FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
(Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File No. 0-20632
FIRST BANKS, INC.
(Exact Name of registrant as specified in its charter)
MISSOURI 43-1175538
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
135 North Meramec, Clayton, MO 63105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 854-4600
--------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Class C 9.00% Increasing Rate, Redeemable, Cumulative Preferred Stock
9.25% Cumulative Trust Preferred Securities (issued by First Preferred Capital
Trust and guaranteed by its parent, First Banks, Inc.)
(Title or class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ X ]
None of the voting stock of the Company is held by non-affiliates. All of
the voting stock of the Company is owned by various trusts which were created by
and for the benefit of Mr. James F. Dierberg, the Company's Chairman of the
Board of Directors, President and Chief Executive Officer, and members of his
immediate family.
At March 18, 1997 there were 23,661 shares of the registrant's common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended
December 31, 1996 (the "1996 Annual Report to Shareholders") are incorporated
by reference into Parts I and II.
<PAGE>
PART I
Item 1. Business
- ------- --------
General
First Banks, Inc. ("First Banks" or the "Company"), incorporated in
Missouri in 1978, is headquartered in St. Louis, Missouri and is a registered
bank holding company under the Bank Holding Company Act of 1956, as amended (the
"BHC Act"). At December 31, 1996, the Company had approximately $3.69 billion in
total assets, $2.77 billion in total loans, net of unearned discount, $3.24
billion in total deposits, and $251.4 million in total stockholders' equity.
First Banks' subsidiary financial institutions and bank holding companies
(the "Subsidiary Banks") are:
Financial institution subsidiaries:
First Bank, headquartered in St. Louis County, Missouri ("First Bank
Missouri");
First Bank, headquartered in O'Fallon, Illinois ("First Bank
Illinois");
First Bank FSB, headquartered in St. Louis County, Missouri ("First
Bank FSB");
Bank holding company subsidiaries:
First Banks America, Inc., headquartered in Houston, Texas ("FBA");
CCB Bancorp, Inc., headquartered in Santa Ana, California ("CCB");
and First Commercial Bancorp, Inc., headquartered in Sacramento,
California ("FCB").
First Bank Missouri and First Bank Illinois are wholly owned banking
subsidiaries. First Bank FSB is a wholly owned thrift subsidiary. CCB, a wholly
owned bank holding company subsidiary, operates through First Bank & Trust,
headquartered in Santa Ana, California ("FB&T"). FBA, a majority-owned bank
holding company subsidiary, operates through BankTEXAS N.A., headquartered in
Houston, Texas ("BTX"), and Sunrise Bank of California, headquartered in
Roseville, California ("Sunrise"). FCB, a majority-owned bank holding company
subsidiary, operates through First Commercial Bank, headquartered in Sacramento,
California ("First Commercial"). First Banks' ownership interests in FBA and FCB
were 68.82% and 61.46%, respectively, at December 31, 1996.
Through the Subsidiary Banks, First Banks offers a broad range of
commercial and personal banking services including certificate of deposit
accounts, individual retirement and other time deposit accounts, checking and
other demand deposit accounts, interest checking accounts, savings accounts and
money market accounts. Loans include commercial, financial, agricultural,
municipal and industrial development, real estate construction and development,
commercial and residential real estate and consumer and installment loans. Other
financial services include mortgage banking, discount brokerage, credit-related
insurance, automatic teller machines, safe deposit boxes, and trust services
offered by certain Subsidiary Banks.
First Banks' 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 managing
the Subsidiary Banks rests with each of the respective Subsidiary Bank's
officers and directors.
<TABLE>
<CAPTION>
The following table lists the Subsidiary Banks at December 31, 1996:
Loans, net of
Number of Total unearned Total
Subsidiary Banks locations assets discount deposits
---------------- --------- ------ -------- --------
(dollars expressed in thousands)
<S> <C> <C> <C> <C>
First Bank FSB..................... 40 $1,040,038 864,174 877,956
First Bank Missouri................ 31 838,799 628,428 745,465
First Bank Illinois................ 27 843,333 627,871 773,606
CCB................................ 13 474,174 310,930 400,342
FBA ............................... 9 375,182 241,874 319,806
FCB ............................... 6 153,033 94,497 136,136
</TABLE>
In addition to the Subsidiary Banks, First Banks owns FirstServ, Inc. which
provides data processing services and operational support for First Banks and
its subsidiaries through a management services agreement with an affiliated
entity which is indirectly owned by First Banks' voting shareholders.
The Company, Mr. Dierberg and an affiliate of Mr. Dierberg own 18.12%,
4.33% and 0.20%, respectively, of the outstanding shares of common stock of
Southside Bancshares Corporation ("Southside") located in St. Louis,
Missouri. The shares of Southside are currently held for investment purposes.
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,
First Banks' Chairman of the Board, President and Chief Executive Officer, and
members of his immediate family. Accordingly, Mr. Dierberg controls the
management and policies of First Banks and the election of its directors. The
Class C Preferred Stock is publicly held and listed on The Nasdaq Stock Market's
National Market. The Class C Preferred Stock has no voting rights except in
certain limited circumstances.
For a description of the business of First Banks during the past year, see
"Management's Discussion and Analysis - General" of the 1996 Annual Report to
Shareholders, which is incorporated herein by reference.
Acquisitions
Prior to 1994, First Banks' acquisitions had been concentrated within its
primary market area of eastern Missouri and central and southern Illinois. The
premiums required to successfully pursue acquisitions escalated sharply in 1993,
reducing dramatically the economic viability of many potential acquisitions in
that area. Recognizing this, First Banks began to expand the geographic area in
which it approached acquisition candidates. While First Banks was successful in
making acquisitions in Chicago and northern Illinois, it became apparent that
acquisition pricing, in Chicago and other areas being considered, was comparable
to that of First Banks' primary acquisition area. As a result, while First Banks
continued to pursue acquisitions within these areas, it turned much of its
attention in 1994 and 1995 to institutions which could be acquired at more
attractive prices which were within major metropolitan areas outside its
immediate market area. This led to the acquisition of financial institutions
which had offices in Dallas and Houston, Texas in 1994 and Los Angeles, Orange
County, Santa Barbara, San Francisco, San Jose and Sacramento, California in
1995.
During 1996, 1995 and 1994, First Banks completed thirteen acquisitions.
These acquisitions provided total assets of $2.06 billion and 46 banking
locations. For a description of the acquisitions completed during the three
years ended December 31, 1996, see "Management's Discussion and Analysis -
Acquisitions" and Note 2 to the consolidated financial statements of the 1996
Annual Report to Shareholders, incorporated herein by reference.
Market Area
As of December 31, 1996, the Subsidiary Banks' 126 banking facilities were
located throughout eastern Missouri, Illinois, California and Texas. First
Banks' primary market area is the St. Louis, Missouri metropolitan area. First
Banks' second and third largest markets are central and southern Illinois and
southern and northern California, respectively. First Banks also has locations
in the Houston, Dallas and McKinney, Texas metropolitan areas, rural eastern
Missouri and the greater Chicago, Illinois metropolitan area.
<PAGE>
<TABLE>
<CAPTION>
The following table lists the market areas in which the Subsidiary Banks
operate by number of locations and deposits as of December 31, 1996:
Total Deposits
deposits as percent No of
Geographic area (in millions) of total locations
<S> <C> <C> <C>
St. Louis, Missouri Metropolitan Area (1)................. $ 672.1 20.8% 27
Rural Eastern Missouri (2)................................ 324.5 10.0 16
Central and Southern Illinois (3)......................... 982.5 30.3 40
Northern Illinois (4)..................................... 403.2 12.5 15
Texas (5)................................................. 232.9 7.2 6
Southern and Central California (6)....................... 369.2 11.4 11
Northern California (7)................................... 254.2 7.8 11
-- ------- ----- ---
Total Deposits............................................ $ 3,238.6 100.0% 126
======= ===== ===
</TABLE>
- ----------------------
(1) First Bank Missouri First Bank Illinois and First Bank FSB operate in the
St. Louis metropolitan market area.
(2) First Bank FSB and First Bank Missouri operate in rural eastern Missouri.
(3) First Bank FSB and First Bank Illinois operate in central and southern
Illinois outside of the St. Louis metropolitan market area.
(4) First Bank FSB operates facilities in northern Illinois, including Chicago.
(5) BTX operates in the Houston, Dallas and McKinney metropolitan areas.
(6) FB&T operates in the greater Los Angeles metropolitan area, including Orange
County, California. Three of the branches are also located in Santa
Barbara County, California.
(7) FB&T, First Commercial and Sunrise operate in northern California,
including the greater San Francisco, San Jose and Sacramento metropolitan
market areas.
Lending Activities
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, the Subsidiary Bank's Board of Directors or the Central Finance
Committee of the Company, depending upon the amount of the loan request. Loan
requests for amounts in excess of $4,000,000, and loan requests for amounts in
excess of $1,000,000 where the aggregate indebtedness of the borrower exceeds
$8,000,000, must also be approved by the Company's Chairman of the Board or
Chief Financial Officer.
Generally, loans are limited to borrowers residing or doing business in the
immediate market area of the originating Subsidiary Bank. The Company'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.
The Company offers the following types of loans: commercial, financial,
agricultural, real estate construction and development, commercial and
residential real estate, consumer and installment loans. The loan portfolio
composition for the five years ended December 31, 1996 is included under
"Management's Discussion and Analysis-Loans and Allowance for Possible Loan
Losses" of the 1996 Annual Report to Shareholders and is incorporated herein by
reference.
Mortgage Banking Operations
Through the First Bank Mortgage division ("First Bank Mortgage") of First
Bank FSB, the Company provides mortgage banking services. First Bank Mortgage
originates, underwrites, closes and services a full line of residential mortgage
loan products, both for the portfolios of First Bank FSB and the Company's other
Subsidiary Banks and for resale in the secondary mortgage market. In addition,
First Bank Mortgage acquires loans originated by the other Subsidiary Banks or
by unrelated entities, which it then underwrites and services.
In conjunction with its de-emphasis of residential mortgage lending for its
loan portfolio, First Banks is considering subcontracting its mortgage loan
servicing and transferring its origination function to an entity which would be
indirectly owned by First Banks' voting shareholders. It is not anticipated that
any such subcontract and transfer, if consummated, would have a material effect
on the financial condition or results of operations of First Banks. First Banks
may also consider selling its residential mortgage servicing, either to an
unrelated entity or an entity which would be indirectly owned by First Banks'
<PAGE>
voting shareholders. If such a transaction is initiated, its purpose would be to
redeploy the capital allocated to its mortgage servicing activities to assets
which would provide a greater and more stable return on capital to First Banks.
For a summary of the mortgage banking activities of First Banks, see
"Management's Discussion and Analysis - Mortgage Banking Activities" of the
1996 Annual Report to Shareholders which is incorporated herein by reference.
Investment Portfolio
The Company 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 the
management of the Subsidiary Banks to consider, among other criteria, the
quality, term, and marketability of the securities acquired for their respective
investment portfolios. The Company does not engage in the practice of trading
securities for the purpose of generating portfolio gains. The investment
portfolio composition is presented in Note 3 to the consolidated financial
statements of the 1996 Annual Report to Shareholders and is incorporated herein
by reference.
Deposits
The Company's deposits consist principally of core deposits from the local
market areas of the Subsidiary Banks. The Subsidiary Banks do not accept
brokered deposits, except for any such deposits which acquired institutions may
have had prior to their acquisition by the Company. A table illustrating the
distribution of the Company's deposit accounts and the weighted average nominal
interest rates on each category of deposits for the three years ending December
31, 1996 is included under "Management's Discussion and Analysis - Deposits"
of the 1996 Annual Report to Shareholders and is incorporated herein by
reference.
Competition and Branch Banking
The activities in which the Subsidiary Banks engage are highly competitive.
Those activities and the geographic markets served involve primarily competition
with other banks, some of which are affiliated with large bank 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 within their primary service
areas, the Subsidiary Banks also compete with other financial intermediaries,
such as thrifts, 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 the Company's non-bank competitors are not subject to the same extensive
federal regulations that govern bank holding companies and federally-insured
banks and thrifts and state regulations governing state-chartered banks and
thrifts. As a result, such non-bank competitors may have certain advantages over
the Company in providing some services.
The trend in Missouri, Illinois, California and Texas has been for
multi-bank holding companies to acquire independent banks and thrifts in
communities throughout these states. The Company believes it will continue to
face competition in the acquisition of such banks and thrifts from bank holding
companies based in those states and from bank holding companies based in other
states under interstate banking laws. Many of the financial institutions with
which the Company competes are larger than the Company and have substantially
greater resources available for making acquisitions.
Subject to regulatory approval, commercial banks situated in Missouri,
Illinois, California and Texas are permitted to establish branches throughout
their respective states, thereby creating the potential for additional
competition in the services areas of the Subsidiary Banks.
<PAGE>
Supervision and Regulation
General
The Company and its Subsidiary Banks are extensively regulated under
federal and state law. These laws and regulations are intended to protect
depositors, not shareholders. To the extent that the following information
describes statutory or regulatory provisions, it is qualified in its entirety by
reference to the particular statutory and regulatory provisions. Any change in
applicable laws or regulations may have a material effect on the business and
prospects of the Company. The operations of the Company may be affected by
legislative changes and by the policies of various regulatory authorities. The
Company is unable to predict the nature or the extent of the effects on its
business and earnings that fiscal or monetary policies, economic controls or new
federal or state legislation may have in the future.
The Company is a registered bank holding company under the BHC Act, and, as
such, is subject to regulation, supervision and examination by the Board of
Governors of the Federal Reserve System (the "FRB"). The Company is required to
file annual reports with the FRB and to provide additional information as it may
require.
The Company's state-chartered Subsidiary Banks (First Bank Missouri, First
Bank Illinois, FB&T, First Commercial and Sunrise) are subject to supervision
and regulation by the bank supervisory authorities in their respective states
and also by their respective primary federal bank regulators. The primary such
regulator for First Bank Missouri, as a member of the Federal Reserve System, is
the FRB, while the primary federal bank regulator for First Bank Illinois, FB&T,
First Commercial and Sunrise, which are not members of the Federal Reserve
System, is the Federal Deposit Insurance Corporation (the "FDIC"). First Bank
FSB, as a federally chartered savings institution, is subject to supervision and
regulation by the Office of Thrift Supervision (the "OTS"), and BTX, a national
banking association, is subject to the supervision and regulation of the Office
the Comptroller of the Currency (the "OCC"). Because the FDIC provides deposit
insurance to the Company's depository subsidiary financial institutions, they
are also subject to supervision and regulation by the FDIC, even where the FDIC
is not their primary federal regulator.
Recent and Pending Legislation
The enactment of the legislation described below has significantly affected
the banking industry generally and will have an ongoing effect on the Company
and its 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: (i) enhanced the supervisory
and enforcement powers for the federal bank regulatory agencies; (ii) required
insured financial institutions to guaranty repayment of losses incurred by the
FDIC in connection with the failure of an affiliated financial institution;
(iii) required financial institutions to provide their primary federal regulator
with notice, under certain circumstances, of changes in senior management; and
(iv) broadened authority for bank holding companies to acquire savings
institutions.
Under FIRREA, federal bank regulators were granted expanded enforcement
authority over "institution-affiliated parties" (i.e., officers, directors,
controlling stockholders, as well as attorneys, appraisers or accountants who
knowingly or recklessly participate in wrongful action likely to have an adverse
effect on an insured institution). Federal banking regulators have greater
flexibility to bring enforcement actions against insured institutions and
institution-affiliated parties, including cease and desist orders, prohibition
orders, civil money penalties, termination of insurance and the imposition of
operating restrictions and capital plan requirements. In general, these
enforcement actions may be initiated for violations of laws and regulations and
unsafe or unsound practices. Since the enactment of FIRREA, the federal bank
regulators have significantly increased the use of written agreements to correct
compliance deficiencies with respect to applicable laws and regulations and to
ensure safe and sound practices. Violations of such written agreements are
grounds for initiation of cease-and-desist proceedings. FIRREA granted the FDIC
back-up enforcement authority to recommend enforcement action to an appropriate
<PAGE>
federal banking agency and to bring such enforcement action against a financial
institution or an institution-affiliated party if such federal banking agency
fails to follow the FDIC's recommendation. In addition, FIRREA requires, except
under certain circumstances, public disclosure of final enforcement actions by
the federal banking agencies.
FIRREA also established a cross guarantee provision pursuant to which the
FDIC may recover from a depository institution losses that the FDIC incurs in
providing assistance to, or paying off the depositors of, any of such depository
institution's affiliated insured banks or thrifts. The cross guarantee thus
enables the FDIC to assess a holding company's healthy Bank Insurance Fund
("BIF") members and Savings Association Insurance Fund ("SAIF") members for the
losses of any of such holding company's failed BIF and SAIF members. Cross
guarantee liabilities are generally superior in priority to obligations of the
depository institution to its stockholders due solely to their status as
stockholders and obligations to other affiliates. Cross guarantee liabilities
are generally subordinated, except with respect to affiliates, 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. In general, FDICIA includes
provisions, among others, to: (I) increase the FDIC's line of credit with the
U.S. Treasury in order to provide the FDIC with additional funds to cover the
losses of federally insured banks; (ii) reform the deposit insurance system,
including the implementation of risk-based deposit insurance premiums; (iii)
establish a format for closer monitoring of financial institutions to enable
prompt corrective action by banking regulators when a financial institution
begins to experience financial difficulty; (iv) establish five capital levels
for financial institutions ("well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized") that impose more scrutiny and restrictions on less
capitalized institutions; (v) require the banking regulators to set operational
and managerial standards for all insured depository institutions and their
holding companies, including limits on excessive compensation to executive
officers, directors, employees and principal stockholders, and establish
standards for loans secured by real estate; (vi) adopt certain accounting
reforms and require annual on-site examinations of federally insured
institutions, including the ability to require independent audits of banks and
thrifts; (vii) revise risk-based capital standards to ensure that they (a) take
adequate account of interest-rate changes, concentration of credit risk and the
risks of nontraditional activities, and (b) reflect the actual performance and
expected risk of loss of multi-family mortgages; and (viii) restrict
state-chartered banks from engaging in activities not permitted for national
banks unless they are adequately capitalized and have FDIC approval. FDICIA,
also authorized 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.
FDICIA, as noted above, 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 6% or greater, and a leverage ratio of 5% or
greater, and the institution is not subject to an order, written agreement,
capital directive, or prompt corrective action directive to meet and maintain a
specific capital level for any capital measure; (ii) adequately capitalized if
the institution has a total risk-based capital ratio of 8% or greater, a 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%.
<PAGE>
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 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 did not submit or comply with acceptable
capital restoration plans are subject to restrictions on the compensation of
senior executive officers and to additional regulatory sanctions that may
include a forced offering of shares or merger, restrictions on affiliate
transactions, restrictions on rates paid on deposits, asset growth and new
activities, the dismissal of directors or senior executive officers and
mandatory divestitures by the institution or its parent company. The banking
agency must require the offering of shares or merger and restrict affiliate
transactions and the rates paid on deposits unless it is determined that they
would not further capital improvement. FDICIA generally requires the appointment
of a conservator or receiver within 90 days after an institution becomes
critically undercapitalized. The federal banking agencies have adopted uniform
procedures for the issuance of directives by the appropriate federal banking
agency. Under these procedures, an institution will generally be provided
advance notice when the appropriate federal banking agency proposes to impose
one or more of the sanctions set forth above. These procedures provide an
opportunity for the institution to respond to the proposed agency action or,
where circumstances warrant immediate agency action, an opportunity for
administrative review of the agency's action.
As described in Note 17 to the accompanying consolidated financial
statements of the 1996 Annual Report to Shareholders, each of the Company's
subsidiary bank and thrift depository institutions have, as of December 31,
1996, capital in excess of the requirements for a "well-capitalized"
institution.
Pursuant to FDICIA, the FRB and the other federal banking agencies adopted
real estate lending guidelines pursuant to which each insured depository
institution is required to adopt and maintain written real estate lending
policies in conformity with the prescribed guidelines. Under these guidelines,
each institution is expected to set loan-to-value ratios not exceeding the
supervisory limits set forth in the guidelines. A loan-to-value ratio is
generally defined as the total loan amount divided by the appraised value of the
property at the time the loan is originated. The guidelines require that the
institution's real estate policy include proper loan documentation, and that it
establish prudent underwriting standards. These guidelines became effective on
March 19, 1993. These rules have had no material adverse impact on the Company.
FDICIA also contained the Truth in Savings Act, which requires clear and
uniform disclosure of the rates of interest payable on deposit accounts by
depository institutions and the fees assessable against deposit accounts, so
that consumers can make a meaningful comparison between the competing claims of
financial institutions with regard to deposit accounts and products.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. In
September 1994, Congress enacted the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Act"). Beginning in September
1995, bank holding companies have the right to expand, by acquiring existing
banks, into all states, even those which had theretofore restricted entry. The
legislation also provides that, subject to future action by individual states, a
holding company will have the right, commencing in 1997, to convert the banks
which its owns in different states to branches of a single bank. A state is
permitted to "opt out" of the law which will permit conversion of separate banks
to branches, but is not permitted to "opt out" of the law allowing bank holding
companies from other states to enter the state of those states in which the
Subsidiary Banks are located. Texas has adopted legislation to "opt out" of the
interstate branching provisions (which Texas law currently expires on September
2, 1999). The federal legislation also establishes limits on acquisitions by
large banking organizations, providing that no acquisition may be undertaken if
it would result in the organization having deposits exceeding either 10% of all
bank deposits in the United States or 30% of the bank deposits in the state in
which the acquisition would occur.
Economic Growth and Regulatory Paperwork Reduction Act of 1996. The
Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("EGRPRA") was
signed into law on September 30, 1996. EGRPRA streamlined the non-banking
activities application process for well-capitalized and well-managed bank
<PAGE>
holding companies. Under EGRPRA, qualified bank holding companies may commence a
regulatory approved non-banking activity without prior notice to the FRB;
written notice is required within 10 days after commencing the activity. Under
EGRPRA, the prior notice period is reduced to 12 days in the event of any
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 FRB has
recently announced comprehensive amendments to its regulations under the BHC Act
that implement the foregoing provisions of EGRPRA and that also streamline the
application / notice process for acquisitions of banks and bank holding
companies and eliminate regulatory provisions the FRB considered unnecessary.
EGRPRA also provides for the recapitalization of the SAIF in order to bring
it into parity with the BIF of the FDIC. First Banks recorded an $8.2 million
charge in the third quarter of 1996 for the one-time special deposit insurance
assessment. As a result of this special assessment, however, First Banks' cost
of deposit insurance is expected to decrease by approximately $2 million for the
year ended December 31, 1997, compared to its deposit insurance cost for the
year ended December 31, 1996, excluding the effect of the special assessment.
The expected decrease in the cost of deposit insurance is based on an overall
assessment rate for 1997 of 1.3 basis points and 6.4 basis points for each $100
of assessable deposits of BIF and SAIF deposits, respectively, in comparison to
the current assessment rate, applicable only to SAIF deposits, of 23 basis
points.
Pending Legislation. Because of concerns relating to competitiveness and
the safety and soundness of the banking industry, Congress is considering a
number of wide-ranging proposals for altering the structure, regulation and
competitive relationships of the nation's financial institutions. Among such
bills are new proposals to merge the BIF and the SAIF insurance funds, to
eliminate the federal thrift charter, to alter the statutory separation of
commercial and investment banking and to further expand the powers of banks,
bank holding companies and competitors of banks. It cannot be predicted whether
or in what form any of these proposals will be adopted or the extent to which
the business of First Banks may be affected thereby.
Bank and Bank Holding Company Regulation
BHC Act. Under the BHC Act, the activities of a bank holding company are
limited to business so closely related to banking, managing or controlling banks
as to be a proper incident thereto. The Company is also subject to capital
requirements applied on a consolidated basis in a form substantially similar to
those required of the Subsidiary Banks. The BHC Act also requires a bank holding
company to obtain approval from the FRB before: (I) acquiring, directly or
indirectly, ownership or control of any voting shares of another bank or bank
holding company if, after such acquisition, it would own or control more than 5%
of such shares (unless it already owns or controls the majority of such shares);
(ii) acquiring all or substantially all of the assets of another bank or bank
holding company; or (iii) merging or consolidating with another bank holding
company. The FRB will not approve any acquisition, merger or consolidation that
would have a substantially anticompetitive result, unless the anticompetitive
effects of the proposed transaction are clearly outweighed by a greater public
interest in meeting the convenience and needs of the community to be served. The
FRB also considers capital adequacy and other financial and managerial factors
in reviewing acquisitions or mergers.
The BHC Act also prohibits a bank holding company, with certain limited
exceptions: (I) from acquiring or retaining direct or indirect ownership or
control of more than 5% of the voting shares of any company which is not a bank
or bank holding company; or (ii) from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks, or
providing services for its subsidiaries. The principal exceptions to these
prohibitions involve certain non-bank activities which, by statute or by FRB
regulation or order, have been identified as activities closely related to the
business of banking or of managing or controlling banks. In making this
determination, the FRB considers whether the performance of such activities by a
bank holding company can be expected to produce benefits to the public such as
greater convenience, increased competition or gains in efficiency in resources,
which can be expected to outweigh the risks of possible adverse effects such as
decreased or unfair competition, conflicts of interest or unsound banking
practices. FIRREA (described in more detail herein) made a significant addition
to this list of permitted non-bank activities for bank holding companies by
providing that bank holding companies may acquire thrift institutions upon
approval by the FRB and the applicable regulatory authority for the thrift
institutions.
Insurance of Accounts. The FDIC provides insurance, through the BIF and the
SAIF, to deposit accounts at the Subsidiary Banks to a maximum of $100,000 for
<PAGE>
each insured depositor. Certain of the Subsidiary Banks have deposits which were
added through the merger of acquired thrifts. Consequently, First Bank FSB,
First Bank Missouri, First Bank Illinois and FB&T are members of both the BIF
and the SAIF, BTX, First Commercial and Sunrise are members of the BIF only.
Through December 31, 1992, all FDIC-insured institutions, whether members
of the BIF, the SAIF or both, paid the same premium (23 cents per $100 of
domestic deposits) under a flat-rate system mandated by law. FDICIA required the
FDIC to raise the reserves of the BIF and the SAIF, implement a risk related
premium system and adopt a long term schedule for recapitalizing the BIF.
Effective January 1, 1993, the FDIC amended its regulations regarding insurance
premiums to provide that a bank or thrift would pay an insurance assessment
within a range of 23 cents to 31 cents per $100 of domestic deposits, depending
on its risk classification.
Effective January 1, 1996, the FDIC implemented an amendment to the BIF
risk-based assessment schedule which effectively eliminated deposit insurance
assessments for most commercial banks and other depository institutions with
deposits insured by the BIF only, while maintaining the assessment rate for
SAIF-insured institutions in even the lowest risk-based premium category at 23
cents for each $100 of assessable deposits. Following enactment of EGRPRA, First
Banks paid a one-time special deposit insurance assessment with respect to its
SAIF-insured deposits, as part of the recapitalization of the SAIF, and the
overall assessment rate for 1997 for institutions in the lowest risk-based
premium category was revised to equal 1.29 cents and 6.44 cents for each $100 of
assessable deposits of BIF and SAIF, respectively, in comparison to the prior
assessment rate for such institutions, applicable only to SAIF deposits, of 23
cents for each $100 of assessable deposits. At this time, the deposit insurance
assessment rate for institutions in the lowest risk-based premium category is
zero, and all of the assessments paid by institutions in this category are used
to service debt issued by the Financing Corporation, a federal agency
established to finance the recapitalization of the former Federal Savings and
Loan Insurance Corporation
Regulations Governing Capital Adequacy. The federal bank regulatory
agencies use capital adequacy guidelines in their examination and regulation of
bank holding companies and banks. If the capital falls below the minimum levels
established by these guidelines, the bank holding company or bank may be denied
approval to acquire or establish additional banks or nonbank businesses or to
open facilities.
The FRB, the FDIC and the OCC 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 banks
and bank holding companies, to account for off-balance sheet exposure and to
minimize disincentives for holding liquid assets. Assets and off-balance sheet
items are assigned to broad risk categories, each with appropriate weights. The
resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance sheet items. The FRB has noted that bank
holding companies contemplating significant expansion programs should not allow
expansion to diminish their capital ratios and should maintain ratios well in
excess of the minimums. Under these guidelines, all bank holding companies and
federally regulated banks must maintain a minimum risk-based total capital ratio
equal to 8%, of which at least 4% must be Tier 1 capital.
The FRB also has implemented a leverage ratio, which is Tier 1 capital to
total assets, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank holding company may leverage its equity capital
base. The FRB requires a minimum leverage ratio of 3%. For all but the most
highly-rated bank holding companies and for bank holding companies seeking to
expand, however, the FRB expects that additional capital sufficient to increase
the ratio by at least 100 to 200 basis points will be maintained.
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 its 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. Although these
requirements would not reduce the ability of the Company to make acquisitions
using the pooling of interests method of accounting, the Company has not
historically made, and has no present plans to make, acquisitions on this basis.
Community Reinvestment Act. The Community Reinvestment Act of 1977 (the
"CRA") requires that, in connection with examinations of financial institutions
<PAGE>
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 the bank holding company or its subsidiaries, or investments in
their securities and on the use of their securities as collateral for loans to
any borrowers. These regulations and restrictions limit the Company's ability to
borrow funds from its Subsidiary Banks for its cash needs, including funds for
acquisitions and for payment of dividends, interest and operating expenses.
Transactions among the Subsidiary Banks (other than BTX, First Commercial Bank
and Sunrise) that do not involve the Company or FirstServ, Inc. are generally
exempt from the foregoing regulations and restrictions. Because the exemption is
available only to those Subsidiary Banks that are at least 80% owned by the
Company, it would not apply to such transactions involving BTX, First Commercial
and Sunrise. Further, under the BHC Act and certain regulations of the FRB,
subsidiary banks of a bank holding company are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services. Bank holding companies and their
nonbank subsidiaries that engage in electronic benefit transfer services are
also subject to certain anti-tying restrictions.
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 above 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.
Reserve Requirements. The FRB requires all depository institutions to
maintain reserves against their transaction accounts and non-personal time
deposits. Reserves of 3% must be maintained against total transaction accounts
of $49.3 million or less (subject to adjustment by the FRB) and an initial
reserve of $1,479,000 plus 10% (subject to adjustment by the FRB to a level
between 8% and 14%) must be maintained against that portion of total transaction
accounts in excess of such amount. The balances maintained to meet the reserve
requirements imposed by the FRB may be used to satisfy liquidity requirements.
Institutions are authorized to borrow from the Federal Reserve Bank
"discount window," but FRB regulations require institutions to exhaust other
reasonable alternative sources of funds, including Federal Home Loan Bank
advances, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. First Bank FSB, First Bank Missouri, First
Bank Illinois, FB&T and BTX are members of the Federal Home Loan Bank System
(the "FHLB System"). The FHLB System consists of twelve regional Federal Home
Loan Banks (each, a "FHLB"), 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. First
Bank FSB and First Bank (Missouri), as members of the FHLB of Des Moines, First
Bank (Illinois), as a member of the FHLB of Chicago, BTX, as a member of the
FHLB of Dallas, and FB&T, as a member of the FHLB of San Francisco, are required
to acquire and hold shares of capital stock in the FHLB in amounts at least
equal to 1% of the aggregate principal amount of its unpaid residential mortgage
loans and similar obligations at the beginning of each year, or 1/20th of its
advances (borrowings) from the FHLB, whichever is greater. Each of the
Subsidiary Banks which is a member of the FHLB is in compliance with these
regulations.
Qualified Thrift Lender Status. First Bank FSB must, and currently does,
meet a "Qualified Thrift Lender" (the "QTL") test for, among other things,
future eligibility for FHLB advances. The QTL test requires savings associations
to maintain a specified percentage of assets in "qualifying" investments, which
may include, for example, home mortgage loans, mortgage-backed securities and a
percentage of consumer loans. Any savings association that fails to meet the QTL
<PAGE>
test must convert to a commercial bank charter, unless it requalifies as a QTL
on an average basis in at least three out of every four quarters for two out of
three years and thereafter remains a QTL. If an institution that fails the QTL
test has not yet requalified and has not converted to a commercial bank, its new
investments and activities are limited to those permissible for a national bank.
Such an association is also immediately ineligible to receive any new FHLB
advances and is subject to national bank limits for payment of dividends and may
not establish a branch office at any location at which a national bank located
in the savings association's home state could not establish a branch. If such
association has not requalified or converted to a commercial bank charter three
years after its failure to meet the QTL test, it must divest all investments and
cease all activities not permissible for a national bank. Such an association
must also repay promptly any outstanding FHLB advances. Certain temporary and
limited exceptions from meeting the QTL test may be granted by the OTS.
Dividends. The Company's primary sources of funds are the dividends and
management fees paid by its Subsidiary Banks. The ability of the Subsidiary
Banks to pay dividends and management fees is limited by various state and
federal laws, by the regulations promulgated by their respective primary
regulators and by the 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 the Company'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 $45.6 million as of December 31, 1996, unless prior
permission of the regulatory authorities and, if necessary, the lead bank for
the lenders is obtained.
Monetary Policy and Economic Control. The commercial banking business in
which the Company engages is affected not only by general economic conditions,
but also by the monetary policies of the FRB. Changes in the discount rate on
member bank borrowing, availability of borrowing at the "discount window," open
market operations, the imposition of changes in reserve requirements against
member banks deposits and assets of foreign branches, and the imposition of and
changes in reserve requirements against certain borrowings by banks and their
affiliates are some of the instruments of monetary policy available to the FRB.
These monetary policies are used in varying combinations to influence overall
growth and distributions of bank loans, investments and deposits, and such use
may affect interest rates charged on loans or paid on deposits. The monetary
policies of the FRB have had a significant effect on the operating results of
commercial banks and are expected to do so in the future. The monetary policies
of the FRB are influenced by various factors, including inflation, unemployment,
short-term and long-term changes in the international trade balance and in the
fiscal policies of the U.S. Government. Future monetary policies and the effect
of such policies on the future business and earnings of the Company cannot be
predicted.
Employees
As of December 31, 1996, the Company and its subsidiaries employed
approximately 1,424 employees. None of the employees are subject to a collective
bargaining agreement. The Company considers its relationships with its employees
and those of the Subsidiary Banks and its other subsidiaries to be good.
Executive Officers of the Registrant
Information regarding executive officers is contained in Item 10 of Part
III hereof (pursuant to General Instruction G) and is incorporated herein by
this reference.
Item 2. Properties
- -------------------
The Company owns the office building which houses the principal place of
business of the Company and First Bank FSB, which is located at 135 N. Meramec,
Clayton, Missouri 63105. The property is in good condition and consists of
approximately 41,763 square feet, of which approximately 12,013 is currently
leased to others. Of the Subsidiary Banks' other 125 main offices and branch
facilities, 83 are located in buildings owned by the Subsidiary Banks and 42
currently are located in leased facilities.
Item 3. Legal Proceedings
- -------------------------
The Company and the Subsidiary Banks are, from time to time, parties to
various legal actions arising in the normal course of business. Management
<PAGE>
believes that there is no proceeding threatened or pending against the Company
or any of the Subsidiary Banks which, if determined adversely, would have a
material adverse effect on the business or financial position of the Company,
any of the Subsidiary Banks or any other subsidiary.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
There is no established public trading market for the Company's Common
Stock. All of the Company's Common Stock is owned by various trusts created by
and for the benefit of Mr. James F. Dierberg, the Company's Chairman of the
Board, President and Chief Executive Officer, and members of his immediate
family.
Item 6. Selected Financial Data
- -------------------------------
The information required by this item is incorporated herein by reference
to "Selected Consolidated Financial Data" included in the 1996 Annual Report to
Shareholders.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by this item is incorporated herein by reference
to "Management's Discussion and Analysis" included in the 1996 Annual Report to
Shareholders.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements, included in the 1996
Annual Report to Shareholders, and quarterly consolidated financial data,
included in the 1996 Annual Report to Shareholders, are incorporated herein by
reference.
Statement
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Income - Years Ended December 31, 1996, 1995
and 1994 Consolidated Statements of Changes in Stockholders' Equity -
Years Ended December 31, 1996, 1995,
and 1994
Consolidated Statements of Cash Flows - Years Ended December 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
Independent Auditors' Report
Item 9. Change in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The directors and executive officers of the Company, their ages, and
positions with the Company and the Subsidiary Banks and the Company's other
subsidiaries as of December 31, 1996, are set forth below.
<TABLE>
<CAPTION>
<S> <C> <C>
Name Age Position with the Company and its Subsidiaries
---- --- ----------------------------------------------
James F. Dierberg............... 59 Chairman of the Board of Directors, President and Chief
Executive Officer of the Company and FBA; Directo of
CCB and Sundowner Corporation (a wholly owned subsidiary
of FBA).
Allen H. Blake.................. 54 Executive Vice President, Chief Financial Officer,
Secretary and Director of the Company; Secretary and
Director of First Bank Missouri; Vice President, Chief
Financial Officer, Secretary and Director of FBA;
Director of First Bank Illinois, FCB, Sunrise, First
Commercial, Sundowner Corporation and FirstServ.
Donald Gunn, Jr................. 61 Director of the Company.
George J. Markos................ 48 Director of the Company.
Thomas A. Bangert............... 53 Senior Vice President and Chief Operations Officer of
the Company; Executive Vice President and Director of
First Bank Missouri; and Executive Vice President of
First Bank FSB; President and Director of FirstServ.
Laurence J. Brost............... 40 Vice President and Controller of the Company; Vice
President, Chief Accounting Officer, Secretary and
Director of First Bank FSB; Chief Accounting Officer
of First Bank Missouri; Vice President of First
Commercial; President and Director of River Valley
Holdings, Inc.; Director of FirstServ.
John A. Schreiber............... 46 Executive Vice President and Chief Lending Officer of
the Company; President and Chairman of the Board of
Directors of First Bank Missouri; Executive Vice
President of First Bank FSB.
Mark T. Turkcan ................ 41 Executive Vice President, Retail and Mortgage Banking
of the Company; President and Chairman of the Board of
Directors of First Bank FSB; Director of First Bank
Missouri and FBA.
Donald W. Williams.............. 49 Executive Vice President and Chief Credit Officer of
the Company; Senior Vice President and Director of
First Bank Missouri; Senior Vice President of First
Bank Illinois and First Bank FSB; Director of FBA and
BTX; Chairman and Chief Executive Officer of CCB,
FB&T, FCB and First Commercial and Sunrise.
</TABLE>
Section 16(a) Beneficial Ownership Reporting Compliance
To the Company's knowledge, no director, executive officer or shareholder
of the Company, subject, in their capacity as such, to the reporting obligations
set forth in Section 16 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") has failed to file on a timely basis reports required by Section
16(a) of the Exchange Act during the year ended December 31, 1996 or prior
years.
<PAGE>
James F. Dierberg is the Chairman of the Board and Chief Executive Officer
of the Company; positions he has held since 1988. He has also served as a
Director of the Company since 1979. Mr. Dierberg was President of the Company
from 1979 until February 1992; he was re-appointed President in April 1994 and
continues to serve in that capacity. Mr. Dierberg was appointed Chairman of the
Board, President and Chief Executive Officer of FBA in September 1994. In
addition, Mr. Dierberg has served in various capacities with other bank holding
companies and banks owned or controlled by him or members of his family since
1957.
Allen H. Blake has been an Executive Vice President of the Company since
April 18, 1996. Mr. Blake joined the Company as Vice President and Chief
Financial Officer in 1984, and in 1988 he was appointed as Secretary and a
Director of the Company. In addition, Mr. Blake has served as Chief Financial
Officer, Secretary and Director
of FBA since September 1994.
Donald Gunn, Jr. was elected a Director of the Company in December 1992.
Mr. Gunn is a practicing attorney and has been a shareholder in the law firm of
Gunn & Gunn, P.C. during the past five years.
George J. Markos was elected a Director of the Company in December 1992.
Mr. Markos is a management consultant providing services primarily to banks,
savings and loans and related businesses, including the Company and has
performed such services during the past five years.
Thomas A. Bangert is Senior Vice President and Chief Operations Officer of
the Company, Executive Vice President and Director of First Bank Missouri and
Executive Vice President of First Bank FSB, positions he assumed on January 1,
1990. He is also the President and a Director of FirstServ, a position he has
held since that company's incorporation in February 1992.
Laurence J. Brost is Vice President and Controller of the Company, a
position he assumed in 1990, and Vice President, Chief Accounting Officer,
Secretary and Director of First Bank FSB where he had been employed as Vice
President and Chief Accounting Officer since 1987. Mr. Brost also serves as a
Director of FirstServ.; Chief Accounting Officer of First Bank Missouri; Vice
President of First Commercial and President and Director of River Valley
Holdings, Inc.
John A. Schreiber is Executive Vice President and Chief Lending Officer of
the Company and President and a Director of First Bank Missouri, positions he
assumed in April 18, 1996 and September 1992, respectively. In May 1994, he
became Chairman of First Bank Missouri. Mr. Schreiber also serves as Executive
Vice President of First Bank FSB. He was previously Senior Vice President at
Mercantile Bank of St. Louis, N.A., a position he had held since 1989, where he
was responsible for commercial lending and operating services to St. Louis-based
companies.
Mark T. Turkcan is Executive Vice President, Retail and Mortgage Banking of
the Company, and President and Chairman of First Bank FSB, where he has been
employed in various executive capacities since 1985. Mr. Turkcan is also a
Director of First Bank Missouri and a Director of FBA, positions he has held
since April 1994 and August 1994, respectively.
Donald W. Williams is an Executive Vice President and Chief Credit Officer
of the Company and First Banks-Illinois, a Senior Vice President and Director of
First Bank Missouri and Senior Vice President of First Bank FSB, positions he
assumed in March 1993. He was previously Senior Vice President at Mercantile
Bank of St. Louis, N.A., a position he had held since 1989, where he was
responsible for credit approval.
<PAGE>
Item 11. Executive Compensation
- ------------------------------
<TABLE>
<CAPTION>
The following table sets forth the compensation for the named executive
officers for the last three years.
SUMMARY COMPENSATION TABLE
All Other
Name and Principal Positions Year Salary ($) Bonus ($) Compensation($)
- ---------------------------- ---- ---------- --------- ---------------
<S> <C> <C> <C> <C>
James F. Dierberg, 1996 $ 492,000$ 0 $ 4,750
Chairman of the Board of 1995 492,000 0 4,500
Directors, President, 1994 492,000 0 4,710
Chief Executive Officer
Donald W. Williams 1996 $ 155,000 $ 30,000 $ 4,750
Executive Vice President 1995 138,750 26,000 4,260
1994 133,750 25,000 3,038
John A. Schreiber 1996 $ 155,000 $ 20,000 $ 4,750
Executive Vice President 1995 138,750 25,000 4,260
1994 133,750 25,000 3,038
Allen H. Blake 1996 $ 140,000 $ 30,000 $ 4,750
Executive Vice President and 1995 128,750 30,000 4,260
Chief Financial Officer 1994 119,500 0 2,813
Mark T. Turkcan 1996 $ 130,000 $ 10,000 $ 4,088
Executive Vice President 1995 113,750 25,000 4,163
1994 105,450 0 2,475
</TABLE>
Employment Agreements
Messrs. Schreiber and Williams are parties to employment agreements with
the Company and First Bank Missouri. In most respects, the two contracts are
identical. The term of each contract is one year, and each is automatically
renewable for additional one-year periods. As part of the annual renewal
process, the base salary payable under each employment agreement is reviewed and
may be adjusted in the discretion of the Board of Directors of the Company. The
base salary paid to each of Messrs. Schreiber and Williams pursuant to their
respective employment agreements is set forth in the salary column of the
Summary Compensation Table.
Both employment contracts provide for a bonus of up to twenty percent (20%)
of the employee's annual base salary, with the exact percentage to be determined
by the Chairman of the Board of the Company if the employee meets the criteria
set by the Company and First Bank Missouri at the beginning of each contract
year. Each annual bonus is payable within ninety (90) days after the close of
the year to which it relates. In addition, each employee is entitled to
participate in the 401(k) Plan, the Company's health insurance plan and in such
other additional benefit plans which the company may adopt for its employees.
Under the terms of the employment contracts, if either Mr. Schreiber or Mr.
Williams are terminated for a reason other than retirement, death, "disability"
or for "cause," as those terms are defined in the employment agreements, or are
terminated due to a change in control of the Company, each such individual will
be entitled to receive two years base salary. Should either Mr. Schreiber or Mr.
Williams voluntarily terminate employment with the Company and First Bank
Missouri, he would be entitled to receive the balance of his base salary for
that year or a minimum of six months salary, provided that neither would be
permitted to accept a position with any bank or trust company for the duration
of that year. Finally, in the event of the death of either Mr. Schreiber or Mr.
Williams, their respective employment agreements provide that their widows would
be entitled to receive compensation that would have been payable to the employee
during the month of his death, and his monthly salary for the twelve month
period following the date of his death.
<PAGE>
Compensation of Directors
Only those directors who are not employees of the Company or any of its
subsidiaries receive remuneration for their services as directors. Such
non-employee directors (currently only Messrs. Donald Gunn and George Markos)
receive a fee of $500 for each Board meeting attended. Effective January 1,
1997, such fees were changed to provide a retainer of $1,000 per quarter and a
fee of $500 per meeting. No directors are compensated for attendance at Audit
Committee meetings, which is the only committee of the Board of Directors.
In addition to Board meeting fees, during 1996 the Company paid Mr. Markos,
directly and indirectly, consulting fees in the amount of $125,500 exclusive of
reimbursement for his travel expenses. It is anticipated that Mr. Markos will
continue to provide consulting services to the Company during the current fiscal
year.
During 1996, the Company paid $37,455 in legal fees to a law firm of which
Mr. Donald Gunn, one of the Company's directors, is a shareholder. It is
anticipated that Mr. Gunn's law firm will continue to provide legal services to
the Company during the current fiscal year.
Executive officers of the Company who are also directors of the Company do
not receive remuneration other than salaries and bonuses for serving on the
Board of Directors.
Compensation Committee Interlock and Insider Participation in Compensation
Decisions
The Company does not have a compensation committee of the Board of
Directors or another committee which performs the functions normally reserved to
compensation committees. All decisions with respect to the compensation of
executive officers of the Company are the responsibility of the Board of
Directors. Messrs. Dierberg and Blake are the only executive officers of the
Company who serve on the Board of Directors. The aforementioned individuals
abstain from voting with respect to matters relating to their own compensation.
All of the executive officers of the Company (some of whom are also
directors of the Company) serve as directors of certain of the Subsidiary Banks,
some of whose executive officers (and directors) serve on the Board of Directors
of the Company. Similarly, certain directors of the Company (some of whom are
executive officers of the Company) serve as executive officers (and directors)
of certain of the Subsidiary Banks, some of whose directors (and executive
officers) are executive officers of the Company.
The Company believes that these relationships are typical of bank holding
companies in general and that they do not constitute "insider participation" as
set forth in the executive compensation disclosure rules promulgated by the
Securities and Exchange Commission. The salaries and bonuses paid these
individuals for their services to the Company and its Subsidiary Banks are
established in their entirety by the Board of Directors of the Company. The
Boards of Directors of the Subsidiary Banks do not participate in the
deliberations of the Company's Board of Directors with respect to the
compensation paid to these individuals.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The following table sets forth the entire ownership of all classes of
voting capital stock of the Company issued and outstanding.
<TABLE>
<CAPTION>
Title of Class Number of Percent Percent of
and Name of Owner Shares of Class Total
----------------- -------
Owned Voting
-----
Power
Common Stock ($250 par value) -----
<S> <C> <C>
Mary W. Dierberg and James F. Dierberg II, 3,459,358(2) 14.6% *
Trustees under living trust of James F. Dierberg II, dated
July 24, 1989(1)........................................
Mary W. Dierberg and Michael James Dierberg, 3,459,358(2) 14.6% *
Trustees under living trust of Michael James Dierberg,
dated July 24, 1989(1)..................................
Mary W. Dierberg and Ellen C. Dierberg, Trustees 3,459,358(2) 14.6% *
under living trust of Ellen C. Dierberg, dated July 17,
1992(1).................................................
First Trust (Mary W. Dierberg and First Bank 13,282,786(3) 56.1% *
Missouri, Trustees established U/I James F. Dierberg,
dated December 30, 1992)................................
Class A Convertible Adjustable Rate Preferred Stock ($20 par value)
James F. Dierberg, trustee of the James F. Dierberg 641,082(4)(5) 100% 77.7%
living trust, dated October 8, 1985(1)..................
Class B Non-Convertible Adjustable Rate Preferred Stock ($1.50 par
value)
James F. Dierberg, trustee of the James F. Dierberg 160,505(5) 100% 19.5%
living trust dated October 8 1985(1)....................
</TABLE>
- ----------------------------------
* Represent less than 1.0%.
(1) Each of the above-named trustees and beneficial owners are United
States citizens, and the business address for each such individual is
135 N. Meramec, Clayton, Missouri 63105. Mr. James F. Dierberg, the
Company's Chairman of the Board, President and Chief Executive Officer,
and Mrs. Mary W. Dierberg, are husband and wife, and Messrs. James F.
Dierberg II, Michael James Dierberg and Miss Ellen C. Dierberg are
their children.
(2) Due to the relationship between Mr. James F. Dierberg, his wife and
their children, Mr. Dierberg is deemed to share voting and investment
power over the Company's common stock.
(3) Due to the relationship between Mr. James F. Dierberg, his wife and
First Bank Missouri, Mr. D ierberg is deemed to share voting and
investment power over these shares.
(4) Convertible into common stock, based on the appraised value of the
common stock at the date of conversion. Assuming an appraised value of
the common stock equal to the book value, the number of shares of
common stock into which the Class A Preferred Stock is convertible at
December 31, 1996, is 1,835, which shares are not included in the above
table.
(5) Sole voting and investment power.
<PAGE>
Security Ownership of Management
As set forth above, other than trusts established by and for the benefit of
Mr. James F. Dierberg, the Company's Chairman of the Board, President and Chief
Executive Officer, or for the benefit of members of Mr. Dierberg's immediate
family, no other director or executive officer of the Company beneficially owns
any of the issued and outstanding shares of the Company's (i) Common Stock, (ii)
Class A Convertible Adjustable Rate Preferred Stock, or (iii) Class B
Non-Convertible Adjustable Rate Preferred Stock - the only classes of voting
stock of the Company outstanding.
The following table sets forth, as of December 31, 1996, the shares of the
Company's non-voting Class C 9.00% Increasing Rate, Redeemable, Cumulative
Preferred Stock (the "Class C Shares") owned by the Company's Directors,
executive officers, including those named in the Summary Compensation Table, and
all Directors and executive officers as a group. The Company has no knowledge of
any person or entity who beneficially owns more than five percent (5.0%) of the
Class C Shares.
<TABLE>
<CAPTION>
Beneficial Owners Number of Class C Percent of Class
Shares Beneficially Owned
as of December 31, 1996(1)
--------------------------
<S> <C>
James F. Dierberg -0- *
Allen H. Blake 800(2) *
Donald Gunn, Jr. -0- *
George Markos -0- *
Donald D. Williams -0- *
John A. Schreiber -0- *
Mark T. Turkcan -0- *
Directors and Executive 800 *
Officers as a Group (9 persons)
</TABLE>
- ---------------------------
* Represents less than 1.0%
(1) Beneficial ownership of shares, as determined in accordance with
applicable rules of the Securities and Exchange Commission, includes
shares as to which a person directly or indirectly has or shares voting
power or investment power or both.
(2) Shares were sold on January 28, 1997.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
Directors and officers of the Company, and some of the corporations and
firms in which one of the directors is a majority owner, have been customers of
the Subsidiary Banks in the ordinary course of business, or have been indebted
to the Subsidiary Banks for loans of $60,000 or more, and it is anticipated that
some of these persons, corporations and firms will continue to be customers of
and indebted to the Subsidiary Banks on a similar basis in the future. All loans
extended to such persons, corporations and firms since the beginning of the last
full fiscal year were made in the ordinary course of business, none involved
more than normal risk of collectibility or presented other unfavorable features,
and all were made on substantially the same terms, including interest rates and
collateral, as those prevailing at the same time for comparable bank
transactions with unaffiliated persons. At December 31, 1996, the Subsidiary
Banks had no loans outstanding to such persons.
<PAGE>
Outside of normal customer relationships, no Directors or officers of the
Company, no shareholders holding over five percent (5.0%) of the Company's
voting securities and no corporations or firms with which such persons or
entities are associated, maintain or have maintained since the beginning of the
last full fiscal year, any significant business or personal relationship with
the Company or its subsidiaries, other than such as arises by virtue of such
position or ownership interest in the Company or its subsidiaries, except as set
forth in Item 11, "Executive Compensation - Compensation of Directors," or as
described in the following paragraphs.
During 1996, 1995 and 1994, Tidal Insurance Limited ("Tidal"), a British
Virgin Islands corporation owned indirectly by Mr. James F. Dierberg and his
children, received approximately $326,000, $192,000 and $233,000, respectively,
in commissions or insurance premiums for accident, health and life insurance
policies purchased by loan customers of the Subsidiary Banks. The insurance
policies are issued by an unaffiliated company and then ceded to Tidal.
Commissions received by Tidal were paid by this unaffiliated company. The
Company believes the premiums paid by the loan customers of the Company are
comparable to those that such loan customers would have paid if the premiums
were subsequently being ceded to an unaffiliated third party insuror.
For the years ended December 31, 1996, 1995 and 1994, First Securities
America, Inc., doing business as First Banc Insurors Agency, received
approximately $285,000, $196,000, and $195,000, respectively, in commissions or
insurance premiums for mortgage, forced hazard and collateral protection
insurance purchased by certain customers of the Subsidiary Banks. Commissions
received by First Banc Insurors Agency in connection with the sale of these
policies were paid by unaffiliated, third-party insurors to which First Banc
Insurors Agency placed such policies. In addition, First Banc Insurors Agency
received approximately $958,000, $999,000 and $635,000 for each of the three
years ended December 31, 1996, 1995 and 1994, respectively, in commissions in
connection with the purchase and/or sale of annuities and securities by certain
customers of the Subsidiary Banks. Commissions received by First Banc Insurors
Agency in connection with the purchase and/or sale of such annuities and
securities were paid by an unaffiliated, third-party company. First Securities
America, Inc., a Missouri corporation, is owned by trusts established and
administered by and for the benefit of the Company's Chairman and members of his
immediate family. The insurance premiums on which the aforementioned commissions
were earned were competitively bid and the Company deems the commissions First
Banc Insurors Agency earned to be comparable to those which would have been
earned by an unaffiliated third-party agent.
First Services, a limited partnership which is indirectly owned by the
Company's Chairman and his children, provides data processing services and
operational support for the Company and its subsidiaries. FirstServ, Inc. paid
$3.2 million, $2.9 million and $2.5 million in fees to First Services as
provided under the Facilities Management Agreement for the years ended December
31, 1996, 1995 and 1994, respectively.
Pursuant to the terms of a lease agreement dated March 1, 1984, the Company
leases certain unimproved and improved land from Investors of America, Limited
Partnership (formerly Dierberg Four, L.P). Total rental expense under the lease
was $180,410 for the year ended December 31, 1996. Pursuant to the terms of the
lease agreement, the Company has provided notice to Investors of America,
Limited Partnership to terminate this agreement effective April 30, 1997.
Investors of America, Limited Partnership is a Delaware limited partnership, the
general partner of which is First Securities America, Inc. The Company believes
that the terms of the lease, including the rental payments, are consistent with
the value of the property and that the terms of the lease are at least as
favorable as those which could have been obtained from an unaffiliated party.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -----------------------------------------------------------------------------
(a) The following documents are filed as part of this Report:
1. Financial Statements: The Financial Statements listed
under Item 8 to this Report are set forth at pages 26
through 30, and the Notes to Consolidated Financial
Statements are set forth at pages 37 through 50, of
the 1996 Annual Report to Shareholders (See Exhibit
13 under Paragraph (a)3 of this Item 14).
2. Financial Statement Schedules: None
3. Exhibits: See the Exhibit Index at pages 23 through
24 of this Report. The following exhibits listed in
the Exhibit Index are filed with this Report:
Exhibit 11.1 Statement Regarding Computation of
Per Share Earnings.
Exhibit 13.1 1996 Annual Report to Shareholders.
The 1996 Annual Report to
Shareholders is being filed as an
Exhibit solely for the purpose of
incorporating certain provisions
thereof by reference. Portions of
the Annual Report to Shareholders
not specifically incorporated by
reference are not deemed "filed" for
the purposes of the Securities
Exchange Act of 1934, as amended.
Exhibit 21.1 Subsidiaries of the Registrant.
(b) Reports on Form 8-K during the quarter ended December 31, 1996:
None.
(c) See the Exhibit Index attached hereto.
Management Contracts and Compensatory Plans -- The
following exhibits listed in the Exhibit Index are
identified below in response to Item 14(a)-3 of Form
10-K:
Exhibit 10.4 Employment Agreement by and among
the Company, First Bank Missouri
and John A. Schreiber, dated
September 21, 1992.
Exhibit 10.5 10.6 Employment Agreement by and
among the Company, First Bank
Missouri and Donald W. Williams,
dated March 22, 1993.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST BANKS, INC.
By: /s/ James F. Dierberg
-------------------------
James F. Dierberg
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Allen H. Blake
----------------------
Allen H. Blake
Executive Vice President, Chief
Financial Officer, Secretary and
Director (Principal Financial Officer)
By: /s/ Laurence J. Brost
-------------------------
Laurence J. Brost
Vice President and Controller
(Principal Accounting Officer)
Date: March 26, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the date indicated.
Signature and Title Date
------------------- ----
/s/ James F. Dierberg March 26, 1997
- -------------------------------------
James F. Dierberg
Chairman of the Board of Directors,
President and Chief Executive Officer
<PAGE>
Signature and Title Date
------------------- ----
/s/ Allen H. Blake March 26, 1997
- ------------------
Allen H. Blake
Executive Vice President,
Chief Financial Officer,
Secretary and Director
/s/ Donald Gunn, Jr. March 26, 1997
- --------------------
Donald Gunn, Jr.
Director
/s/ George Markos March 26, 1997
- -----------------
George Markos
Director
<PAGE>
EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of
Regulation S-K.
Exhibit
Number Description
- ------ -----------
3.1 Restated Articles of Incorporation of the Company, as amended (incorporated
herein by reference to Exhibit 3(i) to the Company's Annual Report on Form
10-K for the year ending December 31, 1993).
3.2 Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 to
Amendment No. 2 to the Company's Registration Statement on Form S-1 (File
No. 33-50576) dated September 15, 1992).
4.1 Reference is made to Article III of the Company's Restated Articles of
Incorporation (incorporated herein by reference to Exhibit 3.1 filed
herewith).
4.2 Certificate of Preferred Stock Designation to the Company's Restated
Articles of Incorporation (incorporated herein by reference to Exhibit 4.2
to Amendment No. 2 to the Company's Registration Statement on Form S-1
(File No. 33-50576) dated September 15, 1992).
4.3 Form of certificate for the Class C 9.00% Increasing Rate, Redeemable,
Cumulative Preferred Stock (incorporated herein by reference to Exhibit 4.3
to Amendment No. 1 to the Company's Registration Statement on Form S-1
(File No. 33-50576) dated September 3, 1992).
4.4 The Company agrees to furnish to the Securities and Exchange Commission
upon request pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of
instruments defining the rights of holders of long term debt of the Company
and its subsidiaries.
10.1 Shareholders' Agreement by and among James F. Dierberg, II and Mary W.
Dierberg, Trustees under Living Trust of James F. Dierberg II, dated July
24, 1989, Michael James Dierberg and Mary W. Dierberg, Trustees under the
Living Trust of Michael James Dierberg, dated July 24, 1989; Ellen C.
Dierberg and Mary W. Dierberg, Trustees under Living Trust of Ellen C.
Dierberg dated July 17, 1992, and First Banks, Inc. (incorporated herein by
reference to Exhibit 10.3 to the Company's Registration Statement on Form
S-1 (File No. 33-50576) dated August 6, 1992).
10.2 Comprehensive Banking System License and Service Agreement dated as of July
24, 1991, by and between the Company and FIserv CIR, Inc. (incorporated
herein by reference to Exhibit 10.4 to the Company's Registration Statement
on Form S-1 (File No. 33-50576) dated August 6, 1992).
10.3 Facilities Management Agreement dated December 30, 1992 by and among
FirstServ, Inc. and First Services, L.P. (incorporated herein by reference
to Exhibit 10(i) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992).
<PAGE>
10.4 Employment Agreement by and among the Company, First Bank Missouri and John
A. Schreiber, dated September 21, 1992 (incorporated herein by reference to
Exhibit 10(iii)(A) to the Company's Form 10-K for the year ended December
31, 1993).
10.5 Employment Agreement by and among the Company, First Bank Missouri and
Donald W. Williams dated March 22, 1993 (incorporated herein by reference
to Exhibit 10(iii)(A) to the Company's Form 10-K for the year ended
December 31, 1993).
10.6 $90,000,000 Secured Credit Agreement, dated as of July 18, 1996, among the
Company, The Boatmen's National Bank of St. Louis, Harris Trust and Savings
Bank, Norwest Bank of Minnesota, National Association, American National
Bank and Trust Company, The Frost National Bank and The Boatmen's National
Bank of St. Louis, as Agent.
10.7 Stock Purchase and Operating Agreement by and between the Company and
BancTEXAS, dated May 19, 1994 (incorporated herein by reference to Exhibit
2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1994).
11.1 Statement Regarding Computation of Per Share Earnings.
13.1 The Company's 1996 Annual Report to Shareholders.
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule (EDGAR only)
<PAGE>
Exhibit 11.1
CALCULATION OF EARNINGS PER SHARE
---------------------------------
For the Year Ended
December 31,
------------
EARNINGS PER SHARE: 1996 1995
- ------------------- ---- ----
Average shares outstanding:
Class C preferred stock 2,194,192 2,200,000
Class A preferred stock 641,082 641,082
Class B preferred stock 160,505 160,505
Common stock 23,661 23,661
Net Income $ 20,218,000 24,471,100
Preferred stock dividends:
Class C preferred stock (4,940,720) (4,950,000)
Class A preferred stock (769,000) (769,000)
Class B preferred stock (16,853) (16,853)
Income available to common
stockholders $ 14,491,427 18,735,147
PRIMARY EARNINGS PER SHARE 612.46 791.82
FULLY DILUTED EARNINGS PER SHARE:
Dividends per share:
Class C preferred stock $2.2500 2.2500
Class A preferred stock 1.1985 1.1984
Class B preferred stock 0.1050 0.1050
Class A preferred stock outstanding 641,082 641,082
Book value/share of common stock,
beginning of year $ 7,038,74 6,307.84
Dilution of common equity upon
exercise of options and
warrants of subsidiary bank (52.08) (46.15)
Adjusted book value $ 6,986.66 5,609.40
Common stock issuable upon conversion 1,835 2,048
Shares of common stock outstanding 23,661 23,661
Fully diluted common stock $ 25,496 25,947
Net income $ 20,218,000 24,471,000
Class C preferred dividends (4,940,720) (4,950,000)
Class B preferred dividends (16,853) (16,853)
Fully-diluted net income $ 15,260,427 19,504,147
Fully diluted earnings per share $ 598.54 758.66
<PAGE>
Exhibit 21.1
FIRST BANKS, INC. AND SUBSIDIARIES
Name and Place of Subsidiary Nature of Organization Ownership
- ---------------------------- ---------------------- ---------
First Bank FSB Federally Chartered
St. Louis Counnty, Missouri Savings and Loan 100% (1)
Association
First Bank Missouri Chartered Bank 100%
St. Louis County, Missouri
First Bank Illinois Chartered bank 100%
O'Fallon, Illinois
First Banks America, Inc. Delaware Corporation 68.82%
Houston, Texas
First Banks America, Inc.
owns 100% of:
Sundowner Corporation
Sundowner Corporation
owns 100% of:
Sunrise Bank of California California Chartered Bank
BankTEXAS, N.A. National Banking Association
River Valley Holdings, Inc. Delaware Corporation 100%
Peoria, Illinois
CCB Bancorp, Inc. Delaware Corporation 100%
Irvine, California
CCB Bancorp, Inc. owns
100% of:
First Bank & Trust California Chartered Bank
First Commercial Bancorp, Inc. Delaware Corporation 61.46%
Sacramento, California
First Commercial Bancorp,
Inc.
owns 100% of:
First Commercial Bank California Chartered Bank
FirstServ, Inc. Missouri Corporation 100%
St. Louis County, Missouri
- ---------------------
(1) 67.10 % of the outstanding capital stock of First Bank FSB is owned by First
Banks, Inc., the remaining 32.90% is owned by River Valley Holdings, Inc., a
wholly-owned subsidiary of First Banks, Inc.
<PAGE>
Exhibit 13.1
First Banks, Inc.
1996 ANNUAL REPORT
<PAGE>
First Banks, Inc.
Table of Contents
Page
Letter to Shareholders............................................ 1
Selected Consolidated and Other Financial Data.................... 2
Management's Discussion and Analysis.............................. 3
Quarterly Condensed Financial Data - Unaudited.................... 25
Financial Statements:
Consolidated Balance Sheets....................................... 26
Consolidated Statements of Income................................. 28
Consolidated Statements of Changes in Stockholders' Equity........ 29
Consolidated Statements of Cash Flows............................. 30
Notes to Consolidated Financial Statements........................ 31
Independent Auditors' Report...................................... 51
Board of Directors and Management................................. 52
Investor Information.............................................. 52
<PAGE>
To our Valued Shareholders, Customers and Friends:
First Banks' earnings for 1996 were $25.5 million, without the one-time
Savings Association Insurance Fund special assessment of $8.2 million or $5.3
million on an after tax-basis. This compares to net earnings of $24.5 million
for 1995. Return on average assets was .72% and .70% for the years ended
December 31, 1996 and 1995, respectively. This compares to First Banks'
historical levels of return on average assets of 1.00% and 1.16% for the years
ended December 31, 1994 and 1993, respectively. With the assessment, net income
for 1996 was $20.2 million, representing a return on average assets of .57%. The
operating results for 1996 and 1995 reflect several influences which have had
significant adverse effects on earnings, including the impact of 13 acquisitions
completed during the three years ended December 31, 1996.
During 1995 and 1994, First Banks experienced substantial growth through
the acquisition of twelve banks and thrifts, providing assets of $1.96 billion
and 43 banking locations. These acquisitions, and the acquisition of Sunrise
Bank of California, which was completed on November 1, 1996, provided three
locations in Missouri, 13 locations in Illinois, six locations in Texas and 24
locations in California. The acquisitions have provided First Banks access into
several new major market areas and, accordingly, an attractive opportunity for
future growth and profitability. They also presented several immediate
challenges, the most immediate being the asset quality problems of certain
acquired entities, particularly those in California and Texas.
For each acquisition, management of First Banks has worked with management
of the institution to reorient their positions within their market places,
restructure their balance sheets and revise their systems and procedures. This
has required a significant dedication of resources by First Banks, both in terms
of expenses and personnel. Substantial expenses have been incurred in
reorganizing, retraining and reducing staff, converting data processing systems,
instituting and controlling new policies and procedures, and merging corporate
cultures, not only with that of First Banks, but also between acquired
institutions.
Our progress toward assimilating the acquired entities into First Banks'
systems and operating culture is best measured by the results for the fourth
quarter of 1996, which reflected net income of $8.78 million, in comparison to
$4.88 million for the same period in 1995. The earnings for the fourth quarter
of 1996 represents a return on average assets of .99%, in comparison to .56% for
the same period in 1995. With the restructuring process substantially complete,
First Banks' focus will be broadened to include the further development of our
expanded banking franchise.
As we begin 1997, we remain committed to the interests of our customers and
shareholders. To this end, First Banks reiterates its unconditional guarantee
that the organization is "Not For Sale" and will continue as an independent bank
for the benefit of our customers, communities, shareholders and employees.
Sincerely,
James F. Dierberg
Chairman, President and
Chief Executive Officer
<PAGE>
The following table presents selected consolidated financial information
for First Banks, Inc. and subsidiaries (First Banks) for each of the years in
the five-year period ended December 31, 1996. The comparability of the selected
data presented is affected by the acquisitions of ten banks and six thrifts
during the five-year period. 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.
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(dollars expressed in thousands, except per share data)
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Interest income................................... $ 266,021 261,621 162,435 140,012 161,303
Interest expense.................................. 141,670 144,945 70,670 58,058 79,529
Net interest income............................... 124,351 116,676 91,765 81,954 81,774
Provision for possible loan losses................ 11,494 10,361 1,858 4,456 10,435
Net interest income after provision
for possible loan losses....................... 112,857 106,315 89,907 77,498 71,339
Noninterest income................................ 20,721 19,407 13,634 9,953 11,140
Noninterest expense............................... 105,741 91,566 67,734 53,431 53,953
Income before provision for income taxes,
minority interest in (income) loss
of subsidiaries and cumulative effect
of change in accounting principle........... 27,837 34,156 35,807 34,020 28,526
Provision for income taxes........................ 6,960 11,038 12,012 11,592 9,510
Income before minority interest in (income)
loss of subsidiaries and cumulative effect of
change in accounting principle................. 20,877 23,118 23,795 22,428 19,016
Minority interest in (income) loss of subsidiaries (659) 1,353 237 -- --
Income before cumulative effect of change in
accounting principle........................... 20,218 24,471 24,032 22,428 19,016
Cumulative effect of change in accounting
principle....................................... -- -- 766 --
Net income........................................ $ 20,218 24,471 24,032 23,194 19,016
Dividends:
Preferred stock................................... $ 5,728 5,736 5,735 5,766 1,951
Common stock...................................... -- -- -- -- --
Ratio of total dividends declared to net income... 28.33% 23.44% 23.86% 24.86% 10.26%
Per Share Data:
Earnings per common share:
Primary......................................... $ 612.46 791.82 773.31 741.69 719.51
Fully diluted................................... 598.54 758.66 734.80 690.43 656.54
Weighted average shares of common stock
outstanding.................................... 23,661 23,661 23,661 23,498 23,144
Balance Sheet Data (at year-end):
Investment securities............................. $ 552,801 508,323 587,878 531,148 518,525
Loans, net of unearned discount................... 2,767,969 2,744,219 2,073,570 1,362,018 1,371,417
Total assets...................................... 3,689,154 3,622,962 2,879,570 2,031,909 2,047,022
Total deposits.................................... 3,238,567 3,183,691 2,333,144 1,779,389 1,768,225
Notes payable..................................... 76,330 88,135 46,203 -- 30,038
Common stockholders' equity....................... 184,439 166,542 149,249 133,781 110,751
Total stockholders' equity........................ 251,389 234,605 217,312 201,844 180,814
Earnings Ratios:
Return on average total assets.................... .57% .70% 1.00% 1.16% 0.95%
Return on average total stockholders' equity...... 8.43 10.79 11.48 12.27 14.13
Asset Quality Ratios:
Allowance for possible loan losses to loans....... 1.69 1.92 1.37 1.69 1.52
Nonperforming loans to loans (1).................. 1.09 1.44 0.78 0.90 0.81
Allowance for possible loan losses to
nonperforming loans (1)........................ 154.55 133.70 175.37 188.50 188.43
Nonperforming assets to loans and foreclosed
assets (2)..................................... 1.47 1.71 1.10 1.08 1.31
Net loan charge-offs to average loans............. .72 0.41 0.09 0.33 0.65
Capital Ratios:
Average total stockholders' equity to average
total assets.................................. 6.79 6.49 8.70 9.46 6.70
Total risk-based capital ratio................... 9.23 9.34 12.68 16.90 14.71
Leverage ratio................................... 5.99 5.32 7.54 9.30 7.66
- ----------------
</TABLE>
(1) Nonperforming loans consist of nonaccrual loans and loans with restructured
terms.
(2) Nonperforming assets consist of nonperforming loans and foreclosed assets.
<PAGE>
Company Profile. First Banks is a registered bank holding company,
incorporated in Missouri in 1978 and headquartered in St. Louis County,
Missouri. At December 31, 1996, First Banks had $3.69 billion in total assets,
$2.77 billion in total loans, net of unearned discount, $3.24 billion in total
deposits and $251.4 million in total stockholders' equity. First Banks'
subsidiary financial institutions and bank holding companies (Subsidiary Banks)
are:
First Bank, headquartered in St. Louis County, Missouri (First Bank
Missouri); First Bank, headquartered in O'Fallon, Illinois (First Bank
Illinois); First Bank FSB, headquartered in St. Louis County,
Missouri (First Bank FSB); First Banks America, Inc., headquartered
in Houston, Texas (FBA); CCB Bancorp, Inc., headquartered in Santa Ana,
California (CCB); and First Commercial Bancorp, Inc., headquartered
in Sacramento, California (FCB).
First Bank Missouri and First Bank Illinois are wholly owned banking
subsidiaries. First Bank FSB is a wholly owned thrift subsidiary. CCB, a wholly
owned bank holding company subsidiary, operates through First Bank & Trust,
headquartered in Santa Ana, California (FB&T). FBA, a majority-owned bank
holding company subsidiary, operates through BankTEXAS N.A., headquartered in
Houston, Texas (BTX) and Sunrise Bank of California, headquartered in Roseville,
California (Sunrise). FCB, a majority-owned bank holding company subsidiary,
operates through First Commercial Bank, headquartered in Sacramento, California
(First Commercial). First Banks' ownership interests in FBA and FCB were 68.82%
and 61.46%, respectively, at December 31, 1996.
Through the Subsidiary Banks, First Banks offers a broad range of
commercial and personal banking services including certificate of deposit
accounts, individual retirement and other time deposit accounts, checking and
other demand deposit accounts, interest checking accounts, savings accounts and
money market accounts. Loans include commercial, financial, agricultural, real
estate construction and development, commercial and residential real estate and
consumer and installment loans. Other financial services include mortgage
banking, discount brokerage, credit-related insurance, automatic teller
machines, safe deposit boxes, and trust services offered by certain Subsidiary
Banks.
First Banks' 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 managing
the Subsidiary Banks rests with each of the respective Subsidiary Bank's
officers and directors.
<TABLE>
<CAPTION>
The following table lists the Subsidiary Banks at December 31, 1996:
Loans, net of
Number of Total unearned Total
Subsidiary Banks locations assets discount deposits
---------------- --------- ------ -------- --------
(dollars expressed in thousands)
<S> <C> <C> <C> <C>
First Bank FSB................................ 40 $1,040,038 864,174 877,956
First Bank Missouri........................... 31 838,799 628,428 745,465
First Bank Illinois........................... 27 843,333 627,871 773,606
CCB........................................... 13 474,174 310,930 400,342
FBA .......................................... 9 375,182 241,874 319,806
FCB .......................................... 6 153,033 94,497 136,136
</TABLE>
In addition to the Subsidiary Banks, First Banks owns FirstServ, Inc. which
provides data processing services and operational support for First Banks and
its Subsidiary Banks through a management services agreement with an affiliated
entity which is indirectly owned by First Banks' voting shareholders.
The voting stock of First Banks, Inc. is owned by various trusts which were
created by and are administered by and for the benefit of Mr. James F. Dierberg,
First Banks' Chairman of the Board, President and Chief Executive Officer, and
members of his immediate family. Accordingly, Mr. Dierberg controls the
management and policies of First Banks, Inc. and the election of its directors.
The Class C Preferred Stock is publicly held and listed on The Nasdaq Stock
Market's National Market. The Class C Preferred Stock has no voting rights
except in certain limited circumstances.
General. First Banks expanded rapidly through acquisitions during the years
ended December 31, 1994 and 1995. Total assets increased from $2.03 billion on
January 1, 1994 to $3.62 billion on December 31, 1995, an increase of 78.3%.
First Banks' net income for these periods was, however, adversely affected by
expenses resulting from the amalgamation of those acquisitions into its systems
and operating culture, as well as certain other non-recurring items.
Consequently, net income of First Banks was $20.2 million for the year ended
December 31, 1996, compared with $24.5 million and $24.0 million for the years
ended December 31, 1995 and 1994, respectively.
First Banks has, in the development of its banking franchise, traditionally
placed primary emphasis upon acquiring other financial institutions as a means
of achieving its growth objectives. These acquisitions may serve to enhance its
presence in a given market, to expand the extent of its market area or to enter
new or noncontiguous markets. Its acquisitions are then supplemented by
marketing and business development efforts to broaden the customer bases,
strengthen particular segments of the business or fill voids in the overall
market coverage. However, because First Banks has exclusively used cash in its
acquisitions, the characteristics of the acquisition arena at any given point in
time may place it at a competitive disadvantage relative to other acquirers able
to offer stock transactions. This is generally a result of the market
attractiveness of financial institutions' stock, the advantages of tax-free
exchanges and the financial reporting flexibility inherent in structuring stock
transactions. Consequently, First Banks' acquisition activities are sporadic, in
which multiple transactions are consummated in a particular period, followed by
a relatively inactive period. Furthermore, the resulting intangible assets
recorded in conjunction with such acquisitions create an immediate reduction in
regulatory capital. This reduction, as required by regulatory policy, provides
further financial disincentives to paying large premiums in cash acquisitions.
Recognizing these facts, First Banks has followed certain patterns in its
acquisitions. First, it tends to acquire several smaller institutions, sometimes
over an extended period of time, rather than a single larger one. This is due
both to the constraints imposed by the amount of funds required for the larger
transaction, as well as the opportunity to minimize the aggregate premium
required through smaller individual transactions. Secondly, it may acquire
institutions which have some problems which could reduce the attractiveness to
other potential acquirers, and therefore reduce the amount of acquisition
premiums required. Finally, First Banks realizes that various acquisition
markets may become so competitive at times, that cash transactions are not
economically viable, thereby requiring it to pursue its acquisition strategy in
other geographic areas. This pattern has been evident in First Banks'
acquisitions in the two years ended December 31, 1995.
During 1995 and 1994, First Banks experienced substantial growth through
the acquisition of seven banks and five thrifts. These included two acquisitions
in Missouri, three in Illinois, one in Texas and six in California. As more
fully discussed below, these acquisitions provided access into several new major
market areas and, accordingly, an attractive opportunity for future growth and
profitability. While providing this long-term opportunity, these acquisitions
presented several immediate challenges. Many of the acquired institutions,
particularly those in California, continue to experience asset quality problems.
While these problems had been identified and considered in the acquisition
pricing, this led to the increase in the level of First Banks' nonperforming
assets to $40.9 million at December 31, 1996 and $47.1 million at December 31,
1995, from $22.9 million and $14.8 million at December 31, 1994 and 1993,
respectively. In addition to the loss of income on these assets, they required
substantial dedication of management and other resources to control.
The combination of five diverse institutions into a single financial
institution, FB&T, and the conversion of that entity to First Banks' systems and
policies required a further commitment of time and effort. A reengineering
process of the operating structures and cultures of these entities was
necessitated by their relatively high operating costs. This process included the
redeployment and repricing of assets, the realignment of deposit products, the
reorganization of personnel and the centralization of various bank functions.
The combination of the costs of managing and servicing the portfolios of
nonperforming assets, the excessive operating cost structures of the acquired
entities and the additional costs associated with the reengineering process has
inhibited the acquired institutions from generating income since their
acquisition dates commensurate with their acquisition costs.
Operating results have also been adversely affected by the lower net
interest margin earned by the thrifts acquired by First Banks compared with
those generally earned by commercial banks. The lower net interest margin earned
by the acquired thrifts, primarily River Valley Holdings, Inc. (River Valley)
and First Federal Savings Bank of Proviso Township (First Federal), is
attributable to their primary source of interest income and the composition of
their deposit bases. Their primary source of interest income is their portfolio
of residential mortgage loans and residential mortgage-backed securities, which
typically yield lower interest rates than other types of loans. In addition, the
cost of deposits is generally higher due to the composition, which includes a
smaller portion of noninterest-bearing accounts and a greater portion of time
deposits. Furthermore, thrifts generally pay slightly higher rates to maintain
the time deposits within the competitive markets.
<PAGE>
Recognizing that the acquisition program involved the assumption of
additional credit risk and lower than normal net interest margins for the thrift
acquisitions, First Banks pursued a strategy of maintaining higher than average
asset quality for its Missouri and Illinois operations through strict adherence
to its lending policies and practices. To accomplish this, First Banks expanded
its credit administration and loan review functions. In addition, in response to
the interest rate risk inherent within the balance sheets of its thrifts, First
Banks commenced a program designed to reduce its exposure to interest rate
fluctuations.
The effort to increase control over the interest rate exposure of First
Banks led to substantially more sophisticated measurement systems and the
implementation of a hedging program. Once the interest rate risk profile of
First Banks was adequately analyzed, the hedging program was implemented during
early 1994. However, at that time, interest rates had already increased. While
the hedging program prevented further deterioration in the net interest margin,
it eliminated the opportunity to recover from the increase in interest rates
which had already occurred. As more fully discussed under "-- Interest Rate Risk
Management," as interest rates began to decline in 1995, the underlying hedges
were adjusted to reflect the increase in prepayments which were subsequently
received and the corresponding shortening of the effective lives of the
residential real estate asset portfolios. These factors and the cost of
implementing the hedging program have had an adverse effect on net interest
income and the net interest margin in 1995 and 1996.
Finally, in September 1996, a one-time special assessment to recapitalize
the Savings Association Insurance Fund (SAIF) of the Federal Deposit Insurance
Corporation (FDIC) was enacted. The assessment was applied to all thrift
deposits as of March 31, 1995. Because First Bank had been active in acquiring
thrifts, a substantial portion of its deposit base was subject to the special
assessment. This special assessment resulted in an $8.2 million charge, which
was recorded as an expense during the year ended December 31, 1996. As a result
of this special assessment, First Banks' cost of deposit insurance for
SAIF-insured deposits is expected to decrease by approximately $2.0 million for
the year ended December 31, 1997 in comparison to December 31, 1996, excluding
the effect of the special one-time assessment.
Acquisitions. Prior to 1994, First Banks' acquisitions had been
concentrated within its primary market area of eastern Missouri and central and
southern Illinois. The premiums required to successfully pursue acquisitions
escalated sharply in 1993, reducing dramatically the economic viability of many
potential acquisitions in that area. Recognizing this, First Banks began to
expand the geographic area in which it approached acquisition candidates. While
First Banks was successful in making acquisitions in Chicago and northern
Illinois, it became apparent that acquisition pricing there was comparable to
that of First Banks' primary acquisition area. As a result, while First Banks
continued to pursue acquisitions within these areas, it turned much of its
attention in 1994 and 1995 to institutions which could be acquired at more
attractive prices which were within major metropolitan areas outside its
immediate market area. This led to the acquisition of financial institutions
which had offices in Dallas and Houston, Texas in 1994 and Los Angeles, Orange
County, Santa Barbara, San Francisco, San Jose and Sacramento, California in
1995.
<PAGE>
<TABLE>
<CAPTION>
During 1996, 1995 and 1994, First Banks completed thirteen acquisitions.
These acquisitions, as more fully described in Note 2 to the accompanying
consolidated financial statements, are summarized as follows:
Loans, net of Number of
Total unearned Investment banking
Entity Date assets discount securities Deposits locations
------ ---- ------ -------- ---------- -------- ---------
(dollars expressed in thousands)
1996
Sunrise Bancorp, Inc.
<S> <C> <C> <C> <C> <C> <C>
Roseville, California November 1, 1996 $110,800 61,100 18,100 92,000 3
1995
QCB Bancorp
Long Beach, California (1) November 30, 1995 $ 56,200 35,100 10,700 50,200 3
La Cumbre Savings Bank F.S.B.
Santa Barbara, California (1) September 1, 1995 144,000 131,000 1,000 124,000 3
First Commercial Bancorp, Inc.
Sacramento, California August 23, 1995 169,000 84,600 30,700 163,600 7
Irvine City Financial
Irvine, California (1) May 31, 1995 83,300 68,700 7,500 61,600 2
HNB Financial Group
Huntington Beach,
California (1) April 28, 1995 88,000 62,800 10,500 76,300 3
CCB Bancorp, Inc.
Santa Ana, California March 15, 1995 193,400 114,500 31,100 156,400 3
River Valley Holdings, Inc.
Chicago, Illinois (2) January 4, 1995 412,000 225,000 125,000 286,000 10
-- --------- ------- ------- ------- --
$ 1,145,900 721,700 216,500 918,100 31
========= ======= ======= ======= ==
1994
St. Charles Federal Savings
and Loan Association
St. Charles, Missouri (2) November 30, 1994 $ 90,000 54,400 29,600 68,900 1
First Banks America, Inc.
(formerly BancTEXAS Group Inc.)
Houston, Texas August 31, 1994 367,000 177,000 167,000 243,600 6
Farmers Bancshares, Inc.
Breese, Illinois (3) June 3, 1994 60,700 27,100 28,300 54,500 2
Heritage National Bank
St. Louis County, Missouri (4) March 31, 1994 63,800 32,200 21,200 57,100 2
First Federal Savings Bank
of Proviso Township
Chicago, Illinois (2) January 3, 1994 230,000 57,900 153,800 168,500 1
-- ------- ------ ------- ------- -
$ 811,500 348,600 399,900 592,600 12
======= ======= ======= ======= ==
</TABLE>
- ------------------
(1) QCB Bancorp, La Cumbre Savings Bank F.S.B., Irvine City Financial and HNB
Financial Group and their respective banking and thrift subsidiaries were
merged into CCB and its wholly owned banking subsidiary, FB&T.
(2) River Valley Holdings, Inc., First Federal Savings Bank of Proviso Township
and St. Charles Federal Savings and Loan Association (St. Charles Federal)
were merged into First Bank FSB.
(3) Farmers Bancshares, Inc. and its banking subsidiaries were merged into
First Banks and First Bank Illinois, respectively.
(4) Heritage National Bank was merged into First Bank Missouri.
The aforementioned acquisitions were funded by First Banks from available
cash reserves, proceeds from the sales and maturities of available for sale
investment securities, borrowings under promissory notes to former shareholders,
and borrowings under the Credit Agreement. See "Note 2 to the Consolidated
Financial Statements."
<PAGE>
Financial Condition and Average Balances. First Banks' total average assets
were $3.53 billion for the year ended December 31, 1996, in comparison to $3.50
billion and $2.41 billion for the years ended December 31, 1995 and 1994,
respectively. Total assets increased by $70 million to $3.69 billion at December
31, 1996 from $3.62 billion at December 31, 1995. The increase is primarily
attributable to the acquisition of Sunrise which provided $110.8 million in
total assets. Offsetting this increase was the settlement in January 1996 of the
sale of $41.3 million of investment securities carried as a receivable at
December 31, 1995.
Loans, net of unearned discount, increased by $30 million to $2.77 billion
from $2.74 billion at December 31, 1996 and 1995, respectively. The increase is
primarily attributable to the loans provided by acquisition of $61.1 million and
the increase of $135.8 million in loans within corporate banking, substantially
offset by decreases in residential real estate and indirect automobile loans of
$127.9 million and $77.4 million, respectively. These changes are consistent
with the restructuring plan of the loan portfolio which was initiated in early
1995. In accordance with that plan, First Banks has sold substantially all of
its conforming residential mortgage production in the secondary mortgage market
and has significantly reduced its origination of indirect consumer automobile
loans. Tables summarizing the composition of the loan portfolio are presented
under "-- Lending and Credit Management."
Deposits increased by $60 million to $3.24 billion from $3.18 billion at
December 31, 1996 and 1995, respectively. The increase is primarily attributable
to the deposits provided by the acquisition of $92 million, partially offset by
the $32 million decrease in time deposits of $100,000 or more to $169 million
from $201 million at December 31, 1996 and 1995, respectively. See "-- Deposits"
for the composition of the deposit portfolio.
For the year ended December 31, 1995, total average assets increased by
$1.09 billion primarily as a result of the assets provided by acquisitions of
$1.15 billion and internal loan growth of $66 million. This was partially offset
by sales of investment securities and residential mortgage loans of $399 million
and $147 million, respectively, most of which were used to fund loan growth and
to reduce borrowings. The internal loan growth is primarily attributable to the
corporate banking activities. Each regional lending area within First Banks'
marketplace experienced growth during 1995. The continued growth within
corporate banking is reflective of First Banks' commitment to expand its
presence in its markets. The sales of investment securities were executed in
connection with the restructuring of acquired entities' investment portfolios,
to provide funds for internal loan growth and to reduce borrowings.
First Banks' acquisition program during 1994 and 1995, coupled with its
internal growth in residential mortgage loans resulted in a consolidated loan
portfolio which had a disproportionate amount of such loans. Although the credit
risk associated with residential mortgage loans is generally relatively small,
the performance of these loans in periods of changing interest rates makes their
interest rate risk more difficult to manage than most other types of loans.
Consequently, First Banks concluded that its residential mortgage loan portfolio
as a percentage of the total loans should be reduced. Accordingly, during 1995,
First Banks sold $147 million of residential mortgage loans which resulted in a
loss of $284,000.
The average balance of notes payable increased by $67.6 million to $83.1
million for 1995, in comparison to $15.5 million for 1994. The increase was used
to provide funds for acquisitions completed during 1995 and 1994.
Average stockholders' equity has continued to increase over these periods
from $209.4 million at December 31, 1994 to $239.9 million at December 31, 1996
or by $30.5 million. The increase is attributable to First Banks' practice of
retaining most of its net income to further support future growth.
<PAGE>
<TABLE>
<CAPTION>
The following table sets forth, on a tax-equivalent basis, certain
information relating to First Banks' average balance sheet, and reflects the
average yield earned on interest-earning assets, the average cost of
interest-bearing liabilities and the resulting net interest income for the
periods indicated.
For the years ended December 31,
1996 1995 1994
Interest Interest Interest
Average income/ Yield/ Average income/ Yield/ Average income/ Yield/
ASSETS balance expense rate balance expense rate balance expense rate
- ------ ------- ------- ---- ------- ------- ---- ------- ------- ----
(dollars expressed in thousands)
Interest-earning assets:
Loans: (1) (2)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Taxable............................ $ 2,714,387 236,527 8.71% $2,585,763 220,931 8.54% $1,602,661 128,708 8.03%
Tax-exempt (3)..................... 11,910 1,311 11.01 13,173 1,543 11.71 13,973 1,346 9.63
Investment securities:
Taxable (4)........................ 469,832 22,650 4.82 585,868 34,379 5.87 593,460 29,385 4.95
Tax-exempt (3) (4)................. 22,648 1,889 8.34 26,751 2,138 7.99 27,492 2,259 8.22
Federal funds sold.................... 63,802 3,352 5.25 52,208 2,905 5.56 37,587 1,533 4.08
Other................................. 25,634 1,410 5.50 14,602 1,013 6.94 9,605 466 4.85
Total interest-earning assets.... 3,308,213 267,139 8.08 3,278,365 262,909 8.02 2,284,778 163,697 7.16
Nonearning assets......................... 224,175 219,445 122,922
--------- --------- ---------
Total assets..................... $ 3,532,388 3,497,810 $2,407,700
========= ========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits...... $ 304,247 4,845 1.59% $ 279,681 5,760 2.06% $ 234,839 4,421 1.88%
Savings deposits...................... 683,009 21,769 3.19 663,870 22,737 3.42 537,462 15,198 2.83
Time deposits of $100 or more (4)..... 164,453 9,665 5.88 166,232 9,931 5.97 72,976 3,300 4.52
Other time deposits (4)............... 1,592,657 95,813 6.02 1,443,026 83,595 5.79 969,840 41,170 4.25
Total interest-bearing deposits.. 2,744,366 132,092 4.81 2,552,809 122,023 4.78 1,815,117 64,089 3.53
Federal funds purchased, repurchase
agreements and Federal Home Loan
Bank advances (4).................... 64,021 3,964 6.19 256,333 16,850 6.57 107,185 5,498 5.13
Notes payable and other................... 76,892 5,614 7.30 83,068 6,072 7.31 15,500 1,083 6.99
Total interest-bearing liabilities 2,885,279 141,670 4.91 2,892,210 144,945 5.01 1,937,802 70,670 3.65
------- ------- ------
Noninterest-bearing liabilities:
Demand deposits....................... 368,786 345,397 243,829
Other liabilities..................... 38,413 33,345 16,692
--------- --------- ---------
Total liabilities................ 3,292,478 3,270,952 2,198,323
Stockholders' equity...................... 239,910 226,858 209,377
--------- --------- ---------
Total liabilities and
stockholders' equity........... $ 3,532,388 $3,497,810 $2,407,700
========= ========= =========
Net interest income.............. 125,469 117,964 93,027
======= ======= ======
Net interest margin.............. 3.79% 3.60% 4.07%
==== ==== ====
</TABLE>
(1) For purposes of these computations, nonaccrual loans are included in the
average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Information is presented on a tax-equivalent basis assuming a tax rate
of 35%. The tax-equivalent adjustments were approximately $1.1 million,
$1.3 million and $1.3 million for the years ended December 31, 1996, 1995
and 1994, respectively.
(4) Includes the effects of interest rate exchange agreements.
<PAGE>
<TABLE>
<CAPTION>
The following table indicates, on a tax-equivalent basis, 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 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.
Increase (decrease)attributable to change in:
---------------------------------------------
December 31, 1996 compared December 31, 1995 compared
to December 31, 1995 to December 31, 1994
-------------------- --------------------
Net Net
Volume Rate Change Volume Rate Change
------ ---- ------ ------ ---- ------
(dollars expressed in thousands)
Interest earned on:
Loans: (1) (2)
<S> <C> <C> <C> <C> <C> <C>
Taxable........................... $ 11,139 4,457 15,596 83,570 8,653 92,223
Tax-exempt t(3)................... (143) (89) (232) (71) 268 197
Investment securities:
Taxable (4)....................... (6,163) (5,566) (11,729) (368) 5,362 4,994
Tax-exempt (3) (4)................ (349) 100 (249) (59) (62) (121)
Federal funds sold................... 597 (150) 447 710 662 1,372
Other................................ 547 (150) 397 299 248 547
------ ------ ------ ------ ------ ------
Total interest income......... 5,628 (1,398) 4,230 84,081 15,131 99,212
------ ------ ------ ------ ------ ------
Interest paid on:
Interest-bearing demand deposits..... 573 (1,488) (915) 892 447 1,339
Savings deposits..................... 678 (1,646) (968) 3,965 3,574 7,539
Time deposits of $100 or more........ (110) (156) (266) 5,300 1,331 6,631
Other time deposits (4).............. 8,834 3,384 12,218 24,345 18,080 42,425
Federal funds purchased, repur-
chase agreements and Federal
Home Loan Bank advances (4)....... (11,964) (922) (12,886) 9,446 1,906 11,352
Notes payable and other.............. (450) (8) (458) 4,937 52 4,989
------- ---- ------ ------ ------ ------
Total interest expense........ (2,439) (836) (3,275) 48,885 25,390 74,275
------- ---- ------ ------ ------ ------
Net interest income........... $ 8,067 (562) 7,505 35,196 (10,259) 24,937
======= ==== ====== ====== ======= ======
</TABLE>
- ---------------
(1) For purposes of these computations, nonaccrual loans are included in the
average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Information is presented on a tax-equivalent basis assuming a tax rate of
35%.
(4) Includes the effect of interest rate exchange agreements.
Net Interest Income. First Banks' primary source of earnings is its net
interest income, which is the difference between the interest earned on its
earning assets and the interest paid on its interest-bearing liabilities. Net
interest income (expressed on a tax-equivalent basis) increased to $125.5
million for the year ended December 31, 1996, from $118.0 million and $93.0
million for the years ended December 31, 1995 and 1994, respectively.
While net interest income continued to increase during these periods, the
net interest margin, which is net interest income (expressed on a tax-equivalent
basis) expressed as a percentage of earning assets, decreased. This is
indicative of the fact that net interest income increased at a slower rate than
the increase of earning assets, as follows:
<TABLE>
<CAPTION>
Increase in average Increase in
Average earning assets net interest Net
earning from preceding Net interest income from interest
assets period income preceding period margin
------ ------ ------ --------------- --------
(dollars expressed in thousands)
Year ended December 31:
<S> <C> <C> <C> <C> <C> <C>
1996 $3,308,213 .91% $ 125,469 6.36% 3.79%
1995 3,278,365 43.49 117,964 26.81 3.60
1994 2,284,778 19.69 93,027 12.16 4.07
</TABLE>
This is not an unusual phenomenon during periods of rapid growth by cash
acquisition because the reduction of interest income on internally generated
funds used in acquisitions and the interest expense on debt incurred in the
transactions offsets a portion of the net interest income of the entities
acquired. However, as indicated by the severity of the decline in net interest
margin, other factors were involved.
Since 1990, First Banks has acquired ten thrifts in various transactions.
Both the regulatory requirements and the historic customer bases of thrifts tend
to result in balance sheets which are predominately comprised of residential
mortgage loans, frequently supplemented by mortgage-backed securities, for
earning assets, and certificates of deposit as a source of funds. For example,
First Bank FSB, First Banks' thrift subsidiary, had loans, net of unearned
discount of $864.2 million at December 31, 1996, of which $570.7 million, or
66.0%, were residential mortgage loans, and deposits of $878 million, of which
$596.5 million, or 67.9%, were certificates of deposit. This compares to loans,
net of unearned discount of $855.8 million at December 31, 1995, of which $619.2
million, or 72.4%, were residential mortgage loans, and deposits of $911.6
million, of which $626.5 million, or 68.7%, were certificates of deposit.
Because of the competitive, homogeneous nature of residential mortgage loans and
certificates of deposit, the interest rate spreads between them tend to be more
narrow than other types of loans and funding sources. First Banks' average yield
on residential real estate loans and average cost of certificates of deposit,
compared to other segments of its loan portfolio and interest-bearing deposits,
respectively, were as follows:
<TABLE>
<CAPTION>
Interest
Average Percent of income/ Yield/
balances total expense rate
-------- ----- ------- ----
(dollars expressed in thousands)
Year ended December 31, 1996:
<S> <C> <C> <C> <C>
Residential mortgage loans $ 1,154,231 42.34% $ 93,282 8.08%
Other loans 1,572,066 57.66 144,556 9.20
--------- ------ ------- ----
Total loans $ 2,726,297 100.00% $ 237,838 8.72
========= ====== ======= ====
Certificates of deposit 1,757,110 64.03 105,478 6.00%
Other interest-bearing deposits 987,256 35.97 26,614 2.70
--------- ------ ------- ----
Total interest-bearing deposits $ 2,744,366 100.00% $ 132,092 4.81
========= ====== ======= ====
Year ended December 31, 1995:
Residential mortgage loans $ 1,253,474 48.23% $ 99,656 7.95%
Other loans 1,345,462 51.77 122,818 9.13
--------- ------ ------- ----
Total loans $ 2,598,936 100.00% $ 222,474 8.56
========= ====== ======= ====
Certificates of deposit 1,609,258 63.04% 93,526 5.81%
Other interest-bearing deposits 943,551 36.96 28,497 3.02
--------- ------ ------- ----
Total interest-bearing deposits $ 2,552,809 100.00% $ 122,023 4.78
========= ====== ======= ====
</TABLE>
In addition to the narrow interest rate spread between the yield on
residential mortgage loans and the rates paid on certificates of deposit,
mortgage loans introduce various prepayment alternatives for borrowers which
exacerbate the inherent interest rate risk associated with their typically long
maturities.
For these two reasons, in 1994, First Banks initiated a plan to reduce its
reliance on residential mortgage loans within its portfolio. The change in the
portfolio composition required the concurrent internal generation of other types
of loans, particularly commercial and industrial, real estate construction and
development and commercial real estate loans, a process which had previously
been initiated. Consequently, this process focused on continuing to build this
business development function as well as the control and servicing staff
necessary to support it. As the growth of other loans developed, First Banks
began selling essentially all of its production of conforming residential
mortgage loans in the secondary market. This process was expedited by the sale
of a portfolio of residential mortgage loans of $147 million in 1995. See "--
Mortgage Banking Activities" and "-- Loans and Allowance for Possible Loan
Losses."
<PAGE>
While this process was occurring, First Banks expanded its interest rate
risk management to improve its risk measurement techniques and reporting, and
increase its risk control abilities. This included initiating a program of
substantial use of derivative financial instruments to reduce interest rate
exposure. Beginning in early 1994, First Banks used a combination of interest
rate futures, options on futures, swaps, caps and floors to reduce its exposure,
primarily arising from residential mortgage loans and mortgage-backed
securities. The expense of these derivative financial instruments is a component
of net interest income as summarized below.
<TABLE>
<CAPTION>
Cost of interest rate
---------------------
Swap, cap Reduction Effect on
Futures and and floor of net net interest
options on futures agreements interest income margin (1)
------------------ ---------- --------------- ----------
(dollars expressed in thousands) (expressed in
Year ended December 31: basis points)
<S> <C> <C> <C> <C> <C>
1996 $ 3,875 7,623 11,498 (.35)
1995 2,210 6,911 9,121 (.28)
1994 -- 490 490 (.02)
</TABLE>
----------------
(1) Effect on net interest margin is expressed as reduction of net interest
income divided by average earning assets.
<PAGE>
Interest Rate Risk Management. In financial institutions, the maintenance
of a satisfactory level of net interest income is a primary factor in achieving
acceptable income levels. However, the maturity and repricing characteristics of
the institution's loan and investment portfolios, relative to those within its
deposit structure, may differ significantly. Furthermore, the ability of
borrowers to repay loans and depositors to withdraw funds prior to stated
maturity dates introduces divergent option characteristics which operate
primarily as interest rates change. This causes various elements of the
institution's balance sheet to react in different manners and at different times
relative to changes in interest rates, thereby leading to increases or decreases
in net interest income over time. Depending upon the nature and velocity of
interest rate movements and their effect on the specific components of the
institution's balance sheet, the effects on net interest income can be
substantial. Consequently, a fundamental requirement in managing a financial
institution is establishing effective control of the exposure of the institution
to changes in interest rates.
First Banks manages its interest rate risk by: (1) maintaining an Asset
Liability Committee (ALCO) responsible to First Banks' Board of Directors to
review the overall interest rate risk management activity and approve actions
taken to reduce risk; (2) maintaining an effective monitoring mechanism to
determine First Banks' 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 and finance, and certain other officers. The ALCO is
supported by the Asset Liability Management Group which monitors interest rate
risk, prepares analyses for review by the ALCO and implements actions which are
either specifically directed by the ALCO or established by policy guidelines. To
measure the effect of interest rate changes, First Banks recalculates its net
income over two one-year horizons on a pro forma basis assuming instantaneous,
permanent parallel and non-parallel shifts in the yield curve, in varying
amounts both upward and downward.
As discussed previously, during 1994, First Banks expanded its use of
off-balance-sheet derivative financial instruments to assist in the management
of interest rate sensitivity. These off-balance-sheet derivative financial
instruments are utilized to modify the repricing, maturity and option
characteristics of on-balance-sheet assets and liabilities. See "-- Notes 1 and
10 to the consolidated financial statements." Derivative financial instruments
held by First Banks for purposes of managing interest rate risk are summarized
as follows:
<TABLE>
<S> <C>
December 31,
------------
1996 1995
---- ----
Notional Credit Notional Credit
amount exposure amount exposure
-------- -------- -------- --------
(dollars expressed in thousands)
<S> <C> <C>
Interest rate swap agreements $ 70,000 -- 145,000 --
Interest rate floor agreements 105,000 141 105,000 608
Interest rate cap agreements 10,000 335 30,000 292
Forward commitments to sell
mortgage-backed securities 35,000 308 42,000 --
</TABLE>
The notional amounts of derivative financial instruments do not represent
amounts exchanged by the parties and, therefore, are not a measure of First
Banks' credit exposure through its use of derivative financial instruments. The
amounts exchanged are determined by reference to the notional amounts and the
other terms of the derivatives.
First Banks 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 to either 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.
With the emphasis on limiting First Banks' reliance on residential
mortgage-based assets and the overall expansion of the loan portfolio during
1994 and 1995, the relative magnitude and primary function of the investment
portfolio changed. During the year ended December 31, 1994, average investment
securities represented 27.2% of average earning assets. This decreased to 18.7%
and 14.9% for the years ended December 31, 1995 and 1996, respectively. This
reduction in the investment security portfolio and corresponding increase in the
magnitude of the loan portfolio increased the importance of liquidity as a
securities selection criteria. Generally this resulted in reducing the average
maturity of the investment security portfolio and directing available funds into
more readily marketable securities, primarily U.S. Treasury and generic U.S.
government agencies obligations. Consequently, mortgage-backed securities in the
portfolio decreased from $351.8 million, or 59.8% of the portfolio at December
31, 1994 to $235.5 million, or 46.3% of the portfolio at December 31, 1995 and
$204.2 million, or 36.9% of the portfolio at December 31, 1996. These changes
had a substantial effect on the interest rate risk characteristics of the
portfolio, and consequently the magnitude of hedging required and methods used
to limit interest rate risk.
<PAGE>
As a result, beginning in the second quarter of 1995, First Banks 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. First Banks continued to reduce its hedge
position through additional reductions in the number of outstanding interest
rate futures contracts during the third quarter as a result of certain
investment security sales and further declines in interest rates. In addition,
during the fourth quarter of 1995, the remaining outstanding interest rate
futures contracts were closed. The closure of the remaining contracts reflects
First Banks' decision to manage the interest rate risk of the overall balance
sheet, rather than specific components.
The net increase in the unamortized balance of net deferred losses to $4.6
million at December 31, 1995, from a net deferred gain of $6.5 million at
December 31, 1994 is attributable to the significant decline in interest rates
which occurred during 1995. The losses incurred on the interest rate futures
contracts were partially offset by gains in the available-for-sale securities
portfolio. The loss in market value, net of related tax benefit, for the
available-for-sale securities portfolio totaled $1.3 million during the period
from December 31, 1994 to December 31, 1995. The loss in market value resulted
from 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.
The unamortized balance of net deferred losses on interest rate futures
contracts of $4.6 million at December 31, 1995 was applied to the carrying value
of the available-for-sale securities portfolio as part of the mark-to-market
valuation. There were no unamortized net deferred losses on interest rate
futures contracts remaining at December 31, 1996. Of the remaining balance of
$4.6 million at December 31, 1995, $3.9 million was amortized as a component of
interest income and $701,000 was realized in connection with the sales of
investment securities during the year ended December 31, 1996.
As more fully described in Note 10 to the accompanying consolidated
financial statements, interest rate swap agreements with notional amounts of $70
million and $145 million were outstanding at December 31, 1996 and 1995,
respectively. Interest rate swap agreements are utilized to extend the repricing
characteristics of certain interest-bearing liabilities to correspond more
closely with the assets of First Banks, with the objective of stabilizing net
interest income over time. The net interest expense for these agreements was
$7.4 million, $6.6 million and $490,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
In connection with the sale of a pool of approximately $147 million of
residential mortgage loans and repayment of the related short-term borrowings,
on May 25, 1995, First Banks terminated a $100 million interest rate swap
agreement resulting in a loss of $3.3 million. The loss on the termination of
the $100 million interest rate swap agreement was reflected in the consolidated
statement of income for the year ended December 31, 1995.
In addition, First Banks experienced a shortening of the expected life of
its loan portfolio. This decrease was the result of the decision by First Banks
to reduce its portfolio of residential mortgage loans by selling essentially all
of its new loan originations in the secondary market as well as a significant
decline in interest rates during 1995, which caused an increase in the
projections of principal prepayments of residential mortgage loans. These
factors disproportionately shortened the expected life of the loan portfolio
relative to the effective maturity created with the interest rate swap
agreements. Consequently, during July 1995 and November 1996, First Banks
shortened the effective maturity of its interest-bearing liabilities through the
termination of $225 million and $75 million, respectively, of interest rate swap
agreements resulting in losses of $13.5 million and $5.3 million, respectively.
These losses were deferred and are being amortized over the remaining lives of
the swap agreements. If all or any portion of the underlying liabilities are
repaid, the related deferred losses will be charged to operations.
First Banks also has interest rate cap and floor agreements to limit the
interest expense associated with certain of its interest-bearing liabilities and
the net interest expense of certain interest rate swap agreements, respectively.
At December 31, 1996 and 1995, the unamortized costs of these agreements were
$433,000 and $685,000, respectively, and were included in other assets. There
are no amounts receivable under these agreements.
As more fully discussed under "-- Mortgage Banking Activities," derivative
financial instruments issued by First Banks consist of commitments to originate
fixed-rate loans. Commitments to originate fixed-rate loans consist primarily of
residential real estate loans. These loan commitments, net of estimated
underwriting fallout, and loans held for sale are hedged with forward contracts
to sell mortgage-backed securities.
<PAGE>
In addition to the simulation model employed by First Banks, 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 First Banks'
rate-sensitive assets and liabilities as of December 31, 1996, adjusted to
account for prepayment assumptions:
<TABLE>
<CAPTION>
Over three Over six
Three through through Over one
months six twelve through Over five
or less months months five years years Total
------- ------ ------ ---------- ----- -----
(dollars expressed in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans (1)........................ $ 776,384 418,266 520,002 942,188 111,129 2,767,969
Investment securities............ 110,407 76,960 85,147 246,014 34,273 552,801
Federal funds sold............... 74,100 -- -- -- -- 74,100
Interest-bearing deposits with
other financial institutions... 6,050 -- -- -- -- 6,050
------- ------- ------- --------- ------- ---------
Total interest-earning assets. $ 966,941 495,226 605,149 1,188,202 145,402 3,400,920
======= ======= ======= ========= ======= =========
Interest-bearing liabilities:
Interest-bearing demand accounts.. $ 124,919 77,651 50,643 37,138 47,267 337,618
Savings accounts.................. 50,153 41,304 35,402 50,153 118,008 295,020
Money market demand accounts...... 376,266 -- -- -- -- 376,266
Time deposits..................... 446,633 354,861 516,119 492,280 1,577 1,811,470
Other borrowed funds.............. 130,989 2,447 10,810 1,522 544 146,312
--------- ------- ------- ------- ------- ---------
Total interest-bearing
liabilitie.................. 1,128,960 476,263 612,974 581,093 167,396 2,966,686
Effect of interest rate exchange
agreements on rate-sensitive
liabilities...................... (70,000) -- 35,000 35,000 -- --
-------- ------- ------ ------ ------- ---------
Total rate-sensitive liabili-
ties adjusted for impact
of interest rate exchange
agreements.............. $ 1,058,960 476,263 647,974 616,093 167,396 2,966,686
========= ======= ======= ======= ======= =========
Interest sensitivity gap:
Periodic....................... $ (92,019) 18,963 (42,825) 572,109 (21,994) 434,234
=======
Cumulative..................... (92,019) (73,056) (115,881) 456,228 434,234
========== ======= ======== ======= =======
Ratio of interest-sensitive
assets to interest-sensitive liabilities:
Periodic...................... 0.91 1.04 0.93 1.93 0.87 1.15
====
Cumulative.................... 0.91 0.95 0.95 1.16 1.15
==== ==== ==== ==== ====
</TABLE>
<PAGE>
- ------------------
(1) Loans presented net of unearned discount.
Management makes certain assumptions in preparing the table above. These
assumptions include: loans will repay at historic repayment speeds;
mortgage-backed securities, included in investment securities, will repay at
projected repayment speeds; interest-bearing demand accounts and savings
accounts are interest sensitive at a rate of 37% and 17%, respectively, of the
remaining balance for each period presented; and fixed maturity deposits will
not be withdrawn prior to maturity.
At December 31, 1996 and 1995, First Banks was liability sensitive on a
cumulative basis through the twelve-month time horizon by $115.9 million, or
3.14% of total assets, and $41.6 million, or 1.1% of total assets, respectively.
The increased liability-sensitive position for 1996 is attributable to the
planned offering of $86.2 million of Cumulative Trust Preferred Securities,
completed in February 1997, which would provide a long-term source of fixed-rate
funding. See Note 21 to the accompanying consolidated financial statements.
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 First Banks' assets and liabilities and
changes in interest rates. For this reason, First Banks places greater emphasis
on a simulation model for monitoring its interest rate exposure.
Mortgage Banking Activities. The mortgage banking activities of First Banks
consist of the origination, purchase and servicing of residential mortgage
loans. Generally, First Banks sells its production of residential mortgage loans
in the secondary loan markets. Servicing rights are retained with respect to
conforming fixed rate loans. Other loans are sold on a servicing released basis.
<PAGE>
In conjunction with its de-emphasis of residential mortgage lending for its
loan portfolio, First Banks is considering subcontracting its mortgage loan
servicing and transferring its origination function to an entity which would be
indirectly owned by First Banks' voting shareholders. It is not anticipated that
any such subcontract and transfer, if consummated, would have a material effect
on the financial condition or results of operations of First Banks. First Banks
may also consider selling its residential mortgage servicing, either to an
unrelated entity or an entity which would be indirectly owned by First Banks'
voting shareholders. If such a transaction is initiated, its purpose would be to
redeploy the capital allocated to its mortgage servicing activities to assets
which would provide a greater and more stable return on capital to First Banks.
For the three years ended December 31, 1996, 1995 and 1994, First Banks
originated and purchased loans for resale totaling $136 million, $67 million and
$81 million and sold loans totaling $113 million, $207 million and $168 million,
respectively. The origination and purchase of residential mortgage loans and the
related sale of the loans provides First Banks with additional sources of income
including the interest income earned while the loan is held awaiting sale and
ongoing loan servicing fees from the loans sold with servicing rights retained.
Mortgage loans serviced for investors totaled $847 million, $857 million and
$699 million at December 31, 1996, 1995 and 1994, respectively. The primary
change was an increase in mortgage loans serviced for investors of $189 million
for the year ended December 31, 1995 reflects both the acquisitions completed
during 1995 and the expansion of the residential mortgage loan origination
function into certain of the markets of the acquired entities. This increase was
substantially offset by First Banks' sale of $427 million of mortgage loan
servicing rights in July 1995. First Banks elected to sell the servicing rights
due to the prospective profitability of its mortgage servicing portfolio, the
favorable sales prices available in the market, and the substantial increases to
the portfolio resulting from various acquisitions. This sale resulted in a gain
of $3.8 million for the year ended December 31, 1995.
The interest income earned on loans held for sale was $3.2 million, $3.2
million and $4.7 million for the three years ended December 31, 1996, 1995 and
1994, respectively. The fluctuations in interest income during these periods
relate primarily to changes in the average balance of loans held for sale and
the related loan volumes, and the prevailing interest rates when the loans were
made. The average balance of loans held for sale was $36.3 million, $36.8
million and $59.2 million for the years ended December 31, 1996, 1995 and 1994,
respectively. On an annualized basis, the yield on the portfolio of loans held
for sale was 8.68%, 8.70% and 7.96% of the average balance for the years ended
December 31, 1996, 1995 and 1994, respectively. This compares with First Banks'
cost of funds, as a percentage of average interest-bearing liabilities, of
4.91%, 5.01% and 3.65% for the years ended December 31, 1996, 1995 and 1994,
respectively.
The mortgage loan servicing fees are reported net of mortgage-backed
security guarantee fee expense, interest shortfall and amortization of purchased
mortgage servicing rights. Loan servicing fees, net were $1.8 million, $2.9
million and $1.6 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
Associated with the activity of originating and purchasing loans to be sold
into the secondary market are the realized and unrealized gains, net of losses,
incurred during the period prior to sale. These net gains or losses include: (1)
the adjustments of the carrying values of loans held for sale to current market
values; (2) the adjustments for any gains or losses on loan commitments for
which the interest rate has been established, net of anticipated underwriting
"fallout"; and (3) the related cost of hedging the loans held for sale and loan
commitments during the period First Banks is exposed to interest rate risk. The
gain on mortgage loans originated for resale, including loans sold and held for
sale, was $40,000 and $126,000 for the years ended December 31, 1996 and 1994,
respectively, in comparison to a loss of $608,000 for the year ended December
31, 1995.
As more fully described under "-- Interest Rate Risk Management," First
Banks' interest rate risk management policy provides certain hedging parameters
to reduce the interest rate exposure arising from changes in loan prices from
the time of commitment until the sale of the security or the loan. To reduce
this exposure, First Banks utilizes forward commitments to sell fixed-rate
mortgage-backed securities at a specified date in the future. At December 31,
1996 and 1995, First Banks had $36.7 million and $42.4 million, respectively, of
loans held for sale and related commitments, net of committed loan sales and
estimated underwriting fallout, of which $35.0 million and $42.0 million,
respectively, were hedged through the use of such forward commitments.
Comparison of Results of Operations for 1996 and 1995
Net Income. Net income for the year ended December 31, 1996 excluding the
effect of the one-time SAIF assessment of $8.2 million ($5.3 million on an after
tax-basis), would have been $25.5 million, compared to $24.5 million for 1995.
This represents a return on average assets of .72% and .70% for the years ended
December 31, 1996 and 1995, respectively. This compares to First Banks'
historical levels of return on average assets of 1.00% and 1.16% for the years
ended December 31, 1994 and 1993, respectively. Including the effect of the
assessment, net income for 1996 was $20.2 million, representing a return on
average assets of .57%.
<PAGE>
The decline in operating results in 1996 and 1995 reflects several
influences which have had significant adverse effects on earnings including the
impact of 13 acquisitions completed during the three years ended December 31,
1996. As previously discussed under "-- General" and "-- Acquisitions," most of
the acquired institutions exhibited significant financial distress prior to
their acquisition, generally related to asset quality problems and/or high
operating expenses. Consequently, in the periods since their respective dates of
acquisition, management of First Banks has worked with management of the
institutions to completely reorient their positions within their market places,
restructure their balance sheets and revise their systems and procedures. This
has required a significant dedication of resources by First Banks, both in terms
of expenses and personnel. Substantial expenses have been incurred in
reorganizing, retraining and reducing staff, converting data processing systems,
instituting and controlling new policies and procedures, and merging corporate
cultures, not only with that of First Banks, but also between acquired
institutions.
This process has been complicated by the existence of what is collectively
a substantial portfolio of problem assets. While the provisions for possible
loan losses in California and Texas have been substantial, this represents only
a portion of the cost of carrying the problem assets. In addition to that
expense is the loss of income on nonperforming assets, the management, legal and
other costs associated with managing and collecting problem loans, and the
expenses incurred in foreclosing, operating, holding and disposing of real
estate and other collateral acquired from problem borrowers.
Although these factors were anticipated prior to the acquisitions and are
considered acceptable as costs of building the long-term franchise value of
First Banks, they had a substantial effect on First Banks' profitability for the
years ended December 31, 1996 and 1995. A comparison of the relative
profitability of First Banks' investment in bank and thrift subsidiaries by area
is as follows:
<TABLE>
<CAPTION>
California Texas Other
---------- ----- -----
1996(1) 1995 1996 1995 1996(1) 1995
------- ---- ---- ---- ------- ----
(dollars expressed in thousands)
Year ended December 31:
<S> <C> <C> <C> <C> <C> <C>
Equity in income of subsidiaries $ 5,259 3,598 806 (2,766) 24,542 29,647
Average investment in subsidiaries 54,114 43,539 23,202 27,250 212,850 230,776
Return on average investment, annualized 9.72% 8.26% 3.47% (10.15)% 11.53% 12.85%
</TABLE>
- -----------------------
(1) Excludes the effect of the one-time FDIC special assessment, net of related
tax benefit.
As previously discussed, during 1994, First Banks expanded its hedging
activities through the use of derivative financial instruments as a means to
reduce its interest rate risk exposure. The hedges were generally established
between September 1994, after a significant increase in interest rates had
already occurred, and March 1995, when interest rates began to decrease. While
being conceptually appropriate in reducing interest rate risk, because of its
timing, this hedging process did not have an opportunity to contribute to
protecting First Banks from the adverse effects of increasing interest rates,
but limited substantially its opportunity to benefit from decreasing interest
rates. The expense of such derivative financial instruments was $11.5 million,
$9.1 million and $490,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
The results of operations for the year ended December 31, 1996 were also
adversely affected by an $8.2 million charge for the one-time special deposit
insurance assessment passed by Congress and signed by President Clinton on
September 30, 1996. This special assessment will be used to recapitalize the
SAIF of the FDIC in order to bring it into parity with the Bank Insurance Fund
(BIF) of the FDIC.
As previously discussed, net interest income (expressed on a tax-equivalent
basis) for the year ended December 31, 1996 was $125.5 million, or 3.79% of
average interest-earning assets, compared to $118.0 million, or 3.60% of average
interest-earning assets, for 1995.
Provision for Possible Loan Losses. The provision for possible loan losses
was $11.5 million and $10.4 million for the years ended December 31, 1996 and
1995, respectively, while net loan charge-offs were $19.7 million and $10.8
million for the same periods.
<PAGE>
Several of First Banks' acquisitions in 1995 and 1994 included significant
portfolios of problem assets. This is particularly evident in California and
Texas, where the economies had been weak in recent years. Of First Banks' total
nonperforming loans of $30.3 million at December 31, 1996, $14.9 million, or
49.1%, were held by the California and Texas banks. As this would suggest, a
substantial portion of First Banks' net loan charge-offs and provisions for
possible loan losses related to loans in the California or Texas banks. The
following is a summary of loan loss experience and nonperforming assets by
geographic area for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
California Texas Other Total
---------- ----- ----- -----
1996 1995 1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total loans $ 467,233 460,907 180,068 192,573 2,120,668 2,090,739 2,767,969 2,744,219
Total assets 732,532 626,782 270,309 296,712 2,686,313 2,699,468 3,689,154 3,622,962
Provisions for possible
loan losses 5,879 1,301 1,000 5,826 4,615 3,234 11,494 10,361
Net loan charge-offs 11,765 5,980 2,677 3,355 5,274 1,426 19,716 10,761
Net loan charge-offs as
a percentage of
average loans 2.42% 1.95% 1.53% 1.63% 0.25% 0.07% 0.72% 0.41%
Nonperforming loans 14,726 18,952 164 549 15,379 19,890 30,269 39,391
Nonperforming assets 18,402 21,852 835 1,561 21,639 23,731 40,876 47,144
</TABLE>
The provision for possible loan losses for the year ended December 31, 1996
reflects an additional provision attributable to a single commercial loan of
First Bank Missouri of approximately $3.7 million which was fully charged-off.
The loan was identified in 1995 as having potential problems creating
uncertainty as to its collectibility. During 1996, the borrower failed to meet
certain previously agreed-upon financial measures and principal reductions. As a
result, it became apparent the loan could not be collected in the normal course
of business and was charged-off.
The provision for possible loan losses for the year ended December 31, 1995
reflects a special provision of $3.7 million. This special provision related to
FBA's portfolio of automobile loans which had experienced increased levels of
loan charge-offs and loans past due 30 days or more within that portfolio during
1995.
Tables summarizing nonperforming assets, past-due loans and charge-off
experience are presented under "-- Loans and Allowance for Possible Loan
Losses."
Noninterest Income and Expense. The following table summarizes noninterest
income and noninterest expense for the years ended December 31, 1996 and 1995,
respectively.
<TABLE>
<CAPTION>
<PAGE>
December 31, Increase (decrease)
------------ -------------------
1996 1995 Amount %
---- ---- ------ -
(dollars expressed in thousands)
Noninterest income:
<S> <C> <C> <C> <C>
Service charges on deposit accounts and customer service fees.... $12,521 10,661 1,860 17.4%
Credit card fees................................................. 2,475 2,179 296 13.6
Loan servicing fees, net......................................... 1,837 2,932 (1,095) (37.3)
Gain (loss) on mortgage loans sold and held for sale:
Originated for sale............................................ 40 (324) 364 112.4
Other loan sales............................................... -- (284) 284 --
Trust and brokerage fees......................................... 782 699 83 11.9
Net loss on sales of securities.................................. (311) (866) 555 64.1
Gain on sale of mortgage loan servicing rights................... -- 3,843 (3,843) --
Loss on cancellation of interest rate swap agreements............ -- (3,342) 3,342 --
Other............................................................ 3,377 3,909 (532) (13.61)
------ =----- ----- ------
Total noninterest income................................. $20,721 19,407 1,314 6.77
------ ------ ----- ----
Noninterest expense:
Salaries and employee benefits................................... $39,995 37,941 2,054 5.4%
Occupancy, net of rental income.................................. 9,758 8,709 1,049 12.0
Furniture and equipment.......................................... 7,218 6,852 366 5.3
Federal Deposit Insurance Corporation premiums................... 11,715 4,911 6,804 138.5
Postage, printing and supplies................................... 4,687 4,678 9 .2
Data processing fees............................................. 4,477 4,838 (361) (7.5)
Legal, examination and professional fees......................... 4,901 5,412 (511) (9.4)
Credit card expenses............................................. 2,913 2,490 423 17.0
Communications................................................... 2,635 2,476 159 6.4
Advertising...................................................... 2,224 2,182 42 1.9
Losses and expenses on foreclosed real estate, net of gains...... 1,927 1,302 625 48.0
Other............................................................ 13,291 9,775 3,516 36.0
------- ------ ------ ----
Total noninterest expense................................. $105,741 91,566 14,175 15.5
======= ====== ====== ====
</TABLE>
<PAGE>
Noninterest income was $20.7 million for the year ended December 31, 1996,
in comparison to $19.4 million for 1995. The increase for the year ended
December 31, 1996 is primarily attributable to the additional noninterest income
generated from the acquisitions completed throughout 1995.
The increase of $2.2 million in service charges, customer service fees and
credit card fees for the year ended December 31, 1996, compared to 1995, relates
primarily to the aforementioned acquisitions.
For the year ended December 31, 1996, loan servicing fees, net decreased by
$1.1 million, in comparison to 1995. As more fully described under "-- Mortgage
Banking Activities," the decrease is attributable to the sale of $427 million of
mortgage loan servicing rights during July 1995. First Banks decided to sell the
mortgage servicing rights due to favorable pricing available in the marketplace
at that time. This sale resulted in a gain of $3.8 million.
In addition, First Banks sold $147 million of residential mortgage loans
during the year ended December 31, 1995, resulting in a loss of $284,000. In
connection with the sale of these loans, First Banks terminated an interest rate
swap agreement, resulting in a loss of $3.3 million for the year ended December
31, 1995.
Noninterest income also includes net loss on sales of securities of
$311,000 for the year ended December 31, 1996, in comparison to net loss on
sales of securities of $866,000 for 1995. The securities sold were classified as
available for sale within the investment security portfolio.
Noninterest expense was $105.7 million and $91.6 million for the years
ended December 31, 1996 and 1995, respectively. The increase of $14.1 million is
primarily attributable to the one-time special assessment discussed below and
incremental operating expenses of the seven acquisitions completed throughout
1995. In particular, salaries and employee benefits increased by $2.1 million to
$40.0 million from $37.9 million for the years ended December 31, 1996 and 1995,
respectively. In addition, occupancy expense, net increased by $1.1 million to
$9.8 million from $8.7 million for the years ended December 31, 1996 and 1995,
respectively.
FDIC premiums expense for the year ended December 31, 1996 includes an $8.2
million charge for the one-time special deposit insurance assessment passed by
Congress and signed by President Clinton on September 30, 1996. This special
assessment will be used to recapitalize the SAIF of the FDIC and bring it into
parity with the BIF of the FDIC. As a result of this special assessment, First
Banks' cost of deposit insurance for SAIF-insured deposits is expected to
decrease by approximately $2.0 million for the year ended December 31, 1997 in
comparison to December 31, 1996, excluding the effect of the special assessment.
First Banks has approximately $1.1 billion of SAIF-insured deposits at December
31, 1996.
Comparison of Results of Operations for Years ended 1995 and 1994
Net Income. Net income for the year ended December 31, 1995 was $24.5
million, compared with $24.0 million earned in 1994. Although income increased
in 1995, the substantial increase in total assets resulting from acquisitions
caused the return on average assets to decrease to .70% for the year ended
December 31, 1995, compared to 1.00% in 1994. This was indicative of the
marginal operating results of certain of the acquired entities during the
periods subsequent to their respective acquisition dates, as well as the cost of
the funds used in their acquisitions and the expenses associated with
amalgamating them into First Banks' systems and culture.
As discussed previously, net interest income (expressed on a tax-equivalent
basis) was $118.0 million, or 3.60%, of average interest-earning assets for
1995, compared to $93.0 million, or 4.07%, for 1994.
Provision for Possible Loan Losses. The provision for possible loan losses
was $10.4 million and $1.9 million for the years ended December 31, 1995 and
1994, respectively, which was partially attributable to the increase in net loan
charge-offs to $10.8 million in 1995 from $1.5 million in 1994. First Banks
substantially increased its provision for possible loan losses in 1995 in
recognition of the internal growth in the loan portfolio as well as its
assessment of the risk inherent in the various portfolios of acquired entities.
The unusually high level of recoveries of previously charged-off loans
experienced in prior years decreased, contributing to the increase in the amount
of net loan charge-offs for the year. At the same time, an increase in the
amount of loans past due over 30 days, particularly in portfolios of recently
acquired entities, and the desire to deal aggressively with loan problems as
they arise, led to First Banks' decision to continue to strengthen its allowance
for possible loan losses.
The increased level of net loan charge-offs and loans past due over 30 days
primarily related to the portfolios of CCB and FBA, which were acquired by First
Banks on March 15, 1995 and August 31, 1994, respectively. Net loan charge-offs
for both CCB and FBA were approximately $9.2 million and $514,000 for the years
ended December 31, 1995 and 1994, respectively.
<PAGE>
CCB's charge-offs resulted primarily from the application of First Banks'
more aggressive approach to resolving loan problems within its consolidated
portfolio. This approach resulted in a reduction in the level of acquired
problem loans to $23.7 million at December 31, 1995 from $38.5 million at March
15, 1995, the acquisition date.
FBA experienced an increase in its automobile loan charge-offs and
automobile loans past due 30 days or more which resulted in a special provision
of $3.7 million during the three-month period ended September 30, 1995. The
increase in charge-offs for FBA is partly due to changes in the practice and
timing of recording such charge-offs. Previously, FBA charged-off the remaining
balance of a loan after reducing that amount by the estimated value of the
collateral even if the collateral was not yet in its possession. Commencing in
the second quarter of 1995, FBA, consistent with First Banks' practice, began
charging off a loan when it became 120 days or more past due, regardless of
whether the collateral was in its possession. When the collateral was
subsequently received, the charged-off amount was adjusted for the value of the
collateral. In addition, in an effort to further reduce the overall level of
loan charge-offs and loans past due 30 days or more within this portfolio, FBA
increased its collection efforts and implemented more stringent lending
practices, including regular reviews of new loans originated and strict
adherence to approved policies and practices.
A contributing factor to the increase in net loan charge-offs for 1995 in
comparison to 1994 was reductions in the level of recoveries of previously
charged-off loans. Recoveries of previously charged-off loans decreased by
$300,000 to $4.9 million from $5.2 million for the years ended December 31, 1995
and 1994, respectively. The decrease reflects the reduced levels of loans
charged-off from $12.2 million for the year ended December 31, 1992, to $9.5
million and $6.7 million for the years ended December 31, 1993 and 1994,
respectively, and the corresponding reduction in the opportunities to obtain
recoveries.
Noninterest Income and Expense. The following table summarizes noninterest
income and noninterest expense for the years ended December 31, 1995 and 1994,
respectively.
<TABLE>
<CAPTION>
December 31, Increase (decrease)
------------ -------------------
1995 1994 Amount %
---- ---- ------ -
(dollars expressed in thousands)
Noninterest income:
<S> <C> <C> <C> <C>
Service charges on deposit accounts and customer service fees.... $ 10,661 8,300 2,361 28.4%
Credit card fees................................................. 2,179 1,746 433 24.8
Loan servicing fees, net......................................... 2,932 1,645 1,287 78.2
Gain (loss) on mortgage loans sold and held for sale:
Originated for sale............................................ (324) 126 (450) (357.1)
Other loan sales............................................... (284) -- (284) --
Trust and brokerage fees......................................... 699 744 (45) (6.0)
Net loss on sales of securities.................................. (866) (290) (576) (198.6)
Gain on sale of mortgage loan servicing rights................... 3,843 -- 3,843 --
Loss on cancellation of interest rate swap agreements.............. (3,342) -- (3,342) --
Other............................................................ 3,909 1,363 2,546 186.8
------ ------ -----
Total noninterest income................................. $ 19,407 13,634 5,773 42.3
====== ====== ===== ====
Noninterest expense:
Salaries and employee benefits................................... $ 37,941 28,337 9,604 33.9%
Occupancy, net of rental income.................................. 8,709 5,260 3,449 65.6
Furniture and equipment.......................................... 6,852 5,209 1,643 31.5
Federal Deposit Insurance Corporation premiums................... 4,911 4,484 427 9.5
Postage, printing and supplies................................... 4,678 3,304 1,374 41.6
Data processing fees............................................. 4,838 3,733 1,105 29.6
Legal, examination and professional fees......................... 5,412 3,562 1,850 51.9
Credit card expenses............................................. 2,490 2,455 35 1.4
Communications................................................... 2,476 1,816 660 36.3
Advertising...................................................... 2,182 1,767 415 23.5
Losses and expenses on foreclosed real estate, net of gains...... 1,302 792 510 64.4
Other............................................................ 9,775 7,015 2,760 39.3
------ ------ ------
Total noninterest expense................................. $ 91,566 67,734 23,832 35.2
====== ====== ====== ====
</TABLE>
<PAGE>
Noninterest income increased by $5.8 million to $19.4 million from $13.6
million for the year ended December 31, 1995 in comparison to December 31, 1994.
The increase was attributable to mortgage banking activities, additional service
charges and customer fee income, partially offset by sales of investment
securities and residential mortgage loans. A more thorough discussion and
analysis of the increases attributable to mortgage banking operations has been
presented under "-- Mortgage Banking Activities."
Increases of $4.1 million for the year ended December 31, 1995, in
comparison to the same period in 1994, in service charges, customer service
fees, credit card fees and loan servicing fees relate primarily to the
aforementioned acquisitions.
Offsetting the increase in noninterest income was a net loss on sales of
securities of $866,000 and $290,000 for the years ended December 31, 1995 and
1994, respectively. The sales were executed to restructure acquired entities'
investment portfolios to provide funds for internal loan growth and to reduce
borrowings.
As previously discussed, First Banks sold $147 million of residential
mortgage loans resulting in a net loss of $284,000 for the year ended December
31, 1995. The proceeds from the sale of these loans were used to repay certain
interest-bearing liabilities, which resulted in the termination of an interest
rate swap agreement. The loss on cancellation of the interest rate swap
agreement was $3.3 million.
Other income for the year ended December 31, 1995 increased by $2.5 million
to $3.9 million from $1.4 million for 1994. In addition to the increase
associated with the overall growth of First Banks, other income for the year
ended December 31, 1995 included a $294,000 gain upon sale of bank building and
related deposits, $179,000 of income from the termination of FBA's Directors'
Retirement Plan and $802,000 of funds returned to FBA which were maintained in a
trust. During 1990, FBA established a trust in lieu of officer and director
liability insurance. Since such coverage is now available and in place through
First Banks, the trust was terminated and the funds were returned to FBA.
Noninterest expense was $91.6 million and $67.7 million for the years ended
December 31, 1995 and 1994, respectively, representing an increase of $23.8
million. As a percentage of average assets, noninterest expenses were 2.62% and
2.81% for the years ended December 31, 1995 and 1994, respectively. To some
extent, the year-to-year noninterest expense was not comparable, due to the
incremental operating expenses of acquired entities, which are accounted for
under the purchase method of accounting, merger-related expenses and expenses
associated with amalgamating acquired entities into First Banks' systems and
culture.
Salaries and employee benefits represent the largest category of
noninterest expense, which totaled $37.9 million, or 41.4% of noninterest
expense, for the year ended December 31, 1995. This compares to salaries and
employee benefits of $28.3 million, or 41.8% of noninterest expense, for the
year ended December 31, 1994. The $9.6 million increase is primarily
attributable to the acquisitions completed during 1995, partially offset by
staff reductions, occurring primarily in the third and fourth quarters of 1995,
due to the effects of both acquisition-related synergies and increasing
economies of scale.
Occupancy and furniture and equipment expenses increased by $5.1 million to
$15.6 million from $10.5 million for the years ended December 31, 1995 and 1994,
respectively. The increase is a result of First Banks' market expansion in
central and northern Illinois, Dallas and Houston, Texas, and California. In
addition, the increase in these expenses reflects the upgrading of systems to
enhance both the quality of service to First Banks' expanding customer base and
improving staff productivity.
On August 8, 1995, the FDIC voted to reduce the deposit insurance premiums
paid by most members of the BIF and to keep existing assessment rates intact for
members of the SAIF. The reduction in the BIF rates were effective June 1, 1995,
resulting in a reduction in First Banks' FDIC premiums expense by approximately
$1.6 million for the year ended December 31, 1995.
Loans and Allowance for Possible Loan Losses. Interest earned on the loan
portfolio is the primary source of income for the Subsidiary Banks. Loans, net
of unearned discount, represent 75.0% of total assets as of December 31, 1996,
as compared to 75.7% as of December 31, 1995. For 1996, loan growth, net of
unearned discount and excluding loans held for sale, was $41.3 million, compared
to $646.0 million for 1995.
Internally generated loans decreased by $37.4 million for 1996, in
comparison to an increase of $65.9 million for 1995. The decrease in 1996
included an increase in corporate banking's loan portfolio of $135.8 million,
offset by decreases in residential real estate and indirect automobile loans of
$127.9 million and $77.4 million, respectively. For 1995, the increase is
attributable to corporate banking, partially offset by the sale of $147 million
of residential mortgage loans. As previously discussed under "-- Financial
Condition and Average Balances," the growth which occurred in the residential
mortgage loan portfolio, relative to other types of loans, and the effects which
these loans have on the interest rate risk management process have led First
Banks to the conclusion that its residential mortgage loan portfolio, as a
percentage of the total loans, should be reduced. In addition, during 1995,
<PAGE>
First Banks elected to reduce the level of originations of indirect automobile
loans due to increasing past due loans and charge-offs within that portfolio.
The indirect automobile loan portfolio which increased from $305.3 million at
December 31, 1994 to $319.8 million at June 30, 1995, has subsequently decreased
to $206.4 million and $283.8 million at December 31, 1996 and 1995,
respectively.
First Banks' lending strategy stresses quality, growth, and diversification
by collateral, geography and industry. A common credit underwriting structure is
in place throughout First Banks. The commercial lenders focus principally on
small to middle-market companies. The retail lenders focus principally on
residential loans, including home equity loans, automobile financing and other
consumer financing needs arising out of First Banks' branch banking network.
Commercial, financial, agricultural, and municipal and industrial
development loans include loans that are made primarily on the strength of the
borrowers' general credit standing 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 residential 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
primarily fixed-rate residential loans pending sale in the secondary loan market
in the form of a GNMA or FNMA mortgage-backed security and the excess production
of ARMs sold directly to private third-party investors.
The following table shows the composition of the loan portfolio by major
category and the percent of each to the total portfolio as of the dates
presented:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Amount % Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ - ------ -
(dollars expressed in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 457,186 16.7%$ 364,018 13.5% $ 208,649 10.2% $160,211 12.8% $154,322 12.2%
Real estate construction and development 289,378 10.5 209,80 7.8 122,912 6.0 76,049 6.17 7,208 6.2
Real estate mortgage:
One- to four-family residential loan 1,059,770 38.7 1,199,491 44.4 967,129 47.1 584,868 46.6 606,847 48.1
Other real estate loans........... 600,810 21.9 512,264 19.0 332,075 16.1 243,382 19.4 189,267 15.0
Consumer and installment, net of
unearned discount................. 333,340 12.2 413,609 15.3 422,461 20.6 189,851 15.1 234,552 18.5
--------- ---- ------- ---- --------- ---- ------- ---- ------- ----
Total loans, excluding
loans held for sale....... 2,740,484 100.0% 2,699,184 100.0% 2,053,226 100.0% 1,254,361 100.0% 1,262,196 100.0%
Loans held for sale................... 27,485 45,035 20,344 107,657 109,221
--------- --------- --------- --------- ---------
Total loans.................. $2,767,969 $2,744,219 $2,073,570 $1,362,018 $1,371,417
========= ======== ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
Loans at December 31, 1996 mature as follows:
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>
Commercial, financial and agricultural $ 353,791 84,688 15,950 2,757 -- 457,186
Real estate construction and development 279,261 9,049 884 184 -- 289,378
Real estate mortgage 818,113 301,076 361,608 178,669 1,114 1,660,580
Consumer and installment, net of unearned discount 65,242 251,838 346 15,914 -- 333,340
Loans held for sale 27,485 -- -- -- -- 27,485
--------- ------- ------- ------- ----- ---------
Total loans $ 1,543,892 646,651 378,788 197,524 1,114 2,767,969
========= ======= ======= ======= ===== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Following is a summary of loan loss experience for the five years ended
December 31, 1996:
December 31,
------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(dollars expressed in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for possible loan losses,
beginning of period................................ $ 52,665 28,410 23,053 20,897 19,238
Acquired allowances for possible loan losses.......... 2,338 24,655 5,026 2,079 399
--------- --------- --------- ---------- ----------
55,003 53,065 28,079 22,976 19,637
--------- --------- --------- ---------- ----------
Loans charged-off:
Commercial, financial and agricultural............ (8,918) (2,337) (813) (2,023) (3,885)
Real estate construction and development.......... (1,241) (275) (119) (19) (424)
Real estate mortgage.............................. (10,308) (5,948) (1,282) (2,212) (2,697)
Consumer and installment.......................... (8,549) (7,060) (4,482) (5,277) (5,197)
--------- --------- --------- --------- ----------
Total..................................... (29,016) (15,620) (6,696) (9,531) (12,203)
--------- --------- --------- --------- ----------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural............ 2,642 1,714 831 1,191 1,083
Real estate construction and development.......... 495 666 401 241 34
Real estate mortgage.............................. 3,255 290 840 1,396 503
Consumer and installment.......................... 2,908 2,189 3,097 2,324 1,408
--------- --------- --------- --------- ---- -----
Total..................................... 9,300 4,859 5,169 5,152 3,028
--------- --------- --------- --------- ----------
Net loans charged-off..................... (19,716) (10,761) (1,527) (4,379) (9,175)
Provision for possible loan losses.................... 11,494 10,361 1,858 4,456 10,435
--------- --------- --------- --------- ----------
Allowance for possible loan losses, end of period..... $ 46,781 52,665 28,410 23,053 20,897
========= ========= ========= ========= ==========
Loans outstanding:
Average........................................... $2,726,297 2,598,936 1,616,634 1,340,641 1,416,597
End of period..................................... 2,767,969 2,744,219 2,073,570 1,362,018 1,371,417
End of period, excluding loans held for sale...... 2,740,484 2,699,184 2,053,226 1,254,361 1,262,196
========= ========= ========= ========= =========
Ratio of allowance for possible loan losses to
loans outstanding:
Average...................................... 1.72% 2.03% 1.76% 1.72% 1.48%
End of period................................ 1.69 1.92 1.37 1.69 1.52
End of period, excluding loans held for sale. 1.71 1.95 1.38 1.84 1.66
Ratio of net charge-offs to average loans
outstanding.................................... 0.72 0.41 0.09 0.33 0.65
==== ==== ==== ==== ====
Allocation of allowance for possible loan losses
at end of period:
Commercial, financial and agricultural............ $ 13,579 12,501 4,160 3,531 2,912
Real estate construction and development.......... 4,584 4,665 2,440 2,867 2,895
Real estate mortgage.............................. 14,081 19,849 8,051 6,712 4,186
Consumer and installment.......................... 10,296 10,016 6,225 2,925 2,428
Unallocated....................................... 4,241 5,634 7,534 7,018 8 ,476
--------- --------- --------- --------- ---------
Total..................................... $ 46,781 52,665 28,410 23,053 20,897
========= ========= ========= ========= =========
Percent of categories to loans, net of unearned
discount:
Commercial, financial and agricultural............ 16.52% 13.27% 10.06% 11.76% 11.25%
Real estate construction and development.......... 10.45 7.65 5.93 5.58 5.63
Real estate mortgage.............................. 60.00 62.49 62.66 60.81 58.05
Consumer and installment.......................... 12.04 14.95 20.37 13.94 17.10
Loans held for sale............................... .99 1.64 0.98 7.91 7.97
--------- --------- --------- --------- ---------
Total..................................... 100.00% 100.00% 100.00% 100.00% 100.00%
========= ========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Following is a summary of nonperforming assets by category:
December 31,
------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(dollars expressed in thousands)
Commercial, financial and agricultural:
<S> <C> <C> <C> <C> <C>
Nonaccrual.............................. $ 4,113 9,930 2,540 4,278 2,707
Restructured terms...................... 130 -- 60 60 122
Real estate construction and development:
Nonaccrual.............................. 817 2,002 1,448 70 89
Real estate mortgage:
Nonaccrual.............................. 24,486 27,159 11,637 7,546 7,292
Restructured terms...................... 278 -- 222 227 568
Consumer and installment:
Nonaccrual.............................. 440 300 293 49 312
Restructured terms...................... 5 -- -- -- --
--------- --------- --------- --------- ----------
Total nonperforming loans......... 30,269 39,391 16,200 12,230 11,090
Other real estate........................... 10,607 7,753 6,740 2,529 6,938
--------- --------- --------- --------- ----------
Total nonperforming assets....... $ 40,876 47,144 22,940 14,759 18,028
========= ========= ========= ========= ==========
Loans, net of unearned discount............. $2,767,969 2,744,219 2,073,570 1,362,018 1,371,417
========= ========= ========= ========= =========
Loans past due 90 days or more and
still accruing........................... $ 3,779 8,474 1,885 1,199 3,074
========= ========= ========= ========= =========
Allowance for possible loan losses to loans. 1.69% 1.92% 1.37% 1.69% 1.52%
Nonperforming loans to loans................ 1.09 1.44 0.78 0.90 0.81
Allowance for possible loan losses to
nonperforming loan....................... 154.55 133.70 175.37 188.50 188.43
Nonperforming assets to loans and
foreclosed assets........................ 1.47 1.71 1.10 1.08 1.31
==== ==== ==== ==== ====
</TABLE>
As of December 31, 1996 and 1995, $31.5 million and $47.9 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.
First Banks' credit management policy and procedures focuses on identifying
and managing credit exposure. First Banks utilizes a lender-initiated system of
rating credits, which is subsequently tested by internal loan review and bank
regulators. Adversely rated credits are included on a watch list, and are
reviewed at the bank level and centrally at least every four months. Loans may
be added to the watch list for reasons which are temporary and correctable, such
as the absence of current financial statements of the borrower, or a deficiency
in loan documentation. Other loans are added as soon as any problem is detected
which might affect the borrower's ability to meet the terms of the loan. This
could be initiated by the delinquency of a scheduled loan payment, a
deterioration in the borrower's financial condition identified in a review of
periodic financial statements, a decrease in the value of the collateral
securing the loan or a change in the economic environment within which the
borrower operates.
In addition to the rating system, credit administration coordinates the
periodic credit reviews and provides management with information on risk levels,
trends, delinquencies and portfolio concentrations.
The allowance for possible loan losses is based on past loan loss
experience, on First Banks management's evaluation of the quality of the loans
in the portfolio and on the anticipated effect of national and local economic
conditions relative to the ability of loan customers to repay. Each quarter, the
allowance for possible loan losses is reviewed relative to the watch list and
other data to determine its adequacy. The provision for possible loan losses is
management's estimate of the amount necessary to maintain the allowance at a
level consistent with this evaluation. As adjustments to the allowance for
possible loan losses are considered necessary, they are reflected in the
consolidated statements of income.
First Banks does not lend funds for foreign loans. Additionally, First
Banks does not have any concentrations of loans exceeding 10% of total loans
which are not otherwise disclosed in the loan portfolio composition table. First
Banks does not have a material amount of interest-bearing assets which would
have been included in nonaccrual, past due or restructured loans if such assets
were loans.
Investment Securities. As more fully described in Note 3 to the
accompanying consolidated financial statements, in October 1995, the FASB issued
a Special Report, A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities (Special Report). The Special
Report was issued in response to various questions that have been raised as a
result of initially applying SFAS 115, including the regulatory treatment for
purposes of calculating capital compliance. The Special Report also provided an
enterprise the opportunity to reassess the appropriateness of the
classifications of all investment securities without bringing into question the
intent of an enterprise to hold other debt securities to maturity. In light of
the Special Report and management's review of the investment securities
portfolios, debt securities with an amortized cost of $174.1 million were
reclassified from held to maturity to available for sale at December 31, 1995.
Deposits. Deposits are the primary source of funds for the Subsidiary
Banks. First Banks' deposits consist principally of core deposits from its
Subsidiary Banks' local market areas. The following table sets forth the
distribution of First Banks' deposit accounts at the dates indicated and the
weighted average nominal interest rates on each category of deposit:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995 1994
---- ---- ----
Percent Percent Percent
of of of
Amount deposits Rate Amount deposits Rate Amount deposits Rate
------ -------- ---- ------ -------- ---- ------ -------- ----
(dollars expressed in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposits.................. $418,193 12.91% -- $389,658 12.24% -- $ 290,039 12.43% --
Interest-bearing demand deposits. 337,618 10.42 1.73 307,584 9.66 1.89 268,212 11.50 2.04
Savings deposits................. 671,286 20.73 3.07 690,902 21.70 3.16 538,027 23.06 3.03
Time deposits of $100,000 or more 169,057 5.22 5.64 201,025 6.31 5.69 113,381 4.86 4.87
Other time deposits.............. 1,642,413 50.72 5.69 1,594,522 50.09 5.72 1,123,485 48.15 4.84
--------- ----- ---- --------- ------ ---- --------- ------ ====
Total deposits..........$3,238,567 100.00% $3,183,691 100.00% $2,333,144 100.00%
========== ====== ========= ====== ========= ======
</TABLE>
Capital and Dividends. Historically, First Banks has accumulated capital to
support its acquisitions by retaining most of its earnings. Relatively small
dividends are paid on the Class A convertible, adjustable rate preferred stock
and the Class B adjustable rate preferred stock, totaling $786,000 in 1996 and
1995. The dividends paid on the Class C Shares were $4.94 million in 1996 and
$4.95 million in 1995 and 1994. First Banks has never paid, and has no present
intention to pay, dividends on its common stock. See Note 17 to the consolidated
financial statements.
Liquidity. The liquidity of First Banks and its Subsidiary Banks is the
ability to maintain a cash flow which is adequate to fund operations, service
its debt obligations and meet other commitments on a timely basis. The
Subsidiary Banks' primary sources for liquidity are customer deposits, loan
payments, maturities and sales of investments and earnings. In addition, First
Banks and its Subsidiary Banks may avail themselves of more volatile sources of
funds through issuance of certificates of deposit in denominations of $100,000
or more, federal funds borrowed, securities sold under agreements to repurchase,
borrowings from the Federal Home Loan Banks (FHLB) and other borrowings,
including First Banks $90 million credit agreement. The aggregate funds acquired
from those sources were $315.4 million and $359.2 million at December 31, 1996
and 1995, respectively.
At December 31, 1996, First Banks' more volatile sources of funds mature as
follows:
(dollars expressed in thousands)
Three months or less........................... $ 120,634
Over three months through six months........... 31,446
Over six months through twelve months.......... 75,516
Over twelve months............................. 87,773
-------
Total........................ $ 315,369
=======
Management believes the earnings of its Subsidiary Banks will be sufficient
to provide funds for growth and to permit the distribution of dividends to First
Banks sufficient to meet First Banks operating and debt service requirements
both on a short-term and long-term basis and to pay the dividends on the Class C
9% preferred stock and the Cummulative Trust Preferred Securities issued
subsequent to December 31, 1996. See Note 21 to the accompanying consolidated
financial statements.
<PAGE>
Effect of New Accounting Standards. First Banks adopted the provisions of
Statement of Financial Accounting Standards (SFAS) 114, Accounting by Creditors
for Impairment of a Loan, and SFAS 118, Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures, which amends SFAS 114, on
January 1, 1995. SFAS 114 defines the recognition criterion for loan impairment
and the measurement methods for certain impaired loans and loans whose terms
have been modified in troubled-debt restructurings. SFAS 118 amends SFAS 114 to
allow a creditor to use existing methods for recognizing interest income on an
impaired loan. The implementation of these statements did not have a material
effect on First Banks' financial position and resulted in no additional
provision for possible loan losses.
First Banks adopted the provisions of SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. SFAS 121 established accounting standards for the impairment of
long-lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of.
<PAGE>
SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In performing the review for recoverability, the entity
should estimate the future cash flows expected to result from the use of the
asset and its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized. Otherwise, an impairment loss is
not recognized. Measurement of an impairment loss for long-lived assets and
identifiable intangibles that an entity expects to hold and use should be based
on the fair value of the asset.
First Banks adopted the provisions of SFAS 122, Accounting for Mortgage
Servicing Rights, on January 1, 1996. SFAS 122 amends SFAS 65, Accounting for
Certain Mortgage Banking Activities. SFAS 122 requires that a mortgage banking
enterprise recognize as separate assets rights to service mortgage loans for
others, regardless of how those servicing rights are acquired.
A mortgage banking enterprise that acquires mortgage servicing rights
through either the purchase or origination of mortgage loans and sells or
securitizes those loans with servicing rights retained should allocate the total
cost of the mortgage loans to the servicing rights and the loans (without the
mortgage servicing rights), based on their relative fair values if it is
practicable to estimate those fair values. If it is not practicable to estimate
the fair values of the mortgage servicing rights and the mortgage loans (without
the mortgage servicing rights), the entire cost of purchasing or originating the
loans should be allocated to the mortgage loans (without the mortgage servicing
rights) and no cost should be allocated to the mortgage servicing rights.
SFAS 122 requires that a mortgage banking enterprise assess its capitalized
mortgage servicing rights for impairment based on the fair value of those
rights. The entity should stratify its mortgage servicing rights that are
capitalized after the adoption of this statement based on one or more of the
predominate risk characteristics of the underlying loans. Impairment should be
recognized through a valuation allowance for each impaired stratum.
The implementation of SFAS 121 and SFAS 122 did not have a material effect
on First Banks' consolidated financial statements.
In June 1995, the FASB issued SFAS 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities. SFAS 125
established accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities.
The standards established by SFAS 125 are based on consistent applications
of a financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered and derecognizes liabilities
when extinguished. SFAS 125 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings.
SFAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive application is not permitted.
First Banks does not believe the implementation of SFAS 125 will have a
material effect on its consolidated financial position or results of operation.
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, First Banks
believes this is generally manageable through its interest rate risk management
program.
<PAGE>
<TABLE>
<CAPTION>
Quarterly Condensed Financial Data (unaudited)
1996 Quarter Ended
------------------
Septem- Decem-
March 31 June 30 ber 30 ber 31
-------- ------- ------ ------
(dollars expressed in thousands)
<S> <C> <C> <C> <C>
Interest income................................................. $ 66,656 65,453 64,899 69,013
Interest expense................................................ 36,551 35,317 34,712 35,090
------ ------ ------ ------
Net interest income............................. 30,105 30,136 30,187 33,923
Provision for possible loan losses.............................. 3,104 3,100 2,570 2,720
------ ------ ------- ------
Net interest income after provision
for possible loan losses...................... 27,001 27,036 27,617 31,203
Noninterest income.............................................. 5,119 5,169 5,510 4,923
Noninterest expense............................................. 25,037 24,043 32,157 24,504
------ ------ ------ ------
Income before provision (benefit) for income taxes
and minority interest in (income) loss
of subsidiaries............................... 7,083 8,162 970 11,622
Provision (benefit) for income taxes............................ 2,564 2,554 (814) 2,656
------ ------ ----- ------
Income before minority interest in
income of subsidiaries........................ 4,519 5,608 1,784 8,966
Minority interest in income of subsidiaries..................... (82) (138) (252) (187)
------ ------ ------ ------
Net income...................................... $ 4,437 5,470 1,532 8,779
====== ====== ====== ======
Earnings per share:.............................................
Primary..................................................... $ 126.93 173.34 4.12 308.07
Fully diluted............................................... 125.52 165.91 11.37 295.74
====== ====== ===== ======
1995 Quarter Ended
------------------
Septem- Decem-
March 31 June 30 ber 30 ber 31
-------- ------- ------ ------
(dollars expressed in thousands)
Interest income................................................. $ 60,582 65,426 66,043 69,570
Interest expense................................................ 33,257 36,061 37,032 38,595
------ ------ ------ ------
Net interest income............................. 27,325 29,365 29,011 30,975
Provision for possible loan losses.............................. 1,366 1,644 5,439 1,912
------ ------ ------ ------
Net interest income after provision
for possible loan losses...................... 25,959 27,721 23,572 29,063
Noninterest income.............................................. 7,060 5,214 5,368 1,765
Noninterest expense............................................. 21,218 24,041 21,442 24,865
------ ------ ------ ------
Income before provision for income taxes
and minority interest in (income) loss
of subsidiaries............................... 11,801 8,894 7,498 5,963
Provision for income taxes...................................... 4,089 2,802 2,523 1,624
------ ------ ------ ------
Income before minority interest in
(income) loss of subsidiaries................. 7,712 6,092 4,975 4,339
Minority interest in (income) loss of subsidiaries.............. (139) (17) 972 537
------ ------ ------ ------
Net income...................................... $ 7,573 6,075 5,947 4,876
====== ====== ====== ======
Earnings per share:
Primary..................................................... $ 259.47 198.89 190.72 142.74
Fully diluted............................................... 246.28 188.04 183.03 141.31
====== ====== ====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
(dollars expressed in thousands, except per share data)
December 31,
------------
1996 1995
---- ----
ASSETS
Cash and cash equivalents:
<S> <C> <C>
Cash and due from banks........................................................ $ 147,804 128,553
Interest-bearing deposits with other financial institutions -
with maturities of three months or less...................................... 6,050 16,860
Federal funds sold............................................................. 74,100 53,800
--------- ---------
Total cash and cash equivalents..................................... 227,954 199,213
--------- ---------
Investment securities:
Available for sale, at fair value.............................................. 532,605 471,791
Held to maturity, at amortized cost (estimated fair value
of $20,611 and $37,021 at December 31, 1996 and 1995,
respectively)................................................................ 20,196 36,532
--------- ---------
Total investment securities......................................... 552,801 508,323
--------- ---------
Loans:
Commercial, financial and agricultural......................................... 457,186 364,018
Real estate construction and development....................................... 289,378 209,802
Real estate mortgage........................................................... 1,660,580 1,715,052
Consumer and installment....................................................... 341,154 419,894
Loans held for sale............................................................ 27,485 45,035
--------- ---------
Total loans......................................................... 2,775,783 2,753,801
Unearned discount.................................................................. (7,814) (9,582)
Allowance for possible loan losses................................................. (46,781) (52,665)
--------- ---------
Net loans........................................................... 2,721,188 2,691,554
--------- ---------
Bank premises and equipment, net of accumulated
depreciation and amortization.................................................. 48,078 50,278
Intangibles associated with the purchase of subsidiaries........................... 23,303 23,841
Purchased mortgage servicing rights, net of amortization........................... 10,230 12,122
Accrued interest receivable........................................................ 23,250 22,027
Receivable from sales of investment securities..................................... -- 41,265
Other real estate.................................................................. 10,607 7,753
Deferred income taxes.............................................................. 43,406 41,576
Other assets....................................................................... 8,337 25,010
--------- ---------
Total assets........................................................ $ 3,689,154 3,622,962
========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets (continued)
(dollars expressed in thousands, except per share data)
December 31,
------------
1996 1995
---- ----
LIABILITIES
Deposits:
Demand:
<S> <C> <C>
Non-interest-bearing............................................................ $ 418,193 389,658
Interest-bearing................................................................ 337,618 307,584
Savings........................................................................... 671,286 690,902
Time:
Time deposits of $100 or more................................................... 169,057 201,025
Other time deposits............................................................. 1,642,413 1,594,522
--------- ---------
Total deposits.............................................................. 3,238,567 3,183,691
Federal Home Loan Bank advances....................................................... 39,277 49,883
Other borrowings...................................................................... 30,705 21,658
Notes payable......................................................................... 76,330 88,135
Accrued interest payable.............................................................. 10,288 10,726
Deferred income taxes................................................................. 6,194 6,517
Accrued and other liabilities......................................................... 23,521 15,310
Minority interest in subsidiaries..................................................... 12,883 12,437
--------- ---------
Total liabilities........................................................... 3,437,765 3,388,357
STOCKHOLDERS' EQUITY
Preferred stock:
Class C 9.00% increasing rate, redeemable, cumulative, $1.00 par value,
$25.00 stated value; 5,000,000 shares authorized, 2,155,480 shares and
2,200,000 shares issued and outstanding at December 31, 1996
and 1995, respectively.......................................................... 53,887 55,000
Class A convertible, adjustable rate, $20.00 par value; 750,000
shares authorized; 641,082 shares issued and outstanding........................ 12,822 12,822
Class B adjustable rate, $1.50 par value; 200,000 shares authorized,
160,505 shares issued and outstanding........................................... 241 241
Common stock, $250.00 par value; 25,000 shares authorized; 23,661
shares issued and outstanding..................................................... 5,915 5,915
Capital surplus....................................................................... 3,289 4,307
Retained earnings..................................................................... 171,182 156,692
Net fair value adjustment for securities available for sale........................... 4,053 (372)
--------- ---------
Total stockholders' equity.................................................. 251,389 234,605
--------- ---------
Total liabilities and stockholders' equity.................................. $ 3,689,154 3,622,962
========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
(dollars expressed in thousands, except per share data)
Years ended December 31,
------------------------
1996 1995 1994
---- ---- ----
Interest income:
<S> <C> <C> <C>
Interest and fees on loans............................................... $ 237,379 221,934 129,583
Investment securities:
Taxable............................................................... 22,639 34,379 29,385
Nontaxable............................................................ 1,240 1,390 1,468
Federal funds sold and other............................................. 4,763 3,918 1,999
------- ------- -------
Total interest income............................................... 266,021 261,621 162,435
------- ------- -------
Interest expense:
Deposits:
Interest-bearing demand............................................... 4,845 5,760 4,421
Savings............................................................... 22,687 22,737 15,198
Time deposits of $100 or more......................................... 8,977 9,315 3,300
Other time deposits................................................... 88,228 78,250 41,170
Federal Home Loan Bank advances.......................................... 2,591 12,548 3,443
Interest rate exchange agreements, net................................... 7,623 6,911 490
Notes payable and other borrowings....................................... 6,719 9,424 2,648
------- ------- -------
Total interest expense.............................................. 141,670 144,945 70,670
------- ------- ------
Net interest income................................................. 124,351 116,676 91,765
Provision for possible loan losses........................................... 11,494 10,361 1,858
------- ------- ------
Net interest income after provision for possible loan losses........ 112,857 106,315 89,907
------- ------- ------
Noninterest income:
Service charges on deposit accounts and customer service fees............ 12,521 10,661 8,300
Credit card fees......................................................... 2,475 2,179 1,746
Loan servicing fees, net................................................. 1,837 2,932 1,645
Gain (loss) on mortgage loans sold and held for sale..................... 40 (608) 126
Net loss on sales of securities.......................................... (311) (866) (290)
Gain on sale of mortgage loan servicing rights........................... -- 3,843 --
Loss on cancellation of interest rate swap agreement..................... -- (3,342) --
Other income............................................................. 4,159 4,608 2,107
------ ------ ------
Total noninterest income............................................ 20,721 19,407 13,634
------ ------ ------
Noninterest expense:
Salaries and employee benefits........................................... 39,995 37,941 28,337
Occupancy, net of rental income.......................................... 9,758 8,709 5,260
Furniture and equipment.................................................. 7,218 6,852 5,209
Federal Deposit Insurance Corporation premiums........................... 11,715 4,911 4,484
Postage, printing and supplies........................................... 4,687 4,678 3,304
Data processing fees..................................................... 4,477 4,838 3,733
Legal, examination and professional fees................................. 4,901 5,412 3,562
Credit card expenses..................................................... 2,913 2,490 2,455
Communications........................................................... 2,635 2,476 1,816
Advertising.............................................................. 2,224 2,182 1,767
Losses and expenses on foreclosed real estate, net of gains.............. 1,927 1,302 792
Other expenses........................................................... 13,291 9,775 7,015
------- ------ ------
Total noninterest expense........................................... 105,741 91,566 67,734
------- ------ ------
Income before provision for income taxes and minority interest
in (income) loss of subsidiaries............................. 27,837 34,156 35,807
Provision for income taxes................................................... 6,960 11,038 12,012
------- ------ ------
Income before minority interest in (income) loss of subsidiaries... 20,877 23,118 23,795
Minority interest in (income) loss of subsidiaries.......................... (659) 1,353 237
------- ------ ------
Net income.......................................................... 20,218 24,471 24,032
Preferred stock dividends.................................................... 5,728 5,736 5,735
------- ------ ------
Net income available to common stockholders......................... $ 14,490 18,735 18,297
------- ------ ------
Earnings per common share:
Primary.................................................................. $ 612.46 791.82 773.31
Fully diluted............................................................ 598.54 758.66 734.80
====== ====== ======
Weighted average shares of common stock outstanding.......................... 23,661 23,661 23,661
====== ====== ======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Stockholder's Equity
(dollars expressed in thousands, except per share data)
Three years ended December 31, 1996
Class C Net fair
preferred Adjustable rate value adjust-
stock, preferred stock ment for total
increasing Class securities stock-
rate, conver- Common Capital Retained available holders'
redeemable tible Class B stock surplus earnings for sale equity
---------- ----- ------- ----- ------- -------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated balances, January 1, 1994........... $ 55,000 12,822 241 5,915 4,604 119,660 3,602 201,844
Year ended December 31, 1994:
Consolidated net income...................... -- -- -- -- -- 24,032 -- 24,032
Class C preferred stock dividends,
$2.25 per share............................. -- -- -- -- -- (4,950) -- (4,950)
Class A preferred stock dividends,
$1.20 per share............................ -- -- -- -- -- (768) -- (768)
Class B preferred stock dividends,
$.11 per share............................. -- -- -- -- -- (17) -- (17)
Effect of capital stock transactions of
majority-owned subsidiary................. -- -- -- -- (125) -- -- (125)
Net fair value adjustment for securities
available for sale........................ -- -- -- -- -- -- (2,704) (2,704)
------ ------ --- ----- ------ ------- ------ ------
Consolidated balances, December 31, 1994......... 55,000 12,822 241 5,915 4,479 137,957 898 217,312
Year ended December 31, 1995:
Consolidated net income...................... -- -- -- -- -- 24,471 -- 24,471
Class C preferred stock dividends,
$2.25 per share............................ -- -- -- -- -- (4,950) -- (4,950)
Class A preferred stock dividends,
$1.20 per share............................. -- -- -- -- -- (769) -- (769)
Class B preferred stock dividends,
$.11 per share............................. -- -- -- -- -- (17) -- (17)
Effect of capital stock transactions of
majority-owned subsidiary................. -- -- -- -- (172) -- -- (172)
Net fair value adjustment for securities
available for sale........................ -- -- -- -- -- -- (1,270) (1,270)
------ ------ --- ----- ------ ------- ------ ------
Consolidated balances, December 31, 1995......... 55,000 12,822 241 5,915 4,307 156,692 (372) 234,605
Year ended December 31, 1996:
Consolidated net income...................... -- -- -- -- -- 20,218 -- 20,218
Class C preferred stock dividends,
$2.25 per share............................ -- -- -- -- -- (4,942) -- (4,942)
Class A preferred stock dividends,
$1.20per share............................. -- -- -- -- -- (769) -- (769)
Class B preferred stock dividends,
$.11 per share............................. -- -- -- -- -- (17) -- (17)
Purchase and retirement of Class C
preferred shares.......................... (1,113) -- -- -- (26) -- -- (1,139)
Effect of capital stock transactions of
majority-owned subsidiary................. -- -- -- -- (992) -- -- (992)
Net fair value adjustment for securities
available for sale........................ -- -- -- -- -- -- 4,425 4,425
------- ------ --- ----- ----- ------- ----- -------
Consolidated balances, December 31, 1996......... $ 53,887 12,822 241 5,915 3,289 171,182 4,053 251,389
======= ====== === ===== ===== ======= ===== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Cash Flow
(dollars expressed in thousands)
Years ended December 31,
------------------------
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income.................................................................. $ 20,218 24,471 24,032
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of bank premises and equipment............. 5,784 5,534 4,164
Amortization, net of accretion........................................... 12,481 4,520 5,364
Originations and purchases of loans held for sale........................ (135,792) (67,005) (80,630)
Proceeds from the sale of loans held for sale............................ 113,074 207,077 167,942
Provision for possible loan losses....................................... 11,494 10,361 1,858
Provision for income taxes............................................... 6,960 11,039 12,012
Payments of income taxes................................................. (7,655) (1,105) (12,125)
(Increase) decrease in accrued interest receivable....................... (623) 1,320 (469)
Interest accrued on liabilities.......................................... 141,670 144,946 70,670
Payments of interest on liabilities...................................... (142,210) (145,066) (69,370)
Other operating activities, net.......................................... (6,637) (5,190) (883)
Minority interest in income (loss) of subsidiaries...................... 659 (1,353) (237)
------- ------- -------
Net cash provided by operating activities............................. 19,423 189,549 122,328
------- ------- -------
Cash flows from investing activities:
Cash paid for acquired entities, net of cash and cash equivalents received.. 10,715 54,458 (24,171)
Sales of investment securities of acquired entity........................... -- 88,334 133,990
Sales of investment securities available for sale........................... 91,147 279,537 145,757
Maturities of investment securities available for sale...................... 440,314 147,395 262,953
Maturities of investment securities held to maturity........................ 14,643 36,469 94,359
Purchases of investment securities available for sale....................... (527,091) (282,599) (235,093)
Purchases of investment securities held to maturity......................... (916) (2,397) (81,096)
Net (increase) decrease in loans............................................ 20,350 (71,211) (458,172)
Recoveries of loans previously charged-off.................................. 9,300 4,859 5,169
Purchases of bank premises and equipment.................................... (3,299) (5,337) (4,190)
Interest rate futures contracts, net........................................ -- (22,167) 7,469
Other investing activities.................................................. 10,657 3,946 (3,285)
------- ------- -------
Net cash provided by (used in) investing activities................... 65,820 231,287 (156,310)
------- ------- --------
Cash flows from financing activities:
Decrease in demand and savings deposits.................................. (20,466) (123,260) (77,075)
Increase (decrease) intime deposits...................................... (15,804) 55,885 38,151
Increase (decrease) in federal funds purchased.............................. (3,000) (67,300) 18,000
Increase (decrease) in Federal Home Loan Bank advances...................... (10,606) (170,644) 11,464
Increase (decrease) in securities sold under agreements to repurchase....... 13,525 (55,615) 40,762
Increase (decrease) in notes payable........................................ (13,284) 13,751 47,493
Purchase and retirement of Class C preferred shares......................... (1,139) -- --
Payment of preferred stock dividends........................................ (5,728) (5,736) (5,735)
------- ------- -------
Net cash provided by (used in) financing activities................... (56,502) (352,919) 73,060
------- -------- ------
Net increase in cash and cash equivalents............................. 28,741 67,917 39,078
Cash and cash equivalents, beginning of year.................................... 199,213 131,296 92,218
------- ------- ------
Cash and cash equivalents, end of year.......................................... $ 227,954 199,213 131,296
======= ======= =======
Noncash investing and financing activities:
Loans transferred to foreclosed real estate................................. $ 10,451 5,395 5,030
Loans to facilitate sale of foreclosed real estate.......................... -- 587 1,724
Investment securities transferred to available for sale..................... -- 174,113 --
Receivable from sale of investment securities............................... -- 41,265 --
Loans transferred to held for sale.......................................... 39,996 146,991 --
======= ======= =====
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
(1) Summary of Significant Accounting Policies
The accompanying consolidated financial statements of First Banks, Inc.
and subsidiaries (First Banks) 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 First Banks:
Basis of Presentation. The consolidated financial statements of First Banks
have been prepared in accordance with generally accepted accounting principles
and conform to predominant practices within the banking industry. Management of
First Banks 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 1995 and 1994 amounts have been reclassified to conform with
the classifications and format used for 1996.
Principles of Consolidation. The consolidated financial statements include
the accounts of First Banks, Inc. and all of its subsidiaries, net of minority
interest, as more fully described below. All significant intercompany accounts
and transactions have been eliminated in consolidation.
First Banks operates primarily through two wholly owned bank subsidiaries,
one wholly owned thrift subsidiary, one wholly owned bank holding company
subsidiary and two majority-owned bank holding company subsidiaries. First
Banks' subsidiary financial institutions (Subsidiary Banks) are:
First Bank, headquartered in St. Louis County, Missouri (First Bank
Missouri);
First Bank, headquartered in O'Fallon, Illinois (First Bank Illinois);
First Bank FSB, headquartered in St. Louis County, Missouri (First Bank
FSB);
First Banks America, Inc., headquartered in Houston, Texas (FBA);
CCB Bancorp, Inc., headquartered in Santa Ana, California (CCB); and
First Commercial Bancorp, Inc., headquartered in Sacramento, California
(FCB).
CCB Bancorp, Inc., a wholly owned bank holding company subsidiary, operates
through First Bank & Trust, headquartered in Santa Ana, California (FB&T). FBA,
a majority-owned bank holding company subsidiary, operates through BankTEXAS
N.A., headquartered in Houston, Texas (BTX) and Sunrise Bank of California,
headquartered in Roseville, California (Sunrise Bank). FCB, a majority-owned
bank holding company subsidiary, operates through First Commercial Bank,
headquartered in Sacramento, California (First Commercial). In addition to the
Subsidiary Banks, First Banks owns FirstServ, Inc. Through a facilities
management agreement with First Services, L.P., FirstServ, Inc. provides data
processing services and operational support for First 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. The Subsidiary Banks are required to maintain certain
daily reserve balances on hand in accordance with regulatory requirements. The
reserve balances maintained in accordance with such requirements at December 31,
1996 and 1995 were $41.4 million and $38.2 million, respectively.
Investment Securities. The classification of investment securities as
available for sale or held to maturity is determined at the date of purchase.
First Banks does not engage in the trading of investment securities. Investment
securities designated as available for sale, which include any security which
First Banks has no immediate plan to sell but which may be sold in the future
under different circumstances, are stated at fair value. Realized gains and
losses are included in noninterest income upon commitment to sell, based on the
amortized cost of the individual security sold. Unrealized gains and losses are
recorded, net of related income tax effects, in a separate component of
stockholders' equity. All previous fair value adjustments included in the
separate component of stockholders' equity are reversed upon sale.
Investment securities designated as held to maturity, which include any
security for which First Banks has the positive intent and ability to hold to
maturity, are stated at cost, net of amortization of premiums and accretion of
discounts computed on the level yield method taking into consideration the level
of current and anticipated prepayments.
As more fully described in Note 3 to the accompanying consolidated
financial statements, First Banks reclassified $174.1 million of
held-to-maturity investment securities to available-for-sale investment
securities on December 31, 1995.
Loans Held for Portfolio. 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 First Banks has the ability and it is management's intention
to hold them to maturity.
<PAGE>
The accrual of interest on loans is discontinued when it appears that
interest or principal may not be paid in a timely manner in the normal course of
business. Generally, payments received on nonaccrual loans are recorded as
principal reductions. Interest income is recognized after all principal has been
repaid or an improvement in the condition of the loan has occurred which would
warrant resumption of interest accruals.
First Banks adopted the provisions of Statement of Financial Accounting
Standards (SFAS) 114, Accounting by Creditors for Impairment of a Loan and SFAS
No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures, which amends SFAS 114, on January 1, 1995. The initial
application of SFAS 114 and SFAS 118 did not have a material effect on First
Banks' financial position and resulted in no additional provision for possible
loan losses. First Banks has elected to continue to use its existing methods for
recognizing interest 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.
Loan Servicing Income. Loan servicing income represents fees earned for
servicing real estate mortgage loans owned by investors, net of federal agency
guarantee fees, interest shortfall, and amortization of the cost of purchased
loan servicing rights. The fees are generally calculated on the outstanding
principal balance of the loans serviced and are recorded as income when earned.
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 held for portfolio and held for sale, 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 identified problem 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 five to
50 years and equipment over two to seven years.
Intangibles Associated With the Purchase of Subsidiaries. Intangibles
associated with the purchase of subsidiaries include excess of cost over net
assets acquired and deposit base premium. The excess of cost over net assets
acquired of purchased subsidiaries is amortized using the straight-line method
over the estimated periods to be benefited, which range from approximately 10 to
15 years.
Mortgage Servicing Rights. Mortgage servicing rights are amortized in
proportion to the related estimated net servicing income on a disaggregated,
discounted basis over the estimated lives of the related mortgages considering
the level of current and anticipated repayments, which range from five to 12
years.
Other Real Estate. Other real estate, 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 other real estate 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.
Income Taxes. First Banks, Inc. and its eligible subsidiaries file a
consolidated federal income tax return and unitary or consolidated state income
tax returns in California, Illinois and Missouri. In addition, First Bank
Missouri and First Bank FSB are subject to a financial institutions tax which is
based on income. Additionally, included in the unitary Illinois and California
income tax returns is the investment in FBA as First Banks' ownership is greater
than 50%. FBA and its eligible subsidiaries file a consolidated federal income
tax return which is separate from that of First Banks.
Earnings Per Common Share. Earnings per common share data is calculated
using the weighted average number of shares of common stock outstanding during
each period. The Class A, Class B, and Class C preferred stock are not common
stock equivalents. The Class A preferred stock has been reflected in fully
diluted earnings per share because of its conversion feature, using the
if-converted method.
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.
<PAGE>
Financial Instruments With Off-Balance-Sheet Risk. First Banks utilizes
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. Risk that interest rates may move
unfavorably from the perspective of First Banks is defined as interest rate
risk. The risk that a counterparty to an agreement entered into by First Banks
may default is defined as credit risk. These financial instruments include
interest rate swap, floor and cap agreements; interest rate futures contracts
and forward contracts to sell mortgage-backed securities.
First Banks 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.
Interest Rate Swap, Floor and Cap Agreements
Interest rate swap, floor and 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 swap, floor and cap agreements are amortized
to interest expense over the life of the agreement using the interest method. In
the event of early termination of these derivative financial instruments, the
net proceeds received or paid are deferred and amortized over the shorter of the
remaining contract life of the derivative financial instrument or the maturity
of the related liability. If, however, the amount of the underlying hedged
liability is repaid, then the gains or losses on the agreements are recognized
immediately in the consolidated statements of income. The unamortized premiums,
fees paid and deferred losses on early terminations are included in other assets
in the accompanying consolidated balance sheets. Interest Rate Futures Contracts
Gains and losses on interest rate futures, which qualify as hedges, are
deferred. Amortization of the net deferred gains or losses is applied to the
interest income of the securities available-for-sale portfolio using the
straight-line method. The net deferred gains and losses are applied to the
carrying value of the securities available-for-sale portfolio as part of the
mark-to-market valuation. In the event the hedged assets are sold, the related
gain or loss of the interest rate futures contracts is immediately recognized in
the consolidated statements of income.
Forward Contracts to Sell Mortgage-Backed Securities
Gains and losses on forward contracts, which qualify as hedges, are
deferred. The net unamortized balance of such deferred gains and losses is
applied to the carrying value of the loans held for sale as part of the lower of
cost or market valuation.
(2) Acquisitions
On January 3, 1994, First Banks completed its acquisition of First Federal
Savings Bank of Proviso Township, Chicago, Illinois (First Federal) in exchange
for $23.1 million in cash. First Federal's total assets were $230 million,
consisting primarily of residential loans of $54 million and investment
securities and federal funds sold of $165 million. First Federal, which was
subsequently merged with First Bank FSB, conducts business from one banking
location centrally located in the Hillside community of the greater Chicago
metropolitan area. The excess of the cost over the fair value of net assets
acquired was approximately $450,000 and is being amortized over 10 years.
On March 31, 1994, First Banks completed its acquisition of Heritage
National Bank, St. Louis, Missouri (Heritage) in exchange for $6.5 million in
cash. Heritage's total assets were $63.8 million, consisting primarily of loans
of $32.2 million and investment securities and federal funds sold of $27.2
million. Heritage was merged into First Bank Missouri. The excess of the cost
over the fair value of the net assets acquired was approximately $2.8 million
and is being amortized over 10 years.
On June 3, 1994, First Banks completed its acquisition of Farmers
Bancshares, Inc., Breese and Valmeyer, Illinois (Farmers) in exchange for $8.1
million in cash. Farmers' total assets were $60.7 million, consisting primarily
of loans of $27.1 million and investment securities and federal funds sold of
$31.0 million. Farmers was merged into First Bank Illinois. The excess of the
cost over the fair value of the net assets acquired was approximately $1.9
million and is being amortized over 10 years.
On August 31, 1994, First Banks completed its acquisition of approximately
65.05% of the voting stock of FBA in exchange for $30 million in cash. At the
time of the transaction, FBA operated through its wholly owned banking
subsidiary, BTX. Total assets were $367 million, consisting primarily of loans
of $177 million and investment securities of $167 million. BTX conducts business
<PAGE>
primarily from six banking locations in Dallas and Houston, Texas. The outside
investors' interest in FBA is reflected as minority interest in the accompanying
consolidated financial statements. The excess of the cost over the fair value of
the net assets acquired was approximately $4.0 million and is being amortized
over 10 years.
On November 30, 1994, First Banks acquired 96.3% of St. Charles Federal in
exchange for $19.3 million in cash. The purchase, combined with the 3.7% of the
stock of St. Charles Federal previously acquired by First Banks, increased First
Banks' ownership of St. Charles Federal to 100%. St. Charles Federal had total
assets of approximately $90.0 million. The excess of the cost over the fair
value of the net assets acquired was approximately $3.9 million and is being
amortized over 12 years.
On January 4, 1995, First Banks completed its acquisition of River Valley
Holdings, Inc. and its wholly owned subsidiary, River Valley Savings Bank,
F.S.B. (River Valley), for a purchase price of $37.4 million. River Valley's
total assets were $412 million, consisting primarily of residential loans of
$225 million and investment securities of $125 million. River Valley was merged
with First Bank FSB. In addition, River Valley operated a mortgage banking
division which serviced approximately $669 million of residential loans for
others which was merged into and centralized with First Banks' mortgage banking
division effective upon completion of the acquisition. The excess of the cost
over the fair value of the net assets acquired was approximately $11.5 million
and is being amortized over 15 years.
On March 15, 1995, First Banks completed its acquisition of CCB and its
wholly owned subsidiary, Commercial Center Bank, in exchange for $30.4 million
in cash. CCB was headquartered in Santa Ana, California and operated three
banking locations in Santa Ana, San Jose and Walnut Creek. The acquisition of
CCB represents First Banks' initial entry into the southern California market.
CCB's total assets were $193.4 million, consisting primarily of loans and
investment securities of $114.5 million and $31.1 million, respectively. The
excess of the fair value of the net assets acquired over the cost was
approximately $3.3 million and is being accreted to income over 10 years.
On April 28, 1995, First Banks completed its acquisition of HNB Financial
Group, Huntington Beach, California (HNB) and its wholly owned subsidiary,
Huntington National Bank, in exchange for $10.9 million in cash. HNB's total
assets were $88.0 million, consisting primarily of loans and investment
securities of $62.8 million and $10.5 million, respectively. The excess of the
cost over the fair value of the net assets acquired was approximately $1.1
million and is being amortized over 10 years. HNB and Huntington National Bank
were merged into CCB and FB&T, formerly Commercial Center Bank, respectively, on
August 18, 1995.
On May 31, 1995, First Banks completed its acquisition of Irvine City
Financial, Irvine, California (Irvine) and its wholly owned subsidiary, Irvine
City Bank, f.s.b., in exchange for $4.2 million in cash. Irvine's total assets
were $83.3 million, consisting primarily of loans of $68.7 million and
investment securities and federal funds sold of $10.6 million. The purchase
price approximated the fair value of the net assets acquired. Irvine and Irvine
City Bank, f.s.b. were merged into CCB and FB&T, respectively, in August 1995.
During 1995, First Banks completed its investment in QCB Bancorp (QCB), a
California corporation and sole shareholder of Queen City Bank, N.A. (Queen
City), Long Beach, California. QCB's total assets were $56.2 million, consisting
primarily of loans of $35.1 million and cash and cash equivalents and investment
securities of $20.5 million. The excess of the cost over the fair value of the
net assets acquired was approximately $465,000 and is being amortized over 10
years. QCB was merged into CCB in March 1996. Queen City was merged into FB&T in
April 1996.
On August 7, 1995, First Banks executed an Amended and Restated Stock
Purchase Agreement (FCB Agreement) with FCB. Under the FCB Agreement and
subsequent agreements entered into with FCB, FCB and its subsidiary, First
Commercial, were recapitalized through a series of transactions. As a result of
these transactions, First Banks owned 93.29% of the outstanding common stock of
FCB and $6.5 million of convertible debentures maturing in October and December
2000. The debentures bear interest at 12% annually. Interest thereon is payable
in cash only if permitted by the appropriate regulatory authorities of FCB and
First Commercial and their Boards of Directors. The debentures and any accrued
but unpaid interest thereon must be converted at maturity, but may be converted
at any time prior thereto at the option of First Banks, at $.10 per share.
FCB's total assets were $169.0 million, consisting primarily of loans, cash
and cash equivalents and investment securities of $84.6 million, $50.3 million
and $30.7 million, respectively. The excess of the cost over the fair value of
the net assets acquired was approximately $2.4 million and is being amortized
over 10 years.
The FCB Agreement also provided for FCB to offer to its shareholders, other
than First Banks, rights to acquire an aggregate of $5 million of newly issued
common stock at $.10 per share. A maximum of $1.0 million of this offering not
otherwise subscribed to was offered to individuals who were not stockholders of
FCB. In addition, $969,000 of common stock was offered in exchange for certain
outstanding dividend obligations and accrued interest thereon of FCB. FCB
<PAGE>
completed the offering during 1996 and issued approximately 36 million shares in
exchange for $2.97 million in cash and $643,000 of outstanding dividend
obligations. As a result of the offering, First Banks' ownership was reduced to
61.46% at December 31, 1996, prior to the conversion of the debentures, or
77.24% if the debentures had been converted as of December 31, 1996.
On September 1, 1995, First Banks completed its acquisition of La Cumbre
Savings Bank F.S.B. (La Cumbre) in exchange for $5.5 million in cash. La
Cumbre's total assets were $144 million, consisting primarily of loans of $131
million and cash and cash equivalents and investment securities of $7.6 million.
The excess of the cost over the fair value of the net assets acquired was
approximately $697,000 and is being amortized over 10 years. La Cumbre operated
as a wholly owned thrift subsidiary of CCB until it was merged into FB&T in
January 1996.
The aforementioned acquisitions were accounted for using the purchase
method of accounting. The acquisitions were funded by available cash, proceeds
from the maturity of short-term investments, borrowings under First Banks'
credit agreement and notes payable to former shareholders.
The following unaudited summary information presents the pro forma results
of operations of First Banks combined with the acquisitions completed during
1995 as if First Banks had completed the transactions on January 1, 1994. The
pro forma results of operations also include FBA, which was acquired by First
Banks on August 31, 1994, for the periods prior to the acquisition date.
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
---- ----
(dollars expressed in thousands,
except per share data)
<S> <C> <C>
Net interest income...................................................... $127,602 136,221
Provision for possible loan losses....................................... 24,770 16,141
Net income (loss)........................................................ 4,018 (4,599)
Preferred stock dividends................................................ 5,736 5,736
Net loss available to common stockholders................................ (1,718) (10,335)
-------- -------
Weighted average shares of common stock outstanding...................... 23,661 23,661
======== =======
Net loss per common share:
Primary ............................................................. $ (72.60) (436.76)
Fully diluted........................................................ (36.91) (368.67)
====== =======
</TABLE>
The unaudited pro forma condensed statements of income reflect the
application of the purchase method of accounting and certain other assumptions.
The purchase accounting adjustments reflect the assets acquired and liabilities
assumed at fair value. Purchase accounting adjustments have been applied to
investment securities, loans, bank premises and equipment, deferred tax assets
and liabilities and excess cost required 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 First
Banks. The application of the purchase method of accounting will not have a
material impact on the future operating results of First Banks.
On November 1, 1996, First Banks completed its acquisition of Sunrise
Bancorp, a California corporation (Sunrise), and its wholly owned subsidiary,
Sunrise Bank, a state chartered 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
First Banks' credit agreement. The transaction was 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 date, and the assets acquired and
liabilities assumed were recorded at fair value at the acquisition date. The
excess of the fair value of the net assets acquired over the cost was $3.2
million and is being amortized to expense over 15 years.
Sunrise was merged into a wholly owned subsidiary of FBA. Sunrise Bank
operates as a wholly owned indirect subsidiary of FBA and conducts its business
through two banking locations in Roseville and Citrus Heights, California and
one loan production office in San Francisco, California.
<PAGE>
(3) Investments in Debt and Equity Securities
Securities Available for Sale. The amortized cost, contractual maturity,
unrealized gains and losses and fair value of investment securities available
for sale at December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Total
Maturity After amor- Gross Weighted
1 Year 1-5 5-10 10 tized unrealized Fair average
or less years years years cost Gains Losses value yield
------- ----- ----- ----- ---- ----- ------ ----- -----
(dollars expressed in thousands)
December 31, 1996:
Carrying value:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury.................. $ 115,675 31,259 -- -- 146,934 166 (73) 147,027 5.38%
U.S. government agencies
and corporations:
Mortgage-backed............. 1,504 70,953 26,500 106,223 205,180 416 (1,383) 204,213 6.11
Other....................... 65,351 81,722 -- -- 147,073 496 (220) 147,349 5.73
Other.......................... 28 704 -- 10 742 2 (2) 742 5.89
Equity investments in other
financial institutions....... 5,256 -- -- -- 5,256 6,808 -- 12,064 4.93
Federal Home Loan Bank and
Federal Reserve Bank stock... 21,210 -- -- -- 21,210 -- -- 21,210 6.92
------- ------- ------ ------- ------- ----- ----- ------ ----
Total................. $ 209,024 184,638 26,500 106,233 526,395 7,888 (1,678) 532,605 5.82
======= ======= ====== ======= ======= ===== ====== ======= ====
Market value:
Debt securities................ 182,629 184,361 26,320 106,021
Equity securities.............. 33,274 -- -- --
------- ------- ------ -------
Total................. $ 215,903 184,361 26,320 106,021
======= ======= ====== =======
Weighted average yield............... 5.44% 5.93% 5.88% 6.37%
==== ==== ==== ====
December 31, 1995:
Carrying value:
U.S. Treasury.................. $ 20,080 23,823 -- -- 43,903 134 (25) 44,012 5.54%
U.S. government agencies and
corporations:
Mortgage-backed............. 2,863 56,178 29,268 48,897 237,206 1,436 (3,146) 235,496 6.32
Other....................... 92,343 67,926 -- -- 160,269 766 (738) 160,297 5.82
Other.......................... 2,383 804 100 9 3,296 7 -- 3,303 5.11
Equity investments in other
financial institutions....... 5,256 -- -- -- 5,256 5,254 -- 10,510 3.97
Federal Home Loan Bank and
Federal Reserve Bank stock... 18,173 -- -- -- 18,173 -- -- 18,173 7.02
Net deferred loss on interest
rate futures contracts....... 2,059 2,517 -- -- 4,576 -- (4,576) -- --
------- ------ ------ ------- ------- ----- ------ ------ -----
Total................. $ 143,157 151,248 29,368 148,906 472,679 7,597 (8,485) 471,791 6.07
======= ======= ====== ======= ======= ===== ====== ======= ====
Market value:
Debt securities................ 117,693 147,690 29,315 148,410
Equity securities.............. 28,683 -- -- --
------- ------- ------ -------
Total................. $ 146,376 147,690 29,315 148,410
======= ======= ====== =======
Weighted average yield............... 5.88% 5.49% 6.45% 6.44%
==== ==== ==== ====
</TABLE>
<PAGE>
Securities Held to Maturity. The amortized cost, contractual maturity,
unrealized gains and losses and fair value of investment securities held to
maturity at December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Total
Maturity After amor- Gross Weighted
1 Year 1-5 5-10 10 tized unrealized Fair average
or less years years years cost Gains Losses value yield
------- ----- ----- ----- ---- ----- ------ ----- -----
(dollars expressed in thousands)
December 31, 1996:
Carrying value :
State and political
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
subdivisions........... $ 589 4,033 13,171 2,403 20,196 485 (70) 20,611 5.56%
==== ===== ====== ===== ====== === === ====== ====
Market value :
Debt securities.......... $ 592 4,098 13,360 2,561
==== ===== ====== =====
Weighted average yield......... 5.88% 5.82% 5.20% 7.01%
==== ==== ==== ====
December 31, 1995:
Carrying value:
U.S. Treasury............ $ 7,018 -- -- -- 7,018 63 -- 7,081 6.51%
U.S. government agencies
and corporations :
Other................. 2,004 1,936 -- -- 3,940 -- (16) 3,924 4.83
State and political
subdivisions........... 2,787 3,545 13,781 5,461 25,574 509 (67) 26,016 5.55
------ ----- ------ ----- ------ --- --- ------
Total................. $ 11,809 5,481 13,781 5,461 36,532 572 (83) 37,021 5.93
====== ===== ====== ===== ====== === === ====== ====
Market value :
Debt securities.......... $ 11,906 5,572 14,035 5,508
====== ===== ====== =====
Weighted average yield......... 6.01% 5.78% 5.18% 5.25%
==== ==== ==== ====
</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. The stated maturity of the net
deferred losses on interest rate futures contracts represents the period the net
deferred losses are expected to be amortized into interest income.
Proceeds from the sales of debt securities classified as available for sale
during 1996 were $100.0 million. Gross gains of $556,000 and gross losses of
$166,000 were realized on these sales. The gross gains, net of gross losses,
were offset by the recognition of $701,000 of hedging losses. Gains and losses
were computed using the specific identification basis for each security sold.
Proceeds from the sales of debt securities classified as available for sale
during 1995 were $388.0 million. Gross gains of $9.1 million and gross losses of
$900,000 were realized on those sales. The gross gains, net of gross losses,
were offset by the recognition of $10.1 million of hedging losses. Proceeds from
the sales of equity securities classified as available for sale during 1995 were
$20.5 million. Gross gains of $1.3 million and gross losses of $200,000 were
realized on those sales. Gains and losses were computed using the specific
identification basis for each security sold.
During 1995, proceeds from the sales of debt securities classified as
available for sale totaling $1.3 million were previously classified as held to
maturity. Gross gains realized from the sales of these securities were $36,000.
These securities were transferred from held to maturity to available for sale in
accordance with the provisions of a special report issued by the FASB, A Guide
to Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities (Special Report).
<PAGE>
The Special Report provided an enterprise the opportunity to reclassify any
of its investment securities through December 31, 1995 without bringing into
question the intent of an enterprise to hold other debt securities to maturity.
Under the Special Report, First Banks reclassified $174.1 million of securities
from held to maturity to available for sale, of which $1.3 million were sold.
Accordingly, at December 31, 1995, debt securities of $172.8 million previously
classified as held to maturity were classified as available for sale. The market
valuation account, for the securities reclassified to available for sale
remaining in the portfolio at December 31, 1995, was adjusted by $2.7 million,
representing a decrease in the recorded balance of such securities at December
31, 1995 to their fair value on that date; the deferred tax asset of $950,000
was recorded to reflect the tax effect of the market valuation account
adjustment; and the net decrease resulting from the reclassification at December
31, 1995 of $1.8 million was reflected within a separate component of
stockholders' equity.
Proceeds from the sales of debt securities classified as available for sale
during 1994 were $261.1 million. Gross gains of $1.7 million and gross losses of
$3.5 million were realized on those sales. Proceeds from the sales of equity
securities classified as available for sale during 1994 were $8.4 million. Gross
gains of $2.1 million and gross losses of $96,000 were realized on those sales.
Proceeds from the sales of debt securities classified as held to maturity
during 1994 were $10.3 million. Gross losses of $488,000 were realized on those
sales. There were no gains realized on those sales. These sales were allowable
under SFAS 115 as they related to investment securities acquired in connection
with the acquisition of First Federal and the sale was necessary in order to
maintain First Banks' existing interest rate risk position.
Various subsidiaries of First Banks maintain investments in the Federal
Home Loan Bank (FHLB) or the Federal Reserve Bank (FRB). The investment in FHLB
stock is maintained at a minimum amount equal to the greater of 1% of the
aggregate outstanding balance of the applicable Subsidiary Bank's loans secured
by residential real estate, or 5% of advances from the FHLB to each Subsidiary
Bank. First Bank FSB, First Bank Missouri, First Bank Illinois, FB&T and BTX are
members of the FHLB system. The investment in the FRB stock is maintained at a
minimum of 6% of the applicable Subsidiary Bank's capital stock and capital
surplus. First Bank Missouri and BTX are members of the FRB system.
Investment securities with a carrying value of approximately $212.1 million
and $230.2 million were pledged in connection with deposits of public and trust
funds and for other purposes as required by law at December 31, 1996 and 1995,
respectively.
<PAGE>
(4) Loans
Changes in the allowance for possible loan losses for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(dollars expressed in thousands)
<S> <C> <C> <C> <C>
Balance, January 1..................................... $ 52,665 28,410 23,053
Acquired allowances for possible loan losses........... 2,338 24,655 5,026
------ ------ ------
55,003 53,065 28,079
------ ------ ------
Loans charged-off...................................... (29,016) (15,620) (6,696)
Recoveries of loans previously charged-off............. 9,300 4,859 5,169
------- ------ ------
Net loans charged-off.................................. (19,716) (10,761) (1,527)
Provision charged to operations........................ 11,494 10,361 1,858
------ ------ ------
Balance, December 31................................... $ 46,781 52,665 28,410
====== ====== ======
</TABLE>
At December 31, 1996 and 1995, First Banks had $30.3 million and $39.4
million, respectively, of loans on a nonaccrual status. Interest on nonaccrual
loans, which would have been recorded under the original terms of the loans, was
$4.2 million for the years ended December 31, 1996 and 1995 and $1.7million for
the period December 31, 1994. Of these amounts, $2.7 million, $1.9 million and
$982,000 were actually recorded as interest income on such loans in 1996,
1995and 1994, respectively. At December 31, 1996 and 1995, First Banks had
impaired loans in the amount of $30.3 million and $39.4 million, respectively,
consisting of loans on nonaccrual status. The impaired loans had no specific
reserves at December 31, 1996 and 1995. The average recorded investment in
impaired loans was $36.2 million and $34.3 million for the years ended December
31, 1996 and 1995, respectively. The amount of interest income recognized using
a cash basis method of accounting during the time these loans were impaired was
$2.7 million and $1.9 million in 1996 and 1995, respectively.
First Banks' primary market areas are the states of Missouri, Illinois and
California. At December 31, 1996 and 1995, 88% and 93% of the total loan
portfolio and 92% and 96% of the commercial, financial and agricultural loan
portfolio were to borrowers within these regions, respectively.
Real estate lending constituted the only other significant concentration of
credit risk. Real estate loans comprised approximately 67% and 73% of the
consolidated loan portfolio at December 31, 1996 and 1995, respectively, of
which 51% and 58% were consumer-related in the form of residential real estate
mortgages and home equity lines of credit.
First Banks is, in general, a secured lender. At December 31, 1996 and
1995, 97% 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.
<PAGE>
(5) Mortgage Banking Activities
At December 31, 1996 and 1995, First Banks serviced loans for others
amounting to $847 million and $857 million, respectively. Borrowers' escrow
balances held by First Banks on such loans were $4.2 million and $4.5 million at
December 31, 1996 and 1995, respectively.
Changes in the mortgage servicing rights for the years ended December 31
were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(dollars expressed in thousands)
<S> <C> <C> <C>
Balance, January 1................................... $ 12,122 5,755
Acquired purchased mortgage servicing rights........ -- 10,601
Purchases of mortgage servicing rights............... 65 685
Sales of mortgage servicing rights .................. -- (2,771)
Amortization......................................... (1,957) (2,148)
------ ------
Balance, December 31................................. $ 10,230 12,122
====== ======
</TABLE>
(6) Bank Premises and Equipment
Bank premises and equipment were comprised of the following at December
31:
<TABLE>
<CAPTION>
1996 1995
---- ----
(dollars expressed in thousands)
<S> <C> <C>
Land........................................................ $ 13,431 12,393
Buildings and improvements.................................. 39,256 40,405
Furniture, fixtures and equipment........................... 36,329 37,211
Leasehold improvements...................................... 6,916 6,582
Construction in progress.................................... 2,149 985
------ ------
98,081 97,576
Less accumulated depreciation and amortization.............. 50,003 47,298
------ ------
Bank premises and equipment, net........... $ 48,078 50,278
====== ======
</TABLE>
Total rent expense was $4.2 million, $3.2 million and $1.1 million for the
years ended December 31, 1996, 1995 and 1994, respectively.
(7) Federal Home Loan Bank Advances
<TABLE>
<CAPTION>
Advances from the FHLB of Des Moines, Dallas and San Francisco at December
31 are summarized as follows:
1996 1995
---- ----
(dollars expressed in thousands)
Advances under a $25 million revolving variable rate line of
<S> <C>
credit maturing July 1997.......................................... $ 23,532 --
Adjustable-rate advances, maturing from December 1996 through
December 1997...................................................... 10,000 44,220
Fixed-rate advances, maturing May 1998 .................................. 5,745 5,663
------ ------
Total................................................. $ 39,277 49,883
====== ======
</TABLE>
<PAGE>
All stock in the FHLB and first mortgage loans with principal balances
aggregating 150% of outstanding and available advances are pledged as collateral
to secure outstanding advances. In addition, investment securities have been
pledged to collateralize $5.7 million and $5.7 million of advances which had an
aggregate market value of $7.6 million and $8.1 million at December 31, 1996 and
1995, respectively. The average rates paid on advances outstanding during the
years ended December 31, 1996, 1995 and 1994 were 6.2%, 6.3% and 5.6%,
respectively.
(8) Notes Payable
Notes payable include a Revolving Line and Term Credit Agreement (Credit
Agreement), promissory notes payable to former shareholders of acquired entities
and convertible subordinated debentures.
First Banks' Credit Agreement, dated July 18, 1996, replaced the revolving
credit agreement outstanding dated July 14, 1995. The Credit Agreement provides
a $40 million revolving loan commitment and a $50 million term loan. Interest
under the revolving loan commitment and the term loan is payable at the lead
bank's corporate base rate or, at the option of First Banks, is payable at the
London Interbank Offered Rate plus 1.50% and 1.25%, respectively, and is paid
monthly. Loans may be made under the revolving loan commitment until July 11,
1997 at which date the principal and accrued interest is due and payable. The
term loan requires quarterly principal payments of $2.5 million and matures on
July 12, 2000, at which date the remaining principal and accrued interest is due
and payable. Loans under the Credit Agreement are secured by all of the stock of
the Subsidiary Banks which is owned by First Banks. Borrowings outstanding under
the Credit Agreement were $75.0 million and $66.3 million at December 31, 1996
and 1995, respectively. See Note 21 to the accompanying consolidated financial
statements regarding the subsequent repayments of balances outstanding under the
Credit Agreement.
<PAGE>
The Credit Agreement requires maintenance of certain minimum capital ratios
for each financial institution subsidiary. In addition, it prohibits the payment
of dividends on First Banks' common stock. At December 31, 1996 and 1995, First
Banks and the Subsidiary Banks were in compliance with all restrictions and
requirements in the Credit Agreement.
The promissory notes and convertible subordinated debentures totaled $1.3
million and $21.8 million at December 31, 1996 and 1995, respectively. Interest
under the promissory notes are payable under similar terms as the Credit
Agreement. The convertible subordinated debentures were repaid in May 1996.
The average balance and maximum month-end balance of the notes payable
outstanding for the years ended December 31 were as follows:
1996 1995
---- ----
(dollars expressed in thousands)
Average balance $ 76,739 80,647
Maximum month-end balance 86,899 89,811
====== ======
The average rates paid on notes payable outstanding during the years ended
December 31, 1996, 1995 and 1994 were 7.15%, 7.22% and 7.17%, respectively.
(9) Income Taxes
Income tax expense (benefit) attributable to income from continuing
operations for the years ended December 31 consists of :
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1996 1995 1994
---- ---- ----
(dollars expressed in thousands)
Current income taxes:
<S> <C> <C> <C>
Federal..................................................... $ 6,106 2,638 11,978
State....................................................... 1,068 870 906
----- ----- ------
7,174 3,508 12,884
----- ----- ------
Deferred income tax expense (benefit):
Federal..................................................... 1,837 8,584 (872)
State....................................................... 3,192 (94) --
----- ---
5,029 8,490 (872)
----- ----- ------
Reduction in valuation allowance................................ (5,243) (960) --
------ ------ ------
Total............................................... $ 6,960 11,038 12,012
====== ====== ======
</TABLE>
<PAGE>
The federal income tax rates and amounts are reconciled with the effective
income tax rates and amounts as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1996 1995 1994
---- ---- ----
% of % of % of
pretax pretax pretax
Amount income Amount income Amount income
------ ------ ------ ------ ------ ------
(dollars expressed in thousands)
Income before provision for income
taxes and minority interest in (income)
<S> <C> <C> <C>
loss of subsidiaries.................. $27,837 $34,156 $35,807
======= ======= =======
Taxes on income calculated at statutory rates 9,743 35.0% 11,955 35.0% 12,532 35.0%
Effects of differences in tax reporting:
Tax-exempt interest income............. (730) (2.6) (817) (2.4) (795) (2.2)
Tax preference adjustment of
interest income..................... 82 .3 99 .3 78 .2
Amortization of excess cost............ 729 2.6 645 1.8 152 .4
State income taxes..................... 715 2.6 504 1.5 589 1.6
Change in deferred valuation allowance. (5,243) (18.8) (960) (2.8) -- --
Other, net............................. 1,664 5.9 (388) (1.1) (544) (1.5)
----- ---- ---- ---- ---- ----
Provision for income taxes..... $ 6,960 25.0% $11,038 32.3% $12,012 33.5%
===== ==== ======= ==== ======= ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities for periods
after the adoption of SFAS 109 are below. The net deferred tax assets reflect
amounts attributable to entities acquired in purchase transactions.
<TABLE>
<CAPTION>
December 31,
1996 1995
(dollars expressed in thousands)
Deferred tax assets:
<S> <C> <C>
Allowance for possible loan losses.................................... $ 19,421 21,642
Other real estate..................................................... 2,179 2,736
Alternative minimum tax credits....................................... 2,102 1,754
Book losses on investment securities currently not allowable
for tax purposes................................................... 1,134 --
Net fair value adjustment for securities available for sale........... -- 329
Net operating loss carryforwards...................................... 33,821 36,145
Other................................................................. 4,276 3,081
------- -------
Total gross deferred tax assets......................... 62,933 65,687
Less valuation allowance.............................................. (19,527) (24,111)
------- -------
Gross deferred tax assets, net of valuation allowance... 43,406 41,576
------- -------
Deferred tax liabilities:
Depreciation on bank premises and equipment........................... 2,231 2,467
FHLB stock dividends.................................................. 1,063 997
State taxes........................................................... 354 1,660
Net fair value adjustment for securities available for sale........... 2,207 --
Book losses on investment securities currently not
allowable for tax purposes......................................... -- 266
Other................................................................. 339 1,393
Total gross deferred tax liabilities.................... 6,194 6,517
Net deferred tax assets................................. $ 37,212 35,059
====== ======
</TABLE>
At December 31, 1996 and 1995, First Banks has separate limitation year
(SRLY) net operating loss (NOL) carryforwards of $60.1 million. These SRLY
carryforwards were acquired with the acquisitions occurring from 1992 through
1995 and their utilization is subject to annual limitations. Also acquired in
the acquisitions are alternative minimum tax credits of $1.8 million. These
credits are also subject to annual limitations.
<PAGE>
At December 31, 1996 and 1995, for federal income taxes purposes, First
Banks had NOL carryforwards of approximately $60.1 million and $70.6 million,
respectively, exclusive of the NOL carryforwards available to FBA and FCB as
further described below. The NOL carryforwards for First Banks expire as
follows:
(dollars expressed
in thousands)
Year ending December 31:
2001.............................................. $ 315
2002.............................................. 5,582
2003.............................................. 7,470
2004.............................................. 7,619
2005 - 2009....................................... 39,117
------
$ 60,103
======
With the completion of the acquisition of FBA, the NOL carryforwards
generated prior to the transaction are 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 FBA and do not affect the
taxable income of First Banks.
At December 31, 1996 and 1995, for federal income tax purposes, FBA had
NOL carryforwards of approximately $35.4 million and $32.7 million,
respectively. The NOL carryforwards at December 31, 1996 expire as follows:
(dollars expressed
in thousands)
Year ending December 31:
1998...................................... $ 4,140
1999...................................... 2,641
2000...................................... 103
2001 - 2010............................... 28,527
------
$ 35,411
======
The remaining net deferred tax assets of FBA were reevaluated to determine
whether it is more likely than not that the deferred tax assets will be
recognized in the future. Taking all positive and negative criteria into
consideration, it was determined that the valuation allowance established for
FBA should remain at $2.7 million.
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 First Banks.
At December 31, 1996, for federal income tax purposes, FCB had NOL
carryforwards of approximately $1.1 million. The NOL carryforwards expire as
follows:
(dollars expressed in thousands)
Year ending December 31:
2008...................................... $ 363
2009...................................... 747
-----
$ 1,110
=====
The realization of First Banks' net deferred tax assets is based on the
availability of carrybacks to prior taxable periods, the anticipation of future
taxable income in certain periods and the utilization of tax planning
strategies. Management has determined that it is more likely than not that the
net deferred tax assets relating to entities owned prior to 1995 can be
supported by carrybacks to federal taxable income in the three-year federal
carryback period and by expected future taxable income which will exceed amounts
necessary to fully realize remaining deferred tax assets resulting from NOL
carryforwards and the scheduling of temporary differences. However, it has been
determined that the net deferred tax assets of certain entities acquired in 1995
and 1996 should not be fully valued until they can provide an earnings history
sufficient to support their respective net deferred tax asset. A valuation
reserve was determined using the same criteria as used for other First Bank
entities. This valuation reserve is shown as an addition to the valuation
allowance in the following schedule.
<PAGE>
<TABLE>
<CAPTION>
Changes to the deferred tax assets valuation allowance are as follows:
Years ended December 31,
------------------------
1996 1995
---- ----
(dollars expressed in thousands)
<S> <C> <C>
Balance, beginning of year............................................ $ 24,111 2,731
Current year deferred provision, change in deferred
tax valuation allowance............................................ (5,243) (960)
Purchase acquisitions................................................. 659 22,340
------ ------
Balance, end of year.................................................. $ 19,527 24,111
====== ======
</TABLE>
The valuation allowance for deferred tax assets at December 31, 1996 and
1995, includes $5.9 million and $2.7 million, respectively, which when
recognized, will be credited to intangibles associated with the purchase of
subsidiaries. This accounting treatment is required under the terms of the
quasi-reorganizations implemented for FBA and FCB as of December 31, 1994 and
1996, respectively.
(10) Interest Rate Risk Management and Derivative Financial Instruments With
Off-Balance Sheet Risk
During 1994, First Banks expanded its use of off-balance-sheet derivative
financial instruments to assist in the management of interest rate sensitivity.
These off-balance-sheet derivative financial instruments are utilized to modify
the repricing, maturity and option characteristics of on-balance-sheet assets
and liabilities. The use of such derivative financial instruments is strictly
limited to reducing the interest rate exposure of First Banks.
<TABLE>
<CAPTION>
Derivative financial instruments held by First Banks are summarized as
follows:
December 31,
------------
1996 1995
---- ----
Notional Credit Notional Credit
amount exposure amount exposure
------ -------- ------ --------
(dollars expressed in thousands)
<S> <C> <C> <C>
Interest rate swap agreements................. $ 70,000 -- 145,000 --
Interest rate floor agreements ............... 105,000 141 105,000 608
Interest rate cap agreements ................. 10,000 335 30,000 292
Forward commitments to sell
mortgage-backed securities .............. 35,000 308 42,000 --
</TABLE>
The notional amounts of derivative financial instruments do not represent
amounts exchanged by the parties and, therefore, are not a measure of First
Banks' credit exposure through its use of derivative financial instruments. The
amounts exchanged are determined by reference to the notional amounts and the
other terms of the derivatives.
Previously, First Banks 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 unamortized net
deferred losses on interest rate futures contract remaining at December 31,
1996. The unamortized balance of net deferred losses on interest rate futures
contracts of $4.6 million at December 31, 1995, was applied to the carrying
value of the available-for-sale securities portfolio as part of the
mark-to-market valuation. Of the remaining balance of $4.6 million at December
31, 1995, $3.9 million was amortized against interest income and $701,000 was
realized in connection with the sales of investment securities during the year
ended December 31, 1996.
Interest rate swap agreements are utilized to extend the repricing
characteristics of certain interest-bearing liabilities to correspond more
closely with the assets of First Banks, with the objective of stabilizing net
interest income over time. The net interest expense for these agreements was
$7.4 million, $6.6 million and $490,000 for the years ended December 31, 1996,
1995 and 1994, respectively. The maturity dates, notional amounts, interest
<PAGE>
rates paid and received, and fair values of interest rate swap agreements
outstanding as of the dates indicated are summarized as follows:
<TABLE>
<CAPTION>
Fair value
Notional Interest rate Interest rate gain
amount paid received (loss)
------ ---- -------- ------
(dollars expressed in thousands)
December 31, 1996:
<S> <C> <C> <C> <C>
September 30, 1997 $ 35,000 7.04% 5.59%$ (417)
September 30, 1999 35,000 7.32 5.59 (1,160)
------ ------
$ 70,000 7.18 5.59 $ (1,577)
====== ==== ==== ======
December 31, 1995:
September 30, 1997 $ 35,000 7.04% 5.69%$ (932)
December 8, 1997 15,000 7.90 5.81 (711)
September 30, 1999 35,000 7.32 5.69 (2,073)
September 30, 2001 35,000 7.65 5.69 (3,207)
January 30, 2005 25,000 8.13 5.94 (3,703)
------- ---- ---- -------
$ 145,000 7.53 5.74 $(10,626)
======= ==== ==== =======
</TABLE>
In connection with the sale of certain residential mortgage loans and
repayment of certain borrowings, on May 25, 1995, First Banks terminated a $100
million interest rate swap agreement resulting in a loss of $3.3 million. The
loss on the termination of the $100 million interest rate swap agreement was
reflected in the consolidated statement of income for the year ended December
31, 1995.
In addition, First Banks experienced a shortening of the expected life of
its loan portfolio. This shortening resulted from the significant decline in
interest rates during 1995, which caused an increase in the projections of
principal prepayments of residential mortgage loans. These increased prepayment
projections and the overall reduction in the residential loan portfolio
disproportionately shortened the expected life of the loan portfolio in
comparison to the effective maturity created with the interest rate swap
agreements. As a result, during July 1995 and November 1996, First Banks
shortened the maturity of its interest-bearing liabilities through the
termination of $225 million and $75 million of interest rate swap agreements
resulting in losses of $13.5 million and $5.3 million, respectively. These
losses have been deferred and are being amortized over the remaining lives of
the agreements, unless the underlying liabilities are repaid. The unamortized
balance of these losses was $13.4 million and $11.6 million at December 31, 1996
and 1995, respectively, and are included in other assets.
First Banks also has interest rate cap and floor agreements to limit the
interest expense associated with certain of its interest-bearing liabilities and
the net interest expense of certain interest rate swap agreements, respectively.
At December 31, 1996 and 1995, the unamortized costs for these agreements were
$433,000 and $685,000, respectively, and were included in other assets. There
are no amounts receivable under these agreements.
Derivative financial instruments issued by First Banks consist of
commitments to originate fixed-rate loans. Commitments to originate fixed-rate
loans consist primarily of residential real estate loans. These loan
commitments, net of estimated underwriting fallout, and loans held for sale were
$36.7 million and $42.4 million at December 31, 1996 and 1995, respectively.
These net loan commitments and loans held for sale are hedged with forward
contracts to sell mortgage-backed securities of $35 million and $42 million at
December 31, 1996 and 1995, respectively. Gains and losses from forward
contracts are deferred and included in the cost basis of loans held for sale. At
December 31, 1996 and 1995, the net unamortized losses were $452,000 and
$737,000, respectively, which were applied to the carrying value of the loans
held for sale as part of the lower of cost or market valuation.
(11) Credit Commitments
First Banks 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.
The interest rate risk associated with these credit commitments relates
primarily to the commitments to originate residential fixed-rate loans. As more
fully discussed in Note 10 to the accompanying consolidated financial
statements, the interest rate risk of the commitments to originate fixed-rate
loans has been hedged with forward contracts to sell mortgage-backed securities.
The credit risk amounts are equal to the contractual amounts, assuming that
the amounts are fully advanced and that, in accordance with the requirements of
SFAS 105, collateral or other security is of no value. First Banks uses the same
<PAGE>
credit policies in granting commitments and conditional obligations as it does
for on-balance-sheet loans.
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
(dollars expressed in thousands)
<S> <C> <C>
Commitments to extend credit........................................ $ 716,967 578,750
Commercial and standby letters of credit............................ 25,256 29,468
------- -------
$ 742,223 608,218
======= =======
</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 certain of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
First Banks evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary by First Banks upon
extension of credit is based on management's credit evaluation of the
counterparty. Collateral held varies, but is generally residential or
income-producing commercial property.
Commercial and standby letters of credit are conditional commitments issued
by First Banks to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
First Banks holds real property as collateral supporting those commitments for
which collateral is deemed necessary.
(12) Fair Values 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 the mortgage
banking operation, deferred tax assets, premises and equipment and goodwill.
Further, the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on the fair value estimates and
have not been considered in any of the estimates.
The estimated fair value of First Banks' financial instruments at December
31 were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
Carrying Estimated Carrying Estimated
value fair value value fair value
----- ---------- ----- ----------
Financial assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents.................. $ 227,954 227,954 199,213 199,213
Investment securities:
Available for sale..................... 532,605 532,605 471,791 471,791
Held to maturity....................... 20,196 20,611 36,532 37,021
Net loans.................................. 2,721,188 2,744,737 2,691,554 2,749,133
Accrued interest receivable................ 23,250 23,250 22,027 22,027
========= ========= ========= =========
Financial liabilities:
Deposits:
Demand:
Non-interest-bearing................ $ 418,193 418,193 389,658 389,658
Interest-bearing.................... 337,618 337,618 307,584 307,584
Savings and money market............ 671,286 671,286 690,902 690,902
Time deposits.......................... 1,811,470 1,815,779 1,795,547 1,804,347
Borrowings................................. 146,312 146,312 159,676 159,676
Accrued interest payable................... 10,288 10,288 10,726 10,726
========= ========= ========= =========
Off-balance-sheet:
Interest rate swap, cap and floor
agreements............................. $ 14,702 (1,101) 14,509 (9,726)
Forward contracts to sell mortgage-
backed securities...................... 308 308 (234) (234)
Credit commitments......................... -- -- -- --
======== ========= ========= =========
</TABLE>
<PAGE>
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 are the
amounts reported in the consolidated balance sheets, and securities held to
maturity are based on quoted market prices where available. If quoted market
prices are not available, fair values are based upon quoted market prices of
comparable instruments.
Net loans: The fair values for most loans held for investment are estimated
utilizing discounted cash flow calculations that apply interest rates currently
being offered for similar loans to borrowers with similar risk profiles. The
fair values of loans held for sale, which are the amounts on the consolidated
balance sheets, are based on quoted market prices where available. If quoted
market prices are not available, fair values are based upon quoted market prices
of comparable instruments. The carrying value for loans is 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) is considered equal to their respective carrying amounts as
reported in the consolidated balance sheets. The fair value disclosed for demand
deposits does not include the benefit that results from the low-cost funding
provided by deposit liabilities compared to the cost of borrowing funds in the
market. Fair values for certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered on
similar certificates to a schedule of aggregated monthly maturities of time
deposits.
Borrowings and accrued interest payable: The carrying values reported in the
consolidated balance sheets approximate fair value.
Off-Balance-Sheet:
Interest Rate Swap, Cap and Floor Agreements: The fair values of interest
rate swap, cap and floor agreements are estimated by comparing the contractual
rates First Banks is paying to market rates quoted on new agreements with
similar creditworthiness.
Forward contracts to sell mortgage-backed securities: The fair values for
forward contracts to sell mortgage-backed securities are based upon quoted
market prices. The fair value of these contracts has been reflected in the
consolidated balance sheets in the carrying value of the loans held for sale
portfolio as part of the lower of cost or market valuation.
Credit commitments: The majority of the commitments to extend credit and
commercial and standby letters of credit contain variable interest rates and
credit deterioration clauses and, therefore, the carrying value of these credit
commitments approximates fair value.
(13) Employee Benefits
First Banks' new profit-sharing plan is a self-administered savings and
incentive plan covering substantially all employees. Under the plan, employer
matching contributions are determined annually by First Banks' Board of
Directors. Employee contributions are limited to 15% of an employee's
compensation, not to exceed $9,500 for 1996. Total employer contributions under
the plan were $576,000, $448,000 and $477,000, for the years ended December 31,
1996, 1995 and 1994, respectively.
Postretirement benefits other than pensions and postemployment benefits are
generally not provided for First Banks' employees.
<PAGE>
(14) Preferred Stock
First Banks has three classes of preferred stock outstanding.
On September 15, 1992, First Banks issued and sold, pursuant to an
effective registration statement under the Securities Act of 1933, 2,200,000
shares of Class C 9% cumulative increasing rate, redeemable, preferred stock.
Class C preferred stock ranks senior to both the Class A preferred stock and the
Class B preferred stock in terms of dividend and liquidation rights. Holders of
the Class C preferred stock do not have any voting rights except in limited
circumstances or as expressly required by law. The holders of the Class A and
Class B preferred stock have full voting rights.
Dividends on the Class A and Class B preferred stock are adjustable
quarterly based on the highest of the Treasury Bill Rate or the Ten Year
Constant Maturity Rate for the two-week period immediately preceding the
beginning of the quarter. This rate shall not be less than 6% nor more than 12%
on Class A preferred stock, or less than 7% nor more than 15% on Class B
preferred stock. Dividends on the Class C preferred stock are 9% through
November 30, 1997. On December 1, 1997, the annual dividend rate increases to
9.75%.
Class A preferred stock is convertible into shares of common stock at a
rate based on the ratio of the par value of the preferred stock to the current
market value of the common stock at the date of conversion, to be determined by
independent appraisal at the time of conversion. Shares of Class A preferred
stock may be redeemed by First Banks at any time at 105% of par value. Class B
preferred stock may not be redeemed or converted. Class C preferred stock may
not be converted, but may be redeemed at stated value after December 1, 1997.
Redemption of any issue of preferred stock requires the prior approval of the
Federal Reserve Board.
The annual dividend rates were as follows:
1996 1995 1994
---- ---- ----
Class C preferred stock 9.0% 9.0% 9.0%
Class A preferred stock 6.0 6.0 6.0
Class B preferred stock 7.0 7.0 7.0
(15) Transactions With Related Parties
Outside of normal customer relationships, no directors or officers of
First Banks, no stockholders holding over 5% of First Banks' voting securities
and no corporations or firms with which such persons or entities are associated
currently maintain or have maintained, since the beginning of the last full
fiscal year, any significant business or personal relationship with First Banks
or its subsidiaries, other than such as arises by virtue of such position or
ownership interest in First Banks or its subsidiaries, except as described in
the following paragraphs.
During 1996, 1995 and 1994, Tidal Insurance Limited (Tidal), a corporation
owned indirectly by First Banks' Chairman and his children, received
approximately $326,000, $192,000 and $233,000, respectively, in insurance
premiums for accident, health and life insurance policies purchased by loan
customers of First Banks. The insurance policies are issued by an unaffiliated
company and then ceded to Tidal. First Banks believes the premiums paid by the
loan customers of First Banks are comparable to those that such loan customers
would have paid if the premiums were subsequently being ceded to an unaffiliated
third-party insurer. In addition, for the years ended December 31, 1996, 1995
and 1994, First Securities America, Inc., doing business as First Banc Insurors,
received approximately $285,000, $196,000 and $195,000, respectively, in
commissions or insurance premiums for mortgage, forced hazard and collateral
protection insurance paid by customers of the Subsidiary Banks to the
unaffiliated, third-party insurors to which First Banc Insurors placed such
policies. In addition, First Banc Insurors received approximately $958,000,
$999,000 and $635,000 for the years ended December 31, 1996, 1995 and 1994,
respectively, in commissions in connection with the purchase and/or sale of
annuities and securities by certain customers of the Subsidiary Banks.
Commissions received by First Banc Insurors in connection with the purchase
and/or sale of such annuities and securities were paid by an unaffiliated,
third-party company. First Securities America, Inc. is owned by a trust
established and administered by and for the benefit of First Banks' Chairman and
members of his immediate family. The insurance premiums on which the
aforementioned commissions were earned were competitively bid and First Banks
deems the commissions First Banc Insurors earned to be comparable to those which
would have been earned by an unaffiliated third-party agent.
First Services, L.P., a limited partnership indirectly owned by First
Banks' Chairman and his children through its General Partners and Limited
Partners, provides data processing services and operational support for First
Banks and its subsidiaries through a facilities management agreement with
FirstServ, Inc., a wholly owned subsidiary of First Banks. Fees paid under the
agreement to First Services L.P. were $3.2 million, $2.9 million and $2.5
million for the years ended December 31, 1996, 1995 and 1994, respectively.
<PAGE>
(16) Capital Stock of Subsidiaries
First Banks America, Inc.
First Banks owns all of the Class B common stock of FBA representing
68.82% and 65.41% of all classes of outstanding voting stock at December 31,
1996 and 1995, respectively. FBA common stock, which is publicly traded on the
New York Stock Exchange, is the only other class of voting stock.
In connection with a previous corporate restructuring, FBA issued warrants
to the FDIC for the purchase of 131,336 shares of Class A common at an exercise
price of $.75 per share. On October 1, 1996, FBA purchased the outstanding
warrants from the FDIC for an aggregate amount of $1.28 million which was
applied as a reduction to FBA's stockholders' equity. First Banks' proportionate
share of $862,000 was applied against capital surplus for the year ended
December 31, 1996.
<PAGE>
First Commercial Bancorp, Inc.
First Banks owns 61.46% and 93.29% of all outstanding voting stock of FCB
at December 31, 1996 and 1995, respectively. FCB common stock is traded on the
NASDAQ Small Cap Market System.
First Banks owns $6.5 million of debentures (FCB Debentures) secured by all
of the outstanding stock of First Commercial. The FCB Debentures bear interest
at 12% per year and mature five years after issuance. The FCB Debentures,
including any accrued but unpaid interest thereon, will be converted at maturity
into FCB common stock at $12.50 per share. However, at the election of First
Banks, the FCB Debentures may be converted into FCB common stock at the same
rate at any time after issuance.
As more fully described in Note 2 to the accompanying consolidated
financial statements, during 1996, FCB offered to its stockholders, other than
First Banks, rights to acquire an aggregate of $6.0 million of newly issued
common stock at $12.50 per share. Upon completion of the offering, FCB issued
approximately 288,720 shares of FCB common stock which resulted in First Banks'
ownership being reduced to 61.46% at December 31, 1996, prior to the conversion
of the FCB Debentures, or 77.24% if the FCB Debentures had been converted as of
December 31, 1996.
(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 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 weightings, and
other factors.
Quantitative measures established by regulations to ensure capital adequacy
require the Subsidiary Banks to maintain certain minimum 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 total
assets) of 3.0% plus an additional cushion of 100 to 200 basis points is
expected. As of August 31, 1995, the date of the most recent notification from
First Banks' primary regulator, the subsidiary banks and thrifts were
categorized as well capitalized under the regulatory framework for promt
corrective action, except for BTX which was categorized as adequately
capitalized. There have been no conditions or events since that notification
that management believes have changed theses subsidiary banks' and thrift
category, except for BTX which management believes is now well capitalized.
Management believes, as of December 31, 1996, the subsidiary banks' and thrifts'
are well capitalized as defined by the FDIC Act.
<PAGE>
At December 31, 1996 and 1995, First Banks' and the Subsidiary Banks'
capital ratios were as follows:
<TABLE>
<CAPTION>
Risk-based capital ratios
-------------------------
Total Tier 1 Leverage ratio
----- ------ --------------
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
First Banks.................................... 9.23% 9.34% 7.92% 7.77% 5.99% 5.32%
First Bank Missouri............................ 10.47 10.03 9.21 8.78 7.25 7.01
First Bank Illinois............................ 11.06 12.91 9.88 11.66 7.17 7.22
First Bank FSB................................. 11.00 11.90 9.75 10.80 6.45 6.74
CCB ........................................... 16.67 15.25 15.40 13.96 11.64 9.58
FBA............................................ 7.64 11.69 6.38 10.43 5.31 8.38
FCB............................................ 6.95 4.99 5.66 3.68 4.25 2.14
St. Charles Federal (1)........................ -- 18.95 -- 18.46 -- 8.73
</TABLE>
- -------------------------------
(1) St. Charles merged with First Bank FSB in December 1996
(18) Distribution of Earnings of Subsidiaries
The Subsidiary Banks are restricted by various state and federal
regulations, as well as by the terms of the Credit Agreement described in Note
8, in the amount of dividends which are available for payment of dividends to
First Banks, Inc. Under the most restrictive of these requirements, the future
payment of dividends from subsidiary financial institutions is limited to
approximately $45.6 million, unless prior permission of the regulatory
authorities or the lending banks is obtained.
<PAGE>
(19) Parent Company Only Financial Information
Following are condensed balance sheets of First Banks (parent company
only) as of December 31, 1996 and 1995, and condensed statements of income and
cash flows for the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31,
------------
Assets 1996 1995
------ ---- ----
(dollars expressed in thousands)
<S> <C> <C>
Cash deposited in subsidiary banks.................................................... $ 3,887 1,331
Investment in subsidiaries, at equity................................................. 290,305 289,211
Investment securities................................................................. 18,564 17,544
Other assets.......................................................................... 19,933 19,943
------- -------
Total assets............................................................... $ 332,689 328,029
======= =======
Liabilities and Stockholders' Equity
Notes payable......................................................................... 76,330 88,135
Accrued expenses and other liabilities................................................ 4,970 5,289
------- -------
Total liabilities.......................................................... 81,300 93,424
Stockholders' equity.................................................................. 251,389 234,605
------- -------
Total liabilities and stockholders' equity................................. $ 332,689 328,029
======= =======
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
------------------------------
Years ended December 31,
------------------------
1996 1995 1994
---- ---- ----
(dollars expressed in thousands)
Income:
<S> <C> <C> <C>
Dividends from subsidiaries........................................... $ 20,714 57,901 42,500
Management fees from subsidiaries..................................... 7,393 5,108 4,304
Other income.......................................................... 1,684 2,015 2,410
------ ------ ------
Total income....................................................... 29,791 65,024 49,214
------ ------ ------
Expenses:
Interest expense...................................................... 5,461 5,861 1,034
Salaries and employee benefits........................................ 5,538 4,597 4,723
Legal and professional fees........................................... 1,978 2,426 1,892
Other expenses........................................................ 3,415 3,035 2,391
------ ------ - -----
Total expenses..................................................... 16,392 15,919 10,040
------ ------ ------
Income before income tax benefit and equity in undistributed
earnings (loss) of subsidiaries.................................. 13,399 49,105 39,174
Income tax benefit........................................................ (1,880) (2,007) (1,162)
------ ------ ------
Income before equity in undistributed earnings (loss)
of subsidiaries.................................................. 15,279 51,112 40,336
Equity in undistributed earnings (loss) of subsidiaries, net
of dividends paid................................................ 4,939 (26,641) (16,304)
------ ------- -------
Net income......................................................... $ 20,218 24,471 24,032
====== ====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
Years ended December 31,
------------------------
1996 1995 1994
---- ---- ----
(dollars expressed in thousands)
Cash flows from operating activities:
<S> <C> <C> <C>
Net income......................................................... $ 20,218 24,471 24,032
Adjustments to reconcile net income to net cash provided by
operating activities:
Net income of subsidiaries.................................... (25,610) (30,973) (24,931)
Dividends from subsidiaries................................... 20,714 57,901 42,500
Other, net.................................................... (998) 58 (511)
------ ------ ------
Net cash provided by operating activities................... 14,324 51,457 41,090
------ ------ ------
Cash flows from investing activities:
(Increase) decrease in investment securities....................... -- 2,420 (2,017)
Acquisitions of subsidiaries....................................... -- (49,996) (72,624)
Capital contributions to subsidiaries.............................. (200) (44,329) (14,656)
Return of subsidiary capital....................................... 7,786 12,149 --
Decrease in advances to subsidiaries............................... (950) (13,529) --
Other, net......................................................... 268 (1,011) (125)
------ ------- -------
Net cash provided by (used in) investing activities......... 6,904 (94,296) (89,422)
------ ------- -------
Cash flows from financing activities:
Increase (decrease) in notes payable............................... (11,805) 41,932 46,203
Payment of preferred stock dividends............................... (5,728) (5,736) (5,735)
Purchase and retirement of Class C preferred shares................ (1,139) -- --
------ ------- -------
Net cash provided by (used in) financing activities......... (18,672) 36,196 40,468
------- ------ ------
Net increase (decrease) in cash and cash equivalents........ 2,556 (6,643) (7,864)
Cash and cash equivalents, beginning of year........................... 1,331 7,974 15,838
------- ------ ------
Cash and cash equivalents, end of year................................. $ 3,887 1,331 7,974
======= ====== ======
</TABLE>
(20) Contingent Liabilities
In the ordinary course of business, there are various legal proceedings
pending against First Banks. Management, after consultation with legal counsel,
is of the opinion that the ultimate resolution of these proceedings will have no
material effect on the consolidated financial position or results of operations
of First Banks.
(21) Subsequent Event
On February 4, 1997, First Preferred Capital Trust (First Capital), a
newly-formed Delaware business trust subsidiary of First Banks, issued 3.45
million shares of 9.25% Cumulative Trust Preferred Securities at $25 per share
in an underwritten public offering and issued 106,702 shares of Common
Securities to First Banks at $25 per share. The gross proceeds of the offering
were used by First Capital to purchase a $88,917,550, 9.25% Subordinated
Debenture from First Banks. First Banks' proceeds from the issuance of the
Subordinated Debentures to First Capital, net of underwriting fees and offering
expenses, were $83.1 million. First Banks will record distributions payable on
the Preferred Securities as an expense in the consolidated statements of income
for financial reporting.
The proceeds from the offering were used for general corporate
purposes, including to reduce the borrowings under the Credit Agreement to $10.0
million and to provide funds toward the repurchase of Class C preferred stock.
The portion of the proceeds not used to reduce borrowings under the Credit
Agreement or repurchase Class C preferred stock has been temporarily invested
pending its use for the purposes described above.
<PAGE>
Independent Auditors' Report
KPMG Peat Marwick LLP
The Board of Directors and Stockholders
First Banks, Inc.:
We have audited the accompanying consolidated balance sheets of First Banks,
Inc. and subsidiaries (the Company) as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996. 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 Banks, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/KPMG Peat Marwick LLP
------------------------
St. Louis, Missouri
March 7, 1997
<PAGE>
Board of Directors
James F. Dierberg Chairman of the Board, President and Chief Executive
Officer, First Banks, Inc.
Allen H. Blake Executive Vice President and Chief Financial Officer,
First Banks, Inc.
George Markos President, Profit Management Systems, Richardson,
Texas
Donald Gunn Attorney-At-Law, Gunn and Gunn, Creve Coeur, Missouri
Investor Information
Stock Quotation Symbol
NASDAQ National Market System:
FBNKP
Class C Preferred Stock
Stock Information
Market price(1) Dividend
1996 High Low declared
First Quarter $ 27-3/4 25-1/2 $ .5625
Second Quarter 26-1/2 25-1/5 .5625
Third Quarter 26 24-3/4 .5625
Fourth Quarter 26 25 .5625
====== ====== ------
$ 2.2500
======
1995
First Quarter $ 26 24-1/2 $ .5625
Second Quarter 26 24-3/4 .5625
Third Quarter 26-1/4 25-1/4 .5625
Fourth Quarter 26-1/2 25-1/4 .5625
====== ====== ------
$ 2.2500
======
- -----------------------
(1) Per NASDAQ National Market System
Dividends are scheduled to be paid the first day of March, June, September
and December.
A copy of the First Banks, Inc. Annual Report on Form 10-K as filed with
the Securities and Exchange Commission may be obtained without charge upon
written request. Please direct your request to the following address.
Allen H. Blake Transfer Agent
Executive Vice President and Boatmen's Trust Company
Chief Financial Officer 510 Locust Street
First Banks, Inc. St. Louis, Missouri 63101
11901 Olive Boulevard (314) 466-1357
Creve Coeur, Missouri 63141
(314) 995-8700
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000710507
<NAME> First Banks, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
<CASH> 147,804
<INT-BEARING-DEPOSITS> 6,050
<FED-FUNDS-SOLD> 74,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 532,605
<INVESTMENTS-CARRYING> 20,196
<INVESTMENTS-MARKET> 0
<LOANS> 2,767,969
<ALLOWANCE> (46,781)
<TOTAL-ASSETS> 3,689,154
<DEPOSITS> 3,238,357
<SHORT-TERM> 146,312
<LIABILITIES-OTHER> 52,886
<LONG-TERM> 0
0
66,950
<COMMON> 5,915
<OTHER-SE> 178,524
<TOTAL-LIABILITIES-AND-EQUITY> 3,689,154
<INTEREST-LOAN> 237,379
<INTEREST-INVEST> 23,879
<INTEREST-OTHER> 4,763
<INTEREST-TOTAL> 266,021
<INTEREST-DEPOSIT> 124,737
<INTEREST-EXPENSE> 141,670
<INTEREST-INCOME-NET> 124,351
<LOAN-LOSSES> 11,494
<SECURITIES-GAINS> (311)
<EXPENSE-OTHER> 105,741
<INCOME-PRETAX> 27,837
<INCOME-PRE-EXTRAORDINARY> 27,837
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,218
<EPS-PRIMARY> 612.46
<EPS-DILUTED> 598.54
<YIELD-ACTUAL> 8.08
<LOANS-NON> 30,269
<LOANS-PAST> 3,779
<LOANS-TROUBLED> 413
<LOANS-PROBLEM> 31,534
<ALLOWANCE-OPEN> 52,665
<CHARGE-OFFS> (29,016)
<RECOVERIES> 9,300
<ALLOWANCE-CLOSE> 46,781
<ALLOWANCE-DOMESTIC> 46,781
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,241
</TABLE>
