FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from _______ to ________
Commission File No. 0-20632
FIRST BANKS, INC.
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(Exact Name of registrant as specified in its charter)
MISSOURI 43-1175538
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
135 North Meramec, Clayton, MO 63105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 854-4600
--------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None N/A
Securities registered pursuant to Section 12(g) of the Act:
9.25% Cumulative Trust Preferred Securities (issued
by First Preferred Capital Trust and guaranteed
by its parent, First Banks, Inc.)
(Title or class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- ------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ X ]
None of the voting stock of the Company is held by non-affiliates. All
of the voting stock of the Company is owned by various trusts which were created
by and for the benefit of Mr. James F. Dierberg, the Company's Chairman of the
Board of Directors, President and Chief Executive Officer, and members of his
immediate family.
At March 25, 1998 there were 23,661 shares of the registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended
December 31, 1997 (the "1997 Annual Report to Shareholders") are incorporated by
reference into Parts I and II.
<PAGE>
PART I
Information appearing in this report, in documents incorporated by
reference herein and in documents subsequently filed with the Securities and
Exchange Commission which are not statements of historical fact may include
forward looking statements. Such forward-looking statements are subject to
certain risks and uncertainties, not all of which can be predicted or
anticipated. Factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements include general market
conditions as well as conditions affecting the banking industry generally and
factors having a specific impact on the Company, including but not limited to
fluctuations in interest rates and in the economy; the impact of laws and
regulations applicable to the Company and changes therein; competitive
conditions in the markets in which the Company conducts its operations; and the
ability of the Company to respond to changes in technology. With regard to the
Company's efforts to grow through acquisitions, factors that could affect the
accuracy or completeness of such forward-looking statements include the
potential for higher than acceptable operating costs arising from the geographic
dispersion of the offices of First Banks, Inc.'s subsidiaries, as compared with
competitors operating solely in contiguous markets; the competition of larger
acquirers with greater resources than First Banks; fluctuations in the prices at
which acquisition targets may be available for sale and in the market for First
Banks' securities, and the potential for difficulty or unanticipated costs in
realizing the benefits of particular acquisition transactions. Readers should
therefore not place undue reliance on forward-looking statements.
Item 1. Business
General
First Banks, Inc. ("First Banks" or the "Company"), incorporated in
Missouri in 1978, is headquartered in St. Louis, Missouri and is a registered
bank holding company under the Bank Holding Company Act of 1956, as amended (the
"BHC Act").
At December 31, 1997, First Banks had $4.17 billion in total assets, $3.00
billion in total loans, net of unearned discount, $3.68 billion in total
deposits and $231.5 million in total stockholders' equity. First Banks operates
through its subsidiary financial institutions and bank holding companies (the
"Subsidiary Banks") as follows:
FirstBank, headquartered in St. Louis County, Missouri ("First Bank").
First Banks America, Inc., headquartered in St. Louis County, Missouri
("FBA"),and its wholly owned subsidiaries:
BankTEXAS N. A., headquartered in Houston, Texas ("BankTEXAS").
First Bank of California, headquartered in Roseville, California
("FB California").
CCB Bancorp, Inc., headquartered in Irvine, California ("CCB"), and its
wholly owned subsidiary:
First Bank & Trust, headquartered in Irvine, California ("FB&T").
First Commercial Bancorp, Inc., headquartered in Sacramento, California
("FCB"), and its wholly owned subsidiary:
First Commercial Bank, headquartered in Sacramento, California ("First
Commercial").
All of the Subsidiary Banks are wholly owned by their respective parents
except FBA and FCB, which were 65.85% and 61.48% owned, respectively, by First
Banks at December 31, 1997. As discussed under "--Acquisitions" in the 1997
Annual Report to Shareholders, incorporated herein by reference, FB California
is a newly-formed California state bank resulting from the merger of Sunrise
Bank of California, which was acquired by FBA on November 1, 1996 and Surety
Bank, Vallejo, California, which was acquired by FBA on December 1, 1997. In
February 1998, FCB was acquired by FBA, and its subsidiary bank, First
Commercial, was merged into FB California.
<PAGE>
Through the Subsidiary Banks, First Banks offers a broad range of
commercial and personal banking services including certificate of deposit
accounts, individual retirement and other time deposit accounts, checking and
other demand deposit accounts, interest checking accounts, savings accounts and
money market accounts. Loans include commercial, financial and agricultural,
real estate construction and development, commercial and residential real
estate, consumer and installment, student and Small Business Administration
loans. Other financial services include mortgage banking, credit cards, discount
brokerage, credit-related insurance, automatic teller machines, telephone
account access, safe deposit boxes, trust and private banking services, and cash
management services.
First Banks centralizes overall corporate policies, procedures and
administrative and operational support functions for the Subsidiary Banks.
Primary responsibility for managing the Subsidiary Banks remains with their
officers and directors.
<TABLE>
<CAPTION>
The following table lists the Subsidiary Banks at December 31, 1997:
Loans, net of
Number of Total unearned Total
Subsidiary Banks locations assets discount deposits
---------------- --------- ------ -------- --------
(dollars expressed in thousands)
<S> <C> <C> <C> <C>
First Bank...................................... 98 $2,843,575 2,185,493 2,559,968
FBA:
BankTEXAS................................... 6 267,152 176,341 231,175
FB California............................... 4 179,999 137,096 152,825
CCB:
FB&T........................................ 17 672,410 385,251 598,560
FCB:
First Commercial............................ 6 190,918 118,018 172,737
</TABLE>
As described under "--Financial Condition and Average Balances" in the 1997
Annual Report to Shareholders, incorporated herein by reference, on February 3,
1997, First Preferred Capital Trust ("First Trust"), a Delaware statutory
business trust, issued 3,450,000 shares of 9.25% cumulative trust preferred
securities ("Preferred Securities") for $86.25 million. In addition, First Trust
issued $2.7 million of common securities which are owned by First Banks. The
Preferred Securities are publicly held and listed on the Nasdaq Stock Market's
National Market System. The Preferred Securities have no voting rights except in
certain limited circumstances. On December 1, 1997, First Banks redeemed all of
the outstanding Class C, 9.00% increasing rate, redeemable, cumulative preferred
stock ("Class C Preferred Stock") which had previously been publicly held and
listed on the Nasdaq Stock Market's National Market System.
As described in Note 17 to the consolidated financial statements of the
1997 Annual Report to Shareholders, incorporated herein by reference, FBA and
FCB were merged. The merger of FBA and FCB will not have a significant impact on
the financial condition or results of operations of First Banks.
The Company, Mr. Dierberg and an affiliate of Mr. Dierberg own 18.55%,
0.20% and 4.44%, respectively, of the outstanding shares of common stock of
Southside Bancshares Corporation ("Southside") located in St. Louis, Missouri.
The shares of Southside are currently held for investment purposes.
The voting stock of First Banks is owned by various trusts which were
created by and are administered by and for the benefit of Mr. James F. Dierberg,
First Banks' Chairman of the Board, President and Chief Executive Officer, and
members of his immediate family. Accordingly, Mr. Dierberg controls the
management and policies of First Banks and the election of its directors. The
Preferred Securities are publicly held and listed on the Nasdaq Stock Market's
National Market. The Preferred Securities have no voting rights except in
certain limited circumstances.
For a description of the business of First Banks during the past year, see
"Management's Discussion and Analysis - General" in the 1997 Annual Report to
Shareholders, incorporated herein by reference.
<PAGE>
Acquisitions
Prior to 1994, First Banks' acquisitions had been concentrated within its
primary market area of eastern Missouri and central and southern Illinois. The
premiums required to successfully pursue acquisitions escalated sharply in 1993,
reducing dramatically the economic viability of many potential acquisitions in
that area. Recognizing this, First Banks began to expand the geographic area in
which it approached acquisition candidates. While First Banks was successful in
making acquisitions in Chicago and northern Illinois, it became apparent that
acquisition pricing, in Chicago and other areas being considered, was comparable
to that of First Banks' primary acquisition area. As a result, while First Banks
continued to pursue acquisitions within these areas, it turned much of its
attention in 1994 and 1995 to institutions which could be acquired at more
attractive prices which were within major metropolitan areas outside of its
immediate market area. This led to the acquisition of a financial institution
which had offices in Dallas and Houston, Texas in 1994 and several acquisitions
of financial institutions which had offices in Los Angeles, Orange County, Santa
Barbara, San Francisco, San Jose and Sacramento, California in 1995, 1996 and
1997.
During 1997, 1996 and 1995, First Banks completed nine acquisitions and two
deposit purchases. These transactions provided total assets of $1.41 billion and
39 banking locations. For a description of the acquisitions completed during the
three years ended December 31, 1997, see "Management's Discussion and Analysis -
Acquisitions" and Note 2 to the consolidated financial statements of the 1997
Annual Report to Shareholders, incorporated herein by reference.
Market Area
As of December 31, 1997, the Subsidiary Banks' 131 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 market areas are central and southern Illinois
and southern and northern California, respectively. First Banks also has
locations in the Houston, Dallas, Irving and McKinney, Texas metropolitan areas,
rural eastern Missouri and the greater Chicago, Illinois metropolitan area.
<TABLE>
<CAPTION>
The following table lists the market areas in which the Subsidiary Banks
operate, total deposits and number of locations as of December 31, 1997:
Total Deposits
deposits as percent No. of
Geographic area (in millions) of total locations
--------------- ------------- -------- ---------
<S> <C> <C> <C>
St. Louis, Missouri Metropolitan Area (1)................. $ 801.9 21.8% 27
Rural Eastern Missouri (1)................................ 343.2 9.3 16
Central and Southern Illinois (1)......................... 1,030.5 27.9 38
Northern Illinois (1)..................................... 354.1 9.6 17
Texas (2)................................................. 231.2 6.3 6
Southern and Central California (3)....................... 566.6 15.4 15
Northern California (4)................................... 357.1 9.7 12
--------- ------ -----
Total Deposits....................................... $ 3,684.6 100.0% 131
========= ===== =====
</TABLE>
- ----------------------
(1) First Bank operates in the St. Louis metropolitan market area, in rural
eastern Missouri, in central and southern Illinois and in northern Illinois,
including Chicago.
(2) BankTEXAS operates in the Houston, Dallas and McKinney metropolitan areas.
(3) 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.
(4) FB&T and FB California operate in northern California, including the greater
San Francisco, San Jose and Sacramento metropolitan market areas.
<PAGE>
Lending Activities
Lending activities are conducted pursuant to a written loan policy which
has been adopted by each of the Subsidiary Banks. Each loan officer has a
defined lending authority and loans made by each such officer must be reviewed
by a loan committee of the banking facility at which the loan officer is
located, the Subsidiary Bank's Board of Directors or the Central Finance
Committee of the Company, depending upon the amount of the loan request. Loan
requests for amounts in excess of $4,000,000, and loan requests for amounts in
excess of $1,000,000 where the aggregate indebtedness of the borrower exceeds
$8,000,000, must also be approved by the Company's Chairman of the Board or
Chief Financial Officer.
Generally, loans are limited to borrowers residing or doing business in the
immediate market area of the originating Subsidiary Bank. The Company's policy
is for each Subsidiary Bank to meet the quality loan demand and credit needs of
its local community before it considers the purchase of loan participations from
an affiliate.
The Company offers the following types of loans: commercial, financial,
agricultural, real estate construction and development, commercial and
residential real estate, consumer and installment loans. The loan portfolio
composition for the five years ended December 31, 1997 is included under
"Management's Discussion and Analysis - Loans and Allowance for Possible Loan
Losses" in the 1997 Annual Report to Shareholders, incorporated herein by
reference.
Mortgage Banking Operations
Through the First Bank Mortgage division ("First Bank Mortgage") of First
Bank, the Company provides mortgage banking services. First Bank Mortgage
originates, underwrites, closes and services a full line of residential mortgage
loan products, both for the portfolios of First Bank and the Company's other
Subsidiary Banks and for resale in the secondary mortgage market. In addition,
First Bank Mortgage acquires loans originated by the other Subsidiary Banks or
by unrelated entities, which it then underwrites and services.
For a summary of the mortgage banking activities of First Banks, see
"Management's Discussion and Analysis Mortgage Banking Activities" in the 1997
Annual Report to Shareholders, incorporated herein by reference.
Investment Portfolio
The Company has established a written investment policy which has been
adopted by the Subsidiary Banks and is reviewed annually. The investment policy
identifies investment criteria and states specific objectives in terms of risk,
interest rate sensitivity, and liquidity. The investment policy directs
management of the Subsidiary Banks to consider, among other criteria, the
quality, term, and marketability of the securities acquired for their respective
investment portfolios. The investment portfolio composition is presented in Note
3 to the consolidated financial statements of the 1997 Annual Report to
Shareholders, incorporated herein by reference.
Deposits
The Company's deposits consist principally of core deposits from the local
market areas of the Subsidiary Banks. The Subsidiary Banks do not accept
brokered deposits, except for any such deposits which acquired institutions may
have had prior to their acquisition by the Company. A table illustrating the
distribution of the Company's deposit accounts and the weighted average nominal
interest rates on each category of deposits for the three years ending December
31, 1997 is included under "Management's Discussion and Analysis - Deposits" in
the 1997 Annual Report to Shareholders, incorporated herein by reference.
<PAGE>
Competition and Branch Banking
The activities in which the Subsidiary Banks engage are highly competitive.
Those activities and the geographic markets served involve primarily competition
with other banks, some of which are affiliated with large bank holding
companies. Competition among financial institutions is based upon interest rates
offered on deposit accounts, interest rates charged on loans and other credit
and service charges, the quality of services rendered, the convenience of
banking facilities and, in the case of loans to large commercial borrowers,
relative lending limits.
In addition to competing with other banks within their primary service
areas, the Subsidiary Banks also compete with other financial intermediaries,
such as thrifts, credit unions, industrial loan associations, securities firms,
insurance companies, small loan companies, finance companies, mortgage
companies, real estate investment trusts, certain governmental agencies, credit
organizations and other enterprises. Additional competition for depositors'
funds comes from United States Government securities, private issuers of debt
obligations and suppliers of other investment alternatives for depositors. Many
of the Company's non-bank competitors are not subject to the same extensive
federal regulations that govern bank holding companies and federally-insured
banks and thrifts and state regulations governing state-chartered banks and
thrifts. As a result, such non-bank competitors may have certain advantages over
the Company in providing some services.
The trend in Missouri, Illinois, California and Texas has been for
multi-bank holding companies to acquire independent banks and thrifts in
communities throughout these states. The Company believes it will continue to
face competition in the acquisition of such banks and thrifts from bank holding
companies based in those states and from bank holding companies based in other
states under interstate banking laws. Many of the financial institutions with
which the Company competes are larger than the Company and have substantially
greater resources available for making acquisitions.
Subject to regulatory approval, commercial banks situated in Missouri,
Illinois, California and Texas are permitted to establish branches throughout
their respective states, thereby creating the potential for additional
competition in the services areas of the Subsidiary Banks.
Supervision and Regulation
General
The Company and its Subsidiary Banks are extensively regulated under
federal and state law. These laws and regulations are intended to protect
depositors, not shareholders. To the extent the following information describes
statutory or regulatory provisions, it is qualified in its entirety by reference
to the particular statutory and regulatory provisions. Any change in applicable
laws or regulations may have a material effect on the business and prospects of
the Company. The operations of the Company may be affected by legislative
changes and by the policies of various regulatory authorities. The Company is
unable to predict the nature or the extent of the effects on its business and
earnings that fiscal or monetary policies, economic controls or new federal or
state legislation may have in the future.
The Company is a registered bank holding company under the BHC Act, and, as
such, is subject to regulation, supervision and examination by the Board of
Governors of the Federal Reserve System (the "FRB"). The Company is required to
file annual reports with the FRB and to provide additional information as it may
require.
The Company's state-chartered Subsidiary Banks (First Bank, FB&T and FB
California) are subject to supervision and regulation by the bank supervisory
authorities in their respective states and also by their respective primary
federal bank regulators. The primary such regulator for First Bank, as a member
of the Federal Reserve System, is the FRB, while the primary federal bank
regulator for FB&T and FB California, which are not members of the Federal
Reserve System, is the Federal Deposit Insurance Corporation (the "FDIC").
BankTEXAS, a national banking association, is subject to the supervision and
regulation of the Office of the Comptroller of the Currency (the "OCC"). Because
the FDIC provides deposit insurance to the Company's depository subsidiary
<PAGE>
financial institutions, they are also subject to supervision and regulation by
the FDIC, even where the FDIC is not their primary federal regulator.
Recent and Pending Legislation.
The enactment of the legislation described below has significantly affected
the banking industry generally and will have an ongoing effect on the Company
and its Subsidiary Banks in the future.
Financial Institutions Reform, Recovery, and Enforcement Act of 1989. The
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA")
reorganized and reformed the regulatory structure applicable to financial
institutions generally. Among other things, FIRREA: (i) enhanced the supervisory
and enforcement powers for the federal bank regulatory agencies; (ii) required
insured financial institutions to guaranty repayment of losses incurred by the
FDIC in connection with the failure of an affiliated financial institution;
(iii) required financial institutions to provide their primary federal regulator
with notice, under certain circumstances, of changes in senior management; and
(iv) broadened authority for bank holding companies to acquire savings
institutions.
Under FIRREA, federal bank regulators were granted expanded enforcement
authority over "institution-affiliated parties" (i.e., officers, directors,
controlling stockholders, as well as attorneys, appraisers or accountants who
knowingly or recklessly participate in wrongful action likely to have an adverse
effect on an insured institution). Federal banking regulators have greater
flexibility to bring enforcement actions against insured institutions and
institution-affiliated parties, including cease and desist orders, prohibition
orders, civil money penalties, termination of insurance and the imposition of
operating restrictions and capital plan requirements. In general, these
enforcement actions may be initiated for violations of laws and regulations and
unsafe or unsound practices. Since the enactment of FIRREA, the federal bank
regulators have significantly increased the use of written agreements to correct
compliance deficiencies with respect to applicable laws and regulations and to
ensure safe and sound practices. Violations of such written agreements are
grounds for initiation of cease-and-desist proceedings. FIRREA granted the FDIC
back-up enforcement authority to recommend enforcement action to an appropriate
federal banking agency and to bring such enforcement action against a financial
institution or an institution-affiliated party if such federal banking agency
fails to follow the FDIC's recommendation. In addition, FIRREA requires, except
under certain circumstances, public disclosure of final enforcement actions by
the federal banking agencies.
FIRREA also established a cross guarantee provision pursuant to which the
FDIC may recover from a depository institution losses the FDIC incurs in
providing assistance to, or paying off the depositors of, any of such depository
institution's affiliated insured banks or thrifts. The cross guarantee thus
enables the FDIC to assess a holding company's healthy Bank Insurance Fund
("BIF") members and Savings Association Insurance Fund ("SAIF") members for the
losses of any of such holding company's failed BIF and SAIF members. Cross
guarantee liabilities are generally superior in priority to obligations of the
depository institution to its stockholders due solely to their status as
stockholders and obligations to other affiliates. Cross guarantee liabilities
are generally subordinated, except with respect to affiliates, to deposit
liabilities, secured obligations or any other general or senior liabilities, and
any obligations subordinated to depositors or other general creditors.
The Federal Deposit Insurance Corporation Improvement Act of 1991. The
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was
adopted to recapitalize the BIF and impose certain supervisory and regulatory
reforms on insured depository institutions. In general, FDICIA includes
provisions, among others, to: (i) increase the FDIC's line of credit with the
U.S. Treasury in order to provide the FDIC with additional funds to cover the
losses of federally insured banks; (ii) reform the deposit insurance system,
including the implementation of risk-based deposit insurance premiums; (iii)
establish a format for closer monitoring of financial institutions to enable
<PAGE>
prompt corrective action by banking regulators when a financial institution
begins to experience financial difficulty; (iv) establish five capital levels
for financial institutions ("well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized") that impose more scrutiny and restrictions on less
capitalized institutions; (v) require the banking regulators to set operational
and managerial standards for all insured depository institutions and their
holding companies, including limits on excessive compensation to executive
officers, directors, employees and principal stockholders, and establish
standards for loans secured by real estate; (vi) adopt certain accounting
reforms and require annual on-site examinations of federally insured
institutions, including the ability to require independent audits of banks and
thrifts; (vii) revise risk-based capital standards to ensure they (a) take
adequate account of interest-rate changes, concentration of credit risk and the
risks of nontraditional activities, and (b) reflect the actual performance and
expected risk of loss of multi-family mortgages; and (viii) restrict
state-chartered banks from engaging in activities not permitted for national
banks unless they are adequately capitalized and have FDIC approval. FDICIA also
authorized the FDIC to make special assessments on insured depository
institutions, in amounts determined by the FDIC to be necessary to give it
adequate assessment income to repay amounts borrowed from the U.S. Treasury and
other sources or for any other purpose the FDIC deems necessary. FDICIA also
grants authority to the FDIC to establish semiannual assessment rates on BIF and
SAIF member banks so as to maintain these funds at the designated reserve
ratios.
FDICIA, as noted above, authorizes and, under certain circumstances,
requires the federal banking agencies to take certain actions against
institutions that fail to meet certain capital-based requirements. Under FDICIA,
the federal banking agencies are required to establish five levels of insured
depository institutions based on leverage limit and risk-based capital
requirements established for institutions subject to their jurisdiction, plus,
in their discretion, individual additional capital requirements for such
institutions. Under the final rules that have been adopted by each of the
federal banking agencies, an institution is designated: (i) well-capitalized if
the institution has a total risk-based capital ratio of 10% or greater, a Tier 1
risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or
greater, and the institution is not subject to an order, written agreement,
capital directive, or prompt corrective action directive to meet and maintain a
specific capital level for any capital measure; (ii) adequately capitalized if
the institution has a total risk-based capital ratio of 8% or greater, a Tier 1
risk-based capital ratio of 4% or greater, and a leverage ratio of 4% or
greater; (iii) undercapitalized if the institution has a total risk-based
capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is
less than 4%, or a leverage ratio that is less than 4%; (iv) significantly
undercapitalized if the institution has a total risk-based capital ratio that is
less than 6%, a Tier 1 risk-based capital ratio that is less than 3%, or a
leverage ratio that is less than 3%; and (v) critically undercapitalized if the
institution has a ratio of tangible equity to total assets that is equal to or
less than 2%.
Undercapitalized, significantly undercapitalized and critically
undercapitalized institutions are required to submit capital restoration plans
to the appropriate federal banking agency and are subject to certain operational
restrictions. Moreover, companies controlling an undercapitalized institution
are required to guarantee the subsidiary institution's compliance with the
capital restoration plan subject to an aggregate limitation of the lesser of 5%
of the institution's assets at the time it received notice it was
undercapitalized or the amount of the capital deficiency when the institution
first failed to meet the plan.
Significantly or critically undercapitalized institutions and
undercapitalized institutions that did not submit or comply with acceptable
capital restoration plans are subject to restrictions on the compensation of
senior executive officers and to additional regulatory sanctions that may
include a forced offering of shares or merger, restrictions on affiliate
transactions, restrictions on rates paid on deposits, asset growth and new
activities, the dismissal of directors or senior executive officers and
mandatory divestitures by the institution or its parent company. The banking
agency must require the offering of shares or merger and restrict affiliate
transactions and the rates paid on deposits unless it is determined 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
<PAGE>
sanctions set forth above. These procedures provide an opportunity for the
institution to respond to the proposed agency action or, where circumstances
warrant immediate agency action, an opportunity for administrative review of the
agency's action.
As described in Note 18 to the consolidated financial statements of the
1997 Annual Report to Shareholders, incorporated herein by reference, each of
the Company's subsidiary bank depository institutions have, as of December 31,
1997, capital in excess of the requirements for a "well-capitalized"
institution.
Pursuant to FDICIA, the FRB and the other federal banking agencies adopted
real estate lending guidelines pursuant to which each insured depository
institution is required to adopt and maintain written real estate lending
policies in conformity with the prescribed guidelines. Under these guidelines,
each institution is expected to set loan-to-value ratios not exceeding the
supervisory limits set forth in the guidelines. A loan-to-value ratio is
generally defined as the total loan amount divided by the appraised value of the
property at the time the loan is originated. The guidelines require the
institution's real estate policy include proper loan documentation, and that it
establish prudent underwriting standards. These guidelines became effective on
March 19, 1993. These rules have had no material adverse impact on the Company.
FDICIA also contained the Truth in Savings Act, which requires clear and
uniform disclosure of the rates of interest payable on deposit accounts by
depository institutions and the fees assessable against deposit accounts, so
that consumers can make a meaningful comparison between the competing claims of
financial institutions with regard to deposit accounts and products.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. In
September 1994, Congress enacted the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Act"). Beginning in September
1995, bank holding companies have the right to expand, by acquiring existing
banks, into all states, even those which had theretofore restricted entry. The
legislation also provides that, subject to future action by individual states, a
holding company will have the right, commencing in 1997, to convert the banks
which its owns in different states to branches of a single bank. A state is
permitted to "opt out" of the law which will permit conversion of separate banks
to branches, but is not permitted to "opt out" of the law allowing bank holding
companies from other states to enter the state of those states in which the
Subsidiary Banks are located. Texas has adopted legislation to "opt out" of the
interstate branching provisions (which Texas law currently expires on September
2, 1999). The federal legislation also establishes limits on acquisitions by
large banking organizations, providing that no acquisition may be undertaken if
it would result in the organization having deposits exceeding either 10% of all
bank deposits in the United States or 30% of the bank deposits in the state in
which the acquisition would occur.
Economic Growth and Regulatory Paperwork Reduction Act of 1996. The
Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("EGRPRA") was
signed into law on September 30, 1996. EGRPRA streamlined the non-banking
activities application process for well-capitalized and well-managed bank
holding companies. Under EGRPRA, qualified bank holding companies may commence a
regulatory approved non-banking activity without prior notice to the FRB;
written notice is required within 10 days after commencing the activity. Under
EGRPRA, the prior notice period is reduced to 12 days in the event of any
non-banking acquisition or share purchase, assuming the size of the acquisition
does not exceed 10% of risk-weighted assets of the acquiring bank holding
company and the consideration does not exceed 15% of Tier 1 capital. The FRB has
recently announced comprehensive amendments to its regulations under the BHC Act
that implement the foregoing provisions of EGRPRA and that also streamline the
application / notice process for acquisitions of banks and bank holding
companies and eliminate regulatory provisions the FRB considered unnecessary.
EGRPRA also provided for the recapitalization of the SAIF in order to bring
it into parity with the BIF of the FDIC. First Banks recorded an $8.2 million
charge in 1996 for the one-time special deposit insurance assessment.
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
<PAGE>
bills are new proposals to merge the BIF and the SAIF insurance funds, to
eliminate the federal thrift charter, to alter the statutory separation of
commercial and investment banking and to further expand the powers of banks,
bank holding companies and competitors of banks. It cannot be predicted whether
or in what form any of these proposals will be adopted or the extent to which
the business of First Banks may be affected thereby.
Bank and Bank Holding Company Regulation
BHC Act. Under the BHC Act, the activities of a bank holding company are
limited to business so closely related to banking, managing or controlling banks
as to be a proper incident thereto. The Company is also subject to capital
requirements applied on a consolidated basis in a form substantially similar to
those required of the Subsidiary Banks. The BHC Act also requires a bank holding
company to obtain approval from the FRB before: (i) acquiring, directly or
indirectly, ownership or control of any voting shares of another bank or bank
holding company if, after such acquisition, it would own or control more than 5%
of such shares (unless it already owns or controls the majority of such shares);
(ii) acquiring all or substantially all of the assets of another bank or bank
holding company; or (iii) merging or consolidating with another bank holding
company. The FRB will not approve any acquisition, merger or consolidation that
would have a substantially anticompetitive result, unless the anticompetitive
effects of the proposed transaction are clearly outweighed by a greater public
interest in meeting the convenience and needs of the community to be served. The
FRB also considers capital adequacy and other financial and managerial factors
in reviewing acquisitions or mergers.
The BHC Act also prohibits a bank holding company, with certain limited
exceptions: (i) from acquiring or retaining direct or indirect ownership or
control of more than 5% of the voting shares of any company which is not a bank
or bank holding company; or (ii) from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks, or
providing services for its subsidiaries. The principal exceptions to these
prohibitions involve certain non-bank activities which, by statute or by FRB
regulation or order, have been identified as activities closely related to the
business of banking or of managing or controlling banks. In making this
determination, the FRB considers whether the performance of such activities by a
bank holding company can be expected to produce benefits to the public such as
greater convenience, increased competition or gains in efficiency in resources,
which can be expected to outweigh the risks of possible adverse effects such as
decreased or unfair competition, conflicts of interest or unsound banking
practices. FIRREA (described in more detail herein) made a significant addition
to this list of permitted non-bank activities for bank holding companies by
providing that bank holding companies may acquire thrift institutions upon
approval by the FRB and the applicable regulatory authority for the thrift
institutions.
Insurance of Accounts. The FDIC provides insurance, through the BIF and the
SAIF, to deposit accounts at the Subsidiary Banks to a maximum of $100,000 for
each insured depositor. Certain of the Subsidiary Banks have deposits which were
added through the merger of acquired thrifts. Consequently, First Bank, FB&T and
FB California are members of both the BIF and the SAIF while BankTEXAS is a
member of the BIF only.
Through December 31, 1992, all FDIC-insured institutions, whether members
of the BIF, the SAIF or both, paid the same premium (23 cents per $100 of
domestic deposits) under a flat-rate system mandated by law. FDICIA required the
FDIC to raise the reserves of the BIF and the SAIF, implement a risk related
premium system and adopt a long term schedule for recapitalizing the BIF.
Effective January 1, 1993, the FDIC amended its regulations regarding insurance
premiums to provide that a bank or thrift would pay an insurance assessment
within a range of 23 cents to 31 cents per $100 of domestic deposits, depending
on its risk classification.
Effective January 1, 1996, the FDIC implemented an amendment to the BIF
risk-based assessment schedule which effectively eliminated deposit insurance
assessments for most commercial banks and other depository institutions with
deposits insured by the BIF only, while maintaining the assessment rate for
SAIF-insured institutions in even the lowest risk-based premium category at 23
cents for each $100 of assessable deposits. Following enactment of EGRPRA, First
<PAGE>
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. Amounts paid by institutions in the lowest risk-based premium category are
used to service debt issued by the Financing Corporation, a federal agency
established to finance the recapitalization of the former Federal Savings and
Loan Insurance Corporation
Regulations Governing Capital Adequacy. The federal bank regulatory
agencies use capital adequacy guidelines in their examination and regulation of
bank holding companies and banks. If the capital falls below the minimum levels
established by these guidelines, the bank holding company or bank may be denied
approval to acquire or establish additional banks or nonbank businesses or to
open facilities.
The FRB, the FDIC and the OCC adopted risk-based capital guidelines for
banks and bank holding companies. The risk-based capital guidelines are designed
to make regulatory capital requirements more sensitive to differences in risk
profile among banks and bank holding companies, to account for off-balance-sheet
exposure and to minimize disincentives for holding liquid assets. Assets and
off-balance-sheet items are assigned to broad risk categories, each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance-sheet items. The FRB
has noted that bank holding companies contemplating significant expansion
programs should not allow expansion to diminish their capital ratios and should
maintain ratios well in excess of the minimums. Under these guidelines, all bank
holding companies and federally regulated banks must maintain a minimum
risk-based total capital ratio equal to 8%, of which at least 4% must be Tier 1
capital.
The FRB also has implemented a leverage ratio, which is Tier 1 capital to
total assets, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank holding company may leverage its equity capital
base. The FRB requires a minimum leverage ratio of 3%. For all but the most
highly-rated bank holding companies and for bank holding companies seeking to
expand, however, the FRB expects that additional capital sufficient to increase
the ratio by at least 100 to 200 basis points will be maintained.
Management of the Company believes the risk-weighting of assets and the
risk-based capital guidelines do not have a material adverse impact on the
Company's operations or on the operations of its Subsidiary Banks. The
requirement of deducting certain intangibles in computing capital ratios
contained in the guidelines, however, could adversely affect the ability of the
Company to make acquisitions in the future in transactions that would be
accounted for using the purchase method of accounting. Although these
requirements would not reduce the ability of the Company to make acquisitions
using the pooling of interests method of accounting, the Company has not
historically made, and has no present plans to make, acquisitions on this basis.
Community Reinvestment Act. The Community Reinvestment Act of 1977 (the
"CRA") requires, in connection with examinations of financial institutions
within their jurisdiction, the federal banking regulators to evaluate the record
of the financial institutions in meeting the credit needs of their local
communities, including low and moderate income neighborhoods, consistent with
the safe and sound operation of those banks. These factors are also considered
in evaluating mergers, acquisitions and applications to open a branch or
facility.
Regulations Governing Extensions of Credit. The Subsidiary Banks are
subject to certain restrictions imposed by the Federal Reserve Act on extensions
of credit to the bank holding company or its subsidiaries, or investments in
their securities and on the use of their securities as collateral for loans to
any borrowers. These regulations and restrictions limit the Company's ability to
borrow funds from its Subsidiary Banks for its cash needs, including funds for
acquisitions and for payment of dividends, interest and operating expenses.
Transactions among the Subsidiary Banks (other than BankTEXAS and FB California)
<PAGE>
that do not involve the Company are generally exempt from the foregoing
regulations and restrictions. Because the exemption is available only to those
Subsidiary Banks that are at least 80% owned by the Company, it would not apply
to such transactions involving BankTEXAS and FB California. Further, under the
BHC Act and certain regulations of the FRB, subsidiary banks of a bank holding
company are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services. Bank holding companies and their nonbank subsidiaries that engage
in electronic benefit transfer services are also subject to certain anti-tying
restrictions.
The Subsidiary Banks are also subject to certain restrictions imposed by
the Federal Reserve Act on extensions of credit to executive officers,
directors, principal stockholders or any related interest of such persons.
Extensions of credit (i) must be made on substantially the same terms, including
interest rates and collateral as, and following credit underwriting procedures
that are not less stringent than, those prevailing at the time for comparable
transactions with persons not covered above and who are not employees; and (ii)
must not involve more than the normal risk of repayment or present other
unfavorable features. The Subsidiary Banks are also subject to certain lending
limits and restrictions on overdrafts to such persons.
Reserve Requirements. The FRB requires all depository institutions to
maintain reserves against their transaction accounts and non-personal time
deposits. Reserves of 3% must be maintained against total transaction accounts
of $49.3 million or less (subject to adjustment by the FRB) and an initial
reserve of $1,479,000 plus 10% (subject to adjustment by the FRB to a level
between 8% and 14%) must be maintained against that portion of total transaction
accounts in excess of such amount. The balances maintained to meet the reserve
requirements imposed by the FRB may be used to satisfy liquidity requirements.
Institutions are authorized to borrow from the Federal Reserve Bank
"discount window," but FRB regulations require institutions to exhaust other
reasonable alternative sources of funds, including Federal Home Loan Bank
advances, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. First Bank, FB&T, FB California and
BankTEXAS 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, as a
member of the FHLB of Des Moines, BankTEXAS, as a member of the FHLB of Dallas,
and FB&T and FB California, as members of the FHLB of San Francisco, are
required to acquire and hold shares of capital stock in the FHLB in amounts at
least equal to 1% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year, or 1/20th
of its advances (borrowings) from the FHLB, whichever is greater. Each of the
Subsidiary Banks which is a member of the FHLB is in compliance with these
regulations.
Dividends. The Company's primary sources of funds are the dividends and
management fees paid by its Subsidiary Banks. The ability of the Subsidiary
Banks to pay dividends and management fees is limited by various state and
federal laws, by the regulations promulgated by their respective primary
regulators and by the principles of prudent bank management. In addition, the
amount of dividends the Subsidiary Banks may pay to the Company is limited by
the provisions of the Company's credit agreement with a group of unaffiliated
lenders, which imposes certain minimum capital requirements. Under the most
restrictive of these requirements, dividends from the Subsidiary Banks are
limited to approximately $29.7 million as of December 31, 1997, unless prior
permission of the regulatory authorities and, if necessary, the lead bank for
the lenders is obtained.
Monetary Policy and Economic Control. The commercial banking business in
which the Company engages is affected not only by general economic conditions,
but also by the monetary policies of the FRB. Changes in the discount rate on
member bank borrowing, availability of borrowing at the "discount window," open
market operations, the imposition of changes in reserve requirements against
member bank deposits and assets of foreign branches, and the imposition of and
<PAGE>
changes in reserve requirements against certain borrowings by banks and their
affiliates are some of the instruments of monetary policy available to the FRB.
These monetary policies are used in varying combinations to influence overall
growth and distributions of bank loans, investments and deposits, and such use
may affect interest rates charged on loans or paid on deposits. The monetary
policies of the FRB have had a significant effect on the operating results of
commercial banks and are expected to do so in the future. The monetary policies
of the FRB are influenced by various factors, including inflation, unemployment,
short-term and long-term changes in the international trade balance and in the
fiscal policies of the U.S. Government. Future monetary policies and the effect
of such policies on the future business and earnings of the Company cannot be
predicted.
Employees
As of December 31, 1997, the Company and its subsidiaries employed
approximately 1,860 employees. None of the employees are subject to a collective
bargaining agreement. The Company considers its relationships with its employees
and those of the Subsidiary Banks and its other subsidiaries to be good.
Executive Officers of the Registrant
Information regarding executive officers is contained in Item 10 of Part
III hereof (pursuant to General Instruction G) and is incorporated herein by
this reference.
Item 2. Properties
The Company owns the office building which houses the principal place of
business of the Company, which is located at 135 N. Meramec, Clayton, Missouri
63105. The property is in good condition and consists of approximately 41,763
square feet, of which approximately 11,742 is currently leased to others. Of the
Subsidiary Banks' other 130 main offices and branch facilities, 85 are located
in buildings owned by the Subsidiary Banks and 45 are located in leased
facilities.
Item 3. Legal Proceedings
The Company and the Subsidiary Banks are, from time to time, parties to
various legal actions arising in the normal course of business. Management
believes there is no proceeding threatened or pending against the Company or any
of the Subsidiary Banks which, if determined adversely, would have a material
adverse effect on the business or financial position of the Company, any of the
Subsidiary Banks or any other subsidiary.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no established public trading market for the Company's common
stock. All of the Company's common stock is owned by various trusts created by
and for the benefit of Mr. James F. Dierberg, the Company's Chairman of the
Board, President and Chief Executive Officer, and members of his immediate
family.
Item 6. Selected Financial Data
The information required by this item is incorporated herein by reference
to "Selected Consolidated and Other Financial Data" included in the 1997 Annual
Report to Shareholders.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by this item is incorporated herein by reference
to "Management's Discussion and Analysis" included in the 1997 Annual Report to
Shareholders.
Item 7a. Quantitative And Qualitative Disclosures About Market Risk.
The information required by this item is incorporated herein by reference
to "Management's Discussion and Analysis-Interest Rate Risk Management" included
in the 1997 annual Report to Shareholders.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements, included in the 1997
Annual Report to Shareholders, and quarterly consolidated financial data,
included in the 1997 Annual Report to Shareholders, are incorporated herein by
reference.
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Income - Years Ended December 31, 1997, 1996
and 1995
Consolidated Statements of Changes in Stockholders' Equity - Years
Ended December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows - Years Ended December 31, 1997,
1996 and 1995
Notes to Consolidated Financial Statements
Independent Auditors' Report
Quarterly Condensed Financial Data (Unaudited)
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
<TABLE>
<CAPTION>
The directors and executive officers of the Company, their ages, and
positions with the Company and the Subsidiary Banks and the Company's other
subsidiaries as of December 31, 1997, are set forth below.
Name Age Position with the Company and its Subsidiaries
---- --- -----------------------------------------------
<S> <C> <C>
James F. Dierberg................... 60 Chairman of the Board of Directors, President and Chief
Executive Officer of the Company and FBA; Director of
CCB and Sundowner Corporation (a wholly owned subsidiary
of FBA); and Trustee of First Preferred Capital Trust.
Allen H. Blake...................... 55 Executive Vice President, Chief Financial Officer,
Secretary and Director of the Company; Secretary and
Director of First Bank; Vice President, Chief
Financial Officer, Secretary and Director of FBA;
Director of Sundowner Corporation; Vice President and
Assistant Secretary of FB&T and FB California; and
Trustee of First Preferred Capital Trust.
Donald Gunn, Jr..................... 62 Director of the Company.
<PAGE>
George J. Markos.................... 49 Director of the Company.
Thomas A. Bangert................... 54 Senior Vice President and Chief Operations Officer of
the Company; and Executive Vice President and Director
of First Bank.
Laurence J. Brost................... 41 Senior Vice President and Controller of the Company;
Vice President, Chief Accounting Officer of First
Bank; and Trustee of First Preferred Capital Trust.
John A. Schreiber................... 47 Executive Vice President and Chief Lending Officer of
the Company; and Chairman of the Board of Directors,
President and Chief Executive Officer of First Bank.
Mark T. Turkcan .................... 42 Executive Vice President, Retail and Mortgage Banking
of the Company; and Director of First Bank and FBA.
Donald W. Williams.................. 50 Executive Vice President and Chief Credit Officer of
the Company; Senior Vice President and Director of
First Bank; Director of FBA and BankTEXAS; and
Chairman of the Board of Directors and Chief Executive
Officer of CCB, FB&T and FB California.
</TABLE>
James F. Dierberg is the Chairman of the Board and Chief Executive Officer
of the Company; positions he has held since 1988. He has also served as a
Director of the Company since 1979. Mr. Dierberg was President of the Company
from 1979 until February 1992; he was re-appointed President in April 1994 and
continues to serve in that capacity. Mr. Dierberg was appointed Chairman of the
Board, President and Chief Executive Officer of FBA in September 1994. Mr.
Dierberg has served in various capacities with other bank holding companies and
banks owned or controlled by him or members of his family since 1957. In
addition, Mr. Dierberg serves as a trustee of First Preferred Capital Trust.
Allen H. Blake has been an Executive Vice President of the Company since
April 18, 1996. Mr. Blake joined the Company as Vice President and Chief
Financial Officer in 1984, and in 1988 he was appointed as Secretary and a
Director of the Company. In addition, Mr. Blake has served as Chief Financial
Officer, Secretary and Director of FBA since September 1994 and as a trustee of
First Preferred Capital Trust.
Donald Gunn, Jr. was elected a Director of the Company in December 1992.
Mr. Gunn is a practicing attorney and has been a shareholder in the law firm of
Gunn & Gunn, P.C. during the past five years.
George J. Markos was elected a Director of the Company in December 1992.
Mr. Markos is a management consultant providing services primarily to banks,
savings and loans and related businesses, including the Company and has
performed such services during the past five years.
Thomas A. Bangert is Senior Vice President and Chief Operations Officer of
the Company, Executive Vice President and Director of First Bank, positions he
assumed on January 1, 1990. Mr. Bangert is also a Director of First Land Trustee
Corporation, a position he assumed during 1997.
Laurence J. Brost has been Senior Vice President and Controller of the
Company since October 21, 1997. Mr. Brost assumed the position of Vice President
and Controller of the Company in 1990. Mr. Brost also serves as a trustee of
First Preferred Capital Trust.
<PAGE>
John A. Schreiber is Executive Vice President and Chief Lending Officer of
the Company and President and a Director of First Bank, positions he assumed in
April 1996 and September 1992, respectively. In May 1994, he became Chairman of
First Bank. He was previously Senior Vice President at Mercantile Bank of St.
Louis, N.A., a position he had held since 1989, where he was responsible for
commercial lending and operating services to St.
Louis-based companies.
Mark T. Turkcan is Executive Vice President, Retail and Mortgage Banking of
the Company, positions he assumed in April 1996. Mr. Turkcan has been employed
in various executive capacities since 1985. Mr. Turkcan is also a Director of
First Bank and FBA, positions he has held since April 1994 and August 1994,
respectively.
Donald W. Williams is an Executive Vice President and Chief Credit Officer
of the Company and a Senior Vice President and Director of First Bank, positions
he assumed in March 1993. Mr. Williams also serves as a Director of FBA and
BankTEXAS and Chairman of the Board of Directors and Chief Executive Officer of
CCB, FB&T and FB California. He was previously Senior Vice President at
Mercantile Bank of St. Louis, N.A., a position he had held since 1989, where he
was responsible for credit approval.
Section 16(a) Beneficial Ownership Reporting Compliance
To the Company's knowledge, no director, executive officer or shareholder
of the Company, subject, in their capacity as such, to the reporting obligations
set forth in Section 16 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") has failed to file on a timely basis reports required by Section
16(a) of the Exchange Act during the year ended December 31, 1997 or prior
years.
Item 11. Executive Compensation
The following table sets forth the compensation for the named executive
officers for the last three years.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
All Other
Name and Principal Positions Year Salary Bonus Compensation (1)
---------------------------- ---- ------ -------- ----------------
<S> <C> <C> <C> <C>
James F. Dierberg
Chairman of the Board of 1997 $ 492,000 $ 0 $ 4,750
Directors, President and 1996 492,000 0 4,750
Chief Executive Officer 1995 492,000 0 4,500
Donald W. Williams 1997 $ 166,250 $ 40,000 $ 4,750
Executive Vice President 1996 155,000 30,000 4,750
1995 138,750 26,000 4,260
John A. Schreiber 1997 $ 166,250 $ 30,000 $ 4,750
Executive Vice President 1996 155,000 20,000 4,750
1995 138,750 25,000 4,260
Allen H. Blake 1997 $ 147,500 $ 30,000 $ 4,750
Executive Vice President and 1996 140,000 30,000 4,750
Chief Financial Officer 1995 128,750 30,000 4,260
Mark T. Turkcan 1997 $ 133,750 $ 15,000 $ 4,012
Executive Vice President 1996 130,000 10,000 4,088
1995 113,750 25,000 4,163
- -------------------
(1) All other compensation reported represents First Banks' matching
contributions to the 401(k) Plan for the year indicated.
</TABLE>
<PAGE>
Employment Agreements
Messrs. Schreiber and Williams are parties to employment agreements with
the Company and First Bank. In most respects, the two contracts are identical.
The term of each contract is one year, and each is automatically renewable for
additional one-year periods. As part of the annual renewal process, the base
salary payable under each employment agreement is reviewed and may be adjusted
at the discretion of the Board of Directors of the Company. The base salary paid
to each of Messrs. Schreiber and Williams pursuant to their respective
employment agreements is set forth in the salary column of the Summary
Compensation Table.
Both employment contracts provide for a bonus of up to twenty percent (20%)
of the employee's annual base salary, with the exact percentage to be determined
by the Chairman of the Board of the Company if the employee meets the criteria
set by the Company and First Bank at the beginning of each contract year. Each
annual bonus is payable within ninety (90) days after the close of the year to
which it relates. In addition, each employee is entitled to participate in the
401(k) Plan, the Company's health insurance plan and in such other additional
benefit plans which the Company may adopt for its employees.
Under the terms of the employment contracts, if either Mr. Schreiber or Mr.
Williams terminated for a reason other than retirement, death, "disability" or
for "cause," as those terms are defined in the employment agreements, or are
terminated due to a change in control of the Company, each such individual will
be entitled to receive two years base salary. Should either Mr. Schreiber or Mr.
Williams voluntarily terminate employment with the Company and First Bank, he
would be entitled to receive the balance of his base salary for that year or a
minimum of six months salary, provided that neither would be permitted to accept
a position with any bank or trust company for the duration of that year.
Finally, in the event of the death of either Mr. Schreiber or Mr. Williams,
their respective employment agreements provide that their widows would be
entitled to receive compensation that would have been payable to the employee
during the month of his death, and his monthly salary for the twelve month
period following the date of his death.
Compensation of Directors
Only those directors who are not employees of the Company or any of its
subsidiaries receive remuneration for their services as directors. Such
non-employee directors (currently only Messrs. Donald Gunn and George Markos)
receive a retainer of $1,000 per quarter and a fee of $500 per Board meeting
attended. No directors are compensated for attendance at Audit Committee
meetings, which is the only committee of the Board of Directors.
In addition to Board meeting fees, during 1997, the Company paid Mr.
Markos, directly and indirectly, consulting fees in the amount of $1,500
exclusive of reimbursement for his travel expenses. It is anticipated Mr. Markos
will continue to provide consulting services to the Company during the current
fiscal year.
During 1997, the Company paid $33,160 in legal fees to a law firm of which
Mr. Donald Gunn, one of the Company's directors, is a shareholder. It is
anticipated Mr. Gunn's law firm will continue to provide legal services to the
Company during the current fiscal year.
Executive officers of the Company who are also directors of the Company do
not receive remuneration other than salaries and bonuses for serving on the
Board of Directors.
Compensation Committee Interlock and Insider Participation in Compensation
Decisions
The Company does not have a compensation committee of the Board of
Directors or another committee which performs the functions normally reserved to
compensation committees. All decisions with respect to the compensation of
executive officers of the Company are the responsibility of the Board of
Directors. Messrs. Dierberg and Blake are the only executive officers of the
Company who serve on the Board of Directors. The aforementioned individuals
abstain from voting with respect to matters relating to their own compensation.
<PAGE>
Certain of the executive officers and directors of the Company serve as
executive officers and directors of certain of the Subsidiary Banks.
The Company believes these relationships are typical of bank holding
companies in general and that they do not constitute "insider participation" as
set forth in the executive compensation disclosure rules promulgated by the
Securities and Exchange Commission. The salaries and bonuses paid to these
individuals for their services to the Company and its Subsidiary Banks are
established in their entirety by the Board of Directors of the Company. The
Boards of Directors of the Subsidiary Banks do not participate in the
deliberations of the Company's Board of Directors with respect to the
compensation paid to these individuals.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the entire ownership of all classes of
voting capital stock of the Company issued and outstanding.
<TABLE>
<CAPTION>
Percent of
Number of Total
Title of Class Shares Percent Voting
and Name of Owner Owned of Class Power
----------------- ----- -------- -----
Common Stock ($250 par value)
<S> <C> <C>
James F. Dierberg II, Family Trust (1).......................... 7,714.677(2) 32.605% *
Michael J. Dierberg, Family Trust (1)........................... 4,255.319(2) 17.985% *
Ellen C. Dierberg, Trustees, Family Trust (1)................... 7,714.676(2) 32.605% *
Michael J. Dierberg and Mary W. Dierberg,
Trustees under living trust of Michael J. Dierberg (1)....... 3,459.358(2) 14.621% *
First Trust (Mary W. Dierberg and First Bank
Trustees).................................................... 516.830(3) 2.184% *
Class A Convertible Adjustable Rate Preferred Stock
($20 par value)
James F. Dierberg, trustee of the James F. Dierberg
living trust (1)............................................. 641,082(4)(5) 100% 77.7%
Class B Non-Convertible Adjustable Rate Preferred Stock
($1.50 par value)
James F. Dierberg, trustee of the James F. Dierberg
living trust (1)............................................. 160,505(5) 100% 19.4%
</TABLE>
- ----------------------------------
* Represent less than 1.0%.
(1) Each of the above-named trustees and beneficial owners are United
States citizens, and the business address for each such individual is
135 N. Meramec, Clayton, Missouri 63105. Mr. James F. Dierberg, the
Company's Chairman of the Board, President and Chief Executive Officer,
and Mrs. Mary W. Dierberg, are husband and wife, and Messrs. James F.
Dierberg II, Michael James Dierberg and Miss Ellen C. Dierberg are
their children.
(2) Due to the relationship between Mr. James F. Dierberg, his wife and
their children, Mr. Dierberg is deemed to share voting and investment
power over the Company's common stock.
(3) Due to the relationship between Mr. James F. Dierberg, his wife and
First Bank, Mr. Dierberg is deemed to share voting and investment power
over these shares.
(4) Convertible into common stock, based on the appraised value of the
common stock at the date of conversion. Assuming an appraised value of
the common stock equal to the book value, the number of shares of
common stock into which the Class A Preferred Stock is convertible at
December 31, 1997, is 1,645, which shares are not included in the above
table.
(5) Sole voting and investment power.
<PAGE>
Security Ownership of Management
As set forth above, other than trusts established by and for the benefit of
Mr. James F. Dierberg, the Company's Chairman of the Board, President and Chief
Executive Officer, or for the benefit of members of Mr. Dierberg's immediate
family, no other director or executive officer of the Company beneficially owns
any of the issued and outstanding shares of the Company's (i) Common Stock, (ii)
Class A Convertible Adjustable Rate Preferred Stock, or (iii) Class B
Non-Convertible Adjustable Rate Preferred Stock - the only classes of voting
stock of the Company outstanding.
The following table sets forth, as of December 31, 1997, the shares of the
Company's non-voting Preferred Securities owned by the Company's Directors,
executive officers, including those named in the Summary Compensation Table, and
all Directors and executive officers as a group. The Company has no knowledge of
any person or entity who beneficially owns more than five percent (5.0%) of the
Preferred Securities.
<TABLE>
<CAPTION>
Number of Preferred Securities
Shares Beneficially Owned
Beneficial Owners as of December 31, 1997(1) Percent of Class
----------------- ----------------------- ----------------
<S> <C>
James F. Dierberg............................. -0- *
Allen H. Blake................................ 1,280 *
Donald Gunn, Jr............................... -0- *
George Markos................................. -0- *
Donald W. Williams............................ -0- *
John A. Schreiber............................. -0- *
Mark T. Turkcan............................... -0- *
Directors and Executive
Officers as a Group (9 persons)............. 1,280 *
</TABLE>
- ---------------------------
* Represents less than 1.0%
(1) Beneficial ownership of shares, as determined in accordance with
applicable rules of the Securities and Exchange Commission, includes
shares as to which a person directly or indirectly has or shares voting
power or investment power or both.
Item 13. Certain Relationships and Related Transactions
Directors and executive officers of the Company, and some of the
corporations and firms in which one of the directors is a majority owner, have
been customers of the Subsidiary Banks in the ordinary course of business, or
have been indebted to the Subsidiary Banks for loans of $60,000 or more, and it
is anticipated that some of these persons, corporations and firms will continue
to be customers of and indebted to the Subsidiary Banks on a similar basis in
the future. All loans extended to such persons, corporations and firms since the
beginning of the last full fiscal year were made in the ordinary course of
business, none involved more than normal risk of collectibility or presented
other unfavorable features, and all were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the same time
for comparable bank transactions with unaffiliated persons. At December 31,
1997, the Subsidiary Banks had no loans outstanding to such persons.
<PAGE>
Outside of normal customer relationships, no Directors or officers of the
Company, no shareholders holding over five percent (5.0%) of the Company's
voting securities and no corporations or firms with which such persons or
entities are associated, maintain or have maintained since the beginning of the
last full fiscal year, any significant business or personal relationship with
the Company or its subsidiaries, other than such as arises by virtue of such
position or ownership interest in the Company or its subsidiaries, except as set
forth in Item 11, "Executive Compensation - Compensation of Directors," or as
described in the following paragraphs.
During 1997, 1996 and 1995, Tidal Insurance Limited (Tidal), a corporation
owned indirectly by First Banks' Chairman and his children, received
approximately $214,000, $326,000 and $192,000, respectively, in insurance
premiums for accident, health and life insurance policies purchased by loan
customers of First Banks. The insurance policies are issued by an unaffiliated
company and then ceded to Tidal. First Banks believes the premiums paid by the
loan customers of First Banks are comparable to those that such loan customers
would have paid if the premiums were subsequently being ceded to an unaffiliated
third-party insurer. In addition, for the years ended December 31, 1997, 1996
and 1995, First Securities America, Inc., doing business as First Banc Insurors,
received approximately $206,000, $231,000 and $196,000, respectively, in
commissions or insurance premiums for policies purchased by First Banks or
customers of the Subsidiary Banks from the unaffiliated, third-party insurors to
which First Banc Insurors placed such policies. First Banc Insurors received an
additional $136,000 and $999,000 in annuity sales commissions for the years
ended December 31, 1996 and 1995, respectively. In addition, First Brokerage
L.P. received approximately $707,000 and $822,000 for the years ended December
31, 1997 and 1996, respectively, in commissions and lease payments in connection
with annuities and securities and other insurance product sales services
provided to certain customers of the Subsidiary Banks. Commissions received by
First Banc Insurors and First Brokerage L.P. 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. and First Brokerage L.P. are
owned by a trust established and administered by and for the benefit of First
Banks' Chairman and members of his immediate family. The insurance premiums on
which the aforementioned commissions were earned were competitively bid and
First Banks deems the commissions First Banc Insurors earned to be comparable to
those which would have been earned by an unaffiliated third-party agent.
First Services, L.P., a limited partnership indirectly owned by First
Banks' Chairman and his children through its General Partners and Limited
Partners, provides data processing services and operational support for First
Banks and its subsidiaries. Fees paid under the agreement to First Services L.P.
were $6.4 million, $3.2 million and $2.9 million for the years ended December
31, 1997, 1996 and 1995, respectively. During 1997, First Services, L.P. paid
First Banks $1.1 million in rental fees for the use of data processing and other
equipment owned by First Banks.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements: The Financial Statements listed
under Item 8 to this Report are set forth at pages 34
through 38, and the Notes to Consolidated Financial
Statements are set forth at pages 39 through 58, of
the 1997 Annual Report to Shareholders (See Exhibit
13 under Paragraph (a)3 of this Item 14).
2. Financial Statement Schedules: None
3. Exhibits: See the Exhibit Index at pages 23 through
24 of this Report. The following exhibits listed in
the Exhibit Index are filed with this Report:
Exhibit 10.8 Service Agreement by and between
First Services, L.P. and First Bank
dated April 1, 1997.
Exhibit 10.9 Service Agreement by and between
First Services, L.P. and First Bank
& Trust dated April 1, 1997.
Exhibit 10.10 Service Agreement by and between
First Services L.P. and BankTEXAS
dated April 1, 1997.
Exhibit 10.11 Service Agreement by and between
First Services L.P. and SunriseBank
dated April 1, 1997.
Exhibit 13.1 1997 Annual Report to Shareholders.
The 1997 Annual Report to
Shareholders is being filed as an
Exhibit solely for the purpose of
incorporating certain provisions
thereof by reference. Portions of
the Annual Report to Shareholders
not specifically incorporated by
reference are not deemed "filed" for
the purposes of the Securities
Exchange Act of 1934, as amended.
Exhibit 21.1 Subsidiaries of the Registrant.
(b) Reports on Form 8-K during the quarter ended December 31, 1997:
None.
(c) See the Exhibit Index attached hereto.
Management Contracts and Compensatory Plans -- The
following exhibits listed in the Exhibit Index are
identified below in response to Item 14(a)-3 of Form
10-K:
Exhibit 10.4 Employment Agreement by and
among the Company, First Bank and
John A. Schreiber, dated September
21, 1992.
Exhibit 10.5 Employment Agreement by and
among the Company, First Bank and
Donald W. Williams, dated March 22,
1993.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST BANKS, INC.
By: /s/ James F. Dierberg
-------------------------
James F. Dierberg
Chairman of the Board of Directors,
President and Chief Executive
Officer (Principal Executive Officer)
By: /s/ Allen H. Blake
----------------------
Allen H. Blake
Executive Vice President, Chief
Financial Officer, Secretary and
Director (Principal Financial Officer)
By: /s/ Laurence J. Brost
-------------------------
Laurence J. Brost
Senior Vice President and Controller
(Principal Accounting Officer)
Date: March 26, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the date indicated.
Signature and Title Date
------------------- ----
/s/ James F. Dierberg March 26, 1998
- -------------------------
James F. Dierberg
Chairman of the Board of Directors, President
and Chief Executive Officer
<PAGE>
Signature and Title Date
- ------------------- ----
/s/ Allen H. Blake March 26, 1998
- ---------------------------
Allen H. Blake
Executive Vice President,
Chief Financial Officer,
Secretary and Director
/s/ Donald Gunn, Jr. March 26, 1998
- -------------------
Donald Gunn, Jr.
Director
/s/ George Markos March 26, 1998
- -------------------
George Markos
Director
<PAGE>
EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of
Regulation S-K.
Exhibit
Number Description
3.1 Restated Articles of Incorporation of the Company, as amended
(incorporated herein by reference to Exhibit 3(i) to the
Company's Annual Report on Form 10-K for the year ending
December 31, 1993).
3.2 Bylaws of the Company (incorporated herein by reference to
Exhibit 3.2 to Amendment No.2 to the Company's Registration
Statement on Form S-1 (File No. 33-50576) dated September 15,
1992).
4.1 Reference is made to Article III of the Company's
Restated Articles of Incorporation (incorporated herein by
reference to Exhibit 3.1 filed herewith).
4.2 The Company agrees to furnish to the Securities and Exchange
Commission upon request pursuant to Item 601(b)(4)(iii) of
Regulation S-K, copies of instruments defining the rights of
holders of long term debt of the Company and its subsidiaries.
4.3 Agreement As To Expenses and Liabilities (incorporated
herein by reference to Exhibit 4(a) to the Company' Report on
Form 10-Q for the quarter ended March 31, 1997).
4.4 Preferred Securities Guarantee Agreement (incorporated herein
by reference to Exhibit (4(b) to the Company's Report on Form
10-Q for the quarter ended March 31, 1997).
4.5 Indenture (incorporated herein by reference to Exhibit 4(c) to
the Company's Report on Form 10-Q for the quarter ended March
31, 1997).
4.6 Amended and Restated Trust Agreement (incorporated herein by
reference to Exhibit 4(d) to the Company's Report on Form 10-Q
for the quarter ended March 31, 1997).
10.1 Shareholders' Agreement by and among James F. Dierberg, II and
Mary W. Dierberg, Trustees under Living Trust of James F.
Dierberg II, dated July 24, 1989, Michael James Dierberg and
Mary W. Dierberg, Trustees under the Living Trust of Michael
James Dierberg, dated July 24, 1989; Ellen C. Dierberg and
Mary W. Dierberg, Trustees under Living Trust of Ellen C.
Dierberg dated July 17, 1992, and First Banks, Inc.
(incorporated herein by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1 (File No.
33-50576) dated August 6, 1992).
10.2 Comprehensive Banking System License and Service Agreement
dated as of July 24, 1991, by and between the Company and
FIserv CIR, Inc. (incorporated herein by reference to Exhibit
10.4 to the Company's Registration Statement on Form S-1 (File
No. 33-50576) dated August 6, 1992).
10.4 Employment Agreement by and among the Company, First Bank
and John A. Schreiber, dated September 21, 1992 (incorporated
herein by reference to Exhibit 10(iii)(A) to the Company's
Form 10-K for the year ended December 31, 1993).
10.5 Employment Agreement by and among the Company, First Bank and
Donald W. Williams dated March 22, 1993 (incorporated herein by
reference to Exhibit 10(iii)(A) to the Company's Form 10-K for
the year ended December 31, 1993).
<PAGE>
10.6 $90,000,000 Secured Credit Agreement, dated as of July 18,
1996 among the Company, The Boatmen's National Bank of St. Louis,
Harris Trust and Savings Bank, Norwest Bank of Minnesota,
National Association, American National Bank and Trust Company,
The Frost National Bank and The Boatmen's National Bank of St.
Louis, as Agent.
10.7 Stock Purchase and Operating Agreement by and between the
Company and BancTEXAS, dated May 19, 1994 (incorporated herein
by reference to Exhibit 2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1994).
10.8 Service Agreement by and between First Services, L.P. and First
Bank dated April 1, 1997.
10.9 Service Agreement by and between First Services, L.P. and
First Bank & Trust dated April 1, 1997.
10.10 Service Agreement by and between First Services L. P. and
BankTEXAS dated April 1, 1997.
10.11 Service Agreement by and between First Services L.P. and Sunrise
Bank dated April 1, 1997.
13.1 The Company's 1997 Annual Report to Shareholders.
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule (EDGAR only).
<PAGE>
EXHIBIT 10.8
SERVICE AGREEMENT
This Service Agreement is made and entered into as of the 1st day of
April, 1997, by and between First Services, L.P., a Missouri Limited Partnership
and First Bank (MO), a banking institution duly organized and existing by virtue
of the laws of the State of Missouri.
WHEREAS, FIRST BANK (MO) and FIRSTSERV, INC. entered into a Service
Agreement dated May l, l992; and
WHEREAS, said Service Agreement was assigned to First Services, L.P. on or
about April 1, 1997; and
WHEREAS, FIRST SERVICES, L.P. and FIRST BANK (MO) desire to amend and
restate said Service Agreement in its entirety.
NOW, THEREFORE, for and in consideration of the mutual promises and
covenants contained herein, and the sum of Ten Dollars ($l0.00) in hand paid,
each to the other, the receipt and sufficiency of which is hereby acknowledged,
the parties agree as follows:
I. TERMINATION AND REVOCATION
The Parties hereto hereby revoke, cancel and hold for naught the
Service Agreement dated May l, l992, and hereby substitute in its place the
Service Agreement herein contained.
II. SERVICES
(A) First Services, L.P. shall furnish First Bank (MO) data
processing and item processing services selected by First Bank
(MO) from the Product and Price Schedule as per Attachment 1,
attached hereto and incorporated herein by reference thereto.
Additional services may be selected upon prior written notice
to First Services, L.P. at First Services, L.P.'s then current
list price by executing an amended Summary Page.
(B) First Services, L.P. will provide conversion and training
services for the fees specified from the Product and Price
Schedule (Attachment 1). Classroom training in the use and
operation of the system for the number of First Bank (MO)
personnel mutually agreed upon in the conversion planning
process will be provided at a training facility mutually
agreed upon. Conversion services are those activities designed
to transfer the processing of First Bank's (MO) data from its
present processing company to First Services, L.P.
(C) First Services, L.P. will also provide Network Support Service
consisting of communication line monitoring and diagnostic
equipment and support personnel to discover, diagnose, repair
or report line problems to the appropriate telephone company.
The fee for this service is also listed from the Product and
Price Schedule (Attachment 1).
(D) First Services, L.P. shall upon request act as First Bank's
(MO) designated representative to arrange for the purchase,
and installation of data lines necessary to access the First
Services, L.P. system. Where requested, additional dial-up
lines and equipment to be utilized as a backup to the regular
data lines may also be ordered. First Services, L.P. shall
bill First Bank (MO) for the actual charges incurred for the
data lines and for the maintenance of the modems and other
interface devices.
<PAGE>
(E) Processing priorities will be determined by mutual agreement
of the parties hereto.
(F) In addition, First Services, L.P. acknowledges that First Bank
(MO) acts as a correspondent bank to certain Affiliate Banks
and that as part of its duties hereunder First Services, L.P.
will be performing certain services for First Bank (MO) which
are necessary because of its status as a correspondent bank.
III. TERM
The term of this Agreement shall be twelve (12) months commencing on
April 1, 1997. Upon expiration, the Agreement will automatically renew
for successive terms of twelve (12) months each unless either party
shall have provided written notice to the other at least one-hundred
eighty (180) days prior to the expiration of the then current term, of
its intent not to renew. In the event of termination, First Services,
L.P. shall provide reasonable time allowance to allow First Bank (MO)
to convert to another system.
IV. SOFTWARE/FIRMWARE
Unmodified third party software or firmware ("Software") may be
supplied as part of the Agreement. All such Software shall be provided
subject to Software License Agreements.
V. PRICE AND PAYMENT
(A) Fees for First Services, L.P.'s services are set forth from
the Product and Price Schedule (Attachment 1), including where
applicable minimum monthly charges and payment schedules for
onetime fees.
(B) Standard Fees shall be invoiced no later than the fifteenth
(15th) of each month for the then current month. Terms of
payment shall be net cash.
(C) The Base Service Charge listed from the Product and Price
Schedule (Attachment 1) shall not change more than once a year
and then only upon six (6) months' prior written notice. The
fee schedule shall be reviewed annually to ensure fair market
value in pricing. Comparisons will be made with peers and
other providers of similar services.
(D) This above limitation shall not apply to pass-thru expenses. A
pass-thru expense is a charge for goods or services by First
Services, L.P. on First Bank's (MO) behalf which are to be
billed to First Bank (MO) without mark-up.
(E) The fees listed from the Product and Price Schedule
(Attachment 1) do not include and First Bank (MO) is
responsible for furnishing transportation or transmission of
information between First Services, L.P.'s data center, First
Bank's (MO) site and any applicable clearing house, regulatory
agency or Federal Reserve Bank. Where First Bank (MO) has
elected to have First Services, L.P. provide Telecommunication
Services, the price for the Services will be provided and
billed as a pass-thru expense.
(F) Network Support Service Fees and Local Network Fees are based
upon services rendered from First Services, L.P.'s premises.
Off-premise support will be provided upon First Bank's (MO)
request on an as available basis at First Services, L.P. then
current charges for time and materials, plus reasonable travel
and living expenses.
<PAGE>
(G) First Services L.P.'s Price Schedule for First Bank (MO) shall
allow for a discount from the Schedule of Fees (Attachment 1)
in return for the use by First Services, L.P. of certain of
First Bank's (MO) computer hardware, software and equipment.
The monthly discount is determined by adding the monthly
depreciation of the assets used and a reasonable cost of funds
factor, said cost of funds factor may be changed from time to
time with the written consent of the parties hereto.
VI. CLIENT OBLIGATIONS
(A) First Bank (MO) shall be solely responsible for the input,
transmission or delivery of all information and data
required by First Services, L.P. to perform the services
except where First Bank (MO) has retained First Services,
L.P. to handle such responsibilities on its behalf. The data
shall be provided in a format and manner approved by First
Services, L.P. First Bank (MO) will provide at its own
expense or procure from First Services, L.P. all equipment,
computer software, communication lines and interface devices
required to access the First Services, L.P. System. If First
Bank (MO) has elected to provide such items itself, First
Services, L.P. shall provide First Bank (MO) with a list of
compatible equipment and software.
(B) First Bank (MO) shall designate appropriate First Bank (MO)
personnel for training in the use of the First Services, L.P.
System, shall allow First Services, L.P. access to First
Bank's (MO) site during normal business hours for conversion
and shall cooperate with First Services, L.P. personnel in the
conversion and implementation of the services.
(C) First Bank (MO) shall comply with any operating instructions
on the use of the First Services, L.P. system provided by
First Services, L.P., shall review all reports furnished by
First Services, L.P. for accuracy and shall work with First
Services, L.P. to reconcile any out of balance conditions.
First Bank (MO) shall determine and be responsible for the
authenticity and accuracy of all information and data
submitted to First Services, L.P.
(D) First Bank (MO) shall furnish, or if First Services, L.P.
agrees to so furnish, reimburse First Services, L.P. for
courier services applicable to the services requested.
VII. GENERAL ADMINISTRATION
First Services, L.P. is continually reviewing and modifying
the First Services, L.P. system to improve service and to comply with
federal government regulations applicable to the data utilized in
providing services to First Bank (MO). First Services, L.P. reserves
the right to make changes in the service, including, but not limited to
operating procedures, security procedures, the type of equipment
resident at and the location of First Services, L.P.'s data center.
First Services, L.P. will provide First Bank (MO) at least sixty (60)
days prior written notice of changes in procedures or reporting and at
least six (6) months prior written notice of changes in service costs.
VIII. CLIENT CONFIDENTIAL INFORMATION
(A) First Services, L.P. shall treat all information and data
relating to First Bank (MO) business provided to First
Services, L.P. by First Bank (MO), or information relating
to First Bank's (MO) customers, as confidential and shall
safe-guard First Bank's (MO) information with the same degree
of care used to protect First Services, L.P.'s confidential
information. First Services, L.P. and First Bank (MO) agree
that master and transaction data files are owned by and
constitute property of First Bank (MO). First Bank (MO) data
and records shall be subject to regulation and examination
by State and Federal supervisory agencies to the same extent
as if such information were on First Bank's (MO) premises.
First Services, L.P.'s obligations under this Section VIII
shall survive the termination or expiration of this Agreement.
<PAGE>
(B) First Services, L.P. shall maintain adequate backup procedures
including storage of duplicate record files as necessary to
reproduce First Bank's (MO) records and data. In the event of
a service disruption due to reasons beyond First Services,
L.P.'s control, First Services, L.P. shall use diligent
efforts to mitigate the effects of such an occurrence.
IX. FIRST SERVICES, L.P. CONFIDENTIAL INFORMATION
(A) First Bank (MO) shall not use or disclose to any third persons
any confidential information concerning First Services, L.P.
First Services, L.P. confidential information is that which
relates to First Services, L.P.'s software, research,
development, trade secrets or business affairs including, but
not limited to, the terms and conditions of this Agreement but
does not include information in the public domain through no
fault of First Bank (MO). First Bank (MO) obligations under
this Section IX shall survive the termination or expiration of
this Agreement.
(B) First Services, L.P.'s system contains information and
computer software which is proprietary and confidential
information of First Services, L.P., its suppliers and
licensees. First Bank (MO) agrees not to attempt to circumvent
the devices employed by First Services, L.P. to prevent
unauthorized access to the First Services, L.P.'s System.
X. WARRANTIES
First Services, L.P. will accurately process First Bank's (MO) work
provided that First Bank (MO) supplies accurate data and follows the
procedures described in First Services, L.P.'s User Manuals, notices
and advises. First Services, L.P. personnel will exercise due care in
the processing of First Bank's (MO) work. In the event of an error
caused by First Services, L.P.'s personnel, programs or equipment,
First Services, L.P. shall correct the data and/or reprocess the
affected report at no additional cost to First Bank (MO).
<PAGE>
XI. LIMITATION OF LIABILITY
IN NO EVENT SHALL FIRST SERVICES, L.P. BE LIABLE FOR LOSS OF GOODWILL,
OR FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING
FROM FIRST BANK'S (MO) USE OF FIRST SERVICES L.P.'S SERVICES, OR FIRST
SERVICES, L.P.'S SUPPLY OF EQUIPMENT OR SOFTWARE, UNDER THIS AGREEMENT
REGARDLESS OF WHETHER SUCH CLAIM ARISES IN TORT OR IN CONTRACT. FIRST
SERVICES, L.P.'S AGGREGATE LIABILITY FOR ANY AND ALL CAUSES OF ACTION
RELATING TO SERVICES PERFORMED HEREUNDER OR ANY DAMAGE OR LOSS INCURRED
OR SUSTAINED BY FIRST BANK (MO) RELATING TO THIS AGREEMENT AND THE
SERVICES PERFORMED HEREUNDER SHALL BE LIMITED TO THE AMOUNT OF TOTAL
FEES PAID BY FIRST BANK (MO) TO FIRST SERVICES, L.P. IN THE THREE (3)
MONTH PERIOD PRECEDING THE DATE THE CLAIM ACCRUED. FIRST SERVICES,
L.P.'S AGGREGATE LIABILITY FOR A DEFAULT RELATING TO EQUIPMENT OR
SOFTWARE SHALL BE LIMITED TO THE AMOUNT PAID FOR THE EQUIPMENT OR
SOFTWARE.
XII. PERFORMANCE STANDARDS
(A) On-Line Availability - First Services, L.P.'s standard of
performance shall be on-line availability of the system 98%
of the time that it is scheduled to be so available over a
three month period (the "Measurement Period") Actual on-line
performance will be calculated monthly by comparing the number
of hours which the system was scheduled to be operational on
an on-line basis with the number of hours, or a portion
thereof, it was actually operational on an on-line basis.
Downtime may be caused by o perator error, hardware
malfunction or failure, or environmental failures such as
loss of power or air conditioning. Downtime caused by reasons
beyond First Services, L.P.'s control should not be considered
in the statistics.
(B) Report Availability - First Services, L.P.'s standard of
performance for report availability shall be that, over a
three (3) month period, ninety-five percent (95%) of all
Critical Daily Reports shall be available for remote printing
on time without significant errors. A Critical Daily Report
shall mean priority group reports which First Services, L.P.
and First Bank (MO) have mutually agreed in writing are
necessary to properly account for the previous day's
activity and properly notify First Bank (MO) of overdraft,
NSF or return items. A significant error is one which impairs
First Bank's (MO) ability to properly account for the previous
days activity and/or properly account for overdraft, NSF or
return items. Actual performance will be calculated monthly
by comparing the total number of First Bank (MO) reports
scheduled to be available from First Services, L.P. to the
number of reports which were available on time and withou
error.
(C) Exclusive Remedy - In the event that First Services, L.P.'s
performance fails to meet the standards listed above and
such failure is not the result of First Bank's (MO)error
or omission, First Bank (MO) sole and exclusive remedy for
such default shall be the right to terminate this Agreement
in accordance with the provisions of this paragraph. In the
event that First Services, L.P. fails to achieve any
Performance Standards, alone or in combination, for the
prescribed measurement period, First Bank (MO) shall notify
First Services, L.P. ofits intent to terminate this agreement
if First Services, L.P. fails to restore performance to the
committed levels. First Services, L.P. shall advise First
Bank (MO) promptly upon correction of the system deficiencies
(in no event shall corrective action exceed sixty (60) days
from the notice date) and shall begin an additional
measurement period. Should First Services, L.P. fail to
achieve the required Performance Standards during the
remeasurement period, First Bank (MO) may terminate this
Agreement and First Services, L.P. shall cooperate with First
Bank (MO) to achieve an orderly transition to First Bank's
(MO) replacement processing system. First Bank (MO) may also
terminate this Agreement if First Services, L.P.'s
performance for the same standard is below the relevant
performance standard for more than two (2) measurement periods
in any consecutive twelve (12) months or for more than five
(5) measurement periods during the term of this agreement.
During the period of transition, First Bank (MO) shall pay
only such charges as are incurred for monthly fees until the
date of deconversion. First Services, L.P. shall not charge
First Bank (MO) for services relating t First Bank's (MO)
deconversion.
(D) Audit - First Bank (MO) shall have the right to perform
reasonable audits, at its cost, upon giving written notice to
First Services, L.P. of its intent to do so. First Services,
L.P. shall provide, upon request, financial information to
First Bank (MO).
XIII. DISASTER RECOVERY
(A) A Disaster shall mean any unplanned interruption of the
operations of or inaccessibility to the First Services, L.P.
data center which appears in First Services, L.P.'s
reasonable judgement to require relocation of processing
to an alternative site. First Services, L.P. shall notify
First Bank (MO) as soon as possible after it deems a service
outage to be a Disaster. First Services, L.P. shall move
the processing of First Bank's (MO) standard on-line services
to an alternative processing center as expeditiously as
possible. First Bank (MO) shall maintain adequate records
of all transactions during the period of service
interruption and shall have personnel available to assist
First Services L.P., Inc. in implementing the switch over
to the alternative processing site. During a disaster,
optional or on-request services shall be provided by First
Services, L.P. only to the extent that there is adequate
capacity at the alternate center and only after stabilizing
the provision of base on-line services. (B) First Services,
L.P. shall work with First Bank (MO) to establish a plan
for alternative data communications in the event of a
disaster. First Bank (MO) shall be responsible for furnishing
any additional communications equipment and data lines
required under the adopted plan.
(C) First Services, L.P. shall test its Disaster Recovery Services
Plan by conducting one annual test. First Bank (MO) agrees to
participate in and assist First Services, L.P. with such
testing. Test results will be made available to First Bank's
(MO) regulators, internal and external auditors, and (upon
request) to First Bank's (MO) insurance underwriters.
(D) First Bank (MO) understands and agrees that the First
Services, L.P. Disaster Recovery Plan is designed to minimize
but not eliminate risks associated with a disaster affecting
First Services, L.P.'s data center. First Services, L.P. does
not warrant that service will be uninterrupted or error free
in the event of a disaster. First Bank (MO) maintains
responsibility for adopting a disaster recovery plan relating
to disasters affecting First Bank's (MO) facilities and for
securing business interruption insurance or other insurance as
necessary to properly protect First Bank's (MO) revenues in
the event of a disaster.
XIV. DEFAULT
(A) In the event that First Bank (MO) is thirty (30) days in
arrears in making any payment required, or in the event of any
other material default by either First Services, L.P. or First
Bank (MO) in the performance of their obligations, the
affected party shall have the right to give written notice to
the other of the default and its intent to terminate this
Agreement stating with reasonable particularity the nature of
the claimed default. This Agreement shall terminate if the
default has not been cured within a reasonable time with a
minimum being thirty (30) days from the effective date of the
notice.
(B) Upon the expiration of this Agreement, or its termination,
First Services, L.P. shall furnish to First Bank (MO) such
copies of First Bank's (MO) data files as First Bank (MO) may
request in machine readable format form along with such other
information and assistance as or is reasonable and customary
to enable First Bank (MO) to deconvert from the First
Services, L.P. system. First Bank (MO) shall reimburse First
Services, L.P. for the production of data records and other
services at First Services, L.P.'s current fees for such
services.
XV. INSURANCE
First Services, L.P. carries Comprehensive General Liability insurance
with primary limits of two million dollars, Commercial Crime insurance
covering Employee Dishonesty in the amount of fifteen million dollars,
all-risk replacement cost coverage on all equipment used at First
Services, L.P.'s data center and Workers Compensation coverage on First
Services, L.P. employees wherever located in the United States. First
Bank (MO) shall carry adequate insurance to cover liability for source
documents while in transit and in case of data loss through errors and
omissions.
XVI. GENERAL
(A) This Agreement is binding upon the parties and their
respective successors and permitted assigns. Neither party may
assign this Agreement in whole or in part without the consent
of First Bank (MO) and/or First Services, L.P., provided,
however, that First Services, L.P. may subcontract any or all
of the services to be performed under this Agreement without
the written consent of First Bank (MO). Any such
subcontractors shall be required to comply with all of the
applicable terms and conditions of this Agreement.
(B) The parties agree that, in connection with the performance of
their obligations hereunder, they will comply with all
applicable Federal, State, and local laws including the laws
and regulations regarding Equal Employment Opportunities.
(C) First Services, L. P. agrees that the Office of Thrift
Supervision, FDIC, or other authority will have the authority
and responsibility provided to the other regulatory agencies
pursuant to the Bank Service Corporation Act, 12 U.S.C. 1867
(C) relating to service performed by contract or otherwise.
First Services, L.P., also agrees that its services shall be
subject to oversight by the O.C.C., FDIC or state banking
departments as may be applicable under laws and regulations
pertaining to First Bank's (MO) charter and shall, if
applicable, provide the O.T.S. DistrictDirector of the
district in which the data processing center is located and
other state and federal agencies with a copy of First
Services, L.P.'s current audit and financial statements and
a copy of any current third party review report when a review
has been performed.
(D) Neither party shall be liable for any errors, delays or
non-performance due to events beyond its reasonable control
including, but not limited to, acts of God, failure or delay
of power or communications, changes in law or regulation or
other acts of governmental authority, strike, weather
conditions or transpor- tation.
(E) All written notices required to be given under this Agreement
shall be sent by Registered or Certified Mail, Return Receipt
Requested, postage prepaid, or by confirmed facsimile to the
persons and at the addresses listed below or to such other
address or person as a party shall have designated in writing.
First Services, L.P. First Bank (MO)
#l First Missouri Center 11901 Olive Blvd.
St. Louis, Missouri 63l4l Creve Coeur, Missouri 63l4l
(F) The failure of either party to exercise in any respect any
right provided for herein shall not be deemed a waiver of any
rights.
(G) Each party acknowledges that is has read this Agreement,
understands it, and agrees that it is the complete and
exclusive statement of the Agreement between the parties and
supersedes and merges any prior or simultaneous proposals,
understandings and all other agreements with respect to the
subject matter. This Agreement may not be modified or altered
except by a written instrument duly executed by both parties.
(H) No waiver of any of the terms of this Agreement shall be
effective unless in writing and signed by the duly authorized
representative of the party charged therewith. No waiver of
any provision hereof shall extend to or affect any obligation
not expressly waived, impair any rights consequent on such
obligation or imply a subsequent waiver of that or any other
provision.
(I) This Agreement shall be governed by, construed and interpreted
in accordance with the laws of the State of Missouri.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement the date
first above written.
First Bank (MO) First Services, L.P.
11901 Olive Boulevard One First Missouri Center
Creve Coeur, Missouri 63141 St. Louis, Missouri 63141
BY: /s/ John A. Schreiber BY: /s/Thomas A. Bangert
- ------------------------- ------------------------
John A. Schreiber Thomas A. Bangert
President President
<PAGE>
Attachment 1
First Bank - Product And Price Schedule
Effective 4/1/97
<TABLE>
<CAPTION>
DATA PROCESSING
<S> <C> <C> <C>
Accounts
DDA per account $0.50
Savings per account $0.50
Time per account $0.50
Loans per account $0.50
Transactions each $0.01
Terminal Management each $5.00
Branch Data Connection each $500.00
ATM Management each $200.00
Telephone Switch Mgmt each $750.00
Other Services per application $100.00
ITEM PROCESSING
Proof each $0.020
POD And EFT each $0.009
Inclearing and Transmission each $0.009
DDA per account $0.250
Savings per account $0.050
Time per account $0.100
Lockbox each $0.020
Branch Courier Route each, per month $17.00
Mail Services per month $200.00
DEPOSIT SERVICES
Customer Accounts per account $0.30
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Included in Above:
<S> <C>
Charge Backs CIF Management
Returns Exception Item Processing
Stops Signature Verification
Wire Transfers Corporate Analysis
ACH Incoming Cash Management Support
ACH Origination FirstLink
Official Checks Control Disbursement
Money Orders Balance Reporting
Savings Bonds Research
Funds Transfer Adjustments
B Notices 1099s "Due From" Reconciliation
Kiting "Due To" Reconciliation
Holds FRB Reconciliation's
Dormant Accounts Application Balancing
ATM Settlement Records Management
Debit Card Settlement Savings Bonds
OTHER SERVICES
Collection System (Cyber Resources) Cash Management System (FirstLink)
Recovery System (Cyber Resources) Commercial Analysis
Asset/Liability (Bankware) Charge Back System
Optical System (RVI) Teller Platform (ISC)
MCIF (OKRA) ATM Support
Loan Documentation (FTI/CFI) General Ledger
Bank Audit Fixed Asset Interface
Accounts Payable Interface Interactive Voice
Remote Laser Printing Card Management System
ACH Origination Wire Transfer (Fundtec)
Organization Profitability (IPS) NOW Reclassification
Loan Tracking (Baker Hill) Retrofit/New Releases
Credit Scoring (Fair Issac)
</TABLE>
<PAGE>
EXHIBIT 10.9
SERVICE AGREEMENT
This Service Agreement is made and entered into as of the 1st day of
April, 1997, by and between First Services, L.P., a Missouri Limited Partnership
and First Bank & Trust, a banking institution duly organized and existing by
virtue of the laws of the State of California.
WHEREAS, FIRST BANK & TRUST and FIRSTSERV, INC. entered into a Service
Agreement dated December 8, 1995, as amended; and
WHEREAS, said Service Agreement was assigned to First Services, L.P. on or
about April 1, 1997; and
WHEREAS, FIRST SERVICES, L.P. and FIRST BANK & TRUST desire to amend and
restate said Service Agreement in its entirety.
NOW, THEREFORE, for and in consideration of the mutual promises and
covenants contained herein, and the sum of Ten Dollars ($l0.00) in hand paid,
each to the other, the receipt and sufficiency of which is hereby acknowledged,
the parties agree as follows:
I. TERMINATION AND REVOCATION
The Parties hereto hereby revoke, cancel and hold for naught the Service
Agreement dated December 8, 1995, as amended, and hereby substitute in its place
the Service Agreement herein contained.
II. SERVICES
(A) First Services, L.P. shall furnish First Bank & Trust data
processing and item processing services selected by First Bank
& Trust from the Product and Price Schedule as per Attachment
1, attached hereto and incorporated herein by reference
thereto. Additional services may be selected upon prior
written notice to First Services, L.P. at First Services,
L.P.'s then current list price by executing an amended Summary
Page.
(B) First Services, L.P. will provide conversion and training
services for the fees specified from the Product and Price
Schedule (Attachment 1). Classroom training in the use and
operation of the system for the number of First Bank & Trust
personnel mutually agreed upon in the conversion planning
process will be provided at a training facility mutually
agreed upon. Conversion services are those activities designed
to transfer the processing of First Bank & Trust's data from
its present processing company to First Services, L.P.
(C) First Services, L.P. will also provide Network Support Service
consisting of communication line monitoring and diagnostic
equipment and support personnel to discover, diagnose, repair
or report line problems to the appropriate telephone company.
The fee for this service is also listed from the Product and
Price Schedule (Attachment 1).
(D) First Services, L.P. shall upon request act as First Bank &
Trust's designated representative to arrange for the purchase,
and installation of data lines necessary to access the First
Services, L.P. system. Where requested, additional dial-up
lines and equipment to be utilized as a backup to the regular
data lines may also be ordered. First Services, L.P. shall
bill First Bank & Trust for the actual charges incurred for
the data lines and for the maintenance of the modems and other
interface devices.
(E) Processing priorities will be determined by mutual agreement
of the parties hereto.
III. TERM
The term of this Agreement shall be twelve (12) months commencing on
April 1, 1997. Upon expiration, the Agreement will automatically renew
for successive terms of twelve (12) months each unless either party
shall have provided written notice to the other at least one-hundred
eighty (180) days prior to the expiration of the then current term, of
its intent not to renew. In the event of termination, First Services,
L.P. shall provide reasonable time allowance to allow First Bank &
Trust to convert to another system.
IV. SOFTWARE/FIRMWARE
Unmodified third party software or firmware ("Software") may be
supplied as part of the Agreement. All such Software shall be provided
subject to Software License Agreements.
V. PRICE AND PAYMENT
(A) Fees for First Services, L.P.'s services are set forth from
the Product and Price Schedule (Attachment 1), including where
applicable minimum monthly charges and payment schedules for
onetime fees.
(B) Standard Fees shall be invoiced no later than the fifteenth
(15th) of each month for the then current month. Terms of
payment shall be net cash.
(C) The Base Service Charge listed from the Product and Price
Schedule (Attachment 1) shall not change more than once a year
and then only upon six (6) months' prior written notice. The
fee schedule shall be reviewed annually to ensure fair market
value in pricing. Comparisons will be made with peers and
other providers of similar services.
(D) This above limitation shall not apply to pass-thru expenses. A
pass-thru expense is a charge for goods or services by First
Services, L.P. on First Bank & Trust's behalf which are to be
billed to First Bank & Trust without mark-up.
(E) The fees listed from the Product and Price Schedule
(Attachment 1) do not include and First Bank & Trust is
responsible for furnishing transportation or transmission of
information between First Services, L.P.'s data center, First
Bank & Trust's site and any applicable clearing house,
regulatory agency or Federal Reserve Bank. Where First Bank &
Trust has elected to have First Services, L.P. provide
Telecommunication Services, the price for the Services will be
provided and billed as a pass-thru expense.
(F) Network Support Service Fees and Local Network Fees are based
upon services rendered from First Services, L.P.'s premises.
Off-premise support will be provided upon First Bank & Trust's
request on an as available basis at First Services, L.P. then
current charges for time and materials, plus reasonable travel
and living expenses.
<PAGE>
VI. CLIENT OBLIGATIONS
(A) First Bank & Trust shall be solely responsible for the input,
transmission or delivery of all information and data required
by First Services, L.P. to perform the services except
where First Bank & Trust has retained First Services, L.P.
to handle such responsibilities on its behalf. The data shall
be provided in a format and manner approved by First Services,
L.P. First Bank & Trust will provide at its own expense or
procure from First Services, L.P. all equipment, computer
software, communication lines and interface devices required
to access the First Services, L.P. System. If First Bank &
Trust has elected to provide such items itself, First
Services, L.P. shall provide First Bank & Trust with a list
of compatible equipment and software.
(B) First Bank & Trust shall designate appropriate First Bank &
Trust personnel for training in the use of the First Services,
L.P. System, shall allow First Services, L.P. access to First
Bank & Trust's site during normal business hours for
conversion and shall cooperate with First Services, L.P.
personnel in the conversion and implementation of the
services.
(C) First Bank & Trust shall comply with any operating
instructions on the use of the First Services, L.P. system
provided by First Services, L.P., shall review all reports
furnished by First Services, L.P. for accuracy and shall work
with First Services, L.P. to reconcile any out of balance
conditions. First Bank & Trust shall determine and be
responsible for the authenticity and accuracy of all
information and data submitted to First Services, L.P.
(D) First Bank & Trust shall furnish, or if First Services, L.P.
agrees to so furnish, reimburse First Services, L.P. for
courier services applicable to the services requested.
VII. GENERAL ADMINISTRATION
First Services, L.P. is continually reviewing and modifying
the First Services, L.P. system to improve service and to comply with
federal government regulations applicable to the data utilized in
providing services to First Bank & Trust. First Services, L.P. reserves
the right to make changes in the service, including, but not limited to
operating procedures, security procedures, the type of equipment
resident at and the location of First Services, L.P.'s data center.
First Services, L.P. will provide First Bank & Trust at least sixty
(60) days prior written notice of changes in procedures or reporting
and at least six (6) months prior written notice of changes in service
costs.
VIII. CLIENT CONFIDENTIAL INFORMATION
(A) First Services, L.P. shall treat all informatio and data
relating to First Bank & Trust business provided to First
Services, L.P. by First Bank & Trust, or information
relating to First Bank & Trust's customers, as confidential
and shall safeguard First Bank & Trust's information with
the same degree of care used to protect First Services, L.P.'s
confidential information. First Services, L.P. and First
Bank & Trust agree that master and transaction data files
are owned by and constitute property of First Bank & Trust.
First Bank & Trust's data and records shall be subject to
regulation and examination by State and Federal
supervisory agencies to the same extent as if such information
were on First Bank & Trust's premises. First Services, L.P.'s
obligations under this Section VIII shall survive the
termination or expiration of this Agreement.
(B) First Services, L.P. shall maintain adequate backup procedures
including storage of duplicate record files as necessary to
reproduce First Bank & Trust's records and data. In the event
of a service disruption due to reasons beyond First Services,
L.P.'s control, First Services, L.P. shall use diligent
efforts to mitigate the effects of such an occurrence.
<PAGE>
IX. FIRST SERVICES, L.P. CONFIDENTIAL INFORMATION
(A) First Bank & Trust shall not use or disclose to any third
persons any confidential information concerning First
Services, L.P. First Services, L.P. confidential information
is that which relates to First Services, L.P.'s software,
research, development, trade secrets or business affairs
including, but not limited to, the terms and conditions of
this Agreement but does not include information in the public
domain through no fault of First Bank & Trust. First Bank &
Trust's obligations under this Section IX shall survive the
termination or expiration of this Agreement.
(B) First Services, L.P.'s system contains information and
computer software which is proprietary and confidential
information of First Services, L.P., its suppliers and
licensees. First Bank & Trust agrees not to attempt to
circumvent the devices employed by First Services, L.P. to
prevent unauthorized access to the First Services, L.P.'s
System.
X. WARRANTIES
First Services, L.P. will accurately process First Bank & Trust's work
provided that First Bank & Trust supplies accurate data and follows the
procedures described in First Services, L.P.'s User Manuals, notices
and advises. First Services, L.P. personnel will exercise due care in
the processing of First Bank & Trust's work. In the event of an error
caused by First Services, L.P.'s personnel, programs or equipment,
First Services, L.P. shall correct the data and/or reprocess the
affected report at no additional cost to First Bank & Trust.
XI. LIMITATION OF LIABILITY
IN NO EVENT SHALL FIRST SERVICES, L.P. BE LIABLE FOR LOSS OF GOODWILL,
OR FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING
FROM FIRST BANK & TRUST'S USE OF FIRST SERVICES L.P.'S SERVICES, OR
FIRST SERVICES, L.P.'S SUPPLY OF EQUIPMENT OR SOFTWARE, UNDER THIS
AGREEMENT REGARDLESS OF WHETHER SUCH CLAIM ARISES IN TORT OR IN
CONTRACT. FIRST SERVICES, L.P.'S AGGREGATE LIABILITY FOR ANY AND ALL
CAUSES OF ACTION RELATING TO SERVICES PERFORMED HEREUNDER OR ANY DAMAGE
OR LOSS INCURRED OR SUSTAINED BY FIRST BANK & TRUST RELATING TO THIS
AGREEMENT AND THE SERVICES PERFORMED HEREUNDER SHALL BE LIMITED TO THE
AMOUNT OF TOTAL FEES PAID BY FIRST BANK & TRUST TO FIRST SERVICES, L.P.
IN THE THREE (3) MONTH PERIOD PRECEDING THE DATE THE CLAIM ACCRUED.
FIRST SERVICES, L.P.'S AGGREGATE LIABILITY FOR A DEFAULT RELATING TO
EQUIPMENT OR SOFTWARE SHALL BE LIMITED TO THE AMOUNT PAID FOR THE
EQUIPMENT OR SOFTWARE.
XII. PERFORMANCE STANDARDS
(A) On-Line Availability - First Services, L.P.'s standard
of performance shall be on-line availability of the system
98% of the time that it is scheduled to be so available over a
three month period (the "Measurement Period"). Actual on-line
performance will be calculated monthly by comparing the number
of hours which the system was scheduled to be operational on
an on-line basis with the number of hours, or a portion
thereof, it was actually operational on an on-line basis.
Downtime may be caused by operator error, hardware
malfunction or failure, or environmental failures such as
loss of power or air conditioning. Downtime caused by
reasons beyond First Services, L.P.'s control should not be
considered in the statistics.
<PAGE>
(B) Report Availability - First Services, L.P.'s standard of
performance for report availability shall be that, over a
three (3) month period, ninety-five percent (95%) of all
Critical Daily Reports shall be available for remote printing
on time without significant errors. A Critical Daily Report
shall mean priority group reports which First Services, L.P.
and First Bank & Trust have mutually agreed in writing are
necessary to properly account for the previous day's activity
and properly notify First Bank & Trust of overdraft, NSF
or return items. A significant error is one which impairs
First Bank & Trust's ability to properly account for the
previous days activity and/or properly account for
overdraft, NSF or return items. Actual performance will be
calculated monthly by comparing the total number of First
Bank & Trust reports scheduled to be available from First
Services, L.P. to the number of reports which were available
on time and without error.
(C) Exclusive Remedy - In the event that First Services, L.P.'s
performance fails to meet the standards listed above and
such failure is not the result of First Bank & Trust's
error or omission, First Bank & Trust's sole and exclusive
remedy for such default shall be the right to terminate this
Agreement in accordance with the provisions of this paragraph.
In the event that First Services, L.P. fails to achieve any
Performance Standards, alone or in combination, for the
prescribed measurement period, First Bank & Trust shall notify
First Services, L.P. of its intent to terminate this agreement
if First Services, L.P. fails to restore performance to
the committed levels. First Services, L.P. shall advise
First Bank & Trust promptly upon correction of the system
deficiencies (in no event shall corrective action exceed
sixty (60) days from the notice date) and shall begin an
additional measurement period. Should First Services, L.P.
fail to achieve the required Performance Standards during
the remeasurement period, First Bank & Trust may terminate
this Agreement and First Services, L.P. shall cooperate
with First Bank & Trust to achieve an orderly transition
to First Bank & Trust's replacement processing system. First
Bank & Trust may also terminate this Agreement if First
Services, L.P.'s performance for the same standard is below
the relevant performance standard for more than two (2)
measurement periods in any consecutive twelve (12) months
or for more than five (5) measurement periods during the term
of this agreement. During the period of transition, First
Bank & Trust shall pay only such charges as are incurred for
monthly fees until the date of deconversion. First Services,
L.P. shall not charge First Bank & Trust for services relating
to First Bank & Trust's deconversion.
(D) Audit - First Bank & Trust shall have the right to perform
reasonable audits, at its cost, upon giving written notice to
First Services, L.P. of its intent to do so. First Services,
L.P. shall provide, upon request, financial information to
First Bank & Trust.
XIII. DISASTER RECOVERY
(A) A Disaster shall mean any unplanned interruption of the
operations of or inaccessibility to the First Services, L.P.
data center which appears in First Services, L.P.s reasonable
judgement to require relocation of processing to an
alternative site. First Services, L.P. shall notify First
Bank & Trust as soon as possible after it deems a service
outage to be a Disaster. First Services, L.P. shall move the
processing of First Bank & Trust's standard on-line services
to an alternative processing center as expeditiously as
possible. First Bank & Trust shall maintain adequate records
of all transactions during the period of service interruption
and shall have personnel available to assist First Services
L.P., Inc.in implementing the switch over to the alternative
processing site. During a disaster, optional or on-request
services shall be provided by First Services, L.P. only to the
extent that there is adequate capacity at the alternate center
and only after stabilizing the provision of base on-line
services.
<PAGE>
(B) First Services, L.P. shall work with First Bank & Trust to
establish a plan for alternative data communications in the
event of a disaster. First Bank & Trust shall be responsible
for furnishing any additional communications equipment and
data lines required under the adopted plan.
(C) First Services, L.P. shall test its Disaster Recovery Services
Plan by conducting one annual test. First Bank & Trust agrees
to participate in and assist First Services, L.P. with such
testing. Test results will be made available to First Bank &
Trust's regulators, internal and external auditors, and (upon
request) to First Bank & Trust's insurance underwriters.
(D) First Bank & Trust understands and agrees that the First
Services, L.P. Disaster Recovery Plan is designed to minimize
but not eliminate risks associated with a disaster affecting
First Services, L.P.'s data center. First Services, L.P. does
not warrant that service will be uninterrupted or error free
in the event of a disaster. First Bank & Trust maintains
responsibility for adopting a disaster recovery plan relating
to disasters affecting First Bank & Trust's facilities and for
securing business interruption insurance or other insurance as
necessary to properly protect First Bank & Trust's revenues in
the event of a disaster.
XIV. DEFAULT
(A) In the event that First Bank & Trust is thirty (30) days in
arrears in making any payment required, or in the event of any
other material default by either First Services, L.P. or First
Bank & Trust in the performance of their obligations, the
affected party shall have the right to give written notice to
the other of the default and its intent to terminate this
Agreement stating with reasonable particularity the nature of
the claimed default. This Agreement shall terminate if the
default has not been cured within a reasonable time with a
minimum being thirty (30) days from the effective date of the
notice.
(B) Upon the expiration of this Agreement, or its termination,
First Services, L.P. shall furnish to First Bank & Trust such
copies of First Bank & Trust's data files as First Bank &
Trust may request in machine readable format form along with
such other information and assistance as or is reasonable and
customary to enable First Bank & Trust to deconvert from the
First Services, L.P. system. First Bank & Trust shall
reimburse First Services, L.P. for the production of data
records and other services at First Services, L.P.'s current
fees for such services.
<PAGE>
XV. INSURANCE
First Services, L.P. carries Comprehensive General Liability insurance
with primary limits of two million dollars, Commercial Crime insurance
covering Employee Dishonesty in the amount of fifteen million dollars,
all-risk replacement cost coverage on all equipment used at First
Services, L.P.'s data center and Workers Compensation coverage on First
Services, L.P. employees wherever located in the United States. First
Bank & Trust shall carry adequate insurance to cover liability for
source documents while in transit and in case of data loss through
errors and omissions.
XVI. GENERAL
(A) This Agreement is binding upon the parties and their
respective successors and permitted assigns. Neither party may
assign this Agreement in whole or in part without the consent
of First Bank & Trust and/or First Services, L.P., provided,
however, that First Services, L.P. may subcontract any or all
of the services to be performed under this Agreement without
the written consent of First Bank & Trust. Any such
subcontractors shall be required to comply with all of the
applicable terms and conditions of this Agreement.
(B) The parties agree that, in connection with the performance of
their obligations hereunder, they will comply with all
applicable Federal, State, and local laws including the laws
and regulations regarding Equal Employment Opportunities.
(C) First Services, L.P. agrees that the Office of Thrift
Supervision, FDIC, or other authority will have the authority
and responsibility provided to the other regulatory agencies
pursuant to the Bank Service Corporation Act, 12 U.S.C. 1867
(C) relating to service performed by contract or otherwise.
First Services, L.P., also agrees that its services shall be
subject to oversight by the O.C.C., FDIC or state banking
departments as may be applicable under laws and regulations
pertaining to First Bank & Trusts's charter and shall, if
applicable, provide the O.T.S. District Director of the
district in which the data processing center is located and
other state and federal agencies with a copy of First
Services, L.P.'s current audit and financial statements and
a copy of any current third party review report when a review
has been performed.
(D) Neither party shall be liable for any errors, delays or
non-performance due to events beyond its reasonable control
including, but not limited to, acts of God, failure or delay
of power or communications, changes in law or regulation or
other acts of governmental authority, strike, weather
conditions or transpor- tation.
(E) All written notices required to be given under this Agreement
shall be sent by Registered or Certified Mail, Return Receipt
Requested, postage prepaid, or by confirmed facsimile to the
persons and at the addresses listed below or to such other
address or person as a party shall have designated in writing.
First Services, L.P. First Bank & Trust
#l First Missouri Center 2400 Michelson Drive
St. Louis, Missouri 63l4l Irvine, California 92714
(F) The failure of either party to exercise in any respect any
right provided for herein shall not be deemed a waiver of any
rights.
(G) Each party acknowledges that is has read this Agreement,
understands it, and agrees that it is the complete and
exclusive statement of the Agreement between the parties and
supersedes and merges any prior or simultaneous proposals,
understandings and all other agreements with respect to the
subject matter. This Agreement may not be modified or altered
except by a written instrument duly executed by both parties.
<PAGE>
(H) No waiver of any of the terms of this Agreement shall be
effective unless in writing and signed by the duly authorized
representative of the party charged therewith. No waiver of
any provision hereof shall extend to or affect any obligation
not expressly waived, impair any rights consequent on such
obligation or imply a subsequent waiver of that or any other
provision.
(I) This Agreement shall be governed by, construed and interpreted
in accordance with the laws of the State of Missouri.
IN WITNESS WHEREOF, the parties have executed this Agreement the date
first above written.
First Bank & Trust First Services, L.P.
2400 Michelson Drive One First Missouri Center
Irvine, California 92714 St. Louis, Missouri 63141
BY:/s/ Fred D. Jensen BY:/s/ Thomas A. Bangert
- --------------------- ------------------------
Fred D. Jensen Thomas A. Bangert
President President
<PAGE>
<TABLE>
<CAPTION>
Attachment 1
First Bank & Trust- Product And Price Schedule
Effective 4/1/97
DATA PROCESSING
Accounts
<CAPTION>
<S> <C> <C> <C>
DDA per account $0.50
Savings per account $0.50
Time per account $0.50
Loans per account $0.50
Transactions each $0.01
Terminal Management each $5.00
Branch Data Connection each $500.00
ATM Management each $200.00
Telephone Switch Mgmt each $750.00
Other Services per application $100.00
ITEM PROCESSING
Proof each $0.020
POD And EFT each $0.009
Inclearing and Transmission each $0.009
DDA per account $0.250
Savings per account $0.050
Time per account $0.100
Lockbox each $0.020
Branch Courier Route each, per month $17.00
Mail Services per month $200.00
DEPOSIT SERVICES
Customer Accounts per account $5,000.00
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Included in Above:
<S> <C> <C>
Charge Backs CIF Management
Returns Exception Item Processing
Stops Signature Verification
Wire Transfers Corporate Analysis
ACH Incoming Cash Management Support
ACH Origination FirstLink
Official Checks Control Disbursement
Money Orders Balance Reporting
Savings Bonds Research
Funds Transfer Adjustments
B Notices 1099s "Due From" Reconciliation
Kiting "Due To" Reconciliation
Holds FRB Reconciliation's
Dormant Accounts Application Balancing
ATM Settlement Records Management
Debit Card Settlement Savings Bonds
OTHER SERVICES
Collection System (Cyber Resources) Cash Management System (FirstLink)
Recovery System (Cyber Resources) Commercial Analysis
Asset/Liability (Bankware) Charge Back System
Optical System (RVI) Teller Platform (ISC)
MCIF (OKRA) ATM Support
Loan Documentation (FTI/CFI) General Ledger
Bank Audit Fixed Asset Interface
Accounts Payable Interface Interactive Voice
Remote Laser Printing Card Management System
ACH Origination Wire Transfer (Fundtec)
Organization Profitability (IPS) NOW Reclassification
Loan Tracking (Baker Hill) Retrofit/New Releases
Credit Scoring (Fair Issac)
</TABLE>
<PAGE>
EXHIBIT 10.10
SERVICE AGREEMENT
This Service Agreement is made and entered into as of the 1st day of
April, 1997, by and between First Services, L.P., a Missouri Limited Partnership
and BankTEXAS N.A., a banking institution duly organized and existing by virtue
of the laws of the United State.
WHEREAS, BankTEXAS and FIRSTSERV, INC. entered into a Service
Agreement dated December 8, 1995, as amended; and
WHEREAS, said Service Agreement was assigned to First Services, L.P.
on or about April 1, 1997; and
WHEREAS, FIRST SERVICES, L.P. and BankTEXAS desire to amend and
restate said Service Agreement in its entirety.
NOW, THEREFORE, for and in consideration of the mutual promises and
covenants contained herein, and the sum of Ten Dollars ($l0.00) in hand paid,
each to the other, the receipt and sufficiency of which is hereby acknowledged,
the parties agree as follows:
I. TERMINATION AND REVOCATION
The Parties hereto hereby revoke, cancel and hold for naught the
Service Agreement dated December 8, 1995, as amended, and hereby substitute in
its place the Service Agreement herein contained.
II. SERVICES
(A) First Services, L.P. shall furnish BankTEXAS data processing and item
processing services selected by BankTEXAS from the Product and Price
Schedule as per Attachment 1, attached hereto and incorporated herein
by reference thereto. Additional services may be selected upon prior
written notice to First Services, L.P. at First Services, L.P.'s then
current list price by executing an amended Summary Page.
(B) First Services, L.P. will provide conversion and training services for
the fees specified from the Product and Price Schedule (Attachment 1).
Classroom training in the use and operation of the system for the
number of BankTEXAS personnel mutually agreed upon in the conversion
planning process will be provided at a training facility mutually
agreed upon. Conversion services are those activities designed to
transfer the processing of BankTEXAS's data from its present
processing company to First Services, L.P.
(C) First Services, L.P. will also provide Network Support Service
consisting of communication line monitoring and diagnostic equipment
and support personnel to discover, diagnose, repair or report line
problems to the appropriate telephone company. The fee for this
service is also listed from the Product and Price Schedule (Attachment
1).
(D) First Services, L.P. shall upon request act as BankTEXAS's designated
representative to arrange for the purchase, and installation of data
lines necessary to access the First Services, L.P. system. Where
requested, additional dial-up lines and equipment to be utilized as a
backup to the regular data lines may also be ordered. First Services,
L.P. shall bill BankTEXAS for the actual charges incurred for the data
lines and for the maintenance of the modems and other interface
devices.
(E) Processing priorities will be determined by mutual
agreement of the parties hereto.
III. TERM
The term of this Agreement shall be twelve (12) months commencing on
April 1, 1997. Upon expiration, the Agreement will automatically renew
for successive terms of twelve (12) months each unless either party
shall have provided written notice to the other at least one-hundred
eighty (180) days prior to the expiration of the then current term, of
its intent not to renew. In the event of termination, First Services,
L.P. shall provide reasonable time allowance to allow BankTEXAS to
convert to another system.
IV. SOFTWARE/FIRMWARE
Unmodified third party software or firmware ("Software") may be
supplied as part of the Agreement. All such Software shall be provided
subject to Software License Agreements.
V. PRICE AND PAYMENT
(A) Fees for First Services, L.P.'s services are set forth from the
Product and Price Schedule (Attachment 1), including where applicable
minimum monthly charges and payment schedules for onetime fees.
(B) Standard Fees shall be invoiced no later than the fifteenth (15th) of
each month for the then current month. Terms of payment shall be net
cash. (C) The Base Service Charge listed from the Product and Price
Schedule (Attachment 1) shall not change more than once a year and
then only upon six (6) months' prior written notice. The fee schedule
shall be reviewed annually to ensure fair market value in pricing.
Comparisons will be made with peers and other providers of similar
services.
(D) This above limitation shall not apply to pass-thru expenses. A
pass-thru expense is a charge for goods or services by First Services,
L.P. on BankTEXAS's behalf which are to be billed to BankTEXAS without
mark-up.
(E) The fees listed from the Product and Price Schedule (Attachment 1) do
not include and BankTEXAS is responsible for furnishing transportation
or transmission of information between First Services, L.P.'s data
center, BankTEXAS's site and any applicable clearing house, regulatory
agency or Federal Reserve Bank. Where BankTEXAS has elected to have
First Services, L.P. provide Telecommunication Services, the price for
the Services will be provided and billed as a pass-thru expense.
(F) Network Support Service Fees and Local Network Fees are based upon
services rendered from First Services, L.P.'s premises. Off-premise
support will be provided upon BankTEXAS's request on an as available
basis at First Services, L.P. then current charges for time and
materials, plus reasonable travel and living expenses.
VI. CLIENT OBLIGATIONS
(A) BankTEXAS shall be solely responsible for the input, transmission or
delivery of all information and data required by First Services, L.P.
to perform the services except where BankTEXAS has retained First
Services, L.P. to handle such responsibilities on its behalf. The data
shall be provided in a format and manner approved by First Services,
L.P. BankTEXAS will provide at its own expense or procure from First
Services, L.P. all equipment, computer software, communication lines
and interface devices required to access the First Services, L.P.
System. If BankTEXAS has elected to provide such items itself, First
Services, L.P. shall provide BankTEXAS with a list of compatible
equipment and software.
(B) BankTEXAS shall designate appropriate BankTEXAS personnel for training
in the use of the First Services, L.P. System, shall allow First
Services, L.P. access to BankTEXAS's site during normal business hours
for conversion and shall cooperate with First Services, L.P. personnel
in the conversion and implementation of the services.
(C) BankTEXAS shall comply with any operating instructions on the use of
the First Services, L.P. system provided by First Services, L.P.,
shall review all reports furnished by First Services, L.P. for
accuracy and shall work with First Services, L.P. to reconcile any out
of balance conditions. BankTEXAS shall determine and be responsible
for the authenticity and accuracy of all information and data
submitted to First Services, L.P.
(D) BankTEXAS shall furnish, or if First Services, L.P. agrees to so
furnish, reimburse First Services, L.P. for courier services
applicable to the services requested.
VII. GENERAL ADMINISTRATION
First Services, L.P. is continually reviewing and modifying the First
Services, L.P. system to improve service and to comply with federal government
regulations applicable to the data utilized in providing services to BankTEXAS.
First Services, L.P. reserves the right to make changes in the service,
including, but not limited to operating procedures, security procedures, the
type of equipment resident at and the location of First Services, L.P.'s data
center. First Services, L.P. will provide BankTEXAS at least sixty (60) days
prior written notice of changes in procedures or reporting and at least six (6)
months prior written notice of changes in service costs.
VIII. CLIENT CONFIDENTIAL INFORMATION
(A) First Services, L.P. shall treat all information and data relating to
BankTEXAS business provided to First Services, L.P. by BankTEXAS, or
information relating to BankTEXAS's customers, as confidential and
shall safeguard BankTEXAS's information with the same degree of care
used to protect First Services, L.P.'s confidential information. First
Services, L.P. and BankTEXAS agree that master and transaction data
files are owned by and constitute property of BankTEXAS. BankTEXAS's
data and records shall be subject to regulation and examination by
State and Federal supervisory agencies to the same extent as if such
information were on BankTEXAS's premises. First Services, L.P.'s
obligations under this Section VIII shall survive the termination or
expiration of this Agreement.
(B) First Services, L.P. shall maintain adequate backup procedures
including storage of duplicate record files as necessary to reproduce
BankTEXAS's records and data. In the event of a service disruption due
to reasons beyond First Services, L.P.'s control, First Services, L.P.
shall use diligent efforts to mitigate the effects of such an
occurrence.
IX. FIRST SERVICES, L.P. CONFIDENTIAL INFORMATION
(A) BankTEXAS shall not use or disclose to any third persons any
confidential information concerning First Services, L.P. First
Services, L.P. confidential information is that which relates to First
Services, L.P.'s software, research, development, trade secrets or
business affairs including, but not limited to, the terms and
conditions of this Agreement but does not include information in the
public domain through no fault of BankTEXAS. BankTEXAS's obligations
under this Section IX shall survive the termination or expiration of
this Agreement.
(B) First Services, L.P.'s system contains information and computer
software which is proprietary and confidential information of First
Services, L.P., its suppliers and licensees. BankTEXAS agrees not to
attempt to circumvent the devices employed by First Services, L.P. to
prevent unauthorized access to the First Services, L.P.'s System.
X. WARRANTIES
First Services, L.P. will accurately process BankTEXAS's work provided
that BankTEXAS supplies accurate data and follows the procedures
described in First Services, L.P.'s User Manuals, notices and advises.
First Services, L.P. personnel will exercise due care in the processing
of BankTEXAS's work. In the event of an error caused by First Services,
L.P.'s personnel, programs or equipment, First Services, L.P. shall
correct the data and/or reprocess the affected report at no additional
cost to BankTEXAS.
XI. LIMITATION OF LIABILITY
IN NO EVENT SHALL FIRST SERVICES, L.P. BE LIABLE FOR LOSS OF GOODWILL,
OR FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING
FROM BANKTEXAS'S USE OF FIRST SERVICES L.P.'S SERVICES, OR FIRST
SERVICES, L.P.'S SUPPLY OF EQUIPMENT OR SOFTWARE, UNDER THIS AGREEMENT
REGARDLESS OF WHETHER SUCH CLAIM ARISES IN TORT OR IN CONTRACT. FIRST
SERVICES, L.P.'S AGGREGATE LIABILITY FOR ANY AND ALL CAUSES OF ACTION
RELATING TO SERVICES PERFORMED HEREUNDER OR ANY DAMAGE OR LOSS INCURRED
OR SUSTAINED BY BANKTEXAS RELATING TO THIS AGREEMENT AND THE SERVICES
PERFORMED HEREUNDER SHALL BE LIMITED TO THE AMOUNT OF TOTAL FEES PAID
BY BANKTEXAS TO FIRST SERVICES, L.P. IN THE THREE (3) MONTH PERIOD
PRECEDING THE DATE THE CLAIM ACCRUED. FIRST SERVICES, L.P.'S AGGREGATE
LIABILITY FOR A DEFAULT RELATING TO EQUIPMENT OR SOFTWARE SHALL BE
LIMITED TO THE AMOUNT PAID FOR THE EQUIPMENT OR SOFTWARE.
XII. PERFORMANCE STANDARDS
(A) On-Line Availability - First Services, L.P.'s standard of performance
shall be on-line availability of the system 98% of the time that it is
scheduled to be so available over a three month period (the
"Measurement Period"). Actual on-line performance will be calculated
monthly by comparing the number of hours which the system was
scheduled to be operational on an on-line basis with the number of
hours, or a portion thereof, it was actually operational on an on-line
basis. Downtime may be caused by operator error, hardware malfunction
or failure, or environmental failures such as loss of power or air
conditioning. Downtime caused by reasons beyond First Services, L.P.'s
control should not be considered in the statistics.
(B) Report Availability - First Services, L.P.'s standard of performance
for report availability shall be that, over a three (3) month period,
ninety-five percent (95%) of all Critical Daily Reports shall be
available for remote printing on time without significant errors. A
Critical Daily Report shall mean priority group reports which First
Services, L.P. and BankTEXAS have mutually agreed in writing are
necessary to properly account for the previous day's activity and
properly notify BankTEXAS of overdraft, NSF or return items. A
significant error is one which impairs BankTEXAS's ability to properly
account for the previous days activity and/or properly account for
overdraft, NSF or return items. Actual performance will be calculated
monthly by comparing the total number of BankTEXAS reports scheduled
to be available from First Services, L.P. to the number of reports
which were available on time and without error.
(C) Exclusive Remedy - In the event that First Services, L.P.'s
performance fails to meet the standards listed above and such failure
is not the result of BankTEXAS's error or omission, BankTEXAS's sole
and exclusive remedy for such default shall be the right to terminate
this Agreement in accordance with the provisions of this paragraph. In
the event that First Services, L.P. fails to achieve any Performance
Standards, alone or in combination, for the prescribed measurement
period, BankTEXAS shall notify First Services, L.P. of its intent to
terminate this agreement if First Services, L.P. fails to restore
performance to the committed levels. First Services, L.P. shall advise
BankTEXAS promptly upon correction of the system deficiencies (in no
event shall corrective action exceed sixty (60) days from the notice
date) and shall begin an additional measurement period. Should First
Services, L.P. fail to achieve the required Performance Standards
during the remeasurement period, BankTEXAS may terminate this
Agreement and First Services, L.P. shall cooperate with BankTEXAS to
achieve an orderly transition to BankTEXAS's replacement processing
system. BankTEXAS may also terminate this Agreement if First Services,
L.P.'s performance for the same standard is below the relevant
performance standard for more than two (2) measurement periods in any
consecutive twelve (12) months or for more than five (5) measurement
periods during the term of this agreement. During the period of
transition, BankTEXAS shall pay only such charges as are incurred for
monthly fees until the date of deconversion. First Services, L.P.
shall not charge BankTEXAS for services relating to BankTEXAS's
deconversion.
(D) Audit - BankTEXAS shall have the right to perform
reasonable audits, at its cost, upon giving written notice to
First Services, L.P. of its intent to do so. First Services,
L.P. shall provide, upon request, financial information to
BankTEXAS.
XIII. DISASTER RECOVERY
(A) A Disaster shall mean any unplanned interruption of the operations of
or inaccessibility to the First Services, L.P. data center which
appears in First Services, L.P.'s reasonable judgement to require
relocation of processing to an alternative site. First Services, L.P.
shall notify BankTEXAS as soon as possible after it deems a service
outage to be a Disaster. First Services, L.P. shall move the
processing of BankTEXAS's standard on-line services to an alternative
processing center as expeditiously as possible. BankTEXAS shall
maintain adequate records of all transactions during the period of
service interruption and shall have personnel available to assist
First Services L.P., Inc. in implementing the switch over to the
alternative processing site. During a disaster, optional or on-request
services shall be provided by First Services, L.P. only to the extent
that there is adequate capacity at the alternate center and only after
stabilizing the provision of base on-line services.
(B) First Services, L.P. shall work with BankTEXAS to establish a plan for
alternative data communications in the event of a disaster. BankTEXAS
shall be responsible for furnishing any additional communications
equipment and data lines required under the adopted plan.
(C) First Services, L.P. shall test its Disaster Recovery Services Plan by
conducting one annual test. BankTEXAS agrees to participate in and
assist First Services, L.P. with such testing. Test results will be
made available to BankTEXAS's regulators, internal and external
auditors, and (upon request) to BankTEXAS's insurance underwriters.
(D) BankTEXAS understands and agrees that the First Services, L.P.
Disaster Recovery Plan is designed to minimize but not eliminate risks
associated with a disaster affecting First Services, L.P.'s data
center. First Services, L.P. does not warrant that service will be
uninterrupted or error free in the event of a disaster. BankTEXAS
maintains responsibility for adopting a disaster recovery plan
relating to disasters affecting BankTEXAS's facilities and for
securing business interruption insurance or other insurance as
necessary to properly protect BankTEXAS's revenues in the event of a
disaster.
XIV. DEFAULT
(A) In the event that BankTEXAS is thirty (30) days in arrears in making
any payment required, or in the event of any other material default by
either First Services, L.P. or BankTEXAS in the performance of their
obligations, the affected party shall have the right to give written
notice to the other of the default and its intent to terminate this
Agreement stating with reasonable particularity the nature of the
claimed default. This Agreement shall terminate if the default has not
been cured within a reasonable time with a minimum being thirty (30)
days from the effective date of the notice.
(B) Upon the expiration of this Agreement, or its termination, First
Services, L.P. shall furnish to BankTEXAS such copies of BankTEXAS's
data files as BankTEXAS may request in machine readable format form
along with such other information and assistance as or is reasonable
and customary to enable BankTEXAS to deconvert from the First
Services, L.P. system. BankTEXAS shall reimburse First Services, L.P.
for the production of data records and other services at First
Services, L.P.'s current fees for such services.
XV. INSURANCE
First Services, L.P. carries Comprehensive General Liability insurance
with primary limits of two million dollars, Commercial Crime insurance
covering Employee Dishonesty in the amount of fifteen million dollars,
all-risk replacement cost coverage on all equipment used at First
Services, L.P.'s data center and Workers Compensation coverage on First
Services, L.P. employees wherever located in the United States.
BankTEXAS shall carry adequate insurance to cover liability for source
documents while in transit and in case of data loss through errors and
omissions.
XVI. GENERAL
(A) This Agreement is binding upon the parties and their respective
successors and permitted assigns. Neither party may assign this
Agreement in whole or in part without the consent of BankTEXAS and/or
First Services, L.P., provided, however, that First Services, L.P. may
subcontract any or all of the services to be performed under this
Agreement without the written consent of BankTEXAS. Any such
subcontractors shall be required to comply with all of the applicable
terms and conditions of this Agreement.
(B) The parties agree that, in connection with the performance of their
obligations hereunder, they will comply with all applicable Federal,
State, and local laws including the laws and regulations regarding
Equal Employment Opportunities.
(C) First Services, L.P. agrees that the Office of Thrift Supervision,
FDIC, or other authority will have the authority and responsibility
provided to the other regulatory agencies pursuant to the Bank Service
Corporation Act, 12 U.S.C. 1867 (C) relating to service performed by
contract or otherwise. First Services, L.P., also agrees that its
services shall be subject to oversight by the O.C.C., FDIC or state
banking departments as may be applicable under laws and regulations
pertaining to BankTEXASs's charter and shall, if applicable, provide
the O.T.S. DistrictDirector of the district in which the data
processing center is located and other state and federal agencies with
a copy of First Services, L.P.'s current audit and financial
statements and a copy of any current third party review report when a
review has been performed.
(D) Neither party shall be liable for any errors, delays or
non-performance due to events beyond its reasonable control including,
but not limited to, acts of God, failure or delay of power or
communications, changes in law or regulation or other acts of
governmental authority, strike, weather conditions or transpor-
tation.
(E) All written notices required to be given under this Agreement shall be
sent by Registered or Certified Mail, Return Receipt Requested,
postage prepaid, or by confirmed facsimile to the persons and at the
addresses listed below or to such other address or person as a party
shall have designated in writing.
First Services, L.P. BankTEXAS
#l First Missouri Center 8820 Westheimer
St. Louis, Missouri 63l4l Houston, Texas 77063
(F) The failure of either party to exercise in any respect any right
provided for herein shall not be deemed a waiver of any rights.
(G) Each party acknowledges that is has read this Agreement,
understands it, and agrees that it is the complete and
exclusive statement of the Agreement between the parties and
supersedes and merges any prior or simultaneous proposals,
understandings and all other agreements with respect to the
subject matter. This Agreement may not be modified or altered
except by a written instrument duly executed by both parties.
(H) No waiver of any of the terms of this Agreement shall be
effective unless in writing and signed by the duly authorized
representative of the party charged therewith. No waiver of
any provision hereof shall extend to or affect any obligation
not expressly waived, impair any rights consequent on such
obligation or imply a subsequent waiver of that or any other
provision.
(I) This Agreement shall be governed by, construed and
interpreted in accordance with the laws of the State of
Missouri.
IN WITNESS WHEREOF, the parties have executed this Agreement the date
first above written.
BankTEXAS First Services, L.P.
8820 Westheimer One First Missouri Center
Houston, Texas 77063 St. Louis, Missouri 63141
BY:/s/ David W. Weaver BY:/s/ Thomas A. Bangert
David Weaver Thomas A. Bangert
President President
<PAGE>
Attachment 1
BankTEXAS - Product And Price Schedule
Effective 4/1/97
<TABLE>
<CAPTION>
DATA PROCESSING
Accounts
<S> <C> <C> <C>
DDA per account $0.50
Savings per account $0.50
Time per account $0.50
Loans per account $0.50
Transactions each $0.01
Terminal Management each $5.00
Branch Data Connection each $500.00
ATM Management each $200.00
Telephone Switch Mgmt each $750.00
Other Services per application $100.00
ITEM PROCESSING
Proof each $0.020
POD And EFT each $0.009
Inclearing and Transmission each $0.009
DDA per account $0.250
Savings per account $0.050
Time per account $0.020
Loan $0.100
DEPOSIT SERVICES
Customer Accounts per account $0.30
</TABLE>
<PAGE>
Included in Above:
<TABLE>
<CAPTION>
<S> <C> <C>
Charge Backs CIF Management
Returns Exception Item Processing
Stops Signature Verification
Wire Transfers Corporate Analysis
ACH Incoming Cash Management Support
ACH Origination FirstLink
Official Checks Control Disbursement
Money Orders Balance Reporting
Savings Bonds Research
Funds Transfer Adjustments
B Notices 1099s "Due From" Reconciliation
Kiting "Due To" Reconciliation
Holds FRB Reconciliation's
Dormant Accounts Application Balancing
ATM Settlement Records Management
Debit Card Settlement Savings Bonds
OTHER SERVICES
Collection System (Cyber Resources) Cash Management System (FirstLink)
Recovery System (Cyber Resources) Commercial Analysis
Asset/Liability (Bankware) Charge Back System
Optical System (RVI) Teller Platform (ISC)
MCIF (OKRA) ATM Support
Loan Documentation (FTI/CFI) General Ledger
Bank Audit Fixed Asset Interface
Accounts Payable Interface Interactive Voice
Remote Laser Printing Card Management System
ACH Origination Wire Transfer (Fundtec)
Organization Profitability (IPS) NOW Reclassification
Loan Tracking (Baker Hill) Retrofit/New Releases
Credit Scoring (Fair Issac)
</TABLE>
<PAGE>
EXHIBIT 10.11
SERVICE AGREEMENT
This Service Agreement is made and entered into as of the 1st day of
April, 1997, by and between First Services, L.P., a Missouri Limited Partnership
and Sunrise Bank, a banking institution duly organized and existing by virtue of
the laws of the State of California.
WHEREAS, SUNRISE BANK and FIRSTSERV, Inc. entered into a Service
Agreement dated November 21, 1996;
WHEREAS, said Service Agreement was assigned to First Services, L.P.
on or about April 1, 1997; and
WHEREAS, FIRST SERVICES, L.P. and SUNRISE BANK desire to amend and
restate said Service Agreement in its entirety.
NOW, THEREFORE, for and in consideration of the mutual promises and
covenants contained herein, and the sum of Ten Dollars ($l0.00) in hand paid,
each to the other, the receipt and sufficiency of which is hereby acknowledged,
the parties agree as follows:
I. TERMINATION AND REVOCATION
The Parties hereto hereby revoke, cancel and hold for naught the
Service Agreement dated November 21, 1996, and hereby substitute in its place
the Service Agreement herein contained.
II. SERVICES
(A) First Services, L.P. shall furnish Sunrise Bank data
processing and item processing services selected by Sunrise
Bank from the Product and Price Schedule as per Attachment 1,
attached hereto and incorporated herein by reference thereto.
Additional services may be selected upon prior written notice
to First Services, L.P. at First Services, L.P.'s then current
list price by executing an amended Summary Page.
(B) First Services, L.P. will provide conversion and training
services for the fees specified from the Product and Price
Schedule (Attachment 1). Classroom training in the use and
operation of the system for the number of Sunrise Bank
personnel mutually agreed upon in the conversion planning
process will be provided at a training facility mutually
agreed upon. Conversion services are those activities designed
to transfer the processing of Sunrise Bank's data from its
present processing company to First Services, L.P.
(C) First Services, L.P. will also provide Network Support Service
consisting of communication line monitoring and diagnostic
equipment and support personnel to discover, diagnose, repair
or report line problems to the appropriate telephone company.
The fee for this service is also listed from the Product and
Price Schedule (Attachment 1).
(D) First Services, L.P. shall upon request act as Sunrise Bank's
designated representative to arrange for the purchase, and
installation of data lines necessary to access the First
Services, L.P. system. Where requested, additional dial-up
lines and equipment to be utilized as a backup to the regular
data lines may also be ordered. First Services, L.P. shall
bill Sunrise Bank for the actual charges incurred for the data
lines and for the maintenance of the modems and other
interface devices.
(E) Processing priorities will be determined by mutual agreement
of the parties hereto.
III. TERM
The term of this Agreement shall be twelve (12) months commencing on
April 1, 1997. Upon expiration, the Agreement will automatically renew
for successive terms of twelve (12) months each unless either party
shall have provided written notice to the other at least one-hundred
eighty (180) days prior to the expiration of the then current term, of
its intent not to renew. In the event of termination, First Services,
L.P. shall provide reasonable time allowance to allow Sunrise Bank to
convert to another system.
IV. SOFTWARE/FIRMWARE
Unmodified third party software or firmware ("Software") may be
supplied as part of the Agreement. All such Software shall be provided
subject to Software License Agreements.
V. PRICE AND PAYMENT
(A) Fees for First Services, L.P.'s services are set forth from
the Product and Price Schedule (Attachment 1), including where
applicable minimum monthly charges and payment schedules for
onetime fees.
(B) Standard Fees shall be invoiced no later than the fifteenth
(15th) of each month for the then current month. Terms of
payment shall be net cash.
(C) The Base Service Charge listed from the Product and Price
Schedule (Attachment 1) shall not change more than once a year
and then only upon six (6) months' prior written notice. The
fee schedule shall be reviewed annually to ensure fair market
value in pricing. Comparisons will be made with peers and
other providers of similar services.
(D) This above limitation shall not apply to pass-thru expenses. A
pass-thru expense is a charge for goods or services by First
Services, L.P. on Sunrise Bank's behalf which are to be billed
to Sunrise Bank without mark-up.
(E) The fees listed from the Product and Price Schedule
(Attachment 1) do not include and Sunrise Bank is responsible
for furnishing transportation or transmission of information
between First Services, L.P.'s data center, Sunrise Bank's
site and any applicable clearing house, regulatory agency or
Federal Reserve Bank. Where Sunrise Bank has elected to have
First Services, L.P. provide Telecommunication Services, the
price for the Services will be provided and billed as a
pass-thru expense.
(F) Network Support Service Fees and Local Network Fees are based
upon services rendered from First Services, L.P.'s premises.
Off-premise support will be provided upon Sunrise Bank's
request on an as available basis at First Services, L.P. then
current charges for time and materials, plus reasonable travel
and living expenses.
VI. CLIENT OBLIGATIONS
(A) Sunrise Bank shall be solely responsible for the input,
transmission or delivery of all information and data required
by First Services, L.P. to perform the services except
where Sunrise Bank has retained First Services, L.P. to handle
such responsibilities on its behalf. The data shall be
provided in a format and manner approved by First Services,
L.P. Sunrise Bank will provide at its own expense or procure
from First Services, L.P. all equipment, computer software,
communication lines and interface devices required to access
the First Services, L.P. System. If Sunrise Bank has elected
to provide such items itself, First Services, L.P. shall
provide Sunrise Bank with a list of compatible equipment and
software.
(B) Sunrise Bank shall designate appropriate Sunrise Bank
personnel for training in the use of the First Services, L.P.
System, shall allow First Services, L.P. access to Sunrise
Bank's site during normal business hours for conversion and
shall cooperate with First Services, L.P. personnel in the
conversion and implementation of the services.
(C) Sunrise Bank shall comply with any operating instructions on
the use of the First Services, L.P. system provided by First
Services, L.P., shall review all reports furnished by First
Services, L.P. for accuracy and shall work with First
Services, L.P. to reconcile any out of balance conditions.
Sunrise Bank shall determine and be responsible for the
authenticity and accuracy of all information and data
submitted to First Services, L.P.
(D) Sunrise Bank shall furnish, or if First Services, L.P. agrees
to so furnish, reimburse First Services, L.P. for courier
services applicable to the services requested.
VII. GENERAL ADMINISTRATION
First Services, L.P. is continually reviewing and modifying
the First Services, L.P. system to improve service and to comply with
federal government regulations applicable to the data utilized in
providing services to Sunrise Bank. First Services, L.P. reserves the
right to make changes in the service, including, but not limited to
operating procedures, security procedures, the type of equipment
resident at and the location of First Services, L.P.'s data center.
First Services, L.P. will provide Sunrise Bank at least sixty (60) days
prior written notice of changes in procedures or reporting and at least
six (6) months prior written notice of changes in service costs.
VIII. CLIENT CONFIDENTIAL INFORMATION
(A) First Services, L.P. shall treat all information and data
relating to Sunrise Bank business provided to First Services,
L.P. by Sunrise Bank, or information relating to Sunrise
Bank's customers, as confidential and shall safeguard Sunrise
Bank's information with the same degree of care used to
protect First Services, L.P.'s confidential information.
First Services, L.P. and Sunrise Bank agree that master
and tra \nsaction data files are owned by and constitute
property of Sunrise Bank. Sunrise Bank data and records
shall be subject to regulation and examination by State and
Federal supervisory agencies to the same extent as if such
information were on Sunrise Bank's premises. First Services,
L.P.'s obligations under this Section VIII shall survive the
termination or expiration of this Agreement.
(B) First Services, L.P. shall maintain adequate backup procedures
including storage of duplicate record files as necessary to
reproduce Sunrise Bank's records and data. In the event of a
service disruption due to reasons beyond First Services,
L.P.'s control, First Services, L.P. shall use diligent
efforts to mitigate the effects of such an occurrence.
IX. FIRST SERVICES, L.P. CONFIDENTIAL INFORMATION
(A) Sunrise Bank shall not use or disclose to any third persons
any confidential information concerning First Services, L.P.
First Services, L.P. confidential information is that which
relates to First Services, L.P.'s software, research,
development, trade secrets or business affairs including, but
not limited to, the terms and conditions of this Agreement but
does not include information in the public domain through no
fault of Sunrise Bank. Sunrise Bank obligations under this
Section IX shall survive the termination or expiration of this
Agreement.
(B) First Services, L.P.'s system contains information and
computer software which is proprietary and confidential
information of First Services, L.P., its suppliers and
licensees. Sunrise Bank agrees not to attempt to circumvent
the devices employed by First Services, L.P. to prevent
unauthorized access to the First Services, L.P.'s System.
X. WARRANTIES
First Services, L.P. will accurately process Sunrise Bank's work
provided that Sunrise Bank supplies accurate data and follows the
procedures described in First Services, L.P.'s User Manuals, notices
and advises. First Services, L.P. personnel will exercise due care in
the processing of Sunrise Bank's work. In the event of an error caused
by First Services, L.P.'s personnel, programs or equipment, First
Services, L.P. shall correct the data and/or reprocess the affected
report at no additional cost to Sunrise Bank.
XI. LIMITATION OF LIABILITY
IN NO EVENT SHALL FIRST SERVICES, L.P. BE LIABLE FOR LOSS OF GOODWILL,
OR FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING
FROM SUNRISE BANK'S USE OF FIRST SERVICES L.P.'S SERVICES, OR FIRST
SERVICES, L.P.'S SUPPLY OF EQUIPMENT OR SOFTWARE, UNDER THIS AGREEMENT
REGARDLESS OF WHETHER SUCH CLAIM ARISES IN TORT OR IN CONTRACT. FIRST
SERVICES, L.P.'S AGGREGATE LIABILITY FOR ANY AND ALL CAUSES OF ACTION
RELATING TO SERVICES PERFORMED HEREUNDER OR ANY DAMAGE OR LOSS INCURRED
OR SUSTAINED BY SUNRISE BANK RELATING TO THIS AGREEMENT AND THE
SERVICES PERFORMED HEREUNDER SHALL BE LIMITED TO THE AMOUNT OF TOTAL
FEES PAID BY SUNRISE BANK TO FIRST SERVICES, L.P. IN THE THREE (3)
MONTH PERIOD PRECEDING THE DATE THE CLAIM ACCRUED. FIRST SERVICES,
L.P.'S AGGREGATE LIABILITY FOR A DEFAULT RELATING TO EQUIPMENT OR
SOFTWARE SHALL BE LIMITED TO THE AMOUNT PAID FOR THE EQUIPMENT OR
SOFTWARE.
<PAGE>
XII. PERFORMANCE STANDARDS
(A) On-Line Availability - First Services, L.P.'s standard
of performance shall be on-line availability of the system
98% of the time that it is scheduled to be so available over a
three month period (the "Measurement Period"). Actual on-line
performance will be calculated monthly by comparing the number
of hours which the system was scheduled to be operational on
an on-line basis with the number of hours, or a portion
thereof, it was actually operational on an on-line basis.
Downtime may be caused by operator error, hardware
malfunction or failure, or environmental failures such as
loss of power or air conditioning. Downtime caused by reasons
beyond First Services, L.P.'s control should not be considered
in the statistics.
(B) Report Availability - First Services, L.P.'s standard of
performance for report availability shall be that, over a
three (3) month period, ninety-five percent (95%) of all
Critical Daily Reports shall be available for remote printing
on time without significant errors. A Critical Daily Report
shall mean priority group reports which First Services, L.P.
and Sunrise Bank have mutually agreed in writing are necessary
to properly account for the previous day's activity and
properly notify Sunrise Bank of overdraft, NSF or return
items. A significant error is one which impairs Sunrise Bank's
ability to properly account for the previous days activity
and/or properly account for overdraft, NSF or return items.
Actual performance will be calculated monthly by comparing
the total number of Sunrise Bank reports scheduled to be
available from First Services, L.P. to the number of reports
which were available on time and without error.
(C) Exclusive Remedy - In the event tha First Services, L.P.'
performance fails to meet the standards listed above and such
failure is not the result of Sunrise Bank's error or omission,
Sunrise Bank's sole and exclusive remedy for such default
shall be the right to terminate this Agreement in accordance
with the provisions of this paragraph. In the event that
First Services, L.P. fails to achieve any Performance
Standards, alone or in combination, for the prescribed
measurement period, Sunrise Bank shall notify First Services,
L.P. of its intent to terminate this agreement if First
Services, L.P. fails to restore performance to the committed
levels. First Services, L.P. shall advise Sunrise Bank
promptly upon correction of the system deficiencies (in no
event shall corrective action exceed sixty (60) days from the
notice date) and shall begin an additional measurement period.
Should First Services, L.P. fail to achieve the required
Performance Standards during the remeasurement period,
Sunrise Bank may terminate this Agreement and First Services,
L.P. shall cooperate with Sunrise Bank to achieve an orderly
transition to Sunrise Bank's replacement processing system.
Sunrise Bank may also terminate this Agreement if First
Services, L.P.'s performance for the same standard is
below the relevant performance standard for more than two
(2) measurement periods in any consecutive twelve (12)
months or for more than five (5) measurement periods during
the term of this agreement. During the period of transition,
Sunrise Bank shall pay only such charges as are incurred for
monthly fees until the date of deconversion. First Services,
L.P. shall not charge Sunrise Bank for services relating to
Sunrise Bank's deconversion.
(D) Audit - Sunrise Bank shall have the right to perform
reasonable audits, at its cost, upon giving written notice to
First Services, L.P. of its intent to do so. First Services,
L.P. shall provide, upon request, financial information to
Sunrise Bank.
XIII. DISASTER RECOVERY
(A) A Disaster shall mean any unplanned interruption of the
operations of or inaccessibility to the First Services, L.P.
data center which appear in First Services, L.P.'s reasonable
judgement to require relocation of processing to an
alternative site. First Services, L.P. shall notify Sunrise
<PAGE>
Bank as soon as possible after it deems a service outage
to be a Disaster. First Services, L.P. shall move the
processing of Sunrise Bank's standard on-line services to
an alternative processing center as expeditiously as
possible. Sunrise Bank shall maintain adequate records of
all transactions during the period of service interruption
and shall have personnel available to assist First Services
L.P., Inc. in implementing the switch over to the alternative
processing site. During a disaster, optional or on-request
services shall be provided by First Services, L.P. only
to the extent that there is adequate capacity at the alternate
center and only after stabilizing the provision of base
on-line services.
(B) First Services, L.P. shall work with Sunrise Bank to establish
a plan for alternative data communications in the event of a
disaster. Sunrise Bank shall be responsible for furnishing any
additional communications equipment and data lines required
under the adopted plan.
(C) First Services L.P., shall test its Disaster Recovery Services
Plan by conducting one annual test. Sunrise Bank agrees to
participate in and assist First Services, L.P. with such
testing. Test results will be made available to Sunrise Bank's
regulators, internal and external auditors, and (upon request)
to Sunrise Bank's insurance underwriters.
(D) Sunrise Bank understands and agrees that the First Services,
L.P. Disaster Recovery Plan is designed to minimize but not
eliminate risks associated with a disaster affecting First
Services, L.P.'s data center. First Services, L.P. does not
warrant that service will be uninterrupted or error free in
the event of a disaster. Sunrise Bank maintains responsibility
for adopting a disaster recovery plan relating to disasters
affecting Sunrise Bank's facilities and for securing business
interruption insurance or other insurance as necessary to
properly protect Sunrise Bank's revenues in the event of a
disaster.
XIV. DEFAULT
(A) In the event that Sunrise Bank is thirty (30) days in arrears
in making any payment required, or in the event of any other
material default by either First Services, L.P. or Sunrise
Bank in the performance of their obligations, the affected
party shall have the right to give written notice to the other
of the default and its intent to terminate this Agreement
stating with reasonable particularity the nature of the
claimed default. This Agreement shall terminate if the default
has not been cured within a reasonable time with a minimum
being thirty (30) days from the effective date of the notice.
(B) Upon the expiration of this Agreement, or its termination,
First Services, L.P. shall furnish to Sunrise Bank such copies
of Sunrise Bank's data files as Sunrise Bank may request in
machine readable format form along with such other information
and assistance as or is reasonable and customary to enable
Sunrise Bank to deconvert from the First Services, L.P.
system. Sunrise Bank shall reimburse First Services, L.P. for
the production of data records and other services at First
Services, L.P.'s current fees for such services.
XV. INSURANCE
First Services, L.P. carries Comprehensive General Liability insurance
with primary limits of two million dollars, Commercial Crime insurance
covering Employee Dishonesty in the amount of fifteen million dollars,
all-risk replacement cost coverage on all equipment used at First
Services, L.P.'s data center and Workers Compensation coverage on First
Services, L.P. employees wherever located in the United States. Sunrise
Bank shall carry adequate insurance to cover liability for source
documents while in transit and in case of data loss through errors and
omissions.
XVI. GENERAL
(A) This Agreement is binding upon the parties and their
respective successors and permitted assigns. Neither party may
assign this Agreement in whole or in part without the consent
of Sunrise Bank and/or First Services, L.P., provided,
however, that First Services, L.P. may subcontract any or all
of the services to be performed under this Agreement without
the written consent of Sunrise Bank. Any such subcontractors
shall be required to comply with all of the applicable terms
and conditions of this Agreement.
(B) The parties agree that, in connection with the performance of
their obligations hereunder, they will comply with all
applicable Federal, State, and local laws including the laws
and regulations regarding Equal Employment Opportunities.
(C) First Services, L.P. agrees that the Office of Thrift
Supervision, FDIC, or other authority will have the authority
and responsibility provided to the other regulatory agencies
pursuant to the Bank Service Corporation Act, 12 U.S.C. 1867
(C) relating to service performed by contract or otherwise.
First Services, L.P., also agrees that its services shall be
subject to oversight by the O.C.C., FDIC or state banking
departments as may be applicable under laws and regulations
pertaining to Sunrise Bank's charter and shall, if applicable,
provide the O.T.S. DistrictDirector of the district in which
the data processing center is located and other state and
federal agencies with a copy of First Services, L.P.'s
current audit and financial statements and a copy of any
current third party review report when a review has been
performed.
(D) Neither party shall be liable for any errors, delays or
non-performance due to events beyond its reasonable control
including, but not limited to, acts of God, failure or delay
of power or communications, changes in law or regulation or
other acts of governmental authority, strike, weather
conditions or transpor- tation.
(E) All written notices required to be given under this Agreement
shall be sent by Registered or Certified Mail, Return Receipt
Requested, postage prepaid, or by confirmed facsimile to the
persons and at the addresses listed below or to such other
address or person as a party shall have designated in writing.
First Services, L.P. Sunrise Bank
#l First Missouri Center Five Sierragate Plaza
St. Louis, Missouri 63l4l Roseveille, California 95678
(F) The failure of either party to exercise in any respect any
right provided for herein shall not be deemed a waiver of any
rights.
(G) Each party acknowledges that is has read this Agreement,
understands it, and agrees that it is the complete and
exclusive statement of the Agreement between the parties and
supersedes and merges any prior or simultaneous proposals,
understandings and all other agreements with respect to the
subject matter. This Agreement may not be modified or altered
except by a written instrument duly executed by both parties.
(H) No waiver of any of the terms of this Agreement shall be
effective unless in writing and signed by the duly authorized
representative of the party charged therewith. No waiver of
any provision hereof shall extend to or affect any obligation
not expressly waived, impair any rights consequent on such
obligation or imply a subsequent waiver of that or any other
provision.
(I) This Agreement shall be governed by, construed and interpreted
<PAGE>
in accordance with the laws of the State of Missouri.
IN WITNESS WHEREOF, the parties have executed this Agreement the date
first above written.
Sunrise Bank First Services, L.P.
Five Sierragate Plaza One First Missouri Center
Roseville, California 95678 St. Louis, Missouri 63141
BY:/s/ Donald W. Williams BY:/s/ Thomas A. Bangert
- ------------------------- ------------------------
Donald W. Williams Thomas A. Bangert
Chairman President
<PAGE>
Attachment 1
Sunrise Bank - Product And Price Schedule
Effective 4/1/97
DATA PROCESSING
<TABLE>
<CAPTION>
Accounts
<S> <C> <C> <C>
DDA 10,000 $0.50
Savings 10,000 $0.50
Time 10,000 $0.50
Loans 10,000 $0.50
Transactions 250,000 $0.01
Terminal Management 25 $5.00
Branch Data Connection Included
ATM Management Included
Telephone Switch Mgmt Included
Other Services Included
ITEM PROCESSING
Proof 200,000 $0.020
POD And EFT 200,000 $0.009
Inclearing and Transmission 50,000 $0.009
Statements:
DDA $0.250
Savings $0.050
Time $0.100
Loan $0.100
Lockbox $0.020
Branch Courier Route $17.00
Mail Services $200.00
DEPOSIT SERVICES
Customer Accounts 40,000 $0.30
</TABLE>
<PAGE>
Included in Above:
<TABLE>
<CAPTION>
<S> <C> <C>
Charge Backs CIF Management
Returns Exception Item Processing
Stops Signature Verification
Wire Transfers Corporate Analysis
ACH Incoming Cash Management Support
ACH Origination FirstLink
Official Checks Control Disbursement
Money Orders Balance Reporting
Savings Bonds Research
Funds Transfer Adjustments
B Notices 1099s "Due From" Reconciliation
Kiting "Due To" Reconciliation
Holds FRB Reconciliation's
Dormant Accounts Application Balancing
ATM Settlement Records Management
Debit Card Settlement Savings Bonds
OTHER SERVICES
Collection System (Cyber Resources) Cash Management System (FirstLink)
Recovery System (Cyber Resources) Commercial Analysis
Asset/Liability (Bankware) Charge Back System
Optical System (RVI) Teller Platform (ISC)
MCIF (OKRA) ATM Support
Loan Documentation (FTI/CFI) General Ledger
Bank Audit Fixed Asset Interface
Accounts Payable Interface Interactive Voice
Remote Laser Printing Card Management System
ACH Origination Wire Transfer (Fundtec)
Organization Profitability (IPS) NOW Reclassification
Loan Tracking (Baker Hill) Retrofit/New Releases
Credit Scoring (Fair Issac)
</TABLE>
<PAGE>
EXHIBIT 13.1
FIRST BANKS, INC.
1997 ANNUAL REPORT
<PAGE>
FIRST BANKS, INC.
TABLE OF CONTENTS
Page
LETTER TO SHAREHOLDERS................................................... 1
SELECTED CONSOLIDATED AND OTHER FINANCIAL DATA........................... 2
MANAGEMENT'S DISCUSSION AND ANALYSIS..................................... 3
QUARTERLY CONDENSED FINANCIAL DATA - UNAUDITED........................... 30
INDEPENDENT AUDITORS' REPORT............................................. 31
FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS.............................................. 32
CONSOLIDATED STATEMENTS OF INCOME........................................ 34
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY............... 35
CONSOLIDATED STATEMENTS OF CASH FLOWS.................................... 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................... 37
DIRECTORS AND EXECUTIVE OFFICERS......................................... 56
INVESTOR INFORMATION..................................................... 57
<PAGE>
To our Valued Shareholders, Customers and Friends:
We are pleased to report our accomplishments and continued progress toward
furthering First Banks' long term objective as a premier provider of financial
services. To that end, First Banks will remain focused on generating progressive
and profitable growth through the continued development of our existing
franchise, augmented by the acquisition of other financial institutions.
Indicative of our recent growth is the continuing improvement in our
operating results. For 1997, net income increased to $33.0 million, compared to
$20.2 million for 1996. The results of operations for 1996 were adversely
affected by a one-time Savings Association Insurance Fund special assessment of
$8.2 million or $5.3 million on an after-tax basis.
Since 1992, First Banks has completed 15 acquisitions of banks and thrifts.
The completion of these acquisitions, coupled with increased business
development activities, fueled asset growth from $2.0 billion at December 31,
1992 to $4.2 billion at December 31, 1997 and provided access into several major
markets. The long term opportunities provided by the entry into these markets,
including Chicago, Dallas, Houston and southern, central and northern
California, represent an unprecedented opportunity for First Banks and a
catalyst for future growth.
Recognizing and acting upon opportunities has been present at First Banks
for years. Going back to 1982, when total assets were $325 million, First Banks
embarked on a plan to expand into central and southern Illinois and further
develop its presence in eastern Missouri. Reflective of our success in this
endeavor is the position of First Banks' lead bank, First Bank, with assets now
totaling $2.8 billion. The profitability of First Bank during this time-frame
was the primary source for First Banks' stockholders' equity increasing from
$26.5 million at December 31, 1982 to $231.5 million by the end of 1997.
With necessary capital, technology and operational support, First Banks is
again embarking on the plan to expand and develop our current franchise.
Accepting the challenge, First Banks has been aggressively quantifying the needs
of the local businesses and consumers and adapting to the changing requirements
of our existing customers. Furthering the plan is the effort and success of each
local market's management team. Each team, equipped with superior products and
services, is expanding their market presence by attracting and retaining
customers through the development and addition of experienced banking officers
and support staff. Surrounding these efforts are the resources of First Banks
and our unconditional guarantee never to sell-out and desert our customers.
As we reflect back over the past century, we are reminded of the many
challenges and successes at First Banks. While those challenges are now history
and new challenges are now present, First Banks' mind-set and sound business
practices will approach each new challenge with optimism that a future success
lies within such challenges.
In closing, I would like to take this opportunity to welcome our new
shareholders, joining us through the issuance of the Preferred Securities, and
to extend our sincerest appreciation for the dedication of our employees, the
loyalty of our customers and the continued support of our shareholders.
Sincerely,
James F. Dierberg
Chairman, President and
Chief Executive Officer
<PAGE>
The following table presents selected consolidated financial information
for First Banks, Inc. and subsidiaries (First Banks) for each of the years in
the five-year period ended December 31, 1997. The comparability of the selected
data presented is affected by the acquisitions of eleven banks and four thrifts
during the five-year period. These acquisitions were accounted for as purchases
and, accordingly, the selected data includes the financial position and results
of operations of each acquired entity only for the periods subsequent to its
date of acquisition.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(dollars expressed in thousands, except per share data)
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Interest income................................... $ 295,101 266,021 261,621 162,435 140,012
Interest expense.................................. 148,831 141,670 144,945 70,670 58,058
---------- ------- ------- ------- --------
Net interest income............................... 146,270 124,351 116,676 91,765 81,954
Provision for possible loan losses................ 11,300 11,494 10,361 1,858 4,456
---------- ------- ------- ------- --------
Net interest income after provision for
possible loan losses......................... 134,970 112,857 106,315 89,907
77,498
Noninterest income................................ 25,697 20,721 19,407 13,634 9,953
Noninterest expense............................... 110,287 105,741 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............... 50,380 27,837 34,156 35,807 34,020
Provision for income taxes........................ 16,083 6,960 11,038 12,012 11,592
---------- ------- ------- ------- --------
Income before minority interest in (income)
loss of subsidiaries and cumulative effect
of change in accounting principle.............. 34,297 20,877 23,118 23,795 22,428
Minority interest in (income) loss of subsidiaries (1,270) (659) 1,353 237 --
----------- ------- ------- ------- --------
Income before cumulative effect of change
in accounting principle......................... 33,027 20,218 24,471 24,032 22,428
Cumulative effect of change in accounting
principle....................................... -- -- -- -- 766
----------- ------- ------- ------- --------
Net income........................................ $ 33,027 20,218 24,471 24,032 23,194
=========== ======= ======= ======= ========
Dividends:
Preferred stock................................... $ 5,067 5,728 5,736 5,735 5,766
Common stock...................................... -- -- -- -- --
Ratio of total dividends declared to net income... 15.34% 28.33% 23.44% 23.86% 24.86%
Per Share Data:
Earnings per common share:
Basic........................................... $ 1,181.69 612.46 791.82 773.31 741.69
Diluted......................................... 1,134.28 596.83 759.09 735.28 696.30
Weighted average shares of common stock
outstanding..................................... 23,661 23,661 23,661 23,661 23,498
Balance Sheet Data (at year-end):
Investment securities............................. $ 795,530 552,801 508,323 587,878 531,148
Loans, net of unearned discount................... 3,002,200 2,767,969 2,744,219 2,073,570 1,362,018
Total assets...................................... 4,165,014 3,689,154 3,622,962 2,879,570 2,031,909
Total deposits.................................... 3,684,595 3,238,567 3,183,691 2,333,144 1,779,389
Notes payable..................................... 55,144 76,330 88,135 46,203 --
Common stockholders' equity....................... 218,474 184,439 166,542 149,249 133,781
Total stockholders' equity........................ 231,537 251,389 234,605 217,312 201,844
Earnings Ratios:
Return on average total assets.................... 0.87% 0.57% 0.70% 1.00% 1.16%
Return on average total stockholders' equity...... 12.91 8.43 10.79 11.48 12.27
Asset Quality Ratios:
Allowance for possible loan losses to loans....... 1.68 1.69 1.92 1.37 1.69
Nonperforming loans to loans (1).................. 0.80 1.09 1.44 0.78 0.90
Allowance for possible loan losses to
nonperforming loans (1)......................... 209.88 154.55 133.70 175.37 188.50
Nonperforming assets to loans and foreclosed
assets (2)....................................... 1.04 1.47 1.71 1.10 1.08
Net loan charge-offs to average loans............. 0.27 0.72 0.41 0.09 0.33
Capital Ratios:
Average total stockholders' equity to
average total assets............................ 6.70 6.79 6.49 8.70 9.46
Total risk-based capital ratio.................... 10.26 9.23 9.34 12.68 16.90
Leverage ratio.................................... 6.80 5.99 5.32 7.54 9.30
- ----------------
(1) Nonperforming loans consist of nonaccrual loans and loans with restructured
terms.
(2) Nonperforming assets consist of nonperforming loans and foreclosed
assets.
</TABLE>
<PAGE>
The discussion set forth in the Letter to Shareholders and Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains certain forward looking statements with respect to the financial
condition, results of operations and business of First Banks. These
forward-looking statements are subject to certain risks and uncertainties, not
all of which can be predicted or anticipated. Factors that may cause actual
results to differ materially from those contemplated by the forward looking
statements herein include general market conditions as well as conditions
specifically affecting the banking industry generally and factors having a
specific impact on First Banks, including but not limited to fluctuations in
interest rates and in the economy; the impact of laws and regulations applicable
to First Banks and changes therein; competitive conditions in the markets in
which First Banks conducts its operations; and the ability of First Banks to
respond to changes in technology. With regard to First Banks' efforts to grow
through acquisitions, factors that could affect the accuracy or completeness of
forward-looking statements contained herein include the potential for higher
than acceptable operating costs arising from the geographic dispersion of the
offices of First Banks, as compared with competitors operating solely in
contiguous markets; the competition of larger acquirers with greater resources
than First Banks; fluctuations in the prices at which acquisition targets may be
available for sale and in the market for First Banks' securities; and the
potential for difficulty or unanticipated costs in realizing the benefits of
particular acquisition transactions. Readers of this Annual Report should
therefore not place undue reliance on forward-looking statements.
Company Profile
First Banks is a registered bank holding company incorporated in Missouri
and headquartered in St. Louis County, Missouri. At December 31, 1997, First
Banks had $4.17 billion in total assets, $3.00 billion in total loans, net of
unearned discount, $3.68 billion in total deposits and $231.5 million in total
stockholders' equity. First Banks operates through its subsidiary financial
institutions and bank holding companies (Subsidiary Banks) as follows:
First Bank, headquartered in St. Louis County, Missouri (First Bank).
First Banks America, Inc., headquartered in St. Louis County, Missouri
(FBA), and its wholly owned subsidiaries:
BankTEXAS N. A., headquartered in Houston, Texas (BankTEXAS).
First Bank of California, headquartered in Roseville, California
(FB California).
CCB Bancorp, Inc., headquartered in Irvine, California (CCB), and its
wholly owned subsidiary: First Bank & Trust, headquartered
in Irvine, California (FB&T).
First Commercial Bancorp, Inc., headquartered in Sacramento, California
(FCB), and its wholly owned subsidiary:
First Commercial Bank, headquartered in Sacramento, California (First
Commercial).
All of the Subsidiary Banks are wholly owned by their respective parents
except FBA and FCB, which were 65.85% and 61.48% owned, respectively, by First
Banks at December 31, 1997. As discussed under "--Acquisitions," FB California
is a newly-formed California state bank resulting from the merger of Sunrise
Bank of California, which was acquired by FBA on November 1, 1996 and Surety
Bank, Vallejo, California, which was acquired by FBA on December 1, 1997. In
February 1998, FCB was acquired by FBA, and its subsidiary bank, First
Commercial, was merged into FB California.
Through the Subsidiary Banks, First Banks offers a broad range of
commercial and personal banking services including certificate of deposit
accounts, individual retirement and other time deposit accounts, checking and
other demand deposit accounts, interest checking accounts, savings accounts and
money market accounts. Loans include commercial, financial and agricultural,
real estate construction and development, commercial and residential real
estate, consumer and installment, student and Small Business Administration
loans. Other financial services include mortgage banking, credit cards, discount
brokerage, credit-related insurance, automatic teller machines, telephone
account access, safe deposit boxes, trust and private banking services, and cash
management services.
First Banks centralizes overall corporate policies, procedures and
administrative and operational support functions for the Subsidiary Banks.
Primary responsibility for managing the Subsidiary Banks remains with their
officers and directors.
<PAGE>
>
The following table lists the Subsidiary Banks at December 31, 1997:
<TABLE>
<CAPTION>
Loans, net of
Number of Total unearned Total
Subsidiary Banks locations assets discount deposits
---------------- --------- ------ -------- --------
(dollars expressed in thousands)
<S> <C> <C> <C> <C>
First Bank...................................... 98 $2,843,575 2,185,493 2,559,968
FBA:
BankTEXAS................................... 6 267,152 176,341 231,175
FB California............................... 4 179,999 137,096 152,825
CCB:
FB&T........................................ 17 672,410 385,251 598,560
FCB:
First Commercial............................ 6 190,918 118,018 172,737
</TABLE>
As described under "--Financial Condition and Average Balances," on
February 3, 1997, First Preferred Capital Trust (First Trust), a Delaware
statutory business trust, issued 3,450,000 shares of 9.25% cumulative trust
preferred securities (Preferred Securities) for $86.25 million. In addition,
First Trust issued $2.7 million of common securities which are owned by First
Banks. The Preferred Securities are publicly held and listed on the Nasdaq Stock
Market's National Market System. The Preferred Securities have no voting rights
except in certain limited circumstances. On December 1, 1997, First Banks
redeemed all of the outstanding Class C, 9.00% increasing rate, redeemable,
cumulative preferred stock (Class C Preferred Stock) which had previously been
publicly held and listed on the Nasdaq Stock Market's National Market System.
The voting stock of First Banks is owned by various trusts which were
created by and are administered by and for the benefit of Mr. James F. Dierberg,
First Banks' Chairman of the Board, President and Chief Executive Officer, and
members of his immediate family. Accordingly, Mr. Dierberg controls the
management and policies of First Banks and the election of its directors.
General
In the development of its banking franchise, First Banks has traditionally
placed primary emphasis upon acquiring other financial institutions as a means
of achieving its growth objectives. Acquisitions may serve to enhance its
presence in a given market, to expand the extent of its market area or to enter
new or noncontiguous markets. However, because First Banks has historically used
cash in its acquisitions, the characteristics of the acquisition arena at any
given point in time may place it at a competitive disadvantage relative to other
acquirers able to offer stock transactions. This is the result of the market
attractiveness of other financial institutions' stock, the advantages of
tax-free exchanges to the selling shareholders, and the financial reporting
flexibility inherent in structuring stock transactions. Consequently, First
Banks' acquisition activities are somewhat sporadic, in which multiple
transactions are consummated in a particular period, followed by substantially
less active acquisition periods. Furthermore, the 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
attributable to the constraints imposed by the amount of funds required for a
larger transaction, as well as the opportunity to minimize the aggregate premium
required through smaller individual transactions. Secondly, First Banks may
acquire institutions which have more significant problems which could reduce
their attractiveness to other potential acquirers, and therefore reduce the
amount of acquisition premiums required. Finally, First Banks realizes that
<PAGE>
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, or pursue internal growth more
aggressively. These patterns have been evident in First Banks' growth during the
four years ended December 31, 1997.
During 1995, First Banks completed seven acquisitions which increased total
assets from $2.88 billion on December 31, 1994 to $3.62 billion on December 31,
1995. These acquisitions provided First Banks with access into several new major
market areas and, accordingly, an attractive opportunity for future growth and
profitability. However, in 1996 and 1997, as acquisition pricing in these areas
escalated dramatically, First Banks' acquisition activities were substantially
reduced. In 1996, First Banks completed one acquisition. In 1997, First Banks
acquired one bank, as well as assuming the liabilities and purchasing certain
assets of three branch offices of a savings bank.
Anticipating that increasing acquisition pricing would eventually make
growth solely by acquisition economically unfeasible, and recognizing that rapid
consolidation within the banking industry would create new business development
opportunities, beginning in 1993 First Banks began a continuing program for
substantial enhancement of its capabilities to achieve and manage internal
growth. This program required significant increases in the resources dedicated
to commercial and retail business development, financial service product line
and delivery systems, branch development and training, and administrative and
operational support. These efforts were manifested during this period in various
changes with the organization.
Many of the acquired loan portfolios exhibited compositions which were
skewed toward certain loan types which reflected the abilities and experiences
of their management. This was particularly evident in acquisitions of savings
banks, which had portfolios heavily concentrated in single family and/or
multi-family residential real estate lending, and in BankTEXAS, which had a
portfolio consisting primarily of indirect automobile loans. In order to achieve
a more diversified portfolio, to address asset quality issues in the portfolios
and to achieve a higher level interest yield on the loan portfolio, a
substantial portion of the loans which were acquired during this time were
reduced through payments, refinancing with other financial institutions,
charge-offs, and, in two instances, sales. As a result, the portfolio of
one-to-four family residential real estate loans, after reaching a maximum of
$1.20 billion at December 31, 1995, was reduced to $1.06 billion at December 31,
1996 and $915.2 million at December 31, 1997. Similarly, the portfolio of
consumer and installment loans, net of unearned discount, the majority of which
is indirect automobile loans, decreased from $422.5 million at December 31, 1994
to $413.6 million, $333.3 million and $279.3 million at December 31, 1995, 1996
and 1997, respectively.
While First Banks' acquisitions in 1994 and 1995 introduced it to new major
market areas which offer significant long-term opportunities, these acquisitions
presented several immediate challenges. Many of the acquired institutions,
particularly those in California, exhibited some degree of distress prior to
their purchase by First Banks, generally including asset quality problems. While
these problems had been identified and considered in the acquisition pricing,
this led to an increase in non-performing assets to $47.1 million at December
31, 1995 from $22.9 million at December 31, 1994. As First Banks worked to
correct these asset quality problems, total nonperforming assets were reduced to
$40.9 million at December 31, 1996 and $31.4 million at December 31, 1997.
As these segments of the loan portfolio decreased, they were replaced with
more diversified, better quality and higher yielding loans which were internally
generated by the business development function which had been established. With
the acquisitions, the business development function was expanded into the new
market areas in which First Banks was then operating. Consequently, in spite of
relatively large reductions in acquired portfolios, the aggregate loan
portfolio, net of unearned discount, increased from $2.07 billion at December
31, 1994 to $2.74 billion, $2.77 billion and $3.00 billion at December 31, 1995,
1996 and 1997, respectively.
While this restructuring of the loan portfolio was occurring, First Banks
was also changing the composition of its deposits. Several of the institutions
which First Banks has acquired since 1990 were savings banks. Traditionally,
savings banks have placed greater reliance on time deposits as a source of
funding than their commercial banking counterparts. Although time deposits are
generally a stable source of funds, they are typically the highest cost deposits
<PAGE>
available, the depositors tend to be relatively sensitive to interest rates in
the market, and frequently the customers have no other banking relationship with
the financial institution. These characteristics suggest that many of these
customers move their deposits between financial institutions fairly readily, and
have limited loyalty to any particular institution. Consequently, First Banks'
deposit development programs have been directed toward increased transaction
accounts, such as demand and savings accounts, rather than time deposits, and
have emphasized attracting more than one account relationship with customers by
cross selling them through packaging various account types and offering
incentives to deposit customers on other deposit or non-deposit services. As a
result, the net growth in deposits has been focused in transaction, rather than
time accounts. At December 31, 1995 and 1996, total time deposits were $1.80
billion and $1.81 billion, or 56.4% and 55.9% of total deposits, respectively.
Although the deposits included in acquisitions in 1997 were predominately time
deposits, by December 31, 1997, total time deposits had increased to $1.90
billion, but decreased to 51.7% of total deposits.
The simultaneous growth by acquisition of financial institutions and the
building of the infrastructure necessary to achieve significant internal growth
has had an adverse effect on the operating results of First Banks. The effects
of this were reflected in a lower net interest margin, increased provisions for
possible loan losses and higher noninterest expenses.
As discussed previously, savings banks generally focus on residential
mortgage loans and residential mortgage-backed securities to generate interest
income. These assets tend to yield lower interest rates than other types of
loans. At the same time, their reliance on time deposits, accompanied by a
relatively small amount of noninterest-bearing demand accounts, tends to result
in a deposit cost which is higher than commercial banks. This results in
generally lower net interest margins than those experienced by comparable
commercial banks. The acquisition of several savings banks by First Banks has
resulted in a reduction of its net interest margin which has not been fully
mitigated. Furthermore, the efforts to change the overall deposit composition
frequently involves the payment of premium interest rates or other incentive
costs for a period of time to influence the account selection by customers.
Consequently, while net interest income increased from $116.7 million for the
year ended December 31, 1995 to $124.4 million and $146.3 million for the years
ended December 31, 1996 and 1997, respectively, the net interest margin
reflected relatively modest improvement from 3.60% in 1995 to 3.79% and 4.09%
for 1996 and 1997, respectively.
Recognizing the acquisition program involved the assumption of additional
credit risk, First Banks controlled this exposure by pursuing a strategy of
maintaining higher than average asset quality in its Missouri and Illinois
operations through strict adherence to its lending policies and practices, and
consistently building the allowance for possible loan losses through substantial
provisions. First Banks provided $11.30 million, $11.49 million and $10.36
million for possible loan losses for the years ended December 31, 1997, 1996 and
1995, respectively. At the same time, First Banks expanded its credit
administration and loan review functions to more closely monitor the overall
risk inherent in the loan portfolio.
Finally, most of the changes described above contributed to an overall
increase in noninterest expenses. The addition of a significant number of new
banking locations through acquisition added new expenses for staffing, bank
premises and equipment and other purposes necessary to operate those locations.
In addition, the time and resources needed to manage a significantly larger
portfolio of problem assets required greater dedication of personnel and third
party assistance than had previously been necessary. Furthermore, the
augmentation of the existing organization to provide the ability to achieve
significant internal growth and to operate and manage a larger organization
entailed substantial additional expenses, particularly in personnel and
equipment. These increases in noninterest expenses were only partially offset by
the economies available as acquired entities were merged into First Banks' other
operations and systems. Consequently, total noninterest expenses increased from
$67.73 million for the year ended December 31, 1994 to $91.57 million, $105.74
million and $110.29 million for the years ended December 31, 1995, 1996 and
1997, respectively. Included in noninterest expenses for 1996 was the
nonrecurring assessment to recapitalize the Savings Association Insurance Fund
(SAIF) of the Federal Deposit Insurance Corporation (FDIC) of $8.2 million.
<PAGE>
Acquisitions
Prior to 1994, First Banks' acquisitions had been limited to its primary
market area of eastern Missouri and central and southern Illinois. However, the
premiums required to successfully pursue acquisitions in this area began
escalating sharply, dramatically reducing 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. As a
result, while First Banks continued to pursue acquisitions within this area, it
then turned much of its attention to institutions which could be acquired at
more attractive prices which were within major metropolitan areas outside its
immediate market area. This had led to the acquisition of a financial
institution which had offices in Dallas and Houston, Texas in 1994 and several
acquisitions of financial institutions which had offices in Los Angeles, Orange
County, Santa Barbara, San Francisco, San Jose and Sacramento, California in
1995, 1996 and 1997.
<TABLE>
<CAPTION>
During the three years ended December 31, 1997, First Banks completed nine
acquisitions and two deposit purchases. These transactions, as more fully
described in Note 2 to the accompanying consolidated financial statements, are
summarized as follows:
Loans, net of Number of
Total unearned Investment banking
Entity Date assets discount securities Deposits locations
------ ---- ------ -------- ---------- -------- ---------
(dollars expressed in thousands)
1995
QCB Bancorp
<S> <C> <C> <C> <C> <C>
Long Beach, California (2).... November 30, 1995 $ 56,200 35,100 10,700 50,200 3
La Cumbre Savings Bank F.S.B.
Santa Barbara, California (2). 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 (2)........ May 31, 1995 83,300 68,700 7,500 61,600 2
HNB Financial Group
Huntington Beach,
California (2)................ 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 (1)......... January 4, 1995 412,000 225,000 125,000 286,000 10
----------- -------- -------- ------- --
$ 1,145,900 721,700 216,500 918,100 31
=========== ======== ======== ======= ==
1996
Sunrise Bancorp, Inc.
Roseville, California ........ November 1, 1996 $ 110,800 61,100 18,100 92,000 3
=========== ======== ======== ======= ===
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1997
Surety Bank
<S> <C> <C> <C> <C> <C>
Vallejo, California (4)....... December 1, 1997 $ 72,800 54,400 11,800 67,500 2
Highland Federal Bank,
F.S.B., Woodland Hills,
California branch office (3).. September 30, 1997 42,400 100 -- 42,400 1
Highland Federal Bank,
F.S.B., Long Beach,
California branch offices (3). March 31, 1997 40,400 100 -- 40,400 2
----------- -------- -------- ------- ---
$ 155,600 54,600 11,800 150,300 5
=========== ======== ======== ======= ===
</TABLE>
- ------------------
(1) River Valley Holdings, Inc. nd its thrift subsidiary were merged into First
Bank.
(2) QCB Bancorp, La Cumbre Savings Bank, F.S.B., Irvine City Financial and HNB
Financial Group and their respective banking and thrift subsidiaries were
merged into CCB and its banking subsidiary, FB&T.
(3) The Woodland Hills branch office and the Long Beach branch offices of
Highland Federal Savings Bank, F.S.B. were acquired by FB&T through a
purchase of certain assets and assumption of deposit liabilities of the
branch offices. Total assets consist primarily of cash received upon
assumption of deposit liabilities.
(4) Sunrise Bancorp, Inc. and its banking subsidiary, and Surety Bank were
merged into FBA and its indirect banking subsidiary, FB California.
Except for the acquisition of Surety Bank, these acquisitions were funded
by First Banks from available cash reserves, proceeds from the sales and
maturities of available-for-sale investment securities, borrowing under a
promissory note to a former shareholder, borrowing under First Banks' credit
agreement with a group of unaffiliated banks (Credit Agreement) and the proceeds
of the Preferred Securities issued in February 1997. The 49% cash portion of the
acquisition of Surety Bank was funded from available cash. The remaining 51% was
acquired through an exchange of shares of common stock of FBA. See Note 2 to the
consolidated financial statements.
On December 1, 1997, Sunrise Bank of California and Surety Bank were merged
into FB California, a newly-formed California state bank. In February 1998, FCB
was acquired by FBA in an exchange of FBA common stock for FCB common stock. In
connection with this transaction, FCB was merged into a wholly owned subsidiary
of FBA, and First Commercial was merged into FB California. In addition, on
February 2, 1998, FBA acquired Pacific Bay Bank, which was then merged into FB
California. As of December 31, 1997, Pacific Bay Bank had $37.5 million in total
assets, $29.3 million in total loans, net of unearned discount, $1.9 million in
total interest-bearing deposits with other financial institutions and $33.9
million in total deposits. Pacific Bay Bank operates through one banking
location in San Pablo, California and one loan production office in Lafayette,
California.
Financial Condition and Average Balances
First Banks' average total assets were $3.82 billion for the year ended
December 31, 1997, compared to $3.53 billion and $3.50 billion for the years
ended December 31, 1996 and 1995, respectively. Total assets at December 31,
1997 were $4.17 billion, an increase of $480 million, or 13.0%, over total
assets of $3.69 billion at December 31, 1996. The increase in total assets was
primarily attributable to $72.8 million of assets provided in the acquisition of
Surety Bank, growth in total loans of $180 million, excluding those acquired in
the acquisition of Surety Bank of $54.4 million, and an increase in investment
securities of $230.9 million, excluding those attributable to Surety Bank. The
increase in total assets was partially offset by a decrease in Federal Funds
sold of $50.6 million to $23.5 million from $74.1 million at December 31, 1997
and 1996, respectively.
Loans, net of unearned discount, increased by $234 million to $3.00 billion
at December 31, 1997 from $2.77 billion at December 31, 1996. The acquisition of
Surety Bank provided $54.4 million of loans, $31.7 million of which were
one-to-four family residential real estate loans. In addition to these loans,
$378.9 million of net loan growth was provided by corporate banking business
development, consisting of an increase of $159.7 million of commercial,
financial and agricultural loans, $120.5 million of real estate construction and
<PAGE>
land development loans and $98.7 million of commercial real estate loans. These
increases were partially offset by continuing reductions in residential real
estate loans of $144.7 million and in consumer and installment loans, net of
unearned discount, which consists primarily of indirect automobile loans, of
$54.3 million. These changes are the result of the focus which First Banks has
placed on its business development efforts and the portfolio reorientation which
began in 1995. This reorientation provided that substantially all of the
conforming residential mortgage loan production of First Banks would be sold in
the secondary mortgage market, and that the origination of indirect automobile
loans would be substantially reduced. Tables summarizing the composition of the
loan portfolio are presented under "--Lending and Credit Management."
The increase in assets was funded by an increase in total deposits of $440
million to $3.68 billion at December 31, 1997 from $3.24 billion at December 31,
1996, an increase of 13.8%. This increase included the deposits of Surety Bank
of $67.5 million, and the deposits of three branches of Highland Federal Bank,
F.S.B. of $82.8 million which were acquired during the year. Excluding the
acquired deposits, total deposits increased by $295.7 million for the year. This
is the result of First Banks' retail marketing efforts, the commercial business
development program and the opening of two new branch offices during the year. A
summary of the composition of deposits is presented under "--Deposits."
In January 1997, First Banks formed First Trust, a Delaware statutory
business trust, for the purpose of conducting a public offering of cumulative
trust securities. First Banks owns all of the common securities of First Trust.
On February 3, 1997, First Trust issued and sold, pursuant to an effective
registration statement filed with the Securities and Exchange Commission,
3,450,000 shares of 9.25% Preferred Securities for $86.25 million. The Preferred
Securities, which are publicly held, are listed on the Nasdaq Stock Market's
National Market System and have no voting rights except in certain limited
circumstances. After payment of offering expenses, the proceeds of the offering
were used to reduce borrowings under the Credit Agreement, for purchases of
shares of Class C Preferred Stock, and for various short-term investments.
On December 1, 1997, First Banks redeemed all of its remaining outstanding
Class C Preferred Stock for $47.1 million. The effect of the redemption was a
reduction of First Banks' total stockholders' equity, and consequently
regulatory capital, by the amount of the redemption. However, the structure of
the Preferred Securities satisfies the regulatory requirements to be included in
First Banks' capital base in a manner identical to the Class C Preferred Stock.
For the year ended December 31, 1996, total average assets were $3.53
billion compared to $3.50 billion for the year ended December 31, 1995. Total
assets at December 31, 1996 were $3.69 billion, an increase of $70 million from
total assets of $3.62 billion at December 31, 1995. The increase was primarily
attributable to the acquisition of Sunrise Bancorp, Inc., which provided $110.8
million in total assets. This increase was partially offset by a settlement in
January 1996 of the sale of $41.3 million of investment securities which were
reflected as a receivable at December 31, 1995. Loans, net of unearned discount,
increased to $2.77 billion at December 31, 1996 from $2.74 billion at December
31, 1995. Included in this growth was $61.1 million of loans provided by the
acquisition of Sunrise Bancorp, Inc. and a net increase of $209.3 million in
loans through First Banks' commercial business development efforts. However,
this was substantially offset by decreases in residential real estate and
consumer and installment loans, net of unearned discount, which consist
primarily of indirect automobile loans, of $164.4 and $82.2 million,
respectively.
Deposits increased to $3.24 billion at December 31, 1996 from $3.18 billion
at December 31, 1995. The acquisition of Sunrise Bancorp, Inc. provided $92
million of deposits, which was partially offset by a decrease of $32 million in
time deposits of $100,000 or more to $169 million at December 31, 1996 from $201
million at December 31, 1995.
<PAGE>
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>
For the years ended December 31,
---------------------------------------------------------
1997 1996 1995
------------------------ ---------------------- ---------------
Interest Interest Interest
Average income/ Yield/ Average income/ Yield/ Average income/ Yield/
ASSETS balance expense rate balance expense rate balance expense rate
(dollars expressed in thousands)
Interest-earning assets:
Loans: (1) (2)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Taxable............................ $2,837,190 252,089 8.89% $2,714,387 236,527 8.71% $2,585,763 220,931 8.54%
Tax-exempt (3)..................... 8,967 1,042 11.62 11,910 1,311 11.01 13,173 1,543 11.71
Investment securities:
Taxable (4)........................ 598,660 35,248 5.89 469,832 22,650 4.82 585,868 34,379 5.87
Tax-exempt (3) (4)................. 19,056 1,552 8.15 22,648 1,889 8.34 26,751 2,138 7.99
Federal funds sold.................... 125,825 5,322 4.23 63,802 3,352 5.25 52,208 2,905 5.56
Other................................. 12,138 757 6.24 25,634 1,410 5.50 14,602 1,013 6.94
---------- ------- ---------- ------- ---------- -------
Total interest-earning assets.... 3,601,836 296,010 8.22 3,308,213 267,139 8.08 3,278,365 262,909 8.02
------- ------- -------
Nonearning assets......................... 215,890 224,175 219,445
---------- ---------- -----------
Total assets..................... $3,817,726 $3,532,388 $ 3,497,810
========== ========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest bearing deposits:
Interest-bearing demand deposits... $ 332,712 5,648 1.70% $ 304,247 4,845 1.59% $ 279,681 5,760 2.06%
Savings deposits................... 761,052 27,383 3.60 683,009 21,769 3.19 663,870 22,737 3.42
Time deposits of $100 or more (4).. 183,223 11,008 6.01 164,453 9,665 5.88 166,232 9,931 5.97
Other time deposits (4)............ 1,681,014 100,954 6.01 1,592,657 95,813 6.02 1,443,026 83,595 5.79
---------- ------- ---------- ------- --------- -------
Total interest-bearing deposits.. 2,958,001 144,993 4.90 2,744,366 132,092 4.81 2,552,809 122,023 4.78
Federal funds purchased, repurchase
agreements and Federal Home Loan
Bank advances (4).................... 75,016 2,463 3.28 64,021 3,964 6.19 256,333 16,850 6.57
Notes payable and other............... 17,883 1,375 7.69 76,892 5,614 7.30 83,068 6,072 7.31
---------- ------ ---------- ------- --------- -------
Total interest-bearing
liabilities..................... 3,050,900 148,831 4.88 2,885,279 141,670 4.91 2,892,210 144,945 5.01
------- ------- -------
Noninterest-bearing liabilities:
Demand deposits....................... 394,580 368,786 345,397
Other liabilities..................... 116,359 38,413 33,345
---------- ---------- ---------
Total liabilities................ 3,561,839 3,292,478 3,270,952
Stockholders' equity...................... 255,887 239,910 226,858
---------- ---------- ---------
Total liabilities and
stockholders' equity........... $3,817,726 $3,532,388 $3,497,810
========== ========== ==========
Net interest income....................... 147,179 125,469 117,964
======= ======= =======
Interest rate spread...................... 3.34 3.17 3.01
Net interest margin....................... 4.09% 3.79% 3.60%
==== ==== ====
- -----------------
(1) For purposes of these computations, nonaccrual loans are included in the
average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Information is presented on a tax-equivalent basis assuming a tax rate of
35%. The tax-equivalent adjustments were approximately $909,000, $1.1
million and $1.3 million for the years ended December 31, 1997, 1996 and
1995, respectively.
(4) Includes the effects of interest rate exchange agreements.
</TABLE>
<PAGE>
The following table indicates, on a tax-equivalent basis, the changes in
interest income and interest expense which are attributable to changes in
average volume and changes in average rates, in comparison with the preceding
year. The change in interest due to the combined rate/volume variance has been
allocated to rate and volume changes in proportion to the dollar amounts of the
change in each.
<TABLE>
<CAPTION>
Increase (decrease) attributable to change in:
----------------------------------------------
December 31, 1997 compared December 31, 1996 compared
to December 31, 1996 to December 31, 1995
---------------------------- ----------------------------
Net Net
Volume Rate Change Volume Rate Change
------ ---- ------ ------ ---- ------
(dollars expressed in thousands)
Interest earned on:
Loans: (1) (2)
<S> <C> <C> <C> <C> <C> <C>
Taxable........................... $ 10,682 4,880 15,562 11,139 4,457 15,596
Tax-exempt (3).................... (347) 78 (269) (143) (89) (232)
Investment securities:
Taxable (4)....................... 6,962 5,636 12,598 (6,163) (5,566) (11,729)
Tax-exempt (3) (4)................ (295) (42) (337) (349) 100 (249)
Federal funds sold................... 2,462 (492) 1,970 597 (150) 447
Other................................ (877) 224 (653) 547 (150) 397
-------- ------ ------ ----- ------ ------
Total interest income......... $ 18,587 10,284 28,871 5,628 (1,398) 4,230
-------- ------ ------ ----- ------ ------
Interest paid on:
Interest-bearing demand deposits..... $ 462 341 803 573 (1,488) (915)
Savings deposits..................... 2,642 2,972 5,614 678 (1,646) (968)
Time deposits of $100 or more........ 1,125 218 1,343 (110) (156) (266)
Other time deposits (4).............. 5,300 (159) 5,141 8,834 3,384 12,218
Federal funds purchased, repur-
chase agreements and Federal
Home Loan Bank advances (4)....... 864 (2,365) (1,501) (11,964) (922) (12,886)
Notes payable and other.............. (4,556) 317 (4,239) (450) (8) (458)
-------- ------ ------ ----- ------ ------
Total interest expense........ $ 5,837 1,324 7,161 (2,439) (836) (3,275)
-------- ------ ------ ------ ------ -------
Net interest income........... $ 12,750 8,960 21,710 8,067 (562) 7,505
======== ====== ====== ===== ====== ======
- ---------------
(1) For purposes of these computations, nonaccrual loans are included in the
average loan amounts. (2) Interest income on loans includes loan fees. (3)
Information is presented on a tax-equivalent basis assuming a tax rate of 35%.
(4) Includes the effect of interest rate exchange agreements.
</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 $147.2 million for the year
ended December 31, 1997, from $125.5 million and $118.0 million for the years
ended December 31, 1996 and 1995, respectively. Although both net interest
income and net interest margin, which is net interest income (expressed on a
tax-equivalent basis) expressed as a percentage of interest-earning assets, have
increased significantly during these periods, the net interest margin has
continued to remain below average for commercial banks. For the year ended
December 31, 1997, net interest margin was 4.09%, compared to 3.79% and 3.60%
for the years ended December 31, 1996 and 1995, respectively.
During periods of rapid growth through cash acquisitions, the net interest
margin frequently decreases 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 a result, during this period interest-earning assets
increased more rapidly than net interest income, contributing to the lower net
interest margin in 1995. As discussed below, there were other additional factors
involved.
<TABLE>
<CAPTION>
Since 1990, First Banks has acquired ten thrifts in various transactions.
As previously discussed, 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 interest earning assets, and certificates of
deposit as a primary source of funds. Because of the competitive, homogeneous
nature of residential mortgage loans and certificates of deposit, the interest
rate spreads between them tend to be more narrow than other types of loans and
funding sources. First Banks' average yield on residential real estate loans and
average cost of certificates of deposit, compared to those of other segments of
its loan portfolio and interest-bearing deposits, respectively, were as follows:
Interest
Average Percent of income/ Yield/
balances total expense rate
-------- ----- ------- ----
(dollars expressed in thousands)
Year ended December 31, 1997:
<S> <C> <C> <C> <C>
Residential mortgage loans........................... $ 1,025,442 36.03% $ 83,248 8.12%
Other loans.......................................... 1,820,715 63.97 169,883 9.33
----------- ------- ---------
Total loans...................................... $ 2,846,157 100.00% $ 253,131 8.89
=========== ====== ========= ====
Certificates of deposit.............................. $ 1,864,237 63.02% $ 111,962 6.01%
Other interest-bearing deposits...................... 1,093,764 36.98 33,031 3.02
----------- ------- ---------
Total interest-bearing deposits.................... $ 2,958,001 100.00% $ 144,993 4.90
=========== ====== ========= ====
Year ended December 31, 1996:
Residential mortgage loans........................... $ 1,154,231 42.34% $ 93,282 8.08%
Other loans.......................................... 1,572,066 57.66 144,556 9.20
----------- ------- ---------
Total loans........................................ $ 2,726,297 100.00% $ 237,838 8.72
=========== ======= ========= ====
Certificates of deposit.............................. $ 1,757,110 64.03% $ 105,478 6.00%
Other interest-bearing deposits...................... 987,256 35.97 26,614 2.70
----------- ------- ---------
Total interest-bearing deposits.................... $ 2,744,366 100.00% $ 132,092 4.81
=========== ====== ========= ====
</TABLE>
In addition to the narrow interest rate spread between the yield on
residential mortgage loans and the rates paid on certificates of deposit,
residential mortgage loans introduce various prepayment alternatives for
borrowers which, when combined with inexpensive refinancing opportunities,
accelerate principal repayments in periods of declining interest rates, thereby
exacerbating their inherent interest rate risk.
In order to enhance its net interest income through increased yields on its
loan portfolio and to reduce the interest rate risk associated with residential
mortgage loans, First Banks initiated a plan to reduce its reliance on
residential mortgage loans within its portfolio. This change in the portfolio
composition required the concurrent internal generation of other types of loans,
particularly commercial and financial, real estate construction and development,
and commercial real estate loans, a process which had previously been initiated.
Consequently, this process focused on continuing to build this business
development function, as well as the control and servicing staff necessary to
support it. As the growth of other loans developed, First Banks expanded its
sale of conforming residential mortgage loans in the secondary market to include
essentially all new loan production. This process was expedited by the sale of a
portfolio of residential mortgage loans of $147 million in 1995. See "--Mortgage
Banking Activities" and "--Loans and Allowance for Possible Loan Losses."
At the same time, in order to limit its interest rate risk, First Banks
expanded its risk management capabilities to improve its risk measurement
techniques and reporting, and increase its risk control alternatives. This
included initiating a program of substantial use of derivative financial
instruments to reduce interest rate exposure. First Banks uses a combination of
swaps, caps and floors to reduce its exposure, primarily arising from
residential mortgage loans and mortgage-backed securities. Although these
financial instruments are effective in reducing interest rate risk, the expense
associated with them has had a significant effect on net interest income.
<TABLE>
<CAPTION>
Cost of interest rate
---------------------
Swap, cap Reduction Effect on
Futures and and floor of net net interest
options on futures agreements interest income margin (1)
------------------ ---------- --------------- ----------
(dollars expressed in thousands) (expressed in
Year ended December 31: basis points)
<S> <C> <C> <C> <C>
1997.......................... $ -- 6,574 6,574 (0.18)
1996.......................... 3,875 7,623 11,498 (0.35)
1995.......................... 2,210 6,911 9,121 (0.28)
- ---------------
(1) Effect on net interest margin is expressed as reduction of net interest
income divided by average earning assets.
</TABLE>
<PAGE>
Interest Rate Risk Management
In financial institutions, the maintenance of a satisfactory level of net
interest income is a primary factor in achieving acceptable income levels.
However, the maturity and repricing characteristics of the institution's loan
and investment portfolios, relative to those within its deposit structure, may
differ significantly. This is influenced by the characteristics of the loan and
deposit markets within which First Banks operates, as well as its objectives for
business development within those markets at any point in time. In addition, the
ability of borrowers to repay loans and depositors to withdraw funds prior to
stated maturity dates introduces divergent option characteristics which operate
primarily as interest rates change. These factors cause various elements of the
institution's balance sheet to react in different manners and at different times
relative to changes in interest rates, thereby leading to increases or decreases
in net interest income over time. Depending upon the nature and velocity of
interest rate movements and their effect on the specific components of the
institution's balance sheet, the effects on net interest income can be
substantial. Consequently, a fundamental requirement in managing a financial
institution is establishing effective control 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 simulation model 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, commercial banking and finance, and certain other
officers. The ALCO is supported by the Asset Liability Management Group which
monitors interest rate risk, prepares analyses for review by the ALCO and
implements actions which are either specifically directed by the ALCO or
established by policy guidelines.
The objective and primary focus of interest sensitivity management is to
optimize earnings results, while managing, within internal policy constraints,
interest rate risk. First Banks' policy on rate sensitivity is to manage
exposure to potential risks associated with changing interest rates by
maintaining a balance sheet posture in which annual net interest income is not
significantly impacted by reasonably possible near term changes in interest
rates. To measure the effect of interest rate changes, First Banks recalculates
its net income over two one-year horizons on a pro forma basis. The analysis
assumes various scenarios for increases and decreases in interest rates
including both instantaneous and gradual, parallel and non-parallel shifts in
the yield curve, in varying amounts. For purposes of arriving at reasonably
possible near term changes in interest rates, First Banks includes a forecast
based on actual changes in interest rates which have occurred over a two-year
period, simulating both a declining and rising interest rate scenario.
Consistent with the table presented below, which indicates First Banks is
"asset-sensitive," First Banks' simulation model indicates a loss of projected
net income should interest rates decline. While a decline in interest rates of
less than 10% has a diminutive effect on the earnings of First Banks, a
significant decline in interest rates, resembling the actual decline which
occurred over a two-year period commencing in March 1991, indicates a loss of
net income equivalent to approximately 4% of net interest income for the year
ended December 31, 1997.
As discussed previously, First Banks has expanded its use of
off-balance-sheet derivative financial instruments to assist in the management
of the interest rate sensitivity inherent in its balance sheet, particularly
that arising from its portfolio of residential mortgage loans and
mortgage-backed securities relative to its deposit structure.
<PAGE>
<TABLE>
<CAPTION>
These off-balance-sheet derivative financial instruments effectively modify the
repricing, maturity and option characteristics of its assets and liabilities.
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 as follows:
December 31,
------------
1997 1996
---- ----
Notional Credit Notional Credit
amount exposure amount exposure
-------- -------- ------ --------
(dollars expressed in thousands)
<S> <C> <C> <C> <C>
Interest rate swap agreements......................... $ -- -- 70,000 --
Interest rate floor agreements........................ 70,000 26 105,000 141
Interest rate cap agreements.......................... 10,000 222 10,000 335
Forward commitments to sell mortgage-backed securities 60,000 -- 35,000 308
</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 uses interest rate swap agreements to extend the repricing
characteristics of certain interest-bearing liabilities to correspond more
closely with its assets, with the objective of stabilizing net interest income
over time. However, the utilization of swaps has decreased with the change in
the composition of its balance sheet, resulting in the termination or expiration
of all remaining swap agreements prior to December 31, 1997. At December 31,
1996 and 1995, there were interest rate swap agreements with notional amounts of
$70 million and $145 million outstanding, respectively. The interest expense
related to these agreements was $6.4 million, $7.4 million and $6.6 million for
the years ended December 31, 1997, 1996 and 1995, respectively.
In connection with the sale of a pool of $147 million of residential
mortgage loans and repayment of the related short-term borrowings, in May 1995,
First Banks terminated a $100 million interest rate swap agreement resulting in
a loss of $3.3 million. This loss on termination was reflected in the
consolidated statement of income for the year ended December 31, 1995. In
addition, the reduction in the residential mortgage loan portfolio has been
accompanied by periods of increased principal prepayments due to declines in
interest rates. These prepayments 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, November 1996 and
July 1997, First Banks shortened the effective maturity of its interest-bearing
liabilities through the termination of $225 million, $75 million and $35
million, respectively, of interest rate swap agreements resulting in losses of
$13.5 million, $5.3 million and $1.4 million, respectively. These losses were
deferred and are being amortized over the remaining lives of the swap
agreements. If all or any portion of the underlying liabilities are repaid, the
related deferred losses are charged to operations.
First Banks also uses interest rate cap and floor agreements to limit the
interest expense associated with certain of its interest-bearing liabilities and
the interest expense of certain interest rate swap agreements, respectively. At
December 31, 1997 and 1996, the unamortized costs of these agreements were
$290,000 and 433,000, respectively, and were included in other assets.
As discussed under "--Mortgage Banking Activities," derivative financial
instruments issued by First Banks consist of commitments to originate fixed-rate
loans. Commitments to originate fixed-rate loans consist primarily of
residential real estate loans. These loan commitments, net of estimated
underwriting fallout, and loans held for sale are hedged with forward contracts
to sell mortgage-backed securities.
<PAGE>
In addition to the simulation model employed by First Banks, an interest
rate sensitivity position summary 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, 1997, adjusted to include prepayment assumptions:
<TABLE>
<CAPTION>
Over three Over six
Three through through Over one
months six twelve through Over five
or less months months five years years Total
------- ------ ------ ---------- ----- -----
(dollars expressed in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans (1).................................. $ 1,550,244 284,049 441,074 395,288 331,545 3,002,200
Investment securities...................... 191,300 37,794 56,840 374,683 134,913 795,530
Federal funds sold......................... 23,515 -- -- -- -- 23,515
Interest-bearing deposits with other
financial institutions................... 2,840 -- -- -- -- 2,840
----------- -------- --------- -------- -------- ----------
Total interest-earning assets.......... $ 1,767,899 321,843 497,914 769,971 466,458 3,824,085
=========== ======== ========= ======== ======== ==========
Interest-bearing liabilities:
Interest-bearing demand accounts........... $ 128,790 80,058 52,212 38,289 48,731 348,080
Savings accounts........................... 96,873 79,912 68,496 97,036 228,320 570,637
Money market demand accounts............... 376,392 -- -- -- -- 376,392
Time deposits.............................. 466,143 415,455 536,528 222,233 263,905 1,904,264
Other borrowed funds....................... 108,073 632 -- 592 -- 109,297
----------- -------- --------- -------- -------- ----------
Total interest-bearing liabilities..... $ 1,176,271 576,057 657,236 358,150 540,956 3,308,670
=========== ======= ======= ======== ======= =========
Interest sensitivity gap:
Periodic................................... $ 591,628 (254,214) (159,322) 411,821 (74,498)
515,415
Cumulative................................. 591,628 337,414 178,092 589,913 515,415
=========== ======== ========= ======== =======
Ratio of interest-sensitive assets to
interest-sensitive liabilities:
Periodic................................. 1.50 .56 .76 2.15 .86 1.16
====
Cumulative............................... 1.50 1.19 1.07 1.21 1.16
==== ==== ==== ==== ====
- ------------------
(1) Loans presented net of unearned discount.
</TABLE>
Management makes certain assumptions in preparing the table above. These
include the assumption that: (1) loans will repay at historic repayment speeds;
(2) interest-bearing demand and savings accounts are interest sensitive at a
rate of 37% and 17%, respectively, of the remaining balance for each period
presented: and (3) fixed maturity deposits will not be withdrawn prior to
maturity.
At December 31, 1997 and 1996, First Banks was asset sensitive on a
cumulative basis through the twelve-month time horizon by $178.1 million, or
4.28% of total assets, and liability sensitive by $115.9 million, or 3.14% of
total assets, respectively. The increase in the asset-sensitive position for
1997 primarily relates to the change in the composition of the loan portfolio
and the issuance of the Preferred Securities in February 1997, which provided a
long-term source of fixed-rate funding.
The interest sensitivity position is one of several measurements of the
impact of interest rate changes on net interest income. Its usefulness in
assessing the effect of potential changes in net interest income varies with the
constant change in the composition of First Banks' assets and liabilities and
changes in interest rates. For this reason, First Banks places greater emphasis
on a simulation model for monitoring its interest rate exposure.
Mortgage Banking Activities
The mortgage banking activities of First Banks consist of the origination,
purchase and servicing of residential mortgage loans. Generally, First Banks
sells its production of residential mortgage loans in the secondary loan
markets. Servicing rights are retained with respect to conforming fixed-rate
loans. Other loans are sold on a servicing released basis.
<PAGE>
For the three years ended December 31, 1997, 1996 and 1995, First Banks
originated and purchased loans for resale totaling $174 million, $136 million
and $67 million and sold loans totaling $148 million, $113 million and $207
million, respectively. The origination and purchase of residential mortgage
loans and the related sale of the loans provides First Banks with additional
sources of income including the interest income earned while the loan is held
awaiting sale and ongoing loan servicing fees from the loans sold with servicing
rights retained. Mortgage loans serviced for investors aggregated $784 million,
$847 million and $857 million at December 31, 1997, 1996 and 1995, respectively.
In 1995, First Banks experienced a substantial increase in its mortgage
servicing portfolio as a result of the addition of loan servicing from acquired
companies and the expansion of its loan origination function into certain of the
markets of the acquired entities. In view of this increase and the favorable
sales prices available in the market relative to the prospective profitability
of the mortgage servicing rights, in July 1995, First Banks elected to sell $427
million of mortgage servicing rights, resulting in a gain of $3.8 million.
The interest income on loans held for sale was $3.2 million for the years
ended December 31, 1997, 1996 and 1995, respectively. The amount of interest
income realized on loans held for sale is a function of the average balance of
loans held for sale, the period for which the loans are held and the prevailing
interest rates when the loans are made. The average balance of loans held for
sale was $35.4 million, $36.3 million and $36.8 million for the years ended
December 31, 1997, 1996 and 1995, respectively. On an annualized basis, the
yield on the portfolio of loans held for sale was 7.07%, 6.99% and 7.17% for the
years ended December 31, 1997, 1996 and 1995, respectively. This compares with
First Banks' cost of funds as a percentage of average interest-bearing
liabilities, of 4.88%, 4.91% and 5.01% for the years ended December 31, 1997,
1996 and 1995, respectively.
Mortgage loan servicing fees are reported net of mortgage-backed security
guarantee fee expense, interest shortfall and amortization of mortgage servicing
rights. Loan servicing fees, net were $1.6 million, $1.8 million and $2.9
million for the years ended December 31, 1997, 1996 and 1995, respectively. The
decrease in loan servicing fees of $200,000 for 1997 is primarily attributable
to the sale of adjustable rate residential loan production on a servicing
released basis and a lower volume of fixed-rate residential loan production
which is generally sold with servicing retained. For 1996, the decrease is
primarily attributable to the sale of mortgage servicing rights.
Ancillary to the origination and purchase of loans held for sale in the
secondary market are the realized and unrealized gains, net of losses, incurred
during the period prior to sale. These net gains or losses include: (1) the
adjustments of the carrying values of loans held for sale to current market
values; (2) the adjustments for any gains or losses on loan commitments for
which the interest rate has been established, net of anticipated underwriting
"fallout"; and (3) the related cost of hedging the loans held for sale and loan
commitments during the period First Banks is exposed to interest rate risk. The
gain on mortgage loans originated for resale, including loans sold and held for
sale, was $716,000 and $40,000 for the years ended December 31, 1997 and 1996,
respectively. For the year ended December 31, 1995, First Banks incurred a loss
on mortgage loans sold and held for sale of $608,000.
As 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 loan. To reduce this exposure,
First Banks uses forward commitments to sell fixed-rate mortgage-backed
securities at a specified date in the future. At December 31, 1997, 1996 and
1995, First Banks had $67.4 million, $36.7 million and $42.4 million,
respectively, of loans held for sale and related commitments, net of committed
loan sales and estimated underwriting fallout, of which $60.0 million, $35.0
million and $42.0 million, respectively, were hedged through the use of such
forward commitments.
Comparison of Results of Operations for 1997 and 1996
Net Income. Net income for the year ended December 31, 1997 was $33.0
million, compared to $20.2 million for 1996. Excluding the effect of the
one-time Savings Association Insurance Fund (SAIF) assessment of $8.2 million
($5.3 million after the related income tax effect), net income for the year
ended December 31, 1996 would have been $25.5 million. The return on average
assets for 1997 was 0.87%, compared with 0.57% for 1996 (0.72% excluding the
effect of the SAIF assessment). The improvement in operating results for 1997
reflects several influences which had various effects on income for the year,
<PAGE>
including: (1) the continuation of the amalgamation of the entities acquired in
recent years into First Banks' systems; (2) the overall improvement in asset
quality, particularly within the acquired entities in Texas and California; and
(3) the expansion of First Banks' internal business development capacity.
During 1994 and 1995, First Banks completed twelve acquisitions which had
an aggregate of $1.96 billion in total assets and 43 banking locations. This
acquisition activity decreased substantially in 1996 and 1997, during which time
management focused on continuing to meld these entities into its operations,
systems and culture, and achieve the efficiencies and opportunities envisioned
when the entities were acquired. As discussed under "--General," most of the
acquired institutions exhibited elements of financial distress prior to their
acquisitions which contributed to marginal earnings performance. Generally,
these were the result of asset quality problems and/or high overhead expenses.
Following acquisition, the most immediate tasks required were the
improvement of asset quality and the elimination of unnecessary expenses.
Although many improvements were instituted shortly after acquisition, many of
the problems which existed were indigenous, requiring a much longer time period
to resolve. This involved not only many problem assets, which had no apparent
short-term solution, but also other elements of expense. This included
addressing such areas as: (1) maintenance, repairs and, in some cases,
refurbishing of bank premises necessitated by the deferral of such projects by
the acquired entities; (2) long-term leases which provided space in excess of
that necessary for banking activities and/or rates in excess of current market
rates; (3) relocation of branch offices which were not adequate, conducive or
convenient for retail banking operations; and (4) management of lawsuits which
had existed with respect to acquired entities to minimize the overall cost of
negotiation, settlement or litigation.
However, the process which was required after acquisition was not only one
of reducing expenses and improving asset quality, but the combining of different
entities together to form a single cohesive organization with common objectives
and focus. This involved a significant post-acquisition investment of resources
by First Banks to reorganize staff, recruit personnel where needed, and
establish the direction and focus necessary for the combined banks to take
advantage of the opportunities available to them. While this contributed to the
increases in noninterest expenses during the three years ended December 31,
1997, it also resulted in the creation of new banking entities which were unlike
any of the merged entities individually. These banks were able to convey a
consistent image and quality of service, provide a complete array of financial
products to their customers and compete effectively in their marketplaces, even
in the presence of other financial institutions with much greater resources.
<TABLE>
<CAPTION>
While some of these activities did not contribute to reductions of
noninterest expenses, they contributed to the commercial and retail business
development efforts of the banks, and ultimately to their overall profitability.
As a result of this, the contribution to consolidated net income by the Texas
and California banks escalated sharply in 1997, as indicated below:
California Texas Other
------------- -------------- ----------------
1997 1996 (1) 1997 1996 (1) 1997 1996 (1)
-------------- ----------------- ------------------
(dollars expressed in thousands)
Year ended December 31:
<S> <C> <C> <C> <C> <C> <C>
Equity in income of subsidiaries.............. $ 7,488 5,259 1,675 806 31,686 24,542
Average investment in subsidiaries............ 76,330 54,114 25,178 23,202 220,134 212,850
Return on average investment............. 9.81% 9.72% 6.65% 3.47% 14.39% 11.53%
- ---------
(1) Excludes the effect of the one-time FDIC special assessment, net of related
tax benefits.
</TABLE>
As this process was occurring in the acquired banks, First Banks continued
the expansion of its business development function throughout the organization.
As discussed under "--Financial Condition and Average Balances," this included
not only the addition of commercial business development and retail banking
personnel, but also increases in the support and administrative staffs necessary
to deliver, control and manage the added volume of business. Although this
contributed to the increase in noninterest expenses, it also was the impetus for
the internal growth of First Banks in 1996 and 1997, as its growth through
acquisitions decreased. For the year ended December 31, 1997, the corporate
banking business development function provided a net loan increase, excluding
loans added through acquisitions, of $378.9 million. This increase was partially
offset by decreases of $199.0 of residential real estate and consumer loans
reflecting the ongoing reorientation of the consolidated loan portfolio.
<PAGE>
In February 1997, First Banks, through First Trust, sold $86.25 million of
Trust Securities, as described under "--Financial Condition and Average
Balances." Initially, the proceeds of this offering were applied to the
reduction of First Banks' borrowing under its Credit Agreement and to open
market purchases and retirements of its Class C Preferred Stock. On December 1,
1997, First Banks redeemed all of the remaining Class C Preferred Stock. Because
the Preferred Securities represent debt under Internal Revenue Regulations, but
are considered capital for purposes of bank regulatory requirements, payments to
security holders are reflected in the accompanying consolidated financial
statements as a component of noninterest expense. Consequently, for the year
ended December 31, 1997, the expense associated with the Preferred Securities
contributed to a reduction in interest expense, due to the repayment of borrowed
funds, and to an increase in noninterest expense. Furthermore, to the extent the
Class C Preferred Stock was redeemed prior to the payment of dividends, it
reduced the aggregate dividends for the year, which are reflected in the
consolidated statements of income as a reduction from net income in arriving at
net income available to common stockholders.
<TABLE>
<CAPTION>
Provision for Possible Loan Losses. The provision for possible loan losses
was $11.3 million for the year ended December 31, 1997, compared to $11.5
million for 1996. Net loan charge-offs were $7.6 million for the year ended
December 31, 1997, compared to $19.7 million for 1996. Although asset quality
has continued to improve, particularly with respect to its Texas and California
banks, First Banks has continued to provide for possible loan losses relatively
aggressively in recognition of the overall growth in the loan portfolio as well
as its changing composition. As the portfolio changes from one with a
significant preponderance in residential real estate loans, to one having
substantial portions of commercial, financial and agricultural loans, real
estate construction and development loans and commercial real estate loans, the
credit risk profile of the portfolio increases. Typically, residential real
estate lending has resulted in relatively minor credit losses. However,
commercial lending carries with it greater credit risk which, although managed
through appropriate loan policies and procedures, underwriting and credit
administration, must be recognized through adequate allowances for possible loan
losses. The following is a summary of loan loss experience and nonperforming
assets by geographic area for the years ended December 31, 1997 and 1996:
California Texas Other Total
-------------- ------------- ---------------- ---------------
1997 1996 1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total loans...................... $ 640,366 467,233 176,341 180,068 2,185,493 2,120,668 3,002,200 2,767,969
Total assets..................... 1,042,979 732,532 271,686 270,309 2,850,349 2,686,313 4,165,014 3,689,154
Provision for possible
loan losses.................... 2,500 5,879 1,500 1,000 7,300 4,615 11,300 11,494
Net loan charge-offs............. 1,510 11,765 1,091 2,677 5,001 5,274 7,602 19,716
Net loan charge-offs as a percentage
of average loans.............. 0.30% 2.42% 0.63% 1.53% 0.23% 0.25% 0.27% 0.72%
Nonperforming loans.............. $ 5,548 14,726 211 164 18,307 15,379 24,066 30,269
Nonperforming assets............. 7,717 18,402 296 835 23,377 21,639 31,390 40,876
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Noninterest Income and Expense. A summary of noninterest income and
noninterest expense for the years ended December 31, 1997 and 1996 appears
below:
December 31, Increase (decrease)
------------ -------------------
1997 1996 Amount %
---- ---- ------ ------
(dollars expressed in thousands)
Noninterest income:
<S> <C> <C> <C> <C>
Service charges on deposit accounts and customer service fees.... $ 12,491 12,521 (30) (.24)%
Credit card fees................................................. 2,914 2,475 439 17.74
Loan servicing fees, net......................................... 1,628 1,837 (209) (11.38)
(Gain) loss on mortgage loans sold and held for sale............. 716 40 676 1,690.00
Trust and brokerage fees......................................... 893 782 111 14.19
Net gain (loss) on sales of securities........................... 2,456 (311) 2,767 889.71
Other............................................................ 4,599 3,377 1,222 36.19
-------- -------- ------
Total noninterest income................................. $ 25,697 20,721 4,976 24.01
======== ======== ====== ======
Noninterest expense:
Salaries and employee benefits................................... $ 43,011 39,995 3,016 7.54%
Occupancy, net of rental income.................................. 10,617 9,758 859 8.80
Furniture and equipment.......................................... 7,618 7,218 400 5.54
Federal Deposit Insurance Corporation premiums................... 804 11,715 (10,911) (93.14)
Postage, printing and supplies................................... 4,187 4,687 (500) (10.67)
Data processing fees............................................. 8,450 4,477 3,973 88.74
Legal, examination and professional fees......................... 4,587 4,901 (314) (6.41)
Credit card expenses............................................. 3,343 2,913 430 14.76
Communications................................................... 2,611 2,635 (24) (.91)
Advertising...................................................... 4,054 2,224 1,830 82.28
(Gain) loss on foreclosed real estate, net of expenses........... (331) 1,927 (2,258) (117.18)
Guaranteed preferred debenture expense........................... 7,322 -- 7,322 --
Other............................................................ 14,014 13,291 723 5.44
-------- -------- ------
Total noninterest expense................................. $110,287 105,741 4,546 4.30
======== ======== ====== ======
</TABLE>
Noninterest income was $25.7 million for the year ended December 31, 1997,
compared to $20.7 million for 1996. The increase is primarily attributable to
net gains on sales of securities, an increase in the net gain on mortgage loans
sold and held for sale, and various increases in other income. Overall, there
were no significant changes in other components of noninterest income for the
year.
Although the acquisitions of Sunrise Bank in November 1996, three branches
of Highland Federal Bank, F.S.B. in March and September 1997 and Surety Bank in
December 1997 added new customer accounts on which service charges could be
assessed, overall customer service charges declined from $12.52 million for the
year ended December 31, 1996 to $12.49 million in 1997. This reflects three
factors. First, following an acquisition and subsequent conversion to First
Banks' account structure and data processing system, a period of moratorium on
assessing of service charges is provided to allow customers to become acclimated
to the changes which have occurred and become familiar with First Banks. During
this period, which may be as long as six months from the date of acquisition,
service charges do not increase, and may actually decrease. Secondly, part of
the retail business development efforts during 1997 involved the marketing of
"packaged accounts." These accounts offer the customer several different banking
services in an effort to achieve a stronger relationship with that customer,
attract the customer to noninterest bearing and lower cost account
relationships, and promote higher balance accounts. However, these accounts also
provide the banking services for a fixed fee, which reduces as the aggregate
customer balances increase, in lieu of various other charges for specific
services. In general, these relationships result in a net reduction of service
charge income but an increase in deposit balances. The extent to which this
occurs is dependent upon the amount of migration of existing customer
relationships relative to the new customer relationships which are established.
Finally, commercial accounts are frequently assessed service charges on demand
accounts based on an analysis which takes into account an earnings credit for
the balances which the customers maintain in their accounts relative to the
service charges which would otherwise be assessed for the services provided. As
interest rates have generally declined during 1997, the alternative
opportunities for customers to invest their funds at yields in excess of the
earnings credits have also declined. Consequently, these commercial customers
have tended to maintain higher average balances in their accounts during 1997,
offsetting a larger amount of service charges which would otherwise have been
assessed.
<PAGE>
In 1997, First Banks realized a gain on the sale of three mortgage-backed
residual securities which it had acquired through the acquisition of a thrift in
1995. Because of the unique structure of these residuals, at the date of
acquisition it appeared unlikely that First Banks would receive payment of all
of the remaining principal and interest. Consequently, the aggregate principal
of these securities had been written down to $250,000, which was the approximate
market value at that time, and recorded as securities available-for-sale.
However, as residential mortgage rates declined in 1997, the value of the
underlying pool of mortgages increased, increasing the value of these securities
significantly.
Recognizing this, First Banks sold these securities, realizing a gain of $2.24
million.
Net gains on mortgage loans sold and held for sale increased to $716,000
for the year ended December 31, 1997 from $40,000 for 1996. As discussed under
"--Mortgage Banking Activities," the increase is attributable to an increase in
the sales of adjustable-rate residential loan production, which are sold on a
servicing released basis, and First Banks' overall pricing practices.
Other noninterest income increased to $4.6 million for the year ended
December 31, 1997 from $3.4 million for 1996. The increase is primarily
attributable to rental fees paid by First Services, L.P. for the use of data
processing and other equipment owned by First Banks. See Note 16 to the
consolidated financial statements.
Noninterest expense increased to $110.3 million for the year ended December
31, 1997 from $105.7 million for 1996. The most significant changes in
noninterest expense were the reduction of Federal Deposit Insurance Corporation
(FDIC) premiums from $11.7 million for the year ended December 31, 1996 to
$804,000 for 1997, and the expense associated with the Preferred Securities. In
1996, the FDIC levied a special deposit insurance assessment to be used to
recapitalize the SAIF of the FDIC and to bring it into parity with the Bank
Insurance Fund (BIF). As a result, First Banks paid a one-time charge to the
FDIC of $8.2 million. However, in recognition of this recapitalization, SAIF
premium rates were lower in 1997, resulting in a further reduction of the 1997
expense. Furthermore, the improving condition of the acquired banks allowed them
to benefit from better rate classifications and consequently lower FDIC
premiums.
In connection with the issuance of the Preferred Securities in February
1997, First Banks incurred $7.32 million of expense for the year ended December
31, 1997. As discussed above, the proceeds from this issue were applied to the
repayment of borrowed funds and the purchase and redemption of Class C Preferred
Stock, resulting in a reduction of both interest expense and dividends during
the year.
Data processing expenses for the year ended December 31, 1997 increased to
$8.45 million from $4.48 million for 1996. Prior to April 1, 1997, data
processing, item processing and operational support services were provided to
all of the Subsidiary Banks through FirstServ, Inc. (First Serv), a wholly owned
subsidiary of First Banks. FirstServ in turn contracted with First Services,
L.P. under a facilities management agreement for these services. However,
FirstServ provided the equipment, premises, supplies, postage, telephone lines
and other non-personnel expenses associated with these services. First Services,
L.P. is owned indirectly by First Banks' voting shareholders. Effective April 1,
1997, FirstServ discontinued operations, transferring all of the functions and
expenses which it had previously provided to the Subsidiary Banks to First
Services, L.P. As a result, items which had previously been reflected in the
consolidated financial statements in various expense categories were paid
directly by First Services, L.P., and then charged to the Subsidiary Banks as
data processing expenses. This change in organizational structure had the effect
of reducing various expenses for 1997 by the amounts assumed by First Services,
L.P., and increasing data processing expenses, when compared with like expenses
in 1996.
<PAGE>
<TABLE>
<CAPTION>
The noninterest expenses of FirstServ for the year ended December 31, 1996
and the three months ended March 31, 1997 which were then assumed by First
Services, L.P. were as follows:
Three months ended Year ended
March 31, 1997 December 31, 1996
-------------- -----------------
(dollars expressed in thousands)
<S> <C> <C>
Occupancy, net of rental income.......................... $ 41 162
Furniture and equipment.................................. 375 889
Postage, printing and supplies........................... 169 459
Communications........................................... 147 569
Other expenses........................................... 151 593
------- ------
Total $ 883 2,672
======= ======
</TABLE>
In connection with its increasing emphasis on internal growth as an
alternative to acquisitions, First Banks' advertising expenses increased to
$4.05 million for the year ended December 31, 1997 from $2.22 million for 1996.
This reflected both advertising for specific promotions intended to increase
deposits, and general image advertising intended to convey First Banks'
stability of ownership to its midwest markets where bank consolidations have
caused significant customer confusion and displacement.
The sale of foreclosed real estate for the year ended December 31, 1997
resulted in a gain, net of expenses of $331,000, compared to a loss of $1.93
million for 1996. The loss for 1996 includes a provision for loss of $747,000
due to a contingent liability with respect to a parcel of foreclosed real estate
in an acquired bank. The contingent liability became more probable due to the
default on an agreement by a developer through whom the Company was attempting
to dispose of the property. The gain for 1997 results partially from the
reduction in the amount of other real estate from $10.6 million at December 31,
1996 to $7.3 million at December 31, 1997. In addition, it is indicative of the
effort of First Banks to realistically value its other real estate at the time
it is foreclosed or at the time banks are acquired.
In addition, noninterest expense for 1997 reflects the expenses associated
with Sunrise Bank, which was acquired in November 1996, three branch offices of
Highland Federal Bank, F.S.B. which were acquired in March and September 1997,
and Surety Bank, which was acquired in December 1997.
Comparison of Results of Operations for 1996 and 1995
Net Income. Net income for the year ended December 31, 1996 excluding the
effect of the one-time SAIF assessment of $8.2 million ($5.3 million on an after
tax-basis), would have been $25.5 million, compared to $24.5 million for 1995.
This represents a return on average assets of 0.72% and 0.70% for the years
ended December 31, 1996 and 1995, respectively. Including the effect of the
assessment, net income for 1996 was $20.2 million, representing a return on
average assets of 0.57%.
The decline in operating results in 1996 and 1995 reflect several
influences which had significant adverse effects on earnings including the
impact of 13 acquisitions completed during the three years ended December 31,
1996. As previously discussed under "-- General" and "-- Acquisitions," most of
the acquired institutions exhibited significant financial distress prior to
their acquisition, generally related to asset quality problems and/or high
operating expenses. Consequently, in the periods since their respective dates of
acquisition, management of First Banks has worked with management of the
institutions to completely reorient their positions within their market places,
restructure their balance sheets and revise their systems and procedures. This
has required a significant dedication of resources by First Banks, both in terms
of expenses and personnel. Substantial expenses have been incurred in
reorganizing, retraining and reducing staff, converting data processing systems,
instituting and controlling new policies and procedures, and merging corporate
cultures, not only with that of First Banks, but also between acquired
institutions.
This process was 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
<PAGE>
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.
<TABLE>
<CAPTION>
Although these factors were anticipated prior to the acquisitions and are
considered acceptable as costs of building the long-term franchise value of
First Banks, they had a substantial effect on First Banks' profitability for the
years ended December 31, 1996 and 1995. A comparison of the relative
profitability of First Banks' investment in bank and thrift subsidiaries by area
is as follows:
California Texas Other
---------- ----- -----
1996(1) 1995 1996 1995 1996(1) 1995
------- ---- ---- ---- ------- ----
(dollars expressed in thousands)
Year ended December 31:
<S> <C> <C> <C> <C> <C> <C>
Equity in income of subsidiaries........... $ 5,259 3,598 806 (2,766) 24,542 29,647
Average investment in subsidiaries......... 54,114 43,539 23,202 27,250 212,850 230,776
Return on average investment, annualized... 9.72% 8.26% 3.47% (10.15)% 11.53% 12.85%
- -----------------------
(1) 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 $11.5 million
and $9.1 million for the years ended December 31, 1996 and 1995, respectively.
The results of operations for the year ended December 31, 1996 were also
adversely affected by an $8.2 million charge for the one-time special deposit
insurance assessment passed by Congress and signed by President Clinton on
September 30, 1996. This special assessment was used to recapitalize the SAIF of
the FDIC in order to bring it into parity with the BIF of the FDIC.
As previously discussed, net interest income (expressed on a tax-equivalent
basis) for the year ended December 31, 1996 was $125.5 million, or 3.79% of
average interest-earning assets, compared to $118.0 million, or 3.60% of average
interest-earning assets, for 1995.
Provision for Possible Loan Losses. The provision for possible loan losses
was $11.5 million and $10.4 million for the years ended December 31, 1996 and
1995, respectively, while net loan charge-offs were $19.7 million and $10.8
million for the same periods.
Several of First Banks' acquisitions in 1995 and 1994 included significant
portfolios of problem assets. This is particularly evident in California and
Texas, where the economies had been weak in recent years. Of First Banks' total
nonperforming loans of $30.3 million at December 31, 1996, $14.9 million, or
49.1%, were held by the California and Texas banks. As this would suggest, a
substantial portion of First Banks' net loan charge-offs and provisions for
possible loan losses related to loans in the California or Texas banks.
<PAGE>
<TABLE>
<CAPTION>
The following is a summary of loan loss experience and nonperforming assets
by geographic area for the years ended December 31, 1996 and 1995:
California Texas Other Total
-------------- ------------ ------------- -----------------
1996 1995 1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total loans.......................$ 467,233 460,907 180,068 192,573 2,120,668 2,090,739 2,767,969 2,744,219
Total assets...................... 732,532 626,782 270,309 296,712 2,686,313 2,699,468 3,689,154 3,622,962
Provisions for possible
loan losses..................... 5,879 1,301 1,000 5,826 4,615 3,234 11,494 10,361
Net loan charge-offs.............. 11,765 5,980 2,677 3,355 5,274 1,426 19,716 10,761
Net loan charge-offs as
a percentage of average loans... 2.42% 1.95% 1.53% 1.63% 0.25% 0.07% 0.72% 0.41%
Nonperforming loans............... $ 14,726 18,952 164 549 15,379 19,890 30,269 39,391
Nonperforming assets.............. 18,402 21,852 835 1,561 21,639 23,731 40,876 47,144
</TABLE>
The provision for possible loan losses for the year ended December 31, 1996
reflects an additional provision attributable to a single commercial loan of
First Bank of approximately $3.7 million which was fully charged-off. The loan
was identified in 1995 as having potential problems creating uncertainty as to
its collectibility. During 1996, the borrower failed to meet certain previously
agreed-upon financial measures and principal reductions. As a result, it became
apparent the loan could not be collected in the normal course of business and
was charged-off.
The provision for possible loan losses for the year ended December 31, 1995
includes a special provision of $3.7 million. This special provision related to
FBA's portfolio of automobile loans which had experienced increased levels of
loan charge-offs and loans past due 30 days or more within that portfolio during
1995.
Tables summarizing nonperforming assets, past-due loans and charge-off
experience are presented under "--Loans and Allowance for Possible Loan Losses."
Noninterest Income and Expense. The following table summarizes noninterest
income and noninterest expense for the years ended December 31, 1996 and 1995,
respectively:
<TABLE>
<CAPTION>
December 31, Increase (decrease)
------------ -------------------
1996 1995 Amount %
---- ---- ------ ------
(dollars expressed in thousands)
Noninterest income:
<S> <C> <C> <C> <C>
Service charges on deposit accounts and customer service fees.... $ 12,521 10,661 1,860 17.4%
Credit card fees................................................. 2,475 2,179 296 13.6
Loan servicing fees, net......................................... 1,837 2,932 (1,095) (37.3)
Gain (loss) on mortgage loans sold and held for sale:
Originated for sale............................................ 40 (324) 364 112.4
Other loan sales............................................... -- (284) 284 --
Trust and brokerage fees......................................... 782 699 83 11.9
Net loss on sales of securities.................................. (311) (866) 555 64.1
Gain on sale of mortgage loan servicing rights................... -- 3,843 (3,843) --
Loss on cancellation of interest rate swap agreements............ -- (3,342) 3,342 --
Other............................................................ 3,377 3,909 (532) (13.61)
-------- ------- ------
Total noninterest income................................. $ 20,721 19,407 1,314 6.77
======== ====== ====== ======
Noninterest expense:
Salaries and employee benefits................................... $ 39,995 37,941 2,054 5.4%
Occupancy, net of rental income.................................. 9,758 8,709 1,049 12.0
Furniture and equipment.......................................... 7,218 6,852 366 5.3
Federal Deposit Insurance Corporation premiums................... 11,715 4,911 6,804 138.5
Postage, printing and supplies................................... 4,687 4,678 9 .2
Data processing fees............................................. 4,477 4,838 (361) (7.5)
Legal, examination and professional fees......................... 4,901 5,412 (511) (9.4)
Credit card expenses............................................. 2,913 2,490 423 17.0
Communications................................................... 2,635 2,476 159 6.4
Advertising...................................................... 2,224 2,182 42 1.9
(Gain) loss on foreclosed real estate, net of expenses........... 1,927 1,302 625 48.0
Other............................................................ 13,291 9,775 3,516 36.0
-------- ------- -------
Total noninterest expense................................. $105,741 91,566 14,175 15.5
======== ====== ====== ======
</TABLE>
<PAGE>
Noninterest income was $20.7 million for the year ended December 31, 1996,
in comparison to $19.4 million for 1995. The increase for the year ended
December 31, 1996 is primarily attributable to the additional noninterest income
generated from the acquisitions completed throughout 1995.
The increase of $2.2 million in service charges, customer service fees and
credit card fees for the year ended December 31, 1996, compared to 1995, relates
primarily to the aforementioned acquisitions.
For the year ended December 31, 1996, loan servicing fees, net, decreased
by $1.1 million, in comparison to 1995. As more fully described under "--
Mortgage Banking Activities," the decrease is attributable to the sale of $427
million of mortgage loan servicing rights during July 1995. First Banks decided
to sell the mortgage servicing rights due to favorable pricing available in the
marketplace at that time. This sale resulted in a gain of $3.8 million.
In addition, First Banks sold $147 million of residential mortgage loans
during the year ended December 31, 1995, resulting in a loss of $284,000. In
connection with the sale of these loans, First Banks terminated an interest rate
swap agreement, resulting in a loss of $3.3 million for the year ended December
31, 1995.
Noninterest income also includes net loss on sales of securities of
$311,000 for the year ended December 31, 1996, in comparison to net loss on
sales of securities of $866,000 for 1995. The securities sold were classified as
available for sale within the investment security portfolio.
Noninterest expense was $105.7 million and $91.6 million for the years
ended December 31, 1996 and 1995, respectively. The increase of $14.1 million is
primarily attributable to the one-time special assessment discussed below and
incremental operating expenses of the seven acquisitions completed throughout
1995. In particular, salaries and employee benefits increased by $2.1 million to
$40.0 million from $37.9 million for the years ended December 31, 1996 and 1995,
respectively. In addition, occupancy expense, net increased by $1.1 million to
$9.8 million from $8.7 million for the years ended December 31, 1996 and 1995,
respectively.
FDIC premiums expense for the year ended December 31, 1996 includes an $8.2
million charge for the one-time special deposit insurance assessment passed by
Congress and signed by President Clinton on September 30, 1996. This special
assessment was used to recapitalize the SAIF of the FDIC and bring it into
parity with the BIF of the FDIC.
Loans and Allowance for Possible Loan Losses
Interest earned on the loan portfolio represents the principal source of
income for First Banks and its Subsidiary Banks. Interest and fees on loans were
85.7%, 89.2% and 84.8% of total interest income for the years ended December 31,
1997, 1996 and 1995, respectively. Loans, net of unearned discount, were 72.1%,
75.0% and 75.7% of total assets at December 31, 1997, 1996 and 1995,
respectively. Consequently, First Banks views the quality, yield and growth of
the loan portfolio to be primary objectives in its growth and profitability.
During the three years ended December 31, 1997, total loans, net of
unearned discount, increased 44.8% from $2.07 billion at December 31, 1994 to
$3.00 billion at December 31, 1997. As discussed under "--General," in 1993
First Banks began a process of substantially enhancing its capabilities to
achieve and manage internal growth. A key element of this process was the
expansion of the corporate business development staff which is responsible for
the internal development of both loan and deposit relationships with commercial
customers. These customers require loans categorized by type of collateral as
commercial, financial and agricultural loans, real estate construction and land
development loans and commercial real estate loans.
While this process was occurring, in order to achieve more diversification,
a higher level of interest yield and a reduction in interest rate risk within
its loan portfolio, in 1995 First Banks began reorienting its portfolio. This
reorientation provided that as the corporate business development effort
continued to originate a substantial volume of new loans, substantially all of
the conforming residential mortgage loan production of First Banks would be sold
in the secondary mortgage market, and the origination of indirect automobile
loans would be substantially reduced. Consequently, these sectors of the
<PAGE>
portfolio began to decline substantially. This process was accelerated in 1995
by the sale of $147 million of residential real estate loans from the portfolio.
As a result, much of the growth in corporate lending was offset by reductions in
residential real estate and indirect automobile lending.
In addition, First Banks' acquisitions during this period added substantial
portfolios of new loans. However, many of these portfolios contained significant
loan problems. As these banks resolved their asset quality issues, those
portfolios tended to decline because many of the resources which would otherwise
be directed toward generating new loans were concentrated on improving or
eliminating old ones.
<TABLE>
<CAPTION>
A summary of the effects of these factors on the loan portfolio for the
three years ended December 31, 1997 follows:
Increase (decrease) in loans for
the year ended December 31,
---------------------------
1997 1996 1995
---- ---- ----
(dollars expressed in thousands)
Internal loan volumes:
<S> <C> <C> <C>
Commercial lending.......................................... $ 378,882 209,251 119,017
Residential real estate lending............................. (144,707) (164,400) (127,648)
Consumer lending, net of unearned discount.................. (54,305) (82,231) (42,453)
Loans provided by acquisitions................................... 54,361 61,130 721,733
---------- --------- ---------
Total increase in loans..................................... $ 234,231 23,750 670,649
========== ========= =========
Increase (decrease) in potential problem loans (1)............... $ (7,600) (25,500) 52,700
========== ========= =========
- ---------------------
(1) Potential problem loans include nonperforming loans and other loans
identified by management as having potential credit problems.
</TABLE>
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. 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 based on the borrowers'
general credit strength and ability to generate repayment cash flows from income
sources even though such loans and bonds may also be secured by real estate or
other assets. Real estate construction and development loans, primarily relating
to residential properties, represent interim financing secured by real estate
under construction. Real estate mortgage loans consist primarily of loans
secured by single-family owner-occupied properties and various types of
commercial properties on which the income from the property is the intended
source of repayment. Consumer and installment loans are loans to individuals and
consist primarily of loans secured by automobiles. Loans held for sale are
primarily fixed and adjustable rate residential loans pending sale in the
secondary mortgage market in the form of a mortgage-backed security, or to
various private third-party investors.
<PAGE>
<TABLE>
<CAPTION>
The following table shows the composition of the loan portfolio by major
category and the percent of each category to the total portfolio as of the dates
presented:
December 31,
-----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- ------------- ------------- ------------ -------------
Amount % Amount % Amount % Amount % Amount %
(dollars expressed in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural.. $ 621,618 21.1% $ 457,186 16.7% $ 364,018 13.5%$ 208,649 10.2% $ 160,211 12.8%
Real estate construction and development 413,107 14.0 289,378 10.5 209,802 7.8 122,912 6.0 76,049 6.1
Real estate mortgage:
One-to-four-family residential loans 915,205 31.1 1,059,770 38.7 1,199,491 44.4 967,129 47.1 584,868 46.6
Other real estate loans............. 713,910 24.3 600,810 21.9 512,264 19.0 332,075 16.1 243,382 19.4
Consumer and installment, net of
unearned discount................... 279,279 9.5 333,340 12.2 413,609 15.3 422,461 20.6 189,851 15.1
---------- ---- --------- ---- ------- ---- --------- ---- --------- ----
Total loans, excluding
loans held for sale......... 2,943,119 100.0% 2,740,484 100.0% 2,699,184 100.0% 2,053,226 100.0% 1,254,361 100.0%
===== ===== ===== ===== =====
Loans held for sale..................... 59,081 27,485 45,035 20,344 107,657
---------- --------- ------- --------- ---------
Total loans.................... $3,002,200 $2,767,969 $2,744,219 $2,073,570 $1,362,018
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Loans at December 31, 1997 mature as follows:
Over one year
through five
years Over five years
----- ---------------
One year Fixed Floating Fixed Floating
or less rate rate rate rate Total
------- ---- ---- ---- ---- -----
(dollars expressed in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural................ $ 492,939 100,011 22,141 4,483 2,044 621,618
Real estate construction and development.............. 392,117 13,571 6,957 115 347 413,107
Real estate mortgage ................................ 858,676 343,837 280,855 134,189 11,558 1,629,115
Consumer and installment, net of unearned discount.... 76,381 191,042 223 11,633 -- 279,279
Loans held for sale................................... 59,081 -- -- -- -- 59,081
----------- ------- ------- -------- ------- ----------
Total loans.................................. $ 1,879,194 648,461 310,176 150,420 13,949 3,002,200
=========== ======= ========= ======== ======= ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Following is a summary of loan loss experience for the five years ended
December 31, 1997:
December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(dollars expressed in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for possible loan losses, beginning of
period........................................ $ 46,781 52,665 28,410 23,053 20,897
Acquired allowances for possible loan losses......... 30 2,338 24,655 5,026 2,079
---------- ---------- -------- --------- ---------
46,811 55,003 53,065 28,079 22,976
---------- ---------- -------- --------- ---------
Loans charged-off:
Commercial, financial and agricultural........... (2,308) (8,918) (2,337) (813) (2,023)
Real estate construction and development......... (2,242) (1,241) (275) (119) (19)
Real estate mortgage............................. (6,250) (10,308) (5,948) (1,282) (2,212)
Consumer and installment......................... (6,032) (8,549) (7,060) (4,482) (5,277)
---------- ----------- -------- --------- ---------
Total.................................... (16,832) (29,016) (15,620) (6,696) (9,531)
---------- ----------- -------- --------- ---------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural........... 2,146 2,642 1,714 831 1,191
Real estate construction and development......... 269 495 666 401 241
Real estate mortgage............................. 3,666 3,255 290 840 1,396
Consumer and installment......................... 3,149 2,908 2,189 3,097 2,324
---------- ---------- -------- --------- ---------
Total.................................... 9,230 9,300 4,859 5,169 5,152
---------- ---------- -------- --------- ---------
Net loans charged-off.................... (7,602) (19,716) (10,761) (1,527) (4,379)
---------- ---------- -------- --------- ---------
Provision for possible loan losses................... 11,300 11,494 10,361 1,858 4,456
---------- ---------- -------- --------- ---------
Allowance for possible loan losses, end of period.... $ 50,509 46,781 52,665 28,410 23,053
========== ========== ======== ========== =========
Loans outstanding:
Average.......................................... $2,846,157 2,726,297 2,598,936 1,616,634 1,340,641
End of period.................................... 3,002,200 2,767,969 2,744,219 2,073,570 1,362,018
End of period, excluding loans held for sale..... 2,943,119 2,740,484 2,699,184 2,053,226 1,254,361
========== ========== ========= ========= =========
Ratio of allowance for possible loan losses
to loans outstanding:
Average..................................... 1.77% 1.72% 2.03% 1.76% 1.72%
End of period............................... 1.68 1.69 1.92 1.37 1.69
End of period, excluding loans
held for sale............................. 1.72 1.71 1.95 1.38 1.84
Ratio of net charge-offs to average loans
outstanding.................................... 0.27 0.72 0.41 0.09 0.33
========== ========= ======== ========= ========
Allocation of allowance for possible loan losses
at end of period:
Commercial, financial and agricultural........... $ 14,879 13,579 12,501 4,160 3,531
Real estate construction and development......... 7,148 4,584 4,665 2,440 2,867
Real estate mortgage............................. 18,317 14,081 19,849 8,051 6,712
Consumer and installment......................... 5,089 10,296 10,016 6,225 2,925
Unallocated...................................... 5,076 4,241 5,634 7,534 7,018
---------- --------- -------- --------- --------
Total.................................... $ 50,509 46,781 52,665 28,410 23,053
========== ========= ======== ========= ========
Percent of categories to loans, net of
unearned discount:
Commercial, financial and agricultural........... 20.71% 16.52% 13.27% 10.06% 11.76%
Real estate construction and development......... 13.76 10.45 7.65 5.93 5.58
Real estate mortgage............................. 54.26 60.00 62.49 62.66 60.81
Consumer and installment......................... 9.30 12.04 14.95 20.37 13.94
Loans held for sale.............................. 1.97 0.99 1.64 0.98 7.91
----------- --------- -------- ---------- --------
Total.................................... 100.00% 100.00% 100.00% 100.00% 100.00%
=========== ========= ======== ========== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Following is a summary of nonperforming assets by category:
December 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(dollars expressed in thousands)
Commercial, financial and agricultural:
<S> <C> <C> <C> <C> <C>
Nonaccrual....................................... $ 4,017 4,113 9,930 2,540 4,278
Restructured terms............................... -- 130 -- 60 60
Real estate construction and development:
Nonaccrual....................................... 4,097 817 2,002 1,448 70
Real estate mortgage:
Nonaccrual....................................... 10,402 24,486 27,159 11,637 7,546
Restructured terms............................... 5,456 278 -- 222 227
Consumer and installment:
Nonaccrual....................................... 94 440 300 293 49
Restructured terms............................... -- 5 -- -- --
----------- -------- ---------- --------- ---------
Total nonperforming loans.................. 24,066 30,269 39,391 16,200 12,230
Other real estate.................................... 7,324 10,607 7,753 6,740 2,529
----------- --------- ---------- --------- ---------
Total nonperforming assets................ $ 31,390 40,876 47,144 22,940 14,759
=========== ========= ========== ========= =========
Loans, net of unearned discount...................... $ 3,002,200 2,767,969 2,744,219 2,073,570 1,362,018
=========== ========= ========== ========= =========
Loans past due 90 days or more and still accruing.... $ 2,725 3,779 8,474 1,885 1,199
=========== ========= ========== ========= =========
Allowance for possible loan losses to loans.......... 1.68% 1.69% 1.92% 1.37% 1.69%
Nonperforming loans to loans......................... 0.80 1.09 1.44 0.78 0.90
Allowance for possible loan losses to
nonperforming loans.............................. 209.88 154.55 133.70 175.37 188.50
Nonperforming assets to loans and
foreclosed assets................................ 1.04 1.47 1.71 1.10 1.08
=========== ========= ========== ========= =========
</TABLE>
As of December 31, 1997 and 1996, $30.7 million and $31.5 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 focus on identifying,
measuring and controlling credit exposure. These procedures employ a
lender-initiated system of rating credits, which is ratified in the loan
approval process and subsequently tested in internal loan reviews, external
audits and regulatory bank examinations. Basically, the system requires rating
all loans at the time they are made, except for homogeneous categories of loans,
such as residential real estate mortgage loans, indirect automobile loans and
credit card loans. These homogeneous loans are assigned an initial rating based
on First Banks' experience with each type of loan. Adjustments to these ratings
are based on payment experience subsequent to their origination.
Adversely rated credits, including loans requiring close monitoring which
would not normally be considered criticized credits by regulators, are included
on a monthly loan watch list. Loans may be added to the watch list for reasons
which are temporary and correctable, such as the absence of current financial
statements of the borrower, or a deficiency in loan documentation. Other loans
are added whenever any adverse circumstance is detected which might affect the
borrower's ability to meet the terms of the loan. 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. Loans on the watch list
require detailed loan status reports prepared by the responsible officer every
four months, which are then discussed in formal meetings with the loan review
and credit administration staffs. Downgrades of loan risk ratings may be
initiated by the responsible loan officer at any time. However, upgrades of risk
ratings may only be made with the concurrence of the loan review and credit
administration staffs generally at the time of the formal watch list review
meetings.
<PAGE>
Each month, credit administration provides First Banks' management with
detailed lists of loans on the watch list and summaries of the entire loan
portfolio of each Subsidiary Bank by risk rating. These are coupled with
analyses of changes in the risk profiles of the portfolios, changes in past due
and nonperforming loans and changes in watch list and classified loans over
time. In this manner, the overall increases or decreases in the levels of risk
in the portfolios are monitored continually. Factors are applied to the loan
portfolios for each category of loan risk to determine acceptable levels of
allowance for possible loan losses. These factors are derived primarily from the
actual loss experience of the Subsidiary Banks and from published national
surveys of norms in the industry. The calculated allowances required for the
portfolios are then compared to the actual allowance balances to determine the
provisions necessary to maintain the allowances at appropriate levels. In
addition, management exercises judgment in its analysis of determining the
overall level of the allowance for possible loan losses. In its analysis,
management considers the change in the portfolio, including growth and
composition, and the economic conditions of the regions in which First Banks
operates. Based on this quantitative and qualitative analysis, the allowance for
possible loan losses is adjusted. Such adjustments are reflected in the
consolidated statements of income.
First Banks does not engage in foreign lending. 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.
Deposits
Deposits are the primary source of funds for the Subsidiary Banks. First
Banks' deposits consist principally of core deposits from its Subsidiary Banks'
local market areas. The following table sets forth the distribution of First
Banks' deposit accounts at the dates indicated and the weighted average nominal
interest rates on each category of deposit:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996 1995
---------------------- ------------------------- ------------------------
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................. $ 485,222 13.17% -- $418,193 12.91% -- $ 389,658 12.24% --
Interest-bearing demand
deposits..................... 348,080 9.45 1.76 337,618 10.42 1.73 307,584 9.66 1.89
Savings deposits................ 947,029 25.70 3.68 671,286 20.73 3.07 690,902 21.70 3.16
Time deposits of $100,000
or more...................... 219,417 5.95 5.63 169,057 5.22 5.64 201,025 6.31 5.69
Other time deposits............. 1,684,847 45.73 5.66 1,642,413 50.72 5.69 1,594,522 50.09 5.72
---------- ------ ==== --------- ------ ==== ----------- ------ ====
Total deposits......... $3,684,595 100.00% $3,238,567 100.00% $ 3,183,691 100.00%
========== ====== ========== ====== =========== ======
</TABLE>
Capital and Dividends
Historically, First Banks has accumulated capital to support its
acquisitions by retaining most of its earnings. Relatively small dividends are
paid on the Class A convertible, adjustable rate preferred stock and the Class B
adjustable rate preferred stock, totaling $786,000 for the years ended December
31, 1997, 1996 and 1995. The dividends paid on the Class C Preferred Stock were
$4.28 million, $4.94 million and $4.95 million for the years ended December 31,
1997, 1996 and 1995, respectively. First Banks has never paid, and has no
present intention to pay, dividends on its common stock.
As discussed under "--Company Profile" and "Financial Condition and Average
Balances," in 1997 First Banks formed First Trust for the purpose of issuing
$86.25 million of Preferred Securities. First Banks received the proceeds and
issued a subordinated debenture to First Trust. The Preferred Securities are
considered Tier 1 capital for regulatory purposes.
See Note 18 to the consolidated financial statements.
<PAGE>
Liquidity
The liquidity of First Banks and its Subsidiary Banks is the ability to
maintain a cash flow which is adequate to fund operations, service its debt
obligations and meet other commitments on a timely basis. The Subsidiary Banks'
primary sources for liquidity are customer deposits, loan payments, maturities
and sales of investments and earnings. In addition, First Banks and its
Subsidiary Banks may avail themselves of more volatile sources of funds through
issuance of certificates of deposit in denominations of $100,000 or more,
federal funds borrowed, securities sold under agreements to repurchase,
borrowings from the Federal Home Loan Banks (FHLB) and other borrowings,
including First Banks' $90 million Credit Agreement. The aggregate funds
acquired from those sources were $328.7 million and $315.4 million at December
31, 1997 and 1996, respectively.
At December 31, 1997, First Banks' more volatile sources of funds mature as
follows:
(dollars expressed in
thousands)
Three months or less......................................... $ 122,622
Over three months through six months......................... 52,921
Over six months through twelve months........................ 55,701
Over twelve months........................................... 97,470
----------
Total............................................... $ 328,714
==========
Management believes the earnings of its Subsidiary Banks will be sufficient
to provide funds for growth and to permit the distribution of dividends to First
Banks sufficient to meet First Banks' operating and debt service requirements
both on a short-term and long-term basis and to pay the dividends on the
Preferred Securities issued in February 1997.
Year 2000 Compatibility
First Banks has significant dependence on various computer equipment and
software for its daily operations. Most software systems were originally
designed to operate using date fields which contain two digits to correspond to
the last two digits of the year. With the approaching change to the Year 2000,
this limitation in these systems could cause the computers to misinterpret years
beginning with "20" as instead being years beginning with "19". If not
corrected, this could cause miscalculation of data for financial purposes, and
operating failure of equipment which is date dependent. While the most obvious
location of this problem is the mainframe computer system, there are many other
potential ramifications. These can be categorized as: (1) the ancillary software
systems which are used for various other purposes throughout First Banks on
secondary mainframe computers, personal computers or intelligent terminals; (2)
other types of equipment which are not related to or connected to computer
equipment, such as vault time locks, elevators, security equipment and
heating/air conditioning systems, which are used in bank branches for various
purposes; and (3) the effects which the transition to the Year 2000 may have on
external suppliers and servicers, as well as the loan and deposit customers of
First Banks.
Recognizing this, First Banks has established an operating committee to
identify all of the various Year 2000 problems which may arise and work with the
various departments within First Banks to address these issues. Since most of
the software used by First Banks is purchased from outside vendors, First Banks
has been working with these vendors to ensure that the issues are being
corrected. In a few instances, there are particular systems or equipment which
the vendors do not intend to convert to Year 2000 compatibility. However,
generally these are items which are at the end of their economic lives and
scheduled for replacement. Consequently, First Banks believes its cost of Year
2000 compliance will not be material to its financial position or results of
operation. These costs are expensed as they occur.
First Banks' Subsidiary Banks are subject to risks associated with the Year
2000 software problem, a term which refers to uncertainties about the ability of
various software systems to interpret dates correctly after the beginning of the
Year 2000. First Banks' process of evaluating potential effects of Year 2000
<PAGE>
issues on customers of the Subsidiary Banks is in its early stages, and it is
therefore impossible to quantify the potential adverse effects of incompatible
software systems on loan customers of First Banks' Subsidiary Banks. The failure
of a commercial bank customer to prepare adequately for Year 2000 compatibility
could have a significant adverse effect on such customer operations and
profitability, in turn inhibiting its ability to repay loans in accordance with
their terms. Until sufficient information is accumulated from customers of the
Subsidiary Banks to enable First Banks to assess the degree to which customers'
operations are susceptible to potential problems, First Banks will be unable to
quantify the potential for losses from loans to commercial customers.
Effects of New Accounting Standards
During 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130 - Reporting
Comprehensive Income. The statement establishes standards for reporting and
displaying income and its components (revenues, gains, and losses) in a full set
of general purpose financial statements. The statement requires all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Although the statement is
effective for fiscal years beginning after December 15, 1997, First Banks does
not believe the SFAS will have a material impact to the Company's financial
statements.
In addition, the FASB issued SFAS No. 131 - Disclosures about Segments of
an Enterprise and Related Information. The statement establishes standards for
the way public business enterprises report information about operating segments
in annual financial statements and requires those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. Additionally, the statement establishes standards for related
disclosures about products and services, geographic areas, and major customers
superseding SFAS No. 14 - Financial Reporting for Segments of a Business
Enterprise. First Banks is currently evaluating information required in the
statement and believes expanded disclosure information will be required to be
included in First Banks' financial statements beginning in 1998.
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 asset/liability management program.
<PAGE>
<TABLE>
<CAPTION>
Quarterly Condensed Financial Data (Unaudited)
1997 Quarter Ended
------------------
Septem- Decem-
March 31 June 30 ber 30 ber 31
-------- ------- ------ ------
(dollars expressed in thousands,
except per share data)
<S> <C> <C> <C> <C>
Interest income................................................. $ 69,300 72,779 74,740 78,282
Interest expense................................................ 34,756 35,338 39,071 39,666
-------- ------- ------- --------
Net interest income............................. 34,544 37,441 35,669 38,616
Provision for possible loan losses.............................. 2,850 3,175 3,100 2,175
-------- ------- ------- --------
Net interest income after provision
for possible loan losses...................... 31,694 34,266 32,569 36,441
Noninterest income.............................................. 5,209 5,706 8,829 5,953
Noninterest expense............................................. 25,152 27,682 27,862 29,591
-------- ------- ------- --------
Income before provision for income taxes
and minority interest in (income) loss
of subsidiaries............................... 11,751 12,290 13,536 12,803
Provision for income taxes...................................... 3,714 4,051 4,632 3,686
-------- ------- ------- --------
Income before minority interest in
income of subsidiaries........................ 8,037 8,239 8,904 9,117
Minority interest in income of subsidiaries..................... (201) (376) (363) (330)
-------- ------- ------- --------
Net income...................................... $ 7,836 7,863 8,541 8,787
======== ======= ======= ========
Earnings per share:.............................................
Basic....................................................... $ 277.11 281.23 307.87 315.49
Diluted..................................................... 266.69 268.02 295.45 306.11
======== ======= ======= ========
1996 Quarter Ended
------------------
Septem- Decem-
March 31 June 30 ber 30 ber 31
-------- ------- ------ ------
(dollars expressed in thousands
except per share data)
Interest income................................................. $ 66,656 65,453 64,899 69,013
Interest expense................................................ 36,551 35,317 34,712 35,090
-------- ------- ------- -------
Net interest income............................. 30,105 30,136 30,187 33,923
Provision for possible loan losses.............................. 3,104 3,100 2,570 2,720
-------- ------- ------- -------
Net interest income after provision
for possible loan losses...................... 27,001 27,036 27,617 31,203
Noninterest income.............................................. 5,119 5,169 5,510 4,923
Noninterest expense............................................. 25,037 24,043 32,157 24,504
-------- ------- ------- -------
Income before provision (benefit) for income taxes
and minority interest in income
of subsidiaries............................... 7,083 8,162 970 11,622
Provision (benefit) for income taxes............................ 2,564 2,554 (814) 2,656
-------- ------- ------- -------
Income before minority interest in
income of subsidiaries........................ 4,519 5,608 1,784 8,966
Minority interest in income of subsidiaries..................... (82) (138) (252) (187)
-------- ------- ------- -------
Net income...................................... $ 4,437 5,470 1,532 8,779
======== ======= ======= =======
Earnings per share:.............................................
Basic....................................................... $ 126.92 173.34 4.14 308.05
Diluted..................................................... 125.39 166.96 4.14 296.09
======== ======= ======= =======
</TABLE>
<PAGE>
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, 1997 and 1996, 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,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the financial position of First Banks, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/KPMG Peat Marwick LLP
St. Louis, Missouri
March 6, 1998
<PAGE>
Consolidated Balance Sheets
(dollars expressed in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
ASSETS
------
Cash and cash equivalents:
<S> <C> <C>
Cash and due from banks........................................................ $ 142,125 147,804
Interest-bearing deposits with other financial institutions -
with maturities of three months or less...................................... 2,840 6,050
Federal funds sold............................................................. 23,515 74,100
----------- ---------
Total cash and cash equivalents..................................... 168,480 227,954
----------- ---------
Investment securities:
Trading, at fair value......................................................... 3,110 --
Available for sale, at fair value.............................................. 773,271 532,605
Held to maturity, at amortized cost (fair value of $19,835 and
$20,611 at December 31, 1997 and 1996, respectively)......................... 19,149 20,196
----------- ---------
Total investment securities......................................... 795,530 552,801
----------- ---------
Loans:
Commercial, financial and agricultural......................................... 621,618 457,186
Real estate construction and development....................................... 413,107 289,378
Real estate mortgage........................................................... 1,629,115 1,660,580
Consumer and installment....................................................... 287,752 341,154
Loans held for sale............................................................ 59,081 27,485
----------- ---------
Total loans......................................................... 3,010,673 2,775,783
Unearned discount.............................................................. (8,473) (7,814)
Allowance for possible loan losses............................................. (50,509) (46,781)
----------- ---------
Net loans........................................................... 2,951,691 2,721,188
----------- ---------
Bank premises and equipment, net of accumulated
depreciation and amortization.................................................. 51,505 48,078
Intangibles associated with the purchase of subsidiaries........................... 25,835 23,303
Mortgage servicing rights, net of amortization..................................... 9,046 10,230
Accrued interest receivable........................................................ 28,358 23,250
Other real estate.................................................................. 7,324 10,607
Deferred income taxes.............................................................. 43,355 43,406
Other assets....................................................................... 83,890 28,337
----------- ---------
Total assets........................................................ $ 4,165,014 3,689,154
=========== =========
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets (Continued)
(dollars expressed in thousands, except per share data)
December 31,
------------
1997 1996
---- ----
LIABILITIES
-----------
Deposits:
Demand:
<S> <C> <C>
Non-interest-bearing........................................................ $ 485,222 418,193
Interest-bearing............................................................ 348,080 337,618
Savings....................................................................... 947,029 671,286
Time:
Time deposits of $100 or more............................................... 219,417 169,057
Other time deposits......................................................... 1,684,847 1,642,413
----------- ----------
Total deposits.......................................................... 3,684,595 3,238,567
Other borrowings.................................................................. 54,153 69,982
Notes payable..................................................................... 55,144 76,330
Accrued interest payable.......................................................... 9,976 10,288
Deferred income taxes............................................................. 9,029 6,194
Accrued and other liabilities..................................................... 20,990 23,521
Minority interest in subsidiaries................................................. 16,407 12,883
----------- ----------
Total liabilities....................................................... 3,850,294 3,437,765
----------- ----------
Guaranteed preferred beneficial interests in First Banks, Inc.
subordinated debenture........................................................ 83,183 --
----------- ----------
STOCKHOLDERS' EQUITY
Preferred stock:
Preferred stock, $1.00 par value; 5,000,000 shares authorized; no shares
issued and outstanding at December 31, 1997; Class C 9.00% increasing
rate, redeemable, cumulative, $25.00 stated value;
2,155,500 shares issued and outstanding at December 31, 1996................ -- 53,887
Class A convertible, adjustable rate, $20.00 par value; 750,000
shares authorized; 641,082 shares issued and outstanding.................... 12,822 12,822
Class B adjustable rate, $1.50 par value; 200,000 shares authorized,
160,505 shares issued and outstanding....................................... 241 241
Common stock, $250.00 par value; 25,000 shares authorized; 23,661
shares issued and outstanding................................................. 5,915 5,915
Capital surplus................................................................... 3,978 3,289
Retained earnings................................................................. 199,143 171,182
Net fair value adjustment for securities available for sale....................... 9,438 4,053
----------- ----------
Total stockholders' equity.............................................. 231,537 251,389
----------- ----------
Total liabilities and stockholders' equity.............................. $ 4,165,014 3,689,154
=========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
(dollars expressed in thousands, except per share data)
Years ended December 31,
------------------------
1997 1996 1995
---- ---- ----
Interest income:
<S> <C> <C> <C>
Interest and fees on loans............................................... $252,766 237,379 221,934
Investment securities:
Taxable............................................................... 35,248 22,639 34,379
Nontaxable............................................................ 1,008 1,240 1,390
Federal funds sold and other............................................. 6,079 4,763 3,918
-------- ------ -------
Total interest income............................................... 295,101 266,021 261,621
-------- ------- -------
Interest expense:
Deposits:
Interest-bearing demand............................................... 5,648 4,845 5,760
Savings............................................................... 27,383 22,687 22,737
Time deposits of $100 or more......................................... 10,386 8,977 9,315
Other time deposits................................................... 95,244 88,228 78,250
Interest rate exchange agreements, net................................... 6,574 7,623 6,911
Notes payable and other borrowings....................................... 3,596 9,310 21,972
-------- ------ -------
Total interest expense.............................................. 148,831 141,670 144,945
-------- ------- -------
Net interest income................................................. 146,270 124,351 116,676
Provision for possible loan losses........................................... 11,300 11,494 10,361
-------- ------- -------
Net interest income after provision for possible loan losses........ 134,970 112,857 106,315
-------- ------- -------
Noninterest income:
Service charges on deposit accounts and customer service fees............ 12,491 12,521 10,661
Credit card fees......................................................... 2,914 2,475 2,179
Loan servicing fees, net................................................. 1,628 1,837 2,932
Gain (loss) on mortgage loans sold and held for sale..................... 716 40 (608)
Net gain (loss) on sales of securities................................... 2,335 (311) (866)
Net gain on sales of trading securities.................................. 121 -- --
Gain on sale of mortgage loan servicing rights........................... -- -- 3,843
Loss on cancellation of interest rate swap agreement..................... -- -- (3,342)
Other income............................................................. 5,492 4,159 4,608
-------- ------ -------
Total noninterest income............................................ 25,697 20,721 19,407
-------- ------ -------
Noninterest expense:
Salaries and employee benefits........................................... 43,011 39,995 37,941
Occupancy, net of rental income.......................................... 10,617 9,758 8,709
Furniture and equipment.................................................. 7,618 7,218 6,852
Federal Deposit Insurance Corporation premiums........................... 804 11,715 4,911
Postage, printing and supplies........................................... 4,187 4,687 4,678
Data processing fees..................................................... 8,450 4,477 4,838
Legal, examination and professional fees................................. 4,587 4,901 5,412
Credit card expenses..................................................... 3,343 2,913 2,490
Communications........................................................... 2,611 2,635 2,476
Advertising.............................................................. 4,054 2,224 2,182
(Gain) loss on foreclosed real estate, net of expenses................... (331) 1,927 1,302
Guaranteed preferred debenture expense................................... 7,322 -- --
Other expenses........................................................... 14,014 13,291 9,775
-------- ------- -------
Total noninterest expense........................................... 110,287 105,741 91,566
-------- ------- -------
Income before provision for income taxes and minority interest
in (income) loss of subsidiaries............................. 50,380 27,837 34,156
Provision for income taxes................................................... 16,083 6,960 11,038
-------- ------ -------
Income before minority interest in (income) loss of subsidiaries.... 34,297 20,877 23,118
Minority interest in (income) loss of subsidiaries........................... (1,270) (659) 1,353
-------- ------ -------
Net income.......................................................... 33,027 20,218 24,471
Preferred stock dividends.................................................... 5,067 5,728 5,736
-------- ------ -------
Net income available to common stockholders......................... $ 27,960 14,490 18,735
======== ======= =======
Earnings per common share:
Basic.................................................................... $1,181.69 612.46 791.82
Diluted.................................................................. $1,134.28 596.83 759.09
========= ====== =======
Weighted average shares of common stock outstanding.......................... 23,661 23,661 23,661
======== ====== =======
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Stockholders' Equity
(dollars expressed in thousands, except per share data)
Three years ended December 31, 1997
Class C Net fair
preferred Adjustable rate value
stock, preferred stock adjustment Total
--------------- for
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, 1995........... $ 55,000 12,822 241 5,915 4,479 137,957 898 217,312
Year ended December 31, 1995:
Consolidated net income........................ -- -- -- -- -- 24,471 -- 24,471
Class C preferred stock dividends, $2.25
per share.................................. -- -- -- -- -- (4,950) -- (4,950)
Class A preferred stock dividends, $1.20
per share................................... -- -- -- -- -- (769) -- (769)
Class B preferred stock dividends, $.11
per share.................................. -- -- -- -- -- (17) -- (17)
Effect of capital stock transactions of
majority-owned subsidiary................... -- -- -- -- (172) -- -- (172)
Net fair value adjustment for securities
available for sale.......................... -- -- -- -- -- -- (1,270) (1,270)
-------- ------ --- ----- ----- -------- ----- -------
Consolidated balances, December 31, 1995......... 55,000 12,822 241 5,915 4,307 156,692 (372) 234,605
Year ended December 31, 1996:
Consolidated net income...................... -- -- -- -- -- 20,218 -- 20,218
Class C preferred stock dividends, $2.25
per share.................................. -- -- -- -- -- (4,942) -- (4,942)
Class A preferred stock dividends, $1.20
per share.................................. -- -- -- -- -- (769) -- (769)
Class B preferred stock dividends, $.11
per share................................... -- -- -- -- -- (17) -- (17)
Purchase and retirement of Class C
preferred shares.......................... (1,113) -- -- -- (26) -- -- (1,139)
Effect of capital stock transactions of
majority-owned subsidiary................. -- -- -- -- (992) -- -- (992)
Net fair value adjustment for securities
available for sale........................ -- -- -- -- -- -- 4,425 4,425
-------- ------ --- ----- ----- -------- ----- -------
Consolidated balances, December 31, 1996......... 53,887 12,822 241 5,915 3,289 171,182 4,053 251,389
Year ended December 31, 1997:
Consolidated net income...................... -- -- -- -- -- 33,027 -- 33,027
Class C preferred stock dividends, $2.25
per share.................................. -- -- -- -- -- (4,280) -- (4,280)
Class A preferred stock dividends, $1.20
per share.................................. -- -- -- -- -- (769) -- (769)
Class B preferred stock dividends, $.11
per share.................................. -- -- -- -- -- (17) -- (17)
Purchase and retirement of Class C
preferred shares.......................... (6,774) -- -- -- (161) -- -- (6,935)
Redemption of Class C preferred shares....... (47,113) -- -- -- -- -- -- (47,113)
Effect of capital stock transactions of
majority-owned subsidiary................. -- -- -- -- 850 -- -- 850
Net fair value adjustment for securities
available for sale........................ -- -- -- -- -- -- 5,385 5,385
-------- ----- ---- ---- ---- -------- ----- -------
Consolidated balances, December 31, 1997......... $ -- 12,822 241 5,915 3,978 199,143 9,438 231,537
======== ====== ==== ===== ===== ======== ===== =======
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
(dollars expressed in thousands)
Years ended December 31,
------------------------
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income.................................................................. $ 33,027 20,218 24,471
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of bank premises and equipment............. 5,687 5,784 5,534
Amortization, net of accretion........................................... 9,512 12,481 4,520
Originations and purchases of loans held for sale........................ (174,330) (135,792) (67,005)
Proceeds from the sale of loans held for sale............................ 148,350 113,074 207,077
Provision for possible loan losses....................................... 11,300 11,494 10,361
Provision for income taxes............................................... 16,083 6,960 11,039
Payments of income taxes................................................. (17,976) (7,655) (1,105)
(Increase) decrease in accrued interest receivable....................... (5,107) (623) 1,320
Net increase in trading securities....................................... (3,110) -- --
Interest accrued on liabilities.......................................... 148,831 141,670 144,946
Payments of interest on liabilities...................................... (149,380) (142,210) (145,066)
Other operating activities, net.......................................... (7,284) (6,637) (5,190)
Minority interest in income (loss) of subsidiaries....................... 1,270 659 (1,353)
-------- ------- --------
Net cash provided by operating activities............................. 16,873 19,423 189,549
-------- ------- --------
Cash flows from investing activities:
Cash paid for acquired entities, net of cash and cash equivalents received.. 84,556 10,715 54,458
Sales of investment securities of acquired entity........................... -- -- 88,334
Sales of investment securities available for sale........................... 20,930 91,147 279,537
Maturities of investment securities available for sale...................... 447,547 440,314 147,395
Maturities of investment securities held to maturity........................ 1,804 14,643 36,469
Purchases of investment securities available for sale....................... (686,474) (527,091) (282,599)
Purchases of investment securities held to maturity......................... (844) (916) (2,397)
Net (increase) decrease in loans............................................ (174,804) 20,350 (71,211)
Recoveries of loans previously charged-off.................................. 9,230 9,300 4,859
Purchases of bank premises and equipment.................................... (6,413) (3,299) (5,337)
Interest rate futures contracts, net........................................ -- -- (22,167)
Other investing activities.................................................. (54,681) 10,657 3,946
--------- ------ --------
Net cash provided by (used in) investing activities................... (359,149) 65,820 231,287
--------- ------ --------
Cash flows from financing activities:
Increase (decrease) in demand and savings deposits....................... 304,193 (20,466) (123,260)
Increase (decrease) in time deposits..................................... (8,348) (15,804) 55,885
Decrease in federal funds purchased...................................... -- (3,000) (67,300)
Decrease in Federal Home Loan Bank advances.............................. (37,218) (10,606) (170,644)
Increase (decrease) in securities sold under agreements to repurchase.... 21,390 13,525 (55,615)
Increase (decrease) in notes payable..................................... (21,186) (13,284) 13,751
Purchase and retirement of Class C preferred shares...................... (54,048) (1,139) --
Proceeds from issuance of guaranteed preferred subordinated debenture.... 83,086 -- --
Payment of preferred stock dividends..................................... (5,067) (5,728) (5,736)
Net cash provided by (used in) financing activities................... 282,802 (56,502) (352,919)
-------- ------- --------
Net increase (decrease) in cash and cash equivalents.................. (59,474) 28,741 67,917
Cash and cash equivalents, beginning of year.................................... 227,954 199,213 131,296
-------- ------- --------
Cash and cash equivalents, end of year.......................................... $168,480 227,954 199,213
======== ======= ========
Noncash investing and financing activities:
Loans transferred to foreclosed real estate................................. $ 4,295 10,451 5,395
Loans to facilitate sales of foreclosed real estate......................... -- -- 587
Investment securities transferred to available for sale..................... -- -- 174,113
Receivable from sale of investment securities............................... -- -- 41,265
Loans transferred to held for sale.......................................... -- 39,996 146,991
======== ====== ========
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
44
(1) Summary of Significant Accounting Policies
The accompanying consolidated financial statements of First Banks, Inc. and
subsidiaries (First Banks) have been prepared in accordance with generally
accepted accounting principles and conform to practices prevalent among
financial institutions. The following is a summary of the more significant
policies followed by First Banks:
Basis of Presentation. The consolidated financial statements of First Banks
have been prepared in accordance with generally accepted accounting principles
and conform to predominant practices within the banking industry. Management of
First Banks has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare the consolidated financial statements in conformity with
generally accepted accounting principles. Actual results could differ from those
estimates. Certain 1996 and 1995 amounts have been reclassified to conform with
the classifications and format used for 1997.
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
through its subsidiary bank holding companies and financial institutions
(Subsidiary Banks) as follows:
First Bank, headquartered in St. Louis County, Missouri (First Bank).
First Banks America, Inc., headquartered in St. Louis County, Missouri
(FBA), and its holly owned subsidiaries:
BankTEXAS N. A., headquartered in Houston, Texas (BankTEXAS).
First Bank of California, headquartered in Roseville, California
(FB California).
CCB Bancorp, Inc., headquartered in Irvine, California (CCB), and
its wholly owned subsidiary:
First Bank & Trust, headquartered in Irvine, California (FB&T).
FirstCommercial Bancorp, Inc., headquartered in Sacramento,
California (FCB), and its wholly owned subsidiary: First
Commercial Bank, headquartered in Sacramento, California
(First Commercial).
All of the Subsidiary Banks are wholly owned by their respective parents
except FBA and FCB, which were 65.85% and 61.48% owned, respectively, by First
Banks at December 31, 1997. As discussed under "--Acquisitions," FB California
is a newly-formed California state bank resulting from the merger of Sunrise
Bank of California, which was acquired by FBA on November 1, 1996 and Surety
Bank, Vallejo, California, which was acquired by FBA on December 1, 1997. In
February 1998, FCB was acquired by FBA, and its subsidiary bank, First
Commercial, was merged into FB California.
Cash and Cash Equivalents. Cash, due from banks, federal funds sold, and
interest-bearing deposits with original maturities of three months or less are
considered to be cash and cash equivalents for purposes of the consolidated
statements of cash flows. The Subsidiary Banks are required to maintain certain
daily reserve balances on hand in accordance with regulatory requirements. The
reserve balances maintained in accordance with such requirements at December 31,
1997 and 1996 were $31.3 million and $41.4 million, respectively.
Investment Securities. The classification of investment securities as
trading, available for sale or held to maturity is determined at the date of
purchase. Investment securities designated as trading, which include any
security held for near term sale, are valued at fair value. Realized and
unrealized gains and losses are included in noninterest income.
Investment securities designated as available for sale, which include any
security which First Banks has no immediate plan to sell but which may be sold
in the future under different circumstances, are stated at fair value. Realized
gains and losses are included in noninterest income upon commitment to sell,
based on the amortized cost of the individual security sold. Unrealized gains
and losses are recorded, net of related income tax effects, in a separate
component of stockholders' equity. All previous fair value adjustments included
in the separate component of stockholders' equity are reversed upon sale.
<PAGE>
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.
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.
A loan is considered impaired when it is probable a creditor will be unable
to collect all amounts due, both principal and interest, according to the
contractual terms of the loan agreement. When measuring impairment, the expected
future cash flows of an impaired loan are discounted at the loan's effective
interest rate. Alternatively, impairment is measured by reference to an
observable market price, if one exists, or the fair value of the collateral for
a collateral-dependent loan. Regardless of the historical measurement method
used, First Banks measures impairment based on the fair value of the collateral
when the creditor determines foreclosure is probable. Additionally, impairment
of a restructured loan is measured by discounting the total expected future cash
flows at the loan's effective rate of interest as stated in the original loan
agreement. First Banks continues to use its existing nonaccrual methods for
recognizing interest income on impaired loans.
Loans Held for Sale. Mortgage loans held for sale are carried at the lower
of cost or market value which is determined on an individual loan basis. Gains
or losses on the sale of loans held for sale are determined on a specific
identification method.
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 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
40 years and equipment over two to ten 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.
<PAGE>
Mortgage Servicing Rights. Mortgage servicing rights are amortized in
proportion to the related estimated net servicing income on a disaggregated,
discounted basis over the estimated lives of the related mortgages considering
the level of current and anticipated repayments, which range from five to 12
years.
Other Real Estate. Other real estate, consisting of real estate acquired
through foreclosure or deed in lieu of foreclosure, is stated at the lower of
fair value less applicable selling costs or cost at the time the property is
acquired. The excess of cost over fair value of other real estate at the date of
acquisition is charged to the allowance for possible loan losses. Subsequent
reductions in carrying value to reflect current fair value or costs incurred in
maintaining the properties are charged to expense as incurred.
Income Taxes. First Banks, Inc. and its eligible subsidiaries file a
consolidated federal income tax return and unitary or consolidated state income
tax returns in California, Illinois and Missouri. In addition, First Bank is
subject to a financial institutions tax which is based on income. Additionally,
included in the unitary Illinois and California income tax returns is the
investment in FBA as First Banks' ownership is greater than 50%. FBA and its
eligible subsidiaries file a consolidated federal income tax return which is
separate from that of First Banks.
Earnings Per Common Share. First Banks adopted the provisions of SFAS 128,
Earnings Per Share (SFAS 128), on a retroactive basis effective December 31,
1997. Accordingly, earnings per common share (EPS) data has been restated to
conform with the provisions of SFAS 128.
SFAS 128 provides for the calculation of a "Basic" and "Diluted" EPS. Basic
EPS is computed by dividing the income available to common stockholders (the
numerator) by the weighted average number of common shares outstanding (the
denominator) during the year. The computation of dilutive EPS is similar except
the denominator is increased to include the number of additional common shares
that would have been outstanding if the dilutive potential shares had been
issued. In addition, in computing the dilutive effect of convertible securities,
the numerator is adjusted to add back (a) any convertible preferred dividends
and (b) the after-tax amount of interest recognized in the period associated
with any convertible debt. The implementation of SFAS 128 did not have a
material impact on the calculation of EPS.
Financial Instruments. A financial instrument is defined as cash, evidence
of an ownership interest in an entity, or a contract that conveys or imposes on
an entity the contractual right or obligation to either receive or deliver cash
or another financial instrument.
Financial Instruments With Off-Balance-Sheet Risk. 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 currently
include interest rate floor and cap agreements and forward contracts to sell
mortgage-backed securities.
First Banks is party to commitments to extend credit and commercial and
standby letters of credit in the normal course of business to meet the financing
needs of its customers. These commitments involve, in varying degrees, elements
of interest rate risk and credit risk in excess of the amount recognized in the
consolidated balance sheets.
Interest Rate Swap, Floor and Cap Agreements. Interest rate swap, floor and
cap agreements are accounted for on an accrual basis with the net interest
differential being recognized as an adjustment to interest expense of the
related liability. Premiums and fees paid upon the purchase of interest rate
swap, floor and cap agreements are amortized to interest expense over the life
of the agreement using the interest method. In the event of early termination of
these derivative financial instruments, the net proceeds received or paid are
deferred and amortized over the shorter of the remaining contract life of the
derivative financial instrument or the maturity of the related liability. If,
however, the amount of the underlying hedged liability is repaid, then the gains
<PAGE>
or losses on the agreements are recognized immediately in the consolidated
statements of income. The unamortized premiums, fees paid and deferred losses on
early terminations are included in other assets in the accompanying consolidated
balance sheets.
Interest Rate Futures Contracts. Gains and losses on interest rate futures,
which qualify as hedges, are deferred. Amortization of the net deferred gains or
losses is applied to the interest income of the securities available-for-sale
portfolio using the straight-line method. The net deferred gains and losses are
applied to the carrying value of the securities available-for-sale portfolio as
part of the mark-to-market valuation. In the event the hedged assets are sold,
the related gain or loss of the interest rate futures contracts is immediately
recognized in the consolidated statements of income.
Forward Contracts to Sell Mortgage-Backed Securities. Gains and losses on
forward contracts, which qualify as hedges, are deferred. The net unamortized
balance of such deferred gains and losses is applied to the carrying value of
the loans held for sale as part of the lower of cost or market valuation.
(2) Acquisitions
On January 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. In addition, River Valley operated a mortgage banking division
which serviced approximately $669 million of residential loans for others which
was merged into and centralized with First Banks' mortgage banking division
effective upon completion of the acquisition. The excess of the cost over the
fair value of the net assets acquired was approximately $11.5 million and is
being amortized over 15 years.
On March 15, 1995, First Banks completed its acquisition of CCB and its
wholly owned subsidiary, Commercial Center Bank, in exchange for $30.4 million
in cash. CCB was headquartered in Santa Ana, California and operated three
banking locations in Santa Ana, San Jose and Walnut Creek. The acquisition of
CCB represents First Banks' initial entry into the southern California market.
CCB's total assets were $193.4 million, consisting primarily of loans and
investment securities of $114.5 million and $31.1 million, respectively. The
excess of the fair value of the net assets acquired over the cost was
approximately $3.3 million and is being accreted to income over 10 years.
On April 28, 1995, First Banks completed its acquisition of HNB Financial
Group, Huntington Beach, California (HNB) and its wholly owned subsidiary,
Huntington National Bank, in exchange for $10.9 million in cash. HNB's total
assets were $88.0 million, consisting primarily of loans and investment
securities of $62.8 million and $10.5 million, respectively. The excess of the
cost over the fair value of the net assets acquired was approximately $1.1
million and is being amortized over 10 years.
On May 31, 1995, First Banks completed its acquisition of Irvine City
Financial, Irvine, California (Irvine) and its wholly owned subsidiary, Irvine
City Bank, f.s.b., in exchange for $4.2 million in cash. Irvine's total assets
were $83.3 million, consisting primarily of loans of $68.7 million and
investment securities and federal funds sold of $10.6 million.
The purchase price approximated the fair value of the net assets acquired.
During 1995, First Banks completed its investment in QCB Bancorp (QCB), a
California corporation and sole shareholder of Queen City Bank, N.A., Long
Beach, California. QCB's total assets were $56.2 million, consisting primarily
of loans of $35.1 million and cash and cash equivalents and investment
securities of $20.5 million. The excess of the cost over the fair value of the
net assets acquired was approximately $465,000 and is being amortized over 10
years.
On August 7, 1995, First Banks executed an Amended and Restated Stock
Purchase Agreement (FCB Agreement) with FCB. Under the FCB Agreement and
subsequent agreements entered into with FCB, FCB and its subsidiary, First
Commercial, were recapitalized through a series of transactions. As a result of
these transactions, First Banks owned 93.29% of the outstanding common stock of
<PAGE>
FCB and $6.5 million of convertible debentures maturing in October and December
2000. The debentures bear interest at 12% annually. FCB's total assets were
$169.0 million, consisting primarily of loans, cash and cash equivalents and
investment securities of $84.6 million, $50.3 million and $30.7 million,
respectively. The excess of the cost over the fair value of the net assets
acquired was approximately $2.4 million and is being amortized over 10 years.
The FCB Agreement also provided for FCB to offer to its shareholders, other
than First Banks, rights to acquire an aggregate of $400,000 of newly issued
common stock at $12.50 per share. FCB completed the offering during 1996 and
issued approximately 288,000 shares in exchange for $2.97 million in cash and
$643,000 of outstanding dividend obligations. As a result of the offering, First
Banks' ownership was reduced to 61.48% at December 31, 1997.
On September 1, 1995, First Banks completed its acquisition of La Cumbre
Savings Bank F.S.B. (La Cumbre) in exchange for $5.5 million in cash. La
Cumbre's total assets were $144 million, consisting primarily of loans of $131
million and cash and cash equivalents and investment securities of $7.6 million.
The excess of the cost over the fair value of the net assets acquired was
approximately $697,000 and is being amortized over 10 years.
On November 1, 1996, First Banks completed its acquisition of Sunrise
Bancorp, a California corporation (Sunrise), and its wholly owned subsidiary,
Sunrise Bank, a state chartered bank, in exchange for $17.5 million in cash. At
the time of the transaction, Sunrise had $110.8 million in total assets; $45.5
million in cash and cash equivalents and investment securities; $61.1 million in
total loans, net of unearned discount; and $91.1 million in total deposits. The
acquisition was funded from available cash and borrowings of $14.0 million. The
excess of the cost over the fair value of the net assets acquired was $3.2
million and is being amortized to expense over 15 years.
On December 1, 1997, First Banks completed its acquisition of Surety Bank
in exchange for 264,622 shares of FBA common stock and cash of $3.8 million. The
cash portion of this transaction was funded in January 1998 with available cash.
At the time of the transaction, Surety had $72.8 million in total assets; $14.9
million in cash and cash equivalents and investment securities; $54.4 million in
total loans net of unearned discount; and $67.5 million in total deposits. The
excess of the cost over the fair value of the net assets acquired was $3.3
million and is being amortized over 15 years.
During 1997, First Banks completed its assumption of the deposits and
purchase of selected assets of three banking locations of Highland Federal Bank,
FSB. The transaction resulted in the acquisition of $82.8 million in deposits.
The banking locations operate as branches of FB&T. The excess of the cost over
the fair value of the net assets acquired was $1.4 million and is being
amortized 10 years.
The aforementioned acquisitions were 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. The acquisitions
were funded by available cash, proceeds from the maturity of short-term
investments, borrowings under First Banks' credit agreement and notes payable to
former shareholders.
<PAGE>
<TABLE>
<CAPTION>
(3) Investments in Debt and Equity Securities
Securities Available for Sale. The amortized cost, contractual maturity,
unrealized gains and losses and fair value of investment securities available
for sale at December 31, 1997 and 1996 were as follows:
Maturity Total
-------- -----
After amor- Gross Weighted
1 Year 1-5 5-10 10 tized unrealized Fair average
or less years years years cost Gains Losses value yield
------- ----- ----- ----- ---- ----- ------ ----- -----
(dollars expressed in thousands)
December 31, 1997:
Carrying value:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury.................. $ 62,537 216,594 -- -- 279,131 1,580 (39) 280,672 5.94%
U.S. government agencies
and corporations:
Mortgage-backed............. 674 51,692 23,856 108,275 184,497 427 (493) 184,431 6.38
Other....................... 60,719 183,652 18,056 -- 262,427 381 (183) 262,625 6.11
Other.......................... 256 -- -- 9 265 1 (6) 260 6.31
Equity investments in other
financial institutions....... 8,255 -- -- -- 8,255 13,025 -- 21,280 4.93
Federal Home Loan Bank and
Federal Reserve Bank stock... 24,003 -- -- -- 24,003 -- -- 24,003 6.76
--------- -------- ------- ------- ------- ----- ----- ------
Total................. $ 156,444 451,938 41,912 108,284 758,578 15,414 (721) 773,271 6.12
========= ======== ======= ======= ======= ====== ===== ======= ======
Market value:
Debt securities................ $ 124,195 453,470 41,920 108,403
Equity securities.............. 45,283 -- -- --
--------- -------- ------- -------
Total................. $ 169,478 453,470 41,920 108,403
========= ======== ======= =======
Weighted average yield............ 5.82% 6.07% 6.32% 6.70%
==== ==== ==== ====
December 31, 1996:
Carrying value:
U.S. Treasury.................. $ 115,675 31,259 -- -- 146,934 166 (73) 147,027 5.38%
U.S. government agencies
and corporations:
Mortgage-backed............. 1,504 70,953 26,500 106,223 205,180 416 (1,383) 204,213
6.11
Other....................... 65,351 81,722 -- -- 147,073 496 (220) 147,349 5.73
Other.......................... 28 704 -- 10 742 2 (2) 742
5.89
Equity investments in other
financial institutions....... 5,256 -- -- -- 5,256 6,808 -- 12,064
4.93
Federal Home Loan Bank and
Federal Reserve Bank stock... 21,210 -- -- -- 21,210 -- -- 21,210
--------- -------- ------- ------- ------- ---- ----- -------
6.92
Total................. $ 209,024 184,638 26,500 106,233 526,395 7,888 (1,678) 532,605
========= ======== ======= ======= ======= ===== ====== =======
5.82
Market value:
Debt securities................ $ 182,629 184,361 26,320 106,021
Equity securities.............. 33,274 -- -- --
--------- --------- -------- --------
Total................. $ 215,903 184,361 26,320 106,021
========= ======== ======= =======
Weighted average yield............ 5.44% 5.93% 5.88% 6.37%
==== ==== ==== ====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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, 1997 and 1996 were as follows:
Maturity Total
-------- -----
After amor- Gross Weighted
1 Year 1-5 5-10 10 tized unrealized Fair average
or less years years years cost Gains Losses value yield
------- ----- ----- ----- ---- ----- ------ ------ -----
(dollars expressed in thousands)
December 31, 1997:
Carrying value :
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
State and political subdivisions.. $1,093 5,324 10,422 2,310 19,149 690 (4) 19,835 5.65%
====== ===== ====== ======= ====== === === ====== =====
Market value :
Debt securities................... $1,111 5,431 10,677 2,616
====== ===== ====== =====
Weighted average yield................ 7.09% 5.38% 5.33% 7.03%
===== ===== ====== =====
December 31, 1996:
Carrying value :
State and political
subdivisions.................. $ 589 4,033 13,171 2,403 20,196 485 (70) 20,611 5.56%
===== ====== ====== ===== ====== ==== ==== ====== ====
Market value :
Debt securities................. $ 592 4,098 13,360 2,561
====== ===== ====== =====
Weighted average yield................ 5.88% 5.82% 5.20% 7.01%
==== ==== ===== =====
</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.
Proceeds from sales of securities designated as available for sale were
$18.6 million for the year ended December 31, 1997. Gross gains of $2.3 million
were realized on these sales. No losses were realized in 1997.
Proceeds from the sales of debt securities classified as available for sale
during 1996 were $100.0 million. Gross gains of $556,000 and gross losses of
$166,000 were realized on these sales. The gross gains, net of gross losses,
were offset by the recognition of $701,000 of hedging losses.
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.
Various subsidiaries of First Banks maintain investments in the Federal
Home Loan Bank (FHLB) or the Federal Reserve Bank (FRB). The investment in FHLB
stock is maintained at a minimum amount equal to the greater of 1% of the
aggregate outstanding balance of the applicable Subsidiary Bank's loans secured
by residential real estate, or 5% of advances from the FHLB to each Subsidiary
Bank. First Bank, FB&T and BankTEXAS are members of the FHLB system. The
investment in the FRB stock is maintained at a minimum of 6% of the applicable
Subsidiary Bank's capital stock and capital surplus. First Bank and BankTEXAS
are members of the FRB system.
Investment securities with a carrying value of approximately $209.1 million
and $212.1 million were pledged in connection with deposits of public and trust
funds and for other purposes as required by law at December 31, 1997 and 1996,
respectively.
<PAGE>
(4) Loans
<TABLE>
<CAPTION>
Changes in the allowance for possible loan losses for the years ended
December 31 were as follows:
1997 1996 1995
---- ---- ----
(dollars expressed in thousands)
<S> <C> <C> <C>
Balance, January 1..................................... $ 46,781 52,665 28,410
Acquired allowances for possible loan losses........... 30 2,338 24,655
-------- -------- -------
46,811 55,003 53,065
-------- -------- -------
Loans charged-off...................................... (16,832) (29,016) (15,620)
Recoveries of loans previously charged-off............. 9,230 9,300 4,859
-------- -------- -------
Net loans charged-off.................................. (7,602) (19,716) (10,761)
-------- -------- ------
Provision charged to operations........................ 11,300 11,494 10,361
-------- -------- -------
Balance, December 31................................... $ 50,509 46,781 52,665
======== ======== =======
</TABLE>
At December 31, 1997 and 1996, First Banks had $19.7 million and $30.3
million, respectively, of loans on nonaccrual status. Interest on nonaccrual
loans, which would have been recorded under the original terms of the loans, was
$4.7 million for the year ended December 31, 1997 and $4.2 million for the years
ended December 31, 1996 and 1995. Of these amounts, $2.0 million, $2.7 million
and $1.9 million were actually recorded as interest income on such loans in
1997, 1996 and 1995, respectively. At December 31, 1997 and 1996, First Banks
had impaired loans in the amount of $29.2 million and $30.3 million,
respectively, consisting of $19.7 million and $30.3 million of loans on
nonaccrual status, respectively. At December 31, 1997, impaired loans also
include $5.5 million of restructured loans. The impaired loans in the amount of
$4.7 million had specific reserves of $1.7 million at December 31, 1997. The
impaired loans had no specific reserves at December 31, 1996. The average
recorded investment in impaired loans was $28.3 million and $36.2 million for
the years ended December 31, 1997 and 1996, respectively. The amount of interest
income recognized using a cash basis method of accounting during the time these
loans were impaired was $2.4 million and $2.7 million in 1997 and 1996,
respectively.
First Banks' primary market areas are the states of Missouri, Illinois and
California. At December 31, 1997 and 1996, 88% of the total loan portfolio and
93% and 92% of the commercial, financial and agricultural loan portfolio were to
borrowers within these regions, respectively.
Real estate lending constituted the only other significant concentration of
credit risk. Real estate loans comprised approximately 70% and 67% of the loan
portfolio at December 31, 1997 and 1996, respectively, of which 48% and 51% 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, 1997 and
1996, 96% 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, 1997 and 1996, First Banks serviced loans for others
amounting to $784 million and $847 million, respectively. Borrowers' escrow
balances held by First Banks on such loans were $2.2 million and $4.2 million at
December 31, 1997 and 1996, respectively.
Changes in the mortgage servicing rights for the years ended December 31
were as follows:
1997 1996
---- ----
(dollars expressed in
thousands)
Balance, January 1................................... $ 10,230 12,122
Originated mortgage servicing rights................. 718 --
Purchases of mortgage servicing rights............... 5 65
Amortization......................................... (1,907) (1,957)
-------- -------
Balance, December 31................................. $ 9,046 10,230
======== =======
<PAGE>
(6) Bank Premises and Equipment
Bank premises and equipment were comprised of the following at December 31:
1997 1996
---- ----
(dollars expressed
in thousands)
Land................................................ $ 14,213 13,431
Buildings and improvements.......................... 39,922 39,256
Furniture, fixtures and equipment................... 37,597 36,329
Leasehold improvements.............................. 6,851 6,916
Construction in progress............................ 3,536 2,149
--------- -------
102,119 98,081
Less accumulated depreciation and amortization...... 50,614 50,003
--------- -------
Bank premises and equipment, net................ $ 51,505 48,078
========= =======
Total rent expense was $5.0 million, $4.2 million and $3.2 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
(7) Notes Payable
Notes payable include a Revolving Line and Term Credit Agreement (Credit
Agreement) and promissory notes payable to former shareholders of acquired
entities.
First Banks' Credit Agreement, dated November 24, 1997, replaced the
revolving credit agreement outstanding dated July 18, 1996. The Credit Agreement
provides a $40 million revolving loan commitment and a $50 million term loan.
Interest under the revolving loan commitment and the term loan is payable at the
lead bank's corporate base rate or, at the option of First Banks, is payable at
the Eurodollar Rate plus 1.25%, respectively, and is paid monthly. Loans may be
made under the revolving loan commitment until November 23, 1998, at which date
the principal and accrued interest is due and payable. The term loan requires
quarterly principal payments of $2.5 million and matures on November 22, 2002,
at which date the remaining principal and accrued interest is due and payable.
Loans under the Credit Agreement are secured by all of the stock of the
Subsidiary Banks which is owned by First Banks. Under the Credit Agreement there
were $55.0 million in outstanding borrowings at December 31, 1997 and $75.0
million at December 31, 1996.
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, 1997 and 1996, First
Banks and the Subsidiary Banks were in compliance with all restrictions and
requirements in the Credit Agreement.
The promissory notes totaled $144,000 and $1.3 million at December 31, 1997
and 1996, respectively. Interest under the promissory notes are payable under
similar terms as the Credit Agreement.
The average balance and maximum month-end balance of the notes payable
outstanding for the years ended December 31 were as follows:
1997 1996
(dollars expressed
in thousands)
Average balance.................................. $ 17,883 76,739
Maximum month-end balance........................ 75,213 86,899
======== ======
The average rates paid on notes payable outstanding during the years ended
December 31, 1997, 1996 and 1995 were 7.10%, 7.15% and 7.22%, respectively.
<PAGE>
(8) Guaranteed Preferred Beneficial Interests in First Banks, Inc. Subordinated
Debentures
On February 4, 1997, First Preferred Capital Trust (First Capital), a
newly-formed Delaware business trust subsidiary of First Banks, issued 3.45
million shares of 9.25% Cumulative Trust Preferred Securities (Preferred
Securities) at $25 per share in an unwritten public offering, and issued 106,702
shares of common securities to First Banks at $25 per share. First Banks owns
all of First Capital's common securities. The gross proceeds of the offering
were used by First Capital to purchase $88.9 million of 9.25% Subordinated
Debentures (Subordinated Debentures) from First Banks, maturing on March 31,
2027. The maturity date may be shortened to a date not earlier than March 31,
2002 or extended to a date no later than March 31, 2046 if certain conditions
and regulatory approval are met. The Subordinated Debentures are the sole asset
of First Capital. In connection with the issuance of the Preferred Securities,
First Banks made certain guarantees and commitments that, in the aggregate,
constitute a full and unconditional guarantee by First Banks of the obligations
of First Capital under the Preferred Securities. First Banks' proceeds from the
issuance of the Subordinated Debentures to First Capital, net of underwriting
fees and offering expenses, were $83.1 million. Distributions payable on the
Preferred Securities were $7.3 million for the year ended December 31, 1997 and
included in noninterest expense in the consolidated financial statements.
<TABLE>
<CAPTION>
(9) Income Taxes Income tax expense attributable to income from continuing
operations for the years ended December 31 consists of :
Years ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(dollars expressed in thousands)
Current income taxes:
<S> <C> <C> <C>
Federal..................................................... $ 15,062 6,106 2,638
State....................................................... 169 1,068 870
-------- ------- -------
15,231 7,174 3,508
-------- ------- -------
Deferred income tax expense (benefit):
Federal............................................... 2,608 1,837 8,584
State................................................. 24 3,192 (94)
-------- ------- -------
2,632 5,029 8,490
-------- ------- -------
Reduction in valuation allowance.......................... (1,780) (5,243) (960)
-------- ------- -------
Total......................................... $ 16,083 6,960 11,038
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
The federal income tax rates and amounts are reconciled with the effective
income tax rates and amounts as follows:
Years ended December 31,
1997 1996 1995
--------------- -------------- ----------
% of % of % of
pretax pretax pretax
Amount income Amount income Amount income
------ ------ ------ ------ ------ ------
(dollars expressed in thousands)
Income before provision for income taxes and
minority interest in (income) loss of
<S> <C> <C> <C> <C> <C> <C>
subsidiaries............................. $50,380 $27,837 $ 34,156
======= ======= ========
Taxes on income calculated at statutory rates.. 17,633 35.0% 9,743 35.0% 11,955 35.0%
Effects of differences in tax reporting:
Tax-exempt interest income.................. (576) (1.1) (730) (2.6) (817) (2.4)
Tax preference adjustment of
interest income.......................... 69 0.1 82 0.3 99 0.3
Amortization of excess cost................. 754 1.5 729 2.6 645 1.8
State income taxes.......................... 126 0.3 715 2.6 504 1.5
Change in deferred valuation allowance...... (1,780) (3.5) (5,243) (18.8) (960) (2.8)
Other, net.................................. (143) (0.4) 1,664 5.9 (388) (1.1)
------- ----- ------- ----- -------- ----
Provision for income taxes.......... $16,083 31.9% $ 6,960 25.0% $ 11,038 32.3%
======= ===== ======= ==== ======== ====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities, including
amounts attributable to entities acquired in purchase transactions are listed
below.
December 31,
------------
1997 1996
---- ----
(dollars expressed in thousands)
Deferred tax assets:
<S> <C> <C>
Allowance for possible loan losses.................................... $ 19,665 19,421
Other real estate..................................................... 971 2,179
Alternative minimum tax credits....................................... 2,067 2,102
Book losses on investment securities currently not allowable
for tax purposes................................................... 1,958 1,134
Net operating loss carryforwards...................................... 33,080 33,821
Other................................................................. 3,361 4,276
-------- --------
Total gross deferred tax assets............................... 61,102 62,933
Less valuation allowance.............................................. (17,747) (19,527)
-------- --------
Gross deferred tax assets, net of valuation allowance......... 43,355 43,406
-------- --------
Deferred tax liabilities:
Depreciation on bank premises and equipment........................... 1,860 2,231
FHLB stock dividends.................................................. 1,269 1,063
State taxes........................................................... 307 354
Net fair value adjustment for securities available for sale........... 5,142 2,207
Other................................................................. 451 339
-------- --------
Total gross deferred tax liabilities.......................... 9,029 6,194
-------- --------
Net deferred tax assets....................................... $ 34,326 37,212
======== ========
</TABLE>
At December 31, 1997 and 1996, for federal income taxes purposes, First
Banks had net operating loss (NOL) carryforwards of approximately $57.3 million
and $60.1 million, respectively, exclusive of the NOL carryforwards available to
FBA and FCB as further described below. The NOL carryforwards for First Banks
expire as follows:
(dollars expressed
in thousands)
Year ending December 31:
2002................................................. $ 3,244
2003................................................. 7,470
2004................................................. 7,516
2005................................................. 12,928
2006 - 2009.......................................... 26,189
---------
$ 57,347
=========
With the completion of the acquisition of FBA, the NOL carryforwards
generated prior to the transaction are subject to an annual limitation in
subsequent tax years. The following schedule reflects the NOL carryforwards that
will be available to offset future taxable income of FBA and do not affect the
taxable income of First Banks.
At December 31, 1997 and 1996, for federal income tax purposes, FBA had
NOL carryforwards of approximately $34.3 million and $35.4 million,
respectively. The NOL carryforwards at December 31, 1997 expire as follows:
(dollars expressed
in thousands)
Year ending December 31:
1998................................................... $ 4,140
1999................................................... 2,641
2000................................................... 103
2001 - 2010............................................ 27,417
------
$ 34,301
========
<PAGE>
The remaining net deferred tax assets of FBA were evaluated to determine
whether it is more likely than not the deferred tax assets will be recognized in
the future. Taking all positive and negative criteria into consideration, it was
determined the valuation allowance established for FBA should remain at $3.4
million.
With the completion of the acquisition of FCB, the NOL carryforwards
generated prior to the transaction were subject to an annual limitation in
subsequent tax years. The following schedule reflects the NOL carryforwards that
will be available to offset future taxable income of FCB and do not affect the
taxable income of First Banks.
At December 31, 1997 and 1996, for federal income tax purposes, FCB had NOL
carryforwards of approximately $2.9 million and $1.1 million, respectively. The
NOL carryforwards at December 31, 1997 expire as follows:
(dollars expressed
in thousands)
Year ending December 31:
2008.................................................. $ 394
2009.................................................. 747
2011.................................................. 660
2017.................................................. 1,064
------
$2,865
======
The realization of First Banks' net deferred tax assets is based on the
availability of carrybacks to prior taxable periods, the expectation of future
taxable income and the utilization of tax planning strategies. Based on these
factors, management believes it is more likely than not that First Banks will
realize the recognized net deferred tax asset of $34.3 million. The net change
in the valuation allowance, related to deferred tax assets, was a decrease of
$1.8 million for the year ended December 31, 1997. The decrease was comprised of
the following components: (1) a reduction of $2.2 million related to the
recognition of deferred tax assets for certain loans and foreclosed property;
and (2) the establishment of $372,000 of additional valuation reserves resulting
from tax net operating losses at First Commercial Bancorp, Inc. First Commercial
Bancorp, Inc. files a separate tax return and based on the surrounding facts and
circumstances, management believes the realization of the tax benefit related to
these tax losses is not likely to occur.
<TABLE>
<CAPTION>
Changes to the deferred tax assets valuation allowance are as follows:
Years ended December 31,
------------------------
1997 1996
---- ----
(dollars expressed in thousands)
<S> <C> <C>
Balance, beginning of year................................................ $ 19,527 24,111
Current year deferred provision, change in
deferred tax valuation allowance...................................... (1,780) (5,243)
Purchase acquisitions..................................................... -- 659
-------- -------
Balance, end of year...................................................... $ 17,747 19,527
======== =======
</TABLE>
The valuation allowance for deferred tax assets at December 31, 1997 and
1996 includes $2.0 million and $1.9 million, respectively, which when
recognized, will be credited to intangibles associated with the purchase of
subsidiaries. The valuation allowance for deferred tax assets at December 31,
1997 and 1996 includes $6.0 million and $5.9 million, respectively, which when
recognized will be credited to capital surplus under the terms of the
quasi-reorganizations implemented for FBA and FCB as of December 31, 1994 and
1996, respectively.
<PAGE>
(10) Earnings Per Share
The following represents a reconciliation of the numerators and
denominators of the basic and diluted EPS computations for the periods
indicated:
<TABLE>
<CAPTION>
Income Shares Per-share
(numerator) (denominator) Amount
----------- ------------- ------
(dollars in thousands, except per share data)
Year ended December 31, 1997:
<S> <C> <C> <C>
Basic EPS-income available to common stockholders......... $ 27,960 23,661 $ 1,181.69
==========
Effect of dilutive securities:
Class A convertible preferred stock................... 769 1,645
Subsidiary bank stock options......................... (25) --
-------- --------
Diluted EPS-income available to common stockholders....... $ 28,704 25,306 $ 1,134.28
======== ======== ==========
Year ended December 31, 1996:
Basic EPS-income available to common stockholders......... $ 14,490 23,661 $ 612.46
==========
Effect of dilutive securities:
Class A convertible preferred stock..................... 769 1,822
Subsidiary bank stock options and warrants.............. (50) --
--------- --------
Diluted EPS-income available to common stockholders....... $ 15,209 25,483 $ 596.83
======== ======== ==========
Year ended December 31, 1995:
Basic EPS--income available to common stockholders........ $ 18,735 23,661 $ 791.82
==========
Effect of dilutive securities:
Class A convertible preferred stock..................... 769 2,033
-------- --------
Diluted EPS-income available to common stockholders....... $ 19,504 25,694 $ 759.09
======== ======== ==========
</TABLE>
(11) Interest Rate Risk Management and Derivative Financial Instruments With
Off-Balance-Sheet Risk
First Banks periodically uses off-balance-sheet derivative financial
instruments to assist in the management of interest rate sensitivity. These
off-balance-sheet derivative financial instruments are utilized to modify the
repricing, maturity and option characteristics of on-balance-sheet assets and
liabilities. The use of such derivative financial instruments is strictly
limited to reducing the interest rate exposure of First Banks.
<TABLE>
<CAPTION>
Derivative financial instruments held by First Banks are summarized as
follows:
December 31,
------------
1997 1996
---- ----
Notional Credit Notional Credit
amount exposure amount exposure
------ -------- ------ --------
(dollars expressed in thousands)
<S> <C> <C> <C> <C>
Interest rate swap agreements................. $ -- -- 70,000 --
Interest rate floor agreements ............... 70,000 26 05,000 141
Interest rate cap agreements ................. 10,000 222 10,000 335
Forward commitments to sell
mortgage-backed securities .............. 60,000 -- 35,000 308
</TABLE>
The notional amounts of derivative financial instruments do not represent
amounts exchanged by the parties and, therefore, are not a measure of First
Banks' credit exposure through its use of derivative financial instruments. The
amounts exchanged are determined by reference to the notional amounts and the
other terms of the derivatives.
Previously, First Banks sold interest rate futures contracts and purchased
options on interest rate futures contracts to hedge the interest rate risk of
its available-for-sale securities portfolio. There were no unamortized net
deferred losses on interest rate futures contract remaining at December 31, 1997
or 1996. The unamortized balance of net deferred losses on interest rate futures
contracts of $4.6 million at December 31, 1995, was applied to the carrying
value of the available-for-sale securities portfolio as part of the
mark-to-market valuation. Of the remaining balance of $4.6 million at December
31, 1995, $3.9 million was amortized against interest income and $701,000 was
realized in connection with sales of investment securities during the year ended
December 31, 1996.
Interest rate swap agreements were 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
$6.4 million, $7.4 million and $6.6 million for the years ended December 31,
<PAGE>
1997, 1996 and 1995, respectively. The maturity dates, notional amounts,
interest rates paid and received, and fair values of interest rate swap
agreements outstanding as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Fair value
Notional Interest rate Interest rate gain
amount paid received (loss)
------ ---- -------- ------
(dollars expressed in thousands)
<S> <C> <C> <C> <C> <C> <C>
September 30, 1997........................ $ 35,000 7.04% 5.59% $ (417)
September 30, 1999........................ 35,000 7.32 5.59 (1,160)
-------- --------
$ 70,000 7.18 5.59 $ (1,577)
======== ===== ==== ========
</TABLE>
In connection with the sale of certain residential mortgage loans and
repayment of certain borrowings, on May 25, 1995, First Banks terminated a $100
million interest rate swap agreement resulting in a loss of $3.3 million. The
loss on the termination of the $100 million interest rate swap agreement was
reflected in the consolidated statement of income for the year ended December
31, 1995.
In addition, First Banks experienced a shortening of the expected life of
its loan portfolio. This shortening resulted from the significant decline in
interest rates during 1995, which caused an increase in the projections of
principal prepayments of residential mortgage loans. These increased prepayment
projections and the overall reduction in the residential loan portfolio
disproportionately shortened the expected life of the loan portfolio in
comparison to the effective maturity created with the interest rate swap
agreements. As a result, during July 1995, November 1996 and July 1997, First
Banks shortened the maturity of its interest-bearing liabilities through the
termination of $225 million, $75 million and $35 million of interest rate swap
agreements resulting in losses of $13.5 million, $5.3 million and $1.4 million,
respectively. These losses have been deferred and are being amortized over the
remaining lives of the agreements, unless the underlying liabilities are repaid.
The unamortized balance of these losses was $9.4 million and $13.4 million at
December 31, 1997 and 1996, respectively, and is 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, 1997 and 1996, the unamortized costs for these agreements were
$290,000 and $433,000, respectively, and were included in other assets.
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
$67.4 million and $36.7 million at December 31, 1997 and 1996, respectively.
These net loan commitments and loans held for sale are hedged with forward
contracts to sell mortgage-backed securities of $60 million and $35 million at
December 31, 1997 and 1996, respectively. Gains and losses from forward
contracts are deferred and included in the cost basis of loans held for sale. At
December 31, 1997 and 1996, the net unamortized losses were $783,000 and
$452,000, 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.
<PAGE>
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 the
amounts are fully advanced and the 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 items
<TABLE>
<CAPTION>
Commitments to extend credit at December 31 are as follows:
December 31,
------------
1997 1996
---- ----
(dollars expressed in thousands)
<S> <C> <C>
Commitments to extend credit............................................. $ 898,723 716,967
Commercial and standby letters of credit................................. 33,672 25,256
--------- --------
$ 932,395 742,223
========= =======
</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
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 generally holds
real property as collateral supporting those commitments for which collateral is
deemed necessary.
(13) Fair Value of Financial Instruments
Fair values of financial instruments are management's estimate of the
values at which the instruments could be exchanged in a transaction between
willing parties. These estimates are subjective and may vary significantly from
amounts that would be realized in actual transactions. In addition, other
significant assets are not considered financial assets including 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.
<PAGE>
<TABLE>
<CAPTION>
The estimated fair value of First Banks' financial instruments at December
31 were as follows:
1997 1996
-------------------- -----------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
Financial assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents...................... $ 168,480 168,480 227,954 227,954
Investment securities:
Trading..................................... 3,110 3,110 -- --
Available for sale.......................... 773,271 773,271 532,605 532,605
Held to maturity............................ 19,149 19,835 20,196 20,611
Net loans...................................... 2,951,691 2,964,115 2,721,188 2,744,737
Accrued interest receivable.................... 28,358 28,358 23,250 23,250
========= ========= ========= ========
Financial liabilities:
Deposits:
Demand:
Non-interest-bearing..................... 485,222 485,222 418,193 418,193
Interest-bearing......................... 348,080 348,080 337,618 337,618
Savings and money market................. 947,029 947,029 671,286 671,286
Time deposits............................... 1,904,264 1,912,461 1,811,470 1,815,779
Borrowings..................................... 109,297 109,297 146,312 146,312
Accrued interest payable....................... 9,976 9,976 10,288 10,288
========= ======== ========= ========
Off-balance-sheet:
Interest rate swap, cap and floor agreements... 9,689 248 14,702 (1,101)
Forward contracts to sell mortgage-backed
securities.................................. (341) (341) 308 308
Credit commitments............................. -- -- -- --
========= ======== ========= ========
</TABLE>
The following methods and assumptions were used in estimating the fair
value of financial instruments:
Financial Assets:
Cash and cash equivalents and accrued interest receivable: The carrying
values reported in the consolidated balance sheets approximate fair value.
Investment securities: Fair value for trading securities and 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 portfolio 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 in the consolidated
balance sheets, are based on quoted market prices where available. If quoted
market prices are not available, fair values are based upon quoted market prices
of comparable instruments. The carrying value for loans is net of the allowance
for possible loan losses and unearned discount.
Financial Liabilities:
Deposits: The fair value disclosed for deposits generally payable on demand
(i.e., non-interest-bearing and interest-bearing demand, savings and money
market accounts) is considered equal to their respective carrying amounts as
reported in the consolidated balance sheets. The fair value disclosed for demand
deposits does not include the benefit that results from the low-cost funding
provided by deposit liabilities compared to the cost of borrowing funds in the
market. Fair values for certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered on
similar certificates to a schedule of aggregated monthly maturities of time
deposits.
Borrowings and accrued interest payable: The carrying values reported in
the consolidated balance sheets approximate fair value.
<PAGE>
Off-Balance-Sheet:
Interest rate swap, cap and floor agreements: The fair values of interest
rate swap, cap and floor agreements are estimated by comparing the contractual
rates First Banks is paying to market rates quoted on new agreements with
similar creditworthiness.
Forward contracts to sell mortgage-backed securities: The fair values for
forward contracts to sell mortgage-backed securities are based upon quoted
market prices. The fair value of these contracts has been reflected in the
consolidated balance sheets in the carrying value of the loans held for sale
portfolio as part of the lower of cost or market valuation.
Credit commitments: The majority of the commitments to extend credit and
commercial and standby letters of credit contain variable interest rates and
credit deterioration clauses and, therefore, the carrying value of these credit
commitments approximates fair value.
(14) Employee Benefits
First Banks' profit-sharing plan is a self-administered savings and
incentive plan covering substantially all employees. Under the plan, employer
matching contributions are determined annually by First Banks' Board of
Directors. Employee contributions are limited to 15% of an employee's
compensation, not to exceed $9,500 for 1997. Total employer contributions under
the plan were $506,000, $576,000 and $448,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
Postretirement benefits other than pensions and postemployment benefits are
generally not provided for First Banks' employees.
(15) Preferred Stock
First Banks had three classes of preferred stock outstanding during the
years ended December 31, 1997 and 1996.
On September 15, 1992, First Banks issued and sold, pursuant to an
effective registration statement under the Securities Act of 1933, 2,200,000
shares of Class C 9% cumulative increasing rate, redeemable, preferred stock.
Class C preferred stock ranks senior to both the Class A preferred stock and the
Class B preferred stock in terms of dividend and liquidation rights. Holders of
the Class C preferred stock do not have any voting rights except in limited
circumstances or as expressly required by law. The holders of the Class A and
Class B preferred stock have full voting rights.
Dividends on the Class A and Class B preferred stock are adjustable
quarterly based on the highest of the Treasury Bill Rate or the Ten Year
Constant Maturity Rate for the two-week period immediately preceding the
beginning of the quarter. This rate shall not be less than 6% nor more than 12%
on Class A preferred stock, or less than 7% nor more than 15% on Class B
preferred stock. Dividends on the Class C preferred stock were 9% through
November 30, 1997. On December 1, 1997, First Banks redeemed all of the
outstanding Class C preferred stock.
Class A preferred stock is convertible into shares of common stock at a
rate based on the ratio of the par value of the preferred stock to the current
market value of the common stock at the date of conversion, to be determined by
independent appraisal at the time of conversion. Shares of Class A preferred
stock may be redeemed by First Banks at any time at 105% of par value. Class B
preferred stock may not be redeemed or converted. Redemption of any issue of
preferred stock requires the prior approval of the Federal Reserve Board.
<PAGE>
The annual dividend rates were as follows:
1997 1996 1995
---- ---- ----
Class C preferred stock (1)....................... 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
- ---------------
(1) Redeemed on December 1, 1997.
(16) Transactions With Related Parties
Outside of normal customer relationships, no directors or officers of
First Banks, no stockholders holding over 5% of First Banks' voting securities
and no corporations or firms with which such persons or entities are associated
currently maintain or have maintained, since the beginning of the last full
fiscal year, any significant business or personal relationship with First Banks
or its subsidiaries, other than such as arises by virtue of such position or
ownership interest in First Banks or its subsidiaries, except as described in
the following paragraphs.
During 1997, 1996 and 1995, Tidal Insurance Limited (Tidal), a corporation
owned indirectly by First Banks' Chairman and his children, received
approximately $214,000, $326,000 and $192,000, respectively, in insurance
premiums for accident, health and life insurance policies purchased by loan
customers of First Banks. The insurance policies are issued by an unaffiliated
company and then ceded to Tidal. First Banks believes the premiums paid by the
loan customers of First Banks are comparable to those that such loan customers
would have paid if the premiums were subsequently being ceded to an unaffiliated
third-party insurer. In addition, for the years ended December 31, 1997, 1996
and 1995, First Securities America, Inc., doing business as First Banc Insurors,
received approximately $206,000, $231,000 and $196,000, respectively, in
commissions or insurance premiums for policies purchased by First Banks or
customers of the Subsidiary Banks from the unaffiliated, third-party insurors to
which First Banc Insurors placed such policies. First Banc Insurors received an
additional $136,000 and $999,000 in annuity sales commissions for the years
ended December 31, 1996 and 1995, respectively. In addition, First Brokerage
L.P. received approximately $707,000 and $822,000 for the years ended December
31, 1997 and 1996, respectively, in commissions and lease payments in connection
with annuities and securities and other insurance product sales services
provided to certain customers of the Subsidiary Banks. Commissions received by
First Banc Insurors and First Brokerage L.P. 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. and First Brokerage L.P. are
owned by a trust established and administered by and for the benefit of First
Banks' Chairman and members of his immediate family. The insurance premiums on
which the aforementioned commissions were earned were competitively bid and
First Banks deems the commissions First Banc Insurors earned to be comparable to
those which would have been earned by an unaffiliated third-party agent.
First Services, L.P., a limited partnership indirectly owned by First
Banks' Chairman and his children through its General Partners and Limited
Partners, provides data processing services and operational support for First
Banks and its subsidiaries. Fees paid under the agreement to First Services L.P.
were $6.4 million, $3.2 million and $2.9 million for the years ended December
31, 1997, 1996 and 1995, respectively. During 1997, First Services, L.P. paid
First Banks $1.1 million in rental fees for the use of data processing and other
equipment owned by First Banks.
(17) Capital Stock of Subsidiaries
First Banks owns all of the Class B common stock of FBA representing 65.85%
and 68.82% of all classes of outstanding voting stock at December 31, 1997 and
1996, respectively. FBA common stock, which is publicly traded on the New York
Stock Exchange, is the only other class of voting stock. In addition, First
Banks owns 61.48% of all outstanding voting stock of FCB at December 31, 1997
and 1996.
<PAGE>
On February 2, 1998, FBA and FCB were merged. Under the terms of the
Agreement and Plan of Merger (Agreement), FCB was merged into FBA, and First
Commercial was merged into FB California. The FCB shareholders received .8888
shares of FBA common stock for each share of FCB common stock that they held. In
total, FCB shareholders received approximately 751,728 shares of FBA common
stock, of which 462,176 shares were issued to First Banks. The transaction also
provided for First Banks to receive 804,000 shares of FBA common stock in
exchange for $10.0 million advanced to FBA under a promissory note payable. In
addition, FCB's convertible debentures of $6.5 million, which are owned by First
Banks, were exchanged for comparable debentures in FBA. First Banks' ownership
interest in FBA would have been 70.4% of the outstanding voting stock of FBA at
December 31, 1997, had the acquisition of FCB been completed on that date. The
merger of FBA and FCB will not have a significant impact on the financial
condition or results of operations of First Banks.
(18) Regulatory Capital
The Subsidiary Banks are subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Subsidiary Banks' financial statements. Under capital
adequacy guidelines and the regulatory framework for Prompt Corrective Action,
the Subsidiary Banks must meet specific capital guidelines that involve
quantitative measures of the Subsidiary Banks' assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Subsidiary Banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Subsidiary Banks to maintain certain minimum ratios. The Subsidiary
Banks are required to maintain a minimum risk-based capital to risk-weighted
assets ratio of 8.0%, with at least 4.0% being "Tier 1" capital (as defined in
the regulations). In addition, a minimum leverage ratio (Tier 1 capital to total
assets) of 3.0% plus an additional cushion of 100 to 200 basis points is
expected. In order to be considered well capitalized under Prompt Corrective
Action provisions, a bank is required to maintain a risk weighted asset ratio of
at least 10%, a Tier 1 to risk weighted assets ratio of at least 6%, and a
leverage ratio of at least 5%. As of December 31, 1996, the date of the most
recent notification from First Banks' primary regulator, each of the Subsidiary
Banks were categorized as well capitalized under the regulatory framework for
prompt corrective action. Management believes, as of December 31, 1997, each of
the Subsidiary Banks' were well capitalized as defined by the FDIC Improvement
Act.
<TABLE>
<CAPTION>
At December 31, 1997 and 1996, First Banks' and the subsidiary depository
institutions' capital ratios were as follows:
Risk-based capital ratios
-------------------------
Total Tier 1 Leverage ratio
----- ---- - --------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
First Banks.................................... 10.26% 9.23% 8.78% 7.92% 6.80% 5.99%
First Bank..................................... 10.78 10.47 9.52 9.21 7.19 7.25
First Bank Illinois (1)........................ -- 11.06 -- 9.88 -- 7.17
First Bank FSB (1)............................. -- 11.00 -- 9.75 -- 6.45
FB&T........................................... 12.71 16.45 11.45 15.18 7.70 11.43
BankTEXAS...................................... 12.26 10.29 11.00 9.04 8.90 7.53
FB California.................................. 13.03 -- 11.77 -- 13.80 --
Sunrise Bank (2)............................... -- 17.67 -- 16.39 -- 10.88
First Commercial............................... 11.89 13.13 10.61 11.84 8.43 8.87
- ----------------
(1) Merged into First Bank effective November 1, 1997. (2) Merged into FB
California effective December 1, 1997.
</TABLE>
<PAGE>
(19) 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
7, 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 $29.7 million, unless prior permission of the regulatory
authorities or the lending banks is obtained.
(20) Parent Company Only Financial Information
<TABLE>
<CAPTION>
Following are condensed balance sheets of First Banks, Inc. as of December
31, 1997 and 1996, and condensed statements of income and cash flows for the
years ended December 31, 1997, 1996 and 1995:
CONDENSED BALANCE SHEETS
December 31,
------------
Assets 1997 1996
------ ---- ----
(dollars expressed in thousands)
<S> <C> <C>
Cash deposited in subsidiary banks.................................................... $ 8,327 3,887
Investment in subsidiaries, at equity................................................. 317,092 290,305
Investment securities................................................................. 27,781 18,564
Other assets.......................................................................... 32,408 19,933
---------- --------
Total assets............................................................... $ 385,608 332,689
========== ========
Liabilities and Stockholders' Equity
Notes payable......................................................................... $ 55,144 76,330
Long term debt........................................................................ 88,918 --
Accrued expenses and other liabilities................................................ 10,009 4,970
---------- --------
Total liabilities.......................................................... 154,071 81,300
Stockholders' equity.................................................................. 231,537 251,389
---------- --------
Total liabilities and stockholders' equity................................. $ 385,608 332,689
========= ========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
Years ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(dollars expressed in thousands)
Income:
<S> <C> <C> <C>
Dividends from subsidiaries........................................... $ 17,221 20,714 57,901
Management fees from subsidiaries..................................... 9,010 7,393 5,108
Other income.......................................................... 3,094 1,684 2,015
--------- ------ -------
Total income....................................................... 29,325 29,791 65,024
--------- ------ -------
Expenses:
Interest expense...................................................... 8,815 5,461 5,861
Salaries and employee benefits........................................ 7,072 5,538 4,597
Legal and professional fees........................................... 1,765 1,978 2,426
Other expenses........................................................ 5,221 3,415 3,035
--------- ------ -------
Total expenses..................................................... 22,873 16,392 15,919
--------- ------ -------
Income before income tax benefit and equity in undistributed
earnings (loss) of subsidiaries.................................. 6,452 13,399 49,105
Income tax benefit........................................................ (2,831) (1,880) (2,007)
--------- ------ -------
Income before equity in undistributed earnings
(loss) of subsidiaries.......................................... 9,283 15,279 51,112
Equity in undistributed earnings (loss) of subsidiaries,
net of dividends paid.................................................. 23,744 4,939 (26,641)
------ ------- -------
Net income......................................................... $ 33,027 20,218 24,471
========= ====== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(dollars expressed in thousands)
Cash flows from operating activities:
<S> <C> <C> <C>
Net income......................................................... $ 33,027 20,218 24,471
Adjustments to reconcile net income to net cash provided by
operating activities:
Net income of subsidiaries.................................... (41,015) (25,610) (30,973)
Dividends from subsidiaries................................... 17,221 20,714 57,901
Other, net.................................................... (2,773) (998) 58
--------- -------- -------
Net cash provided by operating activities................... 6,460 14,324 51,457
--------- -------- -------
Cash flows from investing activities:
(Increase) decrease in investment securities....................... (3,000) -- 2,420
Investment in common securities of First Trust..................... (2,668) -- --
Acquisitions of subsidiaries....................................... -- -- (49,996)
Capital contributions to subsidiaries.............................. (190) (200) (44,329)
Return of subsidiary capital....................................... 2,000 7,786 12,149
Decrease in advances to subsidiaries............................... (121) (950) (13,529)
Other, net......................................................... (6,659) 268 (1,011)
--------- -------- -------
Net cash provided by (used in) investing activities......... (10,638) 6,904 (94,296)
--------- -------- ------
Cash flows from financing activities:
Increase (decrease) in notes payable............................... (21,186) (11,805) 41,932
Increase in long term debt......................................... 88,918 -- --
Payment of preferred stock dividends............................... (5,066) (5,728) (5,736)
Purchase and retirement of Class C preferred stock................. (54,048) (1,139) --
--------- -------- ------
Net cash provided by (used in) financing activities......... 8,618 (18,672) 36,196
--------- -------- -------
Net increase (decrease) in cash and cash equivalents........ 4,440 2,556 (6,643)
Cash and cash equivalents, beginning of year........................... 3,887 1,331 7,974
--------- -------- -------
Cash and cash equivalents, end of year................................. $ 8,327 3,887 1,331
========= ======== =======
</TABLE>
(21) 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 the ultimate resolution of these proceedings will have no
material effect on the consolidated financial position or results of operations
of First Banks.
<PAGE>
<TABLE>
<CAPTION>
DIRECTORS AND EXECUTIVE OFFICERS
First Banks, Inc.
<S> <C>
James F. Dierberg Chairman of the Board, President and Chief Executive Officer
Allen H. Blake Director, Executive Vice President and Chief Financial Officer
George J. Markos Director; President, Profit Management Systems, Richardson, Texas
Donald J. Gunn Director; Attorney-At-Law, Gunn and Gunn, Creve Coeur, Missouri
John A. Schreiber Executive Vice President and Chief Lending Officer
Mark T. Turkcan Executive Vice President, Retail and Mortgage Banking
Donald W. Williams Executive Vice President and Chief Credit Officer
Thomas J. Bangert Senior Vice President and Chief Operations Officer
Laurence J. Brost Senior Vice President and Controller
First Banks America, Inc.
James F. Dierberg Chairman of the Board, President and Chief Executive Officer
Allen H. Blake Director, Vice President, Chief Financial Officer and Secretary
Charles A. Crocco, Jr. Director; Partner in the law firm of Crocco & De Maio, P.C., New York, New York.
Albert M. Lavezzo Director; Partner in the law firm of Favaro, Lavezzo, Gill, Caretti & Neppell,
Vallejo, California.
Edward T. Story, Jr. Director; President and Chief Executive Officer of SOCO International, Inc.,
Comfort, Texas.
Mark T. Turkcan Director
Donald W. Williams Director
David F. Weaver Executive Vice President
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
First Bank
<S> <C>
John A. Schreiber Chairman of the Board, President and Chief Executive Officer
Allen H. Blake Director, Secretary, Treasurer and Chief Financial Officer
Thomas A. Bangert Director and Executive Vice President
Douglas R. Distler Director, Senior Vice President and Regional President
Donald W. Williams Director and Executive Vice President
Mark T. Turkcan Director and Executive Vice President
First Bank & Trust
Donald W. Williams Chairman of the Board and Chief Executive Officer
Fred D. Jensen Director and President
Terrance M. McCarthy Director, Senior Vice President and Chief Credit Officer
Kathryn L. Perrine Director, Vice President, Controller and Secretary
Timothy Marme' Director and Regional President
First Bank of California
Donald W. Williams Chairman of the Board and Chief Executive Officer
Jerry Brannigan Director; Retired Title Company President, Sacaramento, California
James E. Culleton Director, President, Chief Operating Officer and Secretary
Fred L. Harris Director; Attorney at Law, Rancho Cordova, California
Albert M. Lavezzo Director; Partner in the law firm of Favaro, Lavezzo, Gill, Caretti & Neppell,
Vallejo, California
Terrance M. McCarthy Director, Senior Vice President and Chief Credit Officer
Arleen R. Scavone Director and Vice President, Retail Banking
Fred K. Sibley Director; Retired Bank President, Vallejo, California
BankTEXAS N.A.
David F. Weaver Chairman of the Board, President and Chief Executive Officer
Donald W. Williams Director
Alan M. Meyer Director
Joseph Milcoun, Jr. Director and Vice President, Retail Banking
Arved E. White Director, Senior Vice President and Chief Lending Officer
</TABLE>
<PAGE>
INVESTOR INFORMATION
Stock Quotation Symbol
NASDAQ National Market System:
First Preferred Capital Trust
FBNKO
Market price (1) Dividend
1997 High Low declared
---- ---- --- ----------
First Quarter $ 26-1/8 25 $ .38542
Second Quarter 26-3/4 25-1/8 .57812
Third Quarter 27 25-5/8 .57812
Fourth Quarter 28-3/4 25-7/8 .57812
======= =======
$ 2.11978
===========
- -------------------
(1) Per NASDAQ National Market System.
Dividends are scheduled to be paid the last day of March, June, September
and December.
A copy of the First Banks, Inc. Annual Report on Form 10-K as filed with
the Securities and Exchange Commission may be obtained without charge upon
written request. Please direct your request to the following address.
Allen H. Blake Transfer Agent
Executive Vice President and ChaseMellon Shareholder
Chief Financial Officer Service L.L.C.
First Banks, Inc. 85 Challenger Road
11901 Olive Boulevard Overpeck Centre
Creve Coeur, Missouri 63141 Ridgefield Park, New Jersey 07660
(314) 995-8700 (888) 213-0965
www.chasemellon.com
<PAGE>
EXHIBIT 21.1
First Banks, Inc.
Significant Subsidiaries
The following is a list of all subsidiaries of the Company And the
jurisdiction of incorporation or organization.
Jurisdiction of Incorporation
Name of Subsidiary or Organization
------------------ ---------------
First Bank Missouri
CCB Bancorp, Inc. (1) California
First Banks America, Inc. (2) Delaware
First Serve, Inc. Missouri
- ---------------
(1) CCB Bancorp, Inc. is the parent company of First Bank & Trust, a
California state chartered bank.
(2) First Banks America, Inc., a majority owned subsidiary of First Banks, is
the parent company of Sundowner Corporation, a Nevada corporation.
Sundowner Corporation is the parent company of BankTEXAS, N.A., a
national association, and First Bank of California, a state chartered
bank.
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000710507
<NAME> First Banks, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Dec-31-1997
<CASH> 142,125
<INT-BEARING-DEPOSITS> 2,840
<FED-FUNDS-SOLD> 23,515
<TRADING-ASSETS> 3,110
<INVESTMENTS-HELD-FOR-SALE> 773,271
<INVESTMENTS-CARRYING> 19,149
<INVESTMENTS-MARKET> 0
<LOANS> 3,002,200
<ALLOWANCE> 50,509
<TOTAL-ASSETS> 4,165,014
<DEPOSITS> 3,684,595
<SHORT-TERM> 59,297
<LIABILITIES-OTHER> 56,402
<LONG-TERM> 133,183
0
13,063
<COMMON> 5,915
<OTHER-SE> 212,559
<TOTAL-LIABILITIES-AND-EQUITY> 4,165,014
<INTEREST-LOAN> 252,766
<INTEREST-INVEST> 36,256
<INTEREST-OTHER> 6,079
<INTEREST-TOTAL> 295,101
<INTEREST-DEPOSIT> 138,661
<INTEREST-EXPENSE> 148,831
<INTEREST-INCOME-NET> 146,270
<LOAN-LOSSES> 11,300
<SECURITIES-GAINS> 2,456
<EXPENSE-OTHER> 110,287
<INCOME-PRETAX> 50,380
<INCOME-PRE-EXTRAORDINARY> 50,380
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,027
<EPS-PRIMARY> 1,181.69
<EPS-DILUTED> 1,134.28
<YIELD-ACTUAL> 8.22
<LOANS-NON> 18,610
<LOANS-PAST> 2,725
<LOANS-TROUBLED> 5,456
<LOANS-PROBLEM> 30,700
<ALLOWANCE-OPEN> 46,781
<CHARGE-OFFS> (16,832)
<RECOVERIES> 9,230
<ALLOWANCE-CLOSE> 50,509
<ALLOWANCE-DOMESTIC> 50,509
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,076
</TABLE>
