<PAGE> 1
Filed pursuant to Rule 424(b)(4)
Registration Statement Nos. 333-18369 and 333-18369-01
and a related Rule 462(b)
Registration Statement Nos. 333-20691 and 333-20691-01
PROSPECTUS
3,000,000 PREFERRED SECURITIES
FIRST PREFERRED CAPITAL TRUST
9.25% CUMULATIVE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $25 PER PREFERRED SECURITY) FIRST
GUARANTEED, AS DESCRIBED HEREIN, BY BANK
FIRST BANKS, INC.
-----------------
$75,000,000 9.25% SUBORDINATED DEBENTURES OF
FIRST BANKS, INC.
-----------------
The 9.25% Cumulative Trust Preferred Securities (the ``Preferred Securities'')
offered hereby represent preferred undivided beneficial interests in the assets
of First Preferred Capital Trust, a statutory business trust created under the
laws of the State of Delaware (``First Capital''). First Banks, Inc., a
Missouri corporation (``First Banks''), will own all the common securities (the
``Common Securities'' and, together with the Preferred Securities, the ``Trust
Securities'') representing undivided beneficial interests in the assets of
First Capital.
(continued on next page)
The Preferred Securities have been approved for quotation on The Nasdaq
Stock Market's National Market under the symbol ``FBNKO.''
-----------------
SEE ``RISK FACTORS'' COMMENCING ON PAGE 8 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
-----------------
THE SECURITIES OFFERED BY THIS PROSPECTUS ARE NOT SAVINGS OR DEPOSIT
ACCOUNTS, ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANKING OR NON-
BANKING AFFILIATE OF FIRST BANKS (EXCEPT TO THE EXTENT THAT PREFERRED
SECURITIES ARE GUARANTEED BY FIRST BANKS AS DESCRIBED HEREIN), ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENT AGENCY AND INVOLVE INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC COMMISSION<F1> FIRST CAPITAL<F2>
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Preferred Security.......................... $25.00 $0.875<F2> $25.00
- ------------------------------------------------------------------------------------------------------------------
Total<F3>....................................... $75,000,000 $2,625,000<F2> $75,000,000
==================================================================================================================
<FN>
<F1>First Capital and First Banks have each agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See ``Underwriting.''
<F2>In view of the fact that the proceeds of the sale of the Preferred
Securities will be invested in the Subordinated Debentures, First Banks has
agreed to pay the Underwriters as compensation for their arranging the
investment therein of such proceeds, $0.875 per Preferred Security,
or $2,625,000 in the aggregate, ($3,018,750 if the over-allotment
option is exercised in full). See ``Underwriting.'' First Banks has also
agreed to pay the expenses of the offering estimated to be $325,000.
<F3>First Capital has granted the Underwriters an option exercisable within 30
days from the date of this Prospectus to purchase up to 450,000 additional
Preferred Securities on the same terms and conditions set forth above to
cover over-allotments, if any. If all such additional Preferred Securities
are purchased, the total Price to Public and Proceeds to First Capital will
be $86,250,000. See ``Underwriting.''
</TABLE>
-----------------
The Preferred Securities are offered by the Underwriters subject to receipt
and acceptance by them, prior sale and the Underwriters' right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of certificates for the Preferred
Securities will be made on or about February 4, 1997.
STIFEL, NICOLAUS & COMPANY
INCORPORATED
January 29, 1997
<PAGE> 2
(continued from previous page)
State Street Bank and Trust Company is the Property Trustee (as defined
herein) of First Capital. First Capital exists for the purpose of issuing the
Preferred Securities and investing the proceeds thereof in an equivalent amount
of 9.25% Subordinated Debentures (the ``Subordinated Debentures'') of First
Banks. The Subordinated Debentures will mature on March 31, 2027, which date
may be (i) shortened to a date not earlier than March 31, 2002, or (ii)
extended to a date not later than March 31, 2046, in each case if certain
conditions are met (including, in the case of shortening the Stated Maturity
(as defined herein), First Banks having received prior approval of the Board of
Governors of the Federal Reserve System (``Federal Reserve'') to do so if then
required under applicable capital guidelines or policies of the Federal
Reserve). The Preferred Securities will have a preference under certain
circumstances with respect to cash distributions and amounts payable on
liquidation, redemption or otherwise over the Common Securities. See
``Description of the Preferred Securities--Subordination of Common
Securities.''
Holders of Preferred Securities are entitled to receive preferential
cumulative cash distributions, at the annual rate of 9.25% of the liquidation
amount of $25 per Preferred Security (the ``Liquidation Amount''), accruing
from the date of original issuance and payable quarterly in arrears on the last
day of March, June, September and December of each year, commencing March 31,
1997 (the ``Distributions''). First Banks has the right, so long as no
Debenture Event of Default (as defined herein) has occurred and is continuing,
to defer payment of interest on the Subordinated Debentures at any time or from
time to time for a period not to exceed 20 consecutive quarters with respect to
each deferral period (each, an ``Extended Interest Payment Period''); provided
that no Extended Interest Payment Period may extend beyond the Stated Maturity
of the Subordinated Debentures. Upon the termination of any such Extended
Interest Payment Period and the payment of all amounts then due, First Banks
may elect to begin a new Extended Interest Payment Period subject to the
requirements set forth herein. If interest payments on the Subordinated
Debentures are so deferred, Distributions on the Preferred Securities will also
be deferred, and First Banks will not be permitted, subject to certain
exceptions described herein, to declare or pay any cash distributions with
respect to its capital stock or debt securities that rank pari passu with or
junior to the Subordinated Debentures. DURING AN EXTENDED INTEREST PAYMENT
PERIOD, INTEREST ON THE SUBORDINATED DEBENTURES WILL CONTINUE TO ACCRUE (AND
THE AMOUNT OF DISTRIBUTIONS TO WHICH HOLDERS OF THE PREFERRED SECURITIES ARE
ENTITLED WILL ACCUMULATE) AT THE RATE OF 9.25% PER ANNUM, COMPOUNDED QUARTERLY,
AND HOLDERS OF THE PREFERRED SECURITIES WILL BE REQUIRED TO INCLUDE INTEREST
INCOME IN THEIR GROSS INCOME FOR UNITED STATES FEDERAL INCOME TAX PURPOSES IN
ADVANCE OF RECEIPT OF THE CASH DISTRIBUTIONS WITH RESPECT TO SUCH DEFERRED
INTEREST PAYMENTS. A HOLDER OF PREFERRED SECURITIES THAT DISPOSES OF ITS
PREFERRED SECURITIES BETWEEN RECORD DATES FOR PAYMENTS OF DISTRIBUTIONS (AND
CONSEQUENTLY DOES NOT RECEIVE A DISTRIBUTION FROM FIRST CAPITAL FOR THE PERIOD
PRIOR TO SUCH DISPOSITION) WILL NEVERTHELESS BE REQUIRED TO INCLUDE ACCRUED BUT
UNPAID INTEREST ON THE SUBORDINATED DEBENTURES THROUGH THE DATE OF DISPOSITION
IN INCOME AS ORDINARY INCOME AND TO ADD SUCH AMOUNT TO ITS ADJUSTED TAX BASIS
IN ITS PRO RATA SHARE OF THE UNDERLYING SUBORDINATED DEBENTURES DEEMED DISPOSED
OF. See ``Description of the Subordinated Debentures--Option to Extend Interest
Payment Period,'' ``Certain Federal Income Tax Consequences--Potential
Extension of Interest Payment Period and Original Issue Discount'' and
``--Dispositions of Preferred Securities.''
First Banks and First Capital believe that, taken together, the obligations
of First Banks under the Guarantee, the Trust Agreement, the Subordinated
Debentures, the Indenture and the Expense Agreement (each as defined herein)
provide, in the aggregate, a full, irrevocable and unconditional guaranty, on a
subordinated basis, of all of the obligations of First Capital under the
Preferred Securities. See ``Relationship Among the Preferred Securities, the
Subordinated Debentures and the Guarantee--Full and Unconditional Guarantee.''
The Guarantee of First Banks guarantees the payment of Distributions and
payments on liquidation or redemption of the Preferred Securities, but only in
each case to the extent of funds held by First Capital, as described herein.
See ``Description of the Guarantee--General.'' If First Banks does not make
interest payments on the Subordinated Debentures held by First Capital, First
Capital will have insufficient funds to pay Distributions on the Preferred
Securities. The Guarantee does not cover payments of Distributions when First
Capital does not have sufficient funds to pay such Distributions. In such
event, a holder of Preferred Securities may institute a legal proceeding
directly against First Banks pursuant to the terms of the Indenture to enforce
payments of amounts equal to such Distributions to such holder. See
``Description of the Subordinated Debentures--Enforcement of Certain Rights by
Holders of the Preferred Securities.'' The obligations of First Banks under the
Guarantee and the Preferred Securities are subordinate and junior in right of
payment to all Senior Debt, Subordinated Debt and Additional Senior Obligations
(each as defined herein) of First Banks. The Subordinated Debentures are
unsecured obligations of First Banks and are subordinated to all Senior Debt,
Subordinated Debt and Additional Senior Obligations of First Banks.
The Preferred Securities are subject to mandatory redemption, in whole or
in part, upon repayment of the Subordinated Debentures at maturity or their
earlier redemption. Subject to Federal Reserve approval, if then required under
applicable capital guidelines or policies of the Federal Reserve, the
Subordinated Debentures are redeemable prior to maturity at the option of First
Banks (i) on or after March 31, 2002, in whole at any time or in part
(continued on next page)
<PAGE> 3
(continued from previous page)
from time to time, or (ii) at any time, in whole (but not in part), within 180
days following the occurrence of a Tax Event or an Investment Company Event
(each as defined herein), in each case at a redemption price equal to the
accrued and unpaid interest on the Subordinated Debentures so redeemed to the
date fixed for redemption, plus 100% of the principal amount thereof. See
``Description of the Preferred Securities--Redemption or Exchange.''
First Banks has the right at any time to dissolve, wind-up or terminate
First Capital subject to First Banks having received prior approval of the
Federal Reserve to do so if then required under applicable capital guidelines
or policies of the Federal Reserve. In the event of the voluntary or
involuntary dissolution, winding up or termination of First Capital, after
satisfaction of liabilities to creditors of First Capital as required by
applicable law, the holders of Preferred Securities will be entitled to receive
a Liquidation Amount of $25 per Preferred Security, plus accumulated and unpaid
Distributions thereon to the date of payment, which may be in the form of a
Subordinated Debenture having an aggregate principal amount equal to the
Liquidation Amount of such Preferred Securities (and carrying with it
accumulated interest in an amount equal to the accumulated and unpaid
Distributions then due on such Preferred Securities), subject to certain
exceptions. See ``Description of the Preferred Securities--Redemption or
Exchange'' and ``--Liquidation Distribution Upon Termination.''
-----------------
First Banks will provide to the holders of the Preferred Securities quarterly
reports containing unaudited financial statements and annual reports containing
financial statements audited by First Banks' independent auditors. First Banks
will also furnish annual reports on Form 10-K and quarterly reports on Form
10-Q free of charge to holders of the Preferred Securities who so request in
writing addressed to the Secretary of First Banks.
-----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE PREFERRED
SECURITIES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
<PAGE> 4
FIRST BANKS, INC. AND SUBSIDIARIES
MAP OF LOCATIONS
[MAP]
METRO MISSOURI
Arnold
Bogey Hills
Chesterfield Village
Clayton
Craig
Creve Coeur
Ellisville
Florissant (2)
Four Seasons
Graham
Gravois
Hampton
Kirkwood
Lemay
Manchester
Riverview
Shrewsbury
St. Peters (2)
Telegraph
Tesson Ferry
Town & Country
Twin Oaks
Warson Woods
Webster Groves
St. Charles
REGIONAL
MISSOURI
Beaufort
Bismarck
Dutzow
Fulton
Gerald
Hermann
Lake Saint Louis
Middletown
Montgomery City
Morrison
Owensville
Park Hills (2)
Warrenton
Washington
Wentzville
SOUTHERN
ILLINOIS
Belleville
Breese
Carbondale
Chester (2)
Columbia
Fairview Heights
Greenville
Johnston City
Lawrenceville (2)
O'Fallon (2)
Granite City
Red Bud
Salem (4)
Valmeyer
Vandalia
Waterloo
West Frankfort (2)
CENTRAL &
NORTHERN
ILLINOIS
Abingdon
Avon
Bartonville
Bunker Hill
Cambridge
Canton
Carlinville
Chicago (2)
Cuba
Decatur
Galesburg (2)
Galva
Havana
Jacksonville
Knoxville
Mount Pulaski
Peoria (4)
Pittsfield
Pleasant Hill
Quincy (2)
Rock Falls
Roodhouse
Springfield
Sterling
Winchester
[MAP]
CALIFORNIA
FIRST BANK & TRUST
Bellflower
Bolsa Chica
Huntington Beach
Irvine
IrvineCulver
San Jose
Santa Barbara
Northside
Santa Barbara
Downtown
Santa Maria
Walnut Creek
Bixby Knolls
Fountain Valley
Long Beach
SUNRISE BANK OF
CALIFORNIA
Roseville
Citrus Heights
San Francisco
FIRST COMMERCIAL
BANK
Campbell
Concord
Douglas
Howe
San Francisco
Vernon
TEXAS
BANKTEXAS N.A.
(Dallas)
Abrams
Irving-Las Colinas
McKinney
(Houston)
Allen Parkway
Northside
Westheimer
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements of First Banks, including the
related notes, appearing elsewhere in this Prospectus. Unless otherwise
indicated, the information in this Prospectus assumes that the Underwriters'
over-allotment option will not be exercised. Prospective investors should
carefully consider the information set forth under the heading ``Risk
Factors.''
FIRST BANKS
First Banks is a registered bank holding company headquartered in St. Louis
County, Missouri. First Banks' principal business is the ownership and
operation of its subsidiary banks and thrifts (the ``Subsidiary Banks''), which
offer a broad range of commercial and personal banking services through its
banking facilities located in Missouri, Illinois, California and Texas. Of
these banking facilities, 27 are located in the St. Louis metropolitan area,
which is First Banks' primary market area with a population of approximately
2.5 million. At September 30, 1996, First Banks had total assets of $3.5
billion, total loans of $2.7 billion, total deposits of $3.1 billion, and total
shareholders' equity of $244 million. The principal executive office of First
Banks is 135 North Meramec Avenue, St. Louis, Missouri 63105, and its telephone
number is (314) 854-4600.
First Banks has grown through a combination of acquisitions and internal
growth. Prior to 1994, First Banks' acquisitions had been concentrated within
its primary market area of eastern Missouri 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 resulted in two acquisitions in Missouri, three in
Illinois, one in Texas and seven in California during this period and the
increase in total assets by 75% from December 31, 1993 to September 30, 1996.
First Banks follows a policy of retaining earnings to support its growth.
First Banks has never paid, and has no present intention to pay, dividends on
its Common Stock and has, therefore, increased retained earnings by 37% since
December 31, 1993.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------- ----------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets.................................. $3,546 3,700 3,623 2,880 2,032 2,047 1,996
Retained earnings....................... 164 153 157 138 120 102 85
Stockholders' equity.................... 244 230 235 217 202 181 111
Net income.............................. 11 20 24 24 23 19 17
Locations............................... 123 120 125 92 80 80 78
</TABLE>
Through the locations of its 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, 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 officers and directors of the
respective Subsidiary Banks.
All of the voting stock of First Banks is owned by various trusts which
were created by and are administered by and for the benefit of Mr. James F.
Dierberg, Chairman of the Board, President and Chief Executive Officer of First
Banks, and members of his immediate family. Mr. Dierberg, therefore, controls
the management and policies of First
2
<PAGE> 6
Banks and the election of its directors. See ``Risk Factors--Risk Factors
Relating to First Banks--Control of First Banks.'' First Banks also has a class
of non-voting preferred stock, the Class C 9.00% Increasing Rate, Redeemable,
Cumulative Preferred Stock (the ``Class C Preferred Stock''), which is traded
on The Nasdaq Stock Market's National Market under the symbol FBNKP. On
December 1, 1997, the annual dividend rate on the Class C Preferred Stock will
increase by 0.75% to 9.75% and, on such date, the Class C Preferred Stock will
become redeemable by First Banks.
FIRST CAPITAL
First Capital is a statutory business trust formed under Delaware law
pursuant to (i) a trust agreement, dated as of December 12, 1996, executed by
First Banks, as depositor, and the trustees of First Capital (together with the
Property Trustee, the ``Trustees''), and (ii) a certificate of trust filed with
the Secretary of State of the State of Delaware on December 13, 1996. The
initial trust agreement will be amended and restated in its entirety (as so
amended and restated, the ``Trust Agreement'') substantially in the form filed
as an exhibit to the Registration Statement of which this Prospectus forms a
part. The Trust Agreement will be qualified as an indenture under the Trust
Indenture Act of 1939, as amended (the ``Trust Indenture Act''). Upon issuance
of the Preferred Securities, the purchasers thereof will own all of the
Preferred Securities. First Banks will acquire all of the Common Securities
which will represent an aggregate liquidation amount equal to at least 3% of
the total capital of First Capital. The Common Securities will rank pari passu,
and payments will be made thereon pro rata, with the Preferred Securities,
except that upon the occurrence and during the continuance of an Event of
Default (as defined herein) under the Trust Agreement resulting from a
Debenture Event of Default, the rights of First Banks as holder of the Common
Securities to payment in respect of Distributions and payments upon
liquidation, redemption or otherwise will be subordinated to the rights of the
holders of the Preferred Securities. See ``Description of the Preferred
Securities--Subordination of Common Securities.'' First Capital exists for the
exclusive purposes of (i) issuing the Trust Securities representing undivided
beneficial interests in the assets of First Capital, (ii) investing the gross
proceeds of the Trust Securities in the Subordinated Debentures issued by First
Banks, and (iii) engaging in only those other activities necessary, advisable,
or incidental thereto. The Subordinated Debentures and payments thereunder will
be the only assets of First Capital and payments under the Subordinated
Debentures will be the only revenue of First Capital. First Capital has a term
of 55 years, but may terminate earlier as provided in the Trust Agreement. The
principal executive office of First Capital is 135 North Meramec Avenue, St.
Louis, Missouri 63105, and its telephone number is (314) 854-4600.
The number of Trustees will, pursuant to the Trust Agreement, initially be
five. Three of the Trustees (the ``Administrative Trustees'') will be persons
who are employees or officers of, or who are affiliated with, First Banks. The
fourth trustee will be a financial institution that is unaffiliated with First
Banks, which trustee will serve as institutional trustee under the Trust
Agreement and as indenture trustee for the purposes of compliance with the
provisions of the Trust Indenture Act (the ``Property Trustee''). State Street
Bank and Trust Company, a state chartered trust company organized under the
laws of the Commonwealth of Massachusetts, will be the Property Trustee until
removed or replaced by the holder of the Common Securities. For purposes of
compliance with the provisions of the Trust Indenture Act, State Street Bank and
Trust Company will also act as trustee (the ``Guarantee Trustee'') under the
Guarantee and as Debenture Trustee (as defined herein) under the Indenture. The
fifth trustee will be an entity that maintains its principal place of business
in the State of Delaware (the ``Delaware Trustee''). Wilmington Trust Company, a
Delaware chartered trust company, will act as Delaware Trustee.
The Property Trustee will hold title to the Subordinated Debentures for the
benefit of the holders of the Trust Securities and in such capacity will have
the power to exercise all rights, powers and privileges under the Indenture.
The Property Trustee will also maintain exclusive control of a segregated
non-interest-bearing bank account (the ``Property Account'') to hold all
payments made in respect of the Subordinated Debentures for the benefit of the
holders of the Trust Securities. The Property Trustee will make payments of
Distributions and payments on liquidation, redemption and otherwise to the
holders of the Trust Securities out of funds from the Property Account. The
Guarantee Trustee will hold the Guarantee for the benefit of the holders of the
Preferred Securities. First Banks, as the holder of all the Common Securities,
will have the right to appoint, remove or replace any Trustee and to increase
or decrease the number of Trustees. First Banks will pay all fees and expenses
related to First Capital and the offering of the Trust Securities.
The rights of the holders of the Preferred Securities, including economic
rights, rights to information and voting rights, are set forth in the Trust
Agreement, the Delaware Business Trust Act (the ``Trust Act'') and the Trust
Indenture Act. See ``Description of the Preferred Securities.''
3
<PAGE> 7
<TABLE>
THE OFFERING
<S> <C>
Securities Offered................. 3,000,000 Preferred Securities having a Liquidation Amount of $25 per
Preferred Security. The Preferred Securities represent preferred
undivided beneficial interests in the assets of First Capital, which
will consist solely of the Subordinated Debentures and payments
thereunder. First Capital has granted the Underwriters an option,
exercisable within 30 days after the date of this Prospectus, to
purchase up to an additional 450,000 Preferred Securities at the
initial offering price, solely to cover over-allotments, if any.
Distributions...................... The Distributions payable on each Preferred Security will be fixed at
a rate per annum of 9.25% of the Liquidation Amount of $25 per Preferred
Security, will be cumulative, will accrue from February 4, 1997,
the date of issuance of the Preferred Securities, and will be payable
quarterly in arrears, on March 31, June 30, September 30 and December
31 of each year, commencing March 31, 1997. See ``Description of the
Preferred Securities--Distributions--Payment of Distributions.''
Option to Extend Interest
Payment Period................... First Banks has the right, at any time, so long as no Debenture Event
of Default has occurred and is continuing, to defer payments of
interest on the Subordinated Debentures for a period not exceeding 20
consecutive quarters; provided, that no Extended Interest Payment
Period may extend beyond the Stated Maturity of the Subordinated
Debentures. As a consequence of the extension by First Banks of the
interest payment period, quarterly Distributions on the Preferred
Securities will be deferred (though such Distributions would continue
to accrue with interest thereon compounded quarterly, since interest
will continue to accrue and compound on the Subordinated Debentures)
during any such Extended Interest Payment Period. During an Extended
Interest Payment Period, First Banks will be prohibited, subject to
certain exceptions described herein, from declaring or paying any cash
distributions with respect to its capital stock or debt securities
that rank pari passu with or junior to the Subordinated Debentures.
Upon the termination of any Extended Interest Payment Period and the
payment of all amounts then due, First Banks may commence a new Ex-
tended Interest Payment Period, subject to the foregoing requirements.
See ``Description of the Preferred Securities--Distributions--Extended
Interest Payment Period'' and ``Description of the Subordinated Deben-
tures--Option to Extend Interest Payment Period.''
Should an Extended Interest Payment Period occur, holders of Preferred
Securities will be required to include deferred interest income in
their gross income for United States federal income tax purposes in
advance of receipt of the cash distributions with respect to such
deferred interest payments. See ``Certain Federal Income Tax
Consequences--Potential Extension of Interest Payment Period and
Original Issue Discount.''
Optional Redemption................ The Preferred Securities are subject to mandatory redemption, in whole
or in part, upon repayment of the Subordinated Debentures at maturity
or their earlier redemption. Subject to Federal Reserve approval, if
then required under applicable capital guidelines or policies of the
Federal Reserve, the Subordinated Debentures are redeemable prior to
maturity at the option of First Banks (i) on or after March 31, 2002,
in whole at any time or in part from time to time, or (ii) at any
time, in whole (but not in part), within 180 days following the
occurrence of a Tax Event or an Investment Company Event, in each case
at the redemption price equal to 100% of the principal amount of the
Subordinated Debenture, together
4
<PAGE> 8
with any accrued but unpaid interest to the date fixed for redemption. See
``Description of the Subordinated Debentures--Redemption or Exchange.''
Distribution of Subordinated
Debentures....................... First Banks has the right at any time to terminate the Preferred
Securities and cause the Subordinated Debentures to be distributed to
holders of Preferred Securities in liquidation of First Capital,
subject to First Banks having received prior approval of the Federal
Reserve to do so if then required under applicable capital guidelines
or policies of the Federal Reserve. See ``Description of the Preferred
Securities--Redemption or Exchange'' and ``Description of the
Preferred Securities--Liquidation Distribution Upon Termination.''
Guarantee.......................... First Banks has guaranteed the payment of Distributions and payments
on liquidation or redemption of the Preferred Securities, but only in
each case to the extent of funds held by First Capital, as described
herein. First Banks and First Capital believe that, taken together,
the obligations of First Banks under the Guarantee, the Trust
Agreement, the Subordinated Debentures, the Indenture and the Expense
Agreement provide, in the aggregate, a full, irrevocable and
unconditional guaranty, on a subordinated basis, of all of the
obligations of First Capital under the Preferred Securities. The
obligations of First Banks under the Guarantee and the Preferred
Securities are subordinate and junior in right of payment to all
Senior Debt, Subordinated Debt and Additional Senior Obligations of
First Banks. If First Banks does not make principal or interest
payments on the Subordinated Debentures, First Capital will not have
sufficient funds to make distributions on the Preferred Securities; in
which event, the Guarantee will not apply to such Distributions until
First Capital has sufficient funds available therefor. See
``Description of the Guarantee.''
Voting Rights...................... The holders of the Preferred Securities generally will have no voting
rights except in limited circumstances. See ``Description of the
Preferred Securities--Voting Rights; Amendment of Trust Agreement.''
Use of Proceeds.................... The proceeds from the sale of the Preferred Securities offered hereby
will be used by First Capital to purchase the Subordinated Debentures
issued by First Banks. First Banks intends to use a portion of the
net proceeds from the sale of the Subordinated Debentures to,
temporarily, reduce the amount of its indebtedness under the Credit
Agreement (as defined herein) to $20 million, although First Bank expects
the amount outstanding thereunder to increase in the future, and to use
the remaining net proceeds from the sale of the Subordinated
Debentures and any subsequent borrowings under the Credit Agreement
for general corporate purposes, including the possible (i) repurchase
or redemption of all or a portion of its outstanding Class C Preferred
Stock (which becomes redeemable on December 1, 1997), (ii) funding of
investments in, or extensions of credit to, its banking and nonbanking
subsidiaries, (iii) acquisition of other financial institutions or
their assets or liabilities, and (iv) acquisition of or investment in
other businesses of a type eligible for bank holding companies. The
portion of the net proceeds from the sale of Subordinated Debentures
which is not used to reduce indebtedness under the Credit Agreement
will be invested in short term investment securities pending its use
for the purposes described above. See ``Use of Proceeds.''
Nasdaq National Market Symbol...... The Preferred Securities have been approved for quotation on The
Nasdaq Stock Market's National Market under the symbol FBNKO.
</TABLE>
5
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL DATA<F1>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- ----------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Interest income......... $ 197,008 192,051 261,621 162,435 140,012 161,303 178,714
Interest expense........ 106,580 106,350 144,945 70,670 58,058 79,529 106,848
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income..... 90,428 85,701 116,676 91,765 81,954 81,774 71,866
Provision for possible
loan losses........... 8,774 8,449 10,361 1,858 4,456 10,435 9,773
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
possible loan
losses................ 81,654 77,252 106,315 89,907 77,498 71,339 62,093
Noninterest income...... 15,798 17,642 19,407 13,634 9,953 11,140 12,742
Noninterest expense..... 81,237 66,701 91,566 67,734 53,431 53,953 49,088
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before provision
for income taxes,
minority interest in
(income) loss of
subsidiary and
cumulative effect of
change in accounting
principle............. 16,215 28,193 34,156 35,807 34,020 28,526 25,747
Provision for income
taxes................. 4,304 9,414 11,038 12,012 11,592 9,510 9,039
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before minority
interest in (income)
loss of subsidiary and
cumulative effect of
change in accounting
principle............. 11,911 18,779 23,118 23,795 22,428 19,016 16,708
Minority interest in
(income) loss of
subsidiary............ (472) 816 1,353 237 -- -- --
Cumulative effect of
change in accounting
principle............. -- -- -- -- 766 -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income.............. $ 11,439 19,595 24,471 24,032 23,194 19,016 16,708
========== ========== ========== ========== ========== ========== ==========
DIVIDENDS
Preferred stock......... $ 4,237 4,237 5,736 5,735 5,766 1,951 906
Common stock............ -- -- -- -- -- -- --
Ratio of total dividends
declared to net
income................ 37.04% 21.62% 23.44% 23.86% 24.86% 10.26% 5.42%
PER SHARE DATA
Earnings per common
share:
Primary............. 304.39 649.08 791.82 773.31 741.69 719.51 682.75
Fully diluted....... 302.68 617.39 758.66 734.80 690.43 656.54 608.65
Weighted average shares
of common stock
outstanding........... 23,661 23,661 23,661 23,661 23,498 23,144 23,144
BALANCE SHEET DATA (AT
PERIOD-END)
Investment securities... $ 498,785 579,079 508,323 587,878 531,148 518,525 443,057
Loans, net of unearned
discount.............. 2,733,026 2,748,715 2,744,219 2,073,570 1,362,018 1,371,417 1,409,067
Total assets............ 3,546,154 3,699,961 3,622,962 2,879,570 2,031,909 2,047,022 1,996,459
Total deposits.......... 3,054,741 3,170,652 3,183,691 2,333,144 1,779,389 1,768,225 1,753,422
Notes payable........... 66,840 89,146 88,135 46,203 -- 30,038 34,630
Common stockholders'
equity................ 175,754 162,079 166,542 149,249 133,781 110,751 95,970
Total stockholders'
equity................ 243,592 230,142 234,605 217,312 201,844 180,814 111,033
EARNINGS RATIOS
Return on average total
assets<F2>............ 0.43% 0.76% 0.70% 1.00% 1.16% 0.95% 0.85%
Return on average total
stockholders'
equity<F2>............ 6.40 11.61 10.79 11.48 12.27 14.13 16.13
ASSET QUALITY RATIOS
Allowance for possible
loan losses to
loans................. 1.66 1.86 1.92 1.37 1.69 1.52 1.37
Nonperforming loans to
loans<F3>............. 1.22 1.43 1.44 0.78 0.90 0.81 0.74
Allowance for possible
loan losses to
nonperforming
loans<F3>............. 135.86 129.39 133.70 175.37 188.50 188.43 185.30
Nonperforming assets to
loans and foreclosed
assets<F4>............ 1.59 1.74 1.71 1.10 1.08 1.31 1.59
Net loan charge-offs to
average loans<F2>..... 0.79 0.50 0.41 0.09 0.33 0.65 0.47
CAPITAL RATIOS
Average total
stockholders' equity
to average total
assets................ 6.76 6.55 6.49 8.70 9.46 6.70 5.26
Total risk-based capital
ratio................. 9.56 9.67 9.34 12.68 16.90 14.71 10.20
Leverage ratio.......... 6.13 5.60 5.32 7.54 9.30 7.66 5.26
RATIO OF EARNINGS TO
COMBINED FIXED CHARGES
AND PREFERRED STOCK
DIVIDENDS<F5>
Including interest on
deposits.............. 1.11 1.21 1.18 1.39 1.44 1.32 1.22
Excluding interest on
deposits.............. 1.58 1.80 1.75 3.24 4.65 4.55 4.47
<FN>
- ----------
<F1>The comparability of the selected data presented is affected by First
Banks' acquisition of nine banks and six thrifts during the periods
presented. The acquisitions were accounted for as purchases and, therefore,
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. See ``Management's Discussion and Analysis--Acquisitions.''
<F2>Ratios for the nine-month periods are annualized.
<F3>Nonperforming loans consist of nonaccrual loans and loans with restructured
terms.
<F4>Nonperforming assets consist of nonperforming loans and foreclosed assets.
<F5>For purposes of calculating the ratio of earnings to combined fixed charges
and preferred stock dividends, earnings consist of income before taxes plus
interest and rent expense. Fixed charges consist of interest and rent
expense.
</TABLE>
6
<PAGE> 10
SUMMARY OF RECENT FINANCIAL DATA
On January 21, 1997, First Banks issued a press release reporting its
unaudited financial data for the three month period and for the year ended
December 31, 1996. First Banks' net income was $8.78 million for the fourth
quarter of 1996 in comparison to $4.88 million for the same period in 1995,
representing an increase of 80%. First Banks' return on average stockholders'
equity and return on average assets for the fourth quarter of 1996 were 14.3%
and .98%, respectively. This compares to a return on average stockholders'
equity and average assets for the nine months ended September 30, 1996 of 6.40%
and .43%, respectively.
For the year ended December 31, 1996, net income was $20.2 million, after
payment of the one-time Savings Association Insurance Fund (``SAIF'') special
assessment of $8.2 million, which represented a return on average stockholders'
equity and a return on average assets of 8.4% and .57%, respectively. Excluding
the one-time SAIF special assessment, net income for the year ended December
31, 1996, would have been $25.5 million, which represents a return on average
stockholders' equity and a return on average assets of 10.6% and .72%,
respectively. This compares to net income of $24.5 million for 1995, which
represented a return on average stockholders' equity and average assets of
10.79% and .70%, respectively.
The following tables present selected consolidated financial data of First
Banks as of and for the three month period and for the year ended December 31,
1996. The consolidated financial data of First Banks are unaudited and should
be read in conjunction with the consolidated financial statements contained
elsewhere in this Prospectus. In the opinion of management, adjustments
necessary for a fair presentation of the results of operations have been
included.
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
DECEMBER 31, 1996 AND 1995
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Income.............................. $69,013 69,570 266,021 261,621
Interest Expense............................. 35,090 38,595 141,670 144,945
------- ------ ------- -------
Net interest income...................... 33,923 30,975 124,351 116,676
Provision for possible loan losses........... 2,720 1,912 11,494 10,361
------- ------ ------- -------
Net interest income after provision for
loan losses............................ 31,203 29,063 112,857 106,315
Noninterest income........................... 4,923 1,765 20,721 19,407
Noninterest expense.......................... 24,504 24,865 105,741 91,566
------- ------ ------- -------
Income before provision for income taxes
and minority interest in loss (income)
of subsidiaries........................ 11,622 5,963 27,837 34,156
Provision for income taxes................... 2,656 1,624 6,960 11,038
------- ------ ------- -------
Income before minority interest in loss
(income) of subsidiaries............... 8,966 4,339 20,877 23,118
Minority interest in (income) loss of
subsidiaries............................... (187) 537 (659) 1,353
------- ------ ------- -------
Net income............................... $ 8,779 4,876 20,218 24,471
======= ====== ======= =======
Earnings per common share:
Primary.................................. $308.07 142.74 612.46 791.82
Fully diluted............................ 295.74 141.31 598.54 758.66
======= ====== ======= =======
</TABLE>
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEET INFORMATION
DECEMBER 31, 1996 AND 1995
(DOLLARS EXPRESSED IN THOUSANDS)
(UNAUDITED)
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Net Loans............................................................. $2,721,188 2,691,554
Total Assets.......................................................... 3,689,154 3,622,962
Total Deposits........................................................ 3,238,567 3,183,691
Total Stockholders' Equity............................................ 251,389 234,605
Reserves to Nonperforming Loans....................................... 152.27% 133.70%
Nonperforming Assets to Loans and Foreclosed Assets................... 1.49% 1.71%
</TABLE>
7
<PAGE> 11
RISK FACTORS
Prospective investors should carefully consider, together with the other
information contained and incorporated by reference in this Prospectus, the
following risk factors in evaluating First Banks and its business and First
Capital before purchasing the Preferred Securities offered hereby. Prospective
investors should note, in particular, that this Prospectus contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the ``Securities Act''), and Section 21E of the
Securities Act of 1934, as amended (the ``Exchange Act''), and that actual
results could differ materially from those contemplated by such statements. The
considerations listed below represent certain important factors First Banks
believes could cause such results to differ. These considerations are not
intended to represent a complete list of the general or specific risks that may
affect First Banks and First Capital. It should be recognized that other risks
may be significant, presently or in the future, and the risks set forth below
may affect First Banks and First Capital to a greater extent than indicated.
RISK FACTORS RELATING TO THE PREFERRED SECURITIES
RANKING OF SUBORDINATED OBLIGATIONS UNDER THE GUARANTEE AND THE SUBORDINATED
DEBENTURES
The obligations of First Banks under the Guarantee issued for the benefit
of the holders of Preferred Securities and under the Subordinated Debentures
are unsecured and rank subordinate and junior in right of payment to all Senior
Debt, Subordinated Debt and Additional Senior Obligations of First Banks. At
September 30, 1996, the aggregate outstanding Senior Debt, Subordinated Debt
and Additional Senior Obligations of First Banks was approximately $66.8
million. Because First Banks is a holding company, the right of First Banks to
participate in any distribution of assets of any Subsidiary Bank upon such
Subsidiary Bank's liquidation or reorganization or otherwise (and thus the
ability of holders of the Preferred Securities to benefit indirectly from such
distribution) is subject to the prior claims of creditors of that Subsidiary
Bank, except to the extent that First Banks may itself be recognized as a
creditor of that Subsidiary Bank. The Subordinated Debentures, therefore, will
be effectively subordinated to all existing and future liabilities of the
Subsidiary Banks and holders of Subordinated Debentures and Preferred
Securities should look only to the assets of First Banks for payments on the
Subordinated Debentures. Neither the Indenture, the Guarantee nor the Trust
Agreement places any limitation on the amount of secured or unsecured debt,
including Senior Debt, Subordinated Debt and Additional Senior Obligations,
that may be incurred by First Banks. See ``Description of the Guarantee--Status
of the Guarantee'' and ``Description of the Subordinated
Debentures--Subordination.''
The ability of First Capital to pay amounts due on the Preferred Securities
is solely dependent upon First Banks making payments on the Subordinated
Debentures as and when required.
OPTION TO EXTEND INTEREST PAYMENT PERIOD; TAX CONSEQUENCES; MARKET PRICE
CONSEQUENCES
First Banks has the right under the Indenture, so long as no Debenture
Event of Default has occurred and is continuing, to defer the payment of
interest on the Subordinated Debentures at any time or from time to time for a
period not exceeding 20 consecutive quarters with respect to each Extended
Interest Payment Period; provided that no Extended Interest Payment Period may
extend beyond the Stated Maturity of the Subordinated Debentures. As a
consequence of any such deferral, quarterly Distributions on the Preferred
Securities by First Capital will be deferred (and the amount of Distributions
to which holders of the Preferred Securities are entitled will accumulate
additional Distributions thereon at the rate of 9.25% per annum, compounded
quarterly from the relevant payment date for such Distributions) during any
such Extended Interest Payment Period. During any such Extended Interest
Payment Period, First Banks may not (i) declare or pay any dividends or
distributions on, or redeem, purchase, acquire, or make a liquidation payment
with respect to, any of First Banks' capital stock (other than the
reclassification of any class of First Banks' capital stock into another class
of capital stock or the conversion of the Class A Preferred Stock (as defined
herein) into Common Stock (as defined herein)), (ii) make any payment of
principal, interest or premium, if any, on or repay, repurchase or redeem any
debt securities of First Banks that rank pari passu with or junior in interest
to the Subordinated Debentures or make any guarantee payments with respect to
any guarantee by First Banks of the debt securities of any subsidiary of First
Banks if such guarantee ranks pari passu with or junior in interest to the
Subordinated Debentures (other than payments under the Guarantee), or (iii)
redeem, purchase or acquire less than all of the Subordinated Debentures or any
of the Preferred Securities. Prior to the termination of any such Extended
Interest Payment Period, First Banks may further defer the payment of interest;
provided that no
8
<PAGE> 12
Extended Interest Payment Period may exceed 20 consecutive quarters or extend
beyond the Stated Maturity of the Subordinated Debentures. Upon the termination
of any Extended Interest Payment Period and the payment of all interest then
accrued and unpaid (together with interest thereon at the annual rate of 9.25%
compounded quarterly, to the extent permitted by applicable law), First Banks
may elect to begin a new Extended Interest Payment Period, subject to the above
requirements. Subject to the foregoing, there is no limitation on the number of
times that First Banks may elect to begin an Extended Interest Payment Period.
See ``Description of the Preferred Securities--Distributions--Extended Interest
Payment Period'' and ``Description of the Subordinated Debentures--Option to
Extend Interest Payment Period.''
Should an Extended Interest Payment Period occur, each holder of Preferred
Securities will be required to accrue and recognize income (in the form of
original issue discount) in respect of its pro rata share of the interest
accruing on the Subordinated Debentures held by First Capital for United States
federal income tax purposes. A holder of Preferred Securities must, as a
result, include such income in gross income for United States federal income
tax purposes in advance of the receipt of cash, and will not receive the cash
related to such income from First Capital if the holder disposes of the
Preferred Securities prior to the record date for the payment of the related
Distributions. See ``Certain Federal Income Tax Consequences--Potential
Extension of Interest Payment Period and Original Issue Discount.''
First Banks has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the
Subordinated Debentures. Should First Banks elect, however, to exercise such
right in the future, the market price of the Preferred Securities is likely to
be adversely affected. A holder that disposes of its Preferred Securities
during an Extended Interest Payment Period, therefore, might not receive the
same return on its investment as a holder that continues to hold its Preferred
Securities. As a result of the existence of First Banks' right to defer
interest payments, the market price of the Preferred Securities may be more
volatile than the market prices of other securities on which original issue
discount accrues that are not subject to such optional deferrals.
TAX EVENT OR INVESTMENT COMPANY EVENT; REDEMPTION
First Banks has the right to redeem the Subordinated Debentures in whole
(but not in part) within 180 days following the occurrence of a Tax Event or
Investment Company Event (whether occurring before or after March 31, 2002),
and, therefore, cause a mandatory redemption of the Preferred Securities. The
exercise of such right is subject to First Banks having received prior approval
of the Federal Reserve to do so if then required under applicable capital
guidelines or policies of the Federal Reserve.
``Tax Event'' means the receipt by First Capital of an opinion of counsel
experienced in such matters to the effect that, as a result of any amendment
to, or change (including any announced prospective change) in the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein, or as a result of any official
administrative pronouncement or judicial decision interpreting or applying such
laws or regulations, which amendment or change is effective or such
pronouncement or decision is announced on or after the date of issuance of the
Preferred Securities under the Trust Agreement, there is more than an
insubstantial risk that (i) First Capital is, or will be within 90 days of the
date of such opinion, subject to United States federal income tax with respect
to income received or accrued on the Subordinated Debentures, (ii) interest
payable by First Banks on the Subordinated Debentures is not, or, within 90
days of such opinion, will not be, deductible by First Banks, in whole or in
part, for United States federal income tax purposes, or (iii) First Capital is,
or will be within 90 days of the date of the opinion, subject to more than a de
minimis amount of other taxes, duties or other governmental charges. First
Banks must request and receive an opinion with regard to such matters within a
reasonable period of time after it becomes aware of the possible occurrence of
any of the events described in clauses (i) through (iii) above.
``Investment Company Event'' means the receipt by First Capital of an
opinion of counsel experienced in such matters to the effect that, as a result
of the occurrence of a change in law or regulation or a change in
interpretation or application of law or regulation by any legislative body,
court, governmental agency or regulatory authority, First Capital is or will be
considered an ``investment company'' that is required to be registered under
the Investment Company Act of 1940, as amended (the ``Investment Company
Act''), which change becomes effective on or after the date of original
issuance of the Preferred Securities.
9
<PAGE> 13
See ``--Risk Factors Relating to the Preferred Securities--Proposed Tax
Legislation'' for a discussion of certain legislative proposals that, if
adopted, could give rise to a Tax Event, which may permit First Banks to cause
a redemption of the Preferred Securities prior to March 31, 2002.
SHORTENING OR EXTENSION OF STATED MATURITY OF SUBORDINATED DEBENTURES
First Banks has the right, at any time, to shorten the maturity of the
Subordinated Debentures to a date not earlier than March 31, 2002. The exercise
of such right is subject to First Banks having received prior approval of the
Federal Reserve if then required under applicable capital guidelines or
policies of the Federal Reserve. First Banks also has the right to extend the
maturity of the Subordinated Debentures (whether or not First Capital is
terminated and the Subordinated Debentures are distributed to holders of the
Preferred Securities) to a date no later than March 31, 2046, the 49th
anniversary of the initial issuance of the Preferred Securities. Such right may
only be exercised, however, if at the time such election is made and at the
time of such extension (i) First Banks is not in bankruptcy, otherwise
insolvent or in liquidation, (ii) First Banks is not in default in the payment
of any interest or principal on the Subordinated Debentures, (iii) First
Capital is not in arrears on payments of Distributions on the Preferred
Securities and no deferred Distributions are accumulated, and (iv) First Banks
has a Senior Debt rating of investment grade. See ``Description of the
Subordinated Debentures--General.''
RIGHTS UNDER THE GUARANTEE
The Guarantee guarantees to the holders of the Preferred Securities, to the
extent not paid by First Capital, (i) any accrued and unpaid Distributions
required to be paid on the Preferred Securities, to the extent that First
Capital has funds available therefor at such time, (ii) the Redemption Price
(as defined herein) with respect to any Preferred Securities called for
redemption, to the extent that First Capital has funds available therefor at
such time, and (iii) upon a voluntary or involuntary dissolution, winding-up or
liquidation of First Capital (other than in connection with the distribution of
Subordinated Debentures to the holders of Preferred Securities or a redemption
of all of the Preferred Securities), the lesser of (a) the amount of the
Liquidation Distribution (as defined herein), to the extent First Capital has
funds available therefor at such time, and (b) the amount of assets of First
Capital remaining available for distribution to holders of the Preferred
Securities in liquidation of First Capital. The holders of not less than a
majority in Liquidation Amount of the Preferred Securities have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Guarantee Trustee in respect of the Guarantee or to direct the
exercise of any trust power conferred upon the Guarantee Trustee under the
Guarantee. Any holder of the Preferred Securities may institute a legal
proceeding directly against First Banks to enforce its rights under the
Guarantee without first instituting a legal proceeding against First Capital,
the Guarantee Trustee or any other Person (as defined in the Guarantee). If
First Banks were to default on its obligation to pay amounts payable under the
Subordinated Debentures, First Capital would lack funds for the payment of
Distributions or amounts payable on redemption of the Preferred Securities or
otherwise, and, in such event, holders of Preferred Securities would not be
able to rely upon the Guarantee for such amounts. In the event, however, that a
Debenture Event of Default has occurred and is continuing and such event is
attributable to the failure of First Banks to pay interest on or principal of
the Subordinated Debentures on the payment date on which such payment is due
and payable, then a holder of Preferred Securities may institute a legal
proceeding directly against First Banks for enforcement of payment to such
holder of the principal of or interest on such Subordinated Debentures having a
principal amount equal to the aggregate Liquidation Amount of the Preferred
Securities of such holder (a ``Direct Action''). The exercise by First Banks of
its right, as described herein, to defer the payment of interest on the
Subordinated Debentures does not constitute a Debenture Event of Default. In
connection with such Direct Action, First Banks will have a right of set-off
under the Indenture to the extent of any payment made by First Banks to such
holder of Preferred Securities in the Direct Action. Except as described
herein, holders of Preferred Securities will not be able to exercise directly
any other remedy available to the holders of the Subordinated Debentures or
assert directly any other rights in respect of the Subordinated Debentures. See
``Description of the Subordinated Debentures--Enforcement of Certain Rights by
Holders of Preferred Securities,'' ``Description of the Subordinated
Debentures--Debenture Events of Default'' and ``Description of the Guarantee.''
The Trust Agreement provides that each holder of Preferred Securities by
acceptance thereof agrees to the provisions of the Guarantee and the Indenture.
10
<PAGE> 14
NO VOTING RIGHTS EXCEPT IN LIMITED CIRCUMSTANCES
Holders of Preferred Securities will have no voting rights except in
limited circumstances relating only to the modification of the Preferred
Securities and the exercise of the rights of First Capital as holder of the
Subordinated Debentures and the Guarantee. Holders of Preferred Securities will
not be entitled to vote to appoint, remove or replace the Property Trustee or
the Delaware Trustee, as such voting rights are vested exclusively in the
holder of the Common Securities (except upon the occurrence of certain events
described herein). The Property Trustee, the Administrative Trustees and First
Banks may amend the Trust Agreement without the consent of holders of Preferred
Securities to ensure that First Capital will be classified for United States
federal income tax purposes as a grantor trust even if such action adversely
affects the interests of such holders. See ``Description of the Preferred
Securities--Voting Rights; Amendment of Trust Agreement'' and ``Description of
the Preferred Securities--Removal of First Capital Trustees.''
PROPOSED TAX LEGISLATION
On March 19, 1996, President Clinton proposed certain tax law changes that
would, among other things, generally deny corporate issuers a deduction for
interest in respect of certain debt obligations issued on or after December 7,
1995 (the ``Proposed Legislation'') if such debt obligations have a maximum
term in excess of 20 years and are not shown as indebtedness on the issuer's
applicable consolidated balance sheet. On March 29, 1996, Senate Finance
Committee Chairman William V. Roth, Jr. and House Ways and Means Committee
Chairman Bill Archer issued a joint statement (the ``Joint Statement'')
indicating their intent that certain legislative proposals initiated by the
Clinton administration, including the Proposed Legislation, that may be adopted
by either of the tax-writing committees of Congress would have an effective
date that is no earlier than the date of ``appropriate Congressional action.''
In addition, subsequent to the publication of the Joint Statement, Senator
Daniel Patrick Moynihan and Representatives Sam M. Gibbons and Charles B.
Rangel wrote letters to Treasury Department officials concurring with the views
expressed in the Joint Statement (the ``Democrat Letters''). Based upon the
Joint Statement and the Democrat Letters, it is expected that if the Proposed
Legislation were to be enacted, such legislation would not apply to the
Subordinated Debentures. There can be no assurances, however, that the
effective date guidance contained in the Joint Statement and the Democrat
Letters will be incorporated into the Proposed Legislation, if enacted, or that
other legislation enacted after the date hereof will not otherwise adversely
affect the ability of First Banks to deduct the interest payable on the
Subordinated Debentures. There can, therefore, be no assurance that a Tax Event
will not occur. A Tax Event would permit First Banks, upon approval of the
Federal Reserve if then required under applicable capital guidelines or
policies of the Federal Reserve, to cause a redemption of the Preferred
Securities before, as well as after, March 31, 2002. See ``Description of the
Subordinated Debentures--Redemption or Exchange--Tax Event Redemption or
Investment Company Event Redemption'' and ``Certain Federal Income Tax
Consequences--Effect of Proposed Changes in Tax Laws.''
REDEMPTION; EXCHANGE OF PREFERRED SECURITIES FOR SUBORDINATED DEBENTURES
First Banks has the right at any time to dissolve, wind-up or terminate
First Capital and cause the Subordinated Debentures to be distributed to the
holders of the Preferred Securities in exchange therefor in liquidation of
First Capital. The exercise of such right is subject to First Banks having
received prior approval of the Federal Reserve if then required under
applicable capital guidelines or policies of the Federal Reserve. First Banks
will have the right, in certain circumstances, to redeem the Subordinated
Debentures in whole or in part, in lieu of a distribution of the Subordinated
Debentures by First Capital, in which event First Capital will redeem the Trust
Securities on a pro rata basis to the same extent as the Subordinated
Debentures are redeemed by First Banks. Any such distribution or redemption
prior to the Stated Maturity will be subject to prior approval of the Federal
Reserve if then required under applicable capital guidelines or policies of the
Federal Reserve. See ``Description of the Preferred Securities--Redemption or
Exchange--Tax Event Redemption or Investment Company Event Redemption.''
Under current United States federal income tax law, a distribution of
Subordinated Debentures upon the dissolution of First Capital would not be a
taxable event to holders of the Preferred Securities. If, however, First
Capital is characterized as an association taxable as a corporation at the time
of the dissolution of First Capital, the distribution of the Subordinated
Debentures may constitute a taxable event to holders of Preferred Securities.
Moreover, upon occurrence of a Tax Event, a dissolution of First Capital in
which holders of the Preferred Securities
11
<PAGE> 15
receive cash may be a taxable event to such holders. See ``Certain Federal
Income Tax Consequences--Receipt of Subordinated Debentures or Cash Upon
Liquidation of First Capital.''
There can be no assurance as to the market prices for the Preferred
Securities or the Subordinated Debentures that may be distributed in exchange
for Preferred Securities upon a dissolution or liquidation of First Capital.
The Preferred Securities or the Subordinated Debentures, may, therefore, trade
at a discount to the price that the investor paid to purchase the Preferred
Securities offered hereby. Because holders of Preferred Securities may receive
Subordinated Debentures, prospective purchasers of Preferred Securities are
also making an investment decision with regard to the Subordinated Debentures
and should carefully review all the information regarding the Subordinated
Debentures contained herein.
If the Subordinated Debentures are distributed to the holders of Preferred
Securities upon the liquidation of First Capital, First Banks will use its best
efforts to list the Subordinated Debentures on The Nasdaq Stock Market's
National Market or such stock exchanges, if any, on which the Preferred
Securities are then listed.
TRADING PRICE; ABSENCE OF PRIOR PUBLIC MARKET FOR THE PREFERRED SECURITIES
The Preferred Securities may trade at prices that do not fully reflect the
value of accrued but unpaid interest with respect to the underlying
Subordinated Debentures. A holder of Preferred Securities that disposes of its
Preferred Securities between record dates for payments of Distributions (and
consequently does not receive a Distribution from First Capital for the period
prior to such disposition) will nevertheless be required to include accrued but
unpaid interest on the Subordinated Debentures through the date of disposition
in income as ordinary income and to add such amount to its adjusted tax basis
in its pro rata share of the underlying Subordinated Debentures deemed disposed
of. Such holder will recognize a capital loss to the extent the selling price
(which may not fully reflect the value of accrued but unpaid interest) is less
than its adjusted tax basis (which will include all accrued but unpaid
interest). Subject to certain limited exceptions, capital losses cannot be
applied to offset ordinary income for United States federal income tax
purposes. See ``Certain Federal Income Tax Consequences--Disposition of
Preferred Securities.''
There is no current public market for the Preferred Securities. Although
the Preferred Securities have been approved for quotation on The Nasdaq Stock
Market's National Market, there can be no assurance that an active public
market will develop for the Preferred Securities or that, if such market
develops, the market price will equal or exceed the public offering price set
forth on the cover page of this Prospectus. The public offering price for the
Preferred Securities has been determined through negotiations between First
Banks and the Underwriters. Prices for the Preferred Securities will be
determined in the marketplace and may be influenced by many factors, including
prevailing interest rates, the liquidity of the market for the Preferred
Securities, investor perceptions of First Banks and general industry and
economic conditions.
PREFERRED SECURITIES ARE NOT INSURED
The Preferred Securities are not insured by the Bank Insurance Fund (the
``BIF'') or the Savings Association Insurance Fund (the ``SAIF'') of the
Federal Deposit Insurance Corporation (the ``FDIC'') or by any other
governmental agency.
RISK FACTORS RELATING TO FIRST BANKS
IMPACT OF INTEREST RATE CHANGES
First Banks' results of operations are derived from the operations of the
Subsidiary Banks and are principally dependent on net interest income,
calculated as the difference between interest earned on loans and investments
and the interest expense paid on deposits and other borrowings. Like other bank
holding companies and financial institutions, First Banks' interest income and
interest expense are affected by general economic conditions and by the
policies of regulatory authorities, including the monetary policies of the
Federal Reserve. While management has taken measures intended to manage the
risks of operating in a changing interest rate environment, there can be no
assurance that such measures will be effective in avoiding undue interest rate
risk. See ``Management's Discussion and Analysis--General,'' ``--Net Interest
Income'' and ``--Interest Rate Risk Management.''
12
<PAGE> 16
CREDIT RISKS
First Banks, as a financial institution, is exposed to the risk that
customers to whom the Subsidiary Banks have made loans will be unable to repay
those loans according to their terms and that collateral securing such loans
(if any) may not be sufficient in value to assure repayment. Credit losses
could have a material adverse effect on First Banks' operating results. See
``Management's Discussion and Analysis--General'' and ``--Loans and Allowances
for Possible Loan Losses.''
GOVERNMENT REGULATION
Banking organizations are subject to extensive federal and state regulation
and supervision. These regulations and laws are primarily intended to protect
depositors and the FDIC, not shareholders or other creditors. Regulations and
laws affecting the financial institutions industry are undergoing continuous
change, and the ultimate effect of such changes cannot be predicted.
Regulations and laws affecting First Banks and the Subsidiary Banks may be
modified at any time, and new legislation affecting financial institutions may
be proposed and enacted. There is no assurance that such modifications or new
laws will not materially and adversely affect the business, condition or
operations of First Banks and the Subsidiary Banks or benefit competing
entities which may not be subject to the same regulation and supervision. See
``Supervision and Regulation--Recent and Pending Legislation.''
COMPETITION
The banking business is highly competitive. The Subsidiary Banks compete
with other commercial banks, savings and loan associations, credit unions,
mortgage banking companies, securities brokerage companies, insurance
companies, and money market mutual funds. Many of these competitors have
substantially greater resources than First Banks and the Subsidiary Banks and
offer certain services that First Banks and the Subsidiary Banks do not
currently provide. Such competitors may also have greater lending limits than
the Subsidiary Banks. The number of competitors may increase as a result of the
easing of restrictions on interstate banking effected under the Riegle-Neal
Interstate Banking and Efficiency Act of 1994. Non-bank competitors are also
generally not subject to the extensive regulations applicable to First Banks
and the Subsidiary Banks. See ``Business--Competition and Branch Banking'' and
``Supervision and Regulation--Recent and Pending Legislation.''
DIVIDENDS FROM SUBSIDIARY BANKS
The ability of First Banks to pay interest on the Subordinated Debentures
is largely dependent on its receipt of dividends from the Subsidiary Banks. The
amount of dividends that the Subsidiary Banks may pay to First Banks is limited
by various state and federal laws and by the regulations promulgated by their
respective primary regulators, which impose certain minimum capital
requirements. The amount of dividends that the Subsidiary Banks may pay to
First Banks is also limited by the provisions of the Credit Agreement, which
imposes certain minimum capital requirements. Under the most restrictive of
these requirements, the future payment of dividends to First Banks from the
Subsidiary Banks is limited, as of September 30, 1996, to approximately $37.8
million, unless permission of the regulatory authorities and, if necessary, the
lead bank for the lenders is obtained. See ``Supervision and Regulation--Bank
and Bank Holding Company Regulation--Dividends.''
CONTROL OF FIRST BANKS
All of the voting stock of First Banks is owned by various trusts which
were created by and are administered by and for the benefit of Mr. James F.
Dierberg, Chairman of the Board, President and Chief Executive Officer of First
Banks, and members of his immediate family. Mr. Dierberg, therefore, controls
the management and policies of First Banks and the election of its directors by
and through these trusts. The Class C Preferred Stock of First Banks has no
voting rights, except as required by law in certain limited situations and
except for the ability to elect two directors if First Banks fails to pay
dividends on such stock for six quarterly dividend periods. See ``Description
of Other Capital Stock.''
POTENTIAL LIABILITY FOR UNDERCAPITALIZED SUBSIDIARY BANK; CROSS GUARANTEE
Under federal law, a bank holding company may be required to guarantee a
capital plan filed by an undercapitalized bank or thrift subsidiary with its
primary regulator. If the subsidiary defaults under the plan, the holding
company
13
<PAGE> 17
may be required to contribute to the capital of the subsidiary bank an amount
equal to the lesser of 5% of the bank's assets at the time it became
undercapitalized or the amount necessary to bring the bank into compliance with
applicable capital standards. It is, therefore, possible that First Banks would
be required to contribute capital to one or more of the Subsidiary Banks or any
other bank that it may acquire in the event that one or more of the Subsidiary
Banks or such other bank becomes undercapitalized. As described under
``Management's Discussion and Analysis--Capital,'' for these purposes, First
Banks and each of its Subsidiary Banks have, as of September 30, 1996, capital
in excess of the requirements for a ``well-capitalized'' institution. A bank
insured by the FDIC may also be liable for costs incurred by the FDIC as a
result of the failure or near failure of another FDIC-insured bank under common
control with the bank. See ``Supervision and Regulation--Recent and Pending
Legislation.''
FIRST BANKS
First Banks, 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 ``BHCA'').
First Banks' wholly-owned Subsidiary Banks are First Bank, headquartered in
St. Louis County, Missouri (``First Bank (Missouri)''), First Bank,
headquartered in O'Fallon, Illinois (``First Bank (Illinois)''), and First Bank
FSB, headquartered in St. Louis County, Missouri (``First Bank FSB''). First
Banks' wholly-owned bank holding company subsidiary is CCB Bancorp, Inc.,
headquartered in Irvine, California (``CCB''). CCB's wholly-owned subsidiary is
First Bank & Trust, headquartered in Irvine, California (``FB&T''). First
Banks' majority-owned bank holding company subsidiaries are First Banks
America, Inc., headquartered in Houston, Texas (``FBA''), in which First Banks
holds a 67.30% equity interest, and First Commercial Bancorp, Inc.,
headquartered in Sacramento, California (``FCB''), in which First Banks holds a
61.46% equity interest (excluding the effect of the conversion of certain
debentures owned by First Banks). FCB owns all of the capital stock of First
Commercial Bank, headquartered in Sacramento, California (``First
Commercial''). FBA, through its wholly-owned subsidiary, owns all of the
capital stock of BankTEXAS, N.A., headquartered in Houston, Texas (``BTX''),
and Sunrise Bank of California, headquartered in Roseville, California
(``Sunrise''), which was acquired on November 1, 1996. First Bank (Missouri),
First Bank (Illinois), First Bank FSB, FB&T, First Commercial, BTX and Sunrise
are referred to herein as the ``Subsidiary Banks.''
The voting stock of First Banks is owned by various trusts which were
created by and are administered by and for the benefit of Mr. James F.
Dierberg, Chairman of the Board, President and Chief Executive Officer of First
Banks, and members of his immediate family. Mr. Dierberg, therefore, controls
the management and policies of First Banks and the election of its directors.
First Banks also has a class of non-voting preferred stock, the Class C
Preferred Stock, which is traded on The Nasdaq Stock Market's National Market
under the symbol FBNKP.
First Banks' principal executive office is located at 135 North Meramec
Avenue, Clayton, Missouri 63105, and its telephone number is (314) 854-4600.
USE OF PROCEEDS
First Capital will use the gross proceeds received from the sale of the
Preferred Securities to purchase Subordinated Debentures from First Banks.
First Banks intends to use a portion of the net proceeds from the sale of the
Subordinated Debentures to, temporarily, reduce the amount of its indebtedness
under the Credit Agreement to $20 million, although First Banks expects the
amount outstanding thereunder to increase in the future, and to use the
remaining net proceeds from the sale of the Subordinated Debentures and any
subsequent borrowings under the Credit Agreement (see ``Capitalization'') for
general corporate purposes, including the possible (i) repurchase or redemption
of all or a portion of its outstanding Class C Preferred Stock (which becomes
redeemable on December 1, 1997), (ii) funding of investments in, or extensions
of credit to, its banking and nonbanking subsidiaries, (iii) acquisition of
other financial institutions or their assets or liabilities, and (iv)
acquisition of or investment in other businesses of a type eligible for bank
holding companies. The portion of the net proceeds from the sale of the
Subordinated Debentures which is not used to reduce indebtedness under the
Credit Agreement will be invested in short term investment securities pending
its use for the purposes described above. First Banks may, from time to time,
engage in additional capital financings of a character and in amounts to be
determined by First Banks in light of its needs at such time or times and in
light of prevailing market conditions.
14
<PAGE> 18
The Credit Agreement, which is among First Banks and The Boatmen's National
Bank of St. Louis, as lender and agent, and various other unaffiliated
financial institutions, includes a $50 million term loan and a $40 million
revolving line of credit to be used for acquisitions and other corporate
requirements. The obligations of First Banks under the Credit Agreement are
secured by the stock of the wholly-owned Subsidiary Banks and the stock First
Banks owns in any intermediate bank holding company. The term loan requires
quarterly principal payments of $2.5 million and matures on July 12, 2000. The
revolving line of credit matures on July 11, 1997, subject to annual renewal.
The interest rate for the term loan is the agent bank's corporate base rate or,
at the option of First Banks, the London Inter-Bank Offered Rate (``LIBOR'')
plus 1.5%, and the interest rate for the revolving line of credit is the agent
bank's corporate base rate or, at the option of First Banks, LIBOR plus 1.25%.
At September 30, 1996, $47.5 million was outstanding under the term loan
portion of the Credit Agreement and $18.0 million was outstanding under the
revolving line of credit portion of the Credit Agreement. At January 27, 1997,
$45.0 million was outstanding under the term loan portion of the Credit
Agreement and $30.0 million was outstanding under the revolving line of credit
portion of the Credit Agreement.
MARKET FOR THE PREFERRED SECURITIES
The Preferred Securities have been approved for quotation on The Nasdaq
Stock Market's National Market under the symbol FBNKO. Although the
Underwriters have informed First Banks that they presently intend to make a
market in the Preferred Securities, there can be no assurance that an active
and liquid trading market will develop or, if developed, that such a market
will continue. The offering price and distribution rate have been determined by
negotiations among representatives of First Banks and the Underwriters, and the
offering price of the Preferred Securities may not be indicative of the market
price following the offering. See ``Underwriting.''
ACCOUNTING TREATMENT
First Capital will be treated, for financial reporting purposes, as a
subsidiary of First Banks and, accordingly, the accounts of First Capital will
be included in the consolidated financial statements of First Banks. The
Preferred Securities will be presented as a separate line item in the
consolidated balance sheet of First Banks under the caption ``Guaranteed
Preferred Beneficial Interests in Company's Subordinated Debentures,'' and
appropriate disclosures about the Preferred Securities, the Guarantee and the
Subordinated Debentures will be included in the notes to consolidated financial
statements. First Banks will record Distributions payable on the Preferred
Securities as an expense in the consolidated statements of operations for
financial reporting purposes.
All future reports of First Banks filed under the Exchange Act will (a)
present the Trust Securities issued by First Capital on the balance sheet as a
separate line-item entitled ``Guaranteed preferred beneficial interests
Company's subordinated debentures,'' (b) include in a footnote to the financial
statements disclosure that the sole assets of First Capital are the
Subordinated Debentures (including the outstanding principal amount, interest
rate and maturity date of such Subordinated Debentures), and (c) include in an
audited footnote to the financial statements disclosure that First Banks owns
all of the Common Securities of First Capital, the sole assets of First Capital
are the Subordinated Debentures, and the back-up obligations, in the aggregate,
constitute a full and unconditional guarantee by First Banks of the obligations
of First Capital under the Preferred Securities.
15
<PAGE> 19
CAPITALIZATION
The following table sets forth (i) the consolidated capitalization of First
Banks at September 30, 1996 and (ii) the consolidated capitalization of First
Banks giving effect to the issuance of the Preferred Securities hereby offered
by First Capital and receipt by First Banks of the net proceeds from the
corresponding sale of the Subordinated Debentures to First Capital, as if the
sale of the Preferred Securities had been consummated on September 30, 1996,
and assuming the Underwriters' over-allotment option was not exercised.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------
ACTUAL AS ADJUSTED
------ -----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
LONG-TERM DEBT:
Notes payable......................................................................... $ 66,840 21,340<F1>
-------- -------
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN FIRST BANKS' SUBORDINATED DEBENTURES:
Guaranteed preferred beneficial interests in First Banks' subordinated
debentures...................................................................... -- 75,000
Less expenses relating to the issuance of the Preferred Securities................ -- (3,138)
-------- -------
Net proceeds from the sale of guaranteed preferred beneficial interests in
First Banks' subordinated debentures....................................... -- 71,862
-------- -------
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; 2,191,000 shares issued and
outstanding as of September 30, 1996............................................ 54,775 54,775
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....................................................................... 4,237 4,237
Retained earnings..................................................................... 163,894 163,894
Net fair value adjustment for securities available for sale........................... 1,708 1,708
-------- -------
Total stockholders' equity.................................................... 243,592 243,592
-------- -------
Total capitalization.......................................................... $310,432 336,794
======== =======
CAPITAL RATIOS:
Stockholders' equity to total assets.................................................. 6.87% 6.84%
Leverage ratio<F2><F3><F4>............................................................ 6.13 6.10
Risk-based capital ratios:<F4>
Tier 1 capital to risk-weighted assets............................................ 8.23 8.22
Total risk-based capital to risk-weighted assets.................................. 9.56 12.35
<FN>
- --------
<F1>Reflects the temporary reduction of indebtedness under the Credit
Agreement to $20 million. See ``Use of Proceeds'' for a description
of the Credit Agreement and the amounts outstanding thereunder as of
certain dates.
<F2>The leverage ratio is Tier 1 capital divided by average quarterly assets,
after deducting intangible assets and net deferred tax assets in excess of
regulatory maximum limits. See ``Management's Discussion and Analysis--
Capital.''
<F3>The capital ratios, as adjusted, are computed including the total estimated
net proceeds from the sale of the Preferred Securities, in a manner
consistent with Federal Reserve guidelines.
<F4>Federal Reserve guidelines for calculation of Tier 1 capital to
risk-weighted assets limits the amount of cumulative preferred stock which
can be included in Tier 1 capital to 25% of other Tier 1 capital. The Class
C Preferred Stock currently outstanding exceeds this limitation. The
Preferred Securities, although eligible for treatment as Tier 1 capital
under current Federal Reserve guidelines, will not increase First Banks'
Tier 1 capital until either the other components of First Banks' Tier 1
capital increase or the Class C Preferred Stock outstanding decreases
sufficiently to satisfy the foregoing limitation.
</TABLE>
16
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA<F1>
The selected consolidated financial data set forth below, insofar as it
relates to the five years ended December 31, 1995, are derived from the audited
consolidated financial statements of First Banks. The data for the nine-month
periods ended September 30, 1995 and 1996 have been derived from unaudited
interim financial statements; however, in the opinion of First Banks, such
unaudited interim statements include all adjustments (consisting of normal
recurring accruals) necessary to fairly present the data for such periods. The
results of operations for the nine month period ended September 30, 1996, are
not necessarily indicative of results to be achieved for the full year. Such
data are qualified by reference to the consolidated financial statements
included elsewhere in this Prospectus or incorporated by reference and should
be read in conjunction with such financial statements and related notes thereto
and ``Management's Discussion and Analysis.''
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- ----------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA
Interest income......... $ 197,008 192,051 261,621 162,435 140,012 161,303 178,714
Interest expense........ 106,580 106,350 144,945 70,670 58,058 79,529 106,848
---------- --------- --------- --------- --------- --------- ---------
Net interest income..... 90,428 85,701 116,676 91,765 81,954 81,774 71,866
Provision for possible
loan losses........... 8,774 8,449 10,361 1,858 4,456 10,435 9,773
---------- --------- --------- --------- --------- --------- ---------
Net interest income
after provision for
possible loan
losses................ 81,654 77,252 106,315 89,907 77,498 71,339 62,093
Noninterest income...... 15,798 17,642 19,407 13,634 9,953 11,140 12,742
Noninterest expense..... 81,237 66,701 91,566 67,734 53,431 53,953 49,088
---------- --------- --------- --------- --------- --------- ---------
Income before provision
for income taxes,
minority interest in
(income) loss of
subsidiary and
cumulative effect of
change in accounting
principle............. 16,215 28,193 34,156 35,807 34,020 28,526 25,747
Provision for income
taxes................. 4,304 9,414 11,038 12,012 11,592 9,510 9,039
---------- --------- --------- --------- --------- --------- ---------
Income before minority
interest in (income)
loss of subsidiary and
cumulative effect of
change in accounting
principle............. 11,911 18,779 23,118 23,795 22,428 19,016 16,708
Minority interest in
(income) loss of
subsidiary............ (472) 816 1,353 237 -- -- --
Cumulative effect of
change in accounting
principle............. -- -- -- -- 766 -- --
---------- --------- --------- --------- --------- --------- ---------
Net income.............. $ 11,439 19,595 24,471 24,032 23,194 19,016 16,708
========== ========= ========= ========= ========= ========= =========
DIVIDENDS
Preferred stock......... $ 4,237 4,237 5,736 5,735 5,766 1,951 906
Common stock............ -- -- -- -- -- -- --
Ratio of total dividends
declared to net
income................ 37.04% 21.62% 23.44% 23.86% 24.86% 10.26% 5.42%
PER SHARE DATA
Earnings per common
share:
Primary............. 304.39 649.08 791.82 773.31 741.69 719.51 682.75
Fully diluted....... 302.68 617.39 758.66 734.80 690.43 656.54 608.65
Weighted average shares
of common stock
outstanding........... 23,661 23,661 23,661 23,661 23,498 23,144 23,144
BALANCE SHEET DATA (AT
PERIOD-END)
Investment securities... $ 498,785 579,079 508,323 587,878 531,148 518,525 443,057
Loans, net of unearned
discount.............. 2,733,026 2,748,715 2,744,219 2,073,570 1,362,018 1,371,417 1,409,067
Total assets............ 3,546,154 3,699,961 3,622,962 2,879,570 2,031,909 2,047,022 1,996,459
Total deposits.......... 3,054,741 3,170,652 3,183,691 2,333,144 1,779,389 1,768,225 1,753,422
Notes payable........... 66,840 89,146 88,135 46,203 -- 30,038 34,630
Common stockholders'
equity................ 175,754 162,079 166,542 149,249 133,781 110,751 95,970
Total stockholders'
equity................ 243,592 230,142 234,605 217,312 201,844 180,814 111,033
EARNINGS RATIOS
Return on average total
assets<F2>............ 0.43% 0.76% 0.70% 1.00% 1.16% 0.95% 0.85%
Return on average total
stockholders'
equity<F2>............ 6.40 11.61 10.79 11.48 12.27 14.13 16.13
ASSET QUALITY RATIOS
Allowance for possible
loan losses to
loans................. 1.66 1.86 1.92 1.37 1.69 1.52 1.37
Nonperforming loans to
loans<F3>............. 1.22 1.43 1.44 0.78 0.90 0.81 0.74
Allowance for possible
loan losses to
nonperforming
loans<F3>............. 135.86 129.39 133.70 175.37 188.50 188.43 185.30
Nonperforming assets to
loans and foreclosed
assets<F4>............ 1.59 1.74 1.71 1.10 1.08 1.31 1.59
Net loan charge-offs to
average loans<F2>..... 0.79 0.50 0.41 0.09 0.33 0.65 0.47
CAPITAL RATIOS
Average total
stockholders' equity
to average total
assets................ 6.76 6.55 6.49 8.70 9.46 6.70 5.26
Total risk-based capital
ratio................. 9.56 9.67 9.34 12.68 16.90 14.71 10.20
Leverage ratio.......... 6.13 5.60 5.32 7.54 9.30 7.66 5.26
Ratio of earnings to
combined fixed charges
and preferred stock
dividends<F5>:
Including interest
on deposits........ 1.11 1.21 1.18 1.39 1.44 1.32 1.22
Excluding interest
on deposits........ 1.58 1.80 1.75 3.24 4.65 4.55 4.47
<FN>
- ----------
<F1>The comparability of the selected data presented is affected by First
Banks' acquisition of nine banks and six thrifts during the periods
presented. The acquisitions were accounted for as purchases and, therefore,
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. See ``Management's Discussion and Analysis--Acquisitions.''
<F2>Ratios for the nine-month periods are annualized.
<F3>Nonperforming loans consist of nonaccrual loans and loans with restructured
terms.
<F4>Nonperforming assets consist of nonperforming loans and foreclosed assets.
<F5>For purposes of calculating the ratio of earnings to combined fixed charges
and preferred stock dividends, earnings consist of income before taxes plus
interest and rent expense. Fixed charges consist of interest and rent
expense.
</TABLE>
17
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's Discussion and Analysis contains forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. Actual results could differ materially from those projected in
such forward-looking statements as a result of, among other things, the factors
set forth in the section entitled ``Risk Factors.''
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 $11.4 million for the nine months
ended September 30, 1996, compared with $19.6 million for the same period in
1995. For the year ended December 31, 1995, net income was $24.5 million,
compared with $24.0 million for the year 1994. This represents a return on
average assets of .43% and .76% for the nine months ended September 30, 1996
and 1995, respectively. This compares to First Banks' historical levels of
return on average assets of .70%, 1.00% and 1.16% for the years ended December
31, 1995, 1994 and 1993, 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 in order to enhance its presence in a given
market, expand the extent of its market area, or enter new or non-contiguous
markets. First Banks supplements its acquisitions through marketing and
business development efforts designed to broaden the customer bases, strengthen
particular segments of the business or fill in voids in the overall market
coverage. Because all of the Common Stock of First Banks is owned by various
trusts which were created by and are administered by and for the benefit of Mr.
James F. Dierberg and members of his immediate family, First Banks has
determined to use only cash, not common stock, in its acquisitions. Given the
market attractiveness of financial institutions' stock, the advantages of
tax-free exchanges and the structuring flexibility inherent in stock
transactions, the fact that First Bank has determined not to issue stock in its
acquisitions places it at a competitive disadvantage relative to other
acquirers willing to offer stock. In light of these factors, First Banks'
acquisition activities have been sporadic, with multiple transactions
consummated in particular periods, followed by other relatively inactive
periods. 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. These acquisitions, as more fully discussed below, 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 significant asset quality problems. While these asset quality
problems had been identified and considered in the acquisition pricing, these
problems led to the substantial increase in the level of First Banks'
nonperforming assets to $43.7 million at September 30, 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.
18
<PAGE> 22
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. The relatively
high operating costs at these institutions necessitated the re-engineering of
the operating structures and cultures, including 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 re-engineering process inhibited the acquired institutions
from generating income since their acquisition dates commensurate with their
acquisition costs.
Operating results during the years 1994 and 1995 and the nine months ended
September 30, 1996 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. and First Federal
Savings Bank of Proviso Township, 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 interest-earning assets. In addition, the cost of
deposits is generally higher due to the composition, which includes a smaller
portion of noninterest bearing accounts, and slightly higher rates paid to
maintain the time deposits within the competitive markets.
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
1994. At that time, however, 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.
Finally, in September 1996, a one-time special assessment to recapitalize
the SAIF of the FDIC was enacted. The assessment was applied to all thrift
deposits as of March 31, 1995. Because First Banks 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 $8.6 million charge, which
was recorded as an expense during the nine months ended September 30, 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 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,
19
<PAGE> 23
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, as more fully described in Notes 2 and 21 to the
Consolidated Financial Statements, are summarized as follows:
<TABLE>
<CAPTION>
LOANS, NET OF NUMBER OF
TOTAL UNEARNED INVESTMENT BANKING
ENTITY DATE ASSETS DISCOUNT SECURITIES DEPOSITS LOCATIONS
------ ---- ------ ------------- ---------- -------- ---------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1996<F1>
Sunrise Bancorp, Inc.
Roseville, California<F2> November 1, 1996 $ 112,400 61,100 18,100 92,000 3
========== ======= ======= ======= ==
1995
QCB Bancorp
Long Beach, California<F3> November 30, 1995 $ 56,200 35,100 10,700 50,200 3
La Cumbre Savings Bank F.S.B.
Santa Barbara, California<F3> 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<F3> May 31, 1995 83,300 68,700 7,500 61,600 2
HNB Financial Group
Huntington Beach,
California<F3> 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<F4> 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<F7> 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<F5> June 3, 1994 60,700 27,100 28,300 54,500 2
Heritage National Bank
St. Louis County, Missouri<F6> March 31, 1994 63,800 32,200 21,200 57,100 2
First Federal Savings Bank of Proviso
Township
Chicago, Illinois<F4> January 3, 1994 230,000 57,900 153,800 168,500 1
---------- ------- ------- ------- --
$ 811,500 348,600 399,900 592,600 12
========== ======= ======= ======= ==
<FN>
- --------
<F1>On December 19, 1996, FB&T entered into a definitive agreement to purchase
two branch offices located in Long Beach, California with total deposits
of approximately $30 million. Such transaction is pending.
<F2>Sunrise Bancorp, Inc. was acquired subsequent to September 30, 1996 and,
accordingly, is not reflected in the consolidated financial statements as
of September 30, 1996.
<F3>QCB Bancorp, Irvine City Financial and HNB Financial Group and their
respective banking and thrift subsidiaries were merged into CCB Bancorp,
Inc. and its wholly owned banking subsidiary, FB&T. LaCumbre Savings Bank
F.S.B. was merged into FB&T.
<F4>River Valley Savings Bank, F.S.B., a wholly-owned thrift subsidiary of
River Valley Holdings, Inc., and First Federal Savings Bank of Proviso
Township were merged into First Bank FSB.
<F5>Farmers Bancshares, Inc. and its banking subsidiaries were merged into
First Banks and First Bank Illinois, respectively.
<F6>Heritage National Bank was merged into First Bank Missouri.
<F7>First Bank FSB and St. Charles Federal Savings and Loan Association (``St.
Charles Federal'') merged on December 12, 1996 and will collectively
operate as First Bank FSB.
</TABLE>
20
<PAGE> 24
The aforementioned acquisitions were funded by First Banks, Inc. 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 ``Notes 2 and 21
to the Consolidated Financial Statements.''
FINANCIAL CONDITION AND AVERAGE BALANCES
First Banks' total average assets were $3.53 billion and $3.44 billion for
the nine month periods ended September 30, 1996 and 1995, respectively, in
comparison to $3.50 billion, $2.41 billion and $2.00 billion for the years
ended December 31, 1995, 1994 and 1993, respectively. Total assets decreased by
$70 million to $3.55 billion at September 30, 1996 from $3.62 billion at
December 31, 1995. The decrease is primarily attributable to the reduction in
net loans of $11 million and the settlement in January 1996 of the sale of $41
million of investment securities carried as a receivable at December 31, 1995.
In addition, cash and cash equivalents and investment securities decreased by
$17 million and $10 million, respectively, as of September 30, 1996, in
comparison to December 31, 1995. The funds generated from the reduction in
total assets were utilized to reduce rate-sensitive deposits. The decrease in
net loans includes reductions in the residential mortgage and consumer and
installment loan portfolios of $108.5 million and $68.0 million, respectively,
at September 30, 1996 in comparison to December 31, 1995. Substantially
offsetting these decreases, is an increase of $135.8 million in loans within
the corporate banking portfolio. These changes reflect a restructuring 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 and deposits are presented under ``--Lending
and Credit Management'' and ``--Deposits.''
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 of First Banks. 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 the 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 the nine months ended September 30, 1996, First Banks sold
$147 million of residential mortgage loans which resulted in a loss of
$284,000. During the nine months ended September 30, 1996, First Banks sold
various pools of residential mortgage loans held by entities acquired in 1995.
The net gains and losses from these transactions was not material.
The average balance of notes payable increased by $67.6 million to $83.1
million for 1995, in comparison to $15.5 million and $3.3 million for 1994 and
1993, respectively. The increase was used to provide funds for acquisitions
completed during 1995 and 1994.
For the year ended December 31, 1994, total average assets increased by
$409 million. The increase is attributable to the five acquisitions completed
during the year and internal loan growth primarily within the residential and
commercial real estate loan portfolios. The residential loan growth resulted
from a shift in customer preference from longer term fixed-rate loans, which
First Banks sells in the secondary mortgage market, to adjustable rate and
balloon type residential loans, which are eligible for inclusion in First
Banks' loan portfolio. This shift in customer preference is normal during
periods of increasing interest rates such as 1994. The growth in the commercial
real estate loan portfolio is the result of the acquisitions completed during
the year, the increased business development efforts of First Banks' lending
officers, and generally improving economic conditions.
21
<PAGE> 25
Average stockholders' equity continued to increase over these periods, from
$189.0 million at December 31, 1993 to $238.3 million at September 30, 1996, or
by $49.3 million. The increase is attributable to First Banks' practice of
retaining most of its net income to further support future growth.
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:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------
1996 1995
------------------------------ ------------------------------
INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- -------- ------ ------- -------- ------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans:<F1><F2>
Taxable................................... $2,701,314 174,608 8.62% $2,538,575 161,143 8.46%
Tax-exempt<F3>............................ 12,130 1,003 11.03 13,321 1,182 11.83
Investment securities:
Taxable<F4>............................... 470,919 16,939 4.80 593,007 26,513 5.96
Tax-exempt<F3>............................ 23,551 1,544 8.74 27,056 1,650 8.13
Federal funds sold............................ 62,424 2,437 5.21 43,877 1,606 4.88
Other......................................... 31,994 1,345 5.61 11,714 971 11.05
---------- ------- ---------- -------
Total interest-earning assets......... 3,302,332 197,876 7.99 3,227,550 193,065 7.98
------- -------
Nonearning assets................................. 222,692 210,314
---------- ----------
Total assets.......................... $3,525,024 $3,437,864
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits.............. $ 298,990 3,530 1.57% $ 275,788 4,238 2.05%
Savings deposits.............................. 684,640 16,953 3.30 645,951 16,675 3.44
Time deposits of $100 or more<F4>............. 169,889 7,545 5.92 153,274 6,810 5.92
Other time deposits<F4>....................... 1,590,836 71,332 5.98 1,398,234 59,630 5.69
---------- ------- ---------- -------
Total interest-bearing deposits....... 2,744,355 99,360 4.83 2,473,247 87,353 4.71
Federal funds purchased, repurchase agreements and
Federal Home Loan Bank advances<F4>............. 62,354 3,187 6.81 295,474 14,653 6.61
Notes payable and other........................... 78,340 4,032 6.86 80,465 4,344 7.20
---------- ------- ---------- -------
Total interest-bearing liabilities.... 2,885,049 106,579 4.93 2,849,186 106,350 4.98
------- -------
Noninterest-bearing liabilities:
Demand deposits............................... 365,413 331,067
Other liabilities............................. 36,252 32,585
---------- ----------
Total liabilities..................... 3,286,714 3,212,838
Stockholders' equity.............................. 238,310 225,026
---------- ----------
Total liabilities and stockholders'
equity.............................. $3,525,024 $3,437,864
========== ==========
Net interest income................... 91,297 86,715
======= =======
Net interest margin................... 3.69% 3.58%
===== =====
<FN>
- ---------
<F1>For purposes of these computations, nonaccrual loans are included in the
average loan amounts.
<F2>Interest income on loans includes loan fees.
<F3>Information is presented on a tax-equivalent basis assuming a tax rate of
35%. The tax-equivalent adjustments were approximately $892,000 and
$991,000 for the nine months ended September 30, 1996 and 1995, respec-
tively, and $1.3 million, $1.3 million and $984,000 for the years ended
December 31, 1995, 1994 and 1993, respectively.
<F4>Includes the effects of interest rate exchange agreements.
</TABLE>
22
<PAGE> 26
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------- --------------------------------- ---------------------------------
INTEREST INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- ------- ------ ------- -------- ------ ------- -------- ------
(DOLLARS EXPRESSED IN THOUSANDS)
<C> <C> <C> <C> <C> <C> <C> <C> <C>
$2,585,763 220,931 8.54% $1,602,661 128,708 8.03% $1,327,306 110,106 8.30%
13,173 1,543 11.71 13,973 1,346 9.63 13,335 1,088 8.16
585,868 34,379 5.87 593,460 29,385 4.95 497,922 26,634 5.35
26,751 2,138 7.99 27,492 2,259 8.22 18,436 1,725 9.36
52,208 2,905 5.56 37,587 1,533 4.08 50,225 1,418 2.82
14,602 1,013 6.94 9,605 466 4.85 1,691 25 1.48
- ---------- ------- ---------- ------- ---------- -------
3,278,365 262,909 8.02 2,284,778 163,697 7.16 1,908,915 140,996 7.39
------- ------- -------
219,445 122,922 90,124
- ---------- ---------- ----------
$3,497,810 $2,407,700 $1,999,039
========== ========== ==========
$ 279,681 5,760 2.06% $ 234,839 4,421 1.88% $ 209,600 4,008 1.91%
663,870 22,737 3.42 537,462 15,198 2.83 425,555 11,947 2.81
166,232 9,931 5.97 72,976 3,300 4.52 54,061 2,496 4.62
1,443,026 83,595 5.79 969,840 41,170 4.25 870,929 38,635 4.44
- ---------- ------- ---------- ------- ---------- -------
2,552,809 122,023 4.78 1,815,117 64,089 3.53 1,560,145 57,086 3.66
256,333 16,850 6.57 107,185 5,498 5.13 25,679 780 3.04
83,068 6,072 7.31 15,500 1,083 6.99 3,341 192 5.74
- ---------- ------- ---------- ------- ---------- -------
2,892,210 144,945 5.01 1,937,802 70,670 3.65 1,589,165 58,058 3.65
------- ------- -------
345,397 243,829 210,022
33,345 16,692 10,804
- ---------- ---------- ----------
3,270,952 2,198,323 1,809,991
226,858 209,377 189,048
- ---------- ---------- ----------
$3,497,810 $2,407,700 $1,999,039
========== ========== ==========
117,964 93,027 82,938
======= ======= =======
3.60% 4.07% 4.34%
===== ===== =====
</TABLE>
23
<PAGE> 27
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 same period
in the preceding year. The change in interest due to the combined rate/volume
variance has been allocated to rate and volume changes in proportion to the
dollar amounts of the change in each.
<TABLE>
<CAPTION>
INCREASE (DECREASE) ATTRIBUTABLE TO CHANGE IN:
--------------------------------------------------------------------------------
DECEMBER 31, 1995 DECEMBER 31, 1994
SEPTEMBER 30, 1996 COMPARED COMPARED COMPARED
TO SEPTEMBER 30, 1995 TO DECEMBER 31, 1994 TO DECEMBER 31, 1993
--------------------------- ------------------------ -----------------------
NET NET NET
VOLUME RATE CHANGE VOLUME RATE CHANGE VOLUME RATE CHANGE
------ ---- ------ ------ ---- ------ ------ ---- ------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON:
Loans:<F1><F2>
Taxable......................... $ 10,398 3,067 13,465 83,570 8,653 92,223 22,061 (3,459) 18,602
Tax-exempt<F3>.................. (101) (78) (179) (71) 268 197 54 204 258
Investment securities:
Taxable<F4>..................... (4,921) (4,653) (9,574) (368) 5,362 4,994 4,461 (1,710) 2,751
Tax-exempt<F3>.................. (252) 146 (106) (59) (62) (121) 710 (176) 534
Federal funds sold.................. 716 115 831 710 662 1,372 (148) 263 115
Other............................... 523 (149) 374 299 248 547 297 144 441
--------- ------- ------- ------ -------- ------ ------ ------ ------
Total interest income....... 6,363 (1,552) 4,811 84,081 15,131 99,212 27,435 (4,734) 22,701
--------- ------- ------- ------ -------- ------ ------ ------ ------
INTEREST PAID ON:
Interest-bearing demand deposits.... 397 (1,105) (708) 892 447 1,339 475 (62) 413
Savings deposits.................... 867 (589) 278 3,965 3,574 7,539 3,165 86 3,251
Time deposits of $100 or more<F4>... 735 -- 735 5,300 1,331 6,631 857 (53) 804
Other time deposits<F4>............. 8,542 3,160 11,702 24,345 18,080 42,425 4,068 (1,533) 2,535
Federal funds purchased, repurchase
agreements and Federal Home Loan
Bank advances<F4>................. (11,923) 457 (11,466) 9,446 1,906 11,352 3,877 841 4,718
Notes payable and other............. (112) (200) (312) 4,937 52 4,989 841 50 891
--------- ------- ------- ------ -------- ------ ------ ------ ------
Total interest expense...... (1,494) 1,723 229 48,885 25,390 74,275 13,283 (671) 12,612
--------- ------- ------- ------ -------- ------ ------ ------ ------
Net interest income......... $ 7,857 (3,275) 4,582 35,196 (10,259) 24,937 14,152 (4,063) 10,089
========= ======= ======= ====== ======== ====== ====== ====== ======
<FN>
- ----------
<F1>For purposes of these computations, nonaccrual loans are included in the
average loan amounts.
<F2>Interest income on loans includes loan fees.
<F3>Information is presented on a tax-equivalent basis assuming a tax rate of
35%.
<F4>Includes the effect of interest rate exchange agreements.
</TABLE>
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 $91.3 million for the nine
months ended September 30, 1996, from $86.7 million for the same period in
1995. For the years ended December 31, 1995, 1994 and 1993, net interest income
was $118.0 million, $93.0 million and $82.9 million, respectively.
24
<PAGE> 28
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
for all periods other than September 30, 1996. 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 INCREASE IN
EARNING ASSETS NET INTEREST NET
EARNING FROM PRECEDING NET INTEREST INCOME FROM INTEREST
ASSETS PERIOD INCOME PRECEDING PERIOD MARGIN
------- -------------- ------------ ---------------- --------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nine months ended September 30, 1996.............. $3,302,332 2.32% $ 91,297 5.28% 3.69%
Year ended December 31:
1995.......................................... 3,278,365 43.49 117,964 26.81 3.60
1994.......................................... 2,284,778 19.69 93,027 12.16 4.07
1993.......................................... 1,908,915 .05 82,938 .28 4.34
</TABLE>
This is not an unusual phenomena 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. As indicated, however, 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' largest thrift entity, had
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. For the year ended
December 31, 1995, 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, were as follows:
<TABLE>
<CAPTION>
INTEREST
AVERAGE PERCENT OF INCOME/ YIELD/
BALANCES TOTAL EXPENSE RATE
-------- ---------- -------- ------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
Residential mortgage loans.................................. $1,253,474 48.48% $ 99,656 7.95%
Other Loans................................................. 1,332,289 51.52 122,818 9.22
---------- -------- --------
Total loans............................................. $2,585,763 100.00% $222,474 8.60%
========== ======== ======== =====
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 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 which are 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 and various pools of residential mortgage loans held by
acquired entities during the nine months ended September 30, 1996. See
``--Mortgage Banking Activities'' and ``--Loans and Allowance for Possible Loan
Losses.''
25
<PAGE> 29
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 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<F1>
------------------ ---------- --------------- ------------
(DOLLARS EXPRESSED (EXPRESSED IN
IN THOUSANDS) BASIS POINTS)
<S> <C> <C> <C> <C>
Nine months ended September 30:
1996................................ $2,713 6,035 8,748 (35)
1995................................ 1,050 5,168 6,218 (26)
Year ended December 31:
1995................................ 2,210 6,911 9,121 (28)
1994................................ -- 490 490 (2)
1993................................ -- -- -- --
<FN>
- --------
<F1>Effect on net interest margin is expressed as reduction of net interest
income divided by average earning assets, annualized.
</TABLE>
INTEREST RATE RISK MANAGEMENT
In financial institutions, the maintenance of a satisfactory level of net
interest income is a primary factor in achieving acceptable income levels. The
maturity and repricing characteristics of the institution's loan and investment
portfolios, relative to those within its deposit structure, may, however,
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
26
<PAGE> 30
instruments are utilized to modify the repricing, maturity and option
characteristics of on-balance-sheet assets and liabilities. First Banks
utilizes a combination of off-balance-sheet derivative financial instruments,
generally limited to interest rate swap agreements, interest rate cap and floor
agreements, interest rate futures contracts, options on interest rate futures
contracts and forward contracts to sell mortgage-backed securities. The use of
such derivative financial instruments is strictly limited to reducing the
interest rate exposure of First Banks. See ``Notes 1 and 11 to the Consolidated
Financial Statements.''
Derivative financial instruments held by First Banks for purposes of
managing interest rate risk are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1995 1994
--------------------- --------------------- ---------------------
NOTIONAL CREDIT NOTIONAL CREDIT NOTIONAL CREDIT
AMOUNT EXPOSURE AMOUNT EXPOSURE AMOUNT EXPOSURE
-------- -------- -------- -------- -------- --------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest rate swap agreements..................... $145,000 -- 145,000 -- 265,000 2,441
Interest rate floor agreements.................... 105,000 131 105,000 608 -- --
Interest rate cap agreements...................... 30,000 437 30,000 292 10,000 577
Forward commitments to sell mortgage-backed
securities...................................... 31,000 -- 42,000 -- 24,000 --
</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, investments securities
represented 27.2% of average earning assets. This decreased to 18.7% for the
year ended December 31, 1995 and 15.0% for the nine months ended September 30,
1996. 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 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 $197.2 million, or 39.5% of the portfolio at September 30, 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.
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 change 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
27
<PAGE> 31
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 decrease in the unamortized balance of net deferred futures losses
during the nine month period ended September 30, 1996 consists of amortization
of $2.7 million and recognition of $700,000 of realized hedging losses in
connection with sales of investment securities.
The unamortized balance of net deferred losses on interest rate futures
contracts of $1.2 million and $4.6 million at September 30, 1996 and December
31, 1995, respectively, and net deferred gains on interest rate futures
contracts of $6.5 million at December 31, 1994, respectively, were applied to
the carrying value of the available for sale securities portfolio as part of
the mark-to-market valuation.
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
$5.8 million and $4.9 million for the nine months ended September 30, 1996 and
1995, respectively, and $6.6 million and $490,000 for the years ended December
31, 1995 and 1994, respectively. The maturity dates, notional amounts, interest
rates paid and received, and fair values of interest rate swap agreements
outstanding as of the dates indicated are summarized as follows:
<TABLE>
<CAPTION>
INTEREST
NOTIONAL RATE FAIR VALUE
MATURITY DATE AMOUNT PAID RECEIVED GAIN (LOSS)
------------- -------- ---- -------- -----------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
September 30, 1996:
September 30, 1997..................................................... $ 35,000 7.04% 5.55% $ (364)
December 8, 1997....................................................... 15,000 7.90 5.66 (333)
September 30, 1999..................................................... 35,000 7.32 5.55 (744)
September 30, 2001..................................................... 35,000 7.65 5.55 (1,250)
January 30, 2005....................................................... 25,000 8.13 5.63 (1,753)
-------- --------
$145,000 7.53 5.56 $ (4,444)
======== ==== ==== ========
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)
======== ==== ==== ========
December 31, 1994:
December 8, 1996....................................................... $100,000 7.79% 6.38% $ 8
December 8, 1997....................................................... 65,000 7.90 6.38 309
October 21, 1997....................................................... 50,000 7.20 5.56 1,086
October 21, 1999....................................................... 30,000 7.56 5.56 667
October 21, 2001....................................................... 20,000 7.77 5.56 371
-------- --------
$265,000 7.68 6.07 $ 2,441
======== ==== ==== ========
</TABLE>
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 has been 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 significant
decline in interest rates during 1995, which caused
28
<PAGE> 32
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, First Banks shortened the effective
maturity of its interest-bearing liabilities through the termination of $225
million interest rate swap agreements at a loss of $13.5 million. This loss has
been deferred and is being amortized over the remaining lives of the swap
agreements. If all or any portion of the underlying liabilities are repaid, the
related deferred loss will be charged to operations.
During November 1996, First Banks shortened the effective maturity of its
interest-bearing liabilities through the termination of $75 million of interest
rate swap agreements at a loss of $5.3 million. This termination reduced the
effective maturity of liabilities in response to the decrease in the effective
life of the loan portfolio, which occurred primarily as a result of continuing
reduction in the residential mortgage loan portfolio. The loss incurred will be
deferred and amortized over the remaining lives of the swap agreements, unless
the underlying liabilities are repaid prior to that date.
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 September 30, 1996, December 31, 1995 and 1994, the
unamortized costs for these agreements were $470,000, $685,000 and $577,000,
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.
29
<PAGE> 33
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, 1995, adjusted to
account for prepayment assumptions:
<TABLE>
<CAPTION>
OVER THREE OVER SIX
THREE THROUGH THROUGH OVER ONE
MONTHS SIX TWELVE THROUGH OVER FIVE
IMMEDIATE OR LESS MONTHS MONTHS FIVE YEARS YEARS TOTAL
--------- ------- ---------- -------- ---------- --------- -----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans<F1>..................................... $347,887 231,398 400,654 660,505 1,006,406 97,369 2,744,219
Investment securities......................... 59,029 76,869 57,098 50,790 196,714 67,823 508,323
Federal funds sold............................ 53,800 -- -- -- -- -- 53,800
Receivable from sale of investment
securities.................................. -- 41,265 -- -- -- -- 41,265
Interest-bearing deposits with other financial
institutions................................ 16,110 750 -- -- -- -- 16,860
-------- -------- -------- ------- --------- ------- ---------
Total interest-earning assets............. $476,826 350,282 457,752 711,295 1,203,120 165,192 3,364,467
======== ======== ======== ======= ========= ======= =========
Interest-bearing liabilities:
Interest-bearing demand accounts.............. -- 113,805 70,745 46,138 33,834 43,062 307,584
Savings accounts.............................. -- 56,609 46,619 39,959 56,610 133,198 332,995
Money market demand accounts.................. 357,907 -- -- -- -- -- 357,907
Time deposits................................. -- 491,217 304,631 499,595 499,105 999 1,795,547
Other borrowed funds.......................... 62,977 86,688 1,110 4,787 3,570 544 159,676
-------- -------- -------- ------- --------- ------- ---------
Total interest-bearing liabilities........ 420,884 748,319 423,105 590,479 593,119 177,803 2,953,709
Effect of interest rate exchange agreements on
rate-sensitive liabilities...................... -- (145,000) -- -- 85,000 60,000 --
-------- -------- -------- ------- --------- ------- ---------
Total rate-sensitive liabilities adjusted
for impact of interest rate exchange
agreements.............................. $420,884 603,319 423,105 590,479 678,119 237,803 2,953,709
======== ======== ======== ======= ========= ======= =========
Interest sensitivity gap:
Periodic...................................... $ 55,942 (253,037) 34,647 120,816 525,001 72,611 410,758
=========
Cumulative.................................... 55,942 (197,095) (162,448) (41,632) 483,369 410,758
======== ======== ======== ======= ========= =======
Ratio of interest-sensitive assets to interest-
sensitive liabilities:
Periodic...................................... 1.13 0.58 1.08 1.20 1.77 0.69 1.14
=========
Cumulative.................................... 1.13 0.81 0.89 0.98 1.18 1.14
======== ======== ======== ======= ========= =======
<FN>
- ---------
<F1>Loans presented net of unearned discount.
</TABLE>
Management makes certain assumptions in preparing the table above. These
assumptions include: (i) loans will repay at historic repayment speeds; (ii)
mortgage-backed securities, included in investment securities, will repay at
projected repayment speeds; (iii) 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 (iv) fixed maturity deposits
will not be withdrawn prior to maturity. Actual experience may differ from the
rates assumed in preparing this table.
At December 31, 1995, First Banks was liability sensitive on a cumulative
basis through the twelve-month time horizon by $41.6 million or 1.1% of total
assets. This compares to a liability-sensitive position on a cumulative basis
over the same time horizon of $80.6 million or 2.8% of total assets at December
31, 1994. The reduced liability-sensitive position for 1995 reflects the
reduction in short-term borrowings and the change in the composition of
acquired assets and liabilities.
30
<PAGE> 34
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.
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 to
assets which would provide a greater and more stable return on capital to First
Banks.
For the nine month periods ended September 30, 1996 and 1995, First Banks
originated and purchased loans for resale totaling $104 million and $139
million and sold loans totaling $91 million and $27 million, respectively. For
the three years ended December 31, 1995, 1994 and 1993, First Banks originated
and purchased loans for resale totaling $67 million, $81 million and $266
million and sold loans totaling $207 million, $168 million and $268 million,
respectively. Mortgage loans serviced for investors totaled $856 million and
$861 million at September 30, 1996 and 1995, and $888 million, $699 million and
$661 million at December 31, 1995, 1994 and 1993, respectively. The increase
for the year ended December 31, 1995 reflects the production of new loans and
servicing held by various acquired entities, partially offset by First Banks'
sale of $427 million of mortgage loan servicing rights during the year. First
Banks elected to sell the servicing rights after a review of 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 nine month period ended September 30, 1995.
The interest income earned on loans held for sale prior to interest expense
and the cost of capital was $2.5 million and $2.2 million for the nine month
periods ended September 30, 1996 and 1995 and $3.2 million, $4.7 million and
$8.2 million for the three years ended December 31, 1995, 1994 and 1993,
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 rate when the loans were
made. The average balance of loans held for sale was $39.8 million and $33.2
million for the nine month periods ended September 30, 1996 and 1995, and $36.8
million, $59.2 million and $109.0 million for the years ended December 31,
1995, 1994 and 1993, 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 were $2.0 million and
$2.3 million for the nine month periods ended September 30, 1996 and 1995, and
$2.9 million, $1.6 million and $1.2 million for the years ended December 31,
1995, 1994 and 1993, 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 loss on mortgage loans originated for resale, including
loans sold and held for sale, was $7,000 and $622,000 for the nine month
periods ended September 30, 1996 and 1995, respectively. The loss on mortgage
loans originated for resale, including loans sold and held for sale, was
$608,000 for the year ended December 31, 1995, in comparison to a gain of
$126,000 and a loss of $1.7 million for the years ended December 31, 1994 and
1993, respectively. The loss incurred during 1993 was primarily attributable to
the unprecedented high
31
<PAGE> 35
volumes of residential fixed-rate loan commitments and residential fixed-rate
loans held for sale during this period. For the nine month period ended
September 30, 1996 and for the years ended December 31, 1995 and 1994, the
origination volumes of residential fixed-rate loans declined. With the reduced
volumes, the mortgage banking operation was able to originate, package and sell
its production on a more timely basis and, accordingly, reduce the associated
hedge cost. While First Banks experienced higher levels of losses during 1993,
these losses were more than offset by the additional net interest income earned
from the higher average balance of the portfolio of loans held for sale during
these same periods.
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 September 30,
1996, December 31, 1995 and 1994, First Banks had $35.7 million, $42.4 million
and $25.0 million of loans held for sale and related commitments, net of
committed loan sales and estimated underwriting fallout, of which $31.0
million, $42.0 million and $24.0 million, respectively, were hedged through the
use of such forward commitments.
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER
30, 1996 AND 1995
NET INCOME. Net income for the nine months ended September 30, 1996 was
$11.4 million compared to $19.6 million for the same period in 1995. This
represents a return on average assets of .43% and .76% for the nine months
ended September 30, 1996 and 1995, respectively. This compares to First Banks'
historical levels of return on average assets of .70%, 1.00% and 1.16% for the
years ended December 31, 1995, 1994 and 1993, respectively.
The decline in operating results in 1996 and 1995 reflects several
influences which have had significant adverse effects on earnings. As
previously discussed, during this period First Banks completed 12 acquisitions
located in four states, increasing total assets approximately $2.0 billion. See
``--General.'' Eight of these acquired entities have been merged with other
First Banks subsidiaries. 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 acquired
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.
32
<PAGE> 36
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 nine month periods ended September 30, 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>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------
CALIFORNIA TEXAS OTHER
---------------- --------------- ----------------
1996<F1> 1995 1996<F1> 1995 1996<F1> 1995
-------- ---- -------- ---- -------- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Equity in income (loss) of subsidiaries....... $ 3,106 2,689 666 (1,681) 16,834 21,112
Average investment in subsidiaries............ 50,819 43,790 25,893 27,888 213,843 222,258
Return on average investment, annualized...... 8.15 8.19 3.43 (8.04) 10.50 12.67
<FN>
- --------
<F1>Excludes the effect of the one-time FDIC special assessment, net of related
tax benefit.
</TABLE>
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 $8.7 million
for the nine months ended September 30, 1996, in comparison to $6.2 million for
the same period in 1995. The expense of derivative financial instruments was
$9.1 million and $490,000 for the years ended December 31, 1995 and 1994,
respectively.
The results of operations for the nine months ended September 30, 1996 were
also adversely affected by an $8.6 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 BIF of the FDIC.
In addition, income for the nine months ended September 30, 1995 included
net securities gains of $2.8 million compared to net securities losses of
$421,000 for the same period in 1996.
As previously discussed, net interest income (expressed on a tax-equivalent
basis) for the nine months ended September 30, 1996 was $91.3 million, or 3.69%
of average interest earning assets, compared to $86.7 million, or 3.58% of
average interest earning assets, for the same period in 1995.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses
was $8.8 million and $8.4 million for the nine months ended September 30, 1996
and 1995, respectively, while net loan charge-offs were $16.1 million and $9.6
million for the same periods.
Several of First Banks' acquisitions in 1995 and 1994 included significant
portfolios of problem assets. This is particularly evident in California, where
the economy has been weak in recent years. Of First Banks' total nonperforming
assets of $43.7 million at September 30, 1996, $18.1 million, or 41.4%, were
held by the California and Texas banks. As this would suggest, during the nine
month periods ended September 30, 1996 and 1995, a substantial portion of First
Banks' net loan charge-offs and provisions for possible loan losses related to
loans of the California or Texas banks.
33
<PAGE> 37
The following is a summary of loan loss experience by geographic areas for
the nine month periods ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------------
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................... $402,378 441,542 172,737 202,336 2,157,911 2,104,837 2,733,026 2,748,715
Total assets.................. 559,950 610,983 271,700 306,744 2,714,504 2,782,234 3,546,154 3,699,961
Provisions for possible loan
losses...................... 4,024 415 600 5,525 4,150 2,509 8,774 8,449
Net loan charge-offs.......... (8,612) (6,158) (1,921) (2,328) (5,541) (1,122) (16,074) (9,609)
Net loan charge-offs as a
percentage of average
loans<F1>................... 2.67% 2.58% 1.47% 1.50% .35% .07% .79% .50%
<FN>
- --------
<F1>Ratios of net loan charge-offs as a percentage of average loans are
annualized.
</TABLE>
The provision for possible loan losses for the nine months ended September
30, 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.
The provision for possible loan losses for the nine month period ended
September 30, 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 the nine months
ended September 30, 1996, the borrower failed to meet certain previously-agreed
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.
Tables summarizing nonperforming assets, past due loans and charge-off
experience are presented under ``--Loans and Allowance for Possible Loan
Losses.''
34
<PAGE> 38
NONINTEREST INCOME AND EXPENSE. The following table summarizes noninterest
income and noninterest expense for the nine month periods September 30, 1996
and 1995, respectively.
<TABLE>
<CAPTION>
SEPTEMBER 30, INCREASE (DECREASE)
---------------- -------------------
1996 1995 AMOUNT %
---- ---- ------ -
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
Noninterest income:
Service charges on deposit accounts and customer service fees................ $ 9,411 7,634 1,777 23.28%
Credit card fees............................................................. 1,897 1,615 282 17.46
Loan servicing fees, net..................................................... 2,027 2,286 (259) (11.33)
Gain (loss) on mortgage loans sold and held for sale:
Originated for sale...................................................... (7) (338) 331 (97.93)
Other loan sales......................................................... -- (284) 284 --
Trust and brokerage fees..................................................... 512 530 (18) (3.40)
Net gain (loss) on sales of securities....................................... (421) 2,765 (3,186) (115.23)
Gain on sale of mortgage loan servicing rights............................... -- 3,843 (3,843) --
(Loss) on cancellation of interest rate swap agreement....................... -- (3,342) 3,342 --
Other........................................................................ 2,379 2,933 (554) (18.89)
------- ------ ------
Total noninterest income............................................. $15,798 17,642 (1,844) (10.45)
======= ====== ====== =======
Noninterest expense:
Salaries and employee benefits............................................... $30,085 27,938 2,147 7.68%
Occupancy, net of rental income.............................................. 7,245 6,244 1,001 16.03
Furniture and equipment...................................................... 5,404 4,982 422 8.47
Federal Deposit Insurance Corporation premiums............................... 11,355 3,810 7,545 198.03
Postage, printing and supplies............................................... 3,660 3,360 300 8.93
Data processing fees......................................................... 3,479 3,560 (81) (2.28)
Legal, examination and professional fees..................................... 3,620 3,975 (355) (8.93)
Credit card expenses......................................................... 2,149 1,762 387 21.96
Communications............................................................... 1,992 1,744 248 14.22
Advertising.................................................................. 1,253 1,473 (220) (14.94)
Losses and expenses on foreclosed real estate, net of gains.................. 951 539 412 76.44
Other........................................................................ 10,044 7,314 2,730 37.33
------- ------ ------
Total noninterest expense............................................ $81,237 66,701 14,536 21.79
======= ====== ====== =======
</TABLE>
Noninterest income was $15.8 million for the nine months ended September
30, 1996, in comparison to $17.6 million for the same period in 1995. The
decrease for the nine months ended September 30, 1996 is primarily attributable
to net security losses of $421,000 for the nine months ended September 30, 1996
in comparison to net securities gains of $2.8 million for the same period in
1995, partially offset by the additional noninterest income generated from the
acquisitions completed throughout 1995 and 1994.
An increase of $2.1 million in service charges, customer service fees and
credit card fees for the nine months ended September 30, 1996, compared to the
same period in 1995, relates primarily to the aforementioned acquisitions.
For the nine months ended September 30, 1996, loan servicing fees, net,
decreased by $259,000, in comparison to the same period in 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.
During the nine months ended September 30, 1995, First Banks decided to
sell $427 million of mortgage servicing rights due to favorable pricing
available in the marketplace at that time. This sale resulted in a gain of $3.8
million.
35
<PAGE> 39
In addition, First Banks sold $147 million of residential mortgage loans
during the nine months ended September 30, 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 nine
months ended September 30, 1995.
Noninterest income also includes net security losses of $421,000 for the
nine months ended September 30, 1996, in comparison to net security gains of
$2.8 million for the same period in 1995. The securities sold were classified
as available for sale within the investment security portfolio. Gross gains and
losses were $445,000 and $166,000, respectively, for the nine months ended
September 30, 1996. For the nine months ended September 30, 1995, the gross
gains and losses were $8.0 million and $1.2 million, respectively. The net
security losses include the recognition of $700,000 and $4.0 million of
realized hedging losses for the nine month periods ended September 30, 1996 and
1995, respectively.
The increase in other income for the nine months ended September 30, 1996
relates primarily to a non-recurring gain of $795,000 realized from the
termination of a leveraged lease and the related sale of the underlying leased
assets. Included in other income for the nine months ended September 30, 1995
was $802,000 from the termination of a self-insurance trust.
Noninterest expense was $81.2 million and $66.7 million for the nine months
ended September 30, 1996 and 1995, respectively. The increase of $14.5 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
$2.2 million to $30.1 million from $27.9 million for the nine month periods
ended September 30, 1996 and 1995, respectively. In addition, occupancy and
furniture and equipment expenses increased by $1.4 million to $12.6 million
from $11.2 million for the nine month periods ended September 30, 1996 and
1995, respectively.
FDIC expense for the nine months ended September 30, 1996 includes an $8.6
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. The expected decrease in the cost of deposit insurance is based on
an overall assessment rate for 1997 of 1.29 basis points and 6.44 basis points
for each $100.00 of assessable BIF and SAIF deposits respectively, in
comparison to the current assessment rate, of 23 basis points. First Banks
currently has $1.2 billion of SAIF insured deposits.
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 is 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.
36
<PAGE> 40
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.
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 has 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 has 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, charges
off a loan when it becomes 120 days or more past due, regardless of whether the
collateral is in its possession. When the collateral is subsequently received,
the charged-off amount is 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 has increased its
collection efforts and has implemented more stringent lending practices,
including regular reviews of new loans originated and strict adherence to
approved policies and practices.
Contributing further to the increase in net loan charge-offs for 1995 in
comparison to 1994 were 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 loan
charge-offs 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.
37
<PAGE> 41
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>
INCREASE
DECEMBER 31, (DECREASE)
---------------- ---------------
1995 1994 AMOUNT %
---- ---- ------ -
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
Noninterest income:
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 agreement............................ (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>
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 is 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
38
<PAGE> 42
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 includes 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 expenses are 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 synergy's 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 insurance premium expense
by approximately $1.6 million for the year ended December 31, 1995.
COMPARISON OF RESULTS OF OPERATIONS FOR YEARS ENDED 1994 AND 1993
NET INCOME. Net income for the year ended December 31, 1994 was $24.0
million, compared with $23.2 million earned in 1993. Net income for the year
ended December 31, 1993 included a $766,000 benefit from the cumulative effect
of a change in accounting principle due to the adoption of Statement of
Financial Accounting Standards No. 109 Accounting for Income Taxes (``SFAS
109'').
Net interest income (expressed on a tax-equivalent basis) was $93.0
million, or 4.07%, of average interest-earning assets for 1994, compared to
$82.9 million, or 4.34%, for 1993. The increase in net income for 1994 is
primarily attributable to the decrease in the provision for possible loan
losses during 1994 in comparison to 1993.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses
was $1.9 million and $4.5 million for the years ended December 31, 1994 and
1993, respectively. Net loan charge-offs were $1.5 million and $4.4 million for
the same periods. The decrease in the provision for possible loan losses during
1994, in comparison to 1993, is attributable to a decrease in loan charge-offs,
increase in recoveries of loans previously charged-off and management's
assessment of the required reserves based on the risks identified in the
various loan portfolios of each Subsidiary Bank.
39
<PAGE> 43
NONINTEREST INCOME AND EXPENSE. The following table summarizes noninterest
income and noninterest expense for the years ended December 31, 1994 and 1993,
respectively.
<TABLE>
<CAPTION>
INCREASE
DECEMBER 31, (DECREASE)
---------------- ---------------
1994 1993 AMOUNT %
---- ---- ------ -
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
Noninterest income:
Service charges on deposit accounts and customer service fees.................... $ 8,300 6,821 1,479 21.7%
Credit card fees................................................................. 1,746 1,231 515 41.8
Loan servicing fees, net......................................................... 1,645 1,163 482 41.4
Gain (loss) on mortgage loans sold and held for sale............................. 126 (1,693) 1,819 --
Trust and brokerage fees......................................................... 744 752 (8) (1.1)
Net (loss) gain on sales of securities........................................... (290) 155 (445) --
Other............................................................................ 1,363 1,524 (161) (10.6)
------- ------ ------
Total noninterest income................................................. $13,634 9,953 3,681 37.0
======= ====== ====== =====
Noninterest expense:
Salaries and employee benefits................................................... $28,337 22,087 6,250 28.3%
Occupancy, net of rental income.................................................. 5,260 4,450 810 18.2
Furniture and equipment.......................................................... 5,209 4,783 426 8.9
Federal Deposit Insurance Corporation premiums................................... 4,484 4,289 195 4.5
Postage, printing and supplies................................................... 3,304 3,000 304 10.1
Data processing fees............................................................. 3,733 2,929 804 27.4
Legal, examination and professional fees......................................... 3,562 2,369 1,193 50.4
Credit card expenses............................................................. 2,455 1,843 612 33.2
Communications................................................................... 1,816 1,235 581 47.0
Advertising...................................................................... 1,767 1,313 454 34.6
Losses and expenses on foreclosed real estate, net of gains...................... 792 28 764 --
Other............................................................................ 7,015 5,105 1,910 37.4
------- ------ ------
Total noninterest expense................................................ $67,734 53,431 14,303 26.8
======= ====== ====== =====
</TABLE>
Noninterest income increased by $3.6 million to $13.6 million from $10.0
million for the years ended December 31, 1994 and 1993, respectively. The
increase is attributable to mortgage banking activities and additional service
charges and customer fee income. A more thorough discussion and analysis of the
increase attributable to mortgage banking operations has been presented under
``--Mortgage Banking Activities.'' The increased service charges and customer
fee income is associated with the acquisitions completed during 1994 and
improved product offerings to the existing customer base.
Noninterest expense was $67.7 million and $53.4 million for the years ended
December 31, 1994 and 1993, respectively, representing an increase of $14.3
million. The increase is primarily attributable to the five acquisitions
completed during 1994 which affected virtually every aspect of noninterest
expense. In addition to the general increase in expenses resulting from the
acquisitions in 1994, credit card expenses increased primarily from the
development and marketing costs associated with the introduction of the new
variable rate credit card program. Similarly, legal, examination and
professional fees increased to $3.6 million in 1994 from $2.4 million in 1993.
The increase was primarily attributable to a $620,000 increase in regulatory
examination and audit fees and a $574,000 increase in legal and other
professional fees. The increase in regulatory examination and audit fees is
primarily attributable to the increase in the organizational size of First
Banks. The increase in legal and other professional fees is primarily
associated with the increased use of such outside expertise in connection with
the loan growth experienced during 1994 as well as the ongoing requirements of
the existing loan portfolios.
40
<PAGE> 44
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 77.1% of total
assets as of September 30, 1996, compared to 75.7% and 72.0% at December 31,
1995 and 1994, respectively.
Loans, net of unearned discount and excluding loans held for sale,
increased by $10.2 million. This increase is primarily attributable to the
corporate banking loan portfolio of First Banks which experienced an increase
of $135.8 million during the nine months ended September 30, 1996. Offsetting
this increase were reductions in residential real estate mortgage and consumer
and installment loan portfolios of $108.5 million and $68.0 million,
respectively, at September 30, 1996, in comparison to December 31, 1995. These
changes reflect a restructuring 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 automobile
loans.
For 1995, loan growth, net of unearned discount and excluding loans held
for sale, was $646.0 million, compared to $798.9 million for 1994. The
acquisitions completed during 1995 and 1994 provided loans of approximately
$722 million and $349 million, or 63.0% and 43.0%, respectively, of the total
acquired assets. Internally generated loan growth was $65.9 million and $356.1
million for 1995 and 1994, respectively. Offsetting the loan growth in 1995 was
a sale of $147 million of residential mortgage loans. As previously discussed
under ``--Financial Condition and Average Balances,'' as a result of the growth
which had 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, First Banks concluded that its residential
mortgage loan portfolio, as a percentage of the total loans, should be reduced.
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 whereby 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.
41
<PAGE> 45
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,
SEPTEMBER 30, ----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
------------ ------------ ------------- ------------ ------------ ------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ - ------ - ------ - ------ - ------ - ------ -
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial,
financial,
agricultural
and municipal
and industrial
development... $ 443,750 16.4% $ 364,018 13.5% $ 208,649 10.2% $ 160,211 12.8% $ 154,322 12.2% $ 181,978 13.7%
Real estate
construction
and
development... 259,607 9.6 209,802 7.8 122,912 6.0 76,049 6.1 77,208 6.2 94,118 7.1
Real estate
mortgage:
One- to
four-family
residential
loans....... 1,082,705 40.0 1,199,491 44.4 967,129 47.1 584,868 46.6 606,847 48.1 625,801 47.1
Other real
estate loans 579,902 21.3 512,264 19.0 332,075 16.1 243,382 19.4 189,267 15.0 188,623 14.2
Consumer and
installment,
net of
unearned
discount...... 343,375 12.7 413,609 15.3 422,461 20.6 189,851 15.1 234,552 18.5 237,116 17.9
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total loans,
excluding
loans held
for sale... 2,709,339 100.0% 2,699,184 100.0% 2,053,226 100.0% 1,254,361 100.0% 1,262,196 100.0% 1,327,636 100.0%
===== ===== ===== ===== ===== =====
Loans held
for sale....... 23,687 45,035 20,344 107,657 109,221 81,431
---------- ---------- ---------- ---------- ---------- ----------
Total loans.. $2,733,026 $2,744,219 $2,073,570 $1,362,018 $1,371,417 $1,409,067
========== ========== ========== ========== ========== ==========
</TABLE>
Loans at December 31, 1995 mature as follows:
<TABLE>
<CAPTION>
OVER ONE YEAR
THROUGH FIVE YEARS OVER FIVE YEARS
------------------ -------------------
ONE YEAR FIXED FLOATING FIXED FLOATING
OR LESS RATE RATE RATE RATE TOTAL
-------- ----- -------- ----- -------- -----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial, agricultural and municipal and
industrial development................................ $166,215 53,663 106,403 3,299 34,438 364,018
Real estate construction and development................ 141,524 5,068 58,139 173 4,898 209,802
Real estate mortgage.................................... 250,239 309,201 294,792 169,586 687,937 1,711,755
Consumer and installment, net of unearned discount...... 50,573 317,223 4,204 20,498 21,111 413,609
Loans held for sale..................................... 45,035 -- -- -- -- 45,035
-------- ------- ------- -------- -------- ---------
Total loans......................................... $653,586 685,155 463,538 193,556 748,384 2,744,219
======== ======= ======= ======== ======== =========
</TABLE>
42
<PAGE> 46
Following is a summary of loan loss experience for the nine months ended
September 30, 1996 and 1995 and the five years ended December 31, 1995:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
----------------- ---------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance for possible loan losses,
beginning of period............... $ 52,665 28,410 28,410 23,053 20,897 19,238 15,797
Acquired allowances for possible
loan losses....................... -- 23,761 24,655 5,026 2,079 399 --
---------- --------- --------- --------- --------- --------- ---------
52,665 52,171 53,065 28,079 22,976 19,637 15,797
---------- --------- --------- --------- --------- --------- ---------
Loans charged-off:
Commercial, financial and
agricultural................... (7,296) (1,811) (2,337) (813) (2,023) (3,885) (1,991)
Real estate construction and
development.................... (1,142) (253) (275) (119) (19) (424) (272)
Real estate mortgage............. (6,943) (5,640) (5,948) (1,282) (2,212) (2,697) (2,310)
Consumer and installment......... (5,922) (5,152) (7,060) (4,482) (5,277) (5,197) (3,076)
---------- --------- --------- --------- --------- --------- ---------
Total.................... (21,303) (12,856) (15,620) (6,696) (9,531) (12,203) (7,649)
---------- --------- --------- --------- --------- --------- ---------
Recoveries of loans previously
charged-off:
Commercial, financial and
agricultural................... 1,099 945 1,714 831 1,191 1,083 410
Real estate construction and
development.................... 376 479 666 401 241 34 --
Real estate mortgage............. 1,563 249 290 840 1,396 503 144
Consumer and installment......... 2,191 1,574 2,189 3,097 2,324 1,408 763
---------- --------- --------- --------- --------- --------- ---------
Total.................... 5,229 3,247 4,859 5,169 5,152 3,028 1,317
---------- --------- --------- --------- --------- --------- ---------
Net loans charged-off.... (16,074) (9,609) (10,761) (1,527) (4,379) (9,175) (6,332)
---------- --------- --------- --------- --------- --------- ---------
Provision for possible loan losses... 8,774 8,449 10,361 1,858 4,456 10,435 9,773
---------- --------- --------- --------- --------- --------- ---------
Allowance for possible loan losses,
end of period...................... $ 45,365 51,011 52,665 28,410 23,053 20,897 19,238
========== ========= ========= ========= ========= ========= =========
Loans outstanding:
Average.......................... $2,713,444 2,551,896 2,598,936 1,616,634 1,340,641 1,416,597 1,360,169
End of period.................... 2,733,026 2,748,715 2,744,219 2,073,570 1,362,018 1,371,417 1,409,067
End of period, excluding loans
held for sale.................. 2,709,339 2,704,047 2,699,184 2,053,226 1,254,361 1,262,196 1,327,636
========== ========= ========= ========= ========= ========= =========
Ratio of allowance for possible
loan losses to loans
outstanding:
Average.................... 1.67% 2.00% 2.03% 1.76% 1.72% 1.48% 1.41%
End of period.............. 1.66 1.86 1.92 1.37 1.69 1.52 1.37
End of period, excluding
loans held for sale...... 1.67 1.89 1.95 1.38 1.84 1.66 1.45
Ratio of net charge-offs to
average loans outstanding<F1>.. 0.79 0.50 0.41 0.09 0.33 0.65 0.47
==== ==== ==== ==== ==== ==== ====
Allocation of allowance for possible
loan losses at end of period:
Commercial, financial,
agricultural and municipal
and industrial development..... $ 13,408 12,216 12,501 4,160 3,531 2,912 3,431
Real estate construction and
development.................... 5,598 4,371 4,665 2,440 2,867 2,895 3,529
Real estate mortgage............. 13,798 17,125 19,849 8,051 6,712 4,186 4,290
Consumer and installment......... 6,740 10,523 10,016 6,225 2,925 2,428 1,778
Unallocated...................... 5,821 6,776 5,634 7,534 7,018 8,476 6,210
---------- --------- --------- --------- --------- --------- ---------
Total.................... $ 45,365 51,011 52,665 28,410 23,053 20,897 19,238
========== ========= ========= ========= ========= ========= =========
Percent of categories to loans,
net of unearned discount:
Commercial, financial and
agricultural................... 15.79% 11.56% 12.81% 9.40% 10.83% 10.19% 11.68%
Municipal and industrial
development.................... .44 .48 0.46 0.66 0.93 1.06 1.23
Real estate construction and
development.................... 9.50 7.40 7.65 5.93 5.58 5.63 6.68
Real estate mortgage............. 60.84 63.41 62.49 62.66 60.81 58.05 57.80
Consumer and installment......... 12.56 15.52 14.95 20.37 13.94 17.10 16.83
Loans held for sale.............. .87 1.63 1.64 0.98 7.91 7.97 5.78
---------- --------- --------- --------- --------- --------- ---------
Total..................... 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
========== ========= ========= ========= ========= ========= =========
<FN>
- ----------
<F1>The ratios for the nine month periods are annualized.
</TABLE>
43
<PAGE> 47
Following is a summary of nonperforming assets by category:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------ ---------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural:
Nonaccrual...................... $ 4,867 4,261 9,930 2,540 4,278 2,707 1,703
Restructured terms.............. 142 -- -- 60 60 122 314
Real estate construction and
development--
Nonaccrual...................... 2,093 2,175 2,002 1,448 70 89 --
Real estate mortgage:
Nonaccrual...................... 25,669 32,476 27,159 11,637 7,546 7,292 7,443
Restructured terms.............. 106 -- -- 222 227 568 772
Consumer and installment:
Nonaccrual...................... 508 331 300 293 49 312 82
Restructured terms.............. 7 -- -- -- -- -- 68
---------- --------- --------- --------- --------- --------- ---------
Total nonperforming
loans................. 33,392 39,423 39,391 16,200 12,230 11,090 10,382
Other real estate................... 10,298 8,783 7,753 6,740 2,529 6,938 12,282
---------- --------- --------- --------- --------- --------- ---------
Total nonperforming
assets.............. $ 43,690 48,026 47,144 22,940 14,759 18,028 22,664
========== ========= ========= ========= ========= ========= =========
Loans, net of unearned discount..... $2,733,026 2,748,715 2,744,219 2,073,570 1,362,018 1,371,417 1,409,067
========== ========= ========= ========= ========= ========= =========
Loans past due 90 days or more
and still accruing................ $ 5,988 5,314 8,474 1,885 1,199 3,074 5,637
========== ========= ========= ========= ========= ========= =========
Allowance for possible loan
losses to loans................... 1.66% 1.86% 1.92% 1.37% 1.69% 1.52% 1.37%
Nonperforming loans to loans........ 1.22 1.43 1.44 0.78 0.90 0.81 0.74
Allowance for possible loan
losses to nonperforming
loans............................. 135.86 129.99 133.70 175.37 188.50 188.43 185.30
Nonperforming assets to loans and
foreclosed assets................. 1.59 1.74 1.71 1.10 1.08 1.31 1.59
==== ==== ==== ==== ==== ==== ====
</TABLE>
As of September 30, 1996, December 31, 1995 and 1994, $24.5 million, $47.9
million and $18.4 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 month,
the allowance for possible loan losses is reviewed relative to the watch list
and other data to determine its adequacy. The provision for possible loan
losses is management's estimate of the amount necessary to maintain the
allowance at a level consistent with this evaluation. As adjustments to the
allowance for possible loan losses are considered necessary, they are reflected
in the consolidated statements of 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.
44
<PAGE> 48
INVESTMENT SECURITIES
Effective December 31, 1993, First Banks adopted SFAS 115, Accounting for
Certain Investments in Debt and Equity Securities (``SFAS 115''), for which the
cumulative effect was recorded on the consolidated balance sheet on that date.
Under SFAS 115, First Banks is required to classify debt and equity
securities into one of three categories. Held to maturity includes debt
securities which First Banks has the positive intent and ability to hold to
maturity. Trading includes debt and equity securities purchased and held
principally for the purpose of selling them in the near term. Available for
sale includes debt securities not classified as held to maturity or trading and
equity investments not classified as trading, and which, therefore, are
investments which First Banks has no plans to sell in the near term but which
may be sold in the future under different circumstances.
As of December 31, 1993, First Banks conducted an initial evaluation of the
investment security portfolio and practices for purposes of allocation into one
of the three categories. First Banks does not engage in the trading of
securities as defined by SFAS 115 and, accordingly, there are no securities
designated as trading. This evaluation further concluded the composition of
debt securities eligible for inclusion in the held-to-maturity portfolio should
be limited to debt securities purchased to enhance overall profitability of
First Banks. The remaining securities were allocated as available for sale.
While First Banks plans to hold available-for-sale securities for an indefinite
period, management may dispose of these securities as part of its
asset/liability strategy, in response to changing interest rates, to adjust for
liquidity requirements in response to loan demand or other similar factors. The
available-for-sale portfolio also includes investments in equity securities
since it was not First Banks' intent to purchase these securities principally
for the purpose of selling them in the near term.
As a result of this evaluation, debt securities with an amortized cost of
$242.0 million were classified as held-to-maturity securities, and debt and
equity securities with an amortized cost of $283.6 million were classified as
available-for-sale securities. A market valuation account was established for
the available-for-sale securities of $5.5 million, to increase the recorded
balance of such securities at December 31, 1993 to their fair value on that
date; a deferred tax liability of $1.9 million was recorded to reflect the tax
effect of the market valuation account; and the net increase resulting from the
market valuation adjustment at December 31, 1993 was recorded as a separate
component of stockholders' equity. Subsequent to December 31, 1993, the federal
banking and thrift regulatory agencies concluded the impact of applying SFAS
115 would not be considered part of the capital base for purposes of
calculating regulatory capital compliance. In addition, state banking
regulatory agencies have also elected to exclude the impact of applying SFAS
115, except for the California State Banking Department which includes the
impact of SFAS 115.
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. Such reassessment had to
occur by December 31, 1995.
In light of the Special Report and the regulatory capital treatment of the
impact of SFAS 115, First Banks again reviewed its investment securities
portfolios and practices. First Banks concluded the economic benefits available
to First Banks by increasing the types of securities classified as available
for sale exceeded the disadvantages of reflecting market value changes of such
investment securities, net of deferred income taxes, as a component of
stockholders' equity. The primary benefits available to First Banks within its
available-for-sale portfolio, in contrast to the held-to-maturity portfolio,
are: (1) the ability to provide and absorb funds based on the liquidity
position of First Banks; (2) the ability to reposition the interest rate risk
of the portfolio to respond to changes in the overall interest rate risk
profile of First Banks; and (3) the ability to sell selected securities in
response to favorable market conditions. Accordingly, during December 1995,
First Banks concluded the investment securities portfolios would be classified
as available for sale except for investments in state and political
subdivisions and certain securities of FCB. Investments in state and political
subdivisions are generally limited to communities served by First Banks and
would be held to maturity under First Banks' on-going support of the community.
The classifications of FCB's investment securities remain as originally
classified by FCB reflecting the investment strategies of that bank's
management.
45
<PAGE> 49
As of December 31, 1995, debt securities with an amortized cost of $174.1
million were reclassified from held to maturity to available for sale. The
market valuation account 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 related 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 the separate component of stockholders' equity.
The following table shows the composition of the investment security
portfolio by major category as of the dates presented:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ----------------------
1996 1995 1994 1993
---- ---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
Available For Sale
U.S. Treasuries............................................. $ 82,466 44,012 46,036 108,498
U.S. Government Agencies and Corporations:
Mortgage backed......................................... 197,124 235,496 173,368 30,072
Other................................................... 160,431 160,297 98,289 127,993
Other securities............................................ 781 3,303 -- --
Federal Home Loan Bank and Federal Reserve Bank stock....... 21,167 18,173 25,883 6,713
Equity investments in other financial institutions.......... 11,306 10,510 12,382 15,889
-------- ------- ------- -------
Total available for sale........................ 473,275 471,791 355,958 289,165
-------- ------- ------- -------
Held to Maturity
U.S. Treasuries............................................. 3,004 7,018 10,251 --
U.S. Government Agencies and Corporations:
Mortgage-backed......................................... -- -- 178,434 190,920
Other................................................... -- 3,940 9,767 5,000
State and Political Subdivisions............................ 22,506 25,574 27,237 21,539
Other....................................................... -- -- 6,231 24,524
-------- ------- ------- -------
Total held to maturity.......................... 25,510 36,532 231,920 241,983
-------- ------- ------- -------
Total investment securities..................... $498,785 508,323 587,878 531,148
======== ======= ======= =======
</TABLE>
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>
SEPTEMBER 30, 1996
------------------------
PERCENT
OF
AMOUNT DEPOSITS RATE
------ -------- ----
(DOLLARS EXPRESSED IN
THOUSANDS)
<S> <C> <C> <C>
Demand deposits.................... $ 393,401 12.9% --%
Interest-bearing demand deposits... 289,535 9.5 1.77
Savings deposits................... 664,142 21.7 3.12
Time deposits of $100,000 or
more............................. 149,695 4.9 5.34
Other time deposits................ 1,557,968 51.0 5.55
---------- ----- ====
Total deposits.................
$3,054,741 100.0%
========== =====
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------
1995 1994 1993
------------------------ ------------------------ ------------------------
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.................... $ 389,658 12.2% --% $ 290,039 12.4% --% $ 224,041 12.6% --%
Interest-bearing demand deposits... 307,584 9.7 1.89 268,212 11.5 2.04 223,297 12.5 1.75
Savings deposits................... 690,902 21.7 3.16 538,027 23.1 3.03 446,294 25.1 2.63
Time deposits of $100,000 or
more............................. 201,025 6.3 5.69 113,381 4.9 4.87 49,874 2.8 3.81
Other time deposits................ 1,594,522 50.1 5.72 1,123,485 48.1 4.84 835,883 47.0 4.15
---------- ----- ==== ---------- ----- ==== ---------- ----- ====
Total deposits.................
$3,183,691 100.0% $2,333,144 100.0% $1,779,389 100.0%
========== ===== ========== ===== ========== =====
</TABLE>
46
<PAGE> 50
CAPITAL
Risk-based capital guidelines for financial institutions are designed to
relate regulatory capital requirements to the risk profiles of the specific
institutions and to provide more uniform requirements among the various
regulators. First Banks and the Subsidiary Banks are required to maintain a
minimum risk-based capital to risk-weighted assets ratio of 8.00%, with at
least 4.00% being ``Tier 1'' capital. Tier 1 capital is composed of common
stockholders' equity, qualifying perpetual preferred stock instruments
(including instruments such as the Preferred Securities) and minority interests
in equity accounts of consolidated subsidiaries, less intangibles associated
with the purchase of subsidiaries, net losses on financial futures contracts
deferred for financial reporting purposes, and the excess of net deferred tax
assets which is more fully described below. Tier 1 capital also excludes the
fair value adjustment for available for sale investment securities. In
addition, a minimum leverage ratio (Tier 1 capital to total assets) of 3.00%
plus an additional cushion of 100 to 200 basis points is expected. First Banks'
preferred stock qualifies as Tier 1 capital under the risk-based guidelines.
At September 30, 1996 and December 31, 1995 and 1994, First Banks' and the
Subsidiary Banks' capital ratios were as follows:
<TABLE>
<CAPTION>
RISK-BASED CAPITAL RATIOS
--------------------------------------------------
TOTAL TIER 1 LEVERAGE RATIO
------------------------ ------------------------ -------------------------
SEPTEMBER DECEMBER 31, SEPTEMBER DECEMBER 31, SEPTEMBER DECEMBER 31
30, ------------- 30, ------------- 30, -------------
1996 1995 1994 1996 1995 1994 1996 1995 1994
--------- ---- ---- --------- ---- ---- --------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Banks........................ 9.56% 9.34% 12.68% 8.23% 7.77% 11.37% 6.13% 5.32% 7.54
First Bank (Missouri).............. 10.26 10.03 10.66 9.01 8.78 9.41 7.22 7.01 7.57
First Bank (Illinois).............. 11.40 12.91 14.95 10.15 11.66 13.70 7.15 7.22 8.00
First Bank FSB<F1>................. 10.15 11.90 15.34 8.90 10.80 14.31 6.00 6.74 8.24
CCB Bancorp, Inc.<F2>.............. 18.86 15.25 -- 17.58 13.96 -- 11.96 9.58 --
FBA................................ 13.99 11.69 17.50 12.73 10.43 16.28 9.64 8.38 11.97
FCB<F3>............................ 6.61 4.99 -- 5.33 3.68 -- 3.95 2.14 --
St. Charles Federal<F1>............ 14.80 18.95 17.90 14.17 18.46 17.62 7.69 8.73 7.24
<FN>
- ---------
<F1>St. Charles Federal merged with First Bank FSB on December 12, 1996.
<F2>CCB was acquired by First Banks on March 15, 1995.
<F3>First Commercial was acquired by First Banks on August 23, 1995. First
Banks' investment in First Commercial was exchanged into FCB common stock
on December 28, 1995.
</TABLE>
On April 1, 1995, a new capital regulation became effective which limits
the amount of net deferred tax assets that First Banks and the Subsidiary Banks
may include in regulatory capital. A deferred tax asset arises as a result of
an expense recorded currently in the financial statements which will not become
a tax deduction until some time in the future, such as the allowance for
possible loan losses, income which may be recognized for tax purposes before it
is recorded in the financial statements, or tax benefits which may be available
in the future for which there is no corresponding financial statement benefit,
such as a tax loss carryforward. The change in regulation limits the amount of
net deferred tax assets, excluding any amounts applicable to SFAS 115, that are
included in Tier 1 capital to the lesser of the amount of net deferred tax
assets that the entity expects to realize over the next twelve month period or
10% of its Tier 1 capital.
The new capital regulation effects regulatory capital of First Banks, First
Bank FSB and FBA as their net deferred tax assets, as adjusted, exceed the
lesser of the amount expected to be realized over the next twelve month period
or 10% of Tier 1 capital. The amounts expected to be realized over the next
twelve months for First Banks, First Bank FSB and FBA have been estimated to be
at $12.2 million, $1.2 million and $2.6 million at September 30, 1996 and $13.8
million, $1.4 million and $1.8 million at December 31, 1995, respectively, and
are included in Tier 1 capital as these amounts are less than 10% of their Tier
1 capital. The remaining amount of the net deferred tax assets, as adjusted, of
$20.5 million, $12.6 million and $9.6 million at September 30, 1996, and of
$21.3 million, $13.7 million and $11.4 million at December 31, 1995, for First
Banks, First Bank FSB and FBA, respectively, have been subtracted from
stockholders' equity in arriving at Tier 1 capital at September 30, 1996 and
December 31, 1995.
Historically, First Banks accumulates capital to support its acquisitions
by retaining most of its earnings. Relatively small dividends are paid on the
Class A Preferred Stock and the Class B Preferred Stock, totaling $524,000 for
the nine months ended September 30, 1996 and 1995, and $786,000 and $785,000
for the years ended December 31,
47
<PAGE> 51
1995 and 1994, respectively. The dividends paid on the Class C Preferred Stock
were $3.71 million for the nine months ended September 30, 1996 and 1995, and
$4.95 million for the years ended December 31, 1995 and 1994. First Banks has
never paid, and has no present intention to pay, dividends on the Common Stock.
FCB's capital, for regulatory purposes, has improved to
``undercapitalized'' at September 30, 1996 from ``significantly
undercapitalized'' at December 31, 1995 as a result of the offering of
newly-issued common stock as more fully described in note 21 to the
Consolidated Financial Statements. The risk based total and Tier 1 capital
ratios
and leverage ratio for FCB's subsidiary bank, First Commercial, were 12.65%,
11.37% and 8.41%, respectively, at September 30, 1996 and is considered ``well
capitalized'' for regulatory purposes.
LIQUIDITY
The liquidity of First Banks and the 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 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 and other borrowings, including First Banks' $90 million
credit agreement. The aggregate funds acquired from those sources were $344.9
million, $359.2 million and $400.7 million at September 30, 1996, December 31,
1995 and 1994, respectively.
At September 30, 1996 and December 31, 1995, First Banks' more volatile
sources of funds mature as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C>
Three months or less........................................ $178,871 118,568
Over three months through six months........................ 35,839 35,589
Over six months through twelve months....................... 100,904 128,239
Over twelve months.......................................... 29,242 76,827
-------- -------
Total............................................... $344,856 359,223
======== =======
</TABLE>
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 its operating and debt service requirements both
on a short-term and long-term basis and to pay the dividends on the Class C
Preferred Stock and the Distributions on the Preferred Securities.
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 SFAS 118, 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
SFAS 121, 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.
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
48
<PAGE> 52
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 (``SFAS 122''), 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'').
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. This statement 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.
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<PAGE> 53
BUSINESS
GENERAL
First Banks, incorporated in Missouri in 1978, is a registered bank holding
company under the BHCA and is headquartered in St. Louis, Missouri. At
September 30, 1996, First Banks had $3.5 billion in total assets, $2.7 billion
in total loans, $3.1 billion in total deposits, and $244 million in total
shareholders' equity. 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' wholly-owned Subsidiary Banks are First Bank (Missouri), First
Bank (Illinois), First Bank FSB and FB&T, which First Banks owns indirectly
through its wholly-owned subsidiary, CCB. First Banks' majority-owned bank
holding company subsidiaries are FBA, in which First Banks currently holds a
67.30% equity interest, and FCB, in which First Banks currently holds a 61.46%
equity interest (excluding the effect of the conversion of certain debentures
owned by First Banks). FCB owns all of the capital stock of First Commercial.
FBA indirectly owns all of the capital stock of BTX and Sunrise.
Through the 126 locations of its 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, 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 officers and directors of the
respective Subsidiary Banks.
The following table lists, as of September 30, 1996, the Subsidiary Banks
(or their intermediate holding company parent) ranked by asset size:
<TABLE>
<CAPTION>
LOANS, NET OF
NUMBER OF TOTAL UNEARNED TOTAL
SUBSIDIARY BANKS<F1> LOCATIONS ASSETS DISCOUNT DEPOSITS
- -------------------- --------- ------ ------------- --------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
First Bank FSB<F2>................................ 39 $1,013,966 841,206 817,133
First Bank (Missouri)............................. 31 837,561 655,790 733,230
First Bank (Illinois)............................. 27 832,082 595,856 763,945
CCB............................................... 13 410,970 308,109 338,044
FBA............................................... 6 271,700 172,737 229,418
FCB............................................... 6 148,980 94,299 133,656
St. Charles Federal<F2>........................... 1 76,313 65,069 60,320
<FN>
- --------
<F1>Does not include Sunrise, which was acquired on November 1, 1996.
<F2>St. Charles Federal merged with First Banks FSB on December 12, 1996.
</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, First Services, L.P. First Services, L.P. is a limited partnership
which is indirectly owned by First Banks' voting shareholders.
For a discussion of First Banks' recent acquisitions, see ``Management's
Discussion and Analysis--Acquisitions.''
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<PAGE> 54
MARKET AREAS
As of September 30, 1996, the Subsidiary Banks' 123 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.
The following table lists the market areas in which the Subsidiary Banks
operate by number of locations and deposits as of September 30, 1996 updated to
reflect the acquisition of Sunrise on November 1, 1996:
<TABLE>
<CAPTION>
TOTAL DEPOSITS
DEPOSITS AS PERCENT NO. OF
GEOGRAPHIC AREA (IN MILLIONS) OF TOTAL LOCATIONS
--------------- ------------- ---------- ---------
<S> <C> <C> <C>
St. Louis, Missouri Metropolitan Area<F1>......... $ 664.2 21.1% 27
Rural Eastern Missouri<F2>........................ 321.7 10.2 16
Central and Southern Illinois<F3>................. 969.8 30.8 40
Northern Illinois<F4>............................. 397.9 12.6 15
Texas<F5>......................................... 229.4 7.3 6
Southern and Central California<F6>............... 313.4 10.0 11
Northern California<F7>........................... 250.4 8.0 11
-------- ----- ---
Total Deposits................................ $3,146.8 100.0% 126
======== ===== ===
<FN>
- --------
<F1>First Bank (Missouri), First Bank (Illinois) and First Bank FSB operate in
the St. Louis metropolitan market area.
<F2>First Bank FSB and First Bank (Missouri) operate in rural eastern Missouri.
<F3>First Bank FSB and First Bank (Illinois) operate in central and southern
Illinois outside of the St. Louis metropolitan market area.
<F4>First Bank FSB operates facilities in northern Illinois, including Chicago.
<F5>BTX operates in the Houston, Dallas and McKinney metropolitan areas.
<F6>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.
<F7>FB&T, First Commercial and Sunrise (as of November 1, 1996) operate in
northern California, including the greater San Francisco, San Jose and
Sacramento metropolitan market areas.
</TABLE>
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 First Banks, depending upon the amount of the loan request. Loan
requests for amounts in excess of $4 million, and loan requests for amounts in
excess of $1 million where the aggregate indebtedness of the borrower exceeds
$8 million, must also be approved by First Banks' Chairman of the Board or
Chief Financial Officer.
Loans generally are limited to borrowers residing or doing business in the
immediate market area of the originating Subsidiary Bank. First Banks' 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.
First Banks offers commercial, financial, agricultural, municipal and
industrial development, real estate construction and development, commercial
and residential real estate, consumer and installment loans. Additional
information regarding First Banks' loan portfolio is included under
``Management's Discussion and Analysis--Loans and Allowance for Possible Loan
Losses.''
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MORTGAGE BANKING OPERATIONS
First Banks provides mortgage banking services through the First Bank
Mortgage division of First Bank FSB (``First Bank Mortgage''). First Bank
Mortgage has originated, underwritten, closed and serviced a full line of
residential mortgage loan products, both for the portfolios of First Bank FSB
and First Banks' other Subsidiary Banks and for resale in the secondary
mortgage market. First Bank Mortgage has also acquired loans originated by the
other Subsidiary Banks or by unrelated entities, which it has underwritten and
serviced. See, ``Management's Discussion and Analysis--Mortgage Banking
Activities,'' for a discussion of possible changes to the business of First
Bank Mortgage.
INVESTMENT PORTFOLIO
First Banks has established a written investment policy which has been
adopted by the Subsidiary Banks and is reviewed annually. The investment policy
identifies investment criteria and states specific objectives in terms of risk,
interest rate sensitivity, and liquidity. The investment policy directs
management of the Subsidiary Banks to consider, among other criteria, the
quality, term, and marketability of the securities acquired for their
respective investment portfolios. First Banks does not engage in the practice
of trading securities for the purpose of generating portfolio gains. The
investment portfolio composition is included in the Notes to Consolidated
Financial Statements. See, also, ``Management's Discussion and
Analysis--Investment Securities.''
DEPOSITS
First Banks' deposits consist principally of core deposits from the local
market areas of the Subsidiary Banks. The Subsidiary Banks currently do not
hold brokered deposits, except for any such deposits which acquired
institutions may have had prior to their acquisition by First Banks. A table
summarizing the distribution of First Banks' deposit accounts and the weighted
average nominal interest rates on each category of deposits for the three years
ending December 31, 1995 and for the nine months ended September 30, 1996 is
included under ``Management's Discussion and Analysis--Deposits.''
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 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 First Banks' non-bank competitors are not subject to the same extensive
federal regulations that govern bank holding companies and federally-insured
banks and thrifts or the state regulations governing state-chartered banks and
thrifts. Such non-bank competitors may, as a result, have certain advantages
over First Banks in providing some services.
The trend in Missouri, Illinois, Texas and California has been for
multi-bank holding companies to acquire independent banks and thrifts in
communities throughout these states. First Banks 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 First Banks competes are larger than First Banks and have substantially
greater resources available for making acquisitions.
Subject to regulatory approval, commercial banks situated in Missouri,
Illinois, Texas and California are permitted to establish branches throughout
their respective states, thereby creating the potential for additional
competition in the services areas of the Subsidiary Banks.
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SUPERVISION AND REGULATION
GENERAL
First Banks 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 or regulatory provisions. Any change
in applicable laws or regulations may have a material effect on the business
and prospects of First Banks. The operations of First Banks may be affected by
legislative changes and by the policies of various regulatory authorities.
First Banks 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.
First Banks is a registered bank holding company under the BHCA and, as
such, is subject to regulation, supervision and examination by the Federal
Reserve. First Banks is required to file annual reports with the Federal
Reserve and to provide the Federal Reserve such additional information as it
may require.
First Banks' 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 regulator. The primary
regulator for First Bank (Missouri), as a member of the Federal Reserve System,
is the Federal Reserve, 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 FDIC. First Bank FSB, as a federally chartered
savings institution, is subject to supervision and regulation by the Office of
Thrift Supervision (``OTS''), and BTX, as 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
Subsidiary Banks, the Subsidiary Banks 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 First Banks
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. FIRREA, among other things, enhanced the
supervisory and enforcement powers of the federal bank regulatory agencies,
required insured financial institutions to guarantee repayment of losses
incurred by the FDIC in connection with the failure of an affiliated financial
institution, required financial institutions to provide their primary federal
regulator with notice (under certain circumstances) of changes in senior
management and broadened authority for bank holding companies to acquire
savings institutions.
Under FIRREA, federal bank regulators were granted expanded enforcement
authority over ``institution-affiliated parties'' (i.e., officers, directors,
controlling shareholders, 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. These
enforcement actions, in general, may be initiated for violations of laws and
regulations and unsafe or unsound practices. Since the enactment of FIRREA, the
federal bank regulators have significantly increased the use of written
agreements to correct compliance deficiencies with respect to applicable laws
and regulations and to ensure safe and sound practices. Violations of such
written agreements are grounds for initiation of cease-and-desist proceedings.
FIRREA granted the FDIC back-up enforcement authority to recommend enforcement
action to an appropriate federal banking agency and to bring such enforcement
action against a financial institution or an institution-affiliated party if
such federal banking agency fails to follow the FDIC's recommendation. FIRREA
also requires, except under certain circumstances, public disclosure of final
enforcement actions by the federal banking agencies.
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<PAGE> 57
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 insured 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 BIF
members and 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 shareholders due
solely to their status as shareholders 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. FDICIA, in general, 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 shareholders, 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
sufficient 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. The federal
banking agencies are required, under FDICIA, 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%.
``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. Companies controlling an undercapitalized institution
are also required to guarantee the subsidiary institution's compliance with the
capital restoration plan subject to an aggregate limitation of the lesser of 5%
of the institution's assets at the time it received notice that it was
undercapitalized or the amount of the capital deficiency when the institution
first failed to meet the plan.
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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 under ``Management's Discussion and Analysis--Capital,'' First
Banks and each of its Subsidiary Banks have, as of September 30, 1996, capital
in excess of the requirements for a ``well-capitalized'' institution.
Pursuant to FDICIA, the Federal Reserve 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 prudent underwriting standards. These guidelines became
effective on March 19, 1993. These rules have had no material adverse impact on
First Banks.
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.
Congress enacted the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the ``Interstate Act'') in September 1994. 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 has 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
holding companies. Under EGRPRA, qualified bank holding companies may commence
a regulatory approved non-banking activity without prior notice to the Federal
Reserve; 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 foregoing prior notice requirement also applies to commencing
non-banking activity de novo which has been previously approved by order of the
Federal Reserve, but not yet implemented by regulations.
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<PAGE> 59
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 $8.6 million
charge in the third quarter of 1996 for the one-time special deposit insurance
assessment. As a result of this special assessment, however, the assessments
paid by First Banks to the FDIC are expected to decrease by approximately $2
million for the year ended December 31, 1997, compared to the amount of such
assessments for the year ended December 31, 1996, excluding the effect of the
special assessment. The expected decrease in the FDIC assessments payable by
First Banks is based on the overall assessment rate for 1997 (as described
below under ``--Insurance of Accounts''), in comparison to the prior assessment
rate, applicable only to SAIF deposits, of 23 basis points for institutions in
the FDIC's best assessment risk classification. See ``Management's Discussion
and Analysis--General.''
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
BHCA. Under the BHCA, the activities of a bank holding company are limited
to businesses so closely related to banking, managing or controlling banks as
to be a proper incident thereto. First Banks is also subject to capital
requirements applied on a consolidated basis in a form substantially similar to
those required of the Subsidiary Banks. The BHCA also requires a bank holding
company to obtain approval from the Federal Reserve before (i) acquiring,
directly or indirectly, ownership or control of any voting shares of another
bank or bank holding company if, after such acquisition, it would own or
control more than 5% of such shares (unless it already owns or controls the
majority of such shares), (ii) acquiring all or substantially all of the assets
of another bank or bank holding company, or (iii) merging or consolidating with
another bank holding company. The Federal Reserve will not approve any
acquisition, merger or consolidation that would have a substantially
anticompetitive result, unless the anticompetitive effects of the proposed
transaction are clearly outweighed by a greater public interest in meeting the
convenience and needs of the community to be served. The Federal Reserve also
considers capital adequacy and other financial and managerial factors in
reviewing acquisitions or mergers.
The BHCA also prohibits a bank holding company, with certain limited
exceptions, (i) from acquiring or retaining direct or indirect ownership or
control of more than 5% of the voting shares of any company which is not a bank
or bank holding company, or (ii) from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks, or
providing services for its subsidiaries. The principal exceptions to these
prohibitions involve certain non-bank activities which, by statute or by
Federal Reserve regulation or order, have been identified as activities closely
related to the business of banking or of managing or controlling banks. The
Federal Reserve, in making such determination, 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 the list of
permitted non-bank activities for bank holding companies by providing that bank
holding companies may acquire thrift institutions upon approval by the Federal
Reserve 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
each insured depositor. Certain of the Subsidiary Banks have deposits which
were added through the merger of acquired thrifts. Consequently, First Bank
(Missouri), First Bank (Illinois), First Bank FSB and FB&T, although members of
the BIF, have deposits insured by the SAIF as well. The deposits of BTX, First
Commercial and Sunrise are insured by the BIF only.
Through December 31, 1992, all FDIC-insured institutions, whether members
of the BIF or the SAIF, paid the same premium (23 cents per $100 of assessable
deposits) under a flat-rate system mandated by law. FDICIA required
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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 for each $100 of assessable
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.
THE PREFERRED SECURITIES AND THE SUBORDINATED DEBENTURES OFFERED BY THIS
PROSPECTUS ARE NOT SAVINGS OR DEPOSIT ACCOUNTS, ARE NOT OBLIGATIONS OF ANY
BANKING OR NONBANKING AFFILIATE OF FIRST BANKS (EXCEPT TO THE EXTENT THAT
PREFERRED SECURITIES ARE GUARANTEED BY FIRST BANKS AS DESCRIBED HEREIN), ARE
NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY AND INVOLVE INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
REGULATIONS GOVERNING CAPITAL ADEQUACY. The federal bank regulatory
agencies use capital adequacy guidelines in their examination and regulation of
bank holding companies and banks. If the capital falls below the minimum levels
established by these guidelines, the bank holding company or bank may be denied
approval to acquire or establish additional banks or nonbank businesses or to
open facilities.
The Federal Reserve, the FDIC and the OCC 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
Federal Reserve has noted that bank holding companies contemplating significant
expansion programs should not allow expansion to diminish their capital ratios
and should maintain ratios well in excess of the minimums. Under these
guidelines, all bank holding companies and federally regulated banks must
maintain a minimum risk-based total capital ratio equal to 8%, of which at
least one-half must be Tier 1 capital.
The Federal Reserve 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 Federal Reserve requires a minimum leverage ratio
of 3%. For all but the most highly-rated bank holding companies and for bank
holding companies seeking to expand, however, the Federal Reserve expects that
additional capital sufficient to increase the ratio by at least 100 to 200
basis points will be maintained.
On October 21, 1996, the Federal Reserve issued a press release (the
``Federal Reserve Press Release'') announcing that it had approved the use of
certain cumulative preferred stock instruments, such as the Preferred
Securities, in Tier 1 capital for bank holding companies. Because, subject to
certain regulatory limitations, the Preferred Securities may qualify as Tier 1
capital and, under current United States federal tax law, the issuer will
receive a tax deduction for interest in respect of the Subordinated Debentures,
the issuance of the Preferred Securities is a cost effective method of raising
capital on an after-tax basis.
See ``Management's Discussion and Analysis--Capital'' for a discussion of
the capital adequacy of First Banks and the Subsidiary Banks.
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Management of First Banks believes that the risk-weighting of assets and
the risk-based capital guidelines do not have a material adverse impact on
First Banks' 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
First Banks 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 First Banks to make acquisitions
using the pooling of interests method of accounting, First Banks 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 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 ability of First Banks 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 and Sunrise) that do not involve First Banks 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 First Banks, it would not apply to such
transactions involving BTX, Sunrise and First Commercial. Further, under the
BHCA and certain regulations of the Federal Reserve, a bank holding company and
its subsidiaries are prohibited from engaging in certain tying arrangements in
connection with any extension of credit, lease or sale of property or
furnishing of services. For example, a Subsidiary Bank may not generally
require a customer to obtain other services from such Subsidiary Bank or any
other Subsidiary Bank or First Banks, and may not require the customer to
promise not to obtain other services from a competitor, as a condition to an
extension of credit to the customer.
The Subsidiary Banks are also subject to certain restrictions imposed by
the Federal Reserve Act on extensions of credit to executive officers,
directors, principal shareholders 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 Federal Reserve requires all depository
institutions to maintain reserves against their transaction accounts and
non-personal time deposits. Reserves of 3% must be maintained against total
transaction accounts of $49.3 million or less (subject to adjustment by the
Federal Reserve) and an initial reserve of $1,479,000 plus 10% (subject to
adjustment by the Federal Reserve to a level between 8% and 14%) must be
maintained against that portion of total transaction accounts in excess of such
amount. The balances maintained to meet the reserve requirements imposed by the
Federal Reserve may be used to satisfy liquidity requirements.
Institutions are authorized to borrow from the Federal Reserve Bank
``discount window,'' but Federal Reserve regulations require institutions to
exhaust other reasonable alternative sources of funds, including 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
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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 that is a member of a 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 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. First Banks' 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. The amount of
dividends that the Subsidiary Banks may pay to First Banks is also limited by
the provisions of the Credit Agreement, which imposes certain minimum capital
requirements. Under the most restrictive of these requirements, dividends from
the Subsidiary Banks are limited to approximately $37.8 million as of September
30, 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 First Banks engages is affected not only by general economic conditions,
but also by the monetary policies of the Federal Reserve. Changes in the
discount rate on member bank 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 Federal Reserve. 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 Federal
Reserve have had a significant effect on the operating results of commercial
banks and are expected to do so in the future. The monetary policies of the
Federal Reserve are influenced by various factors, including inflation,
unemployment, short-term and long-term changes in the international trade
balance and in the fiscal policies of the U.S. Government. Future monetary
policies and the effect of such policies on the future business and earnings of
First Banks and the Subsidiary Banks cannot be predicted.
DESCRIPTION OF THE PREFERRED SECURITIES
The Preferred Securities will be issued pursuant to the terms of the Trust
Agreement. The Trust Agreement will be qualified as an indenture under the
Trust Indenture Act. The Property Trustee, State Street Bank and Trust Company,
will act as indenture trustee for the Preferred Securities under the Trust
Agreement for purposes of complying with the provisions of the Trust Indenture
Act. The terms of the Preferred Securities will include those stated in the
Trust Agreement and those made part of the Trust Agreement by the Trust
Indenture Act. The following summary of the material terms and provisions of
the Preferred Securities and the Trust Agreement does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
the Trust Agreement, the Trust Act, and the Trust Indenture Act. Wherever
particular defined terms of the Trust Agreement are referred to, but not
defined herein, such defined terms are incorporated herein by reference. The
form of the Trust Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part.
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GENERAL
Pursuant to the terms of the Trust Agreement, the Trustees, on behalf of
First Capital, will issue the Trust Securities. All of the Common Securities
will be owned by First Banks. The Preferred Securities will represent preferred
undivided beneficial interests in the assets of First Capital and the holders
thereof will be entitled to a preference in certain circumstances with respect
to Distributions and amounts payable on redemption or liquidation over the
Common Securities, as well as other benefits as described in the Trust
Agreement. The Trust Agreement does not permit the issuance by First Capital of
any securities other than the Trust Securities or the incurrence of any
indebtedness by First Capital.
The Preferred Securities will rank pari passu, and payments will be made
thereon pro rata, with the Common Securities, except as described under
``--Subordination of Common Securities.'' Legal title to the Subordinated
Debentures will be held by the Property Trustee in trust for the benefit of the
holders of the Trust Securities. The Guarantee executed by First Banks for the
benefit of the holders of the Preferred Securities will be a guarantee on a
subordinated basis with respect to the Preferred Securities, but will not
guarantee payment of Distributions or amounts payable on redemption or
liquidation of such Preferred Securities when First Capital does not have funds
on hand available to make such payments. State Street Bank and Trust Company,
as Guarantee Trustee, will hold the Guarantee for the benefit of the holders of
the Preferred Securities. See ``Description of the Guarantee.''
DISTRIBUTIONS
PAYMENT OF DISTRIBUTIONS. Distributions on each Preferred Security will be
payable at the annual rate of 9.25% of the stated Liquidation Amount of $25,
payable quarterly in arrears on March 31, June 30, September 30 and December 31
of each year, to the holders of the Preferred Securities on the relevant record
dates (each date on which Distributions are payable in accordance with the
foregoing, a ``Distribution Date''). The record date will be the 15th day of
the month in which the relevant Distribution Date occurs. Distributions will
accumulate from the date of original issuance. The first Distribution Date for
the Preferred Securities will be March 31, 1997. The amount of Distributions
payable for any period will be computed on the basis of a 360-day year of
twelve 30-day months. In the event that any date on which Distributions are
payable on the Preferred Securities is not a Business Day, then payment of the
Distributions payable on such date will be made on the next succeeding day that
is a Business Day (and without any additional Distributions, interest or other
payment in respect of any such delay) with the same force and effect as if made
on the date such payment was originally due and payable. ``Business Day'' means
any day other than a Saturday or a Sunday, a day on which banking institutions
in The City of New York are authorized or required by law or executive order to
remain closed or a day on which the corporate trust office of the Property
Trustee or the Debenture Trustee is closed for business.
EXTENSION PERIOD. First Banks has the right under the Indenture, so long as
no Debenture Event of Default has occurred and is continuing, to defer the
payment of interest on the Subordinated Debentures at any time, or from time to
time (each, an ``Extended Interest Payment Period''), which, if exercised,
would defer quarterly Distributions on the Preferred Securities during any such
Extended Interest Payment Period. Distributions to which holders of the
Preferred Securities are entitled will accumulate additional Distributions
thereon at the rate per annum of 9.25% thereof, compounded quarterly from the
relevant Distribution Date. ``Distributions,'' as used herein, includes any
such additional Distributions. The right to defer the payment of interest on
the Subordinated Debentures is limited, however, to a period, in each instance,
not exceeding 20 consecutive quarters and no Extended Interest Payment Period
may extend beyond the Stated Maturity of the Subordinated Debentures. During
any such Extended Interest Payment Period, First Banks may not (i) declare or
pay any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of First Banks' capital stock (other
than the reclassification of any class of First Banks' capital stock into
another class of capital stock or the conversion of the Class A Preferred Stock
into Common Stock), (ii) make any payment of principal, interest or premium, if
any, on or repay, repurchase or redeem any debt securities of First Banks that
rank pari passu with or junior in interest to the Subordinated Debentures or
make any guarantee payments with respect to any guarantee by First Banks of the
debt securities of any subsidiary of First Banks if such guarantee ranks pari
passu with or junior in interest to the Subordinated Debentures (other than
payments under the Guarantee), or (iii) redeem, purchase or acquire less than
all of the Subordinated Debentures or any of the Preferred Securities. Prior to
the termination of any such Extended Interest Payment Period, First Banks may
further defer the payment of interest; provided that such Extended Interest
Payment Period may not exceed 20 consecutive quarters or extend beyond the
Stated Maturity of the Subordinated
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Debentures. Upon the termination of any such Extended Interest Payment Period
and the payment of all amounts then due, First Banks may elect to begin a new
Extended Interest Payment Period, subject to the above requirements. Subject to
the foregoing, there is no limitation on the number of times that First Banks
may elect to begin an Extended Interest Payment Period.
First Banks has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the
Subordinated Debentures.
SOURCE OF DISTRIBUTIONS. The funds of First Capital available for
distribution to holders of its Preferred Securities will be limited to payments
under the Subordinated Debentures in which First Capital will invest the
proceeds from the issuance and sale of its Trust Securities. See ``Description
of the Subordinated Debentures.'' Distributions will be paid through the
Property Trustee who will hold amounts received in respect of the Subordinated
Debentures in the Property Account for the benefit of the holders of the Trust
Securities. If First Banks does not make interest payments on the Subordinated
Debentures, the Property Trustee will not have funds available to pay
Distributions on the Preferred Securities. The payment of Distributions (if and
to the extent First Capital has funds legally available for the payment of such
Distributions and cash sufficient to make such payments) is guaranteed by First
Banks. See ``Description of the Guarantee.'' Distributions on the Preferred
Securities will be payable to the holders thereof as they appear on the
register of holders of the Preferred Securities on the relevant record dates,
which will be the 15th day of the month in which the relevant Distribution Date
occurs.
REDEMPTION OR EXCHANGE
GENERAL. The Subordinated Debentures will mature on March 31, 2027. First
Banks will have the right to redeem the Subordinated Debentures (i) on or after
March 31, 2002, in whole at any time or in part from time to time, or (ii) at
any time, in whole (but not in part), within 180 days following the occurrence
of a Tax Event or an Investment Company Event, in each case subject to receipt
of prior approval by the Federal Reserve if then required under applicable
capital guidelines or policies of the Federal Reserve. First Banks will not
have the right to purchase the Subordinated Debentures, in whole or in part,
from First Capital until after March 31, 2002. See ``Description of the
Subordinated Debentures--General.''
MANDATORY REDEMPTION. Upon the repayment or redemption, in whole or in
part, of any Subordinated Debentures, whether at Stated Maturity or upon
earlier redemption as provided in the Indenture, the proceeds from such
repayment or redemption will be applied by the Property Trustee to redeem a
Like Amount (as defined herein) of the Trust Securities, upon not less than 30
nor more than 60 days notice, at a redemption price (the ``Redemption Price'')
equal to the aggregate Liquidation Amount of such Trust Securities plus
accumulated but unpaid Distributions thereon to the date of redemption (the
``Redemption Date''). See ``Description of the Subordinated
Debentures--Redemption or Exchange.'' If less than all of the Subordinated
Debentures are to be repaid or redeemed on a Redemption Date, then the proceeds
from such repayment or redemption will be allocated to the redemption of the
Trust Securities pro rata.
DISTRIBUTION OF SUBORDINATED DEBENTURES. Subject to First Banks having
received prior approval of the Federal Reserve if so required under applicable
capital guidelines or policies of the Federal Reserve, First Banks will have
the right at any time to dissolve, wind-up or terminate First Capital and,
after satisfaction of the liabilities of creditors of First Capital as provided
by applicable law, cause the Subordinated Debentures to be distributed to the
holders of Trust Securities in liquidation of First Capital. See
``--Liquidation Distribution Upon Termination.''
TAX EVENT REDEMPTION OR INVESTMENT COMPANY EVENT REDEMPTION. If a Tax Event
or an Investment Company Event in respect of the Trust Securities occurs and is
continuing, First Banks has the right to redeem the Subordinated Debentures in
whole (but not in part) and thereby cause a mandatory redemption of such Trust
Securities in whole (but not in part) at the Redemption Price within 180 days
following the occurrence of such Tax Event or Investment Company Event. In the
event a Tax Event or an Investment Company Event in respect of the Trust
Securities has occurred and First Banks does not elect to redeem the
Subordinated Debentures and thereby cause a mandatory redemption of such Trust
Securities or to liquidate First Capital and cause the Subordinated Debentures
to be distributed to holders of such Trust Securities in liquidation of First
Capital as described below under ``--Liquidation Distribution Upon
Termination,'' such Preferred Securities will remain outstanding and Additional
Interest (as defined herein) may be payable on the Subordinated Debentures.
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``Additional Interest'' means the additional amounts as may be necessary in
order that the amount of Distributions then due and payable by First Capital on
the outstanding Trust Securities will not be reduced as a result of any
additional taxes, duties and other governmental charges to which First Capital
has become subject as a result of a Tax Event.
``Like Amount'' means (i) with respect to a redemption of Trust Securities,
Trust Securities having a Liquidation Amount equal to that portion of the
principal amount of Subordinated Debentures to be contemporaneously redeemed in
accordance with the Indenture, which will be used to pay the Redemption Price
of such Trust Securities, and (ii) with respect to a distribution of
Subordinated Debentures to holders of Trust Securities in connection with a
dissolution or liquidation of First Capital, Subordinated Debentures having a
principal amount equal to the Liquidation Amount of the Trust Securities of the
holder to whom such Subordinated Debentures are distributed. Each Subordinated
Debenture distributed pursuant to clause (ii) above will carry with it
accumulated interest in an amount equal to the accumulated and unpaid interest
then due on such Subordinated Debentures.
``Liquidation Amount'' means the stated amount of $25 per Trust Security.
After the liquidation date fixed for any distribution of Subordinated
Debentures for Preferred Securities (i) such Preferred Securities will no
longer be deemed to be outstanding, and (ii) any certificates representing
Preferred Securities will be deemed to represent the Subordinated Debentures
having a principal amount equal to the Liquidation Amount of such Preferred
Securities, and bearing accrued and unpaid interest in an amount equal to the
accrued and unpaid Distributions on the Preferred Securities until such
certificates are presented to the Administrative Trustees or their agent for
transfer or reissuance.
There can be no assurance as to the market prices for the Preferred
Securities or the Subordinated Debentures that may be distributed in exchange
for Preferred Securities if a dissolution and liquidation of First Capital were
to occur. The Preferred Securities that an investor may purchase, or the
Subordinated Debentures that an investor may receive on dissolution and
liquidation of First Capital, may, therefore, trade at a discount to the price
that the investor paid to purchase the Preferred Securities offered hereby.
REDEMPTION PROCEDURES
Preferred Securities redeemed on each Redemption Date will be redeemed at
the Redemption Price with the applicable proceeds from the contemporaneous
redemption of the Subordinated Debentures. Redemptions of the Preferred
Securities will be made and the Redemption Price will be payable on each
Redemption Date only to the extent that First Capital has funds on hand
available for the payment of such Redemption Price. See ``--Subordination of
Common Securities.''
If First Capital gives a notice of redemption in respect of its Preferred
Securities, then, by 12:00 noon, eastern standard time, on the Redemption Date,
to the extent funds are available, the Property Trustee will irrevocably
deposit with the paying agent for the Preferred Securities funds sufficient to
pay the aggregate Redemption Price and will give the paying agent for the
Preferred Securities irrevocable instructions and authority to pay the
Redemption Price to the holders thereof upon surrender of their certificates
evidencing such Preferred Securities. Notwithstanding the foregoing,
Distributions payable on or prior to the Redemption Date for any Preferred
Securities called for redemption will be payable to the holders of such
Preferred Securities on the relevant record dates for the related Distribution
Dates. If notice of redemption will have been given and funds deposited as
required, then upon the date of such deposit, all rights of the holders of such
Preferred Securities so called for redemption will cease, except the right of
the holders of such Preferred Securities to receive the Redemption Price, but
without interest on such Redemption Price, and such Preferred Securities will
cease to be outstanding. In the event that any date fixed for redemption of
Preferred Securities is not a Business Day, then payment of the Redemption
Price payable on such date will be made on the next succeeding day which is a
Business Day (and without any additional Distribution, interest or other
payment in respect of any such delay) with the same force and effect as if made
on such date. In the event that payment of the Redemption Price in respect of
Preferred Securities called for redemption is improperly withheld or refused
and not paid either by First Capital, or by First Banks pursuant to the
Guarantee, Distributions on such Preferred Securities will continue to accrue
at the then applicable rate, from the Redemption Date originally established by
First Capital for such Preferred Securities to the date such Redemption Price is
actually paid, in which case the actual payment date will be considered the date
fixed for redemption for purposes of calculating the Redemption Price. See
``Description of the Guarantee.''
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Subject to applicable law (including, without limitation, United States
federal securities law) and, further provided, that First Banks has not and
is not continuing to exercise its right to defer interest payments, First Banks
or its subsidiaries may at any time and from time to time purchase outstanding
Preferred Securities by tender, in the open market or by private agreement.
Payment of the Redemption Price on the Preferred Securities and any
distribution of Subordinated Debentures to holders of Preferred Securities will
be made to the applicable recordholders thereof as they appear on the register
for the Preferred Securities on the relevant record date, which date will be
the date 15 days prior to the Redemption Date or liquidation date, as
applicable.
If less than all of the Trust Securities are to be redeemed on a Redemption
Date, then the aggregate Liquidation Amount of such Trust Securities to be
redeemed will be allocated pro rata to the Trust Securities based upon the
relative Liquidation Amounts of such classes. The particular Preferred
Securities to be redeemed will be selected by the Property Trustee from the
outstanding Preferred Securities not previously called for redemption, by such
method as the Property Trustee deems fair and appropriate and which may provide
for the selection for redemption of portions (equal to $25 or an integral
multiple of $25 in excess thereof) of the Liquidation Amount of Preferred
Securities of a denomination larger than $25. The Property Trustee will
promptly notify the registrar for the Preferred Securities in writing of the
Preferred Securities selected for redemption and, in the case of any Preferred
Securities selected for partial redemption, the Liquidation Amount thereof to
be redeemed. For all purposes of the Trust Agreement, unless the context
otherwise requires, all provisions relating to the redemption of Preferred
Securities will relate to the portion of the aggregate Liquidation Amount of
Preferred Securities which has been or is to be redeemed.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each holder of Trust Securities to be
redeemed at its registered address. Unless First Banks defaults in payment of
the redemption price on the Subordinated Debentures, on and after the
Redemption Date interest will cease to accrue on such Subordinated Debentures
or portions thereof (and Distributions will cease to accrue on the related
Preferred Securities or portions thereof) called for redemption.
SUBORDINATION OF COMMON SECURITIES
Payment of Distributions on, and the Redemption Price of, the Preferred
Securities and Common Securities, as applicable, will be made pro rata based on
the Liquidation Amount of the Preferred Securities and Common Securities;
provided, however, that if on any Distribution Date or Redemption Date a
Debenture Event of Default has occurred and is continuing, no payment of any
Distribution on, or Redemption Price of, any of the Common Securities, and no
other payment on account of the redemption, liquidation or other acquisition of
such Common Securities, will be made unless payment in full in cash of all
accumulated and unpaid Distributions on all of the outstanding Preferred
Securities for all Distribution periods terminating on or prior thereto, or in
the case of payment of the Redemption Price the full amount of such Redemption
Price on all of the outstanding Preferred Securities then called for
redemption, will have been made or provided for, and all funds available to the
Property Trustee will first be applied to the payment in full in cash of all
Distributions on, or Redemption Price of, the Preferred Securities then due and
payable.
In the case of any Event of Default resulting from a Debenture Event of
Default, First Banks as holder of the Common Securities will be deemed to have
waived any right to act with respect to any such Event of Default under the
Trust Agreement until the effect of all such Events of Default with respect to
the Preferred Securities have been cured, waived or otherwise eliminated. Until
any such Events of Default under the Trust Agreement with respect to the
Preferred Securities has been so cured, waived or otherwise eliminated, the
Property Trustee will act solely on behalf of the holders of the Preferred
Securities and not on behalf of First Banks, as holder of the Common
Securities, and only the holders of the Preferred Securities will have the
right to direct the Property Trustee to act on their behalf.
LIQUIDATION DISTRIBUTION UPON TERMINATION
First Banks will have the right at any time to dissolve, wind-up or
terminate First Capital and cause the Subordinated Debentures to be distributed
to the holders of the Preferred Securities. Such right is subject, however,
to First Banks having received prior approval of the Federal Reserve if then
required under applicable capital guidelines or policies of the Federal
Reserve.
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Pursuant to the Trust Agreement, First Capital will automatically terminate
upon expiration of its term and will terminate earlier on the first to occur of
(i) certain events of bankruptcy, dissolution or liquidation of First Banks,
(ii) the distribution of a Like Amount of the Subordinated Debentures to the
holders of its Trust Securities, if First Banks, as depositor, has given
written direction to the Property Trustee to terminate First Capital (which
direction is optional and wholly within the discretion of First Banks, as
depositor), (iii) redemption of all of the Preferred Securities as described
under ``Description of the Preferred Securities--Redemption or
Exchange--Mandatory Redemption,'' or (iv) the entry of an order for the
dissolution of First Capital by a court of competent jurisdiction.
If an early termination occurs as described in clause (i), (ii) or (iv) of
the preceding paragraph, First Capital will be liquidated by the Trustees as
expeditiously as the Trustees determine to be possible by distributing, after
satisfaction of liabilities to creditors of First Capital as provided by
applicable law, to the holders of such Trust Securities a Like Amount of the
Subordinated Debentures, unless such distribution is determined by the Property
Trustee not to be practical, in which event such holders will be entitled to
receive out of the assets of First Capital available for distribution to
holders, after satisfaction of liabilities to creditors of First Capital as
provided by applicable law, an amount equal to, in the case of holders of
Preferred Securities, the aggregate of the Liquidation Amount plus accrued and
unpaid Distributions thereon to the date of payment (such amount being the
``Liquidation Distribution''). If such Liquidation Distribution can be paid
only in part because First Capital has insufficient assets available to pay in
full the aggregate Liquidation Distribution, then the amounts payable directly
by First Capital on the Preferred Securities will be paid on a pro rata basis.
First Banks, as the holder of the Common Securities, will be entitled to
receive distributions upon any such liquidation pro rata with the holders of
the Preferred Securities, except that, if a Debenture Event of Default has
occurred and is continuing, the Preferred Securities will have a priority over
the Common Securities. See ``--Subordination of Common Securities.''
Under current United States federal income tax law and interpretations and
assuming, as expected, that First Capital is treated as a grantor trust, a
distribution of the Subordinated Debentures should not be a taxable event to
holders of the Preferred Securities. Should there be a change in law, a change
in legal interpretation, a Tax Event or other circumstances, however, the
distribution could be a taxable event to holders of the Preferred Securities.
See ``Certain Federal Income Tax Consequences--Receipt of Subordinated
Debentures or Cash Upon Liquidation of First Capital.'' If First Banks elects
neither to redeem the Subordinated Debentures prior to maturity nor to
liquidate First Capital and distribute the Subordinated Debentures to holders
of the Preferred Securities, the Preferred Securities will remain outstanding
until the repayment of the Subordinated Debentures.
If First Banks elects to liquidate First Capital and thereby causes the
Subordinated Debentures to be distributed to holders of the Preferred
Securities in liquidation of First Capital, First Banks will continue to have
the right to shorten or extend the maturity of such Subordinated Debentures,
subject to certain conditions. See ``Description of the Subordinated
Debentures--General.''
LIQUIDATION VALUE
The amount of the Liquidation Distribution payable on the Preferred
Securities in the event of any liquidation of First Capital is $25 per
Preferred Security plus accrued and unpaid Distributions thereon to the date of
payment, which may be in the form of a distribution of such amount in
Subordinated Debentures, subject to certain exceptions. See ``--Liquidation
Distribution Upon Termination.''
EVENTS OF DEFAULT; NOTICE
Any one of the following events constitutes an event of default under the
Trust Agreement (an ``Event of Default'') with respect to the Preferred
Securities (whatever the reason for such Event of Default and whether voluntary
or involuntary or effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(i) the occurrence of a Debenture Event of Default (see ``Description
of the Subordinated Debentures--Debenture Events of Default''); or
(ii) default by First Capital in the payment of any Distribution when
it becomes due and payable, and continuation of such default for a period
of 30 days; or
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(iii) default by First Capital in the payment of any Redemption Price
of any Trust Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material respect, of
any covenant or warranty of the Trustees in the Trust Agreement (other than
a covenant or warranty a default in the performance of which or the breach
of which is dealt with in clauses (ii) or (iii) above), and continuation of
such default or breach for a period of 60 days after there has been given,
by registered or certified mail, to the Trustee(s) by the holders of at
least 25% in aggregate Liquidation Amount of the outstanding Preferred
Securities, a written notice specifying such default or breach and
requiring it to be remedied and stating that such notice is a ``Notice of
Default'' under the Trust Agreement; or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Property Trustee and the failure by First Banks to appoint a
successor Property Trustee within 60 days thereof.
Within five Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee will transmit
notice of such Event of Default to the holders of the Preferred Securities, the
Administrative Trustees and First Banks, as depositor, unless such Event of
Default has been cured or waived. First Banks, as depositor, and the
Administrative Trustees are required to file annually with the Property Trustee
a certificate as to whether or not they are in compliance with all the
conditions and covenants applicable to them under the Trust Agreement.
If a Debenture Event of Default has occurred and is continuing, the
Preferred Securities will have a preference over the Common Securities upon
termination of First Capital. See ``--Liquidation Distribution Upon
Termination.'' The existence of an Event of Default does not entitle the
holders of Preferred Securities to accelerate the maturity thereof.
REMOVAL OF FIRST CAPITAL TRUSTEES
Unless a Debenture Event of Default has occurred and is continuing, any
Trustee may be removed at any time by the holder of the Common Securities. If a
Debenture Event of Default has occurred and is continuing, the Property Trustee
and the Delaware Trustee may be removed at such time by the holders of a
majority in Liquidation Amount of the outstanding Preferred Securities. In no
event, however, will the holders of the Preferred Securities have the right to
vote to appoint, remove or replace the Administrative Trustees, which voting
rights are vested exclusively in First Banks as the holder of the Common
Securities. No resignation or removal of a Trustee and no appointment of a
successor trustee will be effective until the acceptance of appointment by the
successor trustee in accordance with the provisions of the Trust Agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an Event of Default has occurred and is continuing, at any time or
times, for the purpose of meeting the legal requirements of the Trust Indenture
Act or of any jurisdiction in which any part of the Trust Property (as defined
in the Trust Agreement) may at the time be located, First Banks, as the holder
of the Common Securities, will have power to appoint one or more Persons (as
defined in the Trust Agreement) either to act as a co-trustee, jointly with the
Property Trustee, of all or any part of such Trust Property, or to act as
separate trustee of any such Trust Property, in either case with such powers as
may be provided in the instrument of appointment, and to vest in such Person or
Persons in such capacity any property, title, right or power deemed necessary
or desirable, subject to the provisions of the Trust Agreement. In case a
Debenture Event of Default has occurred and is continuing, the Property Trustee
alone will have power to make such appointment.
MERGER OR CONSOLIDATION OF TRUSTEES
Any Person into which the Property Trustee, the Delaware Trustee or any
Administrative Trustee that is not a natural person may be merged or converted
or with which it may be consolidated, or any Person resulting from any merger,
conversion or consolidation to which such Trustee is a party, or any Person
succeeding to all or substantially all the corporate trust business of such
Trustee, will be the successor of such Trustee under the Trust Agreement,
provided such Person is otherwise qualified and eligible.
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MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF FIRST CAPITAL
First Capital may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, except as described below. First
Capital may, at the request of First Banks, with the consent of the
Administrative Trustees and without the consent of the holders of the Preferred
Securities, the Property Trustee or the Delaware Trustee, merge with or into,
consolidate, amalgamate, or be replaced by or convey, transfer or lease its
properties and assets substantially as an entirety to a trust organized as such
under the laws of any State; provided, that (i) such successor entity either
(a) expressly assumes all of the obligations of First Capital with respect to
the Preferred Securities, or (b) substitutes for the Preferred Securities other
securities having substantially the same terms as the Preferred Securities (the
``Successor Securities'') so long as the Successor Securities rank the same as
the Preferred Securities rank in priority with respect to distributions and
payments upon liquidation, redemption and otherwise, (ii) First Banks expressly
appoints a trustee of such successor entity possessing the same powers and
duties as the Property Trustee in its capacity as the holder of the
Subordinated Debentures, (iii) the Successor Securities are listed, or any
Successor Securities will be listed upon notification of issuance, on any
national securities exchange or other organization on which the Preferred
Securities are then listed (including, if applicable, The Nasdaq Stock Market's
National Market), if any, (iv) such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not adversely affect the
rights, preferences and privileges of the holders of the Preferred Securities
(including any Successor Securities) in any material respect, (v) prior to such
merger, consolidation, amalgamation, replacement, conveyance, transfer or
lease, First Banks has received an opinion from independent counsel to the
effect that (a) such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect the rights, preferences
and privileges of the holders of the Preferred Securities (including any
Successor Securities) in any material respect, and (b) following such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease,
neither First Capital nor such successor entity will be required to register as
an ``investment company'' under the Investment Company Act, and (vi) First
Banks owns all of the common securities of such successor entity and guarantees
the obligations of such successor entity under the Successor Securities at
least to the extent provided by the Guarantee. Notwithstanding the foregoing,
First Capital will not, except with the consent of holders of 100% in
Liquidation Amount of the Preferred Securities, consolidate, amalgamate, merge
with or into, or be replaced by or convey, transfer or lease its properties and
assets substantially as an entirety to any other Person or permit any other
Person to consolidate, amalgamate, merge with or into, or replace it if such
consolidation, amalgamation, merger, replacement, conveyance, transfer or lease
would cause First Capital or the successor entity to be classified as other
than a grantor trust for United States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF TRUST AGREEMENT
Except as provided below and under ``Description of the
Guarantee--Amendments and Assignment'' and as otherwise required by the Trust
Act and the Trust Agreement, the holders of the Preferred Securities will have
no voting rights.
The Trust Agreement may be amended from time to time by First Banks, the
Property Trustee and the Administrative Trustees, without the consent of the
holders of the Preferred Securities (i) with respect to acceptance of
appointment by a successor trustee, (ii) to cure any ambiguity, correct or
supplement any provisions in such Trust Agreement that may be inconsistent with
any other provision, or to make any other provisions with respect to matters or
questions arising under the Trust Agreement (provided such amendment is not
inconsistent with the other provisions of the Trust Agreement), or (iii) to
modify, eliminate or add to any provisions of the Trust Agreement to such
extent as is necessary to ensure that First Capital will be classified for
United States federal income tax purposes as a grantor trust at all times that
any Trust Securities are outstanding or to ensure that First Capital will not
be required to register as an ``investment company'' under the Investment
Company Act; provided, however, that in the case of clause (ii), such action
may not adversely affect in any material respect the interests of any holder of
Trust Securities, and any amendments of such Trust Agreement will become
effective when notice thereof is given to the holders of Trust Securities. The
Trust Agreement may be amended by the Trustees and First Banks with (i) the
consent of holders representing not less than a majority in the aggregate
Liquidation Amount of the outstanding Trust Securities, and (ii) receipt by the
Trustees of an opinion of counsel to the effect that such amendment or the
exercise of any power granted to the Trustees in accordance with such amendment
will not affect First Capital's status as a grantor trust for United States
federal income tax purposes or First Capital's exemption from status as an
``investment
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company'' under the Investment Company Act. Notwithstanding anything in this
paragraph to the contrary, without the consent of each holder of Trust
Securities, the Trust Agreement may not be amended to (a) change the amount or
timing of any Distribution on the Trust Securities or otherwise adversely affect
the amount of any Distribution required to be made in respect of the Trust
Securities as of a specified date, or (b) restrict the right of a holder of
Trust Securities to institute suit for the enforcement of any such payment on or
after such date.
The Trustees will not, so long as any Subordinated Debentures are held by
the Property Trustee, (i) direct the time, method and place of conducting any
proceeding for any remedy available to the Debenture Trustee, or executing any
trust or power conferred on the Property Trustee with respect to the
Subordinated Debentures, (ii) waive any past default that is waivable under the
Indenture, (iii) exercise any right to rescind or annul a declaration that the
principal of all the Subordinated Debentures will be due and payable, or (iv)
consent to any amendment, modification or termination of the Indenture or the
Subordinated Debentures, where such consent is required, without, in each case,
obtaining the prior approval of the holders of a majority in aggregate
Liquidation Amount of all outstanding Preferred Securities; provided, however,
that where a consent under the Indenture requires the consent of each holder of
Subordinated Debentures affected thereby, no such consent will be given by the
Property Trustee without the prior consent of each holder of the Preferred
Securities. The Trustees may not revoke any action previously authorized or
approved by a vote of the holders of the Preferred Securities except by
subsequent vote of the holders of the Preferred Securities. The Property
Trustee will notify each holder of Preferred Securities of any notice of
default with respect to the Subordinated Debentures. In addition to obtaining
the foregoing approvals of the holders of the Preferred Securities, prior to
taking any of the foregoing actions, the Trustees must obtain an opinion of
counsel experienced in such matters to the effect that First Capital will not
be classified as an association taxable as a corporation for United States
federal income tax purposes on account of such action.
Any required approval of holders of Preferred Securities may be given at a
meeting of holders of Preferred Securities convened for such purpose or
pursuant to written consent. The Property Trustee will cause a notice of any
meeting at which holders of Preferred Securities are entitled to vote, or of
any matter upon which action by written consent of such holders is to be taken,
to be given to each holder of record of Preferred Securities in the manner set
forth in the Trust Agreement.
No vote or consent of the holders of Preferred Securities will be required
for First Capital to redeem and cancel its Preferred Securities in accordance
with the Trust Agreement.
Notwithstanding the fact that holders of Preferred Securities are entitled
to vote or consent under any of the circumstances described above, any of the
Preferred Securities that are owned by First Banks, the Trustees or any
affiliate of First Banks or any Trustee, will, for purposes of such vote or
consent, be treated as if they were not outstanding.
PAYMENT AND PAYING AGENCY
Payments in respect of the Preferred Securities will be made by check
mailed to the address of the holder entitled thereto as such address will appear
on the register of holders of the Preferred Securities. The paying agent for the
Preferred Securities will initially be the Property Trustee and any co-paying
agent chosen by the Property Trustee and acceptable to the Administrative
Trustees and First Banks. The paying agent for the Preferred Securities may
resign as paying agent upon 30 days' written notice to the Property Trustee and
First Banks. In the event that the Property Trustee no longer is the paying
agent for the Preferred Securities, the Administrative Trustees will appoint a
successor (which must be a bank or trust company acceptable to the
Administrative Trustees and First Banks) to act as paying agent.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as the registrar and the transfer agent for
the Preferred Securities. Registration of transfers of Preferred Securities
will be effected without charge by or on behalf of First Capital, but upon
payment of any tax or other governmental charges that may be imposed in
connection with any transfer or exchange. First Capital will not be required to
register or cause to be registered the transfer of Preferred Securities after
such Preferred Securities have been called for redemption.
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INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than upon the occurrence and during the
continuance of an Event of Default, undertakes to perform only such duties as
are specifically set forth in the Trust Agreement and, after such Event of
Default, must exercise the same degree of care and skill as a prudent person
would exercise or use in the conduct of his or her own affairs. Subject to this
provision, the Property Trustee is under no obligation to exercise any of the
powers vested in it by the Trust Agreement at the request of any holder of
Preferred Securities unless it is offered reasonable indemnity against the
costs, expenses and liabilities that might be incurred thereby. If no Event of
Default has occurred and is continuing and the Property Trustee is required to
decide between alternative causes of action, construe ambiguous provisions in
the Trust Agreement or is unsure of the application of any provision of the
Trust Agreement, and the matter is not one on which holders of Preferred
Securities are entitled under the Trust Agreement to vote, then the Property
Trustee will take such action as is directed by First Banks and if not so
directed, will take such action as it deems advisable and in the best interests
of the holders of the Trust Securities and will have no liability except for
its own bad faith, negligence or willful misconduct.
MISCELLANEOUS
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate First Capital in such a way that First Capital will
not be deemed to be an ``investment company'' required to be registered under
the Investment Company Act or classified as an association taxable as a
corporation for United States federal income tax purposes and so that the
Subordinated Debentures will be treated as indebtedness of First Banks for
United States federal income tax purposes. First Banks and the Administrative
Trustees are authorized, in this connection, to take any action, not
inconsistent with applicable law, the certificate of trust of First Capital or
the Trust Agreement, that First Banks and the Administrative Trustees determine
in their discretion to be necessary or desirable for such purposes.
Holders of the Preferred Securities have no preemptive or similar rights.
The Trust Agreement and the Preferred Securities will be governed by, and
construed in accordance with, the internal laws of the State of Delaware.
DESCRIPTION OF THE SUBORDINATED DEBENTURES
Concurrently with the issuance of the Preferred Securities, First Capital
will invest the proceeds thereof, together with the consideration paid by First
Banks for the Common Securities, in the Subordinated Debentures issued by First
Banks. The Subordinated Debentures will be issued as unsecured debt under the
Indenture, to be dated as of February 4, 1997 (the ``Indenture''), between First
Banks and State Street Bank and Trust Company, as trustee (the ``Debenture
Trustee''). The Indenture will be qualified as an indenture under the Trust
Indenture Act. The following summary of the material terms and provisions of
the Subordinated Debentures and the Indenture does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, the
Indenture and to the Trust Indenture Act. Wherever particular defined terms of
the Indenture are referred to, but not defined herein, such defined terms are
incorporated herein by reference. The form of the Indenture has been filed as
an exhibit to the Registration Statement of which this Prospectus forms a part.
GENERAL
The Subordinated Debentures will be limited in aggregate principal amount
to approximately $77,319,600 (or $88,917,525 if the option described under the
heading ``Underwriting'' is exercised by the Underwriters), such amount being
the sum of the aggregate stated Liquidation Amount of the Trust Securities. The
Subordinated Debentures will bear interest at the annual rate of 9.25% of the
principal amount thereof, payable quarterly in arrears on March 31, June 30,
September 30, and December 31 of each year (each, an ``Interest Payment Date'')
beginning March 31, 1997, to the Person (as defined in the Indenture) in whose
name each Subordinated Debenture is registered, subject to certain exceptions,
at the close of business on the Business Day next preceding such Interest
Payment Date. It is anticipated that, until the liquidation, if any, of First
Capital, the Subordinated Debentures will be held in the name of the Property
Trustee in trust for the benefit of the holders of the Preferred Securities. The
amount of interest payable for any period will be computed on the basis of a
360-day year of twelve 30-day months. In the event that any date on which
interest is payable on the Subordinated Debentures is not a Business Day, then
payment of the interest payable
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on such date will be made on the next succeeding day that is a Business Day (and
without any interest or other payment in respect of any such delay) with the
same force and effect as if made on the date such payment was originally due and
payable. Accrued interest that is not paid on the applicable Interest Payment
Date will bear additional interest on the amount thereof (to the extent
permitted by law) at the rate per annum of 9.25% thereof, compounded quarterly.
The term ``interest,'' as used herein, includes quarterly interest payments,
interest on quarterly interest payments not paid on the applicable Interest
Payment Date and Additional Interest, as applicable.
The Subordinated Debentures will mature on March 31, 2027 (such date, as it
may be shortened or extended as hereinafter described, the ``Stated
Maturity''). Such date may be shortened at any time by First Banks to any date
not earlier than March 31, 2002, subject to First Banks having received prior
approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve. Such date may also be extended
at any time at the election of First Banks but in no event to a date later than
March 31, 2046, provided that at the time such election is made and at the time
of extension (i) First Banks is not in bankruptcy, otherwise insolvent or in
liquidation, (ii) First Banks is not in default in the payment of any interest
or principal on the Subordinated Debentures, (iii) First Capital is not in
arrears on payments of Distributions on the Preferred Securities and no
deferred Distributions are accumulated, and (iv) First Banks has a Senior Debt
rating of investment grade. In the event that First Banks elects to shorten or
extend the Stated Maturity of the Subordinated Debentures, it will give notice
thereof to the Debenture Trustee, First Capital and to the holders of the
Subordinated Debentures no more than 180 days and no less than 90 days prior to
the effectiveness thereof. First Banks will not have the right to purchase the
Subordinated Debentures, in whole or in part, from First Capital until after
March 31, 2002, except if a Tax Event or an Investment Company Event has
occurred and is continuing.
The Subordinated Debentures will be unsecured and will rank junior and be
subordinate in right of payment to all Senior Debt, Subordinated Debt and
Additional Senior Obligations of First Banks. Because First Banks is a holding
company, the right of First Banks to participate in any distribution of assets
of any Subsidiary Bank, upon any such Subsidiary Bank's liquidation or
reorganization or otherwise (and thus the ability of holders of the
Subordinated Debentures to benefit indirectly from such distribution), is
subject to the prior claim of creditors of such Subsidiary Bank, except to the
extent that First Banks may itself be recognized as a creditor of such
Subsidiary Bank. The Subordinated Debentures will, therefore, be effectively
subordinated to all existing and future liabilities of the Subsidiary Banks,
and holders of Subordinated Debentures should look only to the assets of First
Banks for payments on the Subordinated Debentures. The Indenture does not limit
the incurrence or issuance of other secured or unsecured debt of First Banks,
including Senior Debt, Subordinated Debt and Additional Senior Obligations,
whether under the Indenture or any existing indenture or other indenture that
First Banks may enter into in the future or otherwise. See ``--Subordination.''
The Indenture does not contain provisions that afford holders of the
Subordinated Debentures protection in the event of a highly leveraged
transaction or other similar transaction involving First Banks that may
adversely affect such holders.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
First Banks has the right under the Indenture at any time during the term
of the Subordinated Debentures, so long as no Debenture Event of Default has
occurred and is continuing, to defer the payment of interest at any time, or
from time to time (each, an ``Extended Interest Payment Period''). The right to
defer the payment of interest on the Subordinated Debentures is limited,
however, to a period, in each instance, not exceeding 20 consecutive quarters
and no Extended Interest Payment Period may extend beyond the Stated Maturity
of the Subordinated Debentures. At the end of each Extended Interest Payment
Period, First Banks must pay all interest then accrued and unpaid (together
with interest thereon at the annual rate of 9.25%, compounded quarterly, to the
extent permitted by applicable law). During an Extended Interest Payment
Period, interest will continue to accrue and holders of Subordinated Debentures
(or the holders of Preferred Securities if such securities are then
outstanding) will be required to accrue and recognize income for United States
federal income tax purposes. See ``Certain Federal Income Tax
Consequences--Potential Extension of Interest Payment Period and Original Issue
Discount.''
During any such Extended Interest Payment Period, First Banks may not (i)
declare or pay any dividends or distributions on, or redeem, purchase, acquire
or make a liquidation payment with respect to, any of First Banks' capital
stock (other than the reclassification of any class of First Banks' capital
stock into another class of capital stock
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or the conversion of the Class A Preferred Stock into Common Stock), (ii) make
any payment of principal, interest or premium, if any, on or repay, repurchase
or redeem any debt securities of First Banks that rank pari passu with or junior
in interest to the Subordinated Debentures or make any guarantee payments with
respect to any guarantee by First Banks of the debt securities of any subsidiary
of First Banks if such guarantee ranks pari passu or junior in interest to the
Subordinated Debentures (other than payments under the Guarantee), or (iii)
redeem, purchase or acquire less than all of the Subordinated Debentures or any
of the Preferred Securities. Prior to the termination of any such Extended
Interest Payment Period, First Banks may further defer the payment of interest;
provided that no Extended Interest Payment Period may exceed 20 consecutive
quarters or extend beyond the Stated Maturity of the Subordinated Debentures.
Upon the termination of any such Extended Interest Payment Period and the
payment of all amounts then due on any Interest Payment Date, First Banks may
elect to begin a new Extended Interest Payment Period subject to the above
requirements. No interest will be due and payable during an Extended Interest
Payment Period, except at the end thereof. First Banks has no present intention
of exercising its rights to defer payments of interest on the Subordinated
Debentures. First Banks must give the Property Trustee, the Administrative
Trustees and the Debenture Trustee notice of its election of such Extended
Interest Payment Period at least two Business Days prior to the earlier of (i)
the next succeeding date on which Distributions on the Trust Securities would
have been payable except for the election to begin such Extended Interest
Payment Period, or (ii) the date the Trust is required to give notice of the
record date, or the date such Distributions are payable, to The Nasdaq Stock
Market's National Market (or other applicable self-regulatory organization) or
to holders of the Preferred Securities, but in any event at least one Business
Day before such record date. Subject to the foregoing, there is no limitation
on the number of times that First Banks may elect to begin an Extended Interest
Payment Period.
ADDITIONAL SUMS
If First Capital or the Property Trustee is required to pay any additional
taxes, duties or other governmental charges as a result of the occurrence of a
Tax Event, First Banks will pay as additional amounts (referred to herein as
``Additional Interest'') on the Subordinated Debentures such additional amounts
as may be required so that the net amounts received and retained by First
Capital after paying any such additional taxes, duties or other governmental
charges will not be less than the amounts First Capital would have received had
such additional taxes, duties or other governmental charges not been imposed.
REDEMPTION OR EXCHANGE
First Banks will have the right to redeem the Subordinated Debentures prior
to maturity (i) on or after March 31, 2002, in whole at any time or in part
from time to time, or (ii) at any time in whole (but not in part), within 180
days following the occurrence of a Tax Event or an Investment Company Event, in
each case at a redemption price equal to the accrued and unpaid interest on the
Subordinated Debentures so redeemed to the date fixed for redemption, plus 100%
of the principal amount thereof. Any such redemption prior to the Stated
Maturity will be subject to prior approval of the Federal Reserve if then
required under applicable capital guidelines or policies of the Federal
Reserve.
``Tax Event'' means the receipt by First Capital of an opinion of counsel
experienced in such matters to the effect that, as a result of any amendment
to, or change (including any announced prospective change) in, the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein, or as a result of any official
administrative pronouncement or judicial decision interpreting or applying such
laws or regulations, which amendment or change is effective or which
pronouncement or decision is announced on or after the date of issuance of the
Preferred Securities under the Trust Agreement, there is more than an
insubstantial risk that (i) interest payable by First Banks on the Subordinated
Debentures is not, or within 90 days of the date of such opinion will not be,
deductible by First Banks, in whole or in part, for United States federal
income tax purposes, (ii) First Capital is, or will be within 90 days after the
date of such opinion of counsel, subject to United States federal income tax
with respect to income received or accrued on the Subordinated Debentures, or
(iii) First Capital is, or will be within 90 days after the date of such
opinion of counsel, subject to more than a de minimis amount of other taxes,
duties, assessments or other governmental charges. First Banks must request and
receive an opinion with regard to such matters within a reasonable period of
time after it becomes aware of the possible occurrence of any of the events
described in clauses (i) through (iii) above.
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``Investment Company Event'' means the receipt by First Capital of an
opinion of counsel experienced in such matters to the effect that, as a result
of the occurrence of a change in law or regulation or a change in
interpretation or application of law or regulation by any legislative body,
court, governmental agency or regulatory authority, First Capital is or will be
considered an ``investment company'' that is required to be registered under
the Investment Company Act, which change becomes effective on or after the date
of original issuance of the Preferred Securities.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of Subordinated Debentures to
be redeemed at its registered address. Unless First Banks defaults in payment
of the redemption price for the Subordinated Debentures, on and after the
redemption date interest ceases to accrue on such Subordinated Debentures or
portions thereof called for redemption.
The Subordinated Debentures will not be subject to any sinking fund.
DISTRIBUTION UPON LIQUIDATION
As described under ``Description of the Preferred Securities--Liquidation
Distribution Upon Termination,'' under certain circumstances involving the
termination of First Capital, the Subordinated Debentures may be distributed to
the holders of the Preferred Securities in liquidation of First Capital after
satisfaction of liabilities to creditors of First Capital as provided by
applicable law. Any such distribution will be subject to receipt of prior
approval by the Federal Reserve if then required under applicable policies or
guidelines of the Federal Reserve. If the Subordinated Debentures are
distributed to the holders of Preferred Securities upon the liquidation of
First Capital, First Banks will use its best efforts to list the Subordinated
Debentures on The Nasdaq Stock Market's National Market or such stock
exchanges, if any, on which the Preferred Securities are then listed. There can
be no assurance as to the market price of any Subordinated Debentures that may
be distributed to the holders of Preferred Securities.
RESTRICTIONS ON CERTAIN PAYMENTS
If at any time (i) there has occurred a Debenture Event of Default, (ii)
First Banks is in default with respect to its obligations under the Guarantee,
or (iii) First Banks has given notice of its election of an Extended Interest
Payment Period as provided in the Indenture with respect to the Subordinated
Debentures and has not rescinded such notice, or such Extended Interest Payment
Period, or any extension thereof, is continuing, First Banks will not (1)
declare or pay any dividends or distributions on, or redeem, purchase, acquire,
or make a liquidation payment with respect to, any of First Banks' capital
stock (other than the reclassification of any class of First Banks' capital
stock into another class of capital stock or the conversion of the Class A
Preferred Stock into Common Stock), (2) make any payment of principal, interest
or premium, if any, on or repay or repurchase or redeem any debt securities of
First Banks that rank pari passu with or junior in interest to the Subordinated
Debentures or make any guarantee payments with respect to any guarantee by
First Banks of the debt securities of any subsidiary of First Banks if such
guarantee ranks pari passu or junior in interest to the Subordinated Debentures
(other than payments under the Guarantee), or (3) redeem, purchase or acquire
less than all of the Subordinated Debentures or any of the Preferred
Securities.
SUBORDINATION
The Indenture provides that the Subordinated Debentures issued thereunder
are subordinated and junior in right of payment to all Senior Debt,
Subordinated Debt and Additional Senior Obligations of First Banks. Upon any
payment or distribution of assets to creditors upon any liquidation,
dissolution, winding up, reorganization, assignment for the benefit of
creditors, marshaling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceedings of First Banks, the holders of Senior Debt, Subordinated
Debt and Additional Senior Obligations of First Banks will first be entitled to
receive payment in full of principal of (and premium, if any) and interest, if
any, on such Senior Debt, Subordinated Debt and Additional Senior Obligations
of First Banks before the holders of Subordinated Debentures will be entitled
to receive or retain any payment in respect of the principal of or interest on
the Subordinated Debentures.
In the event of the acceleration of the maturity of any Subordinated
Debentures, the holders of all Senior Debt, Subordinated Debt and Additional
Senior Obligations of First Banks outstanding at the time of such acceleration
will first be entitled to receive payment in full of all amounts due thereon
(including any amounts due upon acceleration) before the holders of the
Subordinated Debentures will be entitled to receive or retain any payment in
respect of the principal of or interest on the Subordinated Debentures.
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No payments on account of principal or interest in respect of the
Subordinated Debentures may be made if there has occurred and is continuing a
default in any payment with respect to Senior Debt, Subordinated Debt or
Additional Senior Obligations of First Banks or an event of default with
respect to any Senior Debt, Subordinated Debt or Additional Senior Obligations
of First Banks resulting in the acceleration of the maturity thereof, or if any
judicial proceeding is pending with respect to any such default.
``Debt'' means, with respect to any Person, whether recourse is to all or a
portion of the assets of such Person and whether or not contingent, (i) every
obligation of such person for money borrowed, (ii) every obligation of such
Person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses, (iii) every reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person, (iv) every obligation of such Person issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business), (v) every capital lease obligation of such Person, and (vi) and
every obligation of the type referred to in clauses (i) through (v) of another
Person and all dividends of another Person the payment of which, in either
case, such Person has guaranteed or is responsible or liable, directly or
indirectly, as obligor or otherwise.
``Senior Debt'' means, with respect to First Banks, the principal of (and
premium, if any) and interest, if any (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization relating to
First Banks whether or not such claim for post-petition interest is allowed in
such proceeding), on Debt, whether incurred on or prior to the date of the
Indenture or thereafter incurred, unless, in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is
provided that such obligations are not superior in right of payment to the
Subordinated Debentures or to other Debt which is pari passu with, or
subordinated to, the Subordinated Debentures; provided, however, that Senior
Debt will not be deemed to include (i) any Debt of First Banks which when
incurred and without respect to any election under section 1111(b) of the
United States Bankruptcy Code of 1978, as amended, was without recourse to
First Banks, (ii) any Debt of First Banks to any of its subsidiaries, (iii) any
Debt to any employee of First Banks, (iv) any Debt which by its terms is
subordinated to trade accounts payable or accrued liabilities arising in the
ordinary course of business to the extent that payments made to the holders of
such Debt by the holders of the Subordinated Debentures as a result of the
subordination provisions of the Indenture would be greater than they otherwise
would have been as a result of any obligation of such holders to pay amounts
over to the obligees on such trade accounts payable or accrued liabilities
arising in the ordinary course of business as a result of subordination
provisions to which such Debt is subject, and (v) Debt which constitutes
Subordinated Debt.
``Subordinated Debt'' means, with respect to First Banks, the principal of
(and premium, if any) and interest, if any (including interest accruing on or
after the filing of any petition in bankruptcy or for reorganization relating
to First Banks whether or not such claim for post-petition interest is allowed
in such proceeding), on Debt, whether incurred on or prior to the date of the
Indenture or thereafter incurred, which is by its terms expressly provided to
be junior and subordinate to other Debt of First Banks (other than the
Subordinated Debentures).
``Additional Senior Obligations'' means, with respect to First Banks, all
indebtedness, whether incurred on or prior to the date of the Indenture or
thereafter incurred, for claims in respect of derivative products such as
interest and foreign exchange rate contracts, commodity contracts and similar
arrangements; provided, however, that Additional Senior Obligations do not
include claims in respect of Senior Debt or Subordinated Debt or obligations
which, by their terms, are expressly stated to be not superior in right of
payment to the Subordinated Debentures or to rank pari passu in right of
payment with the Subordinated Debentures. ``Claim,'' as used herein, has the
meaning assigned thereto in Section 101(4) of the United States Bankruptcy Code
of 1978, as amended.
The Indenture places no limitation on the amount of additional Senior Debt,
Subordinated Debt or Additional Senior Obligations that may be incurred by
First Banks. First Banks expects from time to time to incur additional
indebtedness constituting Senior Debt, Subordinated Debt and Additional Senior
Obligations. As of September 30, 1996, First Banks had aggregate Senior Debt,
Subordinated Debt and Additional Senior Obligations of approximately $66.8
million. Because First Banks is a holding company, the Subordinated Debentures
are effectively subordinated to all existing and future liabilities of First
Banks' subsidiaries, including obligations to depositors of the Subsidiary
Banks.
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PAYMENT AND PAYING AGENTS
Payment of principal of and any interest on the Subordinated Debentures
will be made at the office of the Debenture Trustee in New York, New York,
except that, at the option of First Banks, payment of any interest may be made
(i) by check mailed to the address of the Person entitled thereto as such
address appears in the register of holders of the Subordinated Debentures, or
(ii) by transfer to an account maintained by the Person entitled thereto as
specified in the register of holders of the Subordinated Debentures, provided
that proper transfer instructions have been received by the regular record
date. Payment of any interest on Subordinated Debentures will be made to the
Person in whose name such Subordinated Debenture is registered at the close of
business on the regular record date for such interest, except in the case of
defaulted interest. First Banks may at any time designate additional paying
agents for the Subordinated Debentures or rescind the designation of any paying
agent for the Subordinated Debentures; however, First Banks will at all times
be required to maintain a paying agent in New York, New York and each place of
payment for the Subordinated Debentures.
Any moneys deposited with the Debenture Trustee or any paying agent for the
Subordinated Debentures, or then held by First Banks in trust, for the payment
of the principal of or interest on the Subordinated Debentures and remaining
unclaimed for two years after such principal or interest has become due and
payable will be repaid to First Banks on May 31 of each year or (if then held
in trust by First Banks) will be discharged from such trust and the holder of
such Subordinated Debenture will thereafter look, as a general unsecured
creditor, only to First Banks for payment thereof.
REGISTRAR AND TRANSFER AGENT
The Debenture Trustee will act as the registrar and the transfer agent for
the Subordinated Debentures. Subordinated Debentures may be presented for
registration of transfer (with the form of transfer endorsed thereon, or a
satisfactory written instrument of transfer, duly executed) in New York,
New York or at the office of the registrar in Boston, Massachusetts. First Banks
may at any time rescind the designation of any such transfer agent or approve a
change in the location through which any such transfer agent acts; provided that
First Banks maintains a transfer agent in New York, New York. First Banks may at
any time designate additional transfer agents with respect to the Subordinated
Debentures. In the event of any redemption, neither First Banks nor the
Debenture Trustee will be required to (i) issue, register the transfer of or
exchange Subordinated Debentures during a period beginning at the opening of
business 15 days before the day of selection for redemption of Subordinated
Debentures and ending at the close of business on the day of mailing of the
relevant notice of redemption, or (ii) transfer or exchange any Subordinated
Debentures so selected for redemption, except, in the case of any Subordinated
Debentures being redeemed in part, any portion thereof not to be redeemed.
MODIFICATION OF INDENTURE
First Banks and the Debenture Trustee may, from time to time without the
consent of the holders of the Subordinated Debentures, amend, waive or
supplement the Indenture for specified purposes, including, among other things,
curing ambiguities, defects or inconsistencies and qualifying, or maintaining
the qualification of, the Indenture under the Trust Indenture Act. The
Indenture contains provisions permitting First Banks and the Debenture Trustee,
with the consent of the holders of not less than a majority in principal amount
of the outstanding Subordinated Debentures, to modify the Indenture; provided,
that no such modification may, without the consent of the holder of each
outstanding Subordinated Debenture affected by such proposed modification, (i)
extend the fixed maturity of the Subordinated Debentures, or reduce the
principal amount thereof, or reduce the rate or extend the time of payment of
interest thereon, or (ii) reduce the percentage of principal amount of
Subordinated Debentures, the holders of which are required to consent to any
such modification of the Indenture; provided that so long as any of the
Preferred Securities remain outstanding, no such modification may be made that
requires the consent of the holders of the Subordinated Debentures, and no
termination of the Indenture may occur, and no waiver of any Debenture Event of
Default may be effective, without the prior consent of the holders of at least
a majority of the aggregate Liquidation Amount of the Preferred Securities and
that if the consent of the holder of each Subordinated Debenture is required,
such modification will not be effective until each holder of Trust Securities
has consented thereto.
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DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to the Subordinated Debentures that has occurred and is
continuing constitutes an event of default (each, a ``Debenture Event of
Default'') with respect to the Subordinated Debentures:
(i) failure for 30 days to pay any interest on the Subordinated
Debentures, when due (subject to the deferral of any due date in the case
of an Extended Interest Payment Period); or
(ii) failure to pay any principal on the Subordinated Debentures when
due whether at maturity, upon redemption by declaration or otherwise; or
(iii) failure to observe or perform in any material respect certain
other covenants contained in the Indenture for 90 days after written notice
to First Banks from the Debenture Trustee or the holders of at least 25% in
aggregate outstanding principal amount of the Subordinated Debentures; or
(iv) certain events in bankruptcy, insolvency or reorganization of
First Banks.
The holders of a majority in aggregate outstanding principal amount of the
Subordinated Debentures have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee.
The Debenture Trustee, or the holders of not less than 25% in aggregate
outstanding principal amount of the Subordinated Debentures, may declare the
principal due and payable immediately upon a Debenture Event of Default. The
holders of a majority in aggregate outstanding principal amount of the
Subordinated Debentures may annul such declaration and waive the default if the
default (other than the non-payment of the principal of the Subordinated
Debentures which has become due solely by such acceleration) has been cured and
a sum sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Debenture Trustee.
Should the holders of the Subordinated Debentures fail to annul such
declaration and waive such default, the holders of a majority in aggregate
Liquidation Amount of the Preferred Securities will have such right.
First Banks is required to file annually with the Debenture Trustee a
certificate as to whether or not First Banks is in compliance with all the
conditions and covenants applicable to it under the Indenture.
If a Debenture Event of Default has occurred and is continuing, the
Property Trustee will have the right to declare the principal of and the
interest on such Subordinated Debentures, and any other amounts payable under
the Indenture, to be forthwith due and payable and to enforce its other rights
as a creditor with respect to such Subordinated Debentures.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF THE PREFERRED SECURITIES
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of First Banks to pay interest on or
principal of the Subordinated Debentures on the payment date on which such
payment is due and payable, then a holder of Preferred Securities may institute
a legal proceeding directly against First Banks for enforcement of payment to
such holder of the principal of or interest on such Subordinated Debentures
having a principal amount equal to the aggregate Liquidation Amount of the
Preferred Securities of such holder (a ``Direct Action''). In connection with
such Direct Action, First Banks will have a right of set-off under the
Indenture to the extent of any payment made by First Banks to such holder of
Preferred Securities in the Direct Action. First Banks may not amend the
Indenture to remove the foregoing right to bring a Direct Action without the
prior written consent of the holders of all of the Preferred Securities. If the
right to bring a Direct Action is removed, First Capital may become subject to
the reporting obligations under the Exchange Act. First Banks has the right
under the Indenture to set-off any payment made to such holder of Preferred
Securities by First Banks in connection with a Direct Action.
The holders of the Preferred Securities will not be able to exercise
directly any remedies, other than those set forth in the preceding paragraph,
available to the holders of the Subordinated Debentures unless there has been
an Event of Default under the Trust Agreement. See ``Description of the
Preferred Securities--Events of Default; Notice.''
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CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
First Banks may not consolidate with or merge into any other Person or
convey or transfer its properties and assets substantially as an entirety to
any Person, and any Person may not consolidate with or merge into First Banks
or sell, convey, transfer or otherwise dispose of its properties and assets
substantially as an entirety to First Banks, unless (i) in the event First
Banks consolidates with or merges into another Person or conveys or transfers
its properties and assets substantially as an entirety to any Person, the
successor Person is organized under the laws of the United States or any State
or the District of Columbia, and such successor Person expressly assumes by
supplemental indenture First Banks' obligations on the Subordinated Debentures
issued under the Indenture, (ii) immediately after giving effect thereto, no
Debenture Event of Default, and no event which, after notice or lapse of time
or both, would become a Debenture Event of Default, has occurred and is
continuing, and (iii) certain other conditions as prescribed in the Indenture
are met.
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect (except as to First Banks'
obligations to pay certain sums due pursuant to the Indenture and to provide
certain officers' certificates and opinions of counsel described therein) and
First Banks will be deemed to have satisfied and discharged the Indenture when,
among other things, all Subordinated Debentures not previously delivered to the
Debenture Trustee for cancellation (i) have become due and payable, or (ii)
will become due and payable at their Stated Maturity within one year or are to
be called for redemption within one year, and First Banks deposits or causes to
be deposited with the Debenture Trustee funds, in trust, for the purpose and in
an amount sufficient to pay and discharge the entire indebtedness on the
Subordinated Debentures not previously delivered to the Debenture Trustee for
cancellation, for the principal and interest to the date of the deposit or to
the Stated Maturity or redemption date, as the case may be.
GOVERNING LAW
The Indenture and the Subordinated Debentures will be governed by and
construed in accordance with the laws of the State of Missouri.
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
The Debenture Trustee has and is subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Debenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of Subordinated Debentures, unless offered reasonable
indemnity by such holder against the costs, expenses and liabilities which
might be incurred thereby. The Debenture Trustee is not required to expend or
risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Debenture Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
MISCELLANEOUS
First Banks has agreed, pursuant to the Indenture, for so long as Trust
Securities remain outstanding, (i) to maintain directly or indirectly 100%
ownership of the Common Securities of First Capital (provided that certain
successors which are permitted pursuant to the Indenture may succeed to First
Banks' ownership of the Common Securities), (ii) not to voluntarily terminate,
wind up or liquidate First Capital, except upon prior approval of the Federal
Reserve if then so required under applicable capital guidelines or policies of
the Federal Reserve, and (a) in connection with a distribution of Subordinated
Debentures to the holders of the Preferred Securities in liquidation of First
Capital, or (b) in connection with certain mergers, consolidations or
amalgamations permitted by the Trust Agreement, and (iii) to use its reasonable
efforts, consistent with the terms and provisions of the Trust Agreement, to
cause First Capital to remain classified as a grantor trust and not as an
association taxable as a corporation for United States federal income tax
purposes.
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DESCRIPTION OF THE GUARANTEE
The Preferred Securities Guarantee Agreement (the ``Guarantee'') will be
executed and delivered by First Banks concurrently with the issuance of the
Preferred Securities for the benefit of the holders of the Preferred
Securities. The Guarantee will be qualified as an indenture under the Trust
Indenture Act. The Guarantee Trustee will act as indenture trustee under the
Guarantee for purposes of complying with the provisions of the Trust Indenture
Act. The Guarantee Trustee, State Street Bank and Trust Company, will hold the
Guarantee for the benefit of the holders of the Preferred Securities. The
following summary of the material terms and provisions of the Guarantee does
not purport to be complete and is subject to, and qualified in its entirety by
reference to, all of the provisions of the Guarantee and the Trust Indenture
Act. Wherever particular defined terms of the Guarantee are referred to, but
not defined herein, such defined terms are incorporated herein by reference.
The form of the Guarantee has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part.
GENERAL
First Banks will, pursuant to the Guarantee, irrevocably agree to pay in
full on a subordinated basis, to the extent set forth therein, the Guarantee
Payments (as defined below) to the holders of the Preferred Securities, as and
when due, regardless of any defense, right of set-off or counterclaim that
First Capital may have or assert other than the defense of payment. The
following payments with respect to the Preferred Securities, to the extent not
paid by or on behalf of First Capital (the ``Guarantee Payments''), will be
subject to the Guarantee: (i) any accrued and unpaid Distributions required to
be paid on the Preferred Securities, to the extent that First Capital has funds
available therefor at such time, (ii) the Redemption Price with respect to any
Preferred Securities called for redemption to the extent that First Capital has
funds available therefor at such time, and (iii) upon a voluntary or
involuntary dissolution, winding up or liquidation of First Capital (other than
in connection with the distribution of Subordinated Debentures to the holders
of Preferred Securities or a redemption of all of the Preferred Securities),
the lesser of (a) the amount of the Liquidation Distribution, to the extent
First Capital has funds available therefor at such time, and (b) the amount of
assets of First Capital remaining available for distribution to holders of
Preferred Securities in liquidation of First Capital. The obligation of First
Banks to make a Guarantee Payment may be satisfied by direct payment of the
required amounts by First Banks to the holders of the Preferred Securities or
by causing First Capital to pay such amounts to such holders.
The Guarantee will not apply to any payment of Distributions except to the
extent First Capital has funds available therefor. If First Banks does not make
interest payments on the Subordinated Debentures held by First Capital, First
Capital will not pay Distributions on the Preferred Securities and will not
have funds legally available therefor.
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of First Banks and
will rank subordinate and junior in right of payment to all Senior Debt,
Subordinated Debt and Additional Senior Obligations of First Banks in the same
manner as the Subordinated Debentures. The Guarantee does not place a
limitation on the amount of additional Senior Debt, Subordinated Debt or
Additional Senior Obligations that may be incurred by First Banks. First Banks
expects from time to time to incur additional indebtedness constituting Senior
Debt, Subordinated Debt and Additional Senior Obligations.
The Guarantee will constitute a guarantee of payment and not of collection
(that is, the guaranteed party may institute a legal proceeding directly
against First Banks to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other Person). The Guarantee will
not be discharged except by payment of the Guarantee Payments in full to the
extent not paid by First Capital or upon distribution of the Subordinated
Debentures to the holders of the Preferred Securities. Because First Banks is a
holding company, the right of First Banks to participate in any distribution of
assets of any Subsidiary Bank upon such Subsidiary Bank's liquidation or
reorganization or otherwise is subject to the prior claims of creditors of that
Subsidiary Bank, except to the extent First Banks may itself be recognized as a
creditor of that Subsidiary Bank. First Banks' obligations under the Guarantee,
therefore, will be effectively subordinated to all existing and future
liabilities of First Banks' subsidiaries, and claimants should look only to the
assets of First Banks for payments thereunder.
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AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely affect
the rights of holders of the Preferred Securities (in which case no vote will
be required), the Guarantee may not be amended without the prior approval of
the holders of not less than a majority of the aggregate Liquidation Amount of
the outstanding Preferred Securities. See ``Description of the Preferred
Securities--Voting Rights; Amendment of Trust Agreement.'' All guarantees and
agreements contained in the Guarantee will bind the successors, assigns,
receivers, trustees and representatives of First Banks and will inure to the
benefit of the holders of the Preferred Securities then outstanding.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of
First Banks to perform any of its payment or other obligations thereunder. The
holders of not less than a majority in aggregate Liquidation Amount of the
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of the Guarantee or to direct the exercise of any trust or power
conferred upon the Guarantee Trustee under the Guarantee.
Any holder of Preferred Securities may institute a legal proceeding
directly against First Banks to enforce its rights under the Guarantee without
first instituting a legal proceeding against First Capital, the Guarantee
Trustee or any other Person.
First Banks, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not First Banks is in compliance with
all the conditions and covenants applicable to it under the Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance of
a default by First Banks in performance of the Guarantee, undertakes to perform
only such duties as are specifically set forth in the Guarantee and, after
default with respect to the Guarantee, must exercise the same degree of care
and skill as a prudent person would exercise or use in the conduct of his or
her own affairs. Subject to such provisions, the Guarantee Trustee is under no
obligation to exercise any of the powers vested in it by the Guarantee at the
request of any holder of any Preferred Securities, unless it is offered
reasonable indemnity against the costs, expenses and liabilities that might be
incurred thereby.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect upon (a)
full payment of the Redemption Price of the Preferred Securities, (b) full
payment of the amounts payable upon liquidation of First Capital, or (c)
distribution of the Subordinated Debentures to the holders of the Preferred
Securities. The Guarantee will continue to be effective or will be reinstated,
as the case may be, if at any time any holder of the Preferred Securities must
restore payment of any sums paid under such Preferred Securities or the
Guarantee.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the laws
of the State of Missouri.
EXPENSE AGREEMENT
First Banks will, pursuant to the Agreement as to Expenses and Liabilities
entered into by it under the Trust Agreement (the ``Expense Agreement''),
irrevocably and unconditionally guarantee to each person or entity to whom
First Capital becomes indebted or liable, the full payment of any costs,
expenses or liabilities of First Capital, other than obligations of First
Capital to pay to the holders of the Preferred Securities or other similar
interests in First Capital of the amounts due such holders pursuant to the
terms of the Preferred Securities or such other similar interests, as the case
may be. Third party creditors of First Capital may proceed directly against
First Banks under the Expense Agreement, regardless of whether such creditors
had notice of the Expense Agreement.
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RELATIONSHIP AMONG THE PREFERRED SECURITIES,
THE SUBORDINATED DEBENTURES AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the Preferred Securities
(to the extent First Capital has funds available for the payment of such
Distributions) are irrevocably guaranteed by First Banks as and to the extent
set forth under ``Description of the Guarantee.'' First Banks and First Capital
believe that, taken together, the obligations of First Banks under the
Subordinated Debentures, the Indenture, the Trust Agreement, the Expense
Agreement, and the Guarantee provide, in the aggregate, a full, irrevocable and
unconditional guarantee, on a subordinated basis, of payment of Distributions
and other amounts due on the Preferred Securities. No single document standing
alone or operating in conjunction with fewer than all of the other documents
constitutes such guarantee. It is only the combined operation of these
documents that has the effect of providing a full, irrevocable and
unconditional guarantee of the obligations of First Capital under the Preferred
Securities. If and to the extent that First Banks does not make payments on the
Subordinated Debentures, First Capital will not pay Distributions or other
amounts due on the Preferred Securities. The Guarantee does not cover payment
of Distributions when First Capital does not have sufficient funds to pay such
Distributions. In such event, the remedy of a holder of Preferred Securities is
to institute a legal proceeding directly against First Banks for enforcement of
payment of such Distributions to such holder. The obligations of First Banks
under the Guarantee are subordinate and junior in right of payment to all
Senior Debt, Subordinated Debt and Additional Senior Obligations of First
Banks.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on the
Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the Preferred Securities, primarily
because (i) the aggregate principal amount of the Subordinated Debentures will
be equal to the sum of the aggregate stated Liquidation Amount of the Trust
Securities, (ii) the interest rate and interest and other payment dates on the
Subordinated Debentures will match the Distribution rate and Distribution and
other payment dates for the Preferred Securities, (iii) First Banks will pay
for all and any costs, expenses and liabilities of First Capital (except the
obligations of First Capital to holders of the Preferred Securities), and (iv)
the Trust Agreement further provides that First Capital will not engage in any
activity that is not consistent with the limited purposes of First Capital.
ENFORCEMENT RIGHTS OF HOLDERS OF PREFERRED SECURITIES
A holder of any Preferred Security may institute a legal proceeding
directly against First Banks to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Guarantee Trustee, First
Capital or any other Person. A default or event of default under any Senior
Debt, Subordinated Debt or Additional Senior Obligations of First Banks would
not constitute a default or Event of Default. In the event, however, of payment
defaults under, or acceleration of, Senior Debt, Subordinated Debt or
Additional Senior Obligations of First Banks, the subordination provisions of
the Indenture provide that no payments may be made in respect of the
Subordinated Debentures until such Senior Debt, Subordinated Debt or Additional
Senior Obligations has been paid in full or any payment default thereunder has
been cured or waived. Failure to make required payments on the Subordinated
Debentures would constitute an Event of Default.
LIMITED PURPOSE OF FIRST CAPITAL
The Preferred Securities evidence a preferred undivided beneficial interest
in the assets of First Capital. First Capital exists for the sole purpose of
issuing the Trust Securities and investing the proceeds thereof in Subordinated
Debentures. A principal difference between the rights of a holder of a
Preferred Security and the rights of a holder of a Subordinated Debenture is
that a holder of a Subordinated Debenture is entitled to receive from First
Banks the principal amount of and interest accrued on Subordinated Debentures
held, while a holder of Preferred Securities is entitled to receive
Distributions from First Capital (or from First Banks under the Guarantee) if
and to the extent First Capital has funds available for the payment of such
Distributions.
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RIGHTS UPON TERMINATION
Upon any voluntary or involuntary termination, winding-up or liquidation of
First Capital involving the liquidation of the Subordinated Debentures, the
holders of the Preferred Securities will be entitled to receive, out of assets
held by First Capital, the Liquidation Distribution in cash. See ``Description
of the Preferred Securities--Liquidation Distribution Upon Termination.'' Upon
any voluntary or involuntary liquidation or bankruptcy of First Banks, the
Property Trustee, as holder of the Subordinated Debentures, would be a
subordinated creditor of First Banks, subordinated in right of payment to all
Senior Debt, Subordinated Debt and Additional Senior Obligations of First Banks
(as set forth in the Indenture), but entitled to receive payment in full of
principal and interest before any shareholders of First Banks receive payments
or distributions. Since First Banks is the guarantor under the Guarantee and
has agreed to pay for all costs, expenses and liabilities of First Capital
(other than the obligations of First Capital to the holders of its Preferred
Securities), the positions of a holder of the Preferred Securities and a holder
of the Subordinated Debentures relative to other creditors and to shareholders
of First Banks in the event of liquidation or bankruptcy of First Banks are
expected to be substantially the same.
DESCRIPTION OF OTHER CAPITAL STOCK
COMMON STOCK
The Amended and Restated Articles of Incorporation of First Banks (the
``Restated Articles'') authorize the issuance of 25,000 shares of common stock,
$250 par value per share (the ``Common Stock''). Holders of Common Stock are
entitled to receive, when and as declared by the Board of Directors, out of
funds legally available for that purpose, dividends payable in cash, stock or
otherwise. Each share of Common Stock is entitled to one vote on all matters
except that shareholders have cumulative voting rights in the election of
Directors of First Banks. On liquidation, the holders of Common Stock are
entitled to receive pro rata any assets distributable to stockholders in
respect of the Common Stock held by them after any required distributions to
the holders of First Banks' preferred stock, including the Class A Preferred
Stock, the Class B Preferred Stock and the Class C Preferred Stock.
As of September 30, 1996, First Banks had outstanding 23,661 shares of
Common Stock, all of which shares are owned by various trusts which were
created by and are administered by and for the benefit of Mr. James F.
Dierberg, Chairman of the Board, President and Chief Executive Officer of First
Banks and members of his immediate family. All of the issued and outstanding
shares are fully paid and nonassessable. The holders of the Common Stock, the
Class A Preferred Stock and the Class B Preferred Stock and First Banks have
entered into an agreement limiting the transferability of all such securities
and providing for first rights of refusal with respect to proposed sales for
such securities.
PREFERRED STOCK
The Restated Articles authorize, in addition to 750,000 shares of Class A
Convertible, Adjustable Rate, $20 par value, Preferred Stock (the ``Class A
Preferred Stock''), and 200,000 shares of Class B Adjustable Rate, $1.50 par
value, Preferred Stock (the ``Class B Preferred Stock''), 5,000,000 shares of
preferred stock, par value $1 per share, 2,200,000 of which have been
designated Class C 9.00%, Cumulative, Increasing Rate, $25 stated value
(defined herein as the ``Class C Preferred Stock''). The following is a summary
of the terms of the Class A Preferred Stock, the Class B Preferred Stock and
the Class C Preferred Stock.
CLASS A PREFERRED STOCK
DIVIDENDS. As and when declared by the Board of Directors of First Banks,
the dividend rate on the Class A Preferred Stock for any quarterly period is 4%
less than the higher of the Treasury Bill Rate or the Ten Year Treasury
Constant Maturity Rate, calculated in the manner set forth in the Restated
Articles, except that in no event may the dividend paid be less than 6% per
annum or greater than 12% per annum. Dividends on the Class A Preferred Stock
are noncumulative.
REDEMPTION. The Class A Preferred Stock is redeemable at any time at the
option of First Banks, with the prior written consent of the Federal Reserve,
as long as dividends for all classes of preferred stock have been paid, at a
redemption price of $21 per share (105% of the par value of the Class A
Preferred Stock) plus declared and unpaid dividends to the date fixed for
redemption.
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LIQUIDATION. Holders of the Class A Preferred Stock are entitled to receive
in a liquidation, dissolution or winding-up (either voluntary or involuntary)
of First Banks, the par value per share plus a liquidation premium equal to 5%
of the par value, in addition to all previously declared and unpaid dividends.
CONVERTIBILITY. The Class A Preferred Stock is convertible at the option of
the holder, into shares of Common Stock at a rate based on the ratio of the par
value of the Class A Preferred Stock to the current market value of the Common
Stock at the date of conversion as determined by independent appraisal at the
time of conversion. The number of appraisers and the procedures by which the
appraisers are to be selected are set forth in the Restated Articles.
VOTING RIGHTS. Holders of the Class A Preferred Stock possess full voting
rights and power as are enjoyed by the holders of the Common Stock, except that
the right to vote the shares of the Class A Common Stock lapses upon the date
of death of the first recorded holder of such shares or, if held in trust, upon
the death of the income beneficiary of the trust. No shares of any capital
stock of First Banks ranking prior to or on a parity with the Class A Preferred
Stock may be issued by First Banks unless such issuance is approved by a vote
of the holders of two-thirds of the issued and outstanding shares of Class A
Preferred Stock.
CLASS B PREFERRED STOCK
DIVIDENDS. As and when declared by the Board of Directors of First Banks,
the dividend rate on the Class B Preferred Stock for any quarterly period is 1%
less than the higher of the Treasury Bill Rate or the Ten Year Treasury
Constant Maturity Rate, calculated in the manner set forth in the Restated
Articles, except that in no event may the dividend paid be less than 7% per
annum or greater than 15% per annum. Dividends are noncumulative.
REDEMPTION. The Restated Articles provide that the Class B Preferred Stock
may not be redeemed.
LIQUIDATION. Holders of the Class B Preferred Stock are entitled to receive
in a liquidation, dissolution or winding-up (either voluntary or involuntary)
of First Banks, the par value per share plus all previously declared and unpaid
dividends.
CONVERTIBILITY. The Class B Preferred Stock is not convertible into any
other class of capital stock of First Banks.
VOTING RIGHTS. Holders of the Class B Preferred Stock possess full voting
rights and power as are enjoyed by the holders of the Common Stock. The right
to vote the shares lapses, however, on and upon the date of sale, exchange,
assignment, pledge, gift, bequest or other form of transfer of ownership to a
party other than the first recorded holder of the Class B Preferred Stock or
one of the lineal descendants of each holder or, if held in trust, one of the
lineal descendants of the income beneficiary of said trust, except that the
voting rights will not lapse because of (i) a transfer of Class B Preferred
Stock to a personal representative of a deceased shareholder, or (ii) a pledge
of Class B Preferred Stock by the first-recorded holder thereof to secure
performance of obligations to another party or the subsequent foreclosure of
such pledge or any subsequent transfers thereafter. No shares of any capital
stock of First Banks ranking prior to or on a parity with the Class B Preferred
Stock may be issued by First Banks unless such issuance is approved by a vote
of the holders of two-thirds of the issued and outstanding shares of the Class
B Preferred Stock.
CLASS C PREFERRED STOCK
DIVIDENDS. As and when declared by the Board of Directors of First Banks,
the dividend rate on the Class C Preferred Stock is 9% per annum. On December
1, 1997, the annual dividend rate will increase by 0.75% to 9.75%, which will
thereafter be the annual dividend rate. Dividends are cumulative. So long as
any shares of Class C Preferred Stock remain outstanding, no dividend may be
paid or declared and no other distribution made on the Class A Preferred Stock,
the Class B Preferred Stock, the Common Stock or any other junior stock that
may in the future be issued by First Banks (collectively, the ``Junior Stock'')
other than a dividend payable in Junior Stock, and no shares of Junior Stock
may be purchased, redeemed or otherwise acquired for consideration by First
Banks, directly or indirectly (other than as a result of a reclassification of
Junior Stock or the exchange or conversion of one Junior Stock for or into
another Junior Stock, or other than through the use of the proceeds of a
substantially contemporaneous sale of other Junior Stock) unless all dividends
on shares of the cumulative preferred stock of all classes for all quarterly
dividend periods ended prior to such action have been paid. Subject to the
foregoing, such dividends (payable in cash, stock or otherwise) as may be
determined by the Board of Directors of First Banks may be declared and paid on
any Junior Stock from time to time out of any funds legally available
therefore, and the Class C Preferred
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Stock will not be entitled to participate in any such dividends, whether
payable in cash, stock or otherwise. No dividends may be paid or declared upon
any shares of any class or series of capital stock of First Banks ranking on a
parity with the Class C Preferred Stock for any period unless all dividends
payable on the Class C Preferred Stock for all quarterly dividend periods ended
prior to the date of such payment or declaration have been paid. When dividends
are not paid in full, as aforesaid, upon the Class C Preferred Stock and any
other preferred stock ranking on a parity as to dividends with the Class C
Preferred Stock, all dividends declared upon the Class C Preferred Stock and
any other preferred stock ranking on a parity as to dividends with the Class C
Preferred Stock will be declared pro rata so that the amount of dividends
declared per share on the Class C Preferred Stock and such other preferred
stock will in all cases bear to each other the same ratio that accumulated
dividends per share on the Class C Preferred Stock and such other preferred
stock bear to each other. No interest, or sum or money in lieu of interest,
will be payable in respect of any dividend payment or payments on the shares of
Class C Preferred Stock which may be in arrears. During any period in which a
dividend payment or payments on the Class C Preferred Stock are in arrears,
however, (i) no bonus or extraordinary salary may be paid to any officer of
First Banks who is also the owner of more than 10% of the outstanding voting
capital stock of First Banks, and (ii) no payments may otherwise be made to Mr.
James F. Dierberg or his affiliates except for payments for products and
services not in excess of the costs (excluding profits) incurred by Mr.
Dierberg or his affiliates.
REDEMPTION. The Class C Preferred Stock may not be redeemed prior to
December 1, 1997. The Class C Preferred Stock may be redeemed in whole or in
part, with not less than 40 nor more than 70 days notice, except as described
below, on or after December 1, 1997, at the option of First Banks, at $25 per
share plus all unpaid dividends calculated to the date of redemption. If any
proposed redemption is for less than all of the outstanding shares, then the
shares to be redeemed will be selected pro rata or by lot as determined by the
Board of Directors of First Banks. The shares may not be redeemed without the
prior approval of the Federal Reserve.
LIQUIDATION. If First Banks is voluntarily or involuntarily liquidated,
dissolved or its affairs wound up, the holders of the Class C Preferred Stock
will have a preference of $25 per share plus all dividends accumulated and
unpaid thereon to the date of payment, or such lesser amount remaining after
the claims of all creditors have been satisfied, before any payments are made
with respect to Junior Stock of First Banks or any other class of stock of
First Banks ranking junior to the Class C Preferred Stock. In the event that
upon any such voluntary or involuntary liquidation, the available assets of
First Banks are insufficient to pay the full liquidation preference on the
outstanding Class C Preferred Stock and the liquidation preferences on all
shares of other classes or series of capital stock of First Banks ranking on a
parity with the Class C Preferred Stock, the holders of all such shares will
share ratably in any distribution of assets in proportion to the full amounts
to which they would otherwise be respectively entitled. After payment of the
full amount of the liquidation preference to which they are entitled, the
holders of the Class C Preferred Stock will not be entitled to any further
participation in any distribution of assets by First Banks. The consolidation
or merger of First Banks with any entity will not be considered to constitute a
liquidation, dissolution or winding up of First Banks.
VOTING RIGHTS. Holders of the Class C Preferred Stock do not have any
voting rights except as described below and except as may be expressly required
by law.
If at any time First Banks falls in arrears in the payment of dividends on
the Class C Preferred Stock in an aggregate amount at least equal to the full
accumulated dividends for six quarterly dividend periods, the number of
directors of First Banks will be increased by two and the holders of the Class
C Preferred Stock (and all classes of preferred stock ranking on parity
therewith), voting separately on a noncumulative basis as a single class, will
have the right to elect such two additional directors of First Banks, such
right will continue until all dividends in arrears have been paid or declared
and set apart for payment. The Class A Preferred Stock and Class B Preferred
Stock will not vote with the Class C Preferred Stock for such purpose.
The affirmative vote of the holders of at least 66 2/3% of the outstanding
Class C Preferred Stock is required to amend the Restated Articles to create or
authorize any class of stock ranking prior to the Class C Preferred Stock or to
issue any class of stock to Mr. James F. Dierberg or any entity affiliated with
Mr. Dierberg which would rank on a parity with the Class C Preferred Stock in
respect of dividends or distribution of assets on liquidation or otherwise
alter or abolish the liquidation preferences or any other preferential right of
the Class C Preferred Stock, reduce the redemption price or otherwise alter any
redemption rights of the Class C Preferred Stock, alter or abolish any right of
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the holders of the Class C Preferred Stock to receive dividends, or exclude or
limit the voting rights as to these matters.
If dividends for any past quarterly dividend period are not paid on all
outstanding Class C Preferred Stock, First Banks may not, without the consent
of the holders of at least 66 2/3% shares of the then outstanding Class C
Preferred Stock, purchase or redeem less than all then outstanding shares of
Class C Preferred Stock; provided, however, that nothing will prevent the
purchase or acquisition of the shares pursuant to a purchase or Class C
Preferred Stock exchange offer made on the same terms to holders of all
outstanding shares of Class C Preferred Stock.
If at any time First Banks issues any class or series of preferred stock on
a parity with the Class C Preferred Stock with respect to dividends and
distributions on liquidation, holders of the Class C Preferred Stock will
thereafter possess equivalent voting rights, if any, with such class or series.
The voting rights for all classes or series of preferred stock, except the
Class A Preferred Stock and the Class B Preferred Stock, will not, however,
exceed 25% of the total voting rights of all outstanding capital stock of First
Banks.
TRANSFER AGENT. The transfer agent for the Class C Preferred Stock is
Boatmen's Trust Company.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a summary of the material United States federal income tax
considerations that may be relevant to the purchasers of Preferred Securities
which has been passed upon by Lewis, Rice & Fingersh, L.C., counsel to First
Banks and First Capital insofar as it relates to matters of law and legal
conclusions. The conclusions expressed herein are based upon current provisions
of the Internal Revenue Code of 1986, as amended (the ``Code''), regulations
thereunder and current administrative rulings and court decisions, all of which
are subject to change at any time, with possible retroactive effect. Subsequent
changes may cause tax consequences to vary substantially from the consequences
described below. Furthermore, the authorities on which the following summary is
based are subject to various interpretations, and it is therefore possible that
the United States federal income tax treatment of the purchase, ownership, and
disposition of Preferred Securities may differ from the treatment described
below.
No attempt has been made in the following discussion to comment on all
United States federal income tax matters affecting purchasers of Preferred
Securities. Moreover, the discussion generally focuses on holders of Preferred
Securities who are individual citizens or residents of the United States and
who acquire Preferred Securities on their original issue at their offering
price and hold Preferred Securities as capital assets. The discussion has only
limited application to dealers in securities, corporations, estates, trusts or
nonresident aliens and does not address all the tax consequences that may be
relevant to holders who may be subject to special tax treatment, such as, for
example, banks, thrifts, real estate investment trusts, regulated investment
companies, insurance companies, dealers in securities or currencies, tax-exempt
investors, or persons that will hold the Preferred Securities as a position in
a ``straddle,'' as part of a ``synthetic security'' or ``hedge,'' as part of a
``conversion transaction'' or other integrated investment, or as other than a
capital asset. The following summary also does not address the tax consequences
to persons that have a functional currency other than the U.S. dollar or the
tax consequences to shareholders, partners or beneficiaries of a holder of
Preferred Securities. Further, it does not include any description of any
alternative minimum tax consequences or the tax laws of any state or local
government or of any foreign government that may be applicable to the Preferred
Securities. Accordingly, each prospective investor should consult, and should
rely exclusively on, such investor's own tax advisors in analyzing the federal,
state, local and foreign tax consequences of the purchase, ownership or
disposition of Preferred Securities.
CLASSIFICATION OF THE SUBORDINATED DEBENTURES
First Banks intends to take the position that the Subordinated Debentures
will be classified for United States federal income tax purposes as
indebtedness of First Banks under current law, and, by acceptance of a
Preferred Security, each holder covenants to treat the Subordinated Debentures
as indebtedness and the Preferred Securities as evidence of an indirect
beneficial ownership interest in the Subordinated Debentures. No assurance can
be given, however, that such position of First Banks will not be challenged by
the Internal Revenue Service or, if challenged, that such a challenge will not
be successful. The remainder of this discussion assumes that the Subordinated
Debentures will be classified for United States federal income tax purposes as
indebtedness of First Banks.
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CLASSIFICATION OF FIRST CAPITAL
Under current law and assuming full compliance with the terms of the Trust
Agreement and Indenture (and certain other documents described herein), First
Capital will be classified for United States federal income tax purposes as a
grantor trust and not as an association taxable as a corporation. Accordingly,
for United States federal income tax purposes, each holder of Preferred
Securities generally will be treated as owning an undivided beneficial interest
in the Subordinated Debentures, and each holder will be required to include in
its gross income any original issue discount (``OID'') accrued with respect to
its allocable share of the Subordinated Debentures whether or not cash is
actually distributed to such holder.
POTENTIAL EXTENSION OF INTEREST PAYMENT PERIOD AND ORIGINAL ISSUE DISCOUNT
Because First Banks has the option, under the terms of the Subordinated
Debentures, to defer (so long as no Debenture Event of Default has occurred and
is continuing) payments of interest by extending interest payment periods for
up to 20 consecutive quarters, all of the stated interest payments on the
Subordinated Debentures will be treated as OID. Holders of debt instruments
issued with OID must include that discount in income on an economic accrual
basis before the receipt of cash attributable to the interest, regardless of
their method of tax accounting. Generally, all of a holder's taxable interest
income with respect to the Subordinated Debentures will be accounted for as
OID. Actual payments and distributions of stated interest will not, however, be
separately reported as taxable income. The amount of OID that accrues in any
quarter will approximately equal the amount of the interest that accrues on the
Subordinated Debentures in that quarter at the stated interest rate. In the
event that the interest payment period is extended, holders will continue to
accrue OID approximately equal to the amount of the interest payment due at the
end of the extended interest payment period on an economic accrual basis over
the length of the extended interest payment period.
Because income on the Preferred Securities will constitute interest income
generally and OID specifically, corporate holders of Preferred Securities will
not be entitled to a dividends-received deduction with respect to any income
recognized with respect to the Preferred Securities.
MARKET DISCOUNT AND ACQUISITION PREMIUM
Holders of Preferred Securities other than a holder who purchased the
Preferred Securities upon original issuance may be considered to have acquired
their undivided interests in the Subordinated Debentures with ``market
discount'' or ``acquisition premium'' as such phrases are defined for United
States federal income tax purposes. Such holders are advised to consult their
tax advisors as to the income tax consequences of the acquisition, ownership
and disposition of the Preferred Securities.
RECEIPT OF SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF FIRST CAPITAL
Under certain circumstances, as described under ``Description of the
Preferred Securities--Redemption or Exchange'' and ``--Liquidation Distribution
Upon Termination,'' the Subordinated Debentures may be distributed to holders
of Preferred Securities upon a liquidation of First Capital. Under current
United States federal income tax law, such a distribution would be treated as a
nontaxable event to each such holder and would result in such holder having an
aggregate tax basis in the Subordinated Debentures received in the liquidation
equal to such holder's aggregate tax basis in the Preferred Securities
immediately before the distribution. A holder's holding period in the
Subordinated Debentures so received in liquidation of First Capital would
include the period for which such holder held the Preferred Securities.
If, however, a Tax Event occurs which results in First Capital being
treated as an association taxable as a corporation, the distribution would
likely constitute a taxable event to holders of the Preferred Securities. Under
certain circumstances described herein, the Subordinated Debentures may be
redeemed for cash and the proceeds of such redemption distributed to holders in
redemption of their Preferred Securities. Under current law, such a redemption
would, for United States federal income tax purposes, constitute a taxable
disposition of the redeemed Preferred Securities, and a holder would recognize
gain or loss as if the holder sold such Preferred Securities for cash. See
``Description of the Preferred Securities--Redemption or Exchange'' and
``--Liquidation Distribution Upon Termination.''
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DISPOSITION OF PREFERRED SECURITIES
A holder that sells Preferred Securities will recognize gain or loss equal
to the difference between the amount realized on the sale of the Preferred
Securities and the holder's adjusted tax basis in such Preferred Securities. A
holder's adjusted tax basis in the Preferred Securities generally will be its
initial purchase price increased by OID previously includible in such holder's
gross income to the date of disposition and decreased by payments received on
the Preferred Securities to the date of disposition. Such gain or loss will
generally be a capital gain or loss and will be a long-term capital gain or
loss if the Preferred Securities have been held for more than one year at the
time of sale.
The Preferred Securities may trade at a price that does not accurately
reflect the value of accrued but unpaid interest with respect to the underlying
Subordinated Debentures. A holder that disposes of its Preferred Securities
between record dates for payments of distributions thereon will be required to
include accrued but unpaid interest on the Subordinated Debentures through the
date of disposition in income as ordinary income, and to add such amount to its
adjusted tax basis in its pro rata share of the underlying Subordinated
Debentures deemed disposed of. To the extent the selling price is less than the
holder's adjusted tax basis (which basis will include, in the form of OID, all
accrued but unpaid interest), a holder will recognize a capital loss. Subject
to certain limited exceptions, capital losses cannot be applied to offset
ordinary income for United States federal income tax purposes.
EFFECT OF PROPOSED CHANGES IN TAX LAWS
On March 19, 1996, President Clinton proposed certain tax law changes that
would, among other things, generally deny corporate issuers a deduction for
interest in respect of certain debt obligations issued on or after December 7,
1995 (the ``Proposed Legislation'') if such debt obligations have a maximum
term in excess of 20 years and are not shown as indebtedness on the issuer's
applicable consolidated balance sheet. On March 29, 1996, Senate Finance
Committee Chairman William V. Roth, Jr. and House Ways and Means Committee
Chairman Bill Archer issued a joint statement (the ``Joint Statement'')
indicating their intent that certain legislative proposals initiated by the
Clinton administration, including the Proposed Legislation, that may be adopted
by either of the tax-writing committees of Congress would have an effective
date that is no earlier than the date of ``appropriate Congressional action.''
In addition, subsequent to the publication of the Joint Statement, Senator
Daniel Patrick Moynihan and Representatives Sam M. Gibbons and Charles B.
Rangel wrote letters to Treasury Department officials concurring with the views
expressed in the Joint Statement (the ``Democrat Letters''). Based upon the
Joint Statement and the Democrat Letters, it is expected that if the Proposed
Legislation were to be enacted, such legislation would not apply to the
Subordinated Debentures. There can be no assurances, however, that the
effective date guidance contained in the Joint Statement and the Democrat
Letters will be incorporated into the Proposed Legislation, if enacted, or that
other legislation enacted after the date hereof will not otherwise adversely
affect the ability of First Banks to deduct the interest payable on the
Subordinated Debentures. There can, therefore, be no assurance that a Tax Event
will not occur. A Tax Event would permit First Banks, upon approval of the
Federal Reserve if then required under applicable capital guidelines or
policies of the Federal Reserve, to cause a redemption of the Preferred
Securities before, as well as after, March 31, 2002. See ``Description of the
Subordinated Debentures--Redemption or Exchange'' and ``Description of the
Preferred Securities--Redemption or Exchange--Tax Event Redemption or
Investment Company Event Redemptions.''
BACKUP WITHHOLDING AND INFORMATION REPORTING
The amount of OID accrued on the Preferred Securities held of record by
individual citizens or residents of the United States, or certain trusts,
estates, and partnerships, will be reported to the Internal Revenue Service on
Forms 1099, which forms should be mailed to such holders of Preferred
Securities by January 31 following each calendar year. Payments made on, and
proceeds from the sale of, the Preferred Securities may be subject to a
``backup'' withholding tax (currently at 31%) unless the holder complies with
certain identification and other requirements. Any amounts withheld under the
backup withholding rules will be allowed as a credit against the holder's
United States federal income tax liability, provided the required information
is provided to the Internal Revenue Service.
84
<PAGE> 88
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED
FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON THE
PARTICULAR SITUATION OF A HOLDER OF PREFERRED SECURITIES. HOLDERS OF PREFERRED
SECURITIES SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE
PREFERRED SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES
FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Employee benefit plans that are subject to the Employee Retirement Income
Security Act of 1974, as amended (``ERISA''), or Section 4975 of the Code
(``Plans''), generally may purchase Preferred Securities, subject to the
investing fiduciary's determination that the investment in Preferred Securities
satisfies ERISA's fiduciary standards and other requirements applicable to
investments by the Plan.
In any case, First Banks and/or any of its affiliates may be considered a
``party in interest'' (within the meaning of ERISA) or a ``disqualified
person'' (within the meaning of Section 4975 of the Code) with respect to
certain plans (generally, Plans maintained or sponsored by, or contributed to
by, any such persons with respect to which First Banks or an affiliate is a
fiduciary or Plans for which First Banks or an affiliate provides services).
The acquisition and ownership of Preferred Securities by a Plan (or by an
individual retirement arrangement or other Plans described in Section
4975(e)(1) of the Code) with respect to which First Banks or any of its
affiliates is considered a party in interest or a disqualified person may
constitute or result in a prohibited transaction under ERISA or Section 4975 of
the Code, unless such Preferred Securities are acquired pursuant to and in
accordance with an applicable exemption.
As a result, Plans with respect to which First Banks or any of its
affiliates is a party in interest or a disqualified person should not acquire
Preferred Securities unless such Preferred Securities are acquired pursuant to
and in accordance with an applicable exemption. Any other Plans or other
entities whose assets include Plan assets subject to ERISA or Section 4975 of
the Code proposing to acquire Preferred Securities should consult with their
own counsel.
85
<PAGE> 89
UNDERWRITING
The Underwriters named below, represented by Stifel, Nicolaus & Company,
Incorporated (the ``Representative''), have severally agreed, subject to the
terms and conditions set forth in the Underwriting Agreement, the form of which
is filed as an exhibit to the Registration Statement of which this Prospectus
forms a part, to purchase from First Capital the number of Preferred Securities
set forth opposite their respective names below. The several Underwriters have
agreed in the Underwriting Agreement, subject to the terms and conditions set
forth therein, to purchase all the Preferred Securities offered hereby if any
of the Preferred Securities are purchased. In the event of default by an
Underwriter, the Underwriting Agreement provides that, in certain
circumstances, purchase commitments of the nondefaulting Underwriters may be
increased or the Underwriting Agreement may be terminated.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Stifel, Nicolaus & Company, Incorporated............................................................ 2,062,500
ABN AMRO Chicago Corporation........................................................................ 93,750
A. G. Edwards & Sons, Inc........................................................................... 93,750
Advest, Inc......................................................................................... 46,875
Robert W. Baird & Co. Incorporated.................................................................. 46,875
George K. Baum & Company............................................................................ 46,875
J. C. Bradford & Co................................................................................. 46,875
Dain Bosworth Incorporated.......................................................................... 46,875
EVEREN Securities, Inc.............................................................................. 46,875
Friedman, Billings, Ramsey & Co., Inc............................................................... 46,875
Huntleigh Securities Corporation.................................................................... 46,875
Piper Jaffray Inc................................................................................... 46,875
Principal Financial Securities, Inc................................................................. 46,875
The Robinson-Humphrey Company, Inc.................................................................. 46,875
Roney & Co., LLC.................................................................................... 46,875
Stephens Inc........................................................................................ 46,875
Scott & Stringfellow, Inc........................................................................... 46,875
Sutro & Co. Incorporated............................................................................ 46,875
Wheat, First Securities, Inc. 46,875
---------
Total............................................................................................... 3,000,000
=========
</TABLE>
The Representative has advised First Capital that it proposes initially to
offer the Preferred Securities to the public at the public offering price set
forth on the cover page of this Prospectus, and to certain dealers at such
price less a concession not in excess of $0.50 per Preferred Security. The
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $0.10 per Preferred Security to certain other dealers. After the initial
public offering, the public offering price, concession and discount may be
changed.
In view of the fact that the proceeds of the sale of the Preferred
Securities will be used to purchase the Subordinated Debentures of First Banks,
the Underwriting Agreement provides that First Banks will pay as compensation
to the Underwriters arranging the investment therein of such proceeds, an
amount in immediately available funds of $0.875 per Preferred Security (or
$2,625,000 in the aggregate) for the accounts of the several Underwriters.
First Capital has granted the Underwriters an option to purchase up to an
additional 450,000 Preferred Securities at the initial public offering price.
Such option, which expires 30 days from the date of this Prospectus, may be
exercised solely to cover over-allotments. To the extent that the Underwriters
exercise such option, each of the Underwriters will have a firm commitment,
subject to certain conditions, to purchase approximately the same percentage of
the additional Preferred Securities that the number of Preferred Securities to
be purchased initially by the Underwriter is of the 3,000,000 Preferred
Securities initially purchased by the Underwriters.
To the extent that the Underwriters exercise their option to purchase
additional Preferred Securities, First Capital will issue and sell to First
Banks additional Common Securities and First Banks will issue and sell to First
Capital Subordinated Debentures in an aggregate principal amount equal to the
total aggregate Liquidation Amount of the additional Preferred Securities being
purchased pursuant to the option.
86
<PAGE> 90
During a period of 30 days from the date of this Prospectus, neither First
Capital nor First Banks will, subject to certain exceptions, without the prior
written consent of the Representative, directly or indirectly, sell, offer to
sell, grant any option for sale of, or otherwise dispose of, any Preferred
Securities, any security convertible into or exchangeable into or exercisable
for Preferred Securities or Subordinated Debentures or any debt securities
substantially similar to the Subordinated Debentures or equity securities
substantially similar to the Preferred Securities (except for Subordinated
Debentures and the Preferred Securities offered hereby).
The Preferred Securities have been approved for quotation on The Nasdaq
Stock Market's National Market. The Representative has advised First Capital
that it presently intends to make a market in the Preferred Securities after
the commencement of trading on The Nasdaq Stock Market's National Market, but
no assurances can be made as to the liquidity of such Preferred Securities or
that an active and liquid trading market will develop or, if developed,
that it will continue. The offering price and distribution rate have been
determined by negotiations among representatives of First Banks and the
Underwriters, and the offering price of the Preferred Securities may not be
indicative of the market price following the Offering. The Representative will
have no obligation to make a market in the Preferred Securities, however, and
may cease market-making activities, if commenced, at any time.
First Capital and First Banks have agreed to indemnify the Underwriters
against, or contribute to payments that the Underwriters may be required to
make in respect of, certain liabilities, including liabilities under the
Securities Act.
Certain of the Underwriters engage in transactions with, and, from time to
time, have performed services for, First Banks and its subsidiaries in the
ordinary course of business. In addition, if any Underwriter acts as principal
or agent with respect to an open market purchase or sale of the Class C
Preferred Stock, then such Underwriter will also receive its normal mark-up
and/or commission in connection with such transaction.
VALIDITY OF SECURITIES
Certain matters of Delaware law relating to the validity of the Preferred
Securities, the enforceability of the Trust Agreement and the formation of
First Capital will be passed upon by Richards, Layton & Finger, special
Delaware counsel to First Banks and First Capital. Certain legal matters for
First Banks and First Capital, including the validity of the Guarantee and the
Subordinated Debentures will be passed upon for First Banks and First Capital
by Lewis, Rice & Fingersh, L.C., St. Louis, Missouri, counsel to First Banks
and First Capital. Certain legal matters will be passed upon for the
Underwriters by Bryan Cave LLP, St. Louis, Missouri. Lewis, Rice & Fingersh,
L.C. and Bryan Cave LLP, will rely on the opinion of Richards, Layton & Finger
as to matters of Delaware law. Certain matters relating to United States
federal income tax considerations will be passed upon for First Banks by Lewis,
Rice & Fingersh, L.C.
EXPERTS
The consolidated financial statements of First Banks and FCB are included
in this Prospectus in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, for the periods indicated in their
reports thereon which appear elsewhere herein and upon authority of said firm
as experts in accounting and auditing.
The consolidated financial statements of FCB are included in this
Prospectus in reliance upon the report of Arthur Andersen LLP, independent
certified public accountants, for the periods indicated in their reports
thereon which appear elsewhere herein and upon authority of said firm as
experts in accounting and auditing.
On November 17, 1995, FCB's independent auditors, Arthur Andersen LLP, were
dismissed. The independent auditors' report issued by Arthur Andersen LLP on
FCB's consolidated financial statements as of and for the year ended December
31, 1994, as included herein, was modified as to uncertainty and contained an
explanatory paragraph that described FCB's uncertain ability to continue as a
going concern and the various regulatory agreements entered into by FCB and
First Commercial with the FDIC, the California State Banking Department and the
Federal Reserve Bank of San Francisco. There were no disagreements during 1994,
or any preceding year, between FCB and Arthur Andersen LLP on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope of procedure, which disagreements, if not resolved to the satisfaction of
Arthur Andersen LLP, would have caused it to make reference to the subject
matter of the disagreements in connection with its report.
87
<PAGE> 91
On December 26, 1995, FCB engaged KPMG Peat Marwick LLP to serve as the new
independent auditors and to report on FCB's consolidated financial statements
as of and for the year ended December 31, 1995. This decision to change
accountants was recommended by FCB's Board of Directors and approved by FCB's
Audit Committee in conjunction with the acquisition of a majority ownership
percentage of FCB by First Banks.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, previously filed by First Banks with the
Securities and Exchange Commission pursuant to Section 13 of the Exchange Act,
are incorporated herein by reference:
(a) First Banks' Annual Report on Form 10-K for the year ended December
31, 1995;
(b) First Banks' Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1996, June 30, 1996 and September 30, 1996; and
(c) First Banks' Current Report on Form 8-K filed January 22, 1997.
All reports and any definitive proxy or information statements filed by
First Banks with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act subsequent to the date of this Prospectus and prior to the
termination of the offering of the Preferred Securities offered hereby shall be
deemed to be incorporated by reference in this Prospectus and to be a part
hereof from the date of filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
FIRST BANKS WILL PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM THIS
PROSPECTUS IS DELIVERED, ON THE WRITTEN OR ORAL REQUEST OF ANY SUCH PERSON, A
COPY OF ANY OR ALL OF THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE (OTHER
THAN EXHIBITS TO SUCH DOCUMENTS WHICH ARE NOT SPECIFICALLY INCORPORATED BY
REFERENCE IN SUCH DOCUMENTS). WRITTEN REQUESTS FOR SUCH COPIES SHOULD BE
DIRECTED TO THE OFFICE OF THE SECRETARY, FIRST BANKS, INC., 11901 OLIVE BLVD.,
ST. LOUIS, MISSOURI 63141. TELEPHONE REQUESTS MAY BE DIRECTED TO (314)
995-8700.
AVAILABLE INFORMATION
This Prospectus constitutes a part of a Registration Statement on Form S-2
(together with all amendments and exhibits thereto, the ``Registration
Statement'') filed by First Banks and First Capital with the Commission under
the Securities Act, with respect to the Preferred Securities and the
Subordinated Debentures. This Prospectus does not contain all of the
information set forth in such Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission,
although it does include a summary of the material terms of the Indenture and
the Trust Agreement. Reference is made to such Registration Statement and to
the exhibits relating thereto for further information with respect to the First
Banks, First Capital, the Preferred Securities and the Subordinated Debentures.
Any statements contained herein concerning the provisions of any document filed
as an exhibit to the Registration Statement or otherwise filed with the
Commission or incorporated by reference herein are not necessarily complete,
and, in each instance, reference is made to the copy of such document so filed
for a more complete description of the matter involved. Each such statement is
qualified in its entirety by such reference.
First Banks is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the following public reference
facilities maintained by the Commission: 450 Fifth Street, N.W., Washington,
D.C. 20549; 7 World Trade Center, Suite 1300, New York, New York 10048; and the
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material may also be obtained by mail from the
Public Reference Section of the Commission at 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, upon payment of prescribed rates. The Commission
maintains in Internet web site that contains reports, proxy and information
statements and other information regarding issuers who file electronically with
the Commission. The address of that site is http://www.sec.gov. In addition,
reports, proxy statements and other information concerning First Banks may be
inspected at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, D.C. 20006.
88
<PAGE> 92
No separate financial statements of First Capital have been included
herein. First Banks does not consider that such financial statements would be
material to holders of Preferred Securities because (i) all of the voting
securities of First Capital will be owned by First Banks, a reporting company
under the Exchange Act, (ii) First Capital has no independent operations but
exists for the sole purpose of issuing securities representing undivided
beneficial interests in the assets of First Capital and investing the proceeds
thereof in Subordinated Debentures issued by First Banks, and (iii) the
obligations of First Banks described herein to provide certain indemnities in
respect of and be responsible for certain costs, expenses, debts and
liabilities of First Capital under the Indenture and pursuant to the Trust
Agreement, the guarantee issued by First Banks with respect to the Preferred
Securities, the Subordinated Debentures purchased by First Capital and the
related Indenture, taken together, constitute, in the belief of First Banks and
First Capital, a full and unconditional guarantee of payments due on the
Preferred Securities. See ``Description of the Subordinated Debentures'' and
``Description of the Guarantee.''
First Capital is not currently subject to the information reporting
requirements of the Exchange Act. First Capital will become subject to such
requirements upon the effectiveness of the Registration Statement, although it
intends to seek and expects to receive an exemption therefrom.
89
<PAGE> 93
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
FIRST BANKS, INC. AND SUBSIDIARIES AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report........................................................................ F-2
Consolidated Balance Sheets as of September 30, 1996 (unaudited) and December 31, 1995 and 1994..... F-3
Consolidated Statements of Income for the nine months ended September 30, 1996 and 1995 (unaudited)
and for each of the years ended December 31, 1995, 1994 and 1993.................................. F-5
Consolidated Statements of Changes in Stockholders' Equity for the nine months ended September 30,
1996 (unaudited) and for each of the years ended December 31, 1995, 1994 and 1993................. F-6
Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 and 1995
(unaudited) and for each of the years ended December 31, 1995, 1994 and 1993...................... F-7
Notes to Consolidated Financial Statements.......................................................... F-8
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Reports....................................................................... F-38
Consolidated Balance Sheets as of December 31, 1995 and 1994........................................ F-40
Consolidated Statements of Operations for each of the years ended December 31, 1995, 1994 and
1993.............................................................................................. F-42
Consolidated Statements of Changes in Stockholders' Equity for each of the years ended December 31,
1995, 1994 and 1993............................................................................... F-43
Consolidated Statements of Cash Flows for each of the years ended December 31, 1995, 1994 and
1993.............................................................................................. F-44
Notes to Consolidated Financial Statements.......................................................... F-45
Interim Consolidated Balance Sheets as of September 30, 1996 (unaudited) and December 31, 1995...... F-65
Interim Consolidated Statements of Operations for the nine months ended September 30, 1996 and 1995
(unaudited)....................................................................................... F-67
</TABLE>
F-1
<PAGE> 94
FIRST BANKS, INC. AND SUBSIDIARIES
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, 1995 and 1994, 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, 1995. 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 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, 1995 and 1994, and the results of their operations
and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally
accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
St. Louis, Missouri
March 8, 1996
F-2
<PAGE> 95
<TABLE>
FIRST BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ------------------
1996 1995 1994
------------- ---- ----
ASSETS (UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents:
Cash and due from banks................................................ $ 121,788 128,553 91,028
Interest-bearing deposits with other financial institutions--
with maturities of three months or less.............................. 9,436 16,860 31,568
Federal funds sold..................................................... 51,200 53,800 8,700
---------- --------- ---------
Total cash and cash equivalents................................ 182,424 199,213 131,296
---------- --------- ---------
Investment securities:
Available for sale, at fair value...................................... 473,275 471,791 355,958
Held to maturity, at amortized cost (estimated fair value of $25,839,
$37,021 and $217,658 at September 30, 1996, December 31, 1995 and
December 31, 1994, respectively)..................................... 25,510 36,532 231,920
---------- --------- ---------
Total investment securities.................................... 498,785 508,323 587,878
---------- --------- ---------
Loans:
Commercial, financial and agricultural................................. 443,750 364,018 208,649
Real estate construction and development............................... 259,607 209,802 122,912
Real estate mortgage:
Residential........................................................ 1,082,705 1,191,236 967,129
Commercial......................................................... 579,902 523,816 332,075
Consumer and installment............................................... 351,853 419,894 423,345
Loans held for sale.................................................... 23,687 45,035 20,344
---------- --------- ---------
Total loans.................................................... 2,741,504 2,753,801 2,074,454
Unearned discount...................................................... (8,478) (9,582) (884)
Allowance for possible loan losses..................................... (45,365) (52,665) (28,410)
---------- --------- ---------
Net loans...................................................... 2,687,661 2,691,554 2,045,160
---------- --------- ---------
Bank premises and equipment, net of accumulated depreciation and
amortization............................................................. 48,521 50,278 43,661
Intangibles associated with the purchase of subsidiaries................... 20,882 23,841 13,257
Purchased mortgage servicing rights, net of amortization................... 10,678 12,122 5,755
Accrued interest receivable................................................ 22,851 22,027 16,741
Receivable from sales of investment securities............................. -- 41,265 --
Other real estate.......................................................... 10,298 7,753 6,740
Deferred income taxes...................................................... 41,898 41,576 21,132
Other assets............................................................... 22,156 25,010 7,950
---------- --------- ---------
Total assets................................................... $3,546,154 3,622,962 2,879,570
========== ========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
F-3
<PAGE> 96
FIRST BANKS, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ------------------
1996 1995 1994
------------- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES
Deposits:
Demand:
Non-interest-bearing............................................... $ 393,401 389,658 290,039
Interest-bearing................................................... 289,535 307,584 268,212
Savings................................................................ 664,142 690,902 538,027
Time:
Time deposits of $100 or more...................................... 149,695 201,025 113,381
Other time deposits................................................ 1,557,968 1,594,522 1,123,485
---------- --------- ---------
Total deposits................................................. 3,054,741 3,183,691 2,333,144
Federal Home Loan Bank advances............................................ 71,576 49,883 146,359
Federal funds purchased.................................................... 15,000 3,000 22,000
Securities sold under agreements to repurchase............................. 41,745 17,180 72,794
Other borrowings........................................................... -- 1,478 2,331
Notes payable.............................................................. 66,840 88,135 46,203
Accrued interest payable................................................... 9,641 10,726 7,606
Deferred income taxes...................................................... 9,991 6,517 6,037
Accrued and other liabilities.............................................. 19,172 15,310 11,726
Minority interest in subsidiaries.......................................... 13,856 12,437 14,058
---------- --------- ---------
Total liabilities.............................................. 3,302,562 3,388,357 2,662,258
---------- --------- ---------
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, 2,191,000 shares
issued and outstanding at September 30, 1996 and 2,200,000 issued and
outstanding at December 31, 1995 and 1994............................ 54,775 55,000 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 12,822
Class B, adjustable rate, $1.50 par value; 200,000 shares authorized,
160,505 shares issued and outstanding................................ 241 241 241
Common stock, $250.00 par value; 25,000 shares authorized; 23,661 shares
issued and outstanding................................................... 5,915 5,915 5,915
Capital surplus............................................................ 4,237 4,307 4,479
Retained earnings.......................................................... 163,894 156,692 137,957
Net fair value adjustment for securities available for sale................ 1,708 (372) 898
---------- --------- ---------
Total stockholders' equity..................................... 243,592 234,605 217,312
---------- --------- ---------
Total liabilities and stockholders' equity..................... $3,546,154 3,622,962 2,879,570
========== ========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
F-4
<PAGE> 97
FIRST BANKS, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------- --------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income: (UNAUDITED)
Interest and fees on loans........................................ $175,260 161,912 221,934 129,583 110,813
Investment securities:
Taxable....................................................... 16,999 26,504 34,379 29,385 26,635
Nontaxable.................................................... 967 1,058 1,390 1,468 1,121
Federal funds sold and other...................................... 3,782 2,577 3,918 1,999 1,443
-------- ------- ------- ------- -------
Total interest income..................................... 197,008 192,051 261,621 162,435 140,012
-------- ------- ------- ------- -------
Interest expense:
Deposits:
Interest-bearing demand....................................... 3,530 4,238 5,760 4,421 4,008
Savings....................................................... 16,953 16,675 22,737 15,198 11,947
Time deposits of $100 or more................................. 6,960 6,381 9,315 3,300 2,496
Other time deposits........................................... 66,060 55,718 78,250 41,170 38,635
Federal Home Loan Bank advances................................... 1,954 10,699 12,548 3,443 527
Federal funds purchased and securities sold under agreements to
repurchase....................................................... 762 2,190 3,352 1,565 253
Interest rate exchange agreements, net............................ 6,035 5,168 6,911 490 --
Notes payable and other borrowings................................ 4,326 5,281 6,072 1,083 192
-------- ------- ------- ------- -------
Total interest expense.................................... 106,580 106,350 144,945 70,670 58,058
-------- ------- ------- ------- -------
Net interest income....................................... 90,428 85,701 116,676 91,765 81,954
Provision for possible loan losses.................................... 8,774 8,449 10,361 1,858 4,456
-------- ------- ------- ------- -------
Net interest income after provision for possible loan
losses................................................. 81,654 77,252 106,315 89,907 77,498
-------- ------- ------- ------- -------
Noninterest income:
Service charges on deposit accounts and customer service fees..... 9,411 7,634 10,661 8,300 6,821
Credit card fees.................................................. 1,897 1,615 2,179 1,746 1,231
Loan servicing fees, net.......................................... 2,027 2,286 2,932 1,645 1,163
Gain (loss) on mortgage loans sold and held for sale.............. (7) (622) (608) 126 (1,693)
Net gain (loss) on sales of securities............................ (421) 2,765 (866) (290) 155
Gain on sale of mortgage loan servicing rights.................... -- 3,843 3,843 -- --
Loss on cancellation of interest rate exchange agreements......... -- (3,342) (3,342) -- --
Other income...................................................... 2,891 3,463 4,608 2,107 2,276
-------- ------- ------- ------- -------
Total noninterest income.................................. 15,798 17,642 19,407 13,634 9,953
-------- ------- ------- ------- -------
Noninterest expense:
Salaries and employee benefits.................................... 30,085 27,938 37,941 28,337 22,087
Occupancy, net of rental income................................... 7,245 6,244 8,709 5,260 4,450
Furniture and equipment........................................... 5,404 4,982 6,852 5,209 4,783
Federal Deposit Insurance Corporation premiums.................... 11,355 3,810 4,911 4,484 4,289
Postage, printing and supplies.................................... 3,660 3,360 4,678 3,304 3,000
Data processing fees.............................................. 3,479 3,560 4,838 3,733 2,929
Legal, examination and professional fees.......................... 3,620 3,975 5,412 3,562 2,369
Credit card expenses.............................................. 2,149 1,762 2,490 2,455 1,843
Communications.................................................... 1,992 1,744 2,476 1,816 1,235
Advertising....................................................... 1,253 1,473 2,182 1,767 1,313
Losses and expenses on foreclosed real estate, net of gains....... 951 539 1,302 792 28
Other expenses.................................................... 10,044 7,314 9,775 7,015 5,105
-------- ------- ------- ------- -------
Total noninterest expense................................. 81,237 66,701 91,566 67,734 53,431
-------- ------- ------- ------- -------
Income before provision for income taxes, minority
interest in (income) loss of subsidiaries and
cumulative effect of change in accounting principle.... 16,215 28,193 34,156 35,807 34,020
Provision for income taxes............................................ 4,304 9,414 11,038 12,012 11,592
-------- ------- ------- ------- -------
Income before minority interest in (income) loss of
subsidiaries and cumulative effect of change in
accounting principle................................... 11,911 18,779 23,118 23,795 22,428
Minority interest in (income) loss of subsidiaries.................... (472) 816 1,353 237 --
-------- ------- ------- ------- -------
Income before cumulative effect of change in accounting
principle.............................................. 11,439 19,595 24,471 24,032 22,428
Cumulative effect of change in accounting principle................... -- -- -- -- 766
-------- ------- ------- ------- -------
Net income................................................ 11,439 19,595 24,471 24,032 23,194
Preferred stock dividends............................................. 4,237 4,237 5,736 5,735 5,766
-------- ------- ------- ------- -------
Net income available to common stockholders............... $ 7,202 15,358 18,735 18,297 17,428
======== ======= ======= ======= =======
Earnings per common share (primary):
Income before cumulative effect of change in accounting
principle........................................................ $ 304.39 649.08 791.82 773.31 709.10
Cumulative effect of change in accounting principle............... -- -- -- -- 32.59
-------- ------- ------- ------- -------
Primary earnings per share................................ $ 304.39 649.08 791.82 773.31 741.69
======== ======= ======= ======= =======
Earnings per common share (fully diluted):
Income before cumulative effect of change in accounting
principle........................................................ $ 302.68 617.39 758.66 734.80 661.42
Cumulative effect of change in accounting principle............... -- -- -- -- 29.01
-------- ------- ------- ------- -------
Fully diluted earnings per share.......................... $ 302.68 617.39 758.66 734.80 690.43
======== ======= ======= ======= =======
Weighted average shares of common stock outstanding................... 23,661 23,661 23,661 23,661 23,498
======== ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
F-5
<PAGE> 98
FIRST BANKS, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE YEARS ENDED DECEMBER 31, 1995
AND NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
<CAPTION>
CLASS C ADJUSTABLE RATE NET FAIR
PREFERRED PREFERRED STOCK VALUE ADJUST-
STOCK, ------------------ MENT FOR TOTAL
INCREASING CLASS A, 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>
Consolidated balances, January 1,
1993.................................. $ 55,000 14,822 241 5,786 2,733 102,232 -- 180,814
Year ended December 31, 1993:
Consolidated net income............. -- -- -- -- -- 23,194 -- 23,194
Conversion of 100,000 shares of
Class A preferred stock into
516.83 shares of common stock..... -- (2,000) -- 129 1,871 -- -- --
Class C preferred stock dividends,
$2.25 per share................... -- -- -- -- -- (4,950) -- (4,950)
Class A preferred stock dividends,
$1.20 per share................... -- -- -- -- -- (799) -- (799)
Class B preferred stock dividends,
$.11 per share.................... -- -- -- -- -- (17) -- (17)
Net fair value adjustment for
securities available for sale..... -- -- -- -- -- -- 3,602 3,602
--------- ------ ------ ----- ----- ------- ----- -------
Consolidated balances, December 31,
1993.................................. 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
Nine months ended September 30, 1996
(Unaudited):
Consolidated net income............. -- -- -- -- -- 11,439 -- 11,439
Class C preferred stock dividends,
$1.69 per share................... -- -- -- -- -- (3,713) -- (3,713)
Class A preferred stock dividends,
$.90 per share.................... -- -- -- -- -- (513) -- (513)
Class B preferred stock dividends,
$.08 per share.................... -- -- -- -- -- (11) -- (11)
Purchase and retirement of Class C
preferred shares.................. (225) -- -- -- (5) -- -- (230)
Effect of capital stock transactions
of majority owned subsidiary...... -- -- -- -- (65) -- -- (65)
Net fair value adjustment for
securities available for sale..... -- -- -- -- -- -- 2,080 2,080
--------- ------ ------ ----- ----- ------- ----- -------
Consolidated balances, September 30,
1996.................................. $ 54,775 12,822 241 5,915 4,237 163,894 1,708 243,592
========= ====== ====== ===== ===== ======= ===== =======
See accompanying notes to consolidated financial statements.
</TABLE>
F-6
<PAGE> 99
FIRST BANKS, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS EXPRESSED IN THOUSANDS)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------ ------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Income before cumulative effect of change in accounting
principle.................................................. $ 11,439 19,595 24,471 24,032 22,428
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of bank premises and
equipment.............................................. 4,314 3,997 5,534 4,164 3,936
Amortization, net of accretion........................... 3,360 3,107 4,520 5,364 7,180
Originations and purchases of loans held for sale........ (104,923) (33,434) (67,005) (80,630) (273,395)
Proceeds from the sale of loans held for sale............ 91,336 173,873 207,077 167,942 267,828
Provision for possible loan losses....................... 8,774 8,449 10,361 1,858 4,456
Provision for income taxes currently payable............. 4,304 9,414 11,039 12,012 11,568
Payments of income taxes................................. (5,018) (385) (1,105) (12,125) (9,957)
(Increase) decrease in accrued interest receivable....... (824) 568 1,320 (469) 1,517
Interest accrued on liabilities.......................... 106,579 106,450 144,946 70,670 58,058
Payments of interest on liabilities...................... (107,665) (106,350) (145,066) (69,370) (60,100)
Other operating activities, net.......................... 7,028 (2,545) (5,190) (883) 838
Minority interest in income (loss) of subsidiary......... 453 (815) (1,353) (237) --
--------- -------- -------- -------- --------
Net cash provided by operating activities............ 19,157 181,924 189,549 122,328 34,357
--------- -------- -------- -------- --------
Cash flows from investing activities:
Cash paid for acquired entities, net of cash and cash
equivalents received....................................... -- 51,275 54,458 (24,171) 4,466
Sales of investment securities of acquired entity............ -- 86,723 88,334 133,990 --
Sales of investment securities available for sale............ 83,616 170,270 279,537 145,757 16,128
Maturities of investment securities available for sale....... 299,362 119,927 147,395 262,953 450,395
Maturities of investment securities held to maturity......... 9,049 22,423 36,469 94,359 --
Purchases of investment securities available for sale........ (337,979) (175,107) (282,599) (235,093) (468,279)
Purchases of investment securities held to maturity.......... (596) (2,250) (2,397) (81,096) --
Net (increase) decrease in loans............................. (4,566) (103,938) (71,211) (458,172) 32,315
Recoveries of loans previously charged-off................... 5,229 3,247 4,859 5,169 5,152
Purchases of bank premises and equipment..................... (2,550) (4,056) (5,337) (4,190) (2,775)
Interest rate futures contracts, net......................... -- -- (22,167) 7,469 --
Other investing activities................................... 10,420 (32,042) 3,946 (3,285) 6,360
--------- -------- -------- -------- --------
Net cash provided by (used in) investing
activities........................................ 61,985 136,472 231,287 (156,310) 43,762
--------- -------- -------- -------- --------
Cash flows from financing activities:
Other increases (decreases) in deposits:
Demand and savings deposits.............................. (41,067) (82,306) (123,260) (77,075) 17,405
Time deposits............................................ (87,883) 51,862 55,885 38,151 (53,653)
Increase (decrease) in federal funds purchased............... 12,000 (70,300) (67,300) 18,000 --
Increase (decrease) in Federal Home Loan Bank advances....... 21,693 (84,157) (170,644) 11,464 (15,900)
Increase (decrease) in securities sold under agreements to
repurchase................................................. 24,565 (55,496) (55,615) 40,762 (10,509)
Increase (decrease) in notes payable......................... (22,772) 17,639 13,751 47,493 (30,038)
Purchase and retirement of Class C preferred shares.......... (230) -- -- -- --
Payment of preferred stock dividends......................... (4,237) (4,237) (5,736) (5,735) (5,766)
--------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities........................................ (97,931) (226,995) (352,919) 73,060 (98,461)
--------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents....................................... (16,789) 91,401 67,917 39,078 (20,342)
Cash and cash equivalents, beginning of period................... 199,213 131,296 131,296 92,218 112,560
--------- -------- -------- -------- --------
Cash and cash equivalents, end of period......................... $ 182,424 222,697 199,213 131,296 92,218
========= ======== ======== ======== ========
Noncash investing and financing activities:
Loans transferred to foreclosed real estate.................. $ 7,332 1,893 5,395 5,030 1,496
Loans to facilitate sale of foreclosed real estate........... 168 213 587 1,724 1,270
Investment securities transferred to available for sale...... -- -- 174,113 -- 283,624
Receivable from sale of investment securities................ -- -- 41,265 -- --
Loans transferred to held for sale........................... -- 146,991 146,991 -- --
========= ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
F-7
<PAGE> 100
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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:
BUSINESS
First Banks provides a full range of banking services to individual and
corporate customers through its subsidiaries located in Missouri, Illinois,
California and Texas. First Banks and its banking and thrift subsidiaries are
subject to the regulations of certain federal and state agencies and undergo
periodic examinations by these regulatory agencies.
BASIS OF PRESENTATION
In preparing the consolidated financial statements, management of First
Banks is required to make estimates and assumptions which significantly affect
the reported amounts of assets, liabilities, income and expenses. The most
significant estimate, which is particularly susceptible to change in the
near-term, relates to the determination of the allowance for possible loan
losses. While management uses relevant information to recognize potential
losses on loans, changes in economic conditions and customer conditions could
cause actual experience to differ from that anticipated.
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,
two wholly owned thrift subsidiaries, 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);
First Commercial Bancorp, Inc., headquartered in Sacramento, California
(FCB); and
St. Charles Federal Savings and Loan Association, headquartered in St.
Charles, Missouri (St. Charles Federal).
CCB Bancorp, Inc., a wholly owned bank holding company subsidiary, operates
through First Bank & Trust, headquartered in Irvine, California (FB&T), La
Cumbre Savings Bank F.S.B., headquartered in Santa Barbara, California (La
Cumbre), and Queen City Bank, N.A., headquartered in Long Beach, California
(Queen City). FBA, a majority-owned bank holding company subsidiary, operates
through BankTEXAS N.A., headquartered in Houston, Texas (BTX). First Banks
owned 65.41% and 64.60% of FBA at December 31, 1995 and 1994, respectively.
FCB, a majority-owned bank holding company subsidiary, operates through First
Commercial Bank, headquartered in Sacramento, California (First Commercial).
First Bank acquired its interest in FCB in a series of transactions beginning
in August 1995. First Banks owned 93.29% of FCB at December 31, 1995. 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.
F-8
<PAGE> 101
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH AND CASH EQUIVALENTS
First Banks' subsidiaries maintain deposit balances with various banks
which are necessary for check collection and account activity charges. Cash in
excess of immediate requirements is invested on a daily basis in federal funds
or interest-bearing deposits with other financial institutions. 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.
First Banks' subsidiaries 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, 1995
and 1994 were $38.2 million and $31.5 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. Unrealized gains and losses with
respect to available for sale securities are recorded, net of related income
tax effects, in a separate component of stockholders' equity. When securities
designated as available for sale are sold, the resulting realized gains and
losses are included in noninterest income upon commitment to sell, based on the
amortized cost of each individual security sold. 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, in 1995 First Banks reclassified $174.1 million of
held-to-maturity investment securities to available-for-sale investment
securities.
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.
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) No. 114, Accounting by Creditors for Impairment of a Loan
(SFAS 114) and SFAS No. 118, Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures (SFAS 118), 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. First Banks has elected to continue to use its existing methods
for recognizing interest on impaired loans. First Banks continues to apply all
payments received to the outstanding balance of the impaired loan until the
collection of the outstanding balance is no longer in doubt. When this occurs,
interest payments are recorded as interest income, until an improvement in the
condition of the loan has occurred which would warrant resumption of interest
accruals.
F-9
<PAGE> 102
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In accordance with SFAS 114, in-substance foreclosures have been
reclassified to loans. This reclassification did not significantly affect First
Banks' financial condition or results of operations. 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.
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. In various acquisitions, First Banks has
recorded the valuation of the deposit base premium, representing the estimated
present value of the future net income to be generated from the deposits which
existed at the dates of acquisition. This premium is amortized using various
accelerated methods over the expected lives of the deposit bases, which range
from seven to 10 years.
PURCHASED MORTGAGE SERVICING RIGHTS
Purchased 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.
F-10
<PAGE> 103
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Sales of other real estate are recorded when the title to the property has
passed to the purchaser, minimum down payment requirements have been met, the
terms of any notes received by First Banks satisfy continuing payment
requirements, and First Banks is relieved of any requirement for continued
involvement in the property.
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), First
Bank FSB and St. Charles Federal are subject to a financial institutions tax
which is based on income. The unitary Illinois and California income tax
returns include the investment in FBA because 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. As described in Note 10
to the consolidated financial statements, First Banks has adopted the method of
accounting for income taxes set forth in SFAS No. 109, Accounting for Income
Taxes (SFAS 109).
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Subsidiaries of First Banks enter into sales of securities under agreements
to repurchase at a specified future date. Such repurchase agreements are
considered financing agreements and, accordingly, the obligation to repurchase
assets sold is reflected as a liability in the consolidated balance sheets.
Repurchase agreements are collateralized by debt and mortgage-backed
securities.
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.
During October 1994, the FASB issued SFAS No. 119, Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments (SFAS
119). SFAS 119 requires disclosures about the amounts, nature and terms of
derivative financial instruments that are not subject to SFAS No. 105,
Disclosure of Information About Financial Instruments With Off-Balance-Sheet
Risk and Financial Instruments with Concentrations of Credit Risk. SFAS 119
requires that a distinction be made between financial instruments held or
issued for trading purposes and financial instruments held or issued for
purposes other than trading. First Banks implemented SFAS 119 on December 31,
1994, which resulted in no effect on the consolidated financial statements
other than the additional disclosure requirements presented in Note 11.
F-11
<PAGE> 104
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
First Banks enters into interest rate swap, floor and cap agreements to
manage interest rate risk. The purpose of entering into these agreements is to
reduce the future impact of unfavorable interest rate fluctuations on certain
of First Banks' interest-bearing liabilities. 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
Interest rate futures contracts were utilized to manage the interest rate
risk of the securities available for sale portfolio until the fourth quarter of
1995. 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
Forward contracts to sell mortgage-backed securities are utilized to manage
the interest rate risk of the residential fixed-rate mortgage loan commitments
and loans held for sale. 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.
RECLASSIFICATIONS
Certain 1994 and 1993 amounts have been reclassified to conform with the
classifications and format used for 1995.
(2) ACQUISITIONS
On November 30, 1993, First Banks completed its acquisition of American
Home Savings and Loan Association, St. Louis County, Missouri (American), in
exchange for $1.0 million in cash and subsequently merged American with
F-12
<PAGE> 105
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
First Banks' wholly owned subsidiary, First Bank FSB. The American acquisition
added four banking locations and $47 million in assets. The acquisition was
funded from available cash of First Banks. The transaction was accounted for
using 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.
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 acquisition was funded by available cash, proceeds from
the maturity of short-term investments and borrowings under First Banks' credit
agreement. The transaction was accounted for using the purchase method of
accounting. 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 acquisition was
funded from available liquidity. The transaction was accounted for using the
purchase method of accounting. 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 acquisition
was primarily funded from available liquidity. The transaction was accounted
for using the purchase method of accounting. 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. FBA
operates through its wholly owned banking subsidiary, BTX. At the time of the
transaction, FBA's total assets were $367 million, consisting primarily of
loans of $177 million and investment securities of $167 million. FBA conducts
business primarily from six banking locations in Dallas and Houston, Texas. The
acquisition was funded by available cash and borrowings under First Banks'
credit agreement. The transaction was accounted for using the purchase method
of accounting. 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 acquisition was funded from
available liquidity, borrowings under First Banks' credit agreement, and notes
payable to former shareholders of St. Charles Federal. The transaction was
accounted for using the purchase method of accounting. 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 acquisition
F-13
<PAGE> 106
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
was funded by cash of $18.8 million and a promissory note payable to a former
stockholder of River Valley of $18.6 million. The transaction was accounted for
using the purchase method of accounting. 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
acquisition was funded from available cash and borrowings under First Banks'
credit agreement. The transaction was accounted for using the purchase method
of accounting. 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 acquisition
was funded from available cash and borrowings under First Banks' credit
agreement. The transaction was accounted for using the purchase method of
accounting. 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 acquisition
was funded from available cash and borrowings under First Banks' credit
agreement. The transaction was accounted for using the purchase method of
accounting. 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, on August 23, 1995.
On July 21, 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. As provided by the agreement, First Banks
invested $5.5 million in a convertible debenture issued by QCB. In addition,
First Banks has purchased all other outstanding convertible debentures and
accrued but unpaid interest of QCB totaling $534,000. Under the terms of the
debentures, the principal outstanding balance and the related accrued but
unpaid interest will be converted into shares of common stock of QCB (QCB
Common) on December 31, 1996. Prior to December 31, 1996, the debentures are
convertible into QCB Common at the option of First Banks. The conversion price
is determined by the relationship of the book value per share at the end of the
preceding quarter to that as of September 30, 1994 ($2.03) multiplied by $1.10
per share. On November 30, 1995, First Banks converted $2.2 million of the $5.5
million convertible debenture and related accrued interest of $201,000 into 48
million shares of QCB Common, resulting in an ownership interest in QCB of
96.63%. 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 investment was funded from available cash and borrowings under
First Banks' credit agreement. The transaction was accounted for using the
purchase method of accounting. 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. It is expected that QCB will be merged into CCB in March 1996. Queen
City is expected to be merged into FB&T during 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 follows:
F-14
<PAGE> 107
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
a. On August 22, 1995, First Banks acquired $1.5 million of preferred
stock of First Commercial from Mr. James F. Dierberg, for the $1.5 million
paid for the stock by Mr. Dierberg on June 30, 1995.
b. On August 23, 1995, First Banks purchased 116,666,666 shares of
First Commercial common stock for an additional $3.5 million.
c. On October 31, 1995, First Banks purchased a convertible debenture
of FCB for $1.5 million, the proceeds of which were used to increase the
capital of First Commercial.
d. Following the completion of a Special Stockholders' Meeting of FCB
on December 27, 1995, the shares of First Commercial preferred stock and
First Commercial common stock held by First Banks were exchanged for
50,000,000 shares of FCB common stock. In addition, First Banks purchased a
convertible debenture of FCB for $5.0 million, the proceeds of which,
except for $250,000 retained by FCB, were contributed to the capital of
First Commercial.
e. On December 28, 1995, First Banks purchased an additional 15,000,000
shares of FCB common stock for $1.5 million, the proceeds of which were
used to increase the capital of First Commercial.
The FCB transactions were funded from available cash and an advance of $6.0
million under First Banks' existing credit agreement with a group of
unaffiliated commercial banks. The transaction was accounted for using the
purchase method of accounting. 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.
As a result of these transactions, First Banks owns 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.
The FCB Agreement also provides 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 may be offered to individuals who are not stockholders
of FCB. In addition, $969,000 of common stock is to be offered in exchange for
certain outstanding dividend obligations and accrued interest thereon of FCB.
If this offering is fully subscribed, First Banks' ownership in FCB could be
reduced to 50.25%, prior to the conversion of the debentures, or 66.95%, if the
debentures and accrued interest thereon had been converted as of December 31,
1995.
For each of the three years ended December 31, 1994, FCB and First
Commercial incurred substantial operating losses related primarily to asset
quality problems. These problems continued throughout 1995, resulting in the
elimination of FCB's stockholders' equity, and the substantial reduction of
First Commercial's stockholders' equity, by June 30, 1995. First Commercial's
reduced capital level caused it to be classified as ``critically
undercapitalized'' for regulatory purposes, subjecting it to the Prompt
Corrective Action provisions of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989. These provisions required it to seek additional
capital or face the possible imposition of a conservatorship or receivership
within 90 days. As a result of the FCB Agreement, Tier 1 capital ratios of FCB
and First Commercial as of December 31, 1995 have increased to 2.14% and 6.58%,
respectively. Although FCB continues to be considered ``significantly
undercapitalized'' for regulatory purposes, First Commercial is considered
``adequately capitalized.'' First Banks has committed that it will purchase in
the offering described above, as a standby-purchaser, after the expiration of
the offering and dividend exchange offer, if necessary, such number of shares
as may be required to raise First Commercial's Tier 1 capital ratio to 7.00% as
required by the Capital Impairment Order of the California State Banking
Division.
On September 1, 1995, First Banks completed its acquisition of 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 transaction was accounted for using
the purchase method of accounting.
F-15
<PAGE> 108
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. The acquisition
was funded from available cash. La Cumbre operated as a wholly owned thrift
subsidiary of CCB until it was merged into First Bank & Trust on January 16,
1996.
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.
(3) INVESTMENTS IN DEBT AND EQUITY SECURITIES
Effective December 31, 1993, First Banks adopted SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities (SFAS 115), for which the
cumulative effect was recorded on the consolidated balance sheet on that date.
F-16
<PAGE> 109
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1995 and
1994 were as follows:
<TABLE>
<CAPTION>
MATURITY GROSS
--------------- TOTAL UNREALIZED
AFTER AMOR- --------------- WEIGHTED
1 YEAR 1-5 5-10 10 TIZED FAIR AVERAGE
OR LESS YEARS YEARS YEARS COST GAINS LOSSES VALUE YIELD
------- ----- ----- ----- ----- ----- ------ ----- --------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 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 29,268 148,897 237,206 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 (gain) 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%
==== ==== ==== ====
December 31, 1994:
Carrying value:
U.S. Treasury.............. $ 36,367 9,854 507 -- 46,728 -- (692) 46,036 4.66%
U.S. government agencies
and corporations:
Mortgage-backed........ -- 5,893 28,244 142,207 176,344 155 (3,131) 173,368 6.51
Other.................. 27,114 74,556 496 383 102,549 4 (4,264) 98,289 5.28
Equity investments in other
financial institutions... 8,720 -- -- -- 8,720 3,662 -- 12,382 1.68
Federal Home Loan Bank and
Federal Reserve Bank
stock.................... 25,883 -- -- -- 25,883 -- -- 25,883 7.60
Net deferred (gain) loss on
interest rate futures
contracts................ (224) (6,309) -- -- (6,533) 6,533 -- -- --
-------- ------- ------ ------- ------- ------ ------ ------- ---
Total............. $ 97,860 83,994 29,247 142,590 353,691 10,354 (8,087) 355,958 5.84
======== ======= ====== ======= ======= ====== ====== ======= ====
Market value:
Debt securities............ $ 62,442 85,592 29,035 140,624
Equity securities.......... 38,265 -- -- --
-------- ------- ------ -------
Total............. $100,707 85,592 29,035 140,624
======== ======= ====== =======
Weighted average yield............. 5.38% 5.22% 7.55% 6.30%
==== ==== ==== ====
</TABLE>
F-17
<PAGE> 110
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1995 and
1994 were as follows:
<TABLE>
<CAPTION>
MATURITY GROSS
--------------- TOTAL UNREALIZED
AFTER AMOR- --------------- WEIGHTED
1 YEAR 1-5 5-10 10 TIZED FAIR AVERAGE
OR LESS YEARS YEARS YEARS COST GAINS LOSSES VALUE YIELD
------- ----- ----- ----- ----- ----- ------ ----- --------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1995:
Carrying value:
U.S. Treasury.............. $ 7,018 -- -- -- 7,018 63 -- 7,081 6.51%
U.S. government agencies
and corporations:
Mortgage-backed........ -- -- -- -- -- -- -- -- --
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
Equity securities.......... -- -- -- --
------- ------ ------ -------
Total............. $11,906 5,572 14,035 5,508
======= ====== ====== =======
Weighted average yield............. 6.01% 5.78% 5.18% 5.25%
==== ==== ==== ====
December 31, 1994:
Carrying value:
U.S. Treasury.............. $ -- 10,251 -- -- 10,251 -- (493) 9,758 5.49%
U.S. government agencies
and corporations:
Mortgage-backed........ 3,283 31,753 34,637 108,761 178,434 85 (12,512) 166,007 5.99
Other.................. -- 9,767 -- -- 9,767 -- (464) 9,303 4.95
State and political
subdivisions............. 4,052 4,669 14,006 4,510 27,237 143 (927) 26,453 5.68
Other...................... 3,063 2,939 91 138 6,231 2 (96) 6,137 6.14
------- ------ ------ ------- ------- --- ------- ------- ----
Total............. $10,398 59,379 48,734 113,409 231,920 230 (14,492) 217,658 5.89
======= ====== ====== ======= ======= === ======= ======= ====
Market value:
Debt securities............ $10,461 56,496 45,270 105,431
Equity securities.......... -- -- -- --
------- ------ ------ -------
Total............. $10,461 56,496 45,270 105,431
======= ====== ====== =======
Weighted average yield............. 6.95% 5.92% 5.59% 5.92%
==== ==== ==== ====
</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 and gains on interest rate futures contracts represents the
period the net deferred losses and gains are expected to be amortized and
accreted, respectively, into interest income.
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.
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).
F-18
<PAGE> 111
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 are currently 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 are 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. Proceeds from the
sales of debt securities during 1993 were $16.1 million. Gross gains of
$246,000 and gross losses of $91,000 were realized on those sales. There were
no sales of equity securities during 1993.
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 Banks' loans secured
by residential real estate, or 5% of advances from the FHLB to each Subsidiary
Bank. First Bank FSB, First Bank (Missouri), BTX, La Cumbre and St. Charles
Federal are members of the FHLB system. The investment in the FRB stock is
maintained at a minimum of 6% of the applicable Subsidiary Banks' capital stock
and capital surplus. First Bank (Missouri), BTX and Queen City are members of
the FRB system.
Investment securities with a carrying value of approximately $230.2 million
and $263.4 million at December 31, 1995 and 1994, respectively, were pledged in
connection with deposits of public and trust funds and for other purposes as
required by law.
(4) LOANS
Changes in the allowance for possible loan losses for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Balance, January 1........................................... $ 28,410 23,053 20,897
Acquired allowances for possible loan losses................. 24,655 5,026 2,079
-------- ------ ------
53,065 28,079 22,976
-------- ------ ------
Loans charged-off............................................ (15,620) (6,696) (9,531)
Recoveries of loans previously charged-off................... 4,859 5,169 5,152
-------- ------ ------
Net loans charged-off........................................ (10,761) (1,527) (4,379)
-------- ------ ------
Provision charged to operations.............................. 10,361 1,858 4,456
-------- ------ ------
Balance, December 31......................................... $ 52,665 28,410 23,053
======== ====== ======
</TABLE>
F-19
<PAGE> 112
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1995 and 1994, First Banks had $43.4 million and $15.9
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 and $1.7 million for the years ended December 31, 1995, and
1994, respectively. Of these amounts, $1.9 million and $982,000 was actually
recorded as interest income on such loans in 1995 and 1994, respectively. At
December 31, 1995, First Banks had impaired loans in the amount of $31.5
million, which is represented by certain loans on a nonaccrual status and
consumer installment loans 60 days or more past due. The impaired loans had no
specific reserves at December 31, 1995. The average recorded investment in
impaired loans since the adoption of SFAS 114 and SFAS 118 on January 1, 1995
was $34.3 million. The amount of interest income recognized using a cash basis
method of accounting during the time these loans were impaired was $1.2 million
in 1995.
First Banks' primary market areas are the states of Missouri, Illinois and
California. At December 31, 1995, approximately 92.9% of the total loan
portfolio, and 95.7% of the commercial, financial and agricultural loan
portfolio, were to borrowers within these regions. The diversity of the
region's economic base tends to provide a stable lending environment.
Real estate lending constituted the only other significant concentration of
credit risk. Real estate loans comprised approximately 73% of the consolidated
loan portfolio at December 31, 1995. Of the total real estate loans,
approximately 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, 1995,
approximately 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.
(5) MORTGAGE BANKING ACTIVITIES
At December 31, 1995 and 1994, First Banks serviced loans for others
amounting to $856.6 million and $698.6 million, respectively. Servicing loans
generally consists of collecting mortgage loan payments, maintaining escrow
accounts, disbursing payments to investors and foreclosure processing. In
connection with these loans serviced for others, First Banks held borrowers'
escrow balances of $4.5 million and $4.8 million at December 31, 1995 and 1994,
respectively.
Changes in the purchased mortgage servicing rights for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C>
Balance, January 1.......................................... $ 5,755 4,095
Acquired purchased mortgage servicing rights................ 10,601 --
Purchases of mortgage servicing rights...................... 685 2,371
Sales of mortgage servicing rights.......................... (2,771) --
Amortization................................................ (2,148) (711)
------- -----
Balance, December 31........................................ $12,122 5,755
======= =====
</TABLE>
F-20
<PAGE> 113
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) BANK PREMISES AND EQUIPMENT
Bank premises and equipment were comprised of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C>
Land........................................................ $12,393 9,621
Buildings and improvements.................................. 40,405 38,281
Furniture, fixtures and equipment........................... 37,211 24,348
Leasehold improvements...................................... 6,582 1,466
Construction in progress.................................... 985 545
------- ------
97,576 74,261
Less accumulated depreciation and amortization.............. 47,298 30,600
------- ------
Bank premises and equipment, net.................... $50,278 43,661
======= ======
</TABLE>
Total rent expense was $3.2 million, $1.1 million and $1.0 million for the
years ended December 31, 1995, 1994 and 1993, respectively.
(7) FEDERAL HOME LOAN BANK ADVANCES
Advances from the FHLB of Des Moines, Dallas and San Francisco at December
31 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C>
Advances under a $50,000,000 revolving variable rate line of
credit maturing July 19, 1995............................. $ -- 41,020
Adjustable-rate advances, maturing from October 1995 through
December 1996............................................. 44,220 85,727
Fixed-rate advances, maturing from June 1995 through May
1998...................................................... 5,663 19,612
------- -------
Total............................................... $49,883 146,359
======= =======
</TABLE>
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, FBA has collateralized
$5.7 million and $19.4 million of advances with U.S. government agency and
corporation securities which had an aggregate market value of $8.1 million and
$22.6 million at December 31, 1995 and 1994, respectively. The average rates
paid on advances outstanding during the years ended December 31, 1995, 1994 and
1993 were 6.3%, 5.6% and 3.6%, 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 14, 1995, replaced the revolving
credit agreement outstanding at November 30, 1994. The Credit Agreement
provides a $50 million revolving loan commitment and a $40 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 12, 1996 at which date the principal and accrued interest
is due and payable. The term loan requires quarterly principal payments of $1.0
million and matures on July 31, 2000, at which date the remaining principal and
accrued interest is due and
F-21
<PAGE> 114
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
payable. Loans under the Credit Agreement are secured by all of the stock of
the Subsidiary Banks which is owned by First Banks.
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, 1995, First
Banks and the Subsidiary Banks were in compliance with all restrictions and
requirements in the Credit Agreement.
The promissory notes of $18.6 million and $2.1 million are payable to
former shareholders of River Valley and St. Charles Federal, respectively.
Interest under the promissory notes are payable under similar terms as the
Credit Agreement. The promissory note payable to a former shareholder of River
Valley matured on January 2, 1996 and was repaid through an advance under the
Credit Agreement. The promissory notes payable to the former shareholders of
St. Charles Federal are payable in equal installments of $1.1 million on
January 2, 1996 and 1997. The promissory notes are secured by letters of credit
issued under the Credit Agreement.
At December 31, 1995 and 1994, FBA had $1.1 million of 9% convertible
subordinated debentures due May 15, 1996. These debentures are guaranteed by
FBA and are convertible into common stock of FBA. Management does not expect
these debentures to be converted into common stock of FBA because the exercise
price is substantially in excess of current market prices.
The average balance and maximum month-end balance of the notes payable
outstanding for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C>
Average balance............................................. $80,647 15,518
Maximum month-end balance................................... 89,811 46,760
======= ======
</TABLE>
The average rates paid on notes payable outstanding during the years ended
December 31, 1995, 1994 and 1993 were 7.22%, 7.17% and 6.00%, respectively.
(9) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Certain Subsidiary Banks sell securities under agreements to repurchase.
The securities underlying the agreements are book entry securities and were
delivered, by appropriate entry, to an unaffiliated bank. These borrowings were
collateralized by investment securities in the available-for-sale portfolio,
consisting of U.S. Treasury securities, U.S. government agencies and
corporations and interest-bearing deposits with the FHLB of Des Moines and
Dallas which had an aggregate market value of $29.3 million and $117.1 million
at December 31, 1995 and 1994, respectively. The average balance and maximum
month-end balance of securities sold under agreements to repurchase for the
years ended December 31 were as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C>
Average balance outstanding................................. $42,530 28,237
Maximum month-end balance outstanding....................... 88,337 72,795
======= ======
</TABLE>
(10) INCOME TAXES
SFAS 109 requires a change from the deferred method of accounting for
income taxes under APB Opinion 11 to the asset and liability method of
accounting for income taxes. Under the asset and liability method of SFAS 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax
F-22
<PAGE> 115
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled.
First Banks, Inc. adopted SFAS 109 effective January 1, 1993. The
cumulative effect of this change in accounting for income taxes was $766,000 as
of January 1, 1993. Prior years' consolidated financial statements have not
been restated to apply the provisions of SFAS 109.
Income tax expense (benefit) attributable to income from continuing
operations for the years ended December 31 consists of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Current income taxes:
Federal................................................... $ 2,638 11,978 10,037
State..................................................... 870 906 24
------- ------ ------
3,508 12,884 10,061
------- ------ ------
Deferred income tax expense (benefit):
Federal................................................... 7,624 (872) 1,531
State..................................................... (94) -- --
------- ------ ------
7,530 (872) 1,531
------- ------ ------
Total................................................. $11,038 12,012 11,592
======= ====== ======
</TABLE>
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,
-----------------------------------------------------------
1995 1994 1993
----------------- ----------------- -----------------
% OF % OF % OF
PRETAX PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------ ------ ------ ------ ------ ------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Income before provision for income taxes, minority interest in loss
of subsidiaries and cumulative effect of change in accounting
principle......................................................... $34,156 $35,807 $34,020
======= ======= =======
Taxes on income calculated at statutory rates....................... 11,955 35.0% 12,532 35.0% 11,899 35.0%
Effects of differences in tax reporting:
Tax-exempt interest income...................................... (817) (2.4) (795) (2.2) (628) (1.8)
Tax preference adjustment of interest income.................... 99 .3 78 .2 56 .1
Amortization of excess cost..................................... 645 1.8 152 .4 47 .1
State income taxes.............................................. 504 1.5 589 1.6 24 .1
Change in deferred valuation allowance.......................... (960) (2.8) -- -- -- --
Other, net...................................................... (388) (1.1) (544) (1.5) 196 .6
------- ----- ------- ----- ------- -----
Provision for income taxes.................................. $11,038 32.3% $12,012 33.5% $11,594 34.1%
======= ===== ======= ===== ======= =====
</TABLE>
F-23
<PAGE> 116
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities 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>
YEARS ENDED
DECEMBER 31,
------------------
1995 1994
---- ----
(DOLLARS EXPRESSED
IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for possible loan losses............................................................. $21,642 9,571
Other real estate.............................................................................. 2,736 1,984
Alternative minimum tax credits................................................................ 1,754 60
Book losses on investment securities currently not allowable for tax purposes.................. -- 920
Net fair value adjustment for securities available for sale.................................... 329 --
Net operating loss carryforwards............................................................... 36,145 9,270
Other.......................................................................................... 3,081 2,058
------- ------
Total gross deferred tax assets............................................................ 65,687 23,863
Less valuation allowance....................................................................... (24,111) (2,731)
------- ------
Gross deferred tax assets, net of valuation allowance...................................... 41,576 21,132
------- ------
Deferred tax liabilities:
Depreciation on bank premises and equipment.................................................... 2,467 2,737
FHLB stock dividends........................................................................... 997 835
Mortgage loan hedging loss..................................................................... -- 236
Purchase accounting adjustments................................................................ -- 869
State taxes.................................................................................... 1,660 --
Net fair value adjustment for securities available for sale.................................... -- 483
Book losses on investment securities currently not allowable for tax purposes.................. 266 --
Other.......................................................................................... 1,393 877
------- ------
Total gross deferred tax liabilities....................................................... 6,517 6,037
------- ------
Net deferred tax assets.................................................................... $35,059 15,095
======= ======
</TABLE>
At December 31, 1995 and 1994, the accumulation of prior years' earnings
representing tax bad debt deductions of First Bank FSB, St. Charles Federal and
La Cumbre were approximately $31.4 million and $20.1 million, respectively. If
these tax bad debt reserves were charged for losses other than bad debt losses,
First Bank FSB, St. Charles Federal and La Cumbre would be required to
recognize taxable income in the amount of the charge. It is not contemplated
that such tax-restricted retained earnings will be used in a manner which will
create federal income tax liabilities. A deferred tax liability has been
recorded for approximately $4.0 million and $3.5 million of the accumulation at
December 31, 1995 and 1994, respectively which represents that portion of the
tax bad debt deductions which may require future tax recapture.
At December 31, 1995, First Banks has separate limitation year (SRLY) net
operating loss (NOL) carryforwards of $70.6 million. These SRLY carryforwards
were incurred by institutions acquired between 1992 and 1995 and their
utilization is subject to annual limitations. In addition, these institutions
have alternative minimum tax credits of $1.8 million which are also subject to
annual limitations.
F-24
<PAGE> 117
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1995, for federal income taxes purposes, First Banks had
NOL carryforwards of approximately $70.6 million, exclusive of the NOL
carryforwards available to FBA as further described below. The NOL
carryforwards for First Banks expire as follows:
<TABLE>
<CAPTION>
(DOLLARS EXPRESSED
IN THOUSANDS)
<S> <C>
Year ending December 31:
1998........................................................................... $ 156
2000........................................................................... 4,903
2001........................................................................... 363
2002........................................................................... 5,582
2003-2009...................................................................... 59,563
-------
$70,567
=======
</TABLE>
With the completion of the 1994 acquisition of 65.05% of FBA, the NOL
carryforwards generated prior to the transaction were subject to an annual
limitation under Internal Revenue Code (IRC) Section 382 for all subsequent tax
years. The following schedule reflects the NOL carryforwards that will be
available, after consideration of IRC Section 382 limitations, to offset future
taxable income. These NOLs are only available on the consolidated federal
income tax return of FBA and do not affect the taxable income of First Banks.
At December 31, 1995, for federal income tax purposes, FBA had NOL
carryforwards of approximately $32.7 million. The NOL carryforwards expire as
follows:
<TABLE>
<CAPTION>
(DOLLARS EXPRESSED
IN THOUSANDS)
<S> <C>
Year ending December 31:
1996........................................................................... $ 858
1998........................................................................... 4,140
1999........................................................................... 2,241
2000........................................................................... 103
2001-2010...................................................................... 25,363
=======
$32,705
=======
</TABLE>
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. Subsequently recognized tax benefits
relating to a decrease in the valuation allowance from the balance at December
31, 1994 will be credited directly to intangibles associated with the purchase
of FBA.
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 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.
F-25
<PAGE> 118
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Changes to the deferred tax assets valuation allowance are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1994
---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C>
Balance, beginning of year.................................... $ 2,731 --
Current year deferred provision, change in deferred tax
valuation allowance......................................... (960) --
Purchase acquisitions......................................... 22,340 2,731
------- -----
Balance, end of year.......................................... $24,111 2,731
======= =====
</TABLE>
(11) INTEREST RATE RISK MANAGEMENT AND DERIVATIVE FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK
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 administration, 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 a one-year horizon on a pro forma basis
assuming instantaneous, permanent parallel and nonparallel shifts in the yield
curve, in varying amounts both upward and downward.
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. As more fully described in Note 1 to the accompanying
consolidated financial statements, First Banks holds a combination of off-
balance-sheet derivative financial instruments, generally limited to interest
rate swap agreements, interest rate cap and floor agreements, interest rate
futures contracts, options on interest rate futures contracts and forward
contracts to sell mortgage-backed securities. The use of such derivative
financial instruments is strictly limited to reducing the interest rate
exposure of First Banks.
F-26
<PAGE> 119
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Derivative financial instruments held by First Banks for purposes of
managing interest rate risk are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1995 1994
---------------------- -----------------------
NOTIONAL CREDIT NOTIONAL CREDIT
AMOUNT EXPOSURE AMOUNT EXPOSURE
-------- -------- -------- --------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest rate futures contracts............ $ -- -- 3,587,000 --
Interest rate swap agreements.............. 145,000 -- 265,000 2,441
Interest rate floor agreements............. 105,000 608 -- --
Interest rate cap agreements............... 30,000 292 10,000 577
Forward commitments to sell mortgage-backed
securities............................... 42,000 -- 24,000 --
</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. The unamortized balance of net
deferred losses on interest rate futures contracts of $4.6 million at December
31, 1995 and net deferred gains on interest rate futures contracts of $6.5
million at December 31, 1994, respectively, were applied to the carrying value
of the available-for-sale securities portfolio as part of the mark-to-market
valuation.
F-27
<PAGE> 120
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
$6.6 million and $490,000 for the years ended December 31, 1995 and 1994,
respectively. The maturity dates, notional amounts, interest rates paid and
received, and fair values of interest rate swap agreements outstanding as of
the dates indicated are summarized as follows:
<TABLE>
<CAPTION>
NOTIONAL INTEREST RATE FAIR VALUE-
AMOUNT PAID RECEIVED GAIN (LOSS)
-------- ---- ------------- -----------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
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)
======== ==== ==== ========
December 31, 1994:
December 8, 1996....................................................... $100,000 7.79% 6.38% $ 8
December 8, 1997....................................................... 65,000 7.90 6.38 309
October 21, 1997....................................................... 50,000 7.20 5.56 1,086
October 21, 1999....................................................... 30,000 7.56 5.56 667
October 21, 2001....................................................... 20,000 7.77 5.56 371
-------- --------
$265,000 7.68 6.07 $ 2,441
======== ==== ==== ========
</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 has
been reflected in the consolidated statements 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 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, First Banks shortened the
maturity of its interest-bearing liabilities through the termination of $225
million of interest rate swap agreements resulting in a loss of $13.5 million.
This loss has been deferred and is being amortized over the remaining lives of
the agreements, unless the underlying liabilities are repaid. The unamortized
balance of this loss was $11.6 million at December 31, 1995 and was 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, 1995 and 1994, the unamortized costs for these
agreements were $685,000 and $577,000, 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 $42.4 million and $25.0 million at December 31, 1995 and 1994,
respectively. These net loan commitments and loans held for sale are hedged
with forward contracts to sell mortgage-backed securities. Forward contracts
are transactions in which First Banks has agreed to sell mortgage-
F-28
<PAGE> 121
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
backed securities at a specified future date. Prior to the settlement date,
First Banks closes the hedge by entering into an offsetting transaction with
the same settlement date. Gains and losses from forward contracts are deferred
and included in the cost basis of loans held for sale. At December 31, 1995 and
1994, the net unamortized losses were $737,000 and $925,000, respectively,
which were applied to the carrying value of the loans held for sale as part of
the lower of cost or market valuation.
(12) 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 11 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 credit policies in granting commitments and conditional obligations as it
does for on-balance-sheet loans.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C>
Commitments to extend credit........................................... $578,750 422,982
Commercial and standby letters of credit............................... 29,468 13,380
-------- -------
$608,218 436,362
======== =======
</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.
(13) 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.
F-29
<PAGE> 122
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The estimated fair values of First Banks' financial instruments at December
31 were as follows:
<TABLE>
<CAPTION>
1995 1994
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- --------- ----------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents............................... $ 199,213 199,213 131,296 131,296
Investment securities:
Available for sale.................................. 471,791 471,791 355,958 355,958
Held to maturity.................................... 36,532 37,021 231,920 217,658
Net loans............................................... 2,691,554 2,749,133 2,045,160 2,028,274
Accrued interest receivable............................. 22,027 22,027 16,741 16,741
========== ========= ========= =========
Financial liabilities:
Deposits:
Demand:
Non-interest-bearing............................ $ 389,658 389,658 290,039 290,039
Interest-bearing................................ 307,584 307,584 268,212 268,212
Savings and money market........................ 690,902 690,902 538,027 538,027
Time deposits....................................... 1,795,547 1,804,347 1,236,866 1,227,015
Borrowings.............................................. 159,676 159,676 289,687 289,687
Accrued interest payable................................ 10,726 10,726 7,606 7,606
========== ========= ========= =========
Off-balance-sheet:
Interest rate futures contracts......................... $ -- -- 6,533 6,533
Interest rate swap, cap and floor agreements............ 14,509 (9,726) 577 3,018
Forward contracts to sell mortgage-backed securities.... (234) (234) (81) (81)
Credit commitments -- -- -- --
========== ========= ========= =========
</TABLE>
The following methods and assumptions were used in estimating fair values
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.
F-30
<PAGE> 123
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 futures contracts: The fair values for interest rate futures
contracts 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 securities available-for-sale portfolio as part of the
mark-to-market valuation.
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.
(14) EMPLOYEE BENEFITS
First Banks and all of its subsidiaries had participated in a
noncontributory defined contribution pension plan covering substantially all
employees who met minimum age and service requirements. The annual
contributions to the plan were equal to 3.5% of each participant's covered
compensation under 50% of the Social Security taxable wage base and 7% of
covered compensation in excess of that amount. This pension plan was terminated
as of December 31, 1993 and the vested benefits were distributed during the
first quarter of 1994 to the participants of the plan or directly rolled over
into First Banks' new profit-sharing plan which was effective April 1, 1994.
Maximum covered compensation under the plan was $200,000 as indexed for
inflation by the Secretary of the Treasury. The trustee of the plan was the
trust department of one of the Subsidiary Banks. Total pension expense was
$725,000 for the year ended December 31, 1993.
First Banks' new profit-sharing plan is a self-administered savings and
incentive plan, which qualifies under Section 401(k) of the IRC, 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 1995. Total employer contributions under the plan were $448,000 and
$477,000 for the years ended December 31, 1995 and 1994, respectively.
Postretirement benefits other than pensions and postemployment benefits are
generally not provided for First Banks' employees.
F-31
<PAGE> 124
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) 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 circum-stances 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. On April
26, 1993, 100,000 shares of Class A preferred stock was converted into 516.83
shares of First Banks common stock. The conversion of the Class A preferred
stock into common stock had an insignificant effect on earnings per share and,
thus, supplemental information has not been provided. 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:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
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
</TABLE>
(16) TRANSACTIONS WITH RELATED PARTIES
Outside of normal customer relationships, no directors or officers of First
Banks, no stock-holders 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 1995, 1994 and 1993, Tidal Insurance Limited (Tidal), a corporation
owned indirectly by First Banks' Chairman and his children, received
approximately $192,000, $233,000 and $126,000, respectively, in insurance
premiums for accident and health 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, 1995, 1994
and 1993, First Securities America, Inc., doing business as First Banc
Insurors, received approximately $196,000, $195,000 and $256,000, 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 $999,000,
$635,000 and $1,067,000 for each of the three years ended December 31, 1995,
1994 and 1993, respectively, in
F-32
<PAGE> 125
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Through a facilities management agreement with FirstServ, Inc., First
Services, L.P. provides data processing services and operational support for
First Banks and its subsidiaries. First Services, L.P. is a limited partnership
indirectly owned by First Banks' Chairman and his children through its General
Partners and Limited Partners. FirstServ, Inc. paid $2.9 million, $2.5 million
and $2.3 million in fees to First Services, L.P. under the terms of the
facilities management agreement for the years ended December 31, 1995, 1994 and
1993, respectively.
(17) CAPITAL STOCK OF SUBSIDIARIES
FIRST BANKS AMERICA, INC.
First Banks owns all of the Class B Common Stock (Class B common) of FBA
representing 65.41% of all classes of outstanding voting stock at December 31,
1995. FBA Common Stock (Class A common), which is publicly traded on the New
York Stock Exchange, is the only other class of voting stock.
During 1995 and 1994, options were exercised to purchase 30,633 and 35,567
shares of Class A common at an exercise price of $3.75 per share. Offsetting
the decrease in First Banks' ownership interest in FBA are repurchases of FBA's
Class A common. For the year ended December 31, 1995, FBA repurchased 79,603
shares of Class A common. As a result of these transactions, First Banks'
ownership interest changed from 65.05% as of August 31, 1994 to 65.41% and
64.60% at December 31, 1995 and 1994, respectively. The exercising of the
options and repurchasing of Class A common resulted in a reduction of First
Banks' capital surplus of $172,000 and $125,000 for the years ended December
31, 1995 and 1994, respectively.
The Stock Purchase and Operating Agreement (FBA Agreement) between First
Banks and FBA provides for certain limitations on the capital structure of FBA.
The FBA Agreement provides that, after August 31, 1999, each share of Class B
common will be convertible into one share of Class A common. The Class B common
will not be registered with the Securities and Exchange Commission or listed
for trading on the New York Stock Exchange until at least August 31, 1999.
Thereafter, First Banks will have the right to require FBA to register with the
Securities and Exchange Commission all or a portion of the shares of Class A
common received upon conversion of First Banks' Class B common. First Banks, as
the owner of the Class B common, has certain antidilutive rights for 7 1/2
years after the date of transaction which would enable First Banks to maintain
an ownership interest of at least 55% in the event FBA issues additional shares
of Class A common. The Class B common may not be transferred by First Banks
without the prior approval of FBA, except in certain limited instances. In
addition, the Class B common has dividend rights which are inferior to those of
the Class A common, in the event FBA commences the payment of dividends in the
future.
FBA has a stock option plan under which options were granted to certain
directors and senior officers to purchase shares of Class A Common. At December
31, 1995 and 1994, FBA had options outstanding to purchase up to 67,500 and
98,133, respectively, shares of Class A common at an exercise price of $3.75.
In connection with a previous corporate restructuring, FBA issued warrants
for the purchase of additional Class A common. At December 31, 1995 and 1994,
FBA had warrants outstanding to purchase 196,999 shares of Class A common. The
exercise prices with respect to these warrants are $.75 for 131,336 shares and
$81.15 for 65,663 shares. Management believes the latter warrants have little,
if any, fair market value.
F-33
<PAGE> 126
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The market value of FBA's Class A common was approximately $12.25 per share
at December 31, 1995. If the options to acquire 67,500 shares and the warrants
to acquire 131,336 shares of Class A common were exercised, First Banks'
ownership interest in FBA would be reduced from 65.41% to 62.17%.
FIRST COMMERCIAL BANCORP, INC.
First Banks owns 93.29% of all outstanding voting stock of FCB at December
31, 1995. FCB Common is traded on the NASDAQ Small Cap Market System.
First Banks also purchased $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 at $.10 per share. However, at the
election of First Banks, the FCB Debentures may be converted into FCB Common at
the same rate at any time after issuance.
FCB is in process of offering up to $5.0 million of FCB Common (Rights
Offering) to current shareholders of FCB at $0.10 per share. If the Rights
Offering is completed and fully subscribed, First Banks' ownership of FCB will
be reduced to approximately 50.25%, excluding the effect of conversion of the
FCB Debenture. If the FCB Debentures and the accrued interest thereon had been
converted by First Banks following the Rights Offering, its ownership would be
approximately 66.95%.
In addition, eligible shareholders of FCB Common have the right to receive
additional stock or cash based on certain future events. At June 30, 1996, FCB
will issue additional shares of FCB Common or cash if the adjusted
stockholders' equity per share exceeds $.10 per share. For this purpose,
stockholders' equity is adjusted to the extent the allowance for possible loan
losses at June 30, 1995 is determined to exceed the amount derived from a
specified formula applied to the remaining loan portfolio and reduced by an
imputed interest factor applied to the capital provided by First Banks and the
subscribers to the Rights Offering. Thereafter, through October 31, 1998,
present stockholders may receive additional shares of FCB Common or cash based
on recoveries received from a pool of specified charged-off loans. First Banks
does not believe that the issuance of additional FCB Common or cash based on
the occurrence of these certain events, if any, will have a significant impact
on the financial condition or results of operations of First Banks.
(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 is 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 $45.3 million, unless prior permission of the regulatory
authorities or the lending banks is obtained.
F-34
<PAGE> 127
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(19) PARENT COMPANY ONLY FINANCIAL INFORMATION
Following are condensed balance sheets of First Banks (parent company only)
as of December 31, 1995 and 1994, and condensed statements of income and cash
flows for the years ended December 31, 1995, 1994 and 1993:
<TABLE>
CONDENSED BALANCE SHEETS
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash deposited in subsidiary banks.............................................. $ 1,331 7,974
Investment in subsidiaries, at equity........................................... 289,211 236,328
Investment securities........................................................... 17,544 18,370
Other assets.................................................................... 19,943 4,591
-------- -------
Total assets............................................................ $328,029 267,263
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable................................................................... 88,135 46,203
Accrued expenses and other liabilities.......................................... 5,289 3,748
-------- -------
Total liabilities....................................................... 93,424 49,951
Stockholders' equity............................................................ 234,605 217,312
-------- -------
Total liabilities and stockholders' equity.............................. $328,029 267,263
======== =======
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF INCOME
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Income:
Dividends from subsidiaries................................................. $ 57,901 42,500 14,047
Management fees from subsidiaries........................................... 5,108 4,304 4,081
Other income................................................................ 2,015 2,410 854
-------- ------- ------
Total income............................................................ 65,024 49,214 18,982
-------- ------- ------
Expenses:
Interest expense............................................................ 5,861 1,034 169
Salaries and employee benefits.............................................. 4,597 4,723 3,735
Legal and professional fees................................................. 2,426 1,892 994
Other expenses.............................................................. 3,035 2,391 1,931
-------- ------- ------
Total expenses.......................................................... 15,919 10,040 6,829
-------- ------- ------
Income before income tax benefit, equity in undistributed earnings
(loss) of subsidiaries and cumulative effect of change in accounting
principle............................................................. 49,105 39,174 12,153
Income tax benefit.............................................................. (2,007) (1,162) (631)
-------- ------- ------
Income before equity in undistributed earnings (loss) of subsidiaries
and cumulative effect of change in accounting principle............... 51,112 40,336 12,784
Equity in undistributed earnings (loss) of subsidiaries, net of dividends
paid.......................................................................... (26,641) (16,304) 9,644
Income before cumulative effect of change in accounting principle....... 24,471 24,032 22,428
Cumulative effect of change in accounting principle............................. -- -- 766
-------- ------- ------
Net income.............................................................. $ 24,471 24,032 23,194
======== ======= ======
</TABLE>
F-35
<PAGE> 128
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Income before cumulative effect of change in accounting principle........... $ 24,471 24,032 22,428
Adjustments to reconcile net income to net cash provided by operating
activities:
Net income of subsidiaries.............................................. (30,973) (24,931) (23,691)
Dividends from subsidiaries............................................. 57,901 42,500 14,047
Other, net.............................................................. 58 (511) 1,931
-------- ------- -------
Net cash provided by operating activities........................... 51,457 41,090 14,715
-------- ------- -------
Cash flows from investing activities:
(Increase) decrease in investment securities................................ 2,420 (2,017) 31,988
Acquisitions of subsidiaries................................................ (49,996) (72,624) --
Capital contributions to subsidiaries....................................... (44,329) (14,656) (2,528)
Return of subsidiary capital................................................ 12,149 -- --
(Decrease) increase in advances to subsidiaries............................. (13,529) -- 1,600
Other, net.................................................................. (1,011) (125) --
-------- ------- -------
Net cash provided by (used in) investing activities................. (94,296) (89,422) 31,060
-------- ------- -------
Cash flows from financing activities:
Increase (decrease) in notes payable........................................ 41,932 46,203 (30,000)
Payment of preferred stock dividends........................................ (5,736) (5,735) (5,766)
-------- ------- -------
Net cash provided by (used in) financing activities................. 36,196 40,468 (35,766)
-------- ------- -------
Net increase (decrease) in cash and cash equivalents................ (6,643) (7,864) 10,009
Cash and cash equivalents, beginning of year.................................... 7,974 15,838 5,829
-------- ------- -------
Cash and cash equivalents, end of year.......................................... $ 1,331 7,974 15,838
======== ======= =======
</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
not material effect on the consolidated financial position or results of
operations of First Banks.
(21) EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT
AUDITORS
In accordance with the provisions of the FCB Agreement described in Note 2
to the consolidated financial statements, on May 18, 1996, FCB completed an
offering of a maximum of $5.0 million of newly-issued common stock at $.10 per
share to its shareholders, other than First Banks, and to individuals who were
not shareholders of FCB. In June 1996, FCB concluded a concurrent offering to
exchange shares of its common stock for certain outstanding dividend
obligations and accrued interest thereon of FCB. As a result of these
offerings, FCB issued 29.7 million additional shares of common stock for $2.97
million and exchanged 6.4 million shares of its common stock for its obligation
to pay $643,000 of dividends and accrued interest. This newly-issued stock
reduced the ownership of First Banks in FCB to 61.46%, excluding the effect of
the potential conversion of the debentures held by First Banks. If the
debentures and accrued interest thereon had been converted as of September 30,
1996, First Banks' ownership of FCB would have been 76.96%.
For the periods from their respective dates of acquisition through May 18,
1996, FCB and First Commercial were included in the consolidated federal income
tax return and the unitary or consolidated state income tax returns of First
Banks. Due to the reduction of its ownership below 80%, for periods subsequent
to that date FCB and First
F-36
<PAGE> 129
FIRST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Commercial are no longer eligible for consolidation with First Banks for
federal tax purposes. Furthermore, in the event First Banks' interest in FCB
were to increase to over 80% in the future, current tax regulations preclude
FCB and First Commercial from reconsolidating with First Banks for five years
from the date of deconsolidation, without the permission of the Internal
Revenue Service.
On November 1, 1996, FBA completed its acquisition of Sunrise Bancorp,
Roseville, California, (Sunrise) and its wholly owned subsidiary, Sunrise Bank
of California, in exchange for $17.6 million in cash. Sunrise's total assets
were $112.4 million, consisting primarily of loans of $61.1 million and cash
and cash equivalents and investment securities of $48.2 million. The
acquisition was funded from available cash of $3.6 million, and borrowings from
First Banks of $14.0 million. The funds provided by First Banks were borrowed
by it under its Credit Agreement. The transaction was accounted for using the
purchase method of accounting. The excess of cost over the fair value of the
net assets acquired was approximately $3.1 million and is being amortized over
15 years. The results of operations of Sunrise for periods prior to its
acquisition are not material to the consolidated financial statements.
On July 18, 1996, First Banks renewed its Credit Agreement under which its
revolving credit facility was scheduled to mature as of July 12, 1996. The
renewed 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 monthly at the lead bank's corporate base rate or, at the
option of First Banks, at the London Interbank Offered Rate plus 1.50% and
1.25%, respectively. Loans and accrued interest under the revolving loan
commitment mature on July 11, 1997. The term loan requires quarterly principal
payments of $2.5 million until its maturity on July 12, 2000, at which time the
remaining principal and accrued interest is due and payable. The Credit
Agreement is collateralized by all of the stock of the Subsidiary Banks which
is owned by First Banks. The Credit Agreement requires maintenance of certain
minimum capital ratios for each financial institution subsidiary and prohibits
the payment of dividends on First Banks' common stock. At September 30, 1996,
First Banks and the Subsidiary Banks were in compliance with all restrictions
and requirements in the Credit Agreement.
On September 30, 1996, President Clinton signed legislation establishing a
one-time special deposit insurance assessment to recapitalize the Savings
Association Insurance Fund (SAIF) of the Federal Deposit Insurance Corporation
(FDIC), thereby bringing it into parity with the Bank Insurance Fund (BIF) of
the FDIC. As a result of this legislation, First Banks recorded an $8.6 million
charge for the assessment in its consolidated financial statements as of
September 30, 1996. It is expected that First Banks' cost of deposit insurance
will decrease by approximately $2.0 million for the year ended December 31,
1997 compared to its cost of deposit insurance for the year ending December 31,
1996, excluding the effect of the special assessment. The expected decrease in
the cost of deposit insurance is predicated on an assessment rate for 1997 of
1.29 basis points and 6.44 basis points for each $100 of assessable deposits of
BIF and SAIF deposits, respectively, compared to the current assessment rate,
applicable only to SAIF deposits, of 23 basis points.
During 1996, First Banks has shortened the expected life of its loan
portfolio by changing the distribution of that portfolio primarily between
residential mortgage and indirect automobile loans to commercial, commercial
real estate and construction and development loans. This change created a
disparity between the estimated life of the portfolio and that which had been
originally anticipated in its interest rate risk simulation models. These
models are used to determine the need for hedges of its interest rate exposure.
Consequently, in November 1996, First Banks realigned the maturity of its
interest-bearing liabilities with the current estimated life of its loan
portfolio through the termination of $75 million of interest rate swap
agreements. This resulted in a loss of $5.3 million which has been deferred.
The deferred loss will be amortized over the remaining lives of the agreements,
unless the underlying liabilities are repaid in advance of their expected
maturities.
(22) BASIS OF PRESENTATION-INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited interim consolidated financial statements include the
accounts of First Banks and its subsidiaries after elimination of material
intercompany transactions. This unaudited data, in the opinion of First Banks,
includes all adjustments necessary for the fair presentation thereof. All
adjustments made were of a normal and recurring nature.
F-37
<PAGE> 130
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
INDEPENDENT AUDITORS' REPORT
KPMG PEAT MARWICK LLP
The Board of Directors and Stockholders
First Commercial Bancorp, Inc.:
We have audited the accompanying consolidated balance sheet of First
Commercial Bancorp, Inc. and subsidiary (the Company) as of December 31, 1995,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The accompanying 1994 and 1993 consolidated
financial statements of First Commercial Bancorp, Inc. and subsidiary were
audited by other auditors whose report thereon dated March 29, 1995 included an
explanatory paragraph that described the Company's uncertain ability to
continue as a going concern and the Company's various regulatory agreements
with the Federal Deposit Insurance Corporation, the California State Banking
Department and the Federal Reserve Bank of San Francisco.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 1995 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of First
Commercial Bancorp, Inc. and subsidiary as of December 31, 1995, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
St. Louis, Missouri
March 8, 1996
F-38
<PAGE> 131
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
First Commercial Bancorp, Inc.:
We have audited the consolidated balance sheets of FIRST COMMERCIAL
BANCORP, INC. (a Delaware corporation) and subsidiary as of December 31, 1994,
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the two years in the period ended December
31, 1994 as restated (see Note 16). These financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of First Commercial Bancorp,
Inc. and subsidiary as of December 31, 1994 and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
1994, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that both
First Commercial Bancorp, Inc. (the ``Company'') and First Commercial Bank (the
``Bank'') will continue as going concerns. As discussed in Notes 2 and 15 to
the financial statements, both the Company and the Bank have entered into
various regulatory agreements (the ``Agreements'') with the Federal Deposit
Insurance Corporation (the ``FDIC''), the California State Banking Department
and the Federal Reserve Bank of San Francisco. These Agreements require the
Company and the Bank, among other compliance terms, to maintain certain minimum
capital levels. The Company and the Bank are not in compliance with these
minimum capital requirements and have suffered recurring losses from
operations. An amended capital plan has been submitted to the bank regulators,
which plan was approved by the FDIC on January 30, 1995. The plan consists of
both an intent to decrease the Bank's asset size and the raising of capital
through the sale of stock. There is no assurance that the Company will be able
to raise sufficient capital to meet the minimum capital requirements. Failure
to meet regulatory capital requirements or comply with the terms of the
Agreements could subject the Company and the Bank to additional actions by the
bank regulatory authorities, including restrictions on operations, mandatory
asset dispositions or seizure. These matters raise substantial doubt about the
ability of the Company and the Bank to continue as going concerns. Their
ability to continue as going concerns is dependent on many factors, one of
which is regulatory action and the ability to raise sufficient capital.
Management's plans in regard to these matters are described in Notes 2 and 15.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ Arthur Andersen LLP
San Francisco, California
March 29, 1995
F-39
<PAGE> 132
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED BALANCE SHEETS
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
DECEMBER 31,
----------------
1995 1994
---- ----
ASSETS
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks................................................ $ 9,768 19,059
Federal funds sold..................................................... 9,000 27,200
Securities purchased under resale agreements........................... -- 40,000
-------- -------
Total cash and cash equivalents.................................... 18,768 86,259
-------- -------
Interest-bearing deposits with other financial institutions with original
maturities over three months............................................. -- 299
Investment securities:
Available for sale, at market value.................................... 63,291 13,727
Held to maturity, at amortized cost (estimated market value of $11,005
and $3,815 at December 31, 1995 and 1994, respectively)............... 10,958 3,963
-------- -------
Total investment securities........................................ 74,249 17,690
-------- -------
Loans:
Commercial and financial............................................... 33,752 69,597
Real estate construction and development............................... 4,094 16,386
Real estate mortgage................................................... 32,857 38,439
Consumer and installment............................................... 3,508 5,993
-------- -------
Total loans........................................................ 74,211 130,415
Unearned discount.......................................................... (196) (243)
Allowance for possible loan losses......................................... (5,388) (7,437)
-------- -------
Net loans.......................................................... 68,627 122,735
-------- -------
Lease receivable, net...................................................... 991 1,038
Bank premises and equipment, net........................................... 2,247 2,637
Accrued interest receivable................................................ 1,429 1,287
Other real estate.......................................................... 1,380 5,222
Other assets............................................................... 1,844 2,139
-------- -------
Total assets....................................................... $169,535 239,306
======== =======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-40
<PAGE> 133
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
DECEMBER 31,
----------------
1995 1994
---- ----
LIABILITIES
<S> <C> <C>
Deposits:
Demand:
Non-interest-bearing............................................... $ 27,517 56,483
Interest-bearing................................................... 39,646 68,840
Savings................................................................ 16,707 21,695
Time deposits:
Time deposits of $100 or more...................................... 18,764 25,317
Other time deposits................................................ 53,530 61,201
-------- -------
Total deposits................................................. 156,164 233,536
Accrued interest payable................................................... 487 335
Accrued and other liabilities.............................................. 2,805 1,080
12% convertible debentures................................................. 6,500 --
-------- -------
Total liabilities.............................................. 165,956 234,951
-------- -------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 5,000,000 shares authorized; no shares
issued and outstanding................................................... -- --
Common stock, $.01 par value, 250,000,000 shares and 5,000,000 shares
authorized at December 31, 1995 and 1994, respectively; 69,675,110 shares
issued and outstanding at December 31, 1995 and 4,775,110 shares issued
and 4,675,110 shares outstanding at December 31, 1994, respectively...... 697 48
Capital surplus............................................................ 33,251 28,495
Retained deficit........................................................... (30,311) (22,880)
Treasury stock, at cost: 1995, none; 1994, 100,000 shares.................. -- (709)
Net fair value adjustment for securities available for sale................ (58) (599)
-------- -------
Total stockholders' equity..................................... 3,579 4,355
-------- -------
Total liabilities and stockholders' equity..................... $169,535 239,306
======== =======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-41
<PAGE> 134
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest and fees on loans........................................ $ 9,734 15,126 17,787
Investment securities............................................. 1,981 1,109 1,286
Federal funds sold, securities purchased under resale agreements
and other....................................................... 2,035 2,121 1,027
------- ------- -------
Total interest income..................................... 13,750 18,356 20,100
------- ------- -------
Interest expense:
Deposits:
Interest-bearing demand....................................... 1,082 1,989 2,405
Savings....................................................... 481 589 723
Time deposits of $100 or more................................. 1,054 1,123 1,131
Other time deposits........................................... 3,366 2,157 2,026
Other borrowings.................................................. 153 52 85
------- ------- -------
Total interest expense.................................... 6,136 5,910 6,370
------- ------- -------
Net interest income....................................... 7,614 12,446 13,730
Provision for possible loan losses.................................... 3,885 9,809 8,100
------- ------- -------
Net interest income after provision for possible loan
losses.................................................. 3,729 2,637 5,630
------- ------- -------
Noninterest income:
Service charges on deposit accounts and customer service fees..... 801 1,282 1,426
Other income...................................................... 527 691 1,569
------- ------- -------
Total noninterest income.................................. 1,328 1,973 2,995
------- ------- -------
Noninterest expense:
Salaries and employee benefits.................................... 4,117 6,568 6,951
Occupancy, net of rental income................................... 1,603 1,443 1,475
Furniture and equipment........................................... 581 930 1,075
Federal Deposit Insurance Corporation premiums.................... 629 820 866
Postage, printing and supplies.................................... 297 372 527
Legal, examination and professional fees.......................... 1,164 725 843
Data processing................................................... 145 80 72
Communications.................................................... 210 82 162
Losses and expenses on foreclosed property........................ 2,631 6,035 4,805
Amortization and write-off of acquisition intangibles............. -- 1,047 73
Other............................................................. 1,212 2,291 2,854
------- ------- -------
Total noninterest expense................................. 12,589 20,393 19,703
------- ------- -------
Loss before provision (benefit) for income taxes.......... (7,532) (15,783) (11,078)
Provision (benefit) for income taxes.................................. (101) 2,407 (3,767)
------- ------- -------
Net loss.................................................. $(7,431) (18,190) (7,311)
======= ======= =======
Net loss per common share............................................. $ (.33) (3.89) (1.56)
======= ======= =======
Weighted average common stock and common stock equivalents outstanding
(in thousands)...................................................... 22,826 4,675 4,675
======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-42
<PAGE> 135
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1995
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
NET FAIR
VALUE
ADJUSTMENT TOTAL
RETAINED FOR SECURITIES STOCK-
COMMON CAPITAL EARNINGS TREASURY AVAILABLE HOLDERS'
STOCK SURPLUS (DEFICIT) STOCK FOR SALE EQUITY
------ ------- --------- -------- -------------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993................ $ 48 28,484 2,621 (709) -- 30,444
Net loss................................ -- -- (7,311) -- -- (7,311)
Exercise of stock options............... -- 11 -- -- -- 11
---- ------ ------- ---- ---- -------
Balance, December 31, 1993.............. 48 28,495 (4,690) (709) -- 23,144
Adoption of SFAS 115.................... -- -- -- -- 342 342
Net loss................................ -- -- (18,190) -- -- (18,190)
Net fair value adjustment for securities
available for sale.................... -- -- -- -- (941) (941)
---- ------ ------- ---- ---- -------
Balance, December 31, 1994.............. 48 28,495 (22,880) (709) (599) 4,355
Net loss................................ -- -- (7,431) -- -- (7,431)
Retirement of treasury stock............ (1) (708) -- 709 -- --
Net fair value adjustment for securities
available for sale.................... -- -- -- -- 541 541
Issuance of common stock pursuant to
stock purchase agreement.............. 650 5,464 -- -- -- 6,114
---- ------ ------- ---- ---- -------
Balance, December 31, 1995.............. $697 33,251 (30,311) -- (58) 3,579
==== ====== ======= ==== ==== =======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-43
<PAGE> 136
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................................... $ (7,431) (18,190) (7,311)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization........................................... 899 958 1,024
Provision for possible loan losses...................................... 3,885 9,809 8,100
Write-down of other real estate......................................... 1,141 4,963 2,981
Loss (gain) on disposal of assets....................................... (149) 88 36
Benefit of deferred taxes............................................... (6,081) (6,497) (1,090)
Write-off of intangible................................................. -- 1,047 --
Valuation allowance for deferred taxes.................................. 6,081 8,904 --
Increase (decrease) in interest receivable and other assets............. 521 3,156 (1,459)
Increase (decrease) in interest payable................................. 275 (19) (11)
Increase (decrease) in accrued expenses and other liabilities........... 1,602 (1,404) 612
-------- ------- -------
Net cash provided by operating activities........................... 743 2,815 2,882
-------- ------- -------
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits with other financial
institutions.............................................................. 299 3,674 (308)
Proceeds from maturity of investment securities............................. 2,168 30,982 8,160
Proceeds from the sale of investment securities............................. 1,062 -- --
Purchase of investment securities........................................... (59,451) (5,135) (30,028)
Net decrease in loans....................................................... 46,423 48,082 28,452
Net decrease in deferred loan fees.......................................... (47) (301) (179)
Purchases of premises and equipment......................................... (156) (222) (387)
Net decrease in lease financing............................................. 47 47 23
Proceeds from sale of other real estate..................................... 4,522 10,340 8,111
Payments to complete other real estate...................................... -- (638) (487)
-------- ------- -------
Net cash provided by investing activities........................... (5,133) 86,829 13,357
-------- ------- -------
Cash flows from financing activities:
Net increase (decrease) in demand and savings deposits...................... (49,980) (97,634) 12,156
Net increase (decrease) in time deposits.................................... (10,827) 7,375 11,894
Payment from sale of deposits, net.......................................... (14,541) -- --
Proceeds from the issuance of common stock.................................. 6,114 -- 11
Proceeds from the issuance of convertible debentures........................ 6,133 -- --
-------- ------- -------
Net cash (used in) provided by financing activities................. (63,101) (90,259) 24,061
-------- ------- -------
Net increase (decrease) in cash and cash equivalents................ (67,491) (615) 40,300
Cash and cash equivalents at beginning of year.................................. 86,259 86,874 46,574
-------- ------- -------
Cash and cash equivalents at end of year........................................ $ 18,768 86,259 86,874
======== ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest................................................................ $ 5,861 5,929 6,380
Income taxes............................................................ -- 17 24
======== ======= =======
Supplemental schedule of noncash investing and financing activities--net
decrease in other real estate as a result of foreclosure or financing, and
other related transactions.................................................... $ 1,672 6,714
======== ======= =======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-44
<PAGE> 137
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements of First Commercial
Bancorp, Inc. and subsidiary (FCB or the Company) have been prepared in
accordance with generally accepted accounting principles and conform to
practices prevalent among financial institutions.
As more fully discussed in Note 2, FCB executed an Amended and Restated
Stock Purchase Agreement (Stock Purchase Agreement) with First Banks, Inc., St.
Louis, Missouri (First Banks) and Mr. James F. Dierberg, Chairman, President
and Chief Executive Officer of First Banks, to provide for the recapitalization
of FCB and its wholly owned subsidiary, First Commercial Bank (Bank). As a
result, First Banks owned 93.29% of the outstanding voting stock of FCB at
December 31, 1995.
As provided by the Stock Purchase Agreement, First Banks initially owned
Bank preferred stock and Bank common stock which was subsequently converted
into FCB common stock on December 27, 1995. The consolidated financial
statements have been prepared as if such conversion had occurred on August 22
and 23, 1995, respectively, and as if FCB had owned all of the outstanding
stock of the Bank throughout 1995. The Bank preferred stock was nonvoting stock
and had no dividend requirement, except to the extent dividends may be paid on
Bank common stock. The Bank common stock, during the period it was held by
First Banks, was subject to an irrevocable proxy giving the FCB Board of
Directors the right to vote such shares. Consequently, although First Banks
owned approximately 99% of the outstanding Bank common stock during this
period, it did not have voting control until its stock was converted to FCB
common stock.
The following is a summary of the more significant policies followed by
FCB:
BUSINESS
FCB provides a full range of banking services to individual and corporate
customers through its subsidiary bank, First Commercial Bank, located in
Sacramento, Campbell, Concord, Roseville, and San Francisco, California. FCB
and the Bank are subject to regulations of various federal agencies and undergo
periodic examinations by these regulatory agencies.
BASIS OF PRESENTATION
The consolidated financial statements of FCB have been prepared in
accordance with generally accepted accounting principles and conform to
predominant practices within the banking industry. Management of FCB has made a
number of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
the consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the parent
company and its wholly owned subsidiary. All significant intercompany accounts
and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
The Bank maintains deposit balances with various banks which are necessary
for check collection and account activity charges. Cash in excess of immediate
requirements is invested on a daily basis in federal funds, interest-bearing
deposits with other financial institutions and securities purchased under
resale agreements. Cash, due from banks, federal funds sold, interest-bearing
deposits with original maturities of three months or less and securities
purchased under resale agreements are considered to be cash and cash
equivalents for purposes of the consolidated statements of cash flows. The Bank
is required to maintain certain daily reserve balances in accordance with
F-45
<PAGE> 138
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
regulatory requirements. These reserve balances maintained in accordance with
such requirements were $1.13 million and $2.34 million at December 31, 1995 and
1994, respectively.
INVESTMENT SECURITIES
The classification of investment securities as available for sale or held
to maturity is determined at the date of purchase. FCB does not engage in the
trading of investment securities.
Investment securities designated as available for sale, which include any
security which FCB has no immediate plan to sell but which may be sold in the
future under different circumstances, are stated at fair value. Realized gains
and losses are included in noninterest income upon commitment to sell, based on
the amortized cost of the individual security sold. Unrealized gains and losses
are recorded, net of related income tax effects, in a separate component of
stockholders' equity. All previous fair value adjustments included in the
separate component of stockholders' equity are reversed upon sale.
Investment securities designated as held to maturity, which include any
security for which FCB has the positive intent and ability to hold to maturity,
are stated at cost, net of amortization of premium and accretion of discount
computed on the level yield method, taking into consideration the level of
current and anticipated prepayments.
LOANS
Loans are carried at cost, adjusted for amortization of premiums and
accretion of discounts using a method which approximates the level yield
method. Interest and fees on loans are recognized as income using the interest
method. Loans are stated at cost as FCB has the ability and it is management's
intention to hold them to maturity.
The accrual of interest on loans is discontinued when it appears that
interest or principal may not be paid in a timely manner in the normal course
of business. Generally, payments received on nonaccrual loans are recorded as
principal reductions. Interest income is recognized after all principal has
been repaid or an improvement in the condition of the loan has occurred which
would warrant resumption of interest accruals.
FCB adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, and SFAS No.
118, Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures, which amends SFAS 114, on January 1, 1995. SFAS 114 defines the
recognition criterion for loan impairment and the measurement methods for
certain impaired loans and loans whose terms have been modified in
troubled-debt restructurings. SFAS 118 amends SFAS 114 to allow a creditor to
use existing methods for recognizing interest income on an impaired loan. FCB
has elected to continue to use its existing method for recognizing interest on
impaired loans as described above. The implementation of these statements did
not have a material effect on FCB's financial position and resulted in no
additional provision for possible loan losses.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is maintained at a level considered
adequate to provide for potential losses. The provision for possible loan
losses is based on a periodic analysis of the loan portfolio by management,
considering, among other factors, current economic conditions, loan portfolio
composition, past loan loss experience, independent appraisals, loan collateral
and payment experience. In addition to the allowance for estimated losses on
impaired loans, an overall unallocated allowance is established to provide for
unidentified credit losses which are inherent in the portfolio. As adjustments
become necessary, they are reflected in the results of operations in the
periods in which they become known.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed on the straight-line
method over the estimated useful lives of the related assets. Leasehold
improvements
F-46
<PAGE> 139
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
are capitalized and amortized over the shorter of their estimated useful lives
or the related lease terms. Bank premises are depreciated on the straight-line
method over 11 to 41 years. Furniture, fixtures and equipment are depreciated
on the straight-line method over one to seven years.
OTHER REAL ESTATE
Other real estate (ORE) which includes real estate acquired through
foreclosure or by deed in lieu of foreclosure, is stated at the lower of fair
value less applicable selling costs or cost at the time the property is
acquired. The excess of cost over fair value of ORE at the date of acquisition
is charged to the allowance for possible loan losses. Subsequent reductions in
carrying value to reflect current fair value or costs incurred in maintaining
the properties are charged to expense as incurred.
INTANGIBLES
As part of the 1982 acquisition of the business of thirteen branches of
California Canadian Bank, a leasehold interest intangible asset was established
and is being amortized over the remaining lives of the leases. The unamortized
balance at December 31, 1995 and 1994 was $72,000 and $232,000, respectively,
and is included in other assets.
In 1988, FCB acquired the business of three branches of Citizens Bank of
Roseville resulting in excess cost over net assets acquired of $1.43 million.
FCB concluded that there was no future value to the intangible and,
accordingly, the remaining intangible was charged-off resulting in amortization
expense for the year ended December 31, 1994 of $1.05 million. Amortization
expense for the year ended December 31, 1993 was $73,000.
INCOME TAXES
FCB and its subsidiary filed a consolidated federal income tax return for
the periods preceding First Banks' acquisition of FCB and the Bank. For the
periods subsequent to First Banks' acquisition, FCB and the Bank have joined in
filing a consolidated federal income tax return with First Banks. Prior to
August 24, 1995, FCB and the Bank each paid their respective portion of federal
income taxes or received payments to the extent that tax benefits were
realized. Subsequent to the acquisition of FCB common stock by First Banks, FCB
and the Bank each pay their respective portion of federal income taxes to, or
receive payments from, First Banks to the extent that tax benefits are
available within First Banks' consolidated group. As more fully described in
Note 8, should First Banks' ownership percentage fall below 80%, any subsequent
tax benefits to be realized by FCB will be dependent on the separate
profitability of FCB.
Effective January 1, 1993, FCB adopted SFAS No. 109, Accounting for Income
Taxes. SFAS 109 requires a change from the deferred method of accounting for
income taxes, pursuant to Accounting Principles Board Opinion No. 11 (APB 11),
to the asset and liability method of accounting for income taxes. Under the
asset and liability method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Upon adoption of SFAS 109, the one-time
cumulative effect of this change in accounting for income taxes was not
material to the financial position or results of operations of FCB. Prior
years' consolidated financial statements have not been restated to apply the
provisions of SFAS 109.
FINANCIAL INSTRUMENTS
A financial instrument is defined as cash, evidence of an ownership
interest in an entity, or a contract that conveys or imposes on an entity the
contractual right or obligation to either receive or deliver cash or another
financial instrument.
F-47
<PAGE> 140
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NET LOSS PER COMMON AND COMMON EQUIVALENT SHARES
Net loss per share is computed using the weighted average number of shares
outstanding during the year plus the dilutive effect, if any, of stock options.
RECLASSIFICATIONS
Certain 1994 and 1993 amounts have been reclassified to conform with the
1995 presentation.
(2) RECAPITALIZATION
For each of the three years ended December 31, 1994, FCB and the Bank
incurred substantial operating losses related primarily to asset quality
problems. These problems continued throughout 1995, resulting in the
elimination of FCB's stockholders' equity, and the substantial reduction of the
Bank's stockholders' equity, by June 30, 1995. Recognizing that new capital was
imperative for the Company's survival, the Board of Directors and management
had begun a concerted effort in early 1995 to replenish its capital base.
However, the rapidity with which losses were incurred during the first six
months of 1995 necessitated expediting this process. As a result, as of June
30, 1995, the Company and the Bank entered into a Stock Purchase Agreement with
First Banks and Mr. James F. Dierberg. Pursuant to the Stock Purchase
Agreement, Mr. Dierberg provided interim financing for the Bank in the form of
a purchase of $1.5 million of nonvoting preferred stock. However, in spite of
this additional capital, the leverage capital ratios of FCB and the Bank as of
June 30, 1995 had declined to (.23%) and 1.08%, respectively.
The Bank's reduced capital level caused it to be classified as ``critically
undercapitalized'' for regulatory purposes, subjecting it to the Prompt
Corrective Action provisions of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989. These provisions required it to seek additional
capital or face the possible imposition of a conservatorship or receivership
within 90 days. In order to achieve the capital levels required, on August 7,
1995, FCB and the Bank entered into the Stock Purchase Agreement with First
Banks and Mr. Dierberg. The Stock Purchase Agreement, and subsequent agreements
entered into with First Banks, resulted in a series of transactions as follows:
a. On August 22, 1995, First Banks acquired the Bank preferred stock
from Mr. Dierberg for $1.5 million.
b. On August 23, 1995, First Banks purchased 116,666,666 shares of Bank
common stock for an additional $3.5 million.
c. On October 31, 1995, First Banks purchased a convertible debenture
of FCB for $1.5 million, the proceeds of which were used to increase the
capital of the Bank.
d. Following the completion of a Special Stockholders' Meeting on
December 27, 1995, the shares of Bank preferred stock and Bank common stock
held by First Banks were exchanged for 50,000,000 shares of FCB common
stock. In addition, First Banks purchased a convertible debenture of FCB
for $5.0 million, the proceeds of which, except for $250,000 retained by
First Commercial Bancorp, Inc., were contributed to the capital of the
Bank.
e. On December 28, 1995, First Banks purchased an additional 15,000,000
shares of FCB common stock for $1.5 million, the proceeds of which were
used to increase the capital of the Bank.
As a result of these transactions, the leverage capital ratios of FCB and
the Bank as of December 31, 1995 were 2.14% and 6.58%, respectively. Although
FCB continues to be considered ``significantly undercapitalized'' for
regulatory purposes, the Bank is considered ``adequately capitalized.'' A
``significantly undercapitalized'' institution is one that has a total
risk-based capital ratio of less than 6%, a core risk-based capital ratio of
less than 3%, or a leverage ratio that is less than 3%. An ``adequately
capitalized'' institution is one that has a total risk-based capital ratio of
8% or greater, a core risk-based capital ratio of 4% or greater, and a leverage
ratio of 4% or greater. As of December 31, 1995, First Banks owned 93.29% of
the issued and outstanding common stock of FCB.
F-48
<PAGE> 141
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As more fully described in Note 19, subsequent to December 31, 1995, FCB
has commenced an offering, to its stockholders other than First Banks, of an
aggregate of $5.0 million of newly-issued common stock at $.10 per share. A
maximum of $1.0 million of this, if not otherwise subscribed to, may be offered
to individuals who are not stockholders of FCB. In addition, $969,000 of common
stock is being offered in exchange for certain outstanding dividend obligations
and accrued interest thereon of FCB. If this offering is fully subscribed,
First Banks' ownership in FCB could be reduced to 50.25%, prior to the
conversion of the debentures, or 66.95%, if the debentures are immediately
converted.
(3) SECURITIES PURCHASED UNDER RESALE AGREEMENTS
Securities purchased under resale agreements are typically collateralized
by U.S. Treasury securities, U.S. government agencies, or mortgage-backed
securities and generally have maturities of one month or less. There were no
securities purchased under resale agreements at December 31, 1995. On December
31, 1994, there were $40 million of such agreements outstanding which had a
maturity date of January 3, 1995.
(4) INVESTMENT SECURITIES
As of January 1, 1994, FCB adopted SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. SFAS 115 requires that investments
in debt and equity securities be classified as ``held to maturity,'' ``trading
securities'' or ``available for sale.'' It requires that investments classified
as ``held to maturity'' be reported at amortized cost, that investments
classified as ``trading'' securities be reported at fair value with unrealized
gains and losses included in earnings, and that investments classified as
``available for sale'' be reported at fair value with unrealized gains and
losses reported, net of related income tax effects, as a separate component of
stockholders' equity. As of January 1, 1994, a security with an amortized cost
of $2.09 million and a market value of $2.10 million was classified as ``held
to maturity.'' Securities with an amortized cost of $42.34 million and a market
value of $42.68 million were classified as ``available for sale.'' The effect
of adopting SFAS 115 was to reflect an unrealized gain of $342,000 which was
reported as an increase in stockholders' equity as of January 1, 1994.
F-49
<PAGE> 142
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The amortized cost, unrealized gains and losses and fair value of
investment securities at December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE YIELD
--------- ---------- ---------- ----- -----
(DOLLAR EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
December 31, 1995:
Available for sale:
U.S. Treasury securities............................ $10,034 25 (9) 10,050 6.02%
U.S. government agencies............................ 53,251 67 (77) 53,241 5.64
------- --- ---- ------
Total........................................... 63,285 92 (86) 63,291 5.70
------- --- ---- ------
Held to maturity:
U.S. Treasury securities............................ 7,018 63 -- 7,081 6.51
U.S. government agencies............................ 3,940 -- (16) 3,924 4.83
------- --- ---- ------
10,958 63 (16) 11,005 5.90
------- --- ---- ------
Total........................................... $74,243 155 (102) 74,296 5.73
======= === ==== ====== ====
December 31, 1994:
Available for sale:
U.S. Treasury securities............................ $ 3,146 -- (108) 3,038 4.76%
U.S. government agencies............................ 11,096 9 (416) 10,689 6.27
======= === ==== ======
14,242 9 (524) 13,727 5.94
Held to maturity:
U.S. Treasury agencies.............................. 3,963 -- (148) 3,815 5.22
======= === ==== ======
Total........................................... $18,205 9 (672) 17,542 5.78
</TABLE>
The amortized cost and estimated fair value of investment securities by
contractual maturity at December 31, 1995 are summarized below. Maturities of
mortgage-backed securities are classified in accordance with contractual
repayment schedules. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
------------------------------ ------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE YIELD COST VALUE YIELD
--------- ----- ----- --------- ----- -----
(DOLLAR EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Maturing within one year:
U.S. Treasury securities...................... $10,034 10,050 6.02% $ 7,018 7,081 6.51%
U.S. government agencies...................... 48,703 48,707 5.67 2,005 2,005 4.70
-------- ------ ------- ------
Total maturing within one year............ 58,737 58,757 5.73 9,023 9,086 6.11
Maturing from one to five years:
U.S. government agencies...................... 4,548 4,534 5.29 1,935 1,919 4.97
-------- ------ ------- ------
Total..................................... $63,285 63,291 5.70 $10,958 11,005 5.91
======== ====== ======= ====== ====
</TABLE>
Proceeds from the sale of a debt security classified as available for sale
during 1995 were $1.06 million, resulting in a gain of $3,000. There were no
sales of securities for the years ended December 31, 1994 and 1993.
F-50
<PAGE> 143
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Investment securities with a carrying value of $18.9 million and $17.2
million at December 31, 1995 and 1994, respectively, were pledged to secure
U.S. government and other public deposits and for other purposes required or
permitted by law.
(5) LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
The changes to the allowance for possible loan losses for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ---
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Balance, January 1..................................................................... $ 7,437 7,337 5,484
------- ------- ------
Loans charged-off...................................................................... (6,270) (10,023) (6,509)
Recoveries of loans previously charged-off............................................. 363 314 262
------- ------- ------
Net loans charged-off.............................................................. (5,907) (9,709) (6,247)
------- ------- ------
Provision charged to operations........................................................ 3,885 9,809 8,100
Reduction in allowance for possible loan losses from sale of loans..................... (27) -- --
------- ------- ------
Balance, December 31................................................................... $ 5,388 7,437 7,337
======= ======= ======
</TABLE>
Nonaccruing loans aggregated $4.00 million and $11.43 million at December
31, 1995 and 1994, respectively. At December 31, 1995, the recorded investment
in loans considered impaired was $4.53 million, representing loans on
nonaccrual status and restructured loans. The impaired loans had no valuation
reserves at December 31, 1995. The average recorded investment in impaired
loans, since the adoption of SFAS 114 and SFAS 118 on January 1, 1995, was $8.5
million. The interest income related disclosures, including the amount of
interest that would have been recorded under the original terms of impaired
loans and the amount of income received, were not available. Such information
was not practicable to obtain due to the discontinuance of FCB's former data
processing system in December 1995.
(6) LEASE FINANCING
FCB has an equity participation in a leveraged lease agreement. Under the
terms of the agreement, FCB's equity investment represents approximately 35% of
the cost of the leased equipment. The remaining 65% is provided by a third
party through long-term debt which provides no recourse against FCB and is
secured by first liens on the leased equipment. FCB's net investment in the
leveraged lease at December 31 was as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C>
Lease rental receivable..................................................... $641 695
Estimated residual value.................................................... 378 378
Less unearned and deferred income........................................... (28) (35)
---- -----
Investment in leverage leases............................................... $991 1,038
==== =====
</TABLE>
The net income from FCB's investment in the leveraged lease was $7,100 for
each of the years ended December 31, 1995, 1994 and 1993.
F-51
<PAGE> 144
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) BANK PREMISES AND EQUIPMENT
Bank premises and equipment were comprised of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C>
Buildings....................................................................... $ 616 616
Land and land improvements...................................................... 894 894
Leasehold improvements.......................................................... 1,801 1,485
Furniture, fixtures, and equipment.............................................. 4,520 4,669
------ -----
7,831 7,664
Less accumulated depreciation and amortization.................................. 5,584 5,027
------ -----
Bank premises and equipment, net............................................ $2,247 2,637
====== =====
</TABLE>
Depreciation and amortization expense was $695,000, $667,000 and $875,000
for the years ended December 31, 1995, 1994 and 1993, respectively.
At December 31, 1995, the approximate minimum future lease rentals payable
under noncancellable operating leases for bank premises were as follows:
<TABLE>
<CAPTION>
(DOLLARS EXPRESSED
IN THOUSANDS)
<S> <C>
1996............................................. $ 563
1997............................................. 395
1998............................................. 265
1999............................................. 233
2000............................................. 236
Thereafter....................................... 95
------
Total minimum lease payments................. $1,787
======
</TABLE>
The net rental expense included in occupancy expense for bank premises was
$965,000, $871,000 and $844,000 for the years ended December 31, 1995, 1994 and
1993, respectively. Rental income under noncancellable subleases was $114,000,
$99,000 and $99,000 for the years ended December 31, 1995, 1994 and 1993,
respectively. At December 31, 1995, these subleases extend through 1998 and
future minimum rental income is $105,000, $99,000 and $25,000 for 1996, 1997
and 1998, respectively.
(8) INCOME TAXES
FCB and the Bank filed a consolidated federal income tax return for the
period prior to their respective acquisitions by First Banks. Because of the
structure of the transaction described in Note 2 to the consolidated financial
statements, current regulations of the Internal Revenue Code prohibit FCB and
the Bank from continuing to file a consolidated income tax return for the
period after August 23, 1995, because the acquisition by First Banks of the
Bank stock caused its disaffiliation with FCB. However, subsequent to the
exchange of Bank stock and the acquisition of additional FCB stock by First
Banks, both FCB and the Bank will file a consolidated federal income tax return
with First Banks for the periods First Banks owned greater than 80% of the
respective entities. As more fully discussed in Note 19, should the stock
rights offering cause First Banks' ownership percentage to fall below 80%, FCB
and the Bank would be disaffiliated from First Banks, and neither FCB nor the
Bank would be permitted to be included in the consolidated return of First
Banks for five years. In addition, the Bank, which was disaffiliated from FCB
on August 22, 1995, would not be permitted to file a consolidated return with
FCB for five years. However, regulations do provide procedures for FCB to
request permission from the Internal Revenue Service to join in filing a
F-52
<PAGE> 145
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
consolidated return with the Bank. FCB would need to request a waiver from the
Internal Revenue Service in the form of a private letter ruling, prior to the
due date of the consolidated return, in order to file a consolidated federal
return with the bank. This is not an automatic reaffiliation.
Provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Current income taxes:
Federal................................................. $ (101) -- (2,677)
State................................................... -- -- --
------- ------ ------
(101) -- (2,677)
------- ------ ------
Deferred income tax expense (benefit):
Federal................................................. 5,386 (4,761) (1,090)
State................................................... 695 (1,736) --
------- ------ ------
6,081 (6,497) (1,090)
------- ------ ------
Valuation allowance......................................... (6,081) 8,904 --
------- ------ ------
Total............................................... $ (101) 2,407 (3,767)
======= ====== ======
</TABLE>
The effective federal income tax rates differ from amounts which would be
calculated using statutory tax rates as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1995 1994 1993
----------------- ----------------- -----------------
% OF % OF % OF
PRETAX PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------ ------ ------ ------ ------ ------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loss before provision (benefit) for income taxes............... $(7,532) $(15,783) $(11,078)
======= ======== ========
Taxes on loss calculated at statutory rates.................... (2,636) (35.0)% (5,366) (34.0)% (3,767) (34.0)%
Effects of differences in tax reporting:
Change in the deferred tax valuation allowance............. (6,081) (80.7) 8,904 56.4 -- --
Change in tax attributes available to be carried forward... 8,616 114.4 -- -- -- --
State income taxes......................................... -- -- (1,131) (7.2) -- --
------- ----- -------- ----- -------- -----
Provision (benefit) for income taxes................... $ (101) (1.3)% $ 2,407 15.2% $ (3,767) (34.0)%
======= ===== ======== ===== ======== =====
</TABLE>
F-53
<PAGE> 146
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities for periods
after the adoption of SFAS 109 are shown below.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for possible loan losses................................................................. $ 1,648 1,377
Other real estate.................................................................................. 654 2,981
AMT tax credit carryforwards....................................................................... 448 435
Depreciation on bank premises and equipment........................................................ 145 83
Other.............................................................................................. 23 --
Net operating loss carryforwards (federal and state)............................................... 382 4,346
------- ------
Total gross deferred tax assets................................................................ 3,300 9,222
Less valuation allowance........................................................................... (2,823) (8,904)
------- ------
Gross deferred tax assets, net of valuation allowance.......................................... 477 318
------- ------
Deferred tax liabilities:
Leveraged leases................................................................................... 203 268
Accretion.......................................................................................... 10 50
State taxes........................................................................................ 264 --
------- ------
Total gross deferred tax liabilities....................................................... 477 318
------- ------
Net deferred tax assets.................................................................... $ -- --
======= ======
</TABLE>
With the completion of the 1995 acquisitions of FCB and the Bank by First
Banks, the federal and state net operating loss (NOL) carryforwards generated
prior to the two transactions are subject to an annual limitation under
Internal Revenue Code (IRC) Section 382 and California Revenue and Taxation
Code Section 24451, respectively, for all subsequent tax years. The federal and
state annual limitations for the Bank are $28,598. The following schedules
reflect the NOL carryforwards that will be available, after consideration of
these limitations, to offset future taxable income. If taxable income for a
post-transaction year does not equal or exceed the annual limitation, the
unused limitation is carried forward to increase the limitation amount for the
succeeding years until the excess limitation is utilized. This does not affect
the original expiration dates of the NOL. Also acquired in the acquisitions are
alternative minimum tax credits of $448,000. These credits are also subject to
annual limitations.
For federal income tax purposes, FCB had NOL carryforwards of approximately
$988,000. The NOL carryforwards expire as follows:
<TABLE>
<CAPTION>
(DOLLARS EXPRESSED
IN THOUSANDS)
<S> <C>
Year ending December 31:
2008......................................... $479
2009......................................... 509
----
$988
====
</TABLE>
F-54
<PAGE> 147
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For California income tax purposes, FCB had NOL carryforwards of
approximately $353,000. The NOL carryforwards expire as follows:
<TABLE>
<CAPTION>
(DOLLARS EXPRESSED
IN THOUSANDS)
<S> <C>
Year ending December 31:
1996........................................................................... $ 89
1997........................................................................... 88
1998........................................................................... 88
1999........................................................................... 88
----
$353
====
</TABLE>
Subsequent to the acquisition by First Banks, the net deferred tax assets
of FCB were evaluated to determine whether it is more likely than not that the
deferred tax assets will be recognized in the future. Due to the uncertainty of
future operating results and possible disaffiliation with respect to filing a
consolidated federal income tax return with First Banks, as previously
discussed, it was determined that the valuation allowance established for FCB
should wholly offset any net deferred tax asset.
Changes to the deferred tax assets valuation allowance are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------
1995 1994
---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C>
Balance, beginning of year.................................................... $ 8,904 --
Current year deferred provision, change in deferred tax valuation allowance... (6,081) 8,904
------- -----
Balance, end of year.......................................................... $ 2,823 8,904
======= =====
</TABLE>
(9) 12% CONVERTIBLE DEBENTURES
Pursuant to the Stock Purchase Agreement discussed in Note 2 to the
accompanying consolidated financial statements, FCB issued to First Banks two
5-year, 12% convertible debentures in exchange for a total of $6.5 million. The
principal and any accrued but unpaid interest thereon is convertible at any
time prior to maturity, at the option of First Banks, into FCB common stock at
$.10 per share. At maturity, any unpaid principal and accrued interest will be
converted into FCB common stock at $.10 per share. The initial debenture of
$1.5 million was issued on October 31, 1995 and matures on October 31, 2000.
The second debenture was issued on December 28, 1995 and matures on December
28, 2000. Cash may be paid with respect to either the principal or interest on
the debentures only when, in the sole and absolute discretion of the Board of
Directors of FCB, it is determined that FCB has sufficient funds to make such
payment in accordance with all applicable regulatory requirements. The
debentures are secured by all of the shares of Bank common stock held by FCB.
Accrued and unpaid interest on the debentures was $37,667 at December 31,
1995. At that date, the principal and accrued interest on the debentures could
have been converted into an aggregate of 65,376,670 shares of FCB common stock.
(10) COMMITMENTS AND CONTINGENT LIABILITIES
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, FCB enters into various types of
transactions which involve financial instruments with off-balance-sheet risk.
These instruments include commitments to extend credit and letters of credit
F-55
<PAGE> 148
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and are not reflected in the accompanying consolidated balance sheets. These
financial transactions carry various degrees of credit risk. Credit risk is
defined as the possibility that a loss may occur from the failure of another
party to perform according to the terms of the contract.
FCB's loans, and related credit risks, are primarily concentrated in
Northern California. The cities and surrounding metropolitan areas where the
majority of FCB's loan customers reside are Sacramento, Roseville, San
Francisco, Concord, and Campbell, California. Economic fluctuations in the
California regions of the Sacramento Valley and San Francisco Bay Area have
had, and will continue to have, a direct impact on the credit risk of the
Company.
Commitments to extend credit are legally binding loan commitments, subject
to certain conditions, with set expiration dates. FCB typically receives a fee
for providing a commitment. FCB evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
FCB upon the extension of credit, is based on management's evaluation.
Collateral held varies, but may include cash, marketable securities, accounts
receivable, inventory, equipment and real estate property.
Standby letters of credit are provided to customers to guarantee their
performance, generally in the production of goods and services or under
contractual commitments in the financial markets. Commercial letters of credit
are issued to customers to facilitate trade transactions. They represent a
substitution of FCB's credit for the customer's credit.
The contractual amounts of commitments to extend credit and standby letters
of credit represent the amount of credit risk. Since many of the commitments
and letters of credit are expected to expire without being fully drawn, the
contractual amounts do not necessarily represent future cash requirements. The
following is a summary of financial instruments with off-balance-sheet risk at
December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C>
Commitments to extend credit................................................. $22,578 41,504
Standby letters of credit.................................................... 2,078 3,329
======= ======
</TABLE>
Real estate construction loan commitments were $637,000 and $3.43 million
at December 31, 1995 and 1994, respectively, and are included in commitments to
extend credit in the schedule above.
LITIGATION
FCB is involved in various routine legal actions as both plaintiff and
defendant. In the opinion of management, based upon the present status of
litigation and the advice of legal counsel, the ultimate resolution of any of
these matters will not have a material adverse impact on the financial position
of FCB.
(11) DIVIDENDS
The stockholders of FCB will be entitled to receive dividends, when and as
declared by the Board of Directors, out of funds legally available, subject to
the dividends preference, if any, on preferred shares that may be outstanding
and also subject to the restrictions of the Delaware General Corporation Law.
At December 31, 1995 and 1994, there were no outstanding shares of preferred
stock.
On December 31, 1991, the Board of Directors of FCB declared a $.32 per
share cash dividend on its common stock. This dividend was payable in four
installments during 1992. On July 9, 1992, the Company made the decision to
suspend payment of the third and fourth quarter dividends which totaled $.16
per share. FCB will continue to accrue interest on these suspended dividends at
the current legal rate until such time as the dividends are paid to
stockholders of record as of June 15, 1992 and September 14, 1992. As of
December 31, 1995, the aggregate accrued dividends and accrued but unpaid
interest thereon was approximately $969,000. The payment of the accrued
F-56
<PAGE> 149
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
dividends and declaration of subsequent dividends is subject to approval by the
Federal Reserve Bank of San Francisco (see Note 15). In connection with its
offering to stockholders commenced subsequent to December 31, 1995, as
described in Note 19, FCB is offering, to those individuals eligible to receive
the accrued and unpaid 1992 dividends, one share of FCB common stock for each
$.10 of dividends and accrued interest, in satisfaction of that obligation.
Dividends by the Bank to FCB are restricted under California law to the
lesser of the Bank's retained earnings or the Bank's net income for the latest
three fiscal years, less dividends previously declared during that period, or,
with the approval of the California Superintendent of Banks, to the greater of
the retained earnings of the Bank, the net income of the Bank for its last
fiscal year or the net income of the Bank for its current fiscal year. In
addition, the Federal Reserve Board and the Federal Deposit Insurance
Corporation (FDIC) have indicated that it would generally be considered to be
an unsafe and unsound banking practice for banks to pay dividends except out of
current operating earnings. Further, FCB and the Bank are restricted from
paying dividends under the terms of certain regulatory agreements (see Note
15). During 1995, 1994 and 1993, the Bank paid no dividends to FCB. As of
December 31, 1995, the retained deficit of the Bank was approximately $30.31
million.
(12) STOCK OPTION PLANS
In 1987, the Board of Directors amended and restated the Company's employee
stock option plan (the Employee Plan) for full-time salaried officers and
employees who have substantial responsibility for the successful operation of
FCB and the Bank. The Employee Plan provides for the grant of ``incentive stock
options,'' as defined in Section 422A of the Internal Revenue Code. The
Employee Plan reserved an aggregate of 783,000 shares of FCB common stock.
Options may be granted at an exercise price not less than the fair market value
of the stock at the date of grant and vest at a rate of 20% per year for a
period of five years from date of grant. Options expire ten years from date of
grant and may be exercised with shares of FCB stock or other valuable
consideration. Options may be granted, pursuant to the Employee Plan, until its
expiration on March 11, 1997.
The Employee Plan is administered by the Board of Directors or a committee
appointed by the Board (in either case, the ``Committee''). The Committee
determines to whom options will be granted and the terms of each option
granted, including the exercise price, number of shares subject to the option,
the vesting provisions thereof, and whether the option will be an incentive or
nonstatutory option.
F-57
<PAGE> 150
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Activity for the three years ended December 31, 1995 related to the
Employee Plan was as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
SHARES ----------------------
AVAILABLE PRICE PER
FOR GRANT SHARES SHARE
--------- ------ ---------
<S> <C> <C> <C>
Balance, January 1, 1993.............................. 119,552 523,700 $4.38-11.12
Options granted....................................... (15,000) 15,000 4.00-5.88
Options cancelled..................................... 25,500 (25,500) 6.13-10.75
Options exercised..................................... -- (2,000) 5.63
------- -------- -----------
Balance, December 31, 1993............................ 130,052 511,200 4.00-11.12
Options granted....................................... (3,500) 3,500 4.25-5.38
Options cancelled..................................... 328,900 (328,900) 4.00-11.12
Options exercised -- -- --
------- -------- -----------
Balance, December 31, 1994 455,452 185,800 4.25-11.12
Options granted -- -- --
Options cancelled..................................... 90,500 (90,500) 5.00-8.44
Options exercised -- -- --
------- -------- -----------
Balance, December 31, 1995............................ 545,952 95,300 4.25-11.12
======= ======== ===========
</TABLE>
At December 31, 1995, options for 82,140 shares were exercisable at prices
ranging from $4.25 to $11.12. On August 22, 1989, the Board of Directors
amended the Employee Plan to provide that in the event of a sale, dissolution
or liquidation, merger or consolidation in which FCB is not the surviving
corporation (other than a merger or consolidation solely for the purpose of
charter migration), an optionee shall have the right immediately preceding any
such transaction, to exercise any unvested and unexercised portion of said
optionee's options. Although the transactions with First Banks pursuant to the
Stock Purchase Agreement provided optionees this right, the exercise prices on
options currently outstanding are substantially in excess of market prices.
Consequently, no options were exercised as a result of those transactions.
On September 26, 1989 (Commencement Date), the Board of Directors of FCB
adopted the First Commercial Bancorp, Inc., Directors' Stock Option Plan
(Directors' Plan), which was approved by the stockholders of FCB at its Annual
Stockholders' Meeting held on May 23, 1990. There are presently reserved for
issuance under the Directors' Plan 250,000 shares of FCB's common stock. Only
non-employee directors of FCB are eligible to receive options in accordance
with the Directors' Plan. As of December 31, 1995, only two directors are
eligible to participate in the Directors' Plan.
One present director of FCB received a onetime grant of a nonstatutory
option to purchase 10,000 shares, which became exercisable upon approval by the
stockholders, service as a Board member for at least six months, and
satisfaction of certain vesting requirements set forth below.
On each anniversary date of the Commencement Date, each director who has
been a director continuously for the preceding year and who has not previously
received one or more grants of options to purchase a total of 10,000 shares,
will receive a grant of an option to purchase 2,000 shares. The maximum number
of shares for which options may be granted under the Directors' Plan to any
director is 10,000 shares. Options granted to directors to purchase common
stock of FCB shall vest and become exercisable at the rate of 20% of the shares
per year from the exercise date and may be exercised by the optionee during a
period of 10 years.
The Directors' Plan will expire on September 26, 1998, unless terminated
earlier by the Board of Directors. At December 31, 1995, options for 70,000
vested shares under the Directors' Plan were exercisable at a price of $11.12
per share.
F-58
<PAGE> 151
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) EMPLOYEE BENEFIT PLANS
FCB's profit-sharing plan is a self-administered savings and incentive
plan, which qualifies under Section 401(k) of the Internal Revenue Code,
covering substantially all employees. Under the plan, employer matching
contributions are determined annually by FCB's Board of Directors. An
employee's interest in such contributions vest on a 5-year schedule according
to years of service rendered. Employee contributions are limited to 15% of an
employee's compensation, not to exceed $9,500 for 1995, and vest immediately.
The employer matching contributions were suspended as of January 1, 1995. Total
employer contributions under the plan were $105,000 and $116,000 for the years
ended December 31, 1994 and 1993, respectively. For these same three years, the
Bank paid for the plan's administrative, accounting and legal expenses of
approximately $16,000, $20,000 and $33,000, respectively.
FCB adopted an Employee Stock Ownership Plan (ESOP) for all eligible
employees. Under the terms of the ESOP, the amount of contributions made is
within the sole discretion of the Board of Directors. Employees may not
contribute to the ESOP. Contributions to the ESOP are allocated among eligible
employees' accounts in relation to their compensation as shares of stock of FCB
are acquired and vest over a period specified in the ESOP. Any shares held by
the ESOP are distributed to employees following death, disability, retirement
or other separation from employment in accordance with the terms of the ESOP.
There were no contributions to the ESOP for the years ended December 31, 1995,
1994 and 1993.
Postretirement benefits other than pensions and postemployment benefits are
generally not provided for FCB's employees.
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values for financial instruments are management's estimate of the
values at which the instruments could be exchanged in a transaction between
willing parties. These estimates are subjective and may vary significantly from
amounts that would be realized in actual transactions. In addition, other
significant assets are not considered financial assets including, deferred tax
assets and bank premises and equipment. Further, the tax ramifications related
to the realization of the unrealized gains and losses can have a significant
effect on the fair value estimates and have not been considered in any of the
estimates.
The estimated fair values of FCB's financial instruments at December 31
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------- ----------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- --------- -------- ---------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents..................... $18,768 18,768 86,259 86,259
Interest-bearing deposits with other financial
institutions with original maturities over
three months................................ -- -- 299 299
Investment securities......................... 74,249 74,296 17,690 17,541
Loans, net.................................... 68,627 68,681 122,735 116,315
Lease financing, net.......................... 991 991 1,038 1,038
Accrued interest receivable................... 1,429 1,429 1,287 1,287
Liabilities:
Demand and savings deposits................... 83,870 83,870 147,018 147,018
Time deposits................................. 72,294 72,371 86,518 86,769
12% convertible debentures.................... 6,500 6,500 -- --
Accrued interest payable...................... 487 487 335 335
Off balance sheet--unfunded loan commitments...... -- -- -- --
</TABLE>
F-59
<PAGE> 152
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following methods and assumptions were used in estimating fair values
for financial instruments:
FINANCIAL ASSETS:
Cash and cash equivalents, interest-bearing deposits, lease financing and
accrued interest receivable: The carrying values reported in the consolidated
balance sheets approximate fair value.
Investment securities: Fair value for investment securities is based upon
quoted market prices. If quoted market prices are not available, fair values
are based upon quoted market prices of comparable instruments.
Net loans: The fair values for most loans held for investment are estimated
utilizing discounted cash flow calculations that apply interest rates currently
being offered for similar loans to borrowers with similar risk profiles. The
carrying values for loans are net of the allowance for possible loan losses and
unearned discount.
FINANCIAL LIABILITIES:
Deposits: The fair value disclosed for deposits generally payable on demand
(i.e., non-interest-bearing and interest-bearing demand, savings and money
market accounts) are considered equal to their respective carrying amounts as
reported in the consolidated balance sheets. The fair value disclosed for
demand deposits does not include the benefit that results from the low-cost
funding provided by deposit liabilities compared to the cost of borrowing funds
in the market. Fair values for certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on similar certificates to a schedule of aggregated monthly maturities
of time deposits.
Convertible debentures and accrued interest payable: The carrying value
reported in the consolidated balance sheets approximates fair value.
OFF-BALANCE SHEET:
Credit commitments: The majority of the commitments to extend credit and
commercial and standby letters of credit contain variable interest rates and
credit deterioration clauses and, therefore, the carrying value of these credit
commitments approximates fair value.
(15) REGULATORY AGREEMENTS
For each of the three years ended December 31, 1995, FCB has incurred
substantial losses from operations. These losses were associated primarily with
the emphasis which FCB had placed on real estate based lending and the
deterioration of the California economy during that period, particularly as it
related to the real estate sector. Because of the magnitude of problem assets
which arose and the reduction of FCB's capital due to the losses, FCB has been
operating under the terms of a Memorandum of Understanding with the Federal
Reserve Bank of San Francisco (MOU) and the Bank has been operating under the
terms of a Cease and Desist Order issued by the FDIC, a Final Order issued by
the State Banking Department and several Capital Impairment Orders
(collectively the Orders). The MOU and the Orders have placed significant
restrictions on FCB and the Bank including restrictions on the payment of
dividends, requirements of specified capital levels and reduction of classified
assets. As a result of the recapitalization and numerous actions taken by FCB,
management believes FCB is in substantial compliance with the MOU and the
Orders. However, full compliance, particularly with certain capital
requirements, has not yet been achieved.
FCB and the Bank entered into a Stock Purchase Agreement with First Banks
and James F. Dierberg as outlined in Note 2, which resulted in a substantial
recapitalization of FCB and the Bank during 1995. In addition, as more fully
described in Note 19, subsequent to December 31, 1995, FCB has commenced an
offering of its common stock to existing stockholders in exchange for dividends
owed to certain stockholders. However, FCB has continued to incur losses from
operations through December 31, 1995. Furthermore, the effect of a large
portfolio of problem assets and the potential of a substantial interest cost
associated with the Debenture issued to First Banks under the Stock
F-60
<PAGE> 153
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Purchase Agreement may impair FCB's ability to generate sufficient future
profitability to satisfy all of FCB's regulatory agreements. Consequently,
there can be no assurance that: (1) FCB will not incur substantial additional
losses in the liquidation of its portfolio of problem assets; (2) continued
losses will not adversely effect FCB's ability to comply with the requirement
of the MOU and the Orders; or (3) because of any of the preceding, FCB and the
Bank may not be required to raise additional capital or have additional
regulatory agreements imposed upon it in the future.
(16) RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
During the second quarter of 1994, FCB became aware of the existence of
certain previously unknown information which affected the reported carrying
value of certain assets included in FCB's December 31, 1993 and 1992 financial
statements. FCB believes that had this information been known at December 31,
1992, FCB would have written off certain assets and recognized a loss at that
time. Thus, FCB's financial statements for the fiscal years ended December 31,
1993 and 1992 have been restated to reflect the effects of these charge-offs
and losses. The effect of this restatement for 1994 was to decrease ORE by
$3.90 million, increase the allowance for possible loan losses by $974,000 for
a charge-off recorded in 1993, decrease interest income by $14,000, record a
tax benefit of $5,000, increase cash by $47,000 and increase savings accounts
by $96,000. The net of these transactions increased previously reported loss
and retained deficit by $9,000.
The effect of this restatement for 1992 was to charge-off real estate
construction loans of $4.89 million to the allowance for possible loan losses
and establish a corresponding addition to the provision for possible loan
losses. In addition, interest income was reversed by $18,000 and a tax benefit
was recorded for $1.72 million. The net of these transactions increased
previously reported net loss and retained deficit in 1992 by $3.19 million.
(17) TRANSACTIONS WITH FIRST BANKS
In October 1995, the Board of Directors of the Bank approved a management
services agreement with First Banks and a cost sharing agreement with First
Bank & Trust, Irvine, California, a wholly owned subsidiary of First Banks. The
management fee agreement provides that the Bank will compensate First Banks on
an hourly basis for its use of personnel for various functions including
internal auditing, loan review, income tax preparation and assistance,
accounting and other management and administrative services. Hourly rates for
such services compare favorably with those of similar services from unrelated
sources, as well as the internal costs of the Bank personnel which were used
previously. It is estimated that the aggregate cost for such services will be
more economical than those previously incurred separately by the Bank.
Because of this affiliation through First Banks and the geographic
proximity of certain of these banking offices, the Bank and First Bank & Trust
plan to share the cost of certain personnel and services which will be used by
both banks. This will include the salaries and benefits of certain loan and
administrative personnel. The banks have entered into a cost sharing agreement
for the purpose of allocating these expenses between them. Expenses associated
with loan origination personnel will be allocated based on the relative loan
volume between the banks. Costs of most other personnel will be allocated on an
hourly basis. Because this involves distributing essentially fixed costs over a
larger asset base, it allows each bank to receive the benefit of personnel and
services at a reduced cost.
The Bank also entered into a data processing agreement with FirstServ,
Inc., a wholly owned data processing subsidiary of First Banks, on December 8,
1995. Under this agreement, FirstServ, Inc. began providing data processing and
item processing to the Bank in December 1995. The fees for such services are
substantially less than the Bank had incurred in connection with its previous
data processing operation or than it would incur with non-affiliated vendors.
The management services agreement, cost sharing agreement and data
processing agreement are subject to the review and approval of the Bank's
regulatory authorities. Fees paid by the Bank under any of these agreements
totaled $99,000 for the year ended December 31, 1995.
F-61
<PAGE> 154
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition, the Bank may purchase certain services and supplies from or
through First Banks as one of its subsidiaries. This would include insurance
policies, office supplies and other commonly used banking products which can be
acquired more economically than had previously been possible for the Bank
separately. These items are purchased on a cost pass-through basis and the
amount of such purchases is not expected to be material to FCB's consolidated
financial position or results of operations.
In connection with the recapitalization of FCB, and as more fully discussed
in Notes 2 and 9 to the accompanying consolidated financial statements, First
Banks purchased convertible debentures of FCB of $1.5 million and $5.0 million
on October 31, 1995 and December 28, 1995, respectively. The related interest
expense for these debentures was $37,667 for the year ended December 31, 1995.
(18) PARENT COMPANY ONLY FINANCIAL STATEMENTS
<TABLE>
CONDENSED BALANCE SHEETS
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C>
Assets:
Cash.................................................... $ 200 22
Investment in First Commercial Bank..................... 10,987 5,219
Other assets............................................ 413 --
------- -----
Total assets........................................ $11,600 5,241
======= =====
Liabilities and stockholders' equity:
Dividends payable....................................... $ 748 748
12% convertible debentures.............................. 6,500 --
Accrued expenses and other liabilities.................. 773 138
------- -----
Total liabilities................................... 8,021 886
Stockholders' equity.................................... 3,579 4,355
------- -----
Total liabilities and stockholders' equity.......... $11,600 5,241
======= =====
</TABLE>
F-62
<PAGE> 155
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
CONDENSED STATEMENTS OF OPERATIONS
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Income:
Interest income............................... $ 1 95 224
Other income.................................. -- -- 1
------- ------- ------
Total income.............................. 1 95 225
------- ------- ------
Expense:
Management fee................................ -- 56 14
Other......................................... 716 1,182 591
------- ------- ------
Total expense............................. 716 1,238 605
------- ------- ------
Loss before income tax expense (benefit)
and equity in undistributed loss of
subsidiary.............................. (715) (1,143) (380)
Income tax expense (benefit)...................... 4 (9) (108)
------- ------- ------
Loss before equity in undistributed loss
of subsidiary........................... (719) (1,134) (272)
Equity in undistributed loss of subsidiary........ (6,712) (17,056) (7,039)
------- ------- ------
Net loss.................................. $(7,431) (18,190) (7,311)
======= ======= ======
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................... $(7,431) (18,190) (7,311)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization............. -- 1,047 73
Equity in undistributed loss of
subsidiary.............................. 6,712 17,056 7,039
(Increase) decrease in other assets....... (46) 308 (118)
Increase in liabilities................... 351 33 97
------- ------- ------
Net cash (used in) provided by
operating activities................ (414) 254 (220)
------- ------- ------
Cash flows from investing
activities--contributions to subsidiary......... (7,325) (1,404) --
------- ------- ------
Cash flows from financing activities:
Proceeds from issuance of common stock........ 1,500 -- 11
Proceeds from issuance of debentures.......... 6,133 -- --
Proceeds from advances from subsidiary........ 284 -- --
------- ------- ------
Net cash provided by financing
activities.......................... 7,917 -- 11
------- ------- ------
Net increase (decrease) in cash and
cash equivalents.................... 178 (1,150) (209)
Cash and cash equivalents at beginning of year.... 22 1,172 1,381
------- ------- ------
Cash and cash equivalents at end of year.......... $ 200 22 1,172
======= ======= ======
Noncash financing activities--exchange of Company
common stock for Bank common stock (see Note
2).............................................. $ 6,500 -- --
======= ======= ======
</TABLE>
F-63
<PAGE> 156
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(19) SUBSEQUENT EVENTS
In January 1996, FCB filed an Amended Registration Statement with the
Securities and Exchange Commission for a rights offering to its existing
stockholders other than First Banks, of an aggregate of $5.0 million of
newly-issued common stock at $.10 per share. A maximum of $1.0 million of this,
if not otherwise subscribed to, may be offered to individuals who are not
stockholders of FCB. In addition, $969,000 of common stock is being offered in
exchange for certain outstanding dividend obligations and accrued interest
thereon of FCB. If this offering is fully subscribed, the capital of FCB and
the Bank would exceed regulatory requirements. In addition, First Banks'
ownership in FCB would be reduced to 50.25%, prior to the conversion of the
debentures, or 66.95%, if the debentures are immediately converted.
First Banks has agreed, pursuant to the Stock Purchase Agreement, that it
will purchase on the offering as a standby-purchaser, after the expiration of
the rights offering and dividend exchange offer, if necessary, such number of
shares as may be required to raise the Bank's Tier 1 capital ratio to 7.00% as
required by the SBD's capital impairment order.
The offering was declared effective by the Securities and Exchange
Commission on February 16, 1996, and the Prospectuses were recently mailed to
eligible stockholders.
(20) INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following unaudited interim consolidated financial statements include
the accounts of FCB and its subsidiary, the Bank, after elimination of material
intercompany transactions. The unaudited information, in the opinion of FCB,
includes all adjustments necessary for the fair presentation thereof. All
adjustments made were of a normal and recurring nature.
F-64
<PAGE> 157
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks................................. $ 8,069 9,768
Federal funds sold...................................... 9,100 9,000
-------- -------
Total cash and cash equivalents................. 17,169 18,768
-------- -------
Investment securities:
Available for sale, at fair value....................... 33,269 63,291
Held to maturity, at amortized cost (estimated fair
value of $3,012 and $11,005 at September 30, 1996 and
December 31, 1995, respectively)...................... 3,004 10,958
-------- -------
Total investment securities..................... 36,273 74,249
-------- -------
Loans:
Commercial.............................................. 30,738 33,764
Real estate construction and development................ 10,666 4,094
Real estate mortgage:
Residential......................................... 19,720 17,824
Commercial.......................................... 23,015 15,021
Consumer and installment................................ 10,465 3,508
-------- -------
Total loans..................................... 94,604 74,211
Unearned discount....................................... (305) (196)
Allowance for possible loan losses...................... (4,037) (5,388)
-------- -------
Net loans....................................... 90,262 68,627
-------- -------
Lease receivable, net....................................... -- 991
Bank premises and equipment, net of accumulated
depreciation.............................................. 2,000 2,247
Accrued interest receivable................................. 1,377 1,429
Other real estate owned..................................... 524 1,380
Other assets................................................ 1,375 1,844
-------- -------
Total assets.................................... $148,980 169,535
======== =======
</TABLE>
F-65
<PAGE> 158
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
(CONTINUED)
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
LIABILITIES
Deposits:
Demand:
Non-interest bearing................................ $ 24,381 27,517
Interest bearing.................................... 16,660 19,367
Savings................................................. 32,821 36,986
Time:
Time deposits of $100 or more....................... 10,837 18,764
Other time deposits................................. 48,957 53,530
-------- -------
Total deposits.................................. 133,656 156,164
Accrued interest payable.................................... 812 487
Accrued and other liabilities............................... 2,063 2,805
12% convertible debentures.................................. 6,500 6,500
-------- -------
Total liabilities............................... 143,031 165,956
-------- -------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 5,000,000 shares
authorized; no shares issued and outstanding
Common stock, $.01 par value, 250,000,000 shares authorized;
105,765,932 shares issued and outstanding at September 30,
1996 and 69,675,110 shares issued and outstanding at
December 31, 1995......................................... 1,058 697
Capital surplus............................................. 36,107 33,251
Retained deficit............................................ (31,185) (30,311)
Net fair value adjustment for securities available for
sale...................................................... (31) (58)
-------- -------
Total stockholders' equity...................... 5,949 3,579
-------- -------
Total liabilities and stockholders' equity...... $148,980 169,535
======== =======
</TABLE>
F-66
<PAGE> 159
FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1996 1995
---- ----
<S> <C> <C>
Interest income:
Interest and fees on loans.............................. $ 6,147 7,792
Investment securities................................... 2,248 1,180
Federal funds sold and other............................ 390 1,679
------- ------
Total interest income........................... 8,785 10,651
------- ------
Interest expense:
Deposits:
Interest-bearing demand............................. 211 297
Savings............................................. 1,086 892
Time deposits of $100 or more....................... 492 818
Other time deposits................................. 1,743 2,546
Other borrowings........................................ 677 86
------- ------
Total interest expense.......................... 4,209 4,639
------- ------
Net interest income............................. 4,576 6,012
Provision for possible loan losses.......................... 1,150 3,345
------- ------
Net interest income after provision for possible
loan losses................................... 3,426 2,667
------- ------
Noninterest income:
Service charges on deposit accounts and customer service
fees................................................... 581 639
Other income............................................ 921 492
------- ------
Total noninterest income........................ 1,502 1,131
------- ------
Noninterest expense:
Salaries and employee benefits.......................... 1,705 3,916
Occupancy, net of rental income......................... 668 1,318
Furniture and equipment................................. 309 483
Federal Deposit Insurance Corporation premiums.......... 281 498
Postage, printing and supplies.......................... 440 195
Data processing fees.................................... 304 61
Legal, examination and professional fees................ 1,153 793
Losses and expenses on foreclosed real estate, net of
gains.................................................. 952 2,410
Other expenses.......................................... 722 1,143
------- ------
Total noninterest expense....................... 6,534 10,097
------- ------
Income (loss) before benefit (provision) for
income taxes.................................. (1,606) (6,299)
Provision (benefit) for income taxes........................ (732) 2
------- ------
Net income (loss)............................... $ (874) (6,301)
======= ======
Income (loss) per common shares............................. (0.01) (1.35)
======= ======
Weighted average shares of common stock and common stock
equivalents outstanding (in thousands).................... 87,778 4,675
======= ======
</TABLE>
F-67
<PAGE> 160
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................... 2
Risk Factors................................................. 8
First Banks.................................................. 14
Use of Proceeds.............................................. 14
Market for the Preferred Securities.......................... 15
Accounting Treatment......................................... 15
Capitalization............................................... 16
Selected Consolidated Financial Data......................... 17
Management's Discussion and Analysis......................... 18
Business..................................................... 50
Supervision and Regulation................................... 53
Description of the Preferred Securities...................... 59
Description of the Subordinated Debentures................... 68
Description of the Guarantee................................. 76
Relationship Among the Preferred Securities, the Subordinated
Debentures and the Guarantee............................... 78
Description of Other Capital Stock........................... 79
Certain Federal Income Tax Consequences...................... 82
ERISA Considerations......................................... 85
Underwriting................................................. 86
Validity of Securities....................................... 87
Experts...................................................... 87
Incorporation of Certain Documents by Reference.............. 88
Available Information........................................ 88
Index to Consolidated Financial Statements................... F-1
</TABLE>
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY FIRST
BANKS, FIRST CAPITAL OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF FIRST BANKS SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY CIRCUMSTANCES
IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,000,000 PREFERRED SECURITIES
FIRST PREFERRED
CAPITAL TRUST
9.25% CUMULATIVE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $25 PER PREFERRED SECURITY)
GUARANTEED, AS DESCRIBED HEREIN, BY
FIRST
BANK
FIRST BANKS, INC.
-------------------
$75,000,000
9.25% SUBORDINATED DEBENTURES
OF
FIRST BANKS, INC.
--------------------
Prospectus
January 29, 1997
--------------------
STIFEL, NICOLAUS & COMPANY
INCORPORATED
- --------------------------------------------------------------------------------
