upon sales of $48.9 million of securities, which marked the
completion of the restructuring of the available-for-sale securities portfolio,
the remaining outstanding interest rate futures contracts were closed.
44
<PAGE> 48
In addition to the simulation model employed by FBA, 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 FBA's rate sensitive assets and
liabilities as of December 31, 1997, adjusted to account for anticipated
prepayments:
<TABLE>
<CAPTION>
OVER THREE OVER SIX
THREE THROUGH THROUGH OVER ONE OVER
MONTHS SIX TWELVE THROUGH FIVE
OR LESS MONTHS MONTHS FIVE YEARS YEARS TOTAL
------- ---------- -------- ---------- ----- -----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans<F1>............................... $310,342 21,466 35,589 61,820 2,238 431,455
Investment securities................... 26,959 4,162 9,706 101,638 5,716 148,181
Federal funds sold...................... 2,215 -- -- -- -- 2,215
Interest-bearing deposits with other
financial institutions................ 690 -- -- -- -- 690
-------- ------- ------- ------- ------- -------
Total interest-earning assets... 340,206 25,628 45,295 163,458 7,954 582,541
-------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Interest-bearing demand accounts........ 27,084 16,835 10,980 8,052 10,248 73,199
Money market demand accounts............ 68,201 -- -- -- -- 68,201
Savings accounts........................ 13,502 11,119 9,531 13,501 31,769 79,422
Time deposits........................... 58,703 49,824 65,196 64,589 -- 238,312
Notes payable and other borrowed
funds................................. 18,003 584 -- 6,500 -- 25,087
-------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities................... 185,493 78,362 85,707 92,642 42,017 484,221
-------- ------- ------- ------- ------- -------
Interest-sensitivity gap:
Periodic................................ $154,713 (52,734) (40,412) 70,816 (34,063) 98,320
=======
Cumulative.............................. 154,713 101,979 61,567 132,383 98,320
======== ======= ======= ======= =======
Ratio of interest-sensitive assets to
interest-sensitive liabilities:
Periodic................................ 1.83 0.33 0.53 1.76 0.19 1.20
=======
Cumulative.............................. 1.83 1.39 1.18 1.30 1.20
======== ======= ======= ======= =======
<FN>
- --------
<F1>Loans presented net of unearned discount.
</TABLE>
Management made certain assumptions in preparing the table above. These
assumptions included: 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, 1997, FBA's asset-sensitive position on a cumulative basis
through the twelve-month time horizon was $61.6 million, or 9.6% of total
assets. The asset-sensitive position is attributable to the composition of the
loan and investment security portfolios.
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 FBA's assets and liabilities. For
this reason, FBA places greater emphasis on a simulation model for monitoring
its interest rate risk exposure.
LIQUIDITY
The liquidity of FBA and the Subsidiary Banks 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 Subsidiary Banks receive funds for
liquidity from customer deposits, loan payments, maturities of loans and
investments, sales of investments and from
45
<PAGE> 49
earnings. In addition, the Subsidiary Banks may avail themselves of more
volatile sources of funds through the issuance of certificates of deposit in
denominations of $100,000 or more, federal funds borrowed, securities sold
under agreements to repurchase and through borrowings from the FHLB. The
aggregate funds acquired from these more volatile sources were $61.2 million
at March 31, 1998 and $56.2 million and $43.8 million at December 31, 1997
and 1996, respectively.
The following table presents the maturity structure of volatile funds,
which consists of certificates of deposit of $100,000 or more and other
short-term borrowings, at March 31, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C>
3 months or less............................... $21,562 19,333
Over 3 through 6 months........................ 13,606 11,284
Over 6 through 12 months....................... 13,315 14,142
Over 12 months................................. 12,695 11,400
------- ------
Total.............................. $61,178 56,159
======= ======
</TABLE>
In addition to these more volatile sources of funds, FBA borrowed $13.5
million, $14.9 million and $14.0 million at March 31, 1998 and December 31,
1997 and 1996, respectively, from First Banks under the $20.0 million First
Banks Note to facilitate the funding of its acquisitions. The borrowings under
the First Banks Note bear interest at an annual rate of one-quarter percent
less than the "Prime Rate" as reported in The Wall Street Journal. The
principal and accrued interest under the First Banks Note are due and payable
on October 31, 2001. In connection with the acquisition of FCB, $10.0 million
of the outstanding principal balance of the First Banks Note was exchanged for
804,000 shares of FBA common stock.
Management believes the available liquidity and operating results of the
Subsidiary Banks will be sufficient to provide funds for growth and to meet
FBA's operating and debt service requirements both on a short-term and long-
term basis, including the First Banks Note.
YEAR 2000 COMPATIBILITY
FBA and its Subsidiary Banks are subject to risks associated with the Year
2000 software problem, a term which refers to uncertainties about the ability
of various software systems to interpret dates correctly after the beginning of
the Year 2000. FBA and its Subsidiary Banks have significant dependence on
various computer equipment and software for their daily operations. Most
software systems were originally designed to operate using date fields which
contain two digits to correspond to the last two digits of the Year. With the
approaching change to the Year 2000, this limitation in these systems could
cause the computers to misinterpret years beginning with "20" as instead
being years beginning with "19." If not corrected, this could cause
miscalculation of data for financial purposes, and operating failure of
equipment which is date dependent. While the most obvious part of this
problem is the mainframe computer system, there are many other potential
ramifications. These can be categorized as: (1) the ancillary software systems
which are used for various other purposes throughout FBA on secondary mainframe
computers, personal computers or intelligent terminals; (2) other types of
equipment which are not related to or connected to computer equipment, such as
vault time locks, elevators, security equipment and heating/air conditioning
systems, which are used in bank branches for various purposes; and (3) the
effects which the transition to the Year 2000 may have on external suppliers
and servicers, as well as on the loan and deposit customers of FBA.
Recognizing this issue, FBA has established an operating committee, which
includes representatives of First Banks, to identify all of the various Year
2000 problems which may arise and to work with the various departments within
FBA to address these issues. Since most of the software used by FBA is
purchased from outside vendors, FBA has been working with these vendors to
ensure the issues are being corrected. In a few instances, there are particular
systems or equipment which the vendors do not intend to convert to Year 2000
compatibility. However, generally these are items which are at the end of their
economic lives and scheduled for replacement. Consequently, FBA believes its
cost of Year 2000 compliance will not be material to its financial position or
results of operations. These costs are expensed as incurred.
46
<PAGE> 50
FBA's process of evaluating potential effects of Year 2000 issues on
customers of the Subsidiary Banks is in its early stages, and it is therefore
impossible to quantify the potential adverse effects of incompatible software
systems on loan or deposit customers of FBA's Subsidiary Banks. The failure of
a commercial bank customer to prepare adequately for Year 2000 compatibility
could have a significant adverse effect on such customer's operations and
profitability, in turn inhibiting its ability to repay loans in accordance with
their terms or requiring it to use its deposit balances. Until sufficient
information is accumulated from customers of the Subsidiary Banks to enable FBA
to assess the degree to which customers' operations are susceptible to
potential problems, FBA will be unable to quantify the potential effect on its
commercial customers. FBA has revised its method of determining its adequacy of
the allowance for possible loan losses to include an allocation for the risks
associated with the year 2000 issue.
EFFECT OF NEW ACCOUNTING STANDARDS
FBA adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 130--Reporting Comprehensive Income ("SFAS 130") retroactively
on January 1, 1998. SFAS 130 established standards for reporting and displaying
income and its components (revenues, gains and losses) in a full set of general
purpose financial statements. The statement mandates that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. Comparative financial
statements provided for earlier periods have been restated to reflect the
application of SFAS 130. The implementation of SFAS 130 did not have a material
impact on FBA's consolidated financial statements of FBA.
During 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131--Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131"). SFAS 131 establishes standards for the way public
business enterprises report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. Additionally, SFAS 131 establishes standards for related
disclosures about products and services, geographic areas, and major customers
superseding SFAS No. 14--Financial Reporting for Segments of a Business
Enterprise. FBA is currently evaluating information required by SFAS 131 and
believes expanded disclosure information will be required to be included in
FBA's consolidated financial statements of FBA for fiscal years beginning after
December 15, 1997.
In June 1998, the FASB issued SFAS No. 133--Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge in one of three categories described in the
pronouncement. The accounting for changes in the fair value of a derivative
(that is, gains and losses) depends on the intended use of the derivative and
the resulting designation. Under SFAS 133, an entity that elects to apply hedge
accounting is required to establish at the inception of the hedge the method it
will use for assessing the effectiveness of the hedging derivative and the
measurement approach for determining the ineffective aspect of the hedge. Those
methods must be consistent with the entity's approach to managing risk. SFAS
133 applies to all entities and is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Initial application should be as of the
beginning of an entity's fiscal quarter; on that date, hedging relationships
must be designated and documented pursuant to the provisions of SFAS 133.
Earlier application of all of the provisions is encouraged but is permitted
only as of the beginning of any fiscal quarter that begins after issuance of
SFAS 133. Additionally, SFAS 133 should not be applied retroactively to
financial statements of prior periods. FBA is currently evaluating SFAS 133 to
determine its impact on the consolidated financial statements of FBA.
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, FBA believes this is generally manageable
through its asset/liability management program.
47
<PAGE> 51
BUSINESS
GENERAL
First Banks America, Inc. ("FBA" or the "Company") is a bank holding
company with two wholly-owned banking subsidiaries, First Bank of California
("FB California"), a bank chartered by the State of California, and BankTEXAS
National Association, a national banking association ("BankTEXAS")
(collectively, the "Subsidiary Banks"). FBA, through FB California and
BankTEXAS, operates a total of eleven banking locations in the San
Francisco-Sacramento corridor of Northern California and a total of six banking
locations in Houston, Dallas, Irving and McKinney, Texas. As of March 31, 1998,
FBA had approximately $692.4 million in total assets, $444.1 million in total
loans, net of unearned discount, $600.6 million in total deposits and $56.8
million in total stockholders' equity. Since 1994, FBA has been controlled by
First Banks, a $4.3 billion bank holding company headquartered in St. Louis,
Missouri. First Banks holds, as of March 31, 1998, approximately 72% of FBA's
outstanding voting stock. FBA's senior executive officers, as well as a
majority of FBA's Board of Directors, are executive officers of First Banks.
FBA and the Subsidiary Banks purchase certain services and supplies, including
data processing services, internal auditing, loan review, income tax
preparation and assistance, accounting, asset/liability management and
investment services, loan servicing and other management and administrative
services from First Banks and its affiliates.
In an effort to enhance its banking franchise, FBA places emphasis upon
acquiring other financial institutions as a means of accelerating its growth in
order to expand its presence in a given market, to increase the scope of its
market area or to enter new or noncontiguous market areas. After an acquisition
is consummated, FBA endeavors to enhance the franchise of the acquired entity
by supplementing the acquired entity's marketing and business development
efforts in order to broaden customer bases, strengthen particular business
segments or fill voids in its overall market coverage. In addition, the
acquisition program enables FBA to further leverage the operational support
services available to it through First Banks and to provide the products and
services typically available only through such a larger organization. FBA's
management philosophy is to centralize overall corporate policies, procedures
and administrative functions and to provide operational support functions for
the Subsidiary Banks. Primary responsibility for implementation of such
policies and management of the Subsidiary Banks resides with the officers and
directors of the respective Subsidiary Banks.
After First Banks' 1994 acquisition of control of FBA, FBA embarked on a
business strategy to improve its operating performance and strengthen its asset
quality as prerequisites to initiating an effective acquisition program. The
initial stages of this strategy involved substantial restructuring of assets
and liabilities and reduction of operating expenses, resulting in significant
losses in the sale of investment securities and the establishment of
substantial provisions for loan losses. The loan losses related primarily to
problems with FBA's portfolio of indirect automobile loans. The losses also
included significant nonrecurring expenses in connection with the reduction of
non-interest expenses, including personnel and employee benefits, occupancy,
data processing and other expenses. Following net losses of $4.8 million and
$905,000 for the fiscal years ended December 31, 1995 and 1994, respectively,
reflecting the implementation of the new strategy, FBA returned to
profitability in 1996, with consolidated net income of $691,000, representing a
0.15% return on average assets. FBA's profitability has continued to improve.
FBA has reported consolidated net income of $3.5 million for the fiscal year
ended December 31, 1997 and consolidated net income of $1.1 million for the
three months ended March 31, 1998.
Selected consolidated financial data of FBA and its subsidiaries, including
the Subsidiary Banks, as of and for the five years ended December 31, 1997 and
the three months ended March 31, 1998 and 1997 are set forth below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------------ --------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)................ $ 1,100 484 3,533 691 (4,814) (905) 219
Stockholders' equity............. 56,841 38,013 45,091 38,195 40,965 39,714 14,952
Total assets..................... 692,409 530,023 643,664 529,087 468,486 331,790 368,608
Return on average assets......... 0.67%<F1> 0.37%<F1> 0.65% 0.15% (1.28)% (0.25)% 0.07%
Return on average equity......... 8.13 <F1> 5.11 <F1> 8.90 1.71 (12.06) (3.66) 1.49
<FN>
- ---------
<F1>Ratios as of March 31, 1998 and 1997 are annualized.
</TABLE>
48
<PAGE> 52
The Subsidiary Banks offer a broad range of commercial and personal banking
services, including certificates of deposit, individual retirement and other
time deposit accounts, checking and other demand deposit accounts, and interest
checking, savings and money market accounts. Loan product offerings include
commercial and financial, commercial and residential real estate, real estate
construction and development and consumer loans. Other financial services
include mortgage banking, automatic teller machines, telephone banking, lockbox
deposits, cash management services, sweep accounts, credit-related insurance
and safe deposit boxes. FBA and the Subsidiary Banks purchase certain services
and supplies, including data processing services, internal auditing, loan
review, income tax preparation and assistance, accounting, asset/liability
management and investment services, loan servicing and other management and
administrative services from First Banks and its affiliates.
The following table provides general information regarding FB California
and BankTEXAS as of March 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF TOTAL LOANS, NET OF TOTAL
LOCATIONS ASSETS UNEARNED DISCOUNT DEPOSITS
--------- ------ ----------------- --------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
FB California.......... 11 $415,806 270,713 365,405
BankTEXAS.............. 6 271,902 173,386 235,215
</TABLE>
While FBA initially focused its acquisition efforts within its primary
market areas of Houston and Dallas, Texas and the immediately surrounding
areas, increased prices for potential acquisition candidates in the Texas
market generally reduced the suitability to FBA of potential acquisition
candidates based in such areas. Accordingly, FBA broadened its target market to
include California, where FBA perceived pricing to be more attractive. The
economic advantages of the California market were enhanced by the geographic
proximity of various offices of First Bank & Trust, a subsidiary of First
Banks. Between October 1996 and February 1998, FBA completed four acquisitions
of banks located in northern California, which banks were subsequently merged
together to form FB California. See "Management's Discussion and
Analysis--Acquisitions" for a discussion of FBA's recent acquisitions.
PENDING ACQUISITION
On June 8, 1998, FBA announced the signing of an Agreement in Principle to
acquire Redwood, and its wholly owned subsidiary Redwood Bank, for cash
consideration of $26 million. Redwood is headquartered in San Francisco,
California and operates four banking locations in the San Francisco Bay area.
As of March 31, 1998, Redwood had approximately $152.0 million in total assets,
$120.1 million in total loans, net of unearned discount, $130.1 million in
total deposits and $17.8 million in total stockholder's equity. The transaction
is subject to various conditions, including the negotiation of a definitive
agreement and the receipt of regulatory approvals and the approval of Redwood's
sole shareholder. FBA anticipates the transaction will be consummated at the
end of the fourth quarter of 1998. See "Use of Proceeds" and "Pro Forma
Financial Information."
LENDING ACTIVITIES
FBA's lending activities are conducted pursuant to a written loan policy
which has been adopted by each of the Subsidiary Banks. Each loan officer has a
defined lending authority, and loans made by each such officer must be reviewed
by a loan committee of the banking facility at which the loan officer is
located and by the Subsidiary Bank's board of directors or the Central Finance
Committee of FBA, depending upon the amount of the loan request. Loan requests
for amounts in excess of $5.0 million, and loan requests for amounts in excess
of $1.0 million where the aggregate indebtedness of the borrower exceeds $10.0
million, must also be approved by FBA's Chairman of the Board, Chief Financial
Officer or Chief Credit Officer.
Loans generally are limited to borrowers residing or doing business in the
immediate market area of the originating Subsidiary Bank. FBA's policy is for
each Subsidiary Bank to meet the quality loan demand and credit needs of its
local community before it considers the purchase of loan participations from an
affiliate.
FBA offers commercial and financial, real estate construction and
development, commercial and residential real estate and consumer loans.
Additional information regarding FBA's loan portfolio is included under
"Management's Discussion and Analysis--Loans and Allowance for Possible Loan
Losses."
49
<PAGE> 53
INVESTMENT PORTFOLIO
FBA has established a written investment policy which has been adopted by
the Subsidiary Banks and is reviewed annually. The investment policy identifies
investment criteria and states specific objectives in terms of risk, interest
rate sensitivity and liquidity. The investment policy directs management of the
Subsidiary Banks to consider, among other criteria, the quality, term and
marketability of the securities acquired for their respective investment
portfolios. FBA does not engage in the practice of trading securities for the
purpose of generating portfolio gains. The composition of the investment
portfolio is shown in the Notes to consolidated financial statements of FBA;
see also "Management's Discussion and Analysis--Investment Securities."
DEPOSITS
FBA's deposits consist principally of core deposits from the local market
areas of the Subsidiary Banks. The Subsidiary Banks currently do not hold
brokered deposits, except for any such deposits which acquired institutions may
have had prior to their acquisition by FBA. A table summarizing the
distribution of FBA's deposit accounts and the weighted average nominal
interest rates on each category of deposits for the three years ending December
31, 1997 and for the three months ended March 31, 1998 is included under
"Management's Discussion and Analysis--Deposits."
COMPETITION AND BRANCH BANKING
The activities in which the Subsidiary Banks are engaged are highly
competitive. Those activities and the geographic markets served primarily
involve competition with other banks and thrift institutions, some of which are
affiliated with large regional or national holding companies. Competition among
financial institutions is based upon interest rates offered on deposit
accounts, interest rates charged on loans and other credit and service charges,
the quality of services rendered, the convenience of banking facilities and, in
the case of loans to large commercial borrowers, relative lending limits.
In addition to competing with other banks and thrift institutions within
their primary service areas, the Subsidiary Banks also compete with other
financial intermediaries, such as credit unions, industrial loan associations,
securities firms, insurance companies, small loan companies, finance companies,
mortgage companies, real estate investment trusts, certain governmental
agencies, credit organizations and other enterprises. Additional competition
for depositors' funds comes from United States Government securities, private
issuers of debt obligations and suppliers of other investment alternatives for
depositors. Many of FBA's non-bank competitors are not subject to the same
extensive federal regulations that govern bank holding companies and
federally-insured banks and state regulations governing state-chartered banks.
As a result, such non-bank competitors may have certain advantages over FBA in
providing some services.
The trend in the Subsidiary Banks' markets has been for multi-state holding
companies to acquire independent banks and thrifts. FBA believes it will
continue to face competition in the acquisition of banks and thrifts from
larger holding companies. Many of the financial institutions with which FBA
competes are larger than FBA and have substantially greater resources available
for making acquisitions.
Subject to regulatory approval, both commercial banks and thrift
institutions operating in Texas and California are permitted to establish
branches throughout each of those states, thereby creating the potential for
additional competition in the service areas of the Subsidiary Banks.
50
<PAGE> 54
SUPERVISION AND REGULATION
GENERAL
The Company and the Subsidiary Banks are extensively regulated under
federal and state law. These laws and regulations are intended to protect
depositors, not stockholders. 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. Changes 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.
FBA is a registered bank holding company under the Bank Holding Company Act
of 1956, as amended (the "BHCA") and, as such, is subject to regulation,
supervision and examination by the Federal Reserve. FBA is required to file
annual reports with the Federal Reserve and to provide the Federal Reserve such
additional information as it may require.
BankTEXAS and FB California are subject to supervision and regulation by
the United States Office of the Comptroller of the Currency (the "OCC") and
the State Banking Department of the State of California, respectively. The
Subsidiary Banks are also subject to supervision and regulation by the Federal
Deposit Insurance Corporation ("FDIC"), which provides deposit insurance to
the Subsidiary Banks.
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 Subsidiary Banks 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, attorneys, appraisers and accountants who knowingly
or recklessly participate in wrongful action likely to have an adverse effect
on an insured institution). Federal banking regulators have power 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 generally
requires 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 (the "BIF") members and Savings Association Insurance
Fund (the "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
51
<PAGE> 55
institution to its stockholders due solely to 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 subordinated to depositors or other
general creditors.
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. 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 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 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 is designated: (i) well capitalized if
the institution has a total risk-based capital ratio of 10% or greater, a Tier
1 risk-based capital ratio of 8% 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 Tier 1
risk-based capital ratio of 4% or greater and a leverage ratio of 4% or
greater; (iii) undercapitalized if the institution has a total risk-based
capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is
less than 4% or a leverage ratio that is less than 4%; (iv) significantly
undercapitalized if the institution has a total risk-based capital ratio that
is less than 6%, a Tier 1 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, significantly undercapitalized and critically
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 at the time it received notice that it
was undercapitalized 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 fail to submit or comply with acceptable
capital restoration plans are 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
52
<PAGE> 56
federal banking agency. Under these procedures, an institution is generally
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 institutions 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,"
management believes each of the Subsidiary Banks was "well capitalized" as of
March 31, 1998.
Pursuant to FDICIA, the 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 institution's real estate policy provide for proper loan documentation and
prudent underwriting standards.
FDICIA also contained the Truth in Savings Act, which requires clear and
uniform disclosure of the rates and 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
1994 Congress enacted the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act"). Beginning in 1995, bank
holding companies gained the right to expand, by acquiring existing banks, into
all states, even those which had theretofore restricted entry. The legislation
also provides that a holding company has the right, commencing in 1997, to
convert the banks which its owns in different states to branches of a single
bank. The Interstate Act 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.
ECONOMIC GROWTH AND REGULATORY PAPERWORK REDUCTION ACT OF 1996. The
Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("EGRPRA")
streamlined the non-banking activities application process for well-
capitalized and well-managed bank holding companies. Under EGRPRA, qualified
bank holding companies may commence a regulatory approved non-banking
acquisition or share purchase, assuming the size of the acquisition does not
exceed 10% of risk-weighted assets of the acquiring bank holding company and
the consideration does not exceed 15% of Tier 1 capital. The foregoing prior
notice requirement also applies to commencing a non-banking activity de novo if
that activity has been previously approved by order of the Federal Reserve, but
has not yet been implemented by regulations. EGRPRA also provided for the
recapitalization of the SAIF in order to bring it into parity with the BIF of
the FDIC.
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. On May 13,
1998, the House of Representatives passed H.R.10 which, if passed by the Senate
and signed into law, would 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 AND BANK HOLDING COMPANY REGULATION
BHCA. Under the BHCA, the activities of a bank holding company are limited
to businesses 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 BHCA also requires a bank holding
company to obtain approval from the Federal Reserve 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 Federal Reserve will not approve any
acquisition,
53
<PAGE> 57
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 Federal Reserve also considers capital adequacy
and other financial and managerial factors in reviewing acquisitions or
mergers.
The BHCA 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
Federal Reserve 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 Federal Reserve 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.
INSURANCE OF ACCOUNTS. The FDIC provides insurance to deposit accounts at
the Subsidiary Banks to a maximum of $100,000 for each insured depositor.
Through December 31, 1992, all FDIC-insured institutions, whether members of
the BIF or the SAIF, paid the same premium (23 cents per $100 of 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 in
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.
Effective January 1, 1993, the FDIC established a risk-based deposit
insurance premium assessment system, with assessment rates ranging from 0.23%
of domestic deposits (the same rate as under the previous flat-rate assessment
system) for those banks deemed to pose the least risk to the insurance fund to
0.31% for those banks deemed to pose greater risk. The assessment rate
applicable to a bank is subject to change with each semi-annual assessment
period. Effective September 15, 1995, the FDIC lowered the assessment rate
schedule for BIF-insured institutions from a range of 0.23% to 0.31% of
domestic deposits to a range of 0.04% to 0.31% of domestic deposits. This
reduction in the assessment rate schedule was made retroactive to June 1, 1995
because the FDIC determined that the BIF achieved its statutorily-required
reserve ratio of 1.25% on May 31, 1995. On November 14, 1995, the FDIC again
lowered the assessment rate schedule for BIF-insured institutions, effective
for the semiannual assessment period beginning January 1, 1996, to a range of
0.00% to 0.27% of domestic deposits. The deposits of BankTEXAS consist solely
of BIF deposits, and the deposits of FB California include both BIF and SAIF
deposits.
The statutory semiannual minimum assessment of $1,000 per insured
institution was eliminated as part of EGRPRA, which was signed into law on
September 30, 1996. EGRPRA provided for the recapitalization of the SAIF
through a one-time special assessment on SAIF-insured deposits in order to
bring it into parity with the BIF. Since January 1, 1997, BIF and SAIF premiums
are assessed at between 0.00% and 0.27%, depending on the supervisory rating
assigned.
EGRPRA also requires BIF members to pay a portion of the annual interest on
the Financing Corporation ("FICO") bonds issued by a government
instrumentality in 1987 to begin funding the resolution of the problems of the
savings and loan industry. Since January 1, 1997, BIF members have paid a FICO
premium on BIF deposits equal to 0.0129%. During that same period, SAIF members
have paid a FICO premium on SAIF deposits equal to 0.0644%. Beginning January
1, 2000, BIF members will share in the payment of the FICO assessment with SAIF
members on a pro rata basis, with the annual assessment expected to equal
approximately 0.0243% until retirement of the FICO bond obligation in
approximately 2017. This assessment is not expected to have a material adverse
effect on the Subsidiary Banks.
THE PREFERRED SECURITIES AND THE SUBORDINATED DEBENTURES OFFERED BY THIS
PROSPECTUS ARE NOT SAVINGS OR DEPOSIT ACCOUNTS, ARE NOT OBLIGATIONS OF ANY
BANKING OR NONBANKING AFFILIATE OF FBA (EXCEPT TO THE EXTENT THAT PREFERRED
SECURITIES ARE GUARANTEED BY FBA AS DESCRIBED HEREIN), ARE NOT INSURED BY THE
FDIC OR ANY OTHER GOVERNMENT AGENCY AND INVOLVE INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
54
<PAGE> 58
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 Federal Reserve, the FDIC and the OCC have adopted risk-based capital
guidelines for banks and bank holding companies, and the OTS has adopted
similar guidelines for thrifts. The risk-based capital guidelines are designed
to make regulatory capital requirements more sensitive to differences in risk
profile among financial institutions and 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 Federal Reserve 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.
The Federal Reserve also has implemented a leverage ratio, which is the
ratio of 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 Federal Reserve 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 Federal Reserve
expects that additional capital sufficient to increase the ratio by at least
100 to 200 basis points will be maintained.
As described in "Management's Discussion and Analysis--Capital,"
management believes each of the Subsidiary Banks was "well capitalized" as of
March 31, 1998.
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 operations of the Subsidiary Banks. The
requirement of deducting certain intangibles in computing capital ratios
contained in the guidelines, however, could adversely affect the ability of the
Company to make acquisitions in the future in transactions that would be
accounted for using the purchase method of accounting.
COMMUNITY REINVESTMENT ACT. The Community Reinvestment Act of 1977 (the
"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.
REGULATIONS GOVERNING EXTENSIONS OF CREDIT. The Subsidiary Banks are
subject to certain restrictions imposed by the Federal Reserve Act on
extensions of credit to FBA or its non-bank subsidiaries and its affiliates, 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 Subsidiary Banks for its
cash needs, including funds for acquisitions and for payment of dividends,
interest and operating expenses. Further, under the BHCA and certain
regulations of the Federal Reserve, a bank holding company and its subsidiaries
are prohibited from engaging in certain tying arrangements in connection with
any extension of credit, lease or sale of property or furnishing of services.
For example, the Subsidiary Banks may generally not require a customer to
obtain other services from the Subsidiary Banks or any other affiliated bank or
the Company 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.
The Subsidiary 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 and who are not employees; and
(ii) must not involve more than the normal risk of repayment or present other
unfavorable features. The Subsidiary Banks are also subject to certain lending
limits and restrictions on overdrafts to such persons.
55
<PAGE> 59
RESERVE REQUIREMENTS. The Federal Reserve 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 $47.8 million or less (subject to adjustment by the
Federal Reserve) and an initial reserve of $1,434,000 plus 10% of any amount
over $47.8 million (subject to adjustment by the Federal Reserve 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 Federal Reserve may be used to satisfy
liquidity requirements.
Institutions are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve regulations require institutions to
exhaust other reasonable alternative sources of funds, including advances from
Federal Home Loan Banks ("FHLBs"), before borrowing from the Federal Reserve
Bank.
FEDERAL HOME LOAN BANK SYSTEM. The Subsidiary Banks are members of the
Federal Home Loan Bank System ("FHLB System"), which consists of twelve
regional FHLBs, each subject to supervision and regulation by the Federal
Housing Finance Board, an independent agency created by FIRREA. The FHLBs
provide a central credit facility primarily for member institutions. The
Subsidiary Banks are required to acquire and hold shares of capital stock in an
FHLB in an amount at least equal to 1% of the aggregate principal amount of
their respective unpaid residential mortgage loans and similar obligations at
the beginning of each year, or 1/20th of advances (borrowings) from the FHLB,
whichever is greater. The Subsidiary Banks were in compliance with these
regulations at March 31, 1998, with investments of $857,000 in stock of the
FHLB of Dallas held by BankTEXAS and $715,000 in stock of the FHLB San
Francisco held by FB California.
RESTRICTIONS ON THRIFT ACQUISITIONS. FBA is prohibited from acquiring,
without prior approval of the Director of the Office of Thrift Supervision, (i)
control of any 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 which is not a subsidiary.
Furthermore, such an acquisition would require FBA itself to become registered
as a savings and loan holding company subject to all applicable regulations of
the OTS.
DIVIDENDS. FBA's primary source of funds is the dividends, if any, paid by
the Subsidiary Banks. The ability of the Subsidiary Banks to pay dividends is
limited by federal laws, by the regulations promulgated by the bank regulatory
agencies and by principles of prudent bank management. In addition, the amount
of dividends that the Subsidiary Banks may pay to the Company is limited by the
provisions of First Bank's credit agreement with a group of unaffiliated
lenders, which imposes certain minimum capital requirements. Under the most
restrictive of these requirements, dividends from the Subsidiary Banks are
limited to approximately $2.5 million as of March 31, 1998, unless prior
permission of regulatory authorities is obtained.
MONETARY POLICY AND ECONOMIC CONTROL. The commercial banking business is
affected not only by general economic conditions, but also by the monetary
policies of the Federal Reserve. Changes in the discount rate on member bank
borrowings, availability of borrowing at the "discount window," open market
operations, the imposition of changes in reserve requirements against member
bank 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
Federal Reserve. 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 Federal Reserve 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 Federal Reserve 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 Company or the Subsidiary Banks cannot
be predicted.
56
<PAGE> 60
DESCRIPTION OF THE PREFERRED SECURITIES
The Preferred Securities will be issued pursuant to the terms of the Trust
Agreement. The Trust Agreement will be qualified as an indenture under the
Trust Indenture Act. The Property Trustee, State Street Bank and Trust Company,
will act as indenture trustee for the Preferred Securities under the Trust
Agreement for purposes of complying with the provisions of the Trust Indenture
Act. The terms of the Preferred Securities will include those stated in the
Trust Agreement and those made part of the Trust Agreement by the Trust
Indenture Act. The following summary of the material terms and provisions of
the Preferred Securities and the Trust Agreement does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
the Trust Agreement, the Trust Act, and the Trust Indenture Act. Wherever
particular defined terms of the Trust Agreement are referred to, but not
defined herein, such defined terms are incorporated herein by reference. The
form of the Trust Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part.
GENERAL
Pursuant to the terms of the Trust Agreement, the Trustees, on behalf of
the Trust, will issue the Trust Securities. All of the Common Securities will
be owned by the Company. The Preferred Securities will represent preferred
undivided beneficial interests in the assets of the Trust and the holders
thereof will be entitled to a preference in certain circumstances with respect
to Distributions and amounts payable on redemption or liquidation over the
Common Securities, as well as other benefits as described in the Trust
Agreement. The Trust Agreement does not permit the issuance by the Trust of any
securities other than the Trust Securities or the incurrence of any
indebtedness by the Trust.
The Preferred Securities will rank pari passu, and payments will be made
thereon pro rata, with the Common Securities, except as described under
"--Subordination of Common Securities." Legal title to the Subordinated
Debentures will be held by the Property Trustee in trust for the benefit of the
holders of the Trust Securities. The Guarantee executed by the Company for the
benefit of the holders of the Preferred Securities will be a guarantee on a
subordinated basis with respect to the Preferred Securities, but will not
guarantee payment of Distributions or amounts payable on redemption or
liquidation of such Preferred Securities when the Trust does not have funds on
hand available to make such payments. State Street Bank and Trust Company, as
Guarantee Trustee, will hold the Guarantee for the benefit of the holders of
the Preferred Securities. See "Description of the Guarantee."
DISTRIBUTIONS
PAYMENT OF DISTRIBUTIONS. Distributions on each Preferred Security will be
payable at the annual rate of 8.50% of the stated Liquidation Amount of $25,
payable quarterly in arrears on March 31, June 30, September 30 and December 31
of each year, to the holders of the Preferred Securities on the relevant record
dates (each date on which Distributions are payable in accordance with the
foregoing, a "Distribution Date"). The record date will be the 15th day of
the month in which the relevant Distribution Date occurs. Distributions will
accumulate from July 21, 1998, the date of original issuance. The first
Distribution Date for the Preferred Securities will be September 30, 1998. The
amount of Distributions payable for any period will be computed on the basis of
a 360-day year of twelve 30-day months. In the event that any date on which
Distributions are payable on the Preferred Securities is not a Business Day,
then payment of the Distributions payable on such date will be made on the next
succeeding day that is a Business Day (and without any additional
Distributions, interest or other payment in respect of any such delay) with the
same force and effect as if made on the date such payment was originally due
and payable. "Business Day" means any day other than a Saturday or a Sunday,
a day on which banking institutions in the City of New York are authorized or
required by law or executive order to remain closed or a day on which the
corporate trust office of the Property Trustee or the Debenture Trustee is
closed for business.
EXTENSION PERIOD. The Company has the right under the Indenture, so long as
no Debenture Event of Default has occurred and is continuing, to defer the
payment of interest on the Subordinated Debentures at any time, or from time to
time (each, an "Extension Period"), which, if exercised, would defer
quarterly Distributions on the Preferred Securities during any such Extension
Period. Distributions to which holders of the Preferred Securities are entitled
will accumulate additional Distributions thereon at the rate per annum of
8.50% thereof, compounded quarterly from the relevant Distribution Date.
"Distributions," as used herein, includes any such additional Distributions.
The right to defer the payment of interest on the Subordinated Debentures is
limited, however, to a period, in each instance, not
57
<PAGE> 61
exceeding 20 consecutive quarters, and no Extension Period may
extend beyond the Stated Maturity of the Subordinated Debentures. During any
such Extension Period, the Company may not (i) declare or pay any dividends or
distributions on, or redeem, purchase, acquire or make a liquidation payment
with respect to, any of the Company's capital stock (other than (a) dividends
or distributions in common stock of the Company, any declaration of a non-cash
dividend in connection with the implementation of a shareholder rights plan, or
the issuance of stock under any such plan in the future, or the redemption or
repurchase of any such rights pursuant thereto, and (b) purchases of common
stock of the Company related to the rights under any of the Company's benefit
plans for its directors, officers or employees), (ii) make any payment of
principal, interest or premium, if any, on or repay, repurchase or redeem any
debt securities of the Company that rank pari passu with or junior in interest
to the Subordinated Debentures or make any guarantee payments with respect to
any guarantee by the Company of the debt securities of any subsidiary of the
Company if such guarantee ranks pari passu with or junior in interest to the
Subordinated Debentures (other than payments under the Guarantee), or (iii)
redeem, purchase or acquire less than all of the Subordinated Debentures or any
of the Preferred Securities. Prior to the termination of any such Extension
Period, the Company may further defer the payment of interest; provided that
such Extension Period may not exceed 20 consecutive quarters or extend beyond
the Stated Maturity of the Subordinated Debentures. Upon the termination of any
such Extension Period and the payment of all amounts then due, the Company may
elect to begin a new Extension Period, subject to the above requirements.
Subject to the foregoing, there is no limitation on the number of times that
the Company may elect to begin an Extension Period.
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the
Subordinated Debentures.
SOURCE OF DISTRIBUTIONS. The funds of the Trust available for distribution
to holders of its Preferred Securities will be limited to payments under the
Subordinated Debentures in which the Trust will invest the proceeds from the
issuance and sale of its Trust Securities. See "Description of the
Subordinated Debentures." Distributions will be paid through the Property
Trustee who will hold amounts received in respect of the Subordinated
Debentures in the Property Account for the benefit of the holders of the Trust
Securities. If the Company does not make interest payments on the Subordinated
Debentures, the Property Trustee will not have funds available to pay
Distributions on the Preferred Securities. The payment of Distributions (if and
to the extent the Trust has funds legally available for the payment of such
Distributions and cash sufficient to make such payments) is guaranteed by the
Company. See "Description of the Guarantee." Distributions on the Preferred
Securities will be payable to the holders thereof as they appear on the
register of holders of the Preferred Securities on the relevant record dates,
which will be the 15th day of the month in which the relevant Distribution Date
occurs.
REDEMPTION
GENERAL. The Subordinated Debentures will mature on June 30, 2028. The
Company will have the right to redeem the Subordinated Debentures (i) on or
after June 30, 2003, in whole at any time or in part from time to time, or (ii)
at any time, in whole (but not in part), within 180 days following the
occurrence of a Tax Event, a Capital Treatment Event or an Investment Company
Event, in each case subject to receipt of prior approval by the Federal Reserve
if then required under applicable capital guidelines or policies of the Federal
Reserve. The Company will not have the right to purchase the Subordinated
Debentures, in whole or in part, from the Trust until after June 30, 2003. See
"Description of the Subordinated Debentures--General."
MANDATORY REDEMPTION. Upon the repayment or redemption, in whole or in
part, of any Subordinated Debentures, whether at Stated Maturity or upon
earlier redemption as provided in the Indenture, the proceeds from such
repayment or redemption will be applied by the Property Trustee to redeem a
Like Amount (as defined herein) of the Trust Securities, upon not less than 30
nor more than 60 days notice, at a redemption price (the "Redemption Price")
equal to the aggregate Liquidation Amount of such Trust Securities plus
accumulated but unpaid Distributions thereon to the date of redemption (the
"Redemption Date"). See "Description of the Subordinated
Debentures--Redemption." If less than all of the Subordinated Debentures are
to be repaid or redeemed on a Redemption Date, then the proceeds from such
repayment or redemption will be allocated to the redemption of the Trust
Securities pro rata.
DISTRIBUTION OF SUBORDINATED DEBENTURES. Subject to the Company having
received prior approval of the Federal Reserve if so required under applicable
capital guidelines or policies of the Federal Reserve, the Company will have
58
<PAGE> 62
the right at any time to dissolve, wind-up or terminate the Trust and, after
satisfaction of the liabilities of creditors of the Trust as provided by
applicable law, cause the Subordinated Debentures to be distributed to the
holders of Trust Securities in liquidation of the Trust. See "--Liquidation
Distribution Upon Termination."
TAX EVENT REDEMPTION, CAPITAL TREATMENT EVENT REDEMPTION OR INVESTMENT
COMPANY EVENT REDEMPTION. If a Tax Event, a Capital Treatment Event or an
Investment Company Event in respect of the Trust Securities occurs and is
continuing, the Company has the right to redeem the Subordinated Debentures in
whole (but not in part) and thereby cause a mandatory redemption of such Trust
Securities in whole (but not in part) at the Redemption Price within 180 days
following the occurrence of such Tax Event, Capital Treatment Event or
Investment Company Event. In the event that a Tax Event, a Capital Treatment
Event or an Investment Company Event in respect of the Trust Securities has
occurred and the Company does not elect to redeem the Subordinated Debentures
and thereby cause a mandatory redemption of such Trust Securities or to
liquidate the Trust and cause the Subordinated Debentures to be distributed to
holders of such Trust Securities in liquidation of the Trust as described below
under "--Liquidation Distribution Upon Termination," such Preferred
Securities will remain outstanding and Additional Payments (as defined herein)
may be payable on the Subordinated Debentures.
"Additional Payments" means the additional amounts as may be necessary in
order that the amount of Distributions then due and payable by the Trust on the
outstanding Trust Securities will not be reduced as a result of any additional
taxes, duties and other governmental charges to which the Trust has become
subject as a result of a Tax Event.
"Like Amount" means (i) with respect to a redemption of Trust Securities,
Trust Securities having a Liquidation Amount equal to that portion of the
principal amount of Subordinated Debentures to be contemporaneously redeemed in
accordance with the Indenture, which will be used to pay the Redemption Price
of such Trust Securities, and (ii) with respect to a distribution of
Subordinated Debentures to holders of Trust Securities in connection with a
dissolution or liquidation of the Trust, Subordinated Debentures having a
principal amount equal to the Liquidation Amount of the Trust Securities of the
holder to whom such Subordinated Debentures are distributed. Each Subordinated
Debenture distributed pursuant to clause (ii) above will carry with it
accumulated interest in an amount equal to the accumulated and unpaid interest
then due on such Subordinated Debentures.
"Liquidation Amount" means the stated amount of $25 per Trust Security.
After the liquidation date fixed for any distribution of Subordinated
Debentures for Preferred Securities, (i) such Preferred Securities will no
longer be deemed to be outstanding, and (ii) any certificates representing
Preferred Securities will be deemed to represent the Subordinated Debentures
having a principal amount equal to the Liquidation Amount of such Preferred
Securities, and bearing accrued and unpaid interest in an amount equal to the
accrued and unpaid Distributions on the Preferred Securities until such
certificates are presented to the Administrative Trustees or their agent for
transfer or reissuance.
There can be no assurance as to the market prices for the Preferred
Securities or the Subordinated Debentures that may be distributed in exchange
for Preferred Securities if a dissolution and liquidation of the Trust were to
occur. The Preferred Securities that an investor may purchase, or the
Subordinated Debentures that an investor may receive on dissolution and
liquidation of the Trust, may, therefore, trade at a discount to the price that
the investor paid to purchase the Preferred Securities offered hereby.
REDEMPTION PROCEDURES
Preferred Securities redeemed on each Redemption Date will be redeemed at
the Redemption Price with the applicable proceeds from the contemporaneous
redemption of the Subordinated Debentures. Redemptions of the Preferred
Securities will be made and the Redemption Price will be payable on each
Redemption Date only to the extent that the Trust has funds on hand available
for the payment of such Redemption Price. See "--Subordination of Common
Securities."
If the Trust gives a notice of redemption in respect of its Preferred
Securities, then, by 12:00 noon, Eastern Standard Time, on the Redemption Date,
to the extent funds are available, the Property Trustee will irrevocably
deposit with the paying agent for the Preferred Securities funds sufficient to
pay the aggregate Redemption Price and will give the paying agent for the
Preferred Securities irrevocable instructions and authority to pay the
Redemption Price to the holders thereof upon surrender of their certificates
evidencing such Preferred Securities. Notwithstanding
59
<PAGE> 63
the foregoing, Distributions payable on or prior to the Redemption Date for any
Preferred Securities called for redemption will be payable to the holders of
such Preferred Securities on the relevant record dates for the related
Distribution Dates. If notice of redemption will have been given and funds
deposited as required, then upon the date of such deposit, all rights of the
holders of such Preferred Securities so called for redemption will cease,
except the right of the holders of such Preferred Securities to receive the
Redemption Price, but without interest on such Redemption Price, and such
Preferred Securities will cease to be outstanding. In the event that any date
fixed for redemption of Preferred Securities is not a Business Day, then
payment of the Redemption Price payable on such date will be made on the next
succeeding day which is a Business Day (and without any additional
Distribution, interest or other payment in respect of any such delay) with the
same force and effect as if made on such date. In the event that payment of the
Redemption Price in respect of Preferred Securities called for redemption is
improperly withheld or refused and not paid either by the Trust, or by the
Company pursuant to the Guarantee, Distributions on such Preferred Securities
will continue to accrue at the then applicable rate, from the Redemption Date
originally established by the Trust for such Preferred Securities to the date
such Redemption Price is actually paid, in which case the actual payment date
will be considered the date fixed for redemption for purposes of calculating
the Redemption Price. See "Description of the Guarantee."
Subject to applicable law (including, without limitation, United States
federal securities law), and further provided that the Company does not and is
not continuing to exercise its right to defer interest payments, the Company or
its subsidiaries may at any time and from time to time purchase outstanding
Preferred Securities by tender, in the open market or by private agreement.
Payment of the Redemption Price on the Preferred Securities and any
distribution of Subordinated Debentures to holders of Preferred Securities will
be made to the applicable recordholders thereof as they appear on the register
for the Preferred Securities on the relevant record date, which date will be
the date 15 days prior to the Redemption Date or liquidation date, as
applicable.
If less than all of the Trust Securities are to be redeemed on a Redemption
Date, then the aggregate Liquidation Amount of such Trust Securities to be
redeemed will be allocated pro rata to the Trust Securities based upon the
relative Liquidation Amounts of such classes. The particular Preferred
Securities to be redeemed will be selected by the Property Trustee from the
outstanding Preferred Securities not previously called for redemption, by such
method as the Property Trustee deems fair and appropriate and which may provide
for the selection for redemption of portions (equal to $25 or an integral
multiple of $25 in excess thereof) of the Liquidation Amount of Preferred
Securities of a denomination larger than $25. The Property Trustee will
promptly notify the registrar for the Preferred Securities in writing of the
Preferred Securities selected for redemption and, in the case of any Preferred
Securities selected for partial redemption, the Liquidation Amount thereof to
be redeemed. For all purposes of the Trust Agreement, unless the context
otherwise requires, all provisions relating to the redemption of Preferred
Securities will relate to the portion of the aggregate Liquidation Amount of
Preferred Securities which has been or is to be redeemed.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each holder of Trust Securities to be
redeemed at its registered address. Unless the Company defaults in payment of
the redemption price on the Subordinated Debentures, on and after the
Redemption Date interest will cease to accrue on such Subordinated Debentures
or portions thereof (and Distributions will cease to accrue on the related
Preferred Securities or portions thereof) called for redemption.
SUBORDINATION OF COMMON SECURITIES
Payment of Distributions on, and the Redemption Price of, the Preferred
Securities and Common Securities, as applicable, will be made pro rata based on
the Liquidation Amount of the Preferred Securities and Common Securities;
provided, however, that if on any Distribution Date or Redemption Date a
Debenture Event of Default has occurred and is continuing, no payment of any
Distribution on, or Redemption Price of, any of the Common Securities, and no
other payment on account of the redemption, liquidation or other acquisition of
such Common Securities, will be made unless payment in full in cash of all
accumulated and unpaid Distributions on all of the outstanding Preferred
Securities for all Distribution periods terminating on or prior thereto, or in
the case of payment of the Redemption Price the full amount of such Redemption
Price on all of the outstanding Preferred Securities then called for
redemption, will have been made or provided for, and all funds available to the
Property Trustee will first be
60
<PAGE> 64
applied to the payment in full in cash of all Distributions on, or Redemption
Price of, the Preferred Securities then due and payable.
In the case of any Event of Default resulting from a Debenture Event of
Default, the Company as holder of the Common Securities will be deemed to have
waived any right to act with respect to any such Event of Default under the
Trust Agreement until the effect of all such Events of Default with respect to
the Preferred Securities have been cured, waived or otherwise eliminated. Until
any such Events of Default under the Trust Agreement with respect to the
Preferred Securities has been so cured, waived or otherwise eliminated, the
Property Trustee will act solely on behalf of the holders of the Preferred
Securities and not on behalf of the Company, as holder of the Common
Securities, and only the holders of the Preferred Securities will have the
right to direct the Property Trustee to act on their behalf.
LIQUIDATION DISTRIBUTION UPON TERMINATION
The Company will have the right at any time to dissolve, wind-up or
terminate the Trust and cause the Subordinated Debentures to be distributed to
the holders of the Preferred Securities. Such right is subject, however, to the
Company having received prior approval of the Federal Reserve if then required
under applicable capital guidelines or policies of the Federal Reserve.
Pursuant to the Trust Agreement, the Trust will automatically terminate
upon expiration of its term and will terminate earlier on the first to occur of
(i) certain events of bankruptcy, dissolution or liquidation of the Company,
(ii) the distribution of a Like Amount of the Subordinated Debentures to the
holders of its Trust Securities, if the Company, as depositor, has given
written direction to the Property Trustee to terminate the Trust (which
direction is optional and wholly within the discretion of the Company, as
depositor), (iii) redemption of all of the Preferred Securities as described
under "Description of the Preferred Securities--Redemption--Mandatory
Redemption," or (iv) the entry of an order for the dissolution of the Trust by
a court of competent jurisdiction.
If an early termination occurs as described in clause (i), (ii) or (iv) of
the preceding paragraph, the Trust will be liquidated by the Trustees as
expeditiously as the Trustees determine to be possible by distributing, after
satisfaction of liabilities to creditors of the Trust as provided by applicable
law, to the holders of such Trust Securities a Like Amount of the Subordinated
Debentures, unless such distribution is determined by the Property Trustee not
to be practical, in which event such holders will be entitled to receive out of
the assets of the Trust available for distribution to holders, after
satisfaction of liabilities to creditors of the Trust as provided by applicable
law, an amount equal to, in the case of holders of Preferred Securities, the
aggregate of the Liquidation Amount plus accrued and unpaid Distributions
thereon to the date of payment (such amount being the "Liquidation
Distribution"). If such Liquidation Distribution can be paid only in part
because the Trust has insufficient assets available to pay in full the
aggregate Liquidation Distribution, then the amounts payable directly by the
Trust on the Preferred Securities will be paid on a pro rata basis. The
Company, as the holder of the Common Securities, will be entitled to receive
distributions upon any such liquidation pro rata with the holders of the
Preferred Securities, except that, if a Debenture Event of Default has occurred
and is continuing, the Preferred Securities will have a priority over the
Common Securities. See "--Subordination of Common Securities."
Under current United States federal income tax law and interpretations and
assuming, as expected, that the Trust is treated as a grantor trust, a
distribution of the Subordinated Debentures should not be a taxable event to
holders of the Preferred Securities. Should there be a change in law, a change
in legal interpretation, a Tax Event or other circumstances, however, the
distribution could be a taxable event to holders of the Preferred Securities.
See "Certain Federal Income Tax Consequences--Receipt of Subordinated
Debentures or Cash Upon Liquidation of the Trust." If the Company elects
neither to redeem the Subordinated Debentures prior to maturity nor to
liquidate the Trust and distribute the Subordinated Debentures to holders of
the Preferred Securities, the Preferred Securities will remain outstanding
until the repayment of the Subordinated Debentures.
If the Company elects to liquidate the Trust and thereby causes the
Subordinated Debentures to be distributed to holders of the Preferred
Securities in liquidation of the Trust, the Company will continue to have the
right to shorten or extend the maturity of such Subordinated Debentures,
subject to certain conditions. See "Description of the Subordinated
Debentures--General."
61
<PAGE> 65
LIQUIDATION VALUE
The amount of the Liquidation Distribution payable on the Preferred
Securities in the event of any liquidation of the Trust is $25 per Preferred
Security plus accrued and unpaid Distributions thereon to the date of payment,
which may be in the form of a distribution of such amount in Subordinated
Debentures, subject to certain exceptions. See "--Liquidation Distribution
Upon Termination."
EVENTS OF DEFAULT; NOTICE
Any one of the following events constitutes an event of default under the
Trust Agreement (an "Event of Default") with respect to the Preferred
Securities (whatever the reason for such Event of Default and whether voluntary
or involuntary or effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(i) the occurrence of a Debenture Event of Default (see "Description
of the Subordinated Debentures--Debenture Events of Default"); or
(ii) default by the Trust in the payment of any Distribution when it
becomes due and payable, and continuation of such default for a period of
30 days; or
(iii) default by the Trust in the payment of any Redemption Price of
any Trust Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material respect, of
any covenant or warranty of the Trustees in the Trust Agreement (other than
a covenant or warranty a default in the performance of which or the breach
of which is dealt with in clauses (ii) or (iii) above), and continuation of
such default or breach for a period of 60 days after there has been given,
by registered or certified mail, to the Trustee(s) by the holders of at
least 25% in aggregate Liquidation Amount of the outstanding Preferred
Securities, a written notice specifying such default or breach and
requiring it to be remedied and stating that such notice is a "Notice of
Default" under the Trust Agreement; or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Property Trustee and the failure by the Company to appoint a
successor Property Trustee within 60 days thereof.
Within five Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee will transmit
notice of such Event of Default to the holders of the Preferred Securities, the
Administrative Trustees and the Company, as depositor, unless such Event of
Default has been cured or waived. The Company, as depositor, and the
Administrative Trustees are required to file annually with the Property Trustee
a certificate as to whether or not they are in compliance with all the
conditions and covenants applicable to them under the Trust Agreement.
If a Debenture Event of Default has occurred and is continuing, the
Preferred Securities will have a preference over the Common Securities upon
termination of the Trust. See "--Liquidation Distribution Upon Termination."
The existence of an Event of Default does not entitle the holders of Preferred
Securities to accelerate the maturity thereof.
REMOVAL OF THE TRUST TRUSTEES
Unless a Debenture Event of Default has occurred and is continuing, any
Trustee may be removed at any time by the holder of the Common Securities. If a
Debenture Event of Default has occurred and is continuing, the Property Trustee
and the Delaware Trustee may be removed at such time by the holders of a
majority in Liquidation Amount of the outstanding Preferred Securities. In no
event, however, will the holders of the Preferred Securities have the right to
vote to appoint, remove or replace the Administrative Trustees, which voting
rights are vested exclusively in the Company as the holder of the Common
Securities. No resignation or removal of a Trustee and no appointment of a
successor trustee will be effective until the acceptance of appointment by the
successor trustee in accordance with the provisions of the Trust Agreement.
62
<PAGE> 66
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an Event of Default has occurred and is continuing, at any time or
times, for the purpose of meeting the legal requirements of the Trust Indenture
Act or of any jurisdiction in which any part of the Trust Property (as defined
in the Trust Agreement) may at the time be located, the Company, as the holder
of the Common Securities, will have power to appoint one or more Persons (as
defined in the Trust Agreement) either to act as a co-trustee, jointly with the
Property Trustee, of all or any part of such Trust Property, or to act as
separate trustee of any such Trust Property, in either case with such powers as
may be provided in the instrument of appointment, and to vest in such Person or
Persons in such capacity any property, title, right or power deemed necessary
or desirable, subject to the provisions of the Trust Agreement. In case a
Debenture Event of Default has occurred and is continuing, the Property Trustee
alone will have power to make such appointment.
MERGER OR CONSOLIDATION OF TRUSTEES
Any Person into which the Property Trustee, the Delaware Trustee or any
Administrative Trustee that is not a natural person may be merged or converted
or with which it may be consolidated, or any Person resulting from any merger,
conversion or consolidation to which such Trustee is a party, or any Person
succeeding to all or substantially all the corporate trust business of such
Trustee, will be the successor of such Trustee under the Trust Agreement,
provided such Person is otherwise qualified and eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST
The Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, except as described below. The
Trust may, at the request of the Company, with the consent of the
Administrative Trustees and without the consent of the holders of the Preferred
Securities, the Property Trustee or the Delaware Trustee, merge with or into,
consolidate, amalgamate, or be replaced by or convey, transfer or lease its
properties and assets substantially as an entirety to a trust organized as such
under the laws of any State; provided, that (i) such successor entity either
(a) expressly assumes all of the obligations of the Trust with respect to the
Preferred Securities, or (b) substitutes for the Preferred Securities other
securities having substantially the same terms as the Preferred Securities (the
"Successor Securities") so long as the Successor Securities rank the same as
the Preferred Securities rank in priority with respect to distributions and
payments upon liquidation, redemption and otherwise, (ii) the Company expressly
appoints a trustee of such successor entity possessing the same powers and
duties as the Property Trustee in its capacity as the holder of the
Subordinated Debentures, (iii) the Successor Securities are listed, or any
Successor Securities will be listed upon notification of issuance, on any
national securities exchange or other organization on which the Preferred
Securities are then listed (including, if applicable, the NYSE), if any, (iv)
such merger, consolidation, amalgamation, replacement, conveyance, transfer or
lease does not adversely affect the rights, preferences and privileges of the
holders of the Preferred Securities (including any Successor Securities) in any
material respect, (v) prior to such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, the Company has received an opinion
from independent counsel to the effect that (a) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not adversely
affect the rights, preferences and privileges of the holders of the Preferred
Securities (including any Successor Securities) in any material respect, and
(b) following such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, neither the Trust nor such successor entity will
be required to register as an "investment company" under the Investment
Company Act, and (vi) the Company owns all of the common securities of such
successor entity and guarantees the obligations of such successor entity under
the Successor Securities at least to the extent provided by the Guarantee, the
Indenture, the Subordinated Debentures, the Trust Agreement and the Expense
Agreement. Notwithstanding the foregoing, the Trust will not, except with the
consent of holders of 100% in Liquidation Amount of the Preferred Securities,
consolidate, amalgamate, merge with or into, or be replaced by or convey,
transfer or lease its properties and assets substantially as an entirety to any
other Person or permit any other Person to consolidate, amalgamate, merge with
or into, or replace it if such consolidation, amalgamation, merger,
replacement, conveyance, transfer or lease would cause the Trust or the
successor entity to be classified as other than a grantor trust for United
States federal income tax purposes.
63
<PAGE> 67
VOTING RIGHTS; AMENDMENT OF TRUST AGREEMENT
Except as provided below and under "Description of the Guarantee--Voting
Rights; Amendments and Assignment" and as otherwise required by the Trust Act,
the Trust Agreement and the Guarantee, the holders of the Preferred Securities
will have no voting rights.
The Trust Agreement may be amended from time to time by the Company, the
Property Trustee and the Administrative Trustees, without the consent of the
holders of the Preferred Securities (i) with respect to acceptance of
appointment by a successor trustee, (ii) to cure any ambiguity, correct or
supplement any provisions in such Trust Agreement that may be inconsistent with
any other provision, or to make any other provisions with respect to matters or
questions arising under the Trust Agreement (provided such amendment is not
inconsistent with the other provisions of the Trust Agreement), (iii) to
modify, eliminate or add to any provisions of the Trust Agreement to such
extent as is necessary to ensure that the Trust will be classified for United
States federal income tax purposes as a grantor trust at all times that any
Trust Securities are outstanding or to ensure that the Trust will not be
required to register as an "investment company" under the Investment Company
Act, or (iv) to reduce or increase the Liquidation Amount per Trust Security
and simultaneously to increase or reduce the number of Trust Securities issued
and outstanding solely for the purpose of maintaining the eligibility of the
Preferred Securities for listing or quotation on any national securities
exchange or other organization on which the Preferred Securities are then
listed or quoted (including, if applicable, the NYSE); provided, however, that
in the case of clause (ii), such action may not adversely affect in any
material respect the interests of any holder of Trust Securities and that, in
the case of clause (iv), the aggregate Liquidation Amount of the Trust
Securities outstanding, upon completion of any such reduction or increase, must
be the same as the aggregate Liquidation Amount of the Trust Securities
outstanding immediately prior to any such reduction or increase, and any
amendments of such Trust Agreement will become effective when notice thereof is
given to the holders of Trust Securities (or, in the case of an amendment
pursuant to clause (iv), as of the date specified in the notice). The Trust
Agreement may be amended by the Trustees and the Company with (i) the consent
of holders representing not less than a majority in the aggregate Liquidation
Amount of the outstanding Trust Securities, and (ii) receipt by the Trustees of
an opinion of counsel to the effect that such amendment or the exercise of any
power granted to the Trustees in accordance with such amendment will not affect
the Trust's status as a grantor trust for United States federal income tax
purposes or the Trust's exemption from status as an "investment company"
under the Investment Company Act. The affirmative consent of the holders of at
least 66 2/3% of the outstanding Preferred Securities will be required by the
Trust for amendments to the Trust Agreement that would adversely affect the
rights or privileges of the holders of the Preferred Securities.
Notwithstanding anything in this paragraph to the contrary, without the consent
of each holder of Trust Securities, the Trust Agreement may not be amended to
(a) change the amount or timing of any Distribution on the Trust Securities or
otherwise adversely affect the amount of any Distribution required to be made
in respect of the Trust Securities as of a specified date, or (b) restrict the
right of a holder of Trust Securities to institute suit for the enforcement of
any such payment on or after such date.
The Trustees will not, so long as any Subordinated Debentures are held by
the Property Trustee, (i) direct the time, method and place of conducting any
proceeding for any remedy available to the Debenture Trustee, of executing any
trust or power conferred on the Property Trustee with respect to the
Subordinated Debentures, (ii) waive any past default that is waivable under the
Indenture, (iii) exercise any right to rescind or annul a declaration that the
principal of all the Subordinated Debentures will be due and payable, or (iv)
consent to any amendment, modification or termination of the Indenture or the
Subordinated Debentures, where such consent is required, without, in each case,
obtaining the prior approval of the holders of a majority in aggregate
Liquidation Amount of all outstanding Preferred Securities; provided, however,
that where a consent under the Indenture requires the consent of each holder of
Subordinated Debentures affected thereby, no such consent will be given by the
Property Trustee without the prior consent of each holder of the Preferred
Securities. The Trustees may not revoke any action previously authorized or
approved by a vote of the holders of the Preferred Securities except by
subsequent vote of the holders of the Preferred Securities. The Property
Trustee will notify each holder of Preferred Securities of any notice of
default with respect to the Subordinated Debentures. In addition to obtaining
the foregoing approvals of the holders of the Preferred Securities, prior to
taking any of the foregoing actions, the Trustees must obtain an opinion of
counsel experienced in such matters to the effect that the Trust will not be
classified as an association taxable as a corporation for United States federal
income tax purposes on account of such action.
Any required approval of holders of Preferred Securities may be given at a
meeting of holders of Preferred Securities convened for such purpose or
pursuant to written consent. The Property Trustee will cause a notice of any
64
<PAGE> 68
meeting at which holders of Preferred Securities are entitled to vote, or of
any matter upon which action by written consent of such holders is to be taken,
to be given to each holder of record of Preferred Securities in the manner set
forth in the Trust Agreement.
No vote or consent of the holders of Preferred Securities will be required
for the Trust to redeem and cancel its Preferred Securities in accordance with
the Trust Agreement.
Notwithstanding the fact that holders of Preferred Securities are entitled
to vote or consent under any of the circumstances described above, any of the
Preferred Securities that are owned by the Company, the Trustees or any
affiliate of the Company or any Trustee will, for purposes of such vote or
consent, be treated as if they were not outstanding.
PAYMENT AND PAYING AGENCY
Payments in respect of the Preferred Securities will be made by check
mailed to the address of the holder entitled thereto as such address will
appear on the register of holders of the Preferred Securities. The paying agent
for the Preferred Securities will initially be the Property Trustee and any
co-paying agent chosen by the Property Trustee and acceptable to the
Administrative Trustees and the Company. The paying agent for the Preferred
Securities may resign as paying agent upon 30 days' written notice to the
Property Trustee and the Company. In the event that the Property Trustee no
longer is the paying agent for the Preferred Securities, the Administrative
Trustees will appoint a successor (which must be a bank or trust company
acceptable to the Administrative Trustees and the Company) to act as paying
agent.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as the registrar and the transfer agent for
the Preferred Securities. Registration of transfers of Preferred Securities
will be effected without charge by or on behalf of the Trust, but upon payment
of any tax or other governmental charges that may be imposed in connection with
any transfer or exchange. The Trust will not be required to register or cause
to be registered the transfer of Preferred Securities after such Preferred
Securities have been called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than upon the occurrence and during the
continuance of an Event of Default, undertakes to perform only such duties as
are specifically set forth in the Trust Agreement and, upon the occurrence and
during the continuance of an Event of Default, must exercise the same degree of
care and skill as a prudent person would exercise or use in the conduct of his
or her own affairs. Subject to this provision, the Property Trustee is under no
obligation to exercise any of the powers vested in it by the Trust Agreement at
the request of any holder of Preferred Securities unless it is offered
reasonable indemnity against the costs, expenses and liabilities that might be
incurred thereby. If no Event of Default has occurred and is continuing and the
Property Trustee is required to decide between alternative causes of action,
construe ambiguous provisions in the Trust Agreement or is unsure of the
application of any provision of the Trust Agreement, and the matter is not one
on which holders of Preferred Securities are entitled under the Trust Agreement
to vote, then the Property Trustee will take such action as is directed by the
Company and if not so directed, will take such action as it deems advisable and
in the best interests of the holders of the Trust Securities and will have no
liability except for its own bad faith, negligence or willful misconduct.
MISCELLANEOUS
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate the Trust in such a way that the Trust will not be
deemed to be an "investment company" required to be registered under the
Investment Company Act or classified as an association taxable as a corporation
for United States federal income tax purposes and so that the Subordinated
Debentures will be treated as indebtedness of the Company for United States
federal income tax purposes. The Company and the Administrative Trustees are
authorized, in this connection, to take any action, not inconsistent with
applicable law, the certificate of trust of the Trust or the Trust Agreement,
that the Company and the Administrative Trustees determine in their discretion
to be necessary or desirable for such purposes.
65
<PAGE> 69
Holders of the Preferred Securities have no preemptive or similar rights.
The Trust Agreement and the Preferred Securities will be governed by, and
construed in accordance with, the internal laws of the State of Delaware.
DESCRIPTION OF THE SUBORDINATED DEBENTURES
Concurrently with the issuance of the Preferred Securities, the Trust will
invest the proceeds thereof, together with the consideration paid by the
Company for the Common Securities, in the Subordinated Debentures issued by the
Company. The Subordinated Debentures will be issued as unsecured debt under the
Indenture, to be dated as of July 21, 1998 (the "Indenture"), between the
Company and State Street Bank and Trust Company, as trustee (the "Debenture
Trustee"). The Indenture will be qualified as an indenture under the Trust
Indenture Act. The following summary of the material terms and provisions of the
Subordinated Debentures and the Indenture does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the Indenture and
to the Trust Indenture Act. Wherever particular defined terms of the Indenture
are referred to, but not defined herein, such defined terms are incorporated
herein by reference. The form of the Indenture has been filed as an exhibit to
the Registration Statement of which this Prospectus forms a part.
GENERAL
The Subordinated Debentures will be limited in aggregate principal amount
to approximately $41,237,125 (or $47,442,700 if the option described under the
heading "Underwriting" is exercised by the Underwriters), such amount being
the sum of the aggregate stated Liquidation Amount of the Trust Securities. The
Subordinated Debentures will bear interest at the annual rate of 8.50% of the
principal amount thereof, payable quarterly in arrears on March 31, June 30,
September 30, and December 31 of each year (each, an "Interest Payment Date")
beginning September 30, 1998, to the Person (as defined in the Indenture) in
whose name each Subordinated Debenture is registered, subject to certain
exceptions, at the close of business on the fifteenth day of the last month of
the calendar quarter. It is anticipated that, until the liquidation of the
Trust, the Subordinated Debentures will be held in the name of the Property
Trustee in trust for the benefit of the holders of the Preferred Securities.
The amount of interest payable for any period will be computed on the basis of
a 360-day year of twelve 30-day months. In the event that any date on which
interest is payable on the Subordinated Debentures is not a Business Day, then
payment of the interest payable on such date will be made on the next
succeeding day that is a Business Day (and without any interest or other
payment in respect of any such delay), with the same force and effect as if
made on the date such payment was originally payable. Accrued interest that is
not paid on the applicable Interest Payment Date will bear additional interest
on the amount thereof (to the extent permitted by law) at the rate per annum of
8.50% thereof, compounded quarterly. The term "interest," as used herein,
includes quarterly interest payments, interest on quarterly interest payments
not paid on the applicable Interest Payment Date and Additional Payments (as
herein defined), as applicable.
The Subordinated Debentures will mature on June 30, 2028 (such date, as it
may be shortened or extended as hereinafter described, the "Stated
Maturity"). Such date may be shortened at any time by the Company to any date
not earlier than June 30, 2003, subject to the Company having received prior
approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve. Such date may also be extended
at any time at the election of the Company but in no event to a date later than
June 30, 2037, provided that at the time such election is made and at the time
of extension (i) the Company is not in bankruptcy, otherwise insolvent or in
liquidation, (ii) the Company is not in default in the payment of any interest
or principal on the Subordinated Debentures, and (iii) the Trust is not in
arrears on payments of Distributions on the Preferred Securities and no
deferred Distributions are accumulated. In the event that the Company elects to
shorten or extend the Stated Maturity of the Subordinated Debentures, it will
give notice thereof to the Debenture Trustee, the Trust and to the holders of
the Subordinated Debentures no more than 180 days and no less than 90 days
prior to the effectiveness thereof. The Company will not have the right to
purchase the Subordinated Debentures, in whole or in part, from the Trust until
after June 30, 2003, except if a Tax Event, a Capital Treatment Event or an
Investment Company Event has occurred and is continuing.
The Subordinated Debentures will be unsecured and will rank junior and be
subordinate in right of payment to all Senior Debt, Subordinated Debt and
Additional Senior Obligations of the Company. Because the Company is a
66
<PAGE> 70
holding company, the right of the Company to participate in any distribution of
assets of any Subsidiary Bank, upon any such Subsidiary Bank's liquidation or
reorganization or otherwise (and thus the ability of holders of the
Subordinated Debentures to benefit indirectly from such distribution), is
subject to the prior claim of creditors of such Subsidiary Bank, except to the
extent that the Company may itself be recognized as a creditor of such
Subsidiary Bank. The Subordinated Debentures will, therefore, be effectively
subordinated to all existing and future liabilities of the Subsidiary Banks,
and holders of Subordinated Debentures should look only to the assets of the
Company for payments on the Subordinated Debentures. The Indenture does not
limit the incurrence or issuance of other secured or unsecured debt of the
Company, including Senior Debt, Subordinated Debt and Additional Senior
Obligations, whether under the Indenture or any existing indenture or other
indenture that the Company may enter into in the future or otherwise. See
"--Subordination."
The Indenture does not contain provisions that afford holders of the
Subordinated Debentures protection in the event of a highly leveraged
transaction or other similar transaction involving the Company that may
adversely affect such holders.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
The Company has the right under the Indenture at any time during the term
of the Subordinated Debentures, so long as no Debenture Event of Default has
occurred and is continuing, to defer the payment of interest at any time, or
from time to time (each, an "Extension Period"). The right to defer the
payment of interest on the Subordinated Debentures is limited, however, to a
period, in each instance, not exceeding 20 consecutive quarters, and no
Extension Period may extend beyond the Stated Maturity of the Subordinated
Debentures. At the end of each Extension Period, the Company must pay all
interest then accrued and unpaid (together with interest thereon at the annual
rate of 8.50%, compounded quarterly, to the extent permitted by applicable
law). During an Extension Period, interest will continue to accrue and holders
of Subordinated Debentures (or the holders of Preferred Securities if such
securities are then outstanding) will be required to accrue and recognize
income for United States federal income tax purposes. See "Certain Federal
Income Tax Consequences--Potential Extension of Interest Payment Period and
Original Issue Discount."
During any such Extension Period, the Company may not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Company's capital stock (other
than (a) dividends or distributions in common stock of the Company, any
declaration of a non-cash dividend in connection with the implementation of a
shareholder rights plan, or the issuance of stock under any such plan in the
future, or the redemption or repurchase of any such rights pursuant thereto,
and (b) purchases of common stock of the Company related to the rights under
any of the Company's benefit plans for its directors, officers or employees),
(ii) make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank pari passu
with or junior in interest to the Subordinated Debentures or make any guarantee
payments with respect to any guarantee by the Company of the debt securities of
any subsidiary of the Company if such guarantee ranks pari passu or junior in
interest to the Subordinated Debentures (other than payments under the
Guarantee), or (iii) redeem, purchase or acquire less than all of the
Subordinated Debentures or any of the Preferred Securities. Prior to the
termination of any such Extension Period, the Company may further defer the
payment of interest; provided that no Extension Period may exceed 20
consecutive quarters or extend beyond the Stated Maturity of the Subordinated
Debentures. Upon the termination of any such Extension Period and the payment
of all amounts then due on any Interest Payment Date, the Company may elect to
begin a new Extension Period subject to the above requirements. No interest
will be due and payable during an Extension Period, except at the end thereof.
The Company has no present intention of exercising its rights to defer payments
of interest on the Subordinated Debentures. The Company must give the Property
Trustee, the Administrative Trustees and the Debenture Trustee notice of its
election of such Extension Period at least two Business Days prior to the
earlier of (i) the next succeeding date on which Distributions on the Trust
Securities would have been payable except for the election to begin such
Extension Period, or (ii) the date the Trust is required to give notice of the
record date, or the date such Distributions are payable, to the NYSE (or other
applicable self-regulatory organization) or to holders of the Preferred
Securities, but in any event at least one Business Day before such record date.
Subject to the foregoing, there is no limitation on the number of times that
the Company may elect to begin an Extension Period.
67
<PAGE> 71
ADDITIONAL SUMS
If the Trust or the Property Trustee is required to pay any additional
taxes, duties or other governmental charges as a result of the occurrence of a
Tax Event, the Company will pay to the recordholders of the Subordinated
Debentures as additional amounts (referred to herein as "Additional
Payments") on the Subordinated Debentures such additional amounts as may be
required so that the net amounts received and retained by the Trust after
paying any such additional taxes, duties or other governmental charges will not
be less than the amounts the Trust would have received had such additional
taxes, duties or other governmental charges not been imposed.
REDEMPTION
The Company will have the right to redeem the Subordinated Debentures prior
to maturity (i) on or after June 30, 2003, in whole at any time or in part from
time to time, or (ii) at any time in whole (but not in part), within 180 days
following the occurrence of a Tax Event, a Capital Treatment Event or an
Investment Company Event, in each case at a redemption price equal to the
accrued and unpaid interest on the Subordinated Debentures so redeemed to the
date fixed for redemption, plus 100% of the principal amount thereof. Any such
redemption prior to the Stated Maturity will be subject to prior approval of
the Federal Reserve if then required under applicable capital guidelines or
policies of the Federal Reserve.
"Tax Event" means the receipt by the Trust of an opinion of counsel
rendered by a law firm having a recognized tax and securities law practice to
the effect that, as a result of any amendment to, or change (including any
announced prospective change) in, the laws (or any regulations thereunder) of
the United States or any political subdivision or taxing authority thereof or
therein, or as a result of any official administrative pronouncement or
judicial decision interpreting or applying such laws or regulations, which
amendment or change is effective or which pronouncement or decision is
announced on or after the date of issuance of the Preferred Securities under
the Trust Agreement, there is more than an insubstantial risk that (i) interest
payable by the Company on the Subordinated Debentures is not, or within 90 days
of the date of such opinion will not be, deductible by the Company, in whole or
in part, for United States federal income tax purposes, (ii) the Trust is, or
will be within 90 days after the date of such opinion of counsel, subject to
United States federal income tax with respect to income received or accrued on
the Subordinated Debentures, or (iii) the Trust is, or will be within 90 days
after the date of such opinion of counsel, subject to more than a de minimis
amount of other taxes, duties, assessments or other governmental charges. The
Company must request and receive an opinion with regard to such matters within
a reasonable period of time after it becomes aware of the possible occurrence
of any of the events described in clauses (i) through (iii) above.
"Capital Treatment Event" means the receipt by the Trust of an opinion of
counsel rendered by a law firm having a recognized banking law practice to the
effect that, as a result of any amendment to or any change (including any
announced prospective change) in the laws (or any regulations thereunder) of
the United States or any political subdivision thereof or therein, or as a
result of any official administrative pronouncement or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or such proposed change, pronouncement or decision is announced on or
after the date of issuance of the Preferred Securities under the Trust
Agreement, there is more than an insubstantial risk of impairment of the
Company's ability to treat the aggregate Liquidation Amount of the Preferred
Securities (or any substantial portion thereof) as "Tier 1 Capital" (or the
then equivalent thereof) for purposes of the capital adequacy guidelines of the
Federal Reserve, as then applicable to the Company, provided, however, that the
inability of the Company to treat all or any portion of the Liquidation Amount
of the Preferred Securities as Tier 1 Capital shall not constitute the basis
for a Capital Treatment Event if such inability results from the Company having
cumulative preferred capital in excess of the amount which may qualify for
treatment as Tier 1 Capital under applicable capital adequacy guidelines of the
Federal Reserve.
"Investment Company Event" means the receipt by the Trust of an opinion
of counsel rendered by a law firm having a recognized tax and securities law
practice to the effect that, as a result of the occurrence of a change in law
or regulation or a change in interpretation or application of law or regulation
by any legislative body, court, governmental agency or regulatory authority,
the Trust is or will be considered an "investment company" that is required
to be registered under the Investment Company Act, which change becomes
effective on or after the date of original issuance of the Preferred
Securities.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of Subordinated Debentures to
be redeemed at its registered address. Unless the Company defaults in
68
<PAGE> 72
payment of the redemption price for the Subordinated Debentures, on and after
the redemption date interest ceases to accrue on such Subordinated Debentures
or portions thereof called for redemption.
The Subordinated Debentures will not be subject to any sinking fund.
DISTRIBUTION UPON LIQUIDATION
As described under "Description of the Preferred Securities--Liquidation
Distribution Upon Termination," under certain circumstances involving the
termination of the Trust, the Subordinated Debentures may be distributed to the
holders of the Preferred Securities in liquidation of the Trust after
satisfaction of liabilities to creditors of the Trust as provided by applicable
law. Any such distribution will be subject to receipt of prior approval by the
Federal Reserve if then required under applicable policies or guidelines of the
Federal Reserve. If the Subordinated Debentures are distributed to the holders
of Preferred Securities upon the liquidation of the Trust, the Company will use
its best efforts to list the Subordinated Debentures on the NYSE or such stock
exchanges, if any, on which the Preferred Securities are then listed. There can
be no assurance as to the market price of any Subordinated Debentures that may
be distributed to the holders of Preferred Securities.
RESTRICTIONS ON CERTAIN PAYMENTS
If at any time (i) there has occurred a Debenture Event of Default, (ii)
the Company is in default with respect to its obligations under the Guarantee,
or (iii) the Company has given notice of its election of an Extension Period as
provided in the Indenture with respect to the Subordinated Debentures and has
not rescinded such notice, or such Extension Period, or any extension thereof,
is continuing, the Company will not (1) declare or pay any dividends or
distributions on, or redeem, purchase, acquire, or make a liquidation payment
with respect to, any of the Company's capital stock (other than (a) dividends
or distributions in common stock of the Company, any declaration of a non-cash
dividend in connection with the implementation of a shareholder rights plan, or
the issuance of stock under any such plan in the future, or the redemption or
repurchase of any such rights pursuant thereto, and (b) purchases of common
stock of the Company related to the rights under any of the Company's benefit
plans for its directors, officers or employees), (2) make any payment of
principal, interest or premium, if any, on or repay or repurchase or redeem any
debt securities of the Company that rank pari passu with or junior in interest
to the Subordinated Debentures or make any guarantee payments with respect to
any guarantee by the Company of the debt securities of any subsidiary of the
Company if such guarantee ranks pari passu or junior in interest to the
Subordinated Debentures (other than payments under the Guarantee), or (3)
redeem, purchase or acquire less than all of the Subordinated Debentures or any
of the Preferred Securities.
SUBORDINATION
The Indenture provides that the Subordinated Debentures are subordinated
and junior in right of payment to all Senior Debt, Subordinated Debt and
Additional Senior Obligations of the Company. Upon any payment or distribution
of assets to creditors upon any liquidation, dissolution, winding up,
reorganization, assignment for the benefit of creditors, marshaling of assets
or any bankruptcy, insolvency, debt restructuring or similar proceedings in
connection with any insolvency or bankruptcy proceedings of the Company, the
holders of Senior Debt, Subordinated Debt and Additional Senior Obligations of
the Company will first be entitled to receive payment in full of principal of
(and premium, if any) and interest, if any, on such Senior Debt, Subordinated
Debt and Additional Senior Obligations of the Company before the holders of
Subordinated Debentures will be entitled to receive or retain any payment in
respect of the principal of or interest on the Subordinated Debentures.
In the event of the acceleration of the maturity of any Subordinated
Debentures, the holders of all Senior Debt, Subordinated Debt and Additional
Senior Obligations of the Company outstanding at the time of such acceleration
will first be entitled to receive payment in full of all amounts due thereon
(including any amounts due upon acceleration) before the holders of the
Subordinated Debentures will be entitled to receive or retain any payment in
respect of the principal of or interest on the Subordinated Debentures.
No payments on account of principal or interest in respect of the
Subordinated Debentures may be made if there has occurred and is continuing a
default in any payment with respect to Senior Debt, Subordinated Debt or
Additional Senior Obligations of the Company or an event of default with
respect to any Senior Debt, Subordinated
69
<PAGE> 73
Debt or Additional Senior Obligations of the Company resulting in the
acceleration of the maturity thereof, or if any judicial proceeding is pending
with respect to any such default.
"Debt" means, with respect to any Person, whether recourse is to all or a
portion of the assets of such Person and whether or not contingent, (i) every
obligation of such person for money borrowed, (ii) every obligation of such
Person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses, (iii) every reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person, (iv) every obligation of such Person issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business), (v) every capital lease obligation of such Person, and (vi) and
every obligation of the type referred to in clauses (i) through (v) of another
Person and all dividends of another Person the payment of which, in either
case, such Person has guaranteed or is responsible or liable, directly or
indirectly, as obligor or otherwise.
"Senior Debt" means, with respect to the Company, the principal of (and
premium, if any) and interest, if any (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization relating to the
Company whether or not such claim for post-petition interest is allowed in such
proceeding), on Debt, whether incurred on or prior to the date of the Indenture
or thereafter incurred, unless, in the instrument creating or evidencing the
same or pursuant to which the same is outstanding, it is provided that such
obligations are not superior in right of payment to the Subordinated Debentures
or to other Debt which is pari passu with, or subordinated to, the Subordinated
Debentures; provided, however, that Senior Debt will not be deemed to include
(i) any Debt of the Company which when incurred and without respect to any
election under section 1111(b) of the United States Bankruptcy Code of 1978, as
amended, was without recourse to the Company, (ii) any Debt of the Company to
any of its subsidiaries, (iii) any Debt to any employee of the Company, (iv)
any Debt which by its terms is subordinated to trade accounts payable or
accrued liabilities arising in the ordinary course of business to the extent
that payments made to the holders of such Debt by the holders of the
Subordinated Debentures as a result of the subordination provisions of the
Indenture would be greater than they otherwise would have been as a result of
any obligation of such holders to pay amounts over to the obligees on such
trade accounts payable or accrued liabilities arising in the ordinary course of
business as a result of subordination provisions to which such Debt is subject,
and (v) Debt which constitutes Subordinated Debt.
"Subordinated Debt" means, with respect to the Company, the principal of
(and premium, if any) and interest, if any (including interest accruing on or
after the filing of any petition in bankruptcy or for reorganization relating
to the Company whether or not such claim for post-petition interest is allowed
in such proceeding), on Debt, whether incurred on or prior to the date of the
Indenture or thereafter incurred, which is by its terms expressly provided to
be junior and subordinate to other Debt of the Company (other than the
Subordinated Debentures).
"Additional Senior Obligations" means, with respect to the Company, all
indebtedness, whether incurred on or prior to the date of the Indenture or
thereafter incurred, for claims in respect of derivative products such as
interest and foreign exchange rate contracts, commodity contracts and similar
arrangements; provided, however, that Additional Senior Obligations do not
include claims in respect of Senior Debt or Subordinated Debt or obligations
which, by their terms, are expressly stated to be not superior in right of
payment to the Subordinated Debentures or to rank pari passu in right of
payment with the Subordinated Debentures. "Claim," as used herein, has the
meaning assigned thereto in Section 101(4) of the United States Bankruptcy Code
of 1978, as amended.
The Indenture places no limitation on the amount of additional Senior Debt,
Subordinated Debt or Additional Senior Obligations that may be incurred by the
Company. The Company expects from time to time to incur additional indebtedness
constituting Senior Debt, Subordinated Debt and Additional Senior Obligations.
As of March 31, 1998, the Company had aggregate Senior Debt, Subordinated Debt
and Additional Senior Obligations of approximately $23.4 million. Because the
Company is a holding company, the Subordinated Debentures are effectively
subordinated to all existing and future liabilities of the Company
subsidiaries, including obligations to depositors of the Subsidiary Banks.
PAYMENT AND PAYING AGENTS
Payment of principal of and any interest on the Subordinated Debentures
will be made at the office of the Debenture Trustee in Boston, Massachusetts,
except that, at the option of the Company, payment of any interest may
70
<PAGE> 74
be made (i) by check mailed to the address of the Person entitled thereto as
such address appears in the register of holders of the Subordinated Debentures,
or (ii) by transfer to an account maintained by the Person entitled thereto as
specified in the register of holders of the Subordinated Debentures, provided
that proper transfer instructions have been received by the regular record
date. Payment of any interest on Subordinated Debentures will be made to the
Person in whose name such Subordinated Debenture is registered at the close of
business on the regular record date for such interest, except in the case of
defaulted interest. The Company may at any time designate additional paying
agents for the Subordinated Debentures or rescind the designation of any paying
agent for the Subordinated Debentures; however, the Company will at all times
be required to maintain a paying agent in each place of payment for the
Subordinated Debentures.
Any moneys deposited with the Debenture Trustee or any paying agent for the
Subordinated Debentures, or then held by the Company in trust, for the payment
of the principal of or interest on the Subordinated Debentures and remaining
unclaimed for two years after such principal or interest has become due and
payable will be repaid to the Company on May 31 of each year or (if then held
in trust by the Company) will be discharged from such trust, and the holder of
such Subordinated Debenture will thereafter look, as a general unsecured
creditor, only to the Company for payment thereof.
REGISTRAR AND TRANSFER AGENT
The Debenture Trustee will act as the registrar and the transfer agent for
the Subordinated Debentures. Subordinated Debentures may be presented for
registration of transfer (with the form of transfer endorsed thereon, or a
satisfactory written instrument of transfer, duly executed), at the office of
the registrar in Boston, Massachusetts. The Company may at any time rescind the
designation of any such transfer agent or approve a change in the location
through which any such transfer agent acts. The Company may at any time
designate additional transfer agents with respect to the Subordinated
Debentures. In the event of any redemption, neither the Company nor the
Debenture Trustee will be required to (i) issue, register the transfer of or
exchange Subordinated Debentures during a period beginning at the opening of
business 15 days before the day of selection for redemption of Subordinated
Debentures and ending at the close of business on the day of mailing of the
relevant notice of redemption, or (ii) transfer or exchange any Subordinated
Debentures so selected for redemption, except, in the case of any Subordinated
Debentures being redeemed in part, any portion thereof not to be redeemed.
MODIFICATION OF INDENTURE
The Company and the Debenture Trustee may, from time to time without the
consent of the holders of the Subordinated Debentures, amend, waive or
supplement the Indenture for specified purposes, including, among other things,
curing ambiguities, defects or inconsistencies and qualifying, or maintaining
the qualification of, the Indenture under the Trust Indenture Act. The
Indenture contains provisions permitting the Company and the Debenture Trustee,
with the consent of the holders of not less than a majority in principal amount
of the outstanding Subordinated Debentures, to modify the Indenture; provided,
that no such modification may, without the consent of the holder of each
outstanding Subordinated Debenture affected by such proposed modification, (i)
extend the fixed maturity of the Subordinated Debentures, or reduce the
principal amount thereof, or reduce the rate or extend the time of payment of
interest thereon, or (ii) reduce the percentage of principal amount of
Subordinated Debentures, the holders of which are required to consent to any
such modification of the Indenture; provided that so long as any of the
Preferred Securities remain outstanding, no such modification may be made that
requires the consent of the holders of the Subordinated Debentures, and no
termination of the Indenture may occur, and no waiver of any Debenture Event of
Default may be effective, without the prior consent of the holders of at least
a majority of the aggregate Liquidation Amount of the Preferred Securities and
that if the consent of the holder of each Subordinated Debenture is required,
such modification will not be effective until each holder of Trust Securities
has consented thereto.
71
<PAGE> 75
DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to the Subordinated Debentures that has occurred and is
continuing constitutes an event of default (each, a "Debenture Event of
Default") with respect to the Subordinated Debentures:
(i) failure for 30 days to pay any interest on the Subordinated
Debentures, when due (subject to the deferral of any due date in the case
of an Extension Period); or
(ii) failure to pay any principal on the Subordinated Debentures when
due whether at maturity, upon redemption by declaration or otherwise; or
(iii) failure to observe or perform in any material respect certain
other covenants contained in the Indenture for 90 days after written notice
to the Company from the Debenture Trustee or the holders of at least 25% in
aggregate outstanding principal amount of the Subordinated Debentures; or
(iv) certain events in bankruptcy, insolvency or reorganization of the
Company.
The holders of a majority in aggregate outstanding principal amount of the
Subordinated Debentures have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee.
The Debenture Trustee, or the holders of not less than 25% in aggregate
outstanding principal amount of the Subordinated Debentures, may declare the
principal due and payable immediately upon a Debenture Event of Default. The
holders of a majority in aggregate outstanding principal amount of the
Subordinated Debentures may annul such declaration and waive the default if the
default (other than the non-payment of the principal of the Subordinated
Debentures which has become due solely by such acceleration) has been cured and
a sum sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Debenture Trustee.
Should the holders of the Subordinated Debentures fail to annul such
declaration and waive such default, the holders of a majority in aggregate
Liquidation Amount of the Preferred Securities will have such right.
The Company is required to file annually with the Debenture Trustee a
certificate as to whether or not the Company is in compliance with all the
conditions and covenants applicable to it under the Indenture.
If a Debenture Event of Default has occurred and is continuing, the
Property Trustee will have the right to declare the principal of and the
interest on such Subordinated Debentures, and any other amounts payable under
the Indenture, to be forthwith due and payable and to enforce its other rights
as a creditor with respect to such Subordinated Debentures.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF THE PREFERRED SECURITIES
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay interest on or
principal of the Subordinated Debentures on the payment date on which such
payment is due and payable, then a holder of Preferred Securities may institute
a legal proceeding directly against the Company for enforcement of payment to
such holder of the principal of or interest on such Subordinated Debentures
having a principal amount equal to the aggregate Liquidation Amount of the
Preferred Securities of such holder (a "Direct Action"). In connection with
such Direct Action, the Company will have a right of set-off under the
Indenture to the extent of any payment made by the Company to such holder of
Preferred Securities in the Direct Action. The Company may not amend the
Indenture to remove the foregoing right to bring a Direct Action without the
prior written consent of the holders of all of the Preferred Securities. If the
right to bring a Direct Action is removed, the Trust may become subject to the
reporting obligations under the Exchange Act. The Company has the right under
the Indenture to set-off any payment made to such holder of Preferred
Securities by the Company in connection with a Direct Action.
The holders of the Preferred Securities will not be able to exercise
directly any remedies, other than those set forth in the preceding paragraph,
available to the holders of the Subordinated Debentures unless there has been
an Event of Default under the Trust Agreement. See "Description of the
Preferred Securities--Events of Default; Notice."
72
<PAGE> 76
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Company may not consolidate with or merge into any other Person or
convey or transfer its properties and assets substantially as an entirety to
any Person, and any Person may not consolidate with or merge into the Company
or sell, convey, transfer or otherwise dispose of its properties and assets
substantially as an entirety to the Company, unless (i) in the event the
Company consolidates with or merges into another Person or conveys or transfers
its properties and assets substantially as an entirety to any Person, the
successor Person is organized under the laws of the United States or any State
or the District of Columbia, and such successor Person expressly assumes by
supplemental indenture the Company's obligations on the Subordinated
Debentures, (ii) immediately after giving effect thereto, no Debenture Event of
Default, and no event which, after notice or lapse of time or both, would
become a Debenture Event of Default, has occurred and is continuing, and (iii)
certain other conditions as prescribed in the Indenture are met.
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect (except as to the
Company's obligations to pay certain sums due pursuant to the Indenture and to
provide certain officers' certificates and opinions of counsel described
therein) and the Company will be deemed to have satisfied and discharged the
Indenture when, among other things, all Subordinated Debentures not previously
delivered to the Debenture Trustee for cancellation (i) have become due and
payable, or (ii) will become due and payable at their Stated Maturity within
one year or are to be called for redemption within one year, and the Company
deposits or causes to be deposited with the Debenture Trustee funds, in trust,
for the purpose and in an amount sufficient to pay and discharge the entire
indebtedness on the Subordinated Debentures not previously delivered to the
Debenture Trustee for cancellation, for the principal and interest to the date
of the deposit or to the Stated Maturity or redemption date, as the case may
be.
GOVERNING LAW
The Indenture and the Subordinated Debentures will be governed by and
construed in accordance with the laws of the State of Delaware.
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
The Debenture Trustee has and is subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Debenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of Subordinated Debentures, unless offered reasonable
indemnity by such holder against the costs, expenses and liabilities which
might be incurred thereby. The Debenture Trustee is not required to expend or
risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Debenture Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
MISCELLANEOUS
The Company has agreed, pursuant to the Indenture, for so long as Trust
Securities remain outstanding, (i) to maintain directly or indirectly 100%
ownership of the Common Securities of the Trust (provided that certain
successors which are permitted pursuant to the Indenture may succeed to the
Company's ownership of the Common Securities), (ii) not to voluntarily
terminate, wind up or liquidate the Trust, except upon prior approval of the
Federal Reserve if then so required under applicable capital guidelines or
policies of the Federal Reserve, and (a) in connection with a distribution of
Subordinated Debentures to the holders of the Preferred Securities in
liquidation of the Trust, or (b) in connection with certain mergers,
consolidations or amalgamations permitted by the Trust Agreement, and (iii) to
use its reasonable efforts, consistent with the terms and provisions of the
Trust Agreement, to cause the Trust to remain classified as a grantor trust and
not as an association taxable as a corporation for United States federal income
tax purposes.
73
<PAGE> 77
DESCRIPTION OF THE GUARANTEE
The Preferred Securities Guarantee Agreement (the "Guarantee") will be
executed and delivered by the Company concurrently with the issuance of the
Preferred Securities for the benefit of the holders of the Preferred
Securities. The Guarantee will be qualified as an indenture under the Trust
Indenture Act. The Guarantee Trustee will act as indenture trustee under the
Guarantee for purposes of complying with the provisions of the Trust Indenture
Act. The Guarantee Trustee, State Street Bank and Trust Company, will hold the
Guarantee for the benefit of the holders of the Preferred Securities. The
following summary of the material terms and provisions of the Guarantee does
not purport to be complete and is subject to, and qualified in its entirety by
reference to, all of the provisions of the Guarantee and the Trust Indenture
Act. Wherever particular defined terms of the Guarantee are referred to, but
not defined herein, such defined terms are incorporated herein by reference.
The form of the Guarantee has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part.
GENERAL
The Company will, pursuant to the Guarantee, irrevocably agree to pay in
full on a subordinated basis, to the extent set forth therein, the Guarantee
Payments (as defined below) to the holders of the Preferred Securities, as and
when due, regardless of any defense, right of set-off or counterclaim that the
Trust may have or assert other than the defense of payment; provided, however,
that only when the Guarantee is taken together with the obligations of the
Company under the Trust Agreement, the Subordinated Debentures, the Indenture
and the Expense Agreement do the Company and the Trust believe that the
Company's guarantee of the obligations of the Trust under the Preferred
Securities constitute a full and unconditional guarantee. The following
payments with respect to the Preferred Securities, to the extent not paid by or
on behalf of the Trust (the "Guarantee Payments"), will be subject to the
Guarantee: (i) any accrued and unpaid Distributions required to be paid on the
Preferred Securities, to the extent that the Trust has funds available therefor
at such time, (ii) the Redemption Price with respect to any Preferred
Securities called for redemption to the extent that the Trust has funds
available therefor at such time, and (iii) upon a voluntary or involuntary
dissolution, winding up or liquidation of the Trust (other than in connection
with the distribution of Subordinated Debentures to the holders of Preferred
Securities or a redemption of all of the Preferred Securities), the lesser of
(a) the amount of the Liquidation Distribution, to the extent the Trust has
funds available therefor at such time, and (b) the amount of assets of the
Trust remaining available for distribution to holders of Preferred Securities
in liquidation of the Trust. The obligation of the Company to make a Guarantee
Payment may be satisfied by direct payment of the required amounts by the
Company to the holders of the Preferred Securities or by causing the Trust to
pay such amounts to such holders.
The Guarantee will not apply to any payment of Distributions except to the
extent the Trust has funds available therefor. If the Company does not make
interest payments on the Subordinated Debentures held by the Trust, the Trust
will not pay Distributions on the Preferred Securities and will not have funds
legally available therefor.
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of the Company and
will rank subordinate and junior in right of payment to all Senior Debt,
Subordinated Debt and Additional Senior Obligations of the Company in the same
manner as the Subordinated Debentures. The Guarantee does not place a
limitation on the amount of additional Senior Debt, Subordinated Debt or
Additional Senior Obligations that may be incurred by the Company. The Company
expects from time to time to incur additional indebtedness constituting Senior
Debt, Subordinated Debt and Additional Senior Obligations.
The Guarantee will constitute a guarantee of payment and not of collection
(that is, the guaranteed party may institute a legal proceeding directly
against the Company to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other Person). The Guarantee will
not be discharged except by payment of the Guarantee Payments in full to the
extent not paid by the Trust or upon distribution of the Subordinated
Debentures to the holders of the Preferred Securities. Because the Company is a
holding company, the right of the Company to participate in any distribution of
assets of any Subsidiary Bank upon such Subsidiary Bank's liquidation or
reorganization or otherwise is subject to the prior claims of creditors of that
Subsidiary Bank, except to the extent the Company may itself be recognized as a
creditor of that Subsidiary Bank. The Company's obligations under the
74
<PAGE> 78
Guarantee, therefore, will be effectively subordinated to all existing and
future liabilities of the Company subsidiaries, and claimants should look only
to the assets of the Company for payments thereunder.
VOTING RIGHTS; AMENDMENTS AND ASSIGNMENT
The affirmative consent of the holders of at least 66 2/3% of the
outstanding Preferred Securities will be required by the Trust for amendments
to the Guarantee that would adversely affect the rights or privileges of the
holders of the Preferred Securities. No vote of the holders of Preferred
Securities will be required with respect to any amendments to the Guarantee
which do not adversely affect the rights or privileges of such holders. See
"Description of the Preferred Securities--Voting Rights; Amendment of Trust
Agreement." All guarantees and agreements contained in the Guarantee will bind
the successors, assigns, receivers, trustees and representatives of the Company
and will inure to the benefit of the holders of the Preferred Securities then
outstanding.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of the
Company to perform any of its payment or other obligations thereunder. The
holders of not less than a majority in aggregate Liquidation Amount of the
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of the Guarantee or to direct the exercise of any trust or power
conferred upon the Guarantee Trustee under the Guarantee.
Any holder of Preferred Securities may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Trust, the Guarantee Trustee
or any other Person.
The Company, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not the Company is in compliance with
all the conditions and covenants applicable to it under the Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance of
a default by the Company in performance of the Guarantee, undertakes to perform
only such duties as are specifically set forth in the Guarantee and, after
default with respect to the Guarantee, must exercise the same degree of care
and skill as a prudent person would exercise or use in the conduct of his or
her own affairs. Subject to such provisions, the Guarantee Trustee is under no
obligation to exercise any of the powers vested in it by the Guarantee at the
request of any holder of any Preferred Securities, unless it is offered
reasonable indemnity against the costs, expenses and liabilities that might be
incurred thereby.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect upon (a)
full payment of the Redemption Price of the Preferred Securities, (b) full
payment of the amounts payable upon liquidation of the Trust, or (c)
distribution of the Subordinated Debentures to the holders of the Preferred
Securities. The Guarantee will continue to be effective or will be reinstated,
as the case may be, if at any time any holder of the Preferred Securities must
restore payment of any sums paid under such Preferred Securities or the
Guarantee.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the laws
of the State of Delaware.
EXPENSE AGREEMENT
The Company will, pursuant to the Agreement as to Expenses and Liabilities
entered into by it under the Trust Agreement (the "Expense Agreement"),
irrevocably and unconditionally guarantee to each person or entity to whom the
Trust becomes indebted or liable, the full payment of any costs, expenses or
liabilities of the Trust, other than obligations of the Trust to pay to the
holders of the Preferred Securities or other similar interests in the Trust of
the amounts due such holders pursuant to the terms of the Preferred Securities
or such other similar interests, as the
75
<PAGE> 79
case may be. Third party creditors of the Trust may proceed directly against
the Company under the Expense Agreement, regardless of whether such creditors
had notice of the Expense Agreement.
RELATIONSHIP AMONG THE PREFERRED SECURITIES,
THE SUBORDINATED DEBENTURES AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the Preferred Securities
(to the extent the Trust has funds available for the payment of such
Distributions) are irrevocably guaranteed by the Company as and to the extent
set forth under "Description of the Guarantee." The Company and the Trust
believe that, taken together, the obligations of the Company under the
Subordinated Debentures, the Indenture, the Trust Agreement, the Expense
Agreement, and the Guarantee provide, in the aggregate, a full, irrevocable and
unconditional guarantee, on a subordinated basis, of payment of Distributions
and other amounts due on the Preferred Securities. No single document standing
alone or operating in conjunction with fewer than all of the other documents
constitutes such guarantee. It is only the combined operation of these
documents that has the effect of providing a full, irrevocable and
unconditional guarantee of the obligations of the Trust under the Preferred
Securities. If and to the extent that the Company does not make payments on the
Subordinated Debentures, the Trust will not pay Distributions or other amounts
due on the Preferred Securities. The Guarantee does not cover payment of
Distributions when the Trust does not have sufficient funds to pay such
Distributions. In such event, the remedy of a holder of Preferred Securities is
to institute a legal proceeding directly against the Company for enforcement of
payment of such Distributions to such holder. The obligations of the Company
under the Guarantee are subordinate and junior in right of payment to all
Senior Debt, Subordinated Debt and Additional Senior Obligations of the
Company.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on the
Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the Preferred Securities, primarily
because (i) the aggregate principal amount of the Subordinated Debentures will
be equal to the sum of the aggregate stated Liquidation Amount of the Trust
Securities, (ii) the interest rate and interest and other payment dates on the
Subordinated Debentures will match the Distribution rate and Distribution and
other payment dates for the Preferred Securities, (iii) the Company will pay
for all and any costs, expenses and liabilities of the Trust (except the
obligations of the Trust to holders of the Preferred Securities), and (iv) the
Trust Agreement further provides that the Trust will not engage in any activity
that is not consistent with the limited purposes of the Trust.
ENFORCEMENT RIGHTS OF HOLDERS OF PREFERRED SECURITIES
A holder of any Preferred Security may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Guarantee Trustee, the Trust
or any other Person. A default or event of default under any Senior Debt,
Subordinated Debt or Additional Senior Obligations of the Company would not
constitute a default or Event of Default. In the event, however, of payment
defaults under, or acceleration of, Senior Debt, Subordinated Debt or
Additional Senior Obligations of the Company, the subordination provisions of
the Indenture provide that no payments may be made in respect of the
Subordinated Debentures until such Senior Debt, Subordinated Debt or Additional
Senior Obligations has been paid in full or any payment default thereunder has
been cured or waived. Failure to make required payments on the Subordinated
Debentures would constitute an Event of Default.
LIMITED PURPOSE OF THE TRUST
The Preferred Securities evidence a preferred undivided beneficial interest
in the assets of the Trust. The Trust exists for the exclusive purposes of (i)
issuing the Trust Securities representing undivided beneficial interests in the
assets of the Trust, (ii) investing the gross proceeds of the Trust Securities
in the Subordinated Debentures issued by the Company, and (iii) engaging in
only those other activities necessary, advisable, or incidental thereto. A
principal
76
<PAGE> 80
difference between the rights of a holder of a Preferred Security and the
rights of a holder of a Subordinated Debenture is that a holder of a
Subordinated Debenture is entitled to receive from the Company the principal
amount of and interest accrued on Subordinated Debentures held, while a holder
of Preferred Securities is entitled to receive Distributions from the Trust (or
from the Company under the Guarantee) if and to the extent the Trust has funds
available for the payment of such Distributions.
RIGHTS UPON TERMINATION
Upon any voluntary or involuntary termination, winding-up or liquidation of
the Trust involving the liquidation of the Subordinated Debentures, the holders
of the Preferred Securities will be entitled to receive, out of assets held by
the Trust, the Liquidation Distribution in cash. See "Description of the
Preferred Securities--Liquidation Distribution Upon Termination." Upon any
voluntary or involuntary liquidation or bankruptcy of the Company, the Property
Trustee, as holder of the Subordinated Debentures, would be a subordinated
creditor of the Company, subordinated in right of payment to all Senior Debt,
Subordinated Debt and Additional Senior Obligations of the Company (as set
forth in the Indenture), but entitled to receive payment in full of principal
and interest before any shareholders of the Company receive payments or
distributions. Since the Company is the guarantor under the Guarantee and has
agreed to pay for all costs, expenses and liabilities of the Trust (other than
the obligations of the Trust to the holders of its Preferred Securities), the
positions of a holder of the Preferred Securities and a holder of the
Subordinated Debentures relative to other creditors and to shareholders of the
Company in the event of liquidation or bankruptcy of the Company are expected
to be substantially the same.
77
<PAGE> 81
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a summary of the material United States federal income tax
consequences to purchasers of the Preferred Securities and, insofar as it
relates to matters of law and legal conclusions, reflects the opinion of
Jackson Walker L.L.P., counsel to the Company. This summary is based upon
current provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury regulations issued thereunder and current administrative
rulings and court decisions, all of which are subject to change at any time,
with possible retroactive effect. Subsequent changes may cause the federal
income tax consequences to vary substantially from the consequences described
below. Furthermore, the authorities on which the following summary is based are
subject to various interpretations, and it is therefore possible that the
United States federal income tax treatment of the purchase, ownership, and
disposition of the Preferred Securities may differ from the treatment described
below.
No attempt has been made in the following summary to comment on all United
States federal income tax matters affecting purchasers of the Preferred
Securities. Moreover, this summary generally focuses on holders of the
Preferred Securities who are individual citizens or residents of the United
States, corporations and partnerships created or organized in or under the laws
of the United States or any political subdivision thereof, an estate, the
income of which is includible in its gross income for United States federal
income tax purposes without regard to its source, or a trust if a court within
the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust ("U.S. Holders"),
and who acquire the Preferred Securities on their original issue at their
offering price and hold the Preferred Securities as capital assets. This
summary has only limited application to dealers in securities, corporations,
estates, trusts or nonresident aliens and does not address all the federal
income tax consequences that may be relevant to holders who may be subject to
special tax treatment, such as, for example, banks, thrifts, real estate
investment trusts, regulated investment companies, insurance companies, dealers
in securities or currencies, tax-exempt investors, or persons that will hold
the Preferred Securities as a position in a "straddle," as part of a
"synthetic security" or "hedge," as part of a "conversion transaction" or
other integrated investment, or as other than a capital asset. This summary
also does not address the tax consequences to persons that have a functional
currency other than the U.S. dollar or the tax consequences to shareholders,
partners or beneficiaries of a holder of the Preferred Securities. Further, it
does not include any description of any alternative minimum tax consequences or
the tax laws of any state or local government or of any foreign government that
may be applicable to the Preferred Securities. Accordingly, each prospective
investor should consult, and should rely exclusively on, the investor's own tax
advisors in analyzing the federal, state, local and foreign tax consequences of
the purchase, ownership or disposition of the Preferred Securities.
CLASSIFICATION OF THE SUBORDINATED DEBENTURES
The Company intends to take the position that the Subordinated Debentures
will be classified for United States federal income tax purposes as
indebtedness of the Company under current law, and, by acceptance of a
Preferred Security, each holder covenants to treat the Subordinated Debentures
as indebtedness and the Preferred Securities as evidence of an indirect
beneficial ownership interest in the Subordinated Debentures. The determination
for United States federal income tax purposes of whether an instrument is to be
classified as indebtedness or equity of the issuer is highly factual and the
controlling authorities are subject to varying interpretations. Therefore, no
assurance can be given that the Company's position and a holder's agreed
treatment will not be challenged by the Internal Revenue Service or, if
challenged, that such a challenge will not be successful. The Company is aware
of at least one case, currently pending in the United States Tax Court, in
which the Internal Revenue Service is challenging the issuer's classification
as indebtedness of certain instruments with features similar to but not the
same as those of the Subordinated Debentures. If the Subordinated Debentures
were determined to constitute equity rather than indebtedness of the Company,
the Company would not be entitled to deduct the stated interest payments
thereon and a Tax Event would occur. The remainder of this summary assumes that
the Subordinated Debentures will be classified for United States federal income
tax purposes as indebtedness of the Company.
78
<PAGE> 82
CLASSIFICATION OF THE TRUST
Under current law and assuming full compliance with the terms of the Trust
Agreement and Indenture (and certain other documents described herein), the
Trust will be classified for United States federal income tax purposes as a
grantor trust and not as an association taxable as a corporation. Accordingly,
for United States federal income tax purposes, each holder of the Preferred
Securities generally will be treated as owning an undivided beneficial interest
in the Subordinated Debentures, and upon the occurrence of an Extension Period
each holder will be required to include in its gross income any accrued OID
with respect to its allocable share of the Subordinated Debentures whether or
not cash is actually distributed to such holder.
POTENTIAL EXTENSION OF INTEREST PAYMENT PERIOD AND ORIGINAL ISSUE DISCOUNT
Pursuant to current Treasury regulations (the "Regulations"), a debt
instrument will be deemed to be issued with OID if there is more than a
"remote" contingency that periodic stated interest payments due on the
instrument will not be timely paid. Because the exercise by the Company of its
option to defer the payment of stated interest on the Subordinated Debentures
would prevent the Company from declaring dividends on any class of equity and
would prevent the Company from making any payments with respect to debt
securities that rank pari passu or junior to the Subordinated Debentures, the
Company believes that the likelihood of its exercising the option is "remote"
within the meaning of the Regulations. As a result, the Company intends to take
the position that the Subordinated Debentures will not be deemed to be issued
with OID. Accordingly, based on this position, stated interest payments on the
Subordinated Debentures will be includible in the ordinary income of a holder
at the time that such payments are paid or accrued in accordance with the
holder's regular method of accounting. Because the Regulations have not yet
been addressed in any published rulings or other published interpretations
issued by the Internal Revenue Service, it is possible that the Internal
Revenue Service could take a position contrary to the position taken by the
Company.
If the Company were to exercise its option to defer the payment of stated
interest on the Subordinated Debentures, the Subordinated Debentures would be
treated, solely for purposes of the OID rules, as being "reissued" at such
time with OID. The amount of interest income includible in the taxable income
of a holder of the Subordinated Debentures would be determined on the basis of
a constant yield method over the remaining term of the instrument regardless of
the holder's method of tax accounting, and the actual receipt of future
payments of stated interest on the Subordinated Debentures would no longer be
separately reported as taxable income. Consequently, a holder of the Preferred
Securities would be required to include OID in ordinary income, on a current
basis, over the period that the instrument is held even though the Company
would not be making any actual cash payments during the Extension Period. The
amount of OID that would accrue, in the aggregate, during the Extension Period
would be approximately equal to the amount of the cash payment due at the end
of such period.
If the Company's option to defer interest payments is not treated as
"remote," the Subordinated Debentures would be treated as originally issued
with OID in an amount equal to the aggregate stated interest payable over the
term of the Subordinated Debentures. That OID generally would be included in a
holder's gross income over such term on an economic accrual basis, regardless
of the holder's regular method of accounting.
Because income on the Preferred Securities will constitute interest income
for United States federal income tax purposes, corporate holders of the
Preferred Securities will not be entitled to claim a dividends received
deduction in respect of such income.
MARKET DISCOUNT AND ACQUISITION PREMIUM
Holders of the Preferred Securities other than a holder who purchased the
Preferred Securities upon original issuance may be considered to have acquired
their undivided interests in the Subordinated Debentures with "market
discount" or "acquisition premium" as such phrases are defined for United
States federal income tax purposes. Such holders are advised to consult their
tax advisors as to the income tax consequences of the acquisition, ownership
and disposition of the Preferred Securities.
79
<PAGE> 83
RECEIPT OF SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF THE TRUST
Under certain circumstances, as described under "Description of the
Preferred Securities--Redemption" and "--Liquidation Distribution Upon
Termination," the Subordinated Debentures may be distributed to holders of the
Preferred Securities upon a liquidation of the Trust. Under current United
States federal income tax law, such a distribution would be treated as a
nontaxable event to each such holder and would result in such holder having an
adjusted tax basis in the Subordinated Debentures received in the liquidation
equal to such holder's adjusted tax basis in the Preferred Securities
immediately before the distribution. A holder's holding period in the
Subordinated Debentures so received in liquidation of the Trust would include
the period for which such holder held the Preferred Securities.
If, however, a Tax Event were to occur which resulted in the Trust being
treated as an association taxable as a corporation, the distribution would
likely constitute a taxable event to holders of the Preferred Securities. Under
certain circumstances described herein, the Subordinated Debentures may be
redeemed for cash and the proceeds of such redemption distributed to holders in
redemption of their Preferred Securities. Under current law, such a redemption
would, for United States federal income tax purposes, constitute a taxable
disposition of the redeemed Preferred Securities, and a holder would recognize
gain or loss as if the holder sold such Preferred Securities for cash. See
"Description of the Preferred Securities--Redemption" and "--Liquidation
Distribution Upon Termination."
DISPOSITION OF PREFERRED SECURITIES
Upon the sale of the Preferred Securities, a holder will recognize a gain
or loss in an amount equal to the difference between its adjusted tax basis in
the Preferred Securities and the amount realized in the sale (except to the
extent of any amount received in respect of accrued but unpaid interest not
previously included in income). A holder's adjusted tax basis in the Preferred
Securities generally will be its initial purchase price increased by OID (if
any) previously includible in the holder's gross income to the date of
disposition and decreased by payments (if any) received on the Preferred
Securities in respect of OID to the date of disposition. Such gain or loss
generally will be a capital gain or loss. In the case of non-corporate
taxpayers, the tax rates applicable to capital gains from the disposition of
Preferred Securities generally will vary depending upon whether, at the time of
disposition, the Preferred Securities have been held for more than 12 months or
more than 18 months. Pending legislation, if enacted, will eliminate the
18-month holding period effective for taxable years ending after December 31,
1997.
The Preferred Securities may trade at a price that does not accurately
reflect the value of accrued but unpaid interest (or OID if the Subordinated
Debentures are treated as having been issued, or reissued, with OID) with
respect to the underlying Subordinated Debentures. A holder who disposes of its
Preferred Securities between record dates for payments of distributions thereon
will be required to include in ordinary income (i) any portion of the amount
realized that is attributable to such accrued but unpaid interest to the extent
not previously included in income, or (ii) any amount of OID, in either case,
that has accrued on its pro rata share of the underlying Subordinated
Debentures during the taxable year of sale through the date of disposition. Any
such income inclusion will increase the holder's adjusted tax basis in its
Preferred Securities disposed of. To the extent that the amount realized in the
sale is less than the holder's adjusted tax basis, a holder will recognize a
capital loss. Subject to certain limited exceptions applicable to non-corporate
taxpayers, capital losses cannot be applied to offset ordinary income for
United States federal income tax purposes.
EFFECT OF CHANGES IN TAX LAWS
Certain legislative proposals were made in 1996 and 1997 that, if enacted,
could have adversely affected the ability of the Company to deduct interest
paid on the Subordinated Debentures. These proposals were not, however,
incorporated into the legislation enacted on August 5, 1997 as the Taxpayer
Relief Act of 1997. Nevertheless, there can be no assurance that other
legislation enacted after the date hereof will not otherwise adversely affect
the ability of the Company to deduct the interest payable on the Subordinated
Debentures. Consequently, there can be no assurance that a Tax Event will not
occur. A Tax Event would permit the Company, upon approval of the Federal
Reserve if then required under applicable capital guidelines or policies of the
Federal Reserve, to cause a redemption of the Preferred Securities before, as
well as after, June 30, 2003. See "Risk Factors--Risk Factors Relating to the
Preferred Securities--Tax Event, Capital Treatment Event or Investment Company
Event; Redemption."
80
<PAGE> 84
BACKUP WITHHOLDING AND INFORMATION REPORTING
Interest paid on the Subordinated Debentures, or the amount of OID accrued
on the Subordinated Debentures, if applicable, held of record by individual
citizens or residents of the United States, or certain trusts, estates, and
partnerships, will be reported to the Internal Revenue Service on Forms 1099,
which forms should be mailed to such holders of the Preferred Securities by
January 31 following each calendar year. Payments made on, and proceeds from
the sale of, the Preferred Securities may be subject to a "backup"
withholding tax (currently at 31%) unless the holder complies with certain
identification and other requirements. Any amounts withheld under the backup
withholding rules generally will be allowed as a credit against the holder's
United States federal income tax liability, provided the required information
is timely provided to the Internal Revenue Service.
THE UNITED STATES FEDERAL INCOME TAX SUMMARY SET FORTH ABOVE IS INCLUDED
FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON THE
PARTICULAR SITUATION OF A HOLDER OF THE PREFERRED SECURITIES. HOLDERS OF THE
PREFERRED SECURITIES SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE
PREFERRED SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES
FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Employee benefit plans that are subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Code
("Plans"), generally may purchase Preferred Securities, subject to the
investing fiduciary's determination that the investment in Preferred Securities
satisfies ERISA's fiduciary standards and other requirements applicable to
investments by the Plan.
In any case, the Company and/or any of its affiliates may be considered a
"party in interest" (within the meaning of ERISA) or a "disqualified
person" (within the meaning of Section 4975 of the Code) with respect to
certain plans (generally, Plans maintained or sponsored by, or contributed to
by, any such persons with respect to which the Company or an affiliate is a
fiduciary or Plans for which the Company or an affiliate provides services).
The acquisition and ownership of Preferred Securities by a Plan (or by an
individual retirement arrangement or other Plans described in Section
4975(e)(1) of the Code) with respect to which the Company or any of its
affiliates is considered a party in interest or a disqualified person may
constitute or result in a prohibited transaction under ERISA or Section 4975 of
the Code, unless such Preferred Securities are acquired pursuant to and in
accordance with an applicable exemption.
As a result, Plans with respect to which the Company or any of its
affiliates is a party in interest or a disqualified person should not acquire
Preferred Securities unless such Preferred Securities are acquired pursuant to
and in accordance with an applicable exemption. Any other Plans or other
entities whose assets include Plan assets subject to ERISA or Section 4975 of
the Code proposing to acquire Preferred Securities should consult with their
own counsel.
81
<PAGE> 85
UNDERWRITING
The Underwriters named below, represented by Stifel, Nicolaus & Company,
Incorporated and Hoefer & Arnett, Inc. (collectively, the "Representatives"),
have severally agreed, subject to the terms and conditions set forth in the
Underwriting Agreement, the form of which is filed as an exhibit to the
Registration Statement of which this Prospectus forms a part, to purchase from
the Trust the number of Preferred Securities set forth opposite their
respective names below. The several Underwriters have agreed in the
Underwriting Agreement, subject to the terms and conditions set forth therein,
to purchase all the Preferred Securities offered hereby if any of the Preferred
Securities are purchased. In the event of default by an Underwriter, the
Underwriting Agreement provides that, in certain circumstances, purchase
commitments of the nondefaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Stifel, Nicolaus & Company, Incorporated............................................................ 1,400,000
Hoefer & Arnett, Inc................................................................................ 200,000
---------
1,600,000
=========
</TABLE>
The Representatives have advised the Trust that they propose initially to
offer the Preferred Securities to the public at the public offering price set
forth on the cover page of this Prospectus, and to certain dealers at such
price less a concession not in excess of $0.50 per Preferred Security. The
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $0.10 per Preferred Security to certain other dealers. After the initial
public offering, the public offering price, concession and discount may be
changed. Because the National Association of Securities Dealers, Inc.
("NASD") is expected to view the Preferred Securities as interests in a
direct participation program, the offering of the Preferred Securities is being
made in compliance with the applicable provisions of Rule 2810 of the NASD's
Conduct Rules.
In view of the fact that the proceeds of the sale of the Preferred
Securities will be used to purchase the Subordinated Debentures of the Company,
the Underwriting Agreement provides that the Company will pay as compensation
to the Underwriters for arranging the investment therein of such proceeds, an
amount in immediately available funds of $0.9375 per Preferred Security (or
$1,500,000 in the aggregate) for the accounts of the several Underwriters.
The Trust has granted the Underwriters an option to purchase up to an
additional 240,000 Preferred Securities at the initial public offering price.
Such option, which expires 30 days from the date of this Prospectus, may be
exercised solely to cover over-allotments. To the extent that the Underwriters
exercise such option, each of the Underwriters will have a firm commitment,
subject to certain conditions, to purchase approximately the same percentage of
the additional Preferred Securities that the number of Preferred Securities to
be purchased initially by the Underwriter is of the 1,600,000 Preferred
Securities initially purchased by the Underwriters.
To the extent that the Underwriters exercise their option to purchase
additional Preferred Securities, the Trust will issue and sell to the Company
additional Common Securities in an aggregate Liquidation Amount equal to at
least 3% of the total capital of the Trust, and the Company will issue and sell
to the Trust Subordinated Debentures in an aggregate principal amount equal to
the aggregate Liquidation Amount of the additional Preferred Securities being
purchased pursuant to the option.
Although the Preferred Securities have been approved for listing on the New
York Stock Exchange, no assurances can be made as to the liquidity of such
Preferred Securities or that an active and liquid trading market will develop
or, if developed, that it will continue. The offering price and distribution
rate have been determined by negotiations among representatives of the Company
and the Underwriters, and the offering price of the Preferred Securities may not
be indicative of the market price following the offering.
The Trust and the Company have agreed to indemnify the Underwriters
against, or contribute to payments that the Underwriters may be required to
make in respect of, certain liabilities, including liabilities under the
Securities Act.
Certain of the Underwriters engage in transactions with, and, from time to
time, have performed services for, the Company and its subsidiaries and
affiliates in the ordinary course of business.
82
<PAGE> 86
In connection with the offering of the Preferred Securities, the
Underwriters and any selling group members and their respective affiliates may
engage in transactions effected in accordance with Rule 104 of the Securities
and Exchange Commission's Regulation M that are intended to stabilize, maintain
or otherwise affect the market price of the Preferred Securities. Such
transactions may include over-allotment transactions in which an Underwriter
creates a short position for its own account by selling more Preferred
Securities than it is committed to purchase from the Trust. In such case, to
cover all or part of the short position, the Underwriters may exercise the
over-allotment option described above or may purchase Preferred Securities in
the open market following completion of the initial offering of the Preferred
Securities. The Underwriters also may engage in stabilizing transactions in
which they bid for, and purchase, Preferred Securities at a level above that
which might otherwise prevail in the open market for the purpose of preventing
or retarding a decline in the market price of the Preferred Securities. The
Underwriters also may reclaim any selling concessions allowed to a dealer if
the Underwriters repurchase Preferred Securities distributed by that dealer.
Any of the foregoing transactions may result in the maintenance of a price for
the Preferred Securities at a level above that which might otherwise prevail in
the open market. Neither the Company nor any Underwriter makes any
representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of the Preferred
Securities. The Underwriters are not required to engage in any of the foregoing
transactions and, if commenced, such transactions may be discontinued at any
time without notice.
VALIDITY OF SECURITIES
Certain matters of Delaware law relating to the validity of the Preferred
Securities, the enforceability of the Trust Agreement and the formation of the
Trust will be passed upon by Richards, Layton & Finger, special Delaware
counsel to the Company and the Trust. Certain legal matters for the Company and
the Trust, including the validity of the Guarantee and the Subordinated
Debentures, will be passed upon for the Company and the Trust by Jackson Walker
L.L.P., Dallas, Texas, counsel to the Company and the Trust. Certain legal
matters will be passed upon for the Underwriters by Bryan Cave LLP, St. Louis,
Missouri. Counsel for the Company, the Trust and the Underwriters will rely on
the opinion of Richards, Layton & Finger as to matters of Delaware law. Certain
matters relating to United States federal income tax considerations will be
passed upon for the Company by Jackson Walker L.L.P.
EXPERTS
The consolidated financial statements of FBA and FCB are included in this
Prospectus in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, for the periods indicated in their reports
thereon which appear elsewhere herein and upon authority of said firm as
experts in accounting and auditing.
The consolidated financial statements of Redwood are included in this
Prospectus in reliance upon the report of Coopers & Lybrand, L.L.P.,
independent certified public accountants, for the periods indicated in their
reports thereon which appear elsewhere herein and upon authority of said firm
as experts in accounting and auditing.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's annual report on Form 10-K for the year ended December 31,
1997 and its quarterly report on Form 10-Q for the quarter ended March 31, 1998
which have been filed by the Company with the Commission (File No. 0-8937) are
incorporated herein by reference.
Any statement contained in a document incorporated hereby reference shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM THIS
PROSPECTUS IS DELIVERED, ON THE WRITTEN OR ORAL REQUEST OF ANY SUCH PERSON, A
COPY OF ANY OR ALL OF THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE (OTHER
THAN EXHIBITS TO SUCH DOCUMENTS WHICH ARE NOT SPECIFICALLY INCORPORATED BY
REFERENCE IN SUCH DOCUMENTS). WRITTEN REQUESTS FOR SUCH COPIES SHOULD BE
DIRECTED TO ALLEN H. BLAKE, VICE PRESIDENT AND CHIEF FINANCIAL OFFICER,
FIRST BANKS AMERICA, INC., 11901 OLIVE BOULEVARD, CREVE COEUR, MISSOURI 63141.
TELEPHONE REQUESTS MAY BE DIRECTED TO (314) 995-8700.
83
<PAGE> 87
AVAILABLE INFORMATION
This Prospectus constitutes a part of a Registration Statement on Form S-2
(together with all amendments and exhibits thereto, the "Registration
Statement") filed by the Company and the Trust with the Securities and
Exchange Commission (the "Commission") under the Securities Act, with respect
to the Preferred Securities, the Subordinated Debentures and the Guarantee.
This Prospectus does not contain all of the information set forth in such
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission, although it does include a summary
of the material terms of the Trust Agreement, the Indenture and the Guarantee.
Reference is made to such Registration Statement and to the exhibits relating
thereto for further information with respect to the Company, the Trust, the
Preferred Securities, the Subordinated Debentures and the Guarantee. Any
statements contained herein concerning the provisions of any document filed as
an exhibit to the Registration Statement or otherwise filed with the Commission
or incorporated by reference herein are not necessarily complete, and, in each
instance, reference is made to the copy of such document so filed for a more
complete description of the matter involved. Each such statement is qualified
in its entirety by such reference.
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports, proxy statements and other
information with the Commission. The Trust is not currently subject to the
information reporting requirements of the Exchange Act and, although the Trust
will become subject to such requirements upon the effectiveness of the
Registration Statement, the Trust intends to seek and expects to receive an
exemption therefrom. Accordingly, it is not expected that the Trust will be
filing separate reports under the Exchange Act. The Company's reports, proxy
statements and other information can be inspected and copied at the following
public reference facilities maintained by the Commission: 450 Fifth Street,
N.W., Washington, D.C. 20549; 7 World Trade Center, Suite 1300, New York, New
York 10048; and the Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material may also be obtained by
mail from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, at prescribed rates. The Commission
maintains an Internet web site that contains reports, proxy and information
statements and other information regarding issuers who file electronically with
the Commission. The address of that site is http://www.sec.gov.
No separate financial statements of the Trust have been included herein.
The Company does not consider that such financial statements would be material
to holders of Preferred Securities because (i) all of the voting securities of
the Trust will be owned by the Company, a reporting company under the Exchange
Act; (ii) the Trust has no independent operations but exists solely for the
sole purpose of issuing securities representing undivided beneficial interests
in the assets of the Trust and investing the proceeds thereof in Subordinated
Debentures issued by the Company, and (iii) the obligations of the Company
described herein to provide certain indemnities in respect of and be
responsible for certain costs, expenses, debts and liabilities of the Trust
under the Indenture and pursuant to the Trust Agreement, the guarantee issued
by Company with respect to the Preferred Securities, the Subordinated
Debentures purchased by the Trust and the related Indenture, taken together,
constitute, in the belief of the Company and the Trust, a full and
unconditional guarantee of payments due on the Preferred Securities. See
"Description of the Subordinated Debentures" and "Description of the
Guarantee."
84
<PAGE> 88
<TABLE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report........................................................................ F-2
Consolidated Balance Sheets as of March 31, 1998 (unaudited) and December 31, 1997 and 1996......... F-3
Consolidated Statements of Operations for the three months ended March 31, 1998 and 1997 (unaudited)
and for each of the years ended December 31, 1997, 1996 and 1995.................................. F-5
Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 1998
(unaudited) and for each of the years ended December 31, 1997, 1996 and 1995...................... F-6
Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1997 (unaudited)
and for each of the years ended December 31, 1997, 1996 and 1995.................................. F-7
Notes to Consolidated Financial Statements.......................................................... F-8
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report........................................................................ F-28
Consolidated Balance Sheets as of December 31, 1997 and 1996........................................ F-29
Consolidated Statements of Operations for each of the years ended December 31, 1997 and 1996........ F-31
Consolidated Statements of Changes in Stockholders' Equity for each of the years ended December 31,
1997 and 1996..................................................................................... F-32
Consolidated Statements of Cash Flows for each of the years ended December 31, 1997 and 1996........ F-33
Notes to Consolidated Financial Statements.......................................................... F-34
REDWOOD BANCORP AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report........................................................................ F-49
Consolidated Statements of Financial Condition as of March 31, 1998 (unaudited) and December 31,
1997 and 1996..................................................................................... F-50
Consolidated Statements of Operations for the three months ended March 31, 1998 and 1997 (unaudited)
and for each of the years ended December 31, 1997 and 1996........................................ F-51
Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 1998
(unaudited) and for each of the years ended December 31, 1997 and 1996............................ F-52
Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1997 (unaudited)
and for each of the years ended December 31, 1997 and 1996........................................ F-53
Notes to Consolidated Financial Statements.......................................................... F-54
</TABLE>
F-1
<PAGE> 89
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
KPMG PEAT MARWICK LLP LOGO
The Board of Directors and Stockholders
First Banks America, Inc.:
We have audited the accompanying consolidated balance sheets
of First Banks America, Inc. and subsidiaries (the Company) as of
December 31, 1997, 1996 and 1995, and the related consolidated
statements of operations, changes in stockholders' equity and
cash flows for the years 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 audits. The consolidated
financial statements give retroactive effect to the merger of
First Commercial Bancorp, Inc. and subsidiary on February 2,
1998, which has been accounted for as a combination of entities
under common control as described in the notes to the
consolidated financial statements. Generally accepted accounting
principles prescribe giving effect to a consummated business
combination accounted for as a combination of entities under
common control in financial statements that do not include the
dates of consummation. These financial statements do not extend
through the date of consummation; however, they will become the
historical consolidated financial statements of First Banks
America, Inc. and subsidiaries after financial statements
covering the date of consummation of the business combination are
issued.
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 consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of First Banks America, Inc. and subsidiaries
as of December 31, 1997, 1996, and 1995, and the results of their
operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles
applicable after financial statements are issued for a period
which includes the date of consummation of the business
combination.
/s/ KPMG PEAT MARWICK LLP
June 5, 1998
F-2
<PAGE> 90
<TABLE>
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------
1998 1997 1996
--------- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks........................................... $ 32,651 32,257 21,753
Interest-bearing deposits with other financial institutions with
maturities of three months or less.............................. 2,271 690 146
Federal funds sold................................................ 42,250 2,215 20,975
-------- ------- -------
Total cash and cash equivalents........................... 77,172 35,162 42,874
-------- ------- -------
Investment securities available for sale, at fair value............... 141,131 148,181 125,139
Loans:
Commercial and financial.......................................... 113,312 109,763 80,781
Real estate construction and development.......................... 96,035 93,454 58,045
Real estate mortgage.............................................. 166,160 149,951 93,864
Consumer and installment.......................................... 71,017 75,023 105,340
Loans held for sale............................................... -- 5,708 --
-------- ------- -------
Total loans................................................... 446,524 433,899 338,030
Unearned discount................................................. (2,425) (2,444) (1,659)
Allowance for possible loan losses................................ (12,063) (11,407) (10,744)
-------- ------- -------
Net loans..................................................... 432,036 420,048 325,627
-------- ------- -------
Bank premises and equipment, net of accumulated depreciation.......... 11,382 10,697 8,263
Intangibles associated with the purchase of subsidiaries.............. 8,794 7,189 3,999
Accrued interest receivable........................................... 4,062 4,819 3,545
Foreclosed property, net.............................................. 725 601 977
Deferred tax assets................................................... 13,739 14,164 15,602
Other assets.......................................................... 3,368 2,803 3,061
-------- ------- -------
Total assets...................................................... $692,409 643,664 529,087
======== ======= =======
<CAPTION>
The accompanying notes are an integral part of the consolidated financial statements.
F-3
<PAGE> 91
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, (CONTINUED)
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
MARCH 31, ------------------
1998 1997 1996
--------- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES
Deposits:
Demand:
Non-interest-bearing.......................................... $101,270 97,393 80,187
Interest-bearing.............................................. 73,433 73,199 70,266
Savings........................................................... 158,625 147,623 96,565
Time deposits:
Time deposits of $100 or more................................. 57,725 52,472 40,963
Other time deposits........................................... 209,504 185,840 167,961
-------- ------- -------
Total deposits............................................ 600,557 556,527 455,942
Short-term borrowings................................................. 3,453 3,687 2,797
Promissory note payable............................................... 13,450 14,900 14,000
Accrued interest payable.............................................. 4,803 4,185 2,002
Deferred tax liabilities.............................................. 1,049 1,092 968
Payable to former shareholders of Surety Bank......................... -- 3,829 --
Accrued expenses and other liabilities................................ 5,756 5,058 6,178
12% convertible debentures............................................ 6,500 6,500 6,500
Minority interest in subsidiary....................................... -- 2,795 2,505
-------- ------- -------
Total liabilities......................................... 635,568 598,573 490,892
-------- ------- -------
STOCKHOLDERS' EQUITY
Common stock:
Common stock, $0.15 par value; 6,666,666 shares authorized;
3,238,417 shares, 2,144,865 shares and 1,875,076 shares issued
at March 31, 1998, December 31, 1997 and 1996, respectively..... 486 322 282
Class B common stock, $.15 par value; 4,000,000 shares authorized;
2,500,000 shares issued and outstanding......................... 375 375 375
Capital surplus....................................................... 60,173 47,329 42,862
Retained earnings (deficit), since elimination of accumulated deficit
of $259,117 effective December 31, 1994............................. 2,183 1,083 (2,450)
Common treasury stock, at cost; 496,056 shares, 386,458 shares and
280,430 shares at March 31, 1998, December 31, 1997 and 1996,
respectively........................................................ (6,814) (4,350) (2,838)
Accumulated other comprehensive income................................ 438 332 (36)
-------- ------- -------
Total stockholders' equity................................ 56,841 45,091 38,195
-------- ------- -------
Total liabilities and stockholders' equity................ $692,409 643,664 529,087
======== ======= =======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-4
<PAGE> 92
<TABLE>
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
----------------- ------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans.............................. $10,568 7,453 33,393 25,137 20,087
Investment securities................................... 2,033 1,781 7,870 6,257 5,426
Federal funds sold and other............................ 395 377 1,254 1,988 1,043
------- ----- ------ ------ ------
Total interest income............................... 12,996 9,611 42,517 33,382 26,556
------- ----- ------ ------ ------
Interest expense:
Deposits:
Interest-bearing demand............................. 349 354 1,398 756 578
Savings............................................. 1,454 766 3,747 2,819 2,389
Time deposits of $100 or more....................... 775 529 2,144 2,008 1,610
Other time deposits................................. 2,784 2,314 9,427 8,353 6,258
Promissory note payable and other borrowings............ 537 545 2,439 1,597 2,299
------- ----- ------ ------ ------
Total interest expense.............................. 5,899 4,508 19,155 15,533 13,134
------- ----- ------ ------ ------
Net interest income................................. 7,097 5,103 23,362 17,849 13,422
Provision for possible loan losses.......................... 300 550 2,000 2,405 6,416
------- ----- ------ ------ ------
Net interest income after provision for possible
loan losses....................................... 6,797 4,553 21,362 15,444 7,006
------- ----- ------ ------ ------
Noninterest income:
Service charges on deposit accounts..................... 739 575 2,239 2,258 1,682
Loan sales and servicing income......................... -- -- 40 70 159
Other income............................................ 319 296 932 1,072 1,284
Gain (loss) on sales of securities, net................. 92 -- 76 185 (2,996)
------- ----- ------ ------ ------
Total noninterest income............................ 1,150 871 3,287 3,585 129
------- ----- ------ ------ ------
Noninterest expense:
Salaries and employee benefits.......................... 2,135 1,550 6,226 5,249 5,358
Occupancy, net of rental income......................... 491 571 2,166 1,832 1,615
Furniture and equipment................................. 347 267 1,149 1,003 895
Federal Deposit Insurance Corporation premiums.......... 43 38 119 497 493
Postage, printing and supplies.......................... 167 148 496 744 396
Legal, examination and professional fees................ 890 750 3,241 2,777 1,337
Data processing......................................... 475 327 1,084 735 755
Communications.......................................... 200 164 673 623 619
Losses and expenses on sale of foreclosed property, net
of gains.............................................. 157 (9) (350) 1,148 643
Other................................................... 1,152 687 2,873 3,129 2,037
------- ----- ------ ------ ------
Total noninterest expense........................... 6,057 4,493 17,677 17,737 14,148
------- ----- ------ ------ ------
Income (loss) before provision for income tax
expense (benefit) and minority interest in
(income) loss of subsidiary....................... 1,890 931 6,972 1,292 (7,013)
Provision for income tax expense (benefit).................. 790 361 3,145 470 (2,188)
------- ----- ------ ------ ------
Income (loss) before minority interest in (income)
loss of subsidiary................................ 1,100 570 3,827 822 (4,825)
Minority interest in (income) loss of subsidiary............ -- (86) (294) (131) 11
------- ----- ------ ------ ------
Net income (loss)................................... $ 1,100 484 3,533 691 (4,814)
======= ===== ====== ====== ======
Earnings (loss) per common share:
Basic................................................... $ 0.22 0.12 0.87 0.16 (1.19)
Diluted................................................. 0.22 0.12 0.86 0.16 (1.19)
======= ===== ====== ====== ======
Weighted average common stock outstanding (in thousands).... 4,911 4,082 4,069 4,225 4,032
======= ===== ====== ====== ======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-5
<PAGE> 93
<TABLE>
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE YEARS ENDED DECEMBER 31, 1997
AND THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
<CAPTION>
ACCUM-
ULATED
OTHER TOTAL
CLASS B COMPRE- RETAINED COMMON COMPRE- STOCK-
COMMON COMMON CAPITAL HENSIVE EARNINGS TREASURY HENSIVE HOLDERS'
STOCK STOCK SURPLUS INCOME (DEFICIT) STOCK INCOME EQUITY
------ ------- ------- ------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated balances, January 1, 1995........ $206 375 39,133 -- -- -- -- 39,714
Year ended December 31, 1995:
Comprehensive income:
Net loss.............................. -- -- -- (4,814) (4,814) -- -- (4,814)
Other comprehensive income, net of
tax<F1>--
Unrealized gains on securities, net of
reclassification adjustment<F2>..... -- -- -- 81 -- -- 81 81
------
Comprehensive income.................. (4,733)
======
Exercise of stock options................. 4 -- 111 -- -- -- 115
Issuance of common stock for acquisition
of FCB.................................. 70 -- 6,600 -- -- -- 6,670
Compensation paid in stock................ -- -- 27 -- -- -- 27
Repurchases of common stock............... -- -- -- -- (828) -- (828)
---- --- ------ ------ ------ ---- ------
Consolidated balances, December 31, 1995...... 280 375 45,871 (4,814) (828) 81 40,965
Year ended December 31, 1996:
Comprehensive income:
Net income............................ -- -- -- 691 691 -- -- 691
Other comprehensive income, net of
tax<F1>--
Unrealized losses on securities, net
of reclassification adjustment<F2>.. -- -- -- (17) -- -- (17) (17)
------
Comprehensive income.................. 674
======
Exercise of stock options................. 2 -- 36 -- -- -- 38
Compensation paid in stock................ -- -- 10 -- -- -- 10
Repurchase of outstanding warrants........ -- -- (1,281) -- -- -- (1,281)
Repurchases of common stock............... -- -- -- -- (2,010) -- (2,010)
Pre-merger transactions of FCB............ -- -- (1,774) 1,673 -- (100) (201)
---- --- ------ ------ ------ ---- ------
Consolidated balances, December 31, 1996...... 282 375 42,862 (2,450) (2,838) (36) 38,195
Year ended December 31, 1997:
Comprehensive income:
Net income............................ -- -- -- 3,533 3,533 -- -- 3,533
Other comprehensive income, net of
tax<F1>--
Unrealized gains on securities, net of
reclassification adjustments<F2>.... -- -- -- 368 -- -- 368 368
------
Comprehensive income.................. 3,901
======
Issuance of common stock for purchase
accounting acquisition of Surety Bank... 40 -- 4,723 -- -- -- 4,763
Exercise of stock options................. -- -- 15 -- -- -- 15
Redemption of stock options............... -- -- (290) -- -- -- (290)
Compensation paid in stock................ -- -- 13 -- -- -- 13
Repurchases of common stock............... -- -- -- -- (1,512) -- (1,512)
Pre-merger transactions of FCB............ -- -- 6 -- -- -- 6
---- --- ------ ------ ------ ---- ------
Consolidated balances, December 31, 1997...... 322 375 47,329 1,083 (4,350) 332 45,091
Quarter ended March 31, 1998 (unaudited):
Comprehensive income:
Net income............................ -- -- -- 1,100 1,100 -- -- 1,100
Other comprehensive income, net of
tax<F1>--
Unrealized gains on securities, net of
reclassification adjustment<F2>..... -- -- -- 106 -- -- 106 106
------
Comprehensive income.................. 1,206
======
Issuance of common stock for acquisition
of minority interest of FCB............. 43 -- 2,965 -- -- -- 3,008
Conversion of note payable................ 121 -- 9,879 -- -- -- 10,000
Repurchases of common stock............... -- -- -- -- (2,464) -- (2,464)
---- --- ------ ------ ------ ---- ------
Consolidated balances, March 31, 1998......... $486 375 60,173 2,183 (6,814) 438 56,841
==== === ====== ====== ====== ==== ======
<FN>
- ----------
<F1>Components of other comprehensive income are shown net of tax.
<F2>Disclosure of reclassification amount:
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------
1998 1997 1996 1995
--------- ---- ---- ----
<S> <C> <C> <C> <C>
Unrealized gains (losses) arising during the period......... 198 444 168 (2,915)
Less: reclassification adjustment for gains (losses)
included in net income.................................... 92 76 185 (2,996)
--- --- --- ------
Unrealized gains (losses) on securities..................... 106 368 (17) 81
=== === === ======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-6
<PAGE> 94
<TABLE>
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS EXPRESSED IN THOUSANDS)
<CAPTION>
MARCH 31, YEARS ENDED DECEMBER 31,
-------------- --------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $ 1,100 484 3,533 691 (4,814)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, amortization and accretion, net....... 467 89 1,169 153 509
Provision for possible loan losses.................. 300 550 2,000 2,405 6,416
Provision (benefit) for income taxes................ 790 361 3,145 470 (2,188)
Payments of income taxes............................ (196) -- (1,943) -- --
(Gain) loss on sales of securities, net............. (92) -- (76) (185) 2,996
Decrease (increase) in accrued interest
receivable........................................ 967 197 (1,274) (852) 114
Interest accrued on liabilities..................... 5,899 4,508 19,155 15,533 13,134
Payments of interest on liabilities................. (5,345) (4,010) (16,972) (14,913) (12,862)
Other operating activities, net..................... 550 (471) (29) 274 269
-------- ------- -------- -------- --------
Net cash provided by operating activities....... 4,440 1,708 8,708 3,576 3,574
-------- ------- -------- -------- --------
Cash flows from investing activities:
Cash paid for acquired entities, net of cash and cash
equivalents received.................................. 3,241 -- 3,072 10,715 51,423
Sales of investment securities.......................... -- -- 11,073 20,564 70,995
Maturities of investment securities..................... 32,850 41,365 91,362 248,107 55,351
Purchases of investment securities...................... (25,399) (56,208) (112,730) (256,304) (149,205)
Net decrease (increase) in loans........................ 15,739 8,318 (44,872) (17,093) 15,899
Recoveries of loans previously charged-off.............. 530 560 2,288 2,439 820
Purchases of bank premises and equipment................ (807) (89) (822) (240) (725)
Net decrease in lease financing......................... -- -- -- 991 --
Proceeds from sales of other real estate................ 230 59 1,500 2,805 2,394
Other investing activities.............................. (11) (22) (259) (23) (6,414)
-------- ------- -------- -------- --------
Net cash provided by (used in) investing
activities................................... 26,373 (6,017) (49,388) 11,961 40,538
-------- ------- -------- -------- --------
Cash flows from financing activities:
Other (decreases) increases in deposits:
Demand and savings deposits......................... (1,452) (4,382) 34,675 (20,290) (6,279)
Time deposits....................................... 10,321 895 (1,540) (20,341) 6,727
Decrease in federal funds purchased and other short-term
borrowings............................................ (3,524) -- -- (352) (5,257)
Decrease in Federal Home Loan Bank advances............. (291) (271) (1,122) (3,957) (13,749)
Increase (decrease) in securities sold under agreements
to repurchase......................................... 57 4,791 1,836 (324) (18,722)
Increase in promissory note payable..................... 8,550 -- 900 12,946 --
Repurchase of common stock for treasury and warrant..... (2,464) (331) (1,512) (3,290) (828)
Repurchase of stock option.............................. -- -- (290) -- --
Proceeds from exercise of stock options................. -- 4 15 38 115
Proceeds from the issuance of convertible debentures.... -- -- -- -- 6,500
Pre-merger transactions of FCB.......................... -- -- 6 3,217 --
-------- ------- -------- -------- --------
Net cash provided by (used in) financing
activities................................... 11,197 706 32,968 (32,353) (31,493)
-------- ------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................. 42,010 (3,603) (7,712) (16,816) 12,619
Cash and cash equivalents, beginning of year................ 35,162 42,874 42,874 59,690 47,071
-------- ------- -------- -------- --------
Cash and cash equivalents, end of year...................... $ 77,172 39,271 35,162 42,874 59,690
======== ======= ======== ======== ========
Noncash investing and financing activities:
Loans transferred to foreclosed real estate............. $ 245 309 585 1,385 1,274
Issuance of common stock in purchase accounting
acquisition........................................... 3,008 -- 4,763 -- --
Conversion of promissory note payable to common stock... 10,000 -- -- -- --
Loans transferred from loans held for sale.............. -- -- -- -- 7,253
Pre-merger transaction of FCB--exchange of common stock
for dividend payable.................................. -- -- -- 643 --
Receivable from sale of investment securities........... -- -- -- -- 4,915
======== ======= ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-7
<PAGE> 95
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements of First Banks America,
Inc. and subsidiaries (FBA or the Company), have been prepared in accordance
with generally accepted accounting principles and conform to practices
prevalent among financial institutions. The following is a summary of the more
significant policies followed by FBA:
BASIS OF PRESENTATION
The consolidated financial statements of FBA have been prepared in
accordance with generally accepted accounting principles and conform to
predominant practices within the banking industry. Management of FBA 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.
Certain 1996 and 1995 amounts have been reclassified to conform with the 1997
presentation.
The Board of Directors of FBA elected to implement an accounting adjustment
referred to as a "quasi-reorganization," effective December 31, 1994. In
accordance with accounting provisions applicable to a quasi-reorganization, the
assets and liabilities of FBA were adjusted to fair value and the accumulated
deficit was eliminated as of December 31, 1994.
RESTATEMENT
Effective February 2, 1998, FBA completed its acquisition of First
Commercial Bancorp, Inc. (FCB) and FCB's wholly owned subsidiary, First
Commercial Bank (First Commercial), in a transaction accounted for as a
combination of entities under common control. First Banks, Inc., St. Louis,
Missouri (First Banks), owned a majority interest in both FBA and FCB.
The consolidated financial statements give retroactive effect to the
transaction and, as a result, the consolidated balance sheets, statements of
operations and statements of cash flows are presented as if the combining
entities had been consolidated for all periods presented, which are subsequent
to First Banks' acquisition of FCB on August 23, 1995. As required by generally
accepted accounting principles, the restated consolidated financial statements
become the historical consolidated financial statements upon issuance of the
financial statements for the period that includes the date of the transaction.
The consolidated statements of stockholders' equity reflect the accounts of FBA
as if the common stock issued to First Banks in exchange for its majority
interest in FCB had been outstanding for all periods subsequent to August 23,
1995. First Banks' ownership interest in FCB was approximately 96.1% from
August 23, 1995 to May 1996 and 61.5% from June 1996 to February 2, 1998. The
remaining interest in FCB acquired by FBA is reflected in the consolidated
financial statements as minority interest for the period from August 23, 1995
to February 2, 1998. First Banks owned 71.8% of FBA as of March 31, 1998.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the parent
company and its subsidiaries, all of which are wholly owned. All significant
intercompany accounts and transactions have been eliminated.
FBA operates through three banking subsidiaries, BankTEXAS National
Association, headquartered in Houston, Texas (BankTEXAS), First Bank of
California, headquartered in Roseville, California (FB California) and First
Commercial, headquartered in Sacramento, California, collectively referred to
as the Subsidiary Banks.
CASH AND CASH EQUIVALENTS
Cash, due from banks, federal funds sold, and interest-bearing deposits
with original maturities of three months or less are considered to be cash and
cash equivalents for purposes of the consolidated statements of cash flows.
F-8
<PAGE> 96
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Subsidiary Banks are required to maintain certain daily reserve
balances in accordance with regulatory requirements. These reserve balances
were $4.6 million and $3.5 million at December 31, 1997 and 1996, respectively.
INVESTMENT SECURITIES
The classification of investment securities as available for sale or held
to maturity is determined at the date of purchase. FBA does not engage in the
trading of investment securities.
Investment securities classified as available for sale are those debt and
equity securities for which FBA has no immediate plan to sell, but which may be
sold in the future if circumstances warrant. Available-for-sale securities are
stated at current 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 stockholders' equity are
reversed upon sale.
Investment securities designated as held to maturity are those debt
securities which FBA has the positive intent and ability to hold until
maturity. Held-to-maturity securities are stated at amortized cost, in which
the amortization of premiums and accretion of discounts are recognized over the
contractual maturities or estimated lives of the individual securities,
adjusted for anticipated prepayments, using the level-yield method.
At December 31, 1997 and 1996, all investment securities were classified as
available for sale.
LOANS
Loans held for portfolio 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 held for portfolio are stated at cost as FBA 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 and impaired 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.
A loan is considered impaired when it is probable a creditor will be unable
to collect all amounts due, both principal and interest, according to the
contractual terms of the loan agreement. When measuring impairment, the
expected future cash flows of an impaired loan are discounted at the loan's
effective interest rate. Alternatively, impairment is measured by reference to
an observable market price, if one exists, or the fair value of the collateral
for a collateral-dependent loan. Regardless of the historical measurement
method used, FBA measures impairment based on the fair value of the collateral
when the creditor determines foreclosure is probable. Additionally, impairment
of a restructured loan is measured by discounting the total expected future
cash flows at the loan's effective rate of interest as stated in the original
loan agreement. FBA continues to use its existing nonaccrual methods for
recognizing interest income on impaired loans.
LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of cost or market
value which is determined on an individual loan basis. Gains or losses on the
sale of loans held for sale are determined on a specific identification method.
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 loans by management, considering,
among other factors, current economic conditions, loan portfolio composition,
past loan loss experience, independent
F-9
<PAGE> 97
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 primarily using the
straight-line method over the estimated useful lives of the related assets.
Amortization of leasehold improvements is calculated using the straight-line
method over the shorter of the useful life of the improvement or term of the
lease. Bank premises and improvements are depreciated over 15 to 29 years and
equipment over two to ten years.
INTANGIBLES ASSOCIATED WITH THE PURCHASE OF SUBSIDIARIES
The excess of cost over net assets acquired of purchased subsidiaries is
amortized using the straight-line method over the estimated periods to be
benefitted, which has been estimated at 15 years.
FORECLOSED PROPERTY
Foreclosed property, consisting of real estate acquired through foreclosure
or 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 the property at the date of acquisition is
charged to the allowance for possible loan losses.
INCOME TAXES
FBA and its eligible subsidiaries file a consolidated federal income tax
return. Each subsidiary pays its allocation of federal income taxes to FBA, or
receives payment from FBA to the extent that tax benefits are realized.
Separate state franchise tax returns are filed in Texas and Delaware for the
appropriate entities. FBA and its subsidiaries join in filing Illinois and
California unitary income tax returns with First Banks, as First Banks'
ownership is greater than 50%. FCB and First Commercial file separate federal
income tax returns which are separate from that of FBA.
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.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
FBA uses financial instruments to reduce the interest rate risk arising
from its financial assets and liabilities. These instruments involve, in
varying degrees, elements of interest rate risk and credit risk in excess of
the amount recognized in the consolidated balance sheets. "Interest rate
risk" is defined as the possibility that interest rates may move unfavorably
from the perspective of FBA. The risk that a counterparty to an agreement
entered into by FBA may default is defined as "credit risk." These financial
instruments include one interest rate cap agreement.
FBA is party to commitments to extend credit and commercial and standby
letters of credit in the normal course of business to meet the financing needs
of its customers. These commitments involve, in varying degrees, elements of
interest rate risk and credit risk in excess of the amount recognized in the
consolidated balance sheets.
F-10
<PAGE> 98
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INTEREST RATE FUTURES CONTRACTS
Prior to 1996, interest rate futures contracts were utilized to manage the
interest rate risk of the available-for-sale securities portfolio. Gains and
losses on interest rate futures contracts, which qualified as hedges, were
deferred. Amortization of the net deferred gains or losses was applied to the
interest income of the available-for-sale securities portfolio using the
straight-line method. The net deferred gains and losses were applied to the
carrying value of the available-for-sale securities portfolio as part of the
mark to market valuation. When the hedged assets were sold, the related gain or
loss on the interest rate futures contract was immediately recognized in the
consolidated statements of operations.
INTEREST RATE CAP AGREEMENTS
Interest rate cap agreements are accounted for on an accrual basis with the
net interest differential being recognized as an adjustment to interest expense
of the related liability. Premiums and fees paid upon the purchase of interest
rate cap agreements are amortized to interest expense over the life of the
agreements using the interest method. In the event of early termination of an
interest rate cap agreement, the net proceeds received or paid are deferred and
amortized over the shorter of the remaining contract life or the maturity of
the related liability. If, however, the amount of the underlying hedged
liability is repaid, then the gain or loss on the agreement is recognized
immediately in the consolidated statements of operations. The unamortized
premiums and fees paid are included in other assets in the accompanying
consolidated balance sheets.
EARNINGS (LOSS) PER COMMON SHARE
FBA adopted the provisions of SFAS 128, Earnings Per Share (SFAS 128), on a
retroactive basis effective December 31, 1997. Accordingly, earnings (loss) per
common share (EPS) data has been restated to conform with the provisions of
SFAS 128.
SFAS 128 provides for the calculation of "Basic" and "Diluted" EPS.
Basic EPS is computed by dividing the income (loss) available to common
stockholders (the numerator) by the weighted average number of common shares
outstanding (the denominator) during the year. The computation of diluted EPS
is similar except the denominator is increased to include the number of
additional common shares that would have been outstanding if the dilutive
potential shares had been issued. In addition, in computing the dilutive effect
of convertible securities, the numerator is adjusted to add back (a) any
convertible preferred dividends and (b) the after-tax amount of interest
recognized in the period associated with any convertible debt. The
implementation of SFAS 128 did not have a material impact on the calculation of
EPS.
(2) ACQUISITIONS
On November 1, 1996, FBA completed its acquisition of Sunrise Bancorp, a
California corporation (Sunrise), and its wholly owned subsidiary, Sunrise
Bank, in exchange for $17.5 million in cash. At the time of the transaction,
Sunrise had $110.8 million in total assets, $45.5 million in cash and cash
equivalents and investment securities, $61.1 million in total loans, net of
unearned discount, and $91.1 million in total deposits. The acquisition was
funded from available cash and borrowings of $14.0 million under a promissory
note payable (Note Payable) with First Banks. First Banks owns a majority of
the outstanding voting stock of FBA, representing 65.9% and 68.8% at December
31, 1997 and 1996, respectively.
On December 1, 1997, FBA completed its acquisition of Surety Bank in
exchange for 264,622 shares of FBA common stock and cash of $3.8 million. The
cash portion of this transaction, which was paid to the former shareholders of
Surety Bank in January 1998, was funded by an advance under the Note Payable.
At the time of the transaction, Surety had $72.8 million in total assets, $14.9
million in cash and cash equivalents and investment securities, $54.4 million
in total loans, net of unearned discount, and $67.5 million in total deposits.
F-11
<PAGE> 99
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Sunrise was merged into a wholly owned subsidiary of FBA. Sunrise Bank and
Surety Bank were merged into FB California, a newly-formed commercial bank
charter of FBA. The acquisitions of Sunrise and Surety Bank were accounted for
under the purchase method of accounting and, accordingly, the consolidated
financial statements include the financial position and results of operations
for the period subsequent to the acquisition dates, and the assets acquired and
liabilities assumed were recorded at fair value at the acquisition date. The
excess of the cost over the fair value of the net assets acquired was $3.2
million and $2.8 million for Sunrise and Surety Bank, respectively, and is
being amortized over 15 years.
On February 2, 1998, FBA and FCB were merged. Under the terms of the
Agreement and Plan of Merger (Agreement), FCB was merged into FBA, and FCB's
wholly owned subsidiary, First Commercial Bank, was merged into FB California,
an indirect subsidiary bank of FBA. The FCB shareholders received .8888 shares
of FBA common stock for each share of FCB common stock that they held. In
total, FCB shareholders received approximately 751,728 shares of FBA common
stock. The transaction also provided for First Banks to receive 804,000 shares
of FBA common stock in exchange for $10.0 million of the Note Payable. In
addition, FCB's convertible debentures of $6.5 million, which are owned by
First Banks, were exchanged for convertible debentures of FBA.
FCB had six banking offices located in Sacramento, Roseville (2), San
Francisco, Concord and Campbell, California. At December 31, 1997, FCB had
total assets of $191.6 million and net income of $764,000 for the year then
ended.
First Banks owned a majority interest in both FBA and FCB. Consistent with
the accounting treatment for a combination of entities under common control,
the merger was accounted for by FBA as follows:
* First Banks' interest in FCB was accounted for by FBA at First Banks'
historical cost. First Banks' historical cost basis in FCB was determined
under the purchase method of accounting, effective upon First Banks'
acquisition of First Commercial on August 23, 1995. Accordingly, the
consolidated financial statements of First Banks include the financial
position and results of operations for the periods subsequent to the
acquisition date, and the assets acquired and liabilities assumed were
recorded at fair value at the acquisition date.
Effective with the merger, because the two entities were under the common
control of First Banks, the consolidated financial statements of FBA were
restated in 1998 to reflect First Banks' interest in the financial
condition and results of operations of FCB for the periods subsequent to
August 23, 1995.
* The amount attributable to the interests of the minority shareholders in
the fair value of the net assets of FCB was accounted for by FBA under the
purchase method of accounting. Accordingly, such amount was reflected by
FBA at fair value, as determined by the market value of FBA common stock
exchanged for the minority interest pursuant to the Agreement.
F-12
<PAGE> 100
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following information presents unaudited pro forma condensed results of
operations of FBA, combined with the acquisition of Surety Bank, as if FBA had
completed the transaction on January 1, 1996. In addition, the minority
shareholders' interest in the net assets of FCB is presented as if FBA had
acquired First Banks' interest on January 1, 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
---- ----
(DOLLARS EXPRESSED IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Net interest income...................................... $26,589 20,442
Provision for possible loan losses....................... 2,255 2,730
Net income (loss)........................................ 3,662 57
======= ======
Weighted average shares of common stock outstanding
(in thousands)......................................... 5,427 4,913
======= ======
Earnings (loss) per common share:
Basic................................................ $ 0.67 0.01
Diluted.............................................. 0.67 0.01
======= ======
</TABLE>
The unaudited pro forma condensed results of operations reflect the
application of the purchase method of accounting and certain other assumptions.
Purchase accounting adjustments have been applied to investment securities,
bank premises and equipment, deferred tax assets and liabilities and excess
cost to reflect the assets acquired and liabilities assumed at fair value. The
resulting premiums and discounts are amortized or accreted to income consistent
with the accounting policies of FBA.
The results of operations of Sunrise are not included in the pro forma
combined condensed statements of operations for the year ended December 31,
1996 as the historical results of operations for the period are not
representative of normal operating results subsequent to its acquisition by
FBA.
On February 2, 1998, FBA completed its acquisition of Pacific Bay Bank in
exchange for cash of $4.2 million. This transaction was funded by an advance
under the Note Payable. At the time of the transaction, Pacific Bay Bank had
$38.3 million in total assets; $7.4 million in cash and cash equivalents; $29.7
million in total loans, net of unearned discount; and, $35.2 million in total
deposits.
F-13
<PAGE> 101
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) INVESTMENTS IN DEBT AND EQUITY SECURITIES
The amortized cost, contractual maturity, unrealized gains and losses and
fair value of investment securities available for sale at December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
MATURITY
------------------------------------ TOTAL GROSS
AFTER AMOR- UNREALIZED WEIGHTED
1 YEAR 1-5 5-10 10 TIZED --------------- FAIR AVERAGE
OR LESS YEARS YEARS YEARS COST GAINS LOSSES VALUE YIELD
------- ----- ----- ----- ----- ----- ------ ----- --------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997:
Carrying value:
U.S. Treasury.................... $21,061 56,249 -- -- 77,310 498 (1) 77,807 6.04%
U.S. government agencies and
corporations:
Mortgage-backed.............. -- 14,059 47 6,755 20,861 38 (28) 20,871 6.03
Other........................ 8,488 34,974 -- -- 43,462 41 (38) 43,465 6.15
Federal Home Loan Bank and
Federal Reserve Bank stock (no
stated maturity)............... 6,038 -- -- -- 6,038 -- -- 6,038 5.87
------- ------- ---- ----- ------- ------ ----- ------- ----
Total................... $35,587 105,282 47 6,755 147,671 577 (67) 148,181 6.07
======= ======= ==== ===== ======= ====== ===== ======= ====
Market value:
Debt securities.................. $29,575 105,728 47 6,793
Equity securities................ 6,038 -- -- --
------- ------- ---- -----
Total................... $35,613 105,728 47 6,793
======= ======= ==== =====
Weighted average yield............... 5.87% 6.06% 6.56% 7.23%
======= ======= ==== =====
December 31, 1996:
Carrying value:
U.S. Treasury.................... $35,051 14,119 -- -- 49,170 81 -- 4,9251 5.52%
U.S. government agencies and
corporations:
Mortgage-backed.............. 470 24,373 -- 8,857 33,700 29 (153) 33,576 6.01
Other........................ 24,988 12,040 -- -- 37,028 14 (26) 37,016 5.41
Federal Home Loan Bank and
Federal Reserve Bank stock (no
stated maturity)............... 5,296 -- -- -- 5,296 -- -- 5,296 5.87
------- ------- ---- ----- ------- ------ ----- ------- ----
Total................... $65,805 50,532 -- 8,857 125,194 124 (179) 125,139 5.63
======= ======= ==== ===== ======= ====== ===== ======= ====
Market value:
Debt securities.................. $60,528 50,455 -- 8,860
Equity securities................ 5,296 -- -- --
------- ------- ---- -----
Total................... $65,824 50,455 -- 8,860
======= ======= ==== =====
Weighted average yield............... 5.30% 5.80% --% 7.17%
======= ======= ==== =====
</TABLE>
Proceeds from sales of securities were $11.1 million, $20.6 million and
$71.0 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Gross gains of $76,000, $185,000 and $2.2 million were realized
on those sales for the years ended December 31, 1997, 1996 and 1995,
respectively. No losses were realized on those sales for the years ended
December 31, 1997, 1996 and 1995. For 1995, the net gains on sales of
securities were offset by the recognition of $5.1 million of hedging losses.
The Subsidiary Banks maintain investments in the Federal Home Loan Bank
(FHLB) and the Federal Reserve Bank (FRB). These investments are recorded at
cost, which represents redemption value. The investment in FHLB stock is
maintained at a minimum amount equal to the greater of 1% of the aggregate
outstanding balance of loans secured by residential real estate, or 5% of
advances from the FHLB. The investment in the FRB stock is maintained at a
minimum of 6% of the Subsidiary Banks' capital stock and capital surplus.
Investment securities with a carrying value of approximately $22.5 million
and $12.1 million at December 31, 1997 and 1996, respectively, were pledged in
connection with deposits of public and trust funds, securities sold under
agreements to repurchase and for other purposes as required by law.
F-14
<PAGE> 102
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Changes in the allowance for possible loan losses for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Balance, January 1.......................... $10,744 10,616 2,756
Acquired allowance for possible loan
losses.................................... 30 2,338 4,797
------- ------ ------
10,774 12,954 7,553
------- ------ ------
Loans charged-off........................... (3,655) (7,054) (4,173)
Recoveries of loans previously
charged-off............................... 2,288 2,439 820
------- ------ ------
Net loans charged-off........... (1,367) (4,615) (3,353)
------- ------ ------
Provision charged to operations............. 2,000 2,405 6,416
------- ------ ------
Balance, December 31........................ $11,407 10,744 10,616
======= ====== ======
</TABLE>
At December 31, 1997 and 1996, FBA had $2.8 million and $3.0 million,
respectively, of loans on nonaccrual status. Interest on nonaccrual loans which
would have been recorded under the original terms of the loans was $385,000,
$476,000 and $93,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. Of these amounts, $297,000, $256,000 and $70,000 was actually
recorded as interest income on such loans in 1997, 1996 and 1995, respectively.
In conjunction with the restatement of the financial statements (see Note 1),
the interest amounts for 1995 do not include FCB, as the information was not
practicable to obtain due to the discontinuance of FCB's former data processing
system.
At December 31, 1997 and 1996, FBA had $3.3 million and $4.6 million of
impaired loans, which is represented by loans on nonaccrual status and consumer
installment loans 60 days or more past due. The impaired loans had no specific
reserves at December 31, 1997 and 1996. The average recorded investment in
impaired loans was $3.7 million and $5.1 million for the years ended December
31, 1997 and 1996, respectively.
FBA's primary market areas are Houston, Dallas, Irving and McKinney, Texas
and Sacramento, San Francisco, Roseville, Rancho Cordova, Concord, Campbell,
Vallejo and Fairfield, California. At December 31, 1997, approximately 60.5% of
the total loan portfolio and 61.4% of the commercial, financial and
agricultural loan portfolio were to borrowers within these regions.
In general, FBA is a secured lender. At December 31, 1997, approximately
96.6% of the loan portfolio was secured. Collateral is required in accordance
with the normal credit evaluation process based upon the creditworthiness of
the customer and the credit risk associated with the particular transaction.
(5) BANK PREMISES AND EQUIPMENT
Bank premises and equipment were comprised of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
(DOLLARS EXPRESSED
IN THOUSANDS)
<S> <C> <C>
Land..................................................... $ 4,114 3,314
Buildings and improvements............................... 5,684 3,929
Furniture, fixtures and equipment........................ 4,384 2,923
Construction in progress................................. 387 46
------- ------
Total........................................ 14,569 10,212
Less accumulated depreciation............................ 3,872 1,949
------- ------
Bank premises and equipment, net............. $10,697 8,263
======= ======
</TABLE>
F-15
<PAGE> 103
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Depreciation expense for the years ended December 31, 1997, 1996 and 1995
totaled $851,000, $858,000 and $1.2 million, respectively.
FBA leases land, office properties and some items of equipment under
operating leases. Certain of the leases contain renewal options and escalation
clauses. Total rent expense was $1.0 million, $826,000 and $1.0 million for the
years ended December 31, 1997, 1996 and 1995, respectively. Future minimum
lease payments under noncancellable operating leases extend through 2019 as
follows:
<TABLE>
<CAPTION>
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C>
Year ending December 31:
1998............................................ $1,378
1999............................................ 859
2000............................................ 550
2001............................................ 389
2002............................................ 287
Thereafter...................................... 3,055
------
Total minimum lease payments............ $6,518
======
</TABLE>
FBA leases a portion of its owned banking facilities to unrelated parties.
Total rental income was $762,000, $428,000 and $322,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
(6) PROMISSORY NOTE PAYABLE
FBA borrowed $14.9 million and $14.0 million at December 31, 1997 and 1996,
respectively, from First Banks under a $20.0 million Note Payable. The
borrowings under the Note Payable bear interest at an annual rate of one-
quarter percent less than the "Prime Rate" as reported in the Wall Street
Journal. The principal and accrued interest under the Note Payable are due and
payable on October 31, 2001. The interest expense under the Note Payable was
$1.18 million and $194,000 for the years ended December 31, 1997 and 1996,
respectively. The accrued and unpaid interest under the Note Payable was $1.37
million and $194,000 at December 31, 1997 and 1996, respectively. There were no
balances outstanding during 1995.
(7) EARNINGS PER COMMON SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations for the periods indicated:
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Year ended December 31, 1997:
Basic EPS--income available to common stockholders...... $3,533 4,069 $0.87
Effect of dilutive securities--stock options............ -- 27
------ -----
Diluted EPS--income available to common stockholders.... $3,533 4,096 $0.86
====== ===== =====
Year ended December 31, 1996:
Basic EPS--income available to common stockholders...... $ 691 4,225 $0.16
Effect of dilutive securities:
Stock options....................................... -- 61
Warrants............................................ -- 91
------ -----
Diluted EPS--income available to common stockholders.... $ 691 4,377 $0.16
====== ===== =====
</TABLE>
F-16
<PAGE> 104
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The 12% convertible debentures were anti-dilutive for the periods presented
and therefore, have not been included in the EPS calculations. As a result of
the net loss incurred in 1995, the effects of stock options and warrants were
anti-dilutive for the year then ended.
(8) INCOME TAXES
Total income tax expense of $3.1 million, $470,000, and a tax benefit of
$2.2 million for the years ended December 31, 1997, 1996 and 1995,
respectively, were attributable to income from continuing operations.
Income tax expense (benefit) for the years ended December 31 consists of:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Current income tax expense (benefit):
Federal..................................... $ 947 (509) (105)
State....................................... 383 2 --
------ ---- ------
1,330 (507) (105)
------ ---- ------
Deferred income tax expense (benefit):
Federal...................................... 1,356 23 (2,083)
State........................................ 55 588 --
------ ---- ------
1,411 611 (2,083)
------ ---- ------
Change in valuation allowance.................... 404 366 --
------ ---- ------
Total................................ $3,145 470 (2,188)
====== ==== ======
</TABLE>
The effective rates of federal income taxes for the years ended December 31
differ from statutory rates of taxation as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before provision for income tax
expense (benefit).............................. $6,972 $1,292 $(7,013)
====== ====== =======
Tax expense (benefit) at federal income tax
rate........................................... $2,440 35% 452 35.0% $(2,455) (35.0)%
Effects of differences in tax reporting:
Change in the deferred tax valuation
allowance.................................. 404 5.8 366 28.3 -- --
Change in tax attributes available to be
carried forward............................ -- -- (605) (46.8) -- --
State income taxes........................... 285 4.1 385 29.8 -- --
Other........................................ 16 0.2 (128) (9.9) 267 3.8
------ ---- ------ ----- ------- -----
Income tax expense (benefit) at effective rate... $3,145 45.1% $ 470 36.4% $(2,188) (31.2)%
====== ==== ====== ===== ======= =====
</TABLE>
F-17
<PAGE> 105
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for possible loan losses..................... $ 3,971 3,488
Foreclosed property.................................... 677 1,959
Alternative minimum tax credit......................... 736 727
Postretirement medical plan............................ 247 353
Quasi-reorganization adjustment of bank premises....... 1,377 1,427
Other.................................................. 1,104 1,321
Net operating loss carryforwards....................... 13,092 12,906
------- ------
Gross deferred tax assets........................... 21,204 22,181
Valuation allowance..................................... (7,040) (6,579)
------- ------
Net deferred tax assets............................. 14,164 15,602
------- ------
Deferred tax liabilities:
FHLB stock dividends.................................... 409 230
Bank premises and equipment............................. 533 466
Other................................................... 150 272
------- ------
Gross deferred tax liabilities...................... 1,092 968
------- ------
Net deferred tax assets............................. $13,072 14,634
======= ======
</TABLE>
The realization of FBA's net deferred tax assets is based on the
expectation of future taxable income and the utilization of tax planning
strategies. Based on these factors, management believes it is more likely than
not that FBA will realize the recognized net deferred tax asset of $13.1
million. The net change in the valuation allowance, related to deferred tax
assets, was an increase of $461,000 for the year ended December 31, 1997. FCB
files a separate tax return and based on the surrounding facts and
circumstances, management believes the realization of the tax benefit related
to these tax net operating losses is not likely to occur.
Changes to the deferred tax asset valuation allowance for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C>
Balance, January 1...................................... $6,579 5,554
Current year deferred provision, change in deferred tax
valuation allowance................................... 404 366
Purchase acquisitions................................... 57 659
------ -----
Balance, December 31.................................... $7,040 6,579
====== =====
</TABLE>
The valuation allowance for deferred tax assets at December 31, 1997 and
1996 includes $747,000 which, if recognized, will be credited to intangibles
associated with the purchase of subsidiaries. The valuation allowance for
deferred tax assets at December 31, 1997 and 1996 includes $5.9 million,
respectively, which, if recognized, will be credited to capital surplus under
the terms of the quasi-reorganizations implemented for FBA and FCB as of
December 31, 1994 and 1996, respectively.
F-18
<PAGE> 106
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1997, FBA has separate limitation year (SRLY) net operating
loss carryforwards (NOLs) of $22.5 million and alternative minimum tax credits
of $288,000. Their utilization is subject to annual limitations. Additionally,
FBA has non-SRLY NOLs of $11.8 million.
The NOLs for FBA at December 31, 1997 expire as follows:
<TABLE>
<CAPTION>
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C>
Year ending December 31:
1998.......................................... $ 4,140
1999.......................................... 2,641
2000.......................................... 103
2001 through 2010............................. 27,417
-------
Total..................................... $34,301
=======
</TABLE>
With the completion of the acquisition of FCB, the NOL carryforwards
generated prior to the transaction were subject to an annual limitation in
subsequent tax years. The following schedule reflects the NOL carryforwards
that will be available to offset future taxable income of FCB and do not affect
the taxable income of FBA.
At December 31, 1997, for federal income tax purposes, FCB had NOL
carryforwards of approximately $2.9 million. The NOL carryforwards at December
31, 1997 expire as follows:
<TABLE>
<CAPTION>
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C>
Year ending December 31:
2008.......................................... $ 394
2009.......................................... 747
2011.......................................... 660
2017.......................................... 1,064
------
Total..................................... $2,865
======
</TABLE>
(9) 12% CONVERTIBLE DEBENTURES
In 1995, FCB issued to First Banks two 5-year, 12% convertible debentures
in exchange for $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 FBA common stock at $14.06 per share. At maturity, any unpaid
principal and accrued interest will be converted into FBA common stock at
$14.06 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 FBA, it is determined
that FBA has sufficient funds to make such payment in accordance with all
applicable regulatory requirements.
Accrued and unpaid interest on the debentures was $1.6 million and $831,000
at December 31, 1997 and 1996, respectively. At December 31, 1997, the
principal and accrued but unpaid interest on the debentures could have been
converted into an aggregate of 577,632 shares of FBA common stock.
(10) EMPLOYEE BENEFIT PLANS
401(K) PLAN
FBA has a savings and incentive plan covering substantially all employees.
Under the plan, employer matching contributions are determined annually by
FBA's Board of Directors. Employee contributions are limited to 15% of an
employee's compensation not to exceed $9,500 for 1997. Total employer
contributions under the plan were
F-19
<PAGE> 107
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$63,000, $40,000 and $41,000 for the years ended December 31, 1997, 1996 and
1995, respectively. The plan assets are held and managed under a trust
agreement with the trust department of an affiliated bank.
PENSION PLAN
FBA has a noncontributory defined benefit pension plan covering
substantially all officers and employees. The accumulation of benefits under
the plan were discontinued during 1994. During 1997, 1996 and 1995, no
contributions were made to the pension plan and FBA did not incur any
expenditures associated with the pension plan. FBA is in the process of
terminating this plan and does not expect to incur a significant gain or loss.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Prior to August 31, 1994, FBA made certain health care and life insurance
benefits available for substantially all of its retired employees, a portion of
the cost of which was paid by FBA. The estimated cost of such postretirement
benefits was accrued as an expense during the period of an employee's active
service to FBA. During 1994, FBA reevaluated the cost of this plan and changed
it to provide contributions for coverage only to those individuals receiving
benefits on August 31, 1994. In conjunction with the plan restructuring, FBA
fully recognized the estimated cost of the future benefits payable under the
plan. Employees retiring after that date are allowed to purchase coverage, but
must pay the entire cost associated with such coverage.
(11) DIRECTORS' STOCK BONUS PLAN
The 1993 Directors' Stock Bonus Plan provides for annual grants of FBA
common stock to the nonemployee directors of FBA. Directors' compensation of
$13,000, $10,000 and $27,000 was recorded relating to this plan for the years
ended December 31, 1997, 1996 and 1995, respectively. These amounts represented
the market values of the 1,000 shares granted for the years ended December 31,
1997, 1996 and 1995, respectively.
The plan is self-operative, and the timing, amounts, recipients and terms
of individual grants are determined automatically. On July 1 of each year, each
nonemployee director automatically receives a grant of 500 shares of common
stock. The maximum number of plan shares that may be issued shall not exceed
16,667 shares and 9,667 shares remain to be issued at December 31, 1997. The
plan will expire on July 1, 2001.
(12) COMMITMENTS AND CONTINGENCIES
FBA is a party to commitments to extend credit and commercial and standby
letters of credit in the normal course of business to meet the financing needs
of its customers. These instruments involve, to varying degrees, elements of
credit risk and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The interest rate risk associated with these
credit commitments relates primarily to the commitments to originate fixed-rate
loans. The credit risk amounts are equal to the contractual amounts, assuming
the amounts are fully advanced and the collateral or other security is of no
value. FBA uses the same credit policies in granting commitments and
conditional obligations as it does for on-balance-sheet items.
Commitments to extend credit at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C>
Credit card commitments.............. $ 1,978 3,140
Other loan commitments............... 237,973 134,879
Standby letters of credit............ 2,173 226
======== =======
</TABLE>
Credit card and other loan commitments are agreements to lend to a customer
as long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being
F-20
<PAGE> 108
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. Each customer's creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed necessary upon
extension of credit, is based on credit evaluation of the customer. Collateral
held varies but may include accounts receivable, inventory, property, plant,
equipment, income-producing commercial properties and single family residential
properties. Collateral is generally required except for consumer credit card
commitments.
Standby letters of credit are conditional commitments issued to guarantee
the performance of a customer to a third party. The letters of credit are
primarily issued to support private borrowing arrangements and commercial
transactions. Most letters of credit extend for less than one year. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Upon issuance of the
commitments, FBA holds marketable securities, certificates of deposit,
inventory or other assets as collateral supporting those commitments for which
collateral is deemed necessary.
(13) STOCKHOLDERS' EQUITY
STOCK OPTIONS
On April 19, 1990, the Board of Directors of FBA adopted the 1990 Stock
Option Plan (1990 Plan). The 1990 Plan currently provides that no more than
200,000 shares of common stock will be available for stock options. One-fourth
of each stock option becomes exercisable at the date of the grant and at each
anniversary date of the grant. The options expire ten years from the date of
the grant. There were no options granted under this plan during the three years
ended December 31, 1997.
At December 31, 1997, there were 36,833 shares available for future stock
options and 13,334 shares of common stock reserved for the exercise of
outstanding options. Transactions relating to the 1990 Plan for the years ended
December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- --------------------
AVERAGE AVERAGE AVERAGE
OPTION OPTION OPTION
AMOUNT PRICE AMOUNT PRICE AMOUNT PRICE
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding options, January 1................ 57,500 $3.75 67,500 $3.75 98,133 $3.75
Options exercised and redeemed................ (44,166) 3.75 (10,000) 3.75 (30,633) 3.75
------- ------- -------
Outstanding options, December 31.............. 13,334 3.75 57,500 3.75 67,500 3.75
======= ===== ======= ===== ======= =====
Options exercisable, December 31.............. 13,334 57,500 67,500
======= ======= =======
</TABLE>
WARRANTS
In connection with a previous restructuring of FBA, a warrant to purchase
common stock was granted to the Federal Deposit Insurance Corporation (FDIC).
On October 1, 1996, FBA purchased the outstanding warrant to acquire 131,336
shares of FBA common stock at $0.75 per share from the FDIC for an aggregate
amount of $1.28 million. The purchase of the warrant was applied as a reduction
of capital surplus.
DISTRIBUTION OF EARNINGS OF THE SUBSIDIARY BANKS
The Subsidiary Banks are restricted by various state and federal
regulations as to the amount of dividends which are available for payment of
dividends to FBA. Under the most restrictive of these requirements, the future
payment of dividends from the Subsidiary Banks is limited to approximately $2.6
million at December 31, 1997, unless prior permission of the regulatory
authorities is obtained.
F-21
<PAGE> 109
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) TRANSACTIONS WITH RELATED PARTIES
FBA purchases certain services and supplies from or through First Banks.
FBA's financial position and operating results could significantly differ from
those that would be obtained if FBA's relationship with First Banks did not
exist.
First Banks provides management services to FBA and its Subsidiary Banks.
Management services are provided under a management fee agreement whereby FBA
compensates First Banks on an hourly basis for its use of personnel for various
functions including internal audit, loan review, income tax preparation and
assistance, accounting, asset/liability and investment services, loan servicing
and other management and administrative services. Fees paid under this
agreement were $1.4 million, $1.3 million and $521,000 for the years ended
December 31, 1997, 1996 and 1995 respectively. The fees paid for management
services are at least as favorable as could have been obtained from an
unaffiliated third party.
Because of the affiliation with First Banks and the geographic proximity of
certain of their offices, FBA shares the cost of certain personnel and services
used by FBA and First Banks. This includes the salaries and benefits of certain
loan and administrative personnel. The allocation of the shared costs are
charged and/or credited under the terms of cost sharing agreements entered into
during 1996. 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. Fees paid under these agreements were $709,000 and
$412,000 for the years ended December 31, 1997 and 1996, respectively.
Effective April 1, 1997, First Services L.P., a limited partnership
indirectly owned by First Banks' Chairman and his children through its general
partners and limited partners, began providing data processing and various
related services to FBA under the terms of data processing agreements.
Previously, these services were provided by a subsidiary of First Banks. Fees
paid under these agreements were $1.0 million, $692,000 and $374,000 for the
years ended December 31, 1997, 1996 and 1995, respectively. The fees paid for
data processing services are at least as favorable as could have been obtained
from an unaffiliated third party.
FBA's Subsidiary Banks had $66.9 million and $39.3 million in whole loans
and loan participations outstanding at December 31, 1997 and 1996,
respectively, that were purchased from banks affiliated with First Banks. In
addition, FBA's Subsidiary Banks had sold $54.7 million and $28.7 million in
whole loans and loan participations to affiliates of First Banks at December
31, 1997 and 1996, respectively. These loans and loan participations were
acquired and sold at interest rates and terms prevailing at the dates of their
purchase or sale and under standards and policies followed by FBA's Subsidiary
Banks.
FBA has borrowed $14.9 million and $14.0 million at December 31, 1997 and
1996, respectively, from First Banks under a $20 million Note Payable, dated
November 4, 1997. This Note Payable replaces a $15 million note payable under
similar terms to First Banks. The borrowings under the Note Payable bear
interest at an annual rate of one-quarter percent less than the "Prime Rate"
as reported in the Wall Street Journal. The interest expense was $1.18 million
and $194,000 for the years ended December 31, 1997 and 1996, respectively. The
principal and accrued interest under the Note Payable are due and payable on
October 31, 2001. The accrued and unpaid interest under the Note Payable was
$1.37 million and $194,000 at December 31, 1997 and 1996, respectively.
First Banks purchased convertible debentures of FCB of $1.5 million and
$5.0 million on October 31, 1995 and December 28, 1995, respectively, as more
fully discussed in Note 9. The related interest expense for these debentures
was $791,000, $793,000 and $38,000 for the years ended December 31, 1997, 1996
and 1995, respectively.
Outside of normal customer relationships, no directors, executive officers
or stockholders holding over 5% of FBA's voting stock, and no corporations or
firms with which such persons or entities are associated, currently maintain or
have maintained, any significant business or personal relationships with FBA or
its subsidiaries, other than that which arises by virtue of such position or
ownership interest in FBA, except as described above.
F-22
<PAGE> 110
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) INTEREST RATE RISK MANAGEMENT AND DERIVATIVE FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK
Derivative financial instruments held by FBA at December 31, 1997 and 1996
consist of an interest rate cap agreement with a notional amount of $10.0
million and credit exposure of $222,000 and $335,000, respectively.
FBA's interest rate cap agreement limits the interest expense associated
with certain of its interest-bearing liabilities. In exchange for an initial
fee, the interest rate cap agreement entitles FBA to receive interest payments
when a specified index rate exceeds a predetermined rate. The agreement
outstanding at December 31, 1997 and 1996 effectively limits the interest rate
to 5.0% on $10 million of interest-bearing liabilities from October 15, 1997 to
May 15, 2000. At December 31, 1997 and 1996, the unamortized costs were
$242,000 and $353,000, respectively, and were included in other assets. The
amount receivable under the agreement was $8,000 at December 31, 1997. There
were no amounts receivable under the agreement at December 31, 1996.
Previously, FBA sold interest rate futures contracts and purchased options
on interest rate futures contracts to hedge the interest rate risk of its
available-for-sale securities portfolio. There were no outstanding positions of
interest rate futures for the years ended December 31, 1997 and 1996. For the
year ended December 31, 1995, FBA incurred a net loss on interest rate futures
contracts of $5.95 million, of which $806,000 was amortized to income as a
yield adjustment to the investment security portfolio and $5.14 million was
included in the cost basis in determining the gain or loss upon the sale of the
securities. There were no gains or losses from interest rate futures contracts
for the years ended December 31, 1997 and 1996.
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of 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.
F-23
<PAGE> 111
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The estimated fair value of FBA's financial instruments at December 31 were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------- -------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents.......................... $ 35,162 35,162 42,874 42,874
Investment securities.............................. 148,181 148,181 125,139 125,139
Net loans.......................................... 420,048 421,874 325,627 328,166
Accrued interest receivable........................ 4,819 4,819 3,545 3,545
Liabilities:
Demand and savings deposits........................ $318,215 318,215 247,018 247,018
Time deposits...................................... 238,312 239,344 208,924 209,291
Accrued interest payable........................... 4,185 4,185 2,002 2,002
12% convertible debentures......................... 6,500 6,500 6,500 6,500
Borrowings......................................... 18,587 18,587 16,797 16,797
Off-balance-sheet:
Interest rate cap agreement........................ $ 242 222 353 335
Unfunded loan commitments.......................... -- -- -- --
</TABLE>
The following methods and assumptions were used in estimating the fair
value of financial instruments:
FINANCIAL ASSETS:
Cash and cash equivalents and accrued interest receivable: The carrying
values reported in the consolidated balance sheets approximate fair value.
Investment securities: Fair value for securities available for sale were
the amounts reported in the consolidated balance sheets. If quoted market
prices were not available, fair values were based upon quoted market prices of
comparable instruments.
Net loans: The fair value for most loans was estimated utilizing discounted
cash flow calculations that applied 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) were 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. The fair value for certificates of deposit was estimated
utilizing a discounted cash flow calculation that applied interest rates
currently being offered on similar certificates to a schedule of aggregated
monthly maturities of time deposits.
Borrowings, 12% convertible debentures and accrued interest payable: The
carrying values reported in the consolidated balance sheets approximate fair
value.
F-24
<PAGE> 112
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OFF-BALANCE-SHEET:
Interest rate cap agreement: The fair value of the interest rate cap
agreement is estimated by comparison to market rates quoted on new agreements
with similar creditworthiness.
Unfunded loan 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.
(17) REGULATORY CAPITAL
The Subsidiary Banks are subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Subsidiary Banks' financial statements. Under capital
adequacy guidelines and the regulatory framework for Prompt Corrective Action,
the Subsidiary Banks must meet specific capital guidelines that involve
quantitative measures of the Subsidiary Banks' assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Subsidiary Banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weighting and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Subsidiary Banks to maintain certain minimum capital ratios. The
Subsidiary Banks 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
(as defined in the regulations). In addition, a minimum leverage ratio (Tier 1
capital to average assets) of 3.0% plus an additional cushion of 100 to 200
basis points is expected. In order to be considered well capitalized under
Prompt Corrective Action provisions, a bank is required to maintain a risk
weighted asset ratio of at least 10%, a Tier 1 to risk weighted assets ratio of
at least 6%, and a leverage ratio of at least 5%. As of December 31, 1996, the
date of the most recent notification from FBA's primary regulator, each of the
Subsidiary Banks were categorized as well capitalized under the regulatory
framework for Prompt Corrective Action. Management believes, as of December 31,
1997, each of the Subsidiary Banks was well capitalized as defined by the FDIC
Improvement Act.
At December 31, 1997 and 1996, FBA's and the Subsidiary Banks' capital
ratios were as follows:
<TABLE>
<CAPTION>
RISK-BASED CAPITAL RATIOS
--------------------------------------
TOTAL TIER 1 LEVERAGE RATIO
--------------- --------------- ---------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
FBA................................................ 6.88% 6.62% 5.62% 5.35% 4.96% 4.46%
BankTEXAS.......................................... 12.26 10.29 11.00 9.04 8.90 7.53
FB California...................................... 13.03 -- 11.77 -- 13.80 --
Sunrise Bank<F1>................................... -- 17.67 -- 16.39 -- 10.88
First Commercial<F2>............................... 11.25 12.18 9.98 10.89 7.96 8.21
<FN>
- --------
<F1>Sunrise Bank was merged into FB California on December 1, 1997.
<F2>First Commercial was merged into FB California on February 2, 1998.
</TABLE>
(18) CONTINGENT LIABILITIES
In the ordinary course of business, there are various legal proceedings
pending against FBA and/or the Subsidiary Banks. Management, in consultation
with legal counsel, is of the opinion the ultimate resolution of these
proceedings will have no material effect on the financial condition or results
of operations of FBA or the Subsidiary Banks.
F-25
<PAGE> 113
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(19) PARENT COMPANY ONLY FINANCIAL INFORMATION
<TABLE>
CONDENSED BALANCE SHEETS
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
---- ----
(DOLLARS EXPRESSED IN
THOUSANDS)
<S> <C> <C>
Assets:
Cash.................................................... $ 1,075 802
Investment in subsidiaries.............................. 68,095 55,469
Deferred tax assets..................................... 3,532 3,297
Other assets............................................ 659 667
------- ------
Total assets........................................ $73,361 60,235
======= ======
Liabilities and stockholders' equity:
Dividends payable....................................... $ -- 251
Promissory note payable................................. 14,900 14,000
12% convertible debentures.............................. 6,500 6,500
Accrued and other liabilities........................... 6,870 1,289
------- ------
Total liabilities................................... 28,270 22,040
Stockholders' equity........................................ 45,091 38,195
------- ------
Total liabilities and stockholders' equity.............. $73,361 60,235
======= ======
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Income:
Dividends from subsidiaries............................. $ 1,625 -- --
Other................................................... 31 219 315
------- ------ ------
Total income........................................ 1,656 219 315
------- ------ ------
Expense:
Interest................................................ 2,064 1,138 140
Other................................................... 686 505 32
------- ------ ------
Total expense....................................... 2,750 1,643 172
------- ------ ------
(Loss) income before income tax (benefit) expense... (1,094) (1,424) 143
Income tax (benefit) expense............................ (686) (492) 68
------- ------ ------
(Loss) income before equity in undistributed income
(loss) of subsidiaries............................ (408) (932) 75
Equity in undistributed income (loss) of subsidiaries... 3,941 1,623 (4,889)
------- ------ ------
Net income (loss)................................... $ 3,533 691 (4,814)
======= ====== ======
</TABLE>
F-26
<PAGE> 114
FIRST BANKS AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Operating activities:
Net income (loss)....................................... $ 3,533 691 (4,814)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Credit for deferred income taxes.................... 688 126 --
Equity in undistributed (income) loss of
subsidiaries...................................... (3,941) (1,623) 4,889
Dividends from subsidiaries......................... 1,625 -- --
Other, net.......................................... (1,028) (2,134) (552)
------- ------- -------
Net cash provided by (used in) operating
activities.................................... 877 (2,940) (477)
------- ------- -------
Investing activities:
Cash received from acquired entities.................... -- -- 200
Purchase of investment securities....................... -- (12,618) (21,191)
Proceeds from maturity of investment securities......... -- 7,152 8,345
Proceeds from sales of investment securities............ -- 4,496 25,752
Capital contributions to subsidiaries................... -- (17,052) (3,750)
Pre-merger transactions of FCB.......................... -- (1,938) --
------- ------- -------
Net cash provided by (used in) investing
activities.................................... -- (19,960) 9,356
------- ------- -------
Financing activities:
Increase in promissory note payable..................... 900 14,000 --
Exercise of stock options............................... 15 38 115
Repurchase of common stock for treasury................. (1,512) (2,010) (828)
Pre-merger transactions of FCB.......................... (7) 2,933 --
------- ------- -------
Net cash provided by (used in) financing
activities.................................... (604) 14,961 (713)
------- ------- -------
Net increase (decrease) in cash and cash
equivalents................................... 273 (7,939) 8,166
Cash and cash equivalents at beginning of year.............. 802 8,741 575
------- ------- -------
Cash and cash equivalents at end of year.................... $ 1,075 802 8,741
======= ======= =======
Noncash investing and financing activities:
Issuance of common stock in purchase accounting
acquisition........................................... $ 4,763 -- --
Cash paid for interest.................................. -- 475 110
Pre-merger transaction of FCB--exchange of common stock
for dividend payable.................................. -- 643 --
======= ======= =======
</TABLE>
(20) SUBSEQUENT EVENTS
As described in Note 2 to the consolidated financial statements, FBA
completed the acquisitions of FCB and Pacific Bay Bank on February 2, 1998 in
exchange for 751,728 shares of FBA common stock and cash of $4.2 million,
respectively. The total assets of FCB and Pacific Bay Bank were $192.5 million
and $38.3 million, respectively, at the date of the transactions.
The accounting treatment for the acquisition of FCB is summarized in Note 2
to the consolidated financial statements. The acquisition of Pacific Bay Bank
was accounted for under the purchase method of accounting and was funded
through an advance under the Note Payable. The excess of the cost over the fair
value of the net assets acquired was $1.63 million and $1.52 million for FCB
and Pacific Bay Bank, respectively, and is being amortized over 15 years.
F-27
<PAGE> 115
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
INDEPENDENT AUDITORS' REPORT
KPMG PEAT MARWICK LLP LOGO
The Board of Directors and Stockholders
First Commercial Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of First
Commercial Bancorp, Inc. and subsidiary (the Company) as of December 31, 1997
and 1996, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for the years 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 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 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, 1997 and 1996, and
the results of their operations and their cash flows for the years then ended,
in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
May 22, 1998
F-28
<PAGE> 116
<TABLE>
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
DECEMBER 31,
------------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks................................. $ 8,720 9,410
Federal funds sold...................................... -- 11,500
-------- -------
Total cash and cash equivalents..................... 8,720 20,910
-------- -------
Investment securities available for sale, at fair value..... 64,390 38,229
Loans:
Commercial and financial................................ 40,672 32,756
Real estate construction and development................ 26,853 13,807
Real estate mortgage.................................... 46,233 39,103
Consumer and installment................................ 5,100 9,244
-------- -------
Total loans......................................... 118,858 94,910
Unearned discount....................................... (840) (413)
Allowance for possible loan losses...................... (4,692) (4,597)
-------- -------
Net loans........................................... 113,326 89,900
-------- -------
Bank premises and equipment, net of accumulated
depreciation.............................................. 2,018 1,894
Accrued interest receivable................................. 1,856 1,197
Other real estate........................................... 220 192
Other assets................................................ 1,113 711
-------- -------
Total assets........................................ $191,643 153,033
======== =======
<CAPTION>
The accompanying notes are an integral part of the consolidated financial statements.
F-29
<PAGE> 117
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
------------------
1997 1996
---- ----
<S> <C> <C>
LIABILITIES
Deposits:
Demand:
Non-interest-bearing................................ $ 30,997 24,026
Interest-bearing.................................... 16,188 16,956
Savings................................................. 56,850 30,042
Time deposits:
Time deposits of $100 or more....................... 14,095 9,284
Other time deposits................................. 54,455 55,828
-------- -------
Total deposits.................................. 172,585 136,136
Short-term borrowings....................................... 880 705
Accrued interest payable.................................... 1,939 1,098
Accrued expenses and other liabilities...................... 2,082 2,264
Notes payable............................................... 400 --
12% convertible debentures.................................. 6,500 6,500
-------- -------
Total liabilities............................... 184,386 146,703
-------- -------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 5,000,000 shares
authorized; no shares issued and outstanding.............. -- --
Common stock, $1.25 par value, 10,000,000 shares authorized;
845,779 and 846,127 shares issued and outstanding at
December 31, 1997 and 1996, respectively.................. 1,058 1,058
Capital surplus............................................. 5,265 5,272
Retained earnings since elimination of accumulated deficit
of $30,881, effective December 31, 1996................... 764 --
Net fair value adjustment for securities available for
sale...................................................... 170 --
-------- -------
Total stockholders' equity...................... 7,257 6,330
-------- -------
Total liabilities and stockholders' equity...... $191,643 153,033
======== =======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-30
<PAGE> 118
<TABLE>
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1997 1996
---- ----
<S> <C> <C>
Interest income:
Interest and fees on loans.............................. $ 10,234 8,643
Investment securities................................... 2,797 2,738
Federal funds sold and other............................ 603 555
-------- -------
Total interest income............................... 13,634 11,936
-------- -------
Interest expense:
Deposits:
Interest-bearing demand............................. 224 269
Savings............................................. 1,397 965
Time deposits of $100 or more....................... 513 599
Other time deposits................................. 3,268 2,802
Other borrowings........................................ 919 905
-------- -------
Total interest expense.............................. 6,321 5,540
-------- -------
Net interest income................................. 7,313 6,396
Provision for possible loan losses.......................... -- 1,155
-------- -------
Net interest income after provision for possible
loan losses....................................... 7,313 5,241
-------- -------
Noninterest income:
Service charges on deposit accounts and customer service
fees.................................................. 607 751
Other income............................................ 116 986
-------- -------
Total noninterest income............................ 723 1,737
-------- -------
Noninterest expense:
Salaries and employee benefits.......................... 2,007 2,177
Occupancy, net of rental income......................... 726 881
Furniture and equipment................................. 344 390
Federal Deposit Insurance Corporation premiums.......... 17 337
Postage, printing and supplies.......................... 150 477
Legal, examination and professional fees................ 1,236 1,501
Data processing......................................... 369 401
Communications.......................................... 152 202
(Gain) loss on sale of other real estate, net of
expenses.............................................. (47) 1,002
Other................................................... 931 712
-------- -------
Total noninterest expense........................... 5,885 8,080
-------- -------
Income (loss) before provision (benefit) for income
taxes.............................................. 2,151 (1,102)
Provision (benefit) for income taxes........................ 1,387 (532)
-------- -------
Net income (loss) available to common
stockholders....................................... $ 764 (570)
======== =======
Net earnings (loss) per common share:
Basic................................................... $ 0.90 (0.77)
Diluted................................................. 0.90 (0.77)
======== =======
Weighted average common stock outstanding................... 845,779 738,260
======== =======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-31
<PAGE> 119
<TABLE>
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
TWO YEARS ENDED DECEMBER 31, 1997
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<CAPTION>
NET FAIR
VALUE
ADJUSTMENT
FOR TOTAL
RETAINED SECURITIES STOCK-
COMMON CAPITAL EARNINGS AVAILABLE HOLDERS'
STOCK SURPLUS (DEFICIT) FOR SALE EQUITY
------ ------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996..................... $ 697 33,251 (30,311) (58) 3,579
Net loss..................................... -- -- (570) -- (570)
Net fair value adjustment for securities
available for sale......................... -- -- -- 104 104
Proceeds received from sale of 288,720 shares
of common stock............................ 361 2,856 -- -- 3,217
Effect of quasi-reorganization, effective
December 31, 1996.......................... -- (30,835) 30,881 (46) --
------ ------- -------- ------ ------
Balance, December 31, 1996................... 1,058 5,272 -- -- 6,330
Net income................................... -- -- 764 -- 764
Repurchase of fractional shares.............. -- (7) -- -- (7)
Net fair value adjustment for securities
available for sale......................... -- -- -- 170 170
------ ------- -------- ------ ------
Balance, December 31, 1997................... $1,058 5,265 764 170 7,257
====== ======= ======== ====== ======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-32
<PAGE> 120
<TABLE>
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS EXPRESSED IN THOUSANDS)
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $ 764 (570)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, amortization and accretion, net....... 359 148
Provision for possible loan losses.................. -- 1,155
Provision (benefit) for income taxes................ 1,387 (532)
Payments of income taxes............................ (1,730) --
(Increase) decrease in accrued interest
receivable......................................... (659) 232
Interest accrued on liabilities..................... 6,321 5,540
Payments of interest on liabilities................. (5,480) (4,929)
Other operating activities, net..................... (257) 1,979
-------- -------
Net cash provided by operating activities....... 705 3,023
-------- -------
Cash flows from investing activities:
Proceeds from maturities of investment securities....... 36,557 86,884
Purchases of investment securities...................... (62,604) (50,643)
Recoveries of loans previously charged-off.............. 1,006 1,047
Net increase in loans................................... (24,841) (24,574)
Purchases of bank premises and equipment................ (335) (49)
Net decrease in lease financing......................... -- 991
Proceeds from sales of other real estate................ 480 2,297
Other investing activities.............................. -- (23)
-------- -------
Net cash (used in) provided by investing
activities.................................... (49,737) 15,930
-------- -------
Cash flows from financing activities:
Other increases (decreases) in deposits:
Demand and savings deposits......................... 33,011 (12,846)
Time deposits....................................... 3,438 (7,182)
Proceeds from the issuance of common stock.............. -- 3,217
Increase in notes payable............................... 400 --
Repurchase of fractional shares......................... (7) --
-------- -------
Net cash provided by (used in) financing
activities.................................... 36,842 (16,811)
-------- -------
Net (decrease) increase in cash and cash
equivalents................................... (12,190) 2,142
Cash and cash equivalents at beginning of year.............. 20,910 18,768
-------- -------
Cash and cash equivalents at end of year.................... $ 8,720 20,910
======== =======
Noncash investing and financing activities:
Exchange of common stock for dividends payable.......... $ -- 643
Net decrease in other real estate as a result of
foreclosure or financing, and other related
transactions........................................... 409 1,099
======== =======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-33
<PAGE> 121
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.
FCB operates a commercial banking business through its banking subsidiary,
First Commercial Bank (First Commercial or the Bank or the Subsidiary Bank).
First Commercial is headquartered in Sacramento with five branch offices
located in Roseville (two branches), San Francisco, Concord and Campbell,
California.
FCB is majority owned by First Banks, Inc., St. Louis, Missouri (First
Banks). First Banks owns 61.5% of the outstanding stock at December 31, 1997
and 1996, and accordingly, has effective control over the management and
policies of FCB and the election of its directors.
The following is a summary of the more significant policies followed by
FCB:
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.
Certain 1996 amounts have been reclassified to conform with the 1997
presentation.
The Board of Directors of FCB elected to implement an accounting adjustment
referred to as a "quasi-reorganization," effective December 31, 1996. In
accordance with accounting provisions applicable to a quasi-reorganization, the
assets and liabilities were adjusted to fair value and the accumulated deficit
was eliminated. The implementation of the quasi-reorganization did not have a
significant impact on the results of operations of FCB.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the parent
company and the Bank. All significant intercompany accounts and transactions
have been eliminated.
CASH AND CASH EQUIVALENTS
Cash, due from banks and federal funds sold are considered to be cash and
cash equivalents for purposes of the consolidated statements of cash flows.
The Subsidiary Bank is required to maintain certain daily reserve balances
in accordance with regulatory requirements. These reserve balances were $1.0
million and $918,000 at December 31, 1997 and 1996, 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 classified as available for sale are those debt and
equity securities for which FCB has no immediate plan to sell, but which may be
sold in the future if circumstances warrant. Available-for-sale securities are
stated at current 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 stockholders' equity are
reversed upon sale.
F-34
<PAGE> 122
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Investment securities designated as held to maturity are those debt
securities which FCB has the positive intent and ability to hold until
maturity. Held-to-maturity securities are stated at amortized cost, in which
the amortization of premiums and accretion of discounts are recognized over the
contractual maturities or estimated lives of the individual securities,
adjusted for anticipated prepayments, using the level-yield method.
At December 31, 1997 and 1996, all investment securities were classified as
available for sale.
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 and impaired 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.
A loan is considered impaired when it is probable a creditor will be unable
to collect all amounts due, both principal and interest, according to the
contractual terms of the loan agreement. When measuring impairment, the
expected future cash flows of an impaired loan are discounted at the loan's
effective interest rate. Alternatively, impairment is measured by reference to
an observable market price, if one exists, or the fair value of the collateral
for a collateral-dependent loan. Regardless of the historical measurement
method used, FCB measures impairment based on the fair value of the collateral
when the creditor determines foreclosure is probable. Additionally, impairment
of a restructured loan is measured by discounting the total expected future
cash flows at the loan's effective rate of interest as stated in the original
loan agreement. FCB continues to use its existing nonaccrual methods for
recognizing interest income on impaired loans.
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 loans 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 primarily using the
straight-line method over the estimated useful lives of the related assets.
Amortization of leasehold improvements is calculated using the straight-line
method over the shorter of the useful life of the improvement or term of the
lease. Bank premises and improvements are depreciated over 15 to 29 years and
equipment over two to ten years.
OTHER REAL ESTATE
Real estate acquired through foreclosure or 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 the
property 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.
F-35
<PAGE> 123
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
FCB and First Commercial will file separate federal income tax returns for
the periods subsequent to the common stock offering, as more fully discussed in
Note 2 to the accompanying consolidated financial statements. FCB and First
Commercial will each pay their respective portion of federal income taxes or
receive payments to the extent that tax benefits are realized. For the periods
prior to the common stock offering, FCB and First Commercial each paid their
respective portion of federal income taxes to, or received payments from, First
Banks to the extent that tax benefits were available within First Banks'
consolidated group.
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.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
FCB is party to commitments to extend credit and commercial and standby
letters of credit in the normal course of business to meet the financing needs
of its customers. These commitments involve, in varying degrees, elements of
interest rate risk and credit risk in excess of the amount recognized in the
consolidated balance sheets.
EARNINGS (LOSS) PER COMMON SHARE
FCB adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 128, Earnings Per Share (SFAS 128), on a retroactive basis effective
December 31, 1997. Accordingly, earnings (loss) per common share (EPS) data has
been restated to conform with the provisions of SFAS 128.
SFAS 128 provides for the calculation of a "Basic" and "Diluted" EPS.
Basic EPS is computed by dividing the income (loss) available to common
shareholders (the numerator) by the weighted average number of common shares
outstanding (the denominator) during the year. The computation of dilutive EPS
is similar except the denominator is increased to include the number of
additional common shares that would have been outstanding if the dilutive
potential shares had been issued. In addition, in computing the dilutive effect
of convertible securities, the numerator is adjusted to add back (a) any
convertible preferred dividends and (b) the after-tax amount of interest
recognized in the period associated with any convertible debt. The
implementation of SFAS 128 did not have a material impact on the calculation of
EPS.
(2) CAPITAL TRANSACTION
On February 16, 1996, after its Amended Registration Statement was declared
effective by the Securities and Exchange Commission, FCB commenced an offering
of an aggregate of 477,520 shares of newly-issued common stock (Rights
Offering). The Rights Offering was composed of: (a) an offering to its existing
shareholders, other than First Banks, of 400,000 shares at $12.50 per share;
(b) an offering to individuals who were not shareholders of FCB of a maximum of
80,000 of the shares available in the Rights Offering which were not otherwise
subscribed; and (c) an offering of 77,520 shares in exchange for certain
outstanding dividend obligations and accrued interest thereon of FCB. The
Rights Offering was completed during the second quarter of 1996 and
approximately 288,720 shares were issued in exchange for $2.97 million in cash
and $643,000 of outstanding dividend obligations. The Rights Offering provided
$3.22 million of capital to FCB, net of underwriting expenditures of $373,000.
As a result of the Rights Offering, First Banks' ownership was reduced from
93.3% at December 31, 1995 to 61.5% at the end of the second quarter in 1996.
F-36
<PAGE> 124
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) INVESTMENTS IN DEBT SECURITIES
As part of the quasi-reorganization discussed in Note 1, effective December
31, 1996, carrying values of the Company's investment security portfolio were
adjusted to current fair value and the balance of the net fair value adjustment
of securities available for sale, reflected as a separate component of
stockholders' equity, was eliminated. As a result of this procedure, the
carrying value was increased by $70,000.
The amortized cost, contractual maturity, unrealized gains and losses and
fair value of investment securities available for sale at December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
MATURITY TOTAL GROSS
------------------- AMOR- UNREALIZED WEIGHTED
1 YEAR 1-5 TIZED -------------- FAIR AVERAGE
OR LESS YEARS COST GAINS LOSSES VALUE YIELD
------- ----- ----- ----- ------ ----- --------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997:
Carrying value:
U.S. Treasury.................... $10,061 29,179 39,240 258 -- 39,498 6.08%
U.S. government agencies and
corporations:
Mortgage-backed............ -- 610 610 -- (8) 602 5.05
Other...................... 2,005 22,273 24,278 35 (23) 24,290 6.17
------- ------ ------ ----- --- ------
Total.................. $12,066 52,062 64,128 293 (31) 64,390 6.10
======= ====== ====== ===== === ====== ====
Market value-debt securities........... $12,085 52,305
======= ======
Weighted average yield................. 5.94% 6.14%
======= ======
December 31, 1996:
Carrying value:
U.S. Treasury...................... $15,035 8,047 23,082 -- -- 23,082 5.66%
U.S. government agencies and
corporations:
Mortgage-backed................ 470 705 1,175 -- -- 1,175 4.92
Other.......................... 6,901 7,071 13,972 -- -- 13,972 5.59
------- ------ ------ ----- --- ------
Total.................. $22,406 15,823 38,229 -- -- 38,229 5.61
======= ====== ====== ===== === ====== ====
Market value-debt securities........... $22,406 15,823
======= ======
Weighted average yield................. 5.23% 6.16%
======= ======
</TABLE>
The expected maturities of investment securities may differ from
contractual maturities since borrowers have the right to call or prepay the
obligations with or without prepayment penalties.
There were no sales of securities for the years ended December 31, 1997 and
1996.
Investment securities with a carrying value of approximately $8.6 million
and $3.7 million at December 31, 1997 and 1996, respectively, were pledged in
connection with deposits of public and trust funds, securities sold under
agreements to repurchase and for other purposes as required or permitted by
law.
F-37
<PAGE> 125
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Changes in the allowance for possible loan losses for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(DOLLARS EXPRESSED
IN THOUSANDS)
<S> <C> <C>
Balance, January 1................................... $4,597 5,388
------ ------
Loans charged-off.................................... (911) (2,993)
Recoveries of loans previously charged-off........... 1,006 1,047
------ ------
Net loans (charged-off) recovered............ 95 (1,946)
------ ------
Provision charged to operations...................... -- 1,155
------ ------
Balance, December 31................................. $4,692 4,597
====== ======
</TABLE>
At December 31, 1997 and 1996, FCB had $435,000 and $864,000, respectively,
of loans on nonaccrual status. Interest on nonaccrual loans which would have
been recorded under the original terms of the loans was $87,000 and $315,000
for the years ended December 31, 1997 and 1996, respectively. Of these amounts,
$38,000 and $184,000 was actually recorded as interest income on such loans in
1997 and 1996, respectively.
Impaired loans, which is represented by loans on nonaccrual status, had no
specific reserves at December 31, 1997 and 1996. The average recorded
investment in impaired loans was $761,000 and $2.9 million for the years ended
December 31, 1997 and 1996, respectively.
(5) BANK PREMISES AND EQUIPMENT
Bank premises and equipment were comprised of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
(DOLLARS EXPRESSED
IN THOUSANDS)
<S> <C> <C>
Land.................................................. $ 890 890
Buildings and improvements............................ 689 695
Furniture, fixtures and equipment..................... 345 304
Construction in progress.............................. 301 5
------ -----
Total......................................... 2,225 1,894
Less accumulated depreciation......................... 207 --
------ -----
Bank premises and equipment, net of
accumulated depreciation.................... $2,018 1,894
====== =====
</TABLE>
Depreciation expense for the years ended December 31, 1997 and 1996 totaled
$211,000 and $305,000, respectively.
F-38
<PAGE> 126
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FCB leases land, office properties and some items of equipment under
operating leases. Certain of the leases contain renewal options and escalation
clauses. Total rent expense was $376,000 and $476,000 for the years ended
December 31, 1997 and 1996, respectively. Future minimum lease payments under
noncancellable operating leases extend through 2019 as follows:
<TABLE>
<CAPTION>
(DOLLARS EXPRESSED
IN THOUSANDS)
<S> <C>
Year ending December 31:
1998.................................................... $ 365
1999.................................................... 328
2000.................................................... 328
2001.................................................... 194
2002.................................................... 103
Thereafter.............................................. 560
------
Total minimum lease payments........................ $1,878
======
</TABLE>
FCB leases a portion of its owned banking facilities to unrelated parties.
Total rental income was $22,000 and $9,000 for the years ended December 31,
1997 and 1996, respectively.
(6) PROMISSORY NOTE PAYABLE
On December 31, 1997, FCB borrowed $400,000 under a $1.0 million promissory
note payable (Note Payable) to First Banks. There were no similar borrowings
during 1996. The borrowings under the Note Payable bear interest at an annual
rate of one-quarter percent less than the "Prime Rate" as reported in the
Wall Street Journal. The principal and accrued interest under the Note Payable
are due and payable on October 31, 2001.
(7) EARNINGS PER COMMON SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations for the periods indicated:
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
(DOLLARS EXPRESSED IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Year ended December 31, 1997:
Basic EPS--income available to common stockholders...... $ 764 846 $ 0.90
======
Effect of 12% convertible debentures.................... -- --
----- ---
Diluted EPS--income available to common stockholders.... $ 764 846 $ 0.90
===== === ======
Year ended December 31, 1996:
Basic EPS--income available to common stockholders...... $(570) 738 $(0.77)
======
Effect of 12% convertible debentures.................... -- --
----- ---
Diluted EPS--income available to common stockholders.... $(570) 738 $(0.77)
===== === ======
</TABLE>
Effects of the 12% convertible debentures were anti-dilutive for the years
presented.
F-39
<PAGE> 127
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) INCOME TAXES
Income tax expense (benefit) attributable to income from continuing
operations for the years ended December 31 consists of:
<TABLE>
<CAPTION>
1997 1996
---- ----
(DOLLARS EXPRESSED
IN THOUSANDS)
<S> <C> <C>
Current income tax expense (benefit):............... $ 947 (509)
Federal......................................... 383 2
------ ----
State........................................... 1,330 (507)
------ ----
Deferred income tax expense (benefit):
Federal......................................... (347) (982)
State........................................... -- 591
------ ----
(347) (391)
------ ----
Increase in valuation allowance..................... 404 366
------ ----
Total....................................... $1,387 (532)
====== ====
</TABLE>
The effective rates of federal income taxes for the years ended December 31
differ from statutory rates of taxation as follows:
<TABLE>
<CAPTION>
1997 1996
------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
Income (loss) before provision (benefit) for income taxes... $2,151 $(1,102)
====== =======
Tax expense (benefit) at federal income tax rate............ $ 753 35.0% $ (386) (35.0)%
Effects of differences in tax reporting:
Change in the deferred tax valuation allowance.......... 404 18.8 366 33.2
Change in tax attributes available to be carried
forward............................................... -- -- (605) (54.9)
State income taxes.......................................... 249 11.6 385 34.9
Other, net.................................................. (19) (0.9) (292) (26.5)
------ ---- ------- -----
Provision (benefit) for income taxes.................... $1,387 64.5% $ (532) (48.3)%
====== ==== ======= =====
</TABLE>
F-40
<PAGE> 128
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
---- ----
(DOLLARS EXPRESSED
IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for possible loan losses..................... $ 1,769 1,734
Other real estate...................................... 44 103
Alternative minimum tax credit......................... 448 448
Depreciation on bank premises and equipment............ 152 144
Interest on nonaccrual loans........................... 5 24
Other.................................................. 521 425
Net operating loss carryforwards....................... 1,006 394
------- ------
Gross deferred tax assets........................... 3,945 3,272
Valuation allowance.................................... (3,593) (3,189)
------- ------
Net deferred tax assets............................. 352 83
------- ------
Deferred tax liabilities:
Gains on investment securities currently not allowable
for tax purposes...................................... 92 25
Accretion.............................................. 17 34
------- ------
Gross deferred tax liabilities...................... 109 59
------- ------
Net deferred tax assets............................. $ 243 24
======= ======
</TABLE>
Changes to the deferred tax asset valuation allowance for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(DOLLARS EXPRESSED
IN THOUSANDS)
<S> <C> <C>
Balance, January 1.................................... $3,189 2,823
Current year deferred provision, change in deferred
tax valuation allowance............................. 404 366
------ -----
Balance, December 31.................................. $3,593 3,189
====== =====
</TABLE>
Due to the uncertainty of future operating results, it was determined the
valuation allowance established for FCB should substantially offset any net
deferred tax asset. The valuation allowance for deferred tax assets at December
31, 1997 and 1996, respectively, includes $3.2 million which, if recognized,
will be credited to capital surplus under the terms of the quasi-reorganization
implemented by FCB as of December 31, 1996.
With the completion of the acquisition of FCB and the Bank by First Banks,
the federal and state net operating loss carryforwards (NOLs) generated prior
to the transactions are subject to an annual limitation under Internal Revenue
Code and California Revenue and Taxation Code for all subsequent tax years. The
federal and state annual limitation is $87,739. The following schedules reflect
the NOLs 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. FCB has alternative minimum tax
credits of $448,000 which have no expiration date. These credits are also
subject to an annual limitation and can be utilized subsequent to the
utilization of the NOLs.
F-41
<PAGE> 129
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The NOLs for FCB were approximately $2.9 million at December 31, 1997 and
expire as follows:
<TABLE>
<CAPTION>
(DOLLARS EXPRESSED
IN THOUSANDS)
<S> <C>
Year ending December 31:
2008.................................................... $ 394
2009.................................................... 747
2011.................................................... 660
2017.................................................... 1,064
------
Total............................................... $2,865
======
</TABLE>
For California income tax purposes, FCB had NOLs of approximately $106,000
at December 31, 1997. These NOLs expire as follows:
<TABLE>
<CAPTION>
(DOLLARS EXPRESSED
IN THOUSANDS)
<S> <C>
Year ending December 31:
1998.................................................... $ 77
1999.................................................... 29
----
Total............................................... $106
====
</TABLE>
(9) 12% CONVERTIBLE DEBENTURES
In 1995, FCB issued to First Banks two 5-year, 12% convertible debentures
in exchange for $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 $12.50 per share. At maturity, any unpaid
principal and accrued interest will be converted into FCB common stock at
$12.50 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 the Bank common stock held by FCB.
Accrued and unpaid interest on the debentures was $1.6 million and $831,000
at December 31, 1997 and 1996, respectively. At December 31, 1997, the
principal and accrued interest on the debentures could have been converted into
an aggregate of 649,720 shares of FCB common stock. If the debentures had been
converted as of December 31, 1997, First Banks' ownership interest would have
been 78.2%.
(10) DIVIDENDS PAYABLE
On December 31, 1991, the Board of Directors of FCB declared a $40.00 per
share cash dividend on its common stock. This dividend was payable in four
installments during 1992. On July 9, 1992, the Company made a decision to
suspend payment of the third and fourth quarter dividends which totaled $20.00
per share. FCB continued to accrue interest on these suspended dividends at the
current legal rate until such time as the dividends were paid to stockholders
of record as of June 15, 1992 and September 14, 1992. In connection with its
Rights Offering to shareholders, as described in Note 2, FCB exchanged common
stock with certain of those individuals eligible to receive the accrued and
unpaid 1992 dividends. FCB exchanged one share of FCB common stock for each
$12.50 of dividends and accrued interest in satisfaction of $643,000 of that
obligation. As of December 31, 1996, the aggregate accrued dividends and
accrued but unpaid interest thereon was $351,000, and such obligation was fully
paid in 1997.
F-42
<PAGE> 130
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) EMPLOYEE BENEFIT PLANS
401(K) PLAN
FCB has a self-administered savings and incentive plan covering
substantially all employees. Under the plan, employer matching contributions
are determined annually by FCB's Board of Directors. Employee contributions are
limited to 15% of an employee's compensation not to exceed $9,500 for 1997.
Total employer contributions under the plan were $20,000 and $17,000 for the
years ended December 31, 1997 and 1996, respectively. The plan assets are held
and managed under a trust agreement with the trust department of an affiliated
bank.
Postretirement benefits other than pensions and postemployment benefits are
generally not provided for FCB's employees.
(12) COMMITMENTS AND CONTINGENCIES
FCB is a party to commitments to extend credit and commercial and standby
letters of credit in the normal course of business to meet the financing needs
of its customers. These instruments involve, to varying degrees, elements of
credit risk and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The interest rate risk associated with these
credit commitments relates primarily to the commitments to originate fixed-rate
loans. The credit risk amounts are equal to the contractual amounts, assuming
the amounts are fully advanced and the collateral or other security is of no
value. FCB uses the same credit policies in granting commitments and
conditional obligations as it does for on-balance-sheet items.
Commitments to extend credit at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(DOLLARS EXPRESSED
IN THOUSANDS)
<S> <C> <C>
Commitments to extend credit.............................. $99,129 42,425
Standby letters of credit................................. 250 49
======= ======
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Each customer's
creditworthiness is evaluated on a case-by-case basis. The amount of collateral
obtained, if deemed necessary upon extension of credit, is based on credit
evaluation of the customer. Collateral held varies, but may include accounts
receivable, inventory, property, plant, equipment, income-producing commercial
properties and single family residential properties.
Standby letters of credit are conditional commitments issued to guarantee
the performance of a customer to a third party. The letters of credit are
primarily issued to support private borrowing arrangements and commercial
transactions. Most letters of credit extend for less than one year. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Upon issuance of the
commitments, FCB holds marketable securities, certificates of deposit,
inventory or other assets as collateral supporting those commitments for which
collateral is deemed necessary.
(13) DISTRIBUTION OF EARNINGS OF THE SUBSIDIARY BANK
The Subsidiary Bank is restricted by various state and federal regulations
as to the amount of dividends which are available for payment to FCB. Under the
most restrictive of these requirements, the future payment of dividends from
the Subsidiary Bank is limited to approximately $1.6 million at December 31,
1997, unless prior permission of the regulatory authorities is obtained.
F-43
<PAGE> 131
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) TRANSACTIONS WITH RELATED PARTIES
FCB purchases certain services and supplies from or through First Banks.
FCB's financial position and operating results could significantly differ from
those that would be obtained if FCB's relationship with First Banks did not
exist.
First Banks provides management services to FCB and its Subsidiary Bank.
Management services are provided under a management fee agreement whereby FCB
compensates First Banks on an hourly basis for its use of personnel for various
functions including internal audit, loan review, income tax preparation and
assistance, accounting, asset/liability and investment services, loan servicing
and other management and administrative services. Fees paid under this
agreement were $478,000 and $618,000 for the years ended December 31, 1997 and
1996, respectively. The fees paid for management services are at least as
favorable as could have been obtained from an unaffiliated third party. In
addition, FCB paid First Banks $183,000 and $66,000 for correspondent banking
services for the years ending of December 31, 1997 and 1996, respectively.
Because of the affiliation with First Banks and the geographic proximity of
certain of their offices, FCB shares the cost of certain personnel and services
used by FCB and First Banks. This includes the salaries and benefits of certain
loan and administrative personnel. The allocation of the shared costs are
charged and/or credited under the terms of cost sharing agreements entered into
during 1997. 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. Net fees paid under these agreements were $326,000
and $412,000 for the years ended December 31, 1997 and 1996, respectively.
Effective April 1, 1997, First Services L.P., a limited partnership
indirectly owned by First Banks' Chairman and his children through its general
partners and limited partners, began providing data processing and various
related services to FCB under the terms of data processing agreements.
Previously, these services were provided by a subsidiary of First Banks. Fees
paid under these agreements were $362,000 and $381,000 for the years ended
December 31, 1997 and 1996, respectively. The fees paid for data processing
services are at least as favorable as could have been obtained from an
unaffiliated third party.
First Commercial had $24.9 million and $17.9 million in whole loans and
loan participations outstanding at December 31, 1997 and 1996, respectively,
that were purchased from banks affiliated with First Banks. In addition, First
Commercial had sold $12.0 million and $2.0 million in whole loans and loan
participations to affiliates of First Banks at December 31, 1997 and 1996,
respectively. These loans and loan participations were acquired and sold at
interest rates and terms prevailing at the dates of their purchase or sale and
under standards and policies followed by First Commercial.
As more fully discussed in Note 6, FCB borrowed $400,000 from First Banks
on December 31, 1997.
Outside of normal customer relationships, no directors, executive officers
or stockholders holding over 5% of FCB's voting stock, and no corporations or
firms with which such persons or entities are associated, currently maintain or
have maintained, any significant business or personal relationships with FCB or
its subsidiary, other than that which arises by virtue of such position or
ownership interest in FCB, except as described above.
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of 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.
F-44
<PAGE> 132
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The estimated fair value of FCB's financial instruments at December 31 were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents............................. $ 8,720 8,720 20,910 20,910
Investment securities................................. 64,390 64,390 38,229 38,229
Net loans............................................. 113,326 113,963 89,900 89,900
Accrued interest receivable........................... 1,856 1,856 1,197 1,197
======== ======== ======= ========
Liabilities:
Demand and savings deposits........................... $104,035 104,035 71,024 71,024
Time deposits......................................... 68,550 68,907 65,112 65,112
Accrued interest payable.............................. 1,939 1,939 1,098 1,098
12% convertible debentures............................ 6,500 6,500 6,500 6,500
Notes payable and other short-term borrowings......... 1,280 1,280 705 705
======== ======== ======= ========
Off-balance-sheet:
Unfunded loan commitments............................. $ -- -- -- --
======== ======== ======= ========
</TABLE>
The following methods and assumptions were used in estimating the fair
value of financial instruments:
FINANCIAL ASSETS:
Cash and cash equivalents and accrued interest receivable: The carrying
values reported in the consolidated balance sheets approximate fair value.
Investment securities: Fair value for securities available for sale were
the amounts reported in the consolidated balance sheets. If quoted market
prices were not available, fair values were based upon quoted market prices of
comparable instruments.
Net loans: The fair value for most loans was estimated utilizing discounted
cash flow calculations that applied 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) was 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. The fair value for certificates of deposit was estimated
utilizing a discounted cash flow calculation that applied interest rates
currently being offered on similar certificates to a schedule of aggregated
monthly maturities of time deposits.
Convertible debentures, notes payable, short-term borrowings and accrued
interest payable: The carrying values reported in the consolidated balance
sheets approximate fair value.
F-45
<PAGE> 133
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OFF-BALANCE-SHEET:
Unfunded loan 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.
(16) REGULATORY CAPITAL
The Subsidiary Bank is subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Subsidiary Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for Prompt Corrective Action,
the Subsidiary Bank must meet specific capital guidelines that involve
quantitative measures of the Subsidiary Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Subsidiary Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weighting and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Subsidiary Bank to maintain certain minimum capital ratios. The
Subsidiary Bank is 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
(as defined in the regulations). In addition, a minimum leverage ratio (Tier 1
capital to average assets) of 3.0% plus an additional cushion of 100 to 200
basis points is expected. In order to be considered well capitalized under
Prompt Corrective Action provisions, a bank is required to maintain a risk
weighted asset ratio of at least 10%, a Tier 1 to risk weighted assets ratio of
at least 6%, and a leverage ratio of at least 5%. As of December 31, 1996, the
date of the most recent notification from FCB's primary regulator, First
Commercial was categorized as well capitalized under the regulatory framework
for Prompt Corrective Action. Management believes, as of December 31, 1997,
First Commercial was well capitalized as defined by the FDIC Improvement Act.
At December 31, 1997 and 1996, FCB's and the Bank's capital ratios were as
follows:
<TABLE>
<CAPTION>
RISK-BASED CAPITAL RATIOS
--------------------------------------
TOTAL TIER 1 LEVERAGE RATIO
--------------- --------------- --------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
FCB.............................................. 6.34% 6.95% 5.06% 5.66% 4.03% 4.25%
First Commercial................................. 11.89 13.13 10.61 11.84 8.43 8.87
</TABLE>
(17) CONTINGENT LIABILITIES
In the ordinary course of business, there are various legal proceedings
pending against FCB and/or the Subsidiary Bank. Management, in consultation
with legal counsel, is of the opinion the ultimate resolution of these
proceedings will have no material effect on the financial condition or results
of operations of FCB or the Subsidiary Bank.
F-46
<PAGE> 134
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18) PARENT COMPANY ONLY FINANCIAL INFORMATION
<TABLE>
CONDENSED BALANCE SHEETS
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
---- ----
(DOLLARS EXPRESSED
IN THOUSANDS)
<S> <C> <C>
Assets:
Cash.................................................... $ 153 363
Investment in subsidiary................................ 14,943 13,144
Deferred tax assets..................................... 225 --
Other assets............................................ 502 524
------- ------
Total assets........................................ $15,823 14,031
======= ======
Liabilities and stockholders' equity:
Dividends payable....................................... $ -- 251
Promissory note payable................................. 400 --
12% convertible debentures.............................. 6,500 6,500
Accrued and other liabilities........................... 1,666 950
------- ------
Total liabilities................................... 8,566 7,701
Stockholders' equity........................................ 7,257 6,330
------- ------
Total liabilities and stockholders' equity.............. $15,823 14,031
======= ======
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF OPERATIONS
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996
---- ----
(DOLLARS EXPRESSED
IN THOUSANDS)
<S> <C> <C>
Income:
Dividends from subsidiary............................... $ 200 --
Other................................................... 15 8
------ ------
Total income........................................ 215 8
------ ------
Expense:
Interest................................................ 888 892
Other................................................... 190 167
------ ------
Total expense....................................... 1,078 1,059
------ ------
Loss before income tax expense (benefit) and equity
in undistributed income of subsidiary............. (863) (1,051)
Income tax expense (benefit)............................ 2 (366)
------ ------
Loss before equity in undistributed income of
subsidiary........................................ (865) (685)
Equity in undistributed income of subsidiary............ 1,629 115
------ ------
Net income (loss)................................... $ 764 (570)
====== ======
</TABLE>
F-47
<PAGE> 135
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996
---- ----
(DOLLARS EXPRESSED
IN THOUSANDS)
<S> <C> <C>
Operating activities:
Net income (loss)....................................... $ 764 (570)
Adjustments to reconcile net income (loss) to net cash
used in operating activities
Equity in undistributed income of subsidiary........ (1,629) (115)
Dividends from subsidiary........................... 200 --
Other, net.......................................... 62 (147)
------- ------
Net cash used in operating activities........... (603) (832)
------- ------
Investing activities--capital contributions to subsidiary... -- (1,938)
------- ------
Financing activities:
Proceeds from the issuance of common stock.............. -- 3,217
Repurchase of fractional shares......................... (7) --
Increase in promissory note payable..................... 400 --
Decrease in advances from subsidiary.................... -- (284)
------- ------
Net cash provided by financing activities....... 393 2,933
------- ------
Net increase (decrease) in cash and cash
equivalents.................................. (210) 163
Cash and cash equivalents at beginning of year.......... 363 200
------- ------
Cash and cash equivalents at end of year................ $ 153 363
======= ======
Noncash financing activities:
Exchange of common stock for dividends payable.......... $ -- (643)
======= ======
</TABLE>
(19) SUBSEQUENT EVENTS
On February 2, 1998, FCB and First Banks America, Inc., St. Louis, Missouri
(FBA), a 71.8% owned subsidiary of First Banks, were merged. Under the terms of
the Agreement and Plan of Merger (Agreement), FCB was merged into FBA, and
First Commercial was merged into First Bank of California, an indirect
subsidiary bank of FBA. The FCB shareholders received .8888 shares of FBA
common stock for each share of FCB common stock that they held. In total, FCB
shareholders received approximately 751,728 shares of FBA common stock,
including 462,176 shares received by First Banks in exchange for its 61.5%
ownership of FCB. The transaction also provided for First Banks to receive
804,000 shares of FBA common stock in exchange for $10.0 million of FBA's
promissory note payable to First Banks. In addition, FCB's convertible
debentures of $6.5 million, which are owned by First Banks, were exchanged for
comparable debentures in FBA.
F-48
<PAGE> 136
REDWOOD BANCORP AND SUBSIDIARIES
REPORT OF INDEPENDENT ACCOUNTANTS
Shareholder and Board of Directors of
Redwood Bancorp and Subsidiaries:
We have audited the consolidated statements of financial
condition of Redwood Bancorp and its subsidiaries (the Company)
as of December 31, 1997 and 1996, and the related consolidated
statements of operations, shareholder's equity, and cash flows
for the years 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 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 consolidated financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of the Redwood Bancorp and its
subsidiaries at December 31, 1997 and 1996, and the results of
its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
San Francisco, California
June 19, 1998
F-49
<PAGE> 137
<TABLE>
REDWOOD BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
ASSETS MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
--------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Cash and due from banks................................ $ 6,033,556 $ 8,672,217 $ 8,140,106
Federal funds sold..................................... 3,000,000 1,200,000 5,000,000
Investment securities:
Held-to-maturity................................... 6,224,893 4,228,570 2,249,207
Available-for-sale................................. 10,442,575 14,489,971 9,347,368
Loans, net............................................. 118,880,353 109,483,706 100,994,646
Bank premises and equipment, net....................... 783,633 796,241 785,118
Interest receivable.................................... 954,064 921,150 804,215
Goodwill............................................... 3,919,862 3,964,918 4,145,142
Other assets........................................... 1,767,394 1,715,421 2,594,849
------------ ------------ ------------
Total assets............................... $152,006,330 $145,472,194 $134,060,651
============ ============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deposits........................................... $130,110,833 $126,772,656 $117,379,755
Interest payable and other liabilities............. 1,159,278 1,227,427 737,717
Other borrowings................................... 2,910,000 -- --
------------ ------------ ------------
Total liabilities.......................... 134,180,111 128,000,083 118,117,472
------------ ------------ ------------
Shareholder's equity:
Common stock, $3.33 par value; authorized 1,000,000
shares; issued and outstanding 250,000 shares in
1997 and 1996.................................... 832,500 832,500 832,500
Surplus............................................ 10,639,969 10,639,969 10,639,969
Retained earnings.................................. 6,412,661 5,988,022 4,567,627
Accumulated other comprehensive income (loss)...... (58,911) 11,620 (96,917)
------------ ------------ ------------
Total shareholder's equity................. 17,826,219 17,472,111 15,943,179
------------ ------------ ------------
Total liabilities and shareholder's
equity.............................. $152,006,330 $145,472,194 $134,060,651
============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-50
<PAGE> 138
<TABLE>
REDWOOD BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
--------------------- ----------------------
1998 1997 1997 1996
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans............... $2,700,750 $2,404,315 $10,417,676 $ 8,791,684
Interest on federal funds sold........... 28,323 67,688 243,921 232,516
Interest on investment securities........ 309,244 197,446 1,018,486 967,244
Interest on deposits in other financial
institutions........................... -- -- -- 13,572
---------- ---------- ----------- -----------
Total interest income............ 3,038,317 2,669,449 11,680,083 10,005,01
Interest expense............................. 1,078,079 907,212 3,863,742 3,442,833
---------- ---------- ----------- -----------
Net interest income before
provision for loan losses...... 1,960,238 1,762,237 7,816,341 6,562,183
Provision for loan losses.................... -- -- -- --
---------- ---------- ----------- -----------
Net interest income after
provision for loan losses...... 1,960,238 1,762,237 7,816,341 6,562,183
---------- ---------- ----------- -----------
Noninterest income:
Customer service fees.................... 63,134 56,587 372,429 363,706
Other.................................... 174,626 150,985 28,317 30,247
---------- ---------- ----------- -----------
Total noninterest income......... 237,760 207,572 400,746 393,953
---------- ---------- ----------- -----------
Noninterest expense:
Salaries and employee benefits........... 799,503 931,258 3,362,288 3,085,229
Occupancy and equipment.................. 233,574 226,523 933,728 966,284
Deposit insurance and regulatory
assessments............................ 9,387 8,482 35,220 35,371
Professional services.................... 74,910 30,500 82,729 166,700
Insurance................................ 34,889 38,324 143,729 147,695
Data processing.......................... 56,282 57,012 216,326 221,279
Forms and supplies....................... 26,616 29,360 105,065 101,007
Telecommunication and postage............ 44,647 40,142 147,366 150,085
Corporate expenses....................... 9,000 21,000 56,000 57,000
Goodwill amortization.................... 45,056 45,056 180,224 180,224
Other.................................... 103,145 75,877 378,166 311,541
---------- ---------- ----------- -----------
Total noninterest expense........ 1,437,009 1,503,534 5,640,841 5,422,415
---------- ---------- ----------- -----------
Income before income taxes....... 760,989 466,275 2,576,246 1,533,721
Income tax expense (benefit)................. 336,350 216,000 1,155,851 (1,773,000)
---------- ---------- ----------- -----------
Net income................................... $ 424,639 $ 250,275 $ 1,420,395 $ 3,306,721
========== ========== =========== ===========
Net income per share--basic.................. $ 1.70 $ 1.00 $ 5.68 $ 13.23
========== ========== =========== ===========
Net income per share--diluted................ $ 1.70 $ 1.00 $ 5.68 $ 13.23
========== ========== =========== ===========
Weighted average common stock outstanding.... $ 250,000 $ 250,000 $ 250,000 $ 250,000
========== ========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-51
<PAGE> 139
<TABLE>
REDWOOD BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
<CAPTION>
ACCUMU-
LATED OTHER
COMMON STOCK COMPRE- COMPRE-
------------------ HENSIVE RETAINED HENSIVE
SHARES AMOUNT SURPLUS INCOME EARNINGS INCOME TOTAL
------ ------ ------- ------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995... 250,000 $832,500 $10,639,969 $1,260,906 $ 55,971 $12,789,346
Comprehensive Income:
Net Income............... -- -- -- $3,306,721 3,306,721 -- 3,306,721
Other comprehensive
income--Unrealized
losses on securities... -- -- -- (152,888) -- (152,888) (152,888)
----------
Comprehensive Income..... -- -- -- $3,153,833 -- -- --
-------- -------- ----------- ========== ========== ========= ===========
Balance, December 31, 1996... 250,000 832,500 10,639,969 4,567,627 (96,917) 15,943,179
Comprehensive Income:
Net Income............... -- -- -- $1,420,395 1,420,395 -- 1,420,395
Other comprehensive
income--Unrealized
losses on securities... -- -- -- 108,537 -- 108,537 108,537
----------
Comprehensive Income..... -- -- -- $1,528,932 -- -- --
-------- -------- ----------- ========== ========== ========= ===========
Balance, December 31, 1997... 250,000 832,500 10,639,969 5,988,022 11,620 17,472,111
Quarter ended March 31, 1998
(unaudited):
Comprehensive Income:
Net Income............... -- -- -- $ 424,639 424,639 -- 424,639
Other comprehensive
income--Unrealize
losses on securities... -- -- -- (70,531) -- (70,531) (70,531)
----------
Comprehensive Income..... -- -- -- $ 354,108 -- -- --
-------- -------- ----------- ========== ---------- --------- -----------
Balance, March 31, 1998...... 250,000 $832,500 $10,639,969 $6,412,661 $ (58,911) $17,826,219
======== ======== =========== ========== ========= ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-52
<PAGE> 140
<TABLE>
REDWOOD BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
---------------------- -----------------------
1998 1997 1997 1996
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................... $ 424,639 $ 250,275 $ 1,420,395 $ 3,306,721
Reconciliation to net cash provided
by operating activities:
Deferred income tax.............. -- 160,300 826,000 (1,982,000)
Depreciation and leasehold
amortization................... 57,457 50,550 212,703 225,429
Amortization and accretion of
premiums and discounts......... (31,062) 26,551 (219,090) (185,772)
Goodwill amortization............ 45,046 45,046 180,224 180,224
Net increase (decrease) in
deferred loan fees............. 33,982 10,554 (6,734) 81,407
Increase in interest receivable
and other assets............... (84,887) (51,408) (63,513) (3,752)
Increase (decrease) in interest
payable and other liabilities.. (68,149) (155,826) 489,710 (144,076)
Gain on sale of other real estate
owned.......................... -- -- (12,084) --
----------- ----------- ------------ ------------
Net cash provided by
operating activities....... 377,026 336,042 2,827,611 1,478,181
----------- ----------- ------------ ------------
Cash flows from investing activities:
Purchase of:
Held-to-maturity securities...... (4,997,500) (1,000,000) (5,000,000) (2,940,333)
Available-for-sale securities.... (5,000,000) (1,497,500) (9,970,184) (7,455,899)
Proceeds from:
Maturities of held-to-maturity
securities..................... 3,000,000 -- 3,041,583 2,181,859
Maturities of available-for-sale
securities..................... 9,009,114 -- 5,134,262 9,670,112
Net change in interest-earning deposits
in other financial institutions........ -- -- -- 322,520
Loan originations and purchases, net of
repayments and participations.......... (9,430,629) 2,087,656 (8,608,504) (21,611,266)
Purchase of bank premises and
equipment.............................. (44,849) (10,273) (223,820) (165,133)
Proceeds from sale of other real estate
owned.................................. -- -- 138,262 --
----------- ----------- ------------ ------------
Net cash used in investing
activities................. (7,463,864) (420,117) (15,488,401) (19,998,140)
----------- ----------- ------------ ------------
Cash flows from financing activities:
Net change in deposits............... 3,338,177 (929,896) 9,392,901 13,237,354
Net change in other borrowings....... 2,910,000 -- -- --
----------- ----------- ------------ ------------
Net cash provided by
financing activities....... 6,248,177 (929,896) 9,392,901 13,237,354
----------- ----------- ------------ ------------
Net decrease in cash and cash
equivalents................ (838,661) (1,013,971) (3,267,889) (5,282,605)
Cash and cash equivalents at beginning of
year................................... 9,872,217 13,140,106 13,140,106 18,422,711
----------- ----------- ------------ ------------
Cash and cash equivalents at end of
year................................... $ 9,033,556 $12,126,135 $ 9,872,217 $ 13,140,106
=========== =========== ============ ============
Other cash flow information:
Interest paid........................ $ 1,047,453 $ 902,925 $ 3,824,888 $ 3,436,800
=========== =========== ============ ============
Income taxes paid.................... -- -- $ 260,000 $ 211,500
=========== =========== ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-53
<PAGE> 141
REDWOOD BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Redwood Bancorp (Bancorp or the Company) is owned by Empire Holdings, Inc.,
a wholly owned subsidiary of Empire Holdings, Ltd., a closely held bank holding
company with no other significant operations. Redwood Bank (the Bank) is
Bancorp's principal subsidiary and the primary operating entity of the
consolidated group. All intercompany transactions have been eliminated.
NATURE OF OPERATIONS
Bancorp operates four branches in the San Francisco Bay Area. Bancorp's
primary source of revenue is through providing commercial and real estate loans
to customers, who are predominantly small and middle-market businesses. The
cost of funds relates to various deposit products offered to these same
businesses and individuals.
INTERIM RESULTS (UNAUDITED)
The accompanying statements of financial position as of March 31, 1998, and
statements of operations, shareholder's equity and cash flows for the
three-month periods ended March 31, 1998 and 1997, are unaudited. In the
opinion of management, these statements have been prepared on the same basis as
the audited financial statements and include all adjustments, consisting of
only normal recurring adjustments, necessary for the fair presentation of the
results of the interim periods.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and certain
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of certain revenues and
certain expenses during the reporting period. Actual results could differ from
those estimates.
CASH EQUIVALENTS
For the purposes of reporting cash flows, cash equivalents include federal
funds sold. Generally, federal funds are sold for one-day periods.
Substantially all cash equivalents held in other financial institutions exceed
existing deposit insurance coverage.
INTEREST-EARNING DEPOSITS IN OTHER FINANCIAL INSTITUTIONS
Interest-earning deposits in other financial institutions generally have
one year original maturities and no individual deposit exceeds $100,000.
Accordingly, these deposits are recorded at cost, which approximates market.
INVESTMENT SECURITIES:
Bancorp classifies and accounts for debt and equity securities as follows:
* Held-to-Maturity--Debt securities that management has the positive intent
and ability to hold until maturity are classified as held-to-maturity and
are carried at their remaining unpaid principal balance, net of
unamortized premiums or unaccreted discounts. Premiums are amortized and
discounts are accreted using the level interest yield method over the
estimated remaining term of the underlying security.
F-54
<PAGE> 142
REDWOOD BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
* Trading Securities--Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are
classified as trading securities and reported at market value, with
unrealized gains and losses included in earnings. The Bank held no trading
securities during 1997 and 1996.
* Available-For-Sale--Debt and equity securities that will be held for
indefinite periods of time, including securities that may be sold in
response to changes in market interest or prepayment rates, needs for
liquidity and changes in the availability of and the yield of alternative
investments are classified as available-for-sale. After amortization or
accretion of any premiums or discounts, these assets are carried at market
value. Market value is determined using published quotes as of the close
of business. Unrealized gains and losses are excluded from earnings and
reported net of tax as a separate component of stockholders' equity until
realized.
Realized gains and losses on held-to-maturity and available-for-sale
securities are computed using the specific identification method using
amortized cost.
LOANS
Loans held for investment are carried at amortized cost. Bancorp's loan
portfolio consists of commercial, installment, real estate construction and
other real estate loans generally collateralized by first and second deeds of
trust on real estate, business assets, or personal property.
Interest income is accrued daily on the outstanding loan balances using the
simple interest method. Loans are generally placed on nonaccrual status when
the borrowers are past due 90 days and when payment in full of principal or
interest is not expected. At the time a loan is placed on nonaccrual status,
any interest income previously accrued but not collected is reversed.
Bancorp charges loan origination and commitment fees. Net loan origination
fees are deferred and amortized to interest income over the life of the loan on
a method that produces a level yield. Loan commitment fees related to lines of
credit are amortized to interest income over the commitment period. If a loan
is paid-off prior to maturity, the remaining unamortized deferred fee is
immediately recognized to interest income.
ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses is maintained at a level deemed appropriate by
management to provide for known and unidentified losses in the loan portfolio.
The allowance is based upon management's assessment of various factors
affecting the collectibility of the loans and commitments to extend credit,
including current and projected economic conditions, past credit experience,
delinquency status, the value of the underlying collateral, if any, and the
continuing review of the portfolio of loans and commitments.
The allowance for loan losses is based on estimates, and ultimate losses
may vary from the current estimates. These estimates are reviewed periodically
and, as adjustments become necessary, they are reported in earnings in the
periods in which they become known.
A loan is considered impaired based on current information and events, if
it is probable that the Bancorp will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms
of the loan agreement. The allowance for losses on impaired loans is measured
under one of three prescribed methods. Since most of the Bancorp's loans are
collateral dependent, the calculation of the allowance on impaired loans is
generally based on the fair value of the collateral. Income recognition on
impaired loans conforms to the method the Bancorp uses for income recognition
on nonaccrual loans.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are computed on
the straight-line basis over the shorter of the estimated useful lives of the
assets or the term of the lease.
F-55
<PAGE> 143
REDWOOD BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OTHER REAL ESTATE OWNED
Other real estate owned consists of properties acquired through foreclosure
and is stated at the lower of cost or fair market value less estimated costs to
sell. Estimated losses that result from the ongoing periodic valuation of these
properties are charged to current earnings with a provision for losses on
foreclosed property in the period in which they are identified. Operating
expenses of such properties, net of related income, are included in other
expenses.
INCOME TAXES
Bancorp is included in the consolidated federal income tax returns of
Empire Holdings, Inc. and files its own state income tax returns. Income taxes
have been computed on the separate results of Bancorp based on the provisions
of its tax sharing agreements with Empire Holdings, Inc. These agreements
generally provide that Bancorp will be charged or reimbursed based on the tax
effect of its earnings or losses in the combined and consolidated tax returns.
Deferred income taxes reflect the estimated future tax effects of temporary
differences between amount of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws and regulations.
GOODWILL
Goodwill represents the excess of the purchase price over the estimated
fair value of identifiable net assets associated with the purchase of Bancorp
in March 1980. Goodwill is being amortized over 40 years on a straight-line
basis.
PER SHARE DATA
Net income per share is stated in accordance with SFAS No. 128, Earnings
Per Share. Basic net income per share is computed by dividing net income
available to common shareholders (the numerator) by the weighted average number
of common shares outstanding during the year (denominator). Diluted net income
per share is computed by dividing diluted net income available to common
shareholders by the weighted average number of common shares and common
equivalent shares outstanding. There were no common equivalent shares
outstanding during 1997 and 1996.
(2) INVESTMENT SECURITIES
The amortized cost and estimated market values of investment securities at
December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997
---------------------------------------------------------
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ---------- ---------- ------
<S> <C> <C> <C> <C>
Held-to-maturity:
U.S. Government Agencies................... $ 4,228,570 $ 754 -- $ 4,229,324
----------- ------- --------- -----------
4,228,570 754 -- 4,229,324
----------- ------- --------- -----------
Available-for-sale:
U.S. Treasury Securities................... 2,000,348 1,527 -- 2,001,875
U.S. Government Agencies................... 12,478,003 10,093 -- 12,488,096
----------- ------- --------- -----------
14,478,351 11,620 -- 14,489,971
----------- ------- --------- -----------
$18,706,921 $12,374 -- $18,719,295
=========== ======= ========= ===========
</TABLE>
F-56
<PAGE> 144
REDWOOD BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1996
---------------------------------------------------------
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ---------- ---------- ------
<S> <C> <C> <C> <C>
Held-to-maturity:
U.S. Treasury Securities................... $ 979,385 $3,256 -- $ 982,641
U.S. Government Agencies................... 1,269,822 -- $ (4,280) 1,265,542
----------- ------ --------- -----------
2,249,207 3,256 (4,280) 2,248,183
----------- ------ --------- -----------
Available-for-sale:
U.S. Treasury Securities................... 1,999,864 1,387 -- 2,001,251
U.S. Government Agencies................... 7,444,421 -- (98,304) 7,346,117
----------- ------ --------- -----------
9,444,285 1,387 (98,304) 9,347,368
----------- ------ --------- -----------
$11,693,492 $4,643 $(102,584) $11,595,551
=========== ====== ========= ===========
</TABLE>
At December 31, 1997 and 1996, securities with carrying amounts of
$6,992,099 and $8,965,398 were pledged to secure public deposits.
The amortized cost and estimated market value of investment securities at
December 31, 1997 by contractual maturity, is as follows:
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
--------- ------
<S> <C> <C>
Held-to-maturity:
Over five through ten years................. $ 3,000,000 $ 3,007,454
Over ten years.............................. 1,228,570 1,221,870
----------- -----------
4,228,570 4,229,324
----------- -----------
Available for Sale:
One year or less............................ 7,992,634 7,997,174
Over one through five years................. 5,983,500 5,988,494
Over five through ten years................. 502,217 504,303
----------- -----------
14,478,351 14,489,971
----------- -----------
$18,706,921 $18,719,295
=========== ===========
</TABLE>
(3) LOANS AND ALLOWANCE FOR LOAN LOSSES
The loan portfolio at December 31, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Commercial.................................... $ 12,219,400 $ 12,600,149
Real estate--mortgage......................... 80,168,678 69,257,087
Real estate--construction..................... 10,566,258 11,557,092
Installment and other loans................... 8,193,617 8,258,278
Acceptances of other banks.................... -- 999,855
------------ ------------
111,147,953 102,672,461
Less:
Deferred loan fees........................ (477,622) (484,356)
Allowance for loan losses................. (1,186,625) (1,193,459)
------------ ------------
$109,483,706 $100,994,646
============ ============
</TABLE>
F-57
<PAGE> 145
REDWOOD BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Bancorp concentrates its lending activities in commercial loans and real
estate loans made primarily to businesses and individuals within the San
Francisco Bay Area.
The change in the allowance for loan losses for the years ended December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Balance at beginning of year...................... $1,193,459 $1,210,127
Provision for loan losses......................... -- --
Loans charged off................................. (13,249) (38,170)
Recoveries........................................ 6,415 21,502
---------- ----------
Balance at end of year............................ $1,186,625 $1,193,459
========== ==========
</TABLE>
At December 31, 1997 and 1996, loans on nonaccrual status totaled
$1,354,003 and $2,470,127. Foregone interest on these loans for 1997 and 1996
were $123,941 and $230,667.
At December 31, 1997 and 1996, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS No. 114 totaled $641,431
and $626,689 with a corresponding valuation allowance of $103,792 and $239,176,
respectively. The average recorded investment in impaired loans in 1997 and
1996 was $634,060 and $370,845, respectively. From the time each loan was
classified as impaired, no interest income was recognized on such loans in 1997
or 1996.
At December 31, 1997 and 1996, loans pledged to secure public deposits were
$322,660 and $425,394, respectively.
(4) BANK PREMISES AND EQUIPMENT
Bank premises and equipment at December 31, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land............................................ $ 228,923 $ 228,923
Building........................................ 661,392 672,368
Furniture and fixtures.......................... 447,662 696,769
Equipment....................................... 1,515,192 2,424,191
Leasehold improvements.......................... 1,872,058 1,830,899
----------- -----------
4,725,227 5,853,150
Less accumulated depreciation and
amortization.................................. (3,928,986) (5,068,032)
----------- -----------
$ 796,241 $ 785,118
=========== ===========
</TABLE>
Depreciation and amortization expense for the year ended December 31, 1997
and 1996 were $212,697 and $225,429.
(5) DEPOSITS
At December 31, 1997 and 1996, deposits consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Noninterest-bearing demand.................... $ 27,427,159 $ 27,115,692
Savings and interest-bearing demand........... 55,152,181 50,545,444
Certificates of deposit issued in amounts less
than $100,000............................... 26,936,714 26,246,053
Certificates of deposit of $100,000 or more... 17,256,602 13,472,566
------------ ------------
Total............................. $126,772,656 $117,379,755
============ ============
</TABLE>
F-58
<PAGE> 146
REDWOOD BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The maturity of certificates accounts are as follows:
<TABLE>
<S> <C>
1998........................... $39,545,316
1999........................... 3,829,000
2000........................... 479,000
2001........................... 120,000
2002 and thereafter.................. 220,000
-----------
$44,193,316
===========
</TABLE>
(6) INCOME TAXES
The components of the provision (benefit) for federal and state income
taxes are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Currently payable:
Federal...................................... $ 30,851 $ 23,000
State........................................ 265,000 186,000
---------- -----------
Total................................ 295,851 209,000
---------- -----------
Deferred:
Federal...................................... 19,000 27,000
State........................................ (45,000) 14,000
Reduction of income tax due to utilization of
net operating loss carryforward............ 886,000 514,000
Reduction in valuation allowance............. -- (2,537,000)
---------- -----------
Total................................ 860,000 (1,982,000)
---------- -----------
Income tax expense (benefit)..... $1,155,851 $(1,773,000)
========== ===========
</TABLE>
Reconciliation of the statutory tax rate to the effective tax rate is as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Statutory federal tax rate............................. 35.0% 35.0%
State tax, net of federal income tax effect.............. 5.6% 8.9%
Reduction in deferred tax asset valuation allowance...... -- (165.4)%
Other, net............................................... 4.3% 5.9%
---- ------
44.9% (115.6)%
==== ======
</TABLE>
The components of net deferred income tax assets and liabilities as of
December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Allowance for loan losses......................... $ 237,000 $ 239,000
Fixed assets...................................... 148,000 147,000
Deferred loan fees................................ 20,000 32,000
Net operating loss carryforward................... 803,000 1,689,000
State tax, net of federal income tax effect....... 196,000 151,000
AMT credit carryforward........................... 53,000 34,000
Other............................................. 3,000 (6,000)
---------- ----------
Total deferred tax assets............. $1,460,000 $2,286,000
========== ==========
</TABLE>
As of December 31, 1997, Bancorp had federal net operating loss
carryforwards of $2,363,000 available to reduce future financial statement
income based on the provisions of its tax sharing, agreement with Empire
Holdings, Inc. In addition, Bancorp is a member of the Empire Holdings, Inc.
and subsidiaries consolidated tax return filing group.
F-59
<PAGE> 147
REDWOOD BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1997, the Empire Holdings consolidated group had federal
net operating loss carryforwards available, on a tax basis, to reduce future
taxable income as follows:
<TABLE>
<CAPTION>
NET OPERATING EXPIRATION
LOSS CARRYOVER DATE
- -------------- ----------
<C> <C>
$ 70,000 ........................................... 2002
2,846,000 ........................................... 2003
245,000 ........................................... 2004
3,000 ........................................... 2005
658,000 ........................................... 2006
5,000 ........................................... 2007
164,000 ........................................... 2008
26,000 ........................................... 2009
----------
$4,017,000
==========
</TABLE>
(7) EMPLOYEE BENEFIT PLAN
Bancorp has a 401(k) savings plan covering substantially all employees of
Bancorp. Under the provisions of the plan, employees who elect to participate
are allowed to make "deferred contributions" (as defined in the Plan
Agreement) of up to 15% of their annual salary. In addition, the Bank will make
matching contributions equal to 50% of each employee's elective deferral and at
year end 1% of the employee's annual salary. Contributions by Bancorp for the
year ended December 31, 1997 and 1996 amounted to $107,200 and $104,954,
respectively.
(8) RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bancorp has made loans and advances
under lines of credit to directors and officers and their related interests. An
analysis of loans to related parties for 1997 and 1996 are shown below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Balance, beginning of year.......... -- $ 100,000
Advances............................ -- 886,000
Payments............................ -- (986,000)
--------- ---------
Balance, end of year................ -- --
========= =========
</TABLE>
(9) COMMITMENTS AND CONTINGENCIES
The Bank is required by federal regulations to maintain certain minimum
average balances with the Federal Reserve Bank, based primarily on the Bank's
daily demand deposit balances. Required deposits held with the Federal Reserve
Bank as of December 31, 1997 and 1996 were $1,479,000 and $1,482,000, and the
Bank had a balance of $6,213,000 and $5,177,000 with the Federal Reserve Bank
at these dates.
Bancorp has entered into various noncancelable operating lease arrangements
for three branch offices. Future minimum lease payments as of December 31, 1997
are as follows:
<TABLE>
<CAPTION>
FUTURE
MINIMUM
LEASE PAYMENTS
--------------
<S> <C>
1998.......................................... $385,683
1999.......................................... 19,400
--------
$405,083
========
</TABLE>
F-60
<PAGE> 148
REDWOOD BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Certain of the leases contain renewal options and rent escalation clauses
based upon certain economic indices. Net rental expense for bank premises and
equipment under operating leases for the year ended December 31, 1997 and 1996
was $477,398 and $475,395.
Bancorp is involved in legal actions arising from normal business
activities. Management, upon the advice of legal counsel handling such actions,
believes that the ultimate resolution of these actions will not have a material
effect on the financial position of Bancorp.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Bancorp is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers. To
date, these financial instruments include commitments to extend credit which
involve elements of credit and interest rate risk in excess of the amount
recognized in the statement of financial position.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bancorp upon commitments to extend credit,
is based on management's credit evaluation of the counter-party. Collateral
held varies but usually consists of residential and commercial property.
Standby letters of credit are performance assurances made on behalf of
customers who have a contractual obligation to produce or deliver goods or
services or otherwise perform. Credit risk in these transactions arises from
the possibility that a customer may not be able to repay the Bank if the letter
of credit is drawn upon. As with commitments to extend credit, the Bank
evaluates each customer's creditworthiness on a case-by-case basis.
At December 31, 1997 and 1996, Bancorp had $18,883,206 and $16,244,782 of
commitments to extend credit and $366,968 and $226,968 in standby letters of
credit.
(10) REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1997, that
the Bank meets all capital adequacy requirements to which it is subject.
F-61
<PAGE> 149
REDWOOD BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the regulatory capital position of the Bank
as of December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
TO BE WELL-
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------------- -------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk Weighted
Assets).......................... $13,803 12.0% >=$9,237 >=8.0% >=$11,546 >=10.0%
Tier I Capital (to Risk Weighted
Assets).......................... $12,617 10.9% >=$4,618 >=4.0% >=$ 6,928 >= 6.0%
Tier I Capital (to Average
Assets).......................... $12,617 9.0% >=$5,611 >=4.0% >=$ 7,014 >= 5.0%
As of December 31, 1996:
Total Capital (to Risk Weighted
Assets).......................... $11,514 10.6% >=$8,663 >=8.0% >=$10,829 >=10.0%
Tier I Capital (to Risk Weighted
Assets).......................... $10,320 9.5% >=$4,331 >=4.0% >=$ 6,497 >= 6.0%
Tier I Capital (to Average
Assets).......................... $10,320 8.5% >=$4,837 >=4.0% >=$ 6,046 >= 5.0%
</TABLE>
As of December 31, 1997 and 1996, the regulatory capital position of
Bancorp approximated the Bank's.
As of December 31, 1997, the Bank was categorized as "well-capitalized"
under the regulatory framework for prompt corrective action. To be categorized
as "well-capitalized," the Bank must maintain minimum total risk-based, Tier
I risk-based, Tier I leverage ratios as set forth in the table, and not be
subject to a capital directive.
In addition, the California State Banking Department limits the amount of
dividends that can be paid without its prior approval for all state chartered
banks. The limitation for a given year is the lesser of the Bank's retained
earnings or its net income for the last three fiscal years, less the amount of
any distributions made by the Bank's during such period. As of December 31,
1997, the Bank could pay dividends of up to $4,829,074 without prior approval.
Lastly, in September 1992, Bancorp entered into an agreement with the
Federal Reserve Bank whereby Bancorp cannot pay dividends unless the Bank
maintains a Tier 1 capital ratio of at least 7.0%, a Tier 1 risk-based capital
ratio of at least 4% and a total risk-based capital ratio of 8%.
(11) FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value estimates are determined as of a specific date in time utilizing
quoted market prices, where available, or various assumptions and estimates. As
the assumptions underlying these estimates change, the fair value of the
financial instruments will change. The use of assumptions and various valuation
techniques, as well as the absence of secondary markets for certain financial
instruments, will likely reduce the comparability of fair value disclosures
between financial institutions. Additionally, Bancorp has not disclosed highly
subjective values of other nonfinancial instruments. Accordingly, the aggregate
fair value amounts presented do not represent and should not be construed to
represent the full underlying value of the Bank.
The methods and assumptions used to estimate the fair values of each class
of financial instruments are as follows:
CASH AND CASH EQUIVALENTS
The carrying value of cash and cash equivalents approximates fair value due
to the relatively short term nature of these instruments.
INTEREST EARNING DEPOSITS IN OTHER FINANCIAL INSTITUTIONS
The carrying value of interest earning deposits in other financial
institutions approximates fair value due to the short term nature of all such
deposits in the Bancorp's portfolio.
F-62
<PAGE> 150
REDWOOD BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INVESTMENT SECURITIES, HELD TO MATURITY
Fair value of securities and investments is based on quoted market prices.
If quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
LOANS RECEIVABLE
In order to determine the fair values for loans, the loan portfolio was
segmented based on loan type, credit quality and repricing characteristics. For
certain variable rate loans with no significant credit concerns and frequent
pricings, estimated fair values are based on the carrying values. The fair
values of other loans are estimated using discounted cash flow analyses. The
discount rates used in these analyses are generally based on origination rates
for similar loans of comparable credit quality. Maturity estimates of
installment loans are based on historical experience with prepayments.
DEPOSITS
The fair values for deposits, subject to immediate withdrawal such as
interest and noninterest bearing, and savings deposit accounts, are equal to
the amount payable on demand at the reporting date (i.e., their carrying amount
on the balance sheet). Fair values for fixed rate certificates of deposits are
estimated by discounting future cash flows using interest rates currently
offered on time deposits with similar remaining maturities.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents.......... $ 9,872,217 $ 9,872,217 $ 13,140,106 $ 13,140,106
Investment securities.............. 18,718,541 18,719,295 11,596,575 11,595,551
Loans receivable, net.............. 109,483,706 109,442,971 100,994,646 100,924,569
------------ ------------ ------------ ------------
$138,074,464 $138,034,483 $125,731,327 $125,660,226
============ ============ ============ ============
Financial liabilities:
Deposits........................... $126,772,656 $126,832,967 $117,379,755 $117,420,827
============ ============ ============ ============
</TABLE>
(12) PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
The financial statements of Bancorp (parent company only) follow:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
BALANCE SHEETS
Cash........................................................ $ 307 $ 567
Investment in subsidiaries.................................. 16,594,254 14,369,612
Deferred tax assets......................................... 877,550 1,573,000
----------- -----------
Total assets.................................... $17,472,111 $15,943,179
=========== ===========
Shareholder's equity:
Common stock............................................ $ 832,500 $ 832,500
Surplus................................................. 10,639,969 10,639,969
Retained earnings....................................... 5,988,022 4,567,627
Accumulated other comprehensive income (loss), net of
tax................................................... 11,620 (96,917)
----------- -----------
Total shareholder's equity.................................. $17,472,111 $15,943,179
=========== ===========
</TABLE>
F-63
<PAGE> 151
REDWOOD BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
INCOME STATEMENTS
Expenses:
Goodwill amortization................................... $ (180,224) $ (180,224)
----------- -----------
Total expenses.......................................... (180,224) (180,224)
Loss before taxes and equity in undistributed net income of
subsidiaries.............................................. (180,224) (180,224)
Income tax benefit.......................................... -- 1,573,000
----------- -----------
Income (loss) before equity in undistributed net income of
subsidiaries.............................................. (180,224) 1,392,776
Equity in undistributed net income of subsidiaries.......... 1,600,619 1,913,945
----------- -----------
Net Income.................................................. $ 1,420,395 $ 3,306,721
=========== ===========
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
STATEMENTS OF CASH FLOWS
Cash flows--operating activities:
Net Income.............................................. $ 1,420,395 $ 3,306,721
Reconciliation of net income to net cash from
operations:
Equity in undistributed net income of
subsidiaries...................................... (1,600,619) (1,913,945)
Goodwill amortization............................... 180,224 180,224
Deferred income tax................................. 695,450 (1,573,000)
----------- -----------
Operating cash flows, net................................... 695,450 --
Cash flows--investing activities:
Capital contribution to the subsidiaries................ (695,710) --
----------- -----------
Investing cash flows, net........................... (695,710) --
Net decrease in cash........................................ (260) --
----------- -----------
Cash at beginning of the year............................... 567 567
Cash at end of the year..................................... $ 307 $ 567
=========== ===========
</TABLE>
(13) SUBSEQUENT EVENT
On June 8, 1998, the sole shareholder of Bancorp signed an Agreement in
Principle to sell all of Bancorp's outstanding shares to First Banks AmericaInc.
The transaction is expected to be completed in the fourth quarter of 1998,
subject to regulatory approval.
F-64
<PAGE> 152
- --------------------------------------------------------------------------------
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................ 2
Summary Consolidated Financial Data............... 7
Risk Factors...................................... 8
Use of Proceeds................................... 16
Market for the Preferred Securities............... 16
Accounting Treatment.............................. 16
Capitalization.................................... 17
Pro Forma Financial Information................... 19
Management's Discussion and Analysis.............. 26
Business.......................................... 48
Supervision and Regulation........................ 51
Description of the Preferred Securities........... 57
Description of the Subordinated Debentures........ 66
Description of the Guarantee...................... 74
Relationship Among the Preferred Securities, the
Subordinated Debentures and the Guarantee....... 76
Certain Federal Income Tax Consequences........... 78
ERISA Considerations.............................. 81
Underwriting...................................... 82
Validity of Securities............................ 83
Experts........................................... 83
Incorporation of Certain Documents by Reference... 83
Available Information............................. 84
Index to Consolidated Financial Statements........ F-1
</TABLE>
------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY FIRST BANKS
AMERICA, INC., FIRST AMERICA CAPITAL TRUST OR THE UNDERWRITERS. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF FIRST BANKS AMERICA, INC. SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,600,000 PREFERRED SECURITIES
FIRST AMERICA
CAPITAL TRUST
8.50% CUMULATIVE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $25 PER PREFERRED SECURITY)
GUARANTEED, AS DESCRIBED HEREIN, BY
FIRST BANKS
AMERICA, INC.
------------------------
$40,000,000
8.50% SUBORDINATED DEBENTURES
OF
FIRST BANKS AMERICA, INC.
------------------------
Prospectus
July 15, 1998
------------------------
STIFEL, NICOLAUS & COMPANY
INCORPORATED
HOEFER & ARNETT
INCORPORATED
- --------------------------------------------------------------------------------
