FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the
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 of (I.R.S. Employer Identification No.)
incorporation or organization)
135 North Meramec, Clayton, MO 63105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 854-4600
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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 18, 1999, 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, 1998 are incorporated by
reference into Parts I, II and IV of this report.
<PAGE>
PART I
The following portions of the 1998 Annual Report to Stockholders ("1998
Annual Report") of First Banks, Inc. ("First Banks" or the "Company") are
incorporated by reference in this report:
Page(s) in 1998
Section Report
------- ------
Management's Discussion and Analysis of
Financial Condition and Results of Operations 3-29
Selected Consolidated and Other Financial Data 2
Consolidated Financial Statements 32-58
Supplementary Financial Data 30
Range of Prices of Preferred Securities 49
Except for the parts of the 1998 Annual Report expressly incorporated by
reference, such report is not deemed filed with the Securities and Exchange
Commission.
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. 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 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,
including competition from banking and non-banking companies with substantially
greater resources than First Banks, some of which may offer and develop products
and services not offered by First Banks; and the ability of First Banks to
respond to changes in technology, including effects of the Year 2000 issue. 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 should
therefore not place undue reliance on forward looking statements.
Item 1. Business
General. First Banks, incorporated in Missouri in 1978, is headquartered in St.
Louis, Missouri and is a registered bank holding company under the Bank Holding
Company Act of 1956, as amended ("BHC Act").
At December 31, 1998, First Banks had $4.55 billion in total assets, $3.58
billion in total loans, net of unearned discount, $3.94 billion in total
deposits and $263 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:
First Bank Texas N.A., headquartered in Houston, Texas,
formerly BankTEXAS N.A. ("FB Texas"). First Bank of
California, headquartered in Roseville, California ("FB
California").
CCB Bancorp, Inc., headquartered in Newport Beach, California
("CCB"), and its wholly owned subsidiary - First Bank & Trust,
headquartered in Newport Beach, California ("FB&T").
<PAGE>
The Subsidiary Banks are wholly owned by their respective parents except
FBA, which was 76.8% owned by First Banks at December 31, 1998. In February
1998, First Commercial Bancorp, Inc. (FCB), a majority owned subsidiary of First
Banks, was acquired by FBA, and its subsidiary bank, First Commercial Bank, was
merged into FB California. The acquisition of FCB by FBA did not have a material
effect on the financial condition or results of operations of First Banks. In
addition, on February 17, 1999, First Banks completed its purchase of 314,848
shares of FBA common stock, pursuant to a tender offer to purchase up to 400,000
shares of FBA common stock. The tender offer increased First Banks' ownership
interest in FBA to 82.3% of the outstanding voting stock of FBA.
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 the
officers and directors.
The following table recaps selected data about the Subsidiary Banks at
December 31, 1998:
<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 $ 3,024,600 2,490,556 2,659,030
CCB:
FB&T........................................ 21 793,217 573,562 701,406
FBA:
FB California............................... 10 410,110 314,977 363,422
FB Texas.................................... 6 300,984 201,426 264,425
</TABLE>
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 system.
For a further discussion of the business of First Banks during the past
year, see "Management's Discussion and Analysis - General" in the 1998 Annual
Report.
Acquisitions. Prior to 1994, First Banks' acquisitions had been concentrated
within the market area of eastern Missouri and central and southern Illinois.
The premiums required to successfully pursue acquisitions escalated sharply in
1993, 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. 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' eastern Missouri and central and southern Illinois
<PAGE>
acquisition area. As a result, while First Banks continued to pursue
acquisitions within these areas, it turned much of its attention to institutions
which could be acquired at more attractive prices which were within major
metropolitan areas outside of these market areas. This led to the acquisition of
FB Texas which had offices in Dallas and Houston, Texas in 1994 and numerous
acquisitions of financial institutions which had offices in Los Angeles, Orange
County, Santa Barbara, San Francisco, San Jose and Sacramento, California during
the past four years ending December 31, 1998.
For the three years ended December 31, 1998, First Banks completed four
acquisitions and three branch deposit purchases. These transactions provided
total assets of $444.3 million and 13 banking locations. For a description of
these acquisitions, see "Management's Discussion and Analysis - Acquisitions"
and Note 2 to the Consolidated Financial Statements of the 1998 Annual Report.
Market Area. As of December 31, 1998, the Subsidiary Banks' 135 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.
The following table lists the market areas in which the Subsidiary Banks
operate, total deposits and number of locations as of December 31, 1998:
<TABLE>
<CAPTION>
Total Deposits
deposits as percent No. of
Geographic area (in millions) of total locations
--------------- ------------- -------- ---------
<S> <C> <C> <C>
St. Louis, Missouri metropolitan area (1).......................... $ 864.3 22.0% 27
Rural eastern Missouri (1)......................................... 371.5 9.4 16
Central and southern Illinois (1).................................. 1,024.0 26.0 38
Northern Illinois (1).............................................. 351.0 8.9 17
Texas (2).......................................................... 264.4 6.7 6
Southern and central California (3)................................ 670.6 17.0 21
Northern California (4)............................................ 394.2 10.0 10
--------- ----- -----
Total deposits................................................. $ 3,940.0 100.0% 135
========= ===== =====
</TABLE>
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(1) First Bank operates in the St. Louis metropolitan area, in rural eastern
Missouri, in central and southern Illinois and in northern Illinois,
including Chicago.
(2) FB Texas operates in the Houston, Dallas, Irving 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 areas.
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 area,
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.
<PAGE>
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 service 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 ("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 ("FDIC"). FB Texas,
a national banking association, is subject to the supervision and regulation of
the Office of the Comptroller of the Currency ("OCC"). Because the FDIC provides
deposit insurance to the Company's depository subsidiary financial institutions,
the Subsidiary Banks are also subject to supervision and regulation by the FDIC,
even where the FDIC is not their primary federal regulator.
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 guarantee 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
<PAGE>
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.
<PAGE>
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 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 onsite 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
<PAGE>
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
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 1998
Annual Report to Shareholders, incorporated herein by reference, each of the
Company's subsidiary bank depository institutions have, as of December 31, 1998,
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 to include proper loan documentation, and that
it establish prudent underwriting standards.
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 ("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. The Interstate
Act also establishes limits on acquisitions by large banking organizations,
providing that no acquisition may be undertaken if it would result in the
organization having deposits exceeding either 10% of all bank deposits in the
United States or 30% of the bank deposits in the state in which the acquisition
would occur.
Economic Growth and Regulatory Paperwork Reduction Act of 1996. The Economic
Growth and Regulatory Paperwork Reduction Act of 1996 ("EGRPRA") 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
<PAGE>
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.
Pending Legislation. Because of concerns relating to competitiveness and the
safety and soundness of the banking industry, Congress is considering a number
of wide-ranging proposals for altering the structure, regulation and competitive
relationships of the nation's financial institutions. Among such bills are new
proposals to merge the BIF and the SAIF insurance funds, to eliminate the
federal thrift charter, to alter the statutory separation of commercial and
investment banking and to further expand the powers of banks, bank holding
companies and competitors of banks. It cannot be predicted whether or in what
form any of these proposals will be adopted or the extent to which the business
of First Banks may be affected thereby.
Bank and Bank Holding Company Regulation
BHC Act. Under the BHC Act, the activities of a bank holding company are limited
to businesses so closely related to banking, managing or controlling banks as to
be a proper incident thereto. The Company is also subject to capital
requirements applied on a consolidated basis in a form substantially similar to
those required of the Subsidiary Banks. The 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 anti-competitive result, unless the anti-competitive
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-banking 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 FB Texas 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 SAIF. 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.
<PAGE>
Effective January 1, 1996, the FDIC implemented an amendment to the BIF
risk-based assessment schedule which effectively eliminated deposit insurance
assessments for most commercial banks and other depository institutions with
deposits insured by the BIF only, while maintaining the assessment rate for
SAIF-insured institutions in even the lowest risk-based premium category at 23
cents for each $100 of assessable deposits. Following enactment of EGRPRA, First
Banks paid a one-time special deposit insurance assessment with respect to its
SAIF-insured deposits, as part of the recapitalization of the SAIF, and the
overall assessment rate for 1997 for institutions in the lowest risk-based
premium category was revised to equal 1.29 cents and 6.44 cents for each $100 of
assessable deposits of BIF and SAIF members, 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 are used to service debt issued by the Financing Corporation, a federal
agency established to finance the recapitalization of the former Federal Savings
and Loan Insurance Corporation. The lowest risk-based premium rate was 1.16
cents and 5.82 cents for each $100 of assessable deposits of BIF and SAIF
members, respectively.
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 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 non-bank 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 ("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.
<PAGE>
Transactions among the Subsidiary Banks that do not involve the Company are
generally exempt from the foregoing regulations and restrictions. Further, under
the BHC Act and certain regulations of the FRB, subsidiary banks of a bank
holding company are prohibited from engaging in certain tying 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. The Subsidiary Banks are members of the Federal
Home Loan Bank System ("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, FB
Texas, 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. The Subsidiary Banks are 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 $46.3 million as of December 31, 1998, 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 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.
<PAGE>
Employees
As of March 18, 1999, the Company employed approximately 1,739 employees.
None of the employees are subject to a collective bargaining agreement. The
Company considers its relationships with its employees 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 6,500 is currently leased to others. Of
First Banks' other 135 branch offices and facilities, 89 are located in
buildings owned by First Banks and 46 are located in leased facilities.
Item 3. Legal Proceedings
First Banks is, from time to time, party to various legal actions arising in
the normal course of business. Management believes there is no proceeding
threatened or pending against First Banks which, if determined adversely, would
have a material adverse effect on the business or financial position of First
Banks.
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 First Banks' common stock.
All of First Banks' 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 1998 Annual
Report.
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 1998 Annual Report.
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 1998 Annual Report.
<PAGE>
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements, included in the 1998 Annual
Report, and quarterly consolidated financial data, included in the 1998 Annual
Report.
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Income - Years Ended December 31, 1998, 1997
and 1996
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income - Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years Ended December 31, 1998,
1997 and 1996
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
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company, their ages, and
positions with the Company and the Subsidiary Banks and the Company's other
subsidiaries as of March 18, 1999, are set forth below.
<TABLE>
<CAPTION>
Name Age Position with the Company and its Subsidiaries
---- --- ----------------------------------------------
<S> <C> <C>
James F. Dierberg 61 Chairman of the Board of Directors, Presiden and Chief Executive
Officer of the Company and FBA. Trustee of First Preferred Capital
Trust and First America Capital Trust since February 1997 and July
1998, respectively.
Allen H. Blake 56 Executive Vice President and Chief Financial Officer of First Banks
since 1996; Chief Operating Officer of First Banks since October
1998; Senior Vice President and Chief Financial Officer from 1992
to 1996; Secretary and Director of First Banks since 1988.
Executive Vice President and Chief Operating and Financial Officer
of FBA since October 1998; Director, Vice President, Chief
Financial Officer and Secretary of FBA since 1994; Director and
Executive Vice President of FCB from 1995 until its merger into FBA
in February 1998; Trustee of First Preferred Capital Trust and
First America Capital Trust since February 1997 and July 1998,
respectively.
Donald Gunn, Jr. (1) 63 Director of the Company.
George J. Markos (1) 50 Director of the Company.
<PAGE>
Thomas A. Bangert 55 Senior Vice President and Chief Operations Officer of the Company
and Executive Vice President and Director of First Bank. President
of First Services, L.P. Director of First Land Trustee Corporation.
Laurence J. Brost 42 Senior Vice President and Controller of the Company; Vice
President, Chief Accounting Officer of First Bank; and Trustee of
First Preferred Capital Trust and Fist America Capital Trust since
February 1997 and July 1998, respectively.
John A. Schreiber 48 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 43 Executive Vice President, Consumer Lending and Mortgage Banking of
the Company; and Executive Vice President and Director of First
Bank.
Donald W. Williams 51 Executive Vice President and Chief Credit Officer of the Company;
Senior Vice President and Director of First Bank; Director of FBA,
FB Texas, CCB, FB&T and FB California.
</TABLE>
- ------------------
(1) Member of the Audit Committee
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 and
First America 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 been Chief Operating Officer
of the Company since October 1998. Mr. Blake also serves as Executive Vice
President and Chief Operating and Financial Officer, Secretary and Director of
FBA and as a trustee of First Preferred Capital Trust and First America 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.
<PAGE>
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 and First America Capital Trust.
John A. Schreiber is Executive Vice President and Chief Lending Officer of
the Company and President and Chief Executive Officer of First Bank. In May
1994, he became Chairman of the Board of First Bank.
Mark T. Turkcan is Executive Vice President, Consumer Lending and Mortgage
Banking of the Company, positions he assumed in April 1996. Mr. Turkcan has been
employed in various executive capacities with the Company since 1985. Mr.
Turkcan is also a Director of First Bank, a position he has held since
April1994.
Donald W. Williams is Executive Vice President and Chief Credit Officer of
the Company and a Senior Vice President and Director of First Bank, a position
he assumed in March 1993. Mr. Williams also serves as a Director of FBA, FB
Texas, CCB, FB&T and FB California.
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
("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, 1998 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)
---------------------------- ---- ------ ----- ---------------
James F. Dierberg
<S> <C> <C> <C> <C>
Chairman of the Board of 1998 $ 536,000 0 5,000
Directors, President and 1997 492,000 0 4,750
Chief Executive Officer 1996 492,000 0 4,750
Donald W. Williams 1998 182,600 40,000 5,000
Executive Vice President 1997 166,250 40,000 4,750
and Chief Credit Officer 1996 155,000 30,000 4,750
John A. Schreiber 1998 181,900 40,000 5,000
Executive Vice President 1997 166,250 30,000 4,750
and Chief Lending Officer 1996 155,000 20,000 4,750
Allen H. Blake 1998 157,300 40,000 5,000
Executive Vice President and 1997 147,500 30,000 4,750
Chief Operating and Financial Officer 1996 140,000 30,000 4,750
Mark T. Turkcan 1998 140,800 15,000 4,725
Executive Vice President 1997 133,750 15,000 4,012
Consumer Lending and Mortgage Banking 1996 130,000 10,000 4,088
</TABLE>
- -------------
(1) All other compensation reported represents First Banks' matching
contributions to the 401(k) Plan for the year indicated.
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
<PAGE>
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 is 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 estates 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.
Messrs. Gunn and Markos each received $6,000 in directors fees during 1998.
In addition to Board meeting fees, during 1998, the Company paid Mr. Markos,
directly and indirectly, consulting fees in the amount of $2,000 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 1998, the Company paid $109,412 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 Interlocks and Insider Participation. Messrs. Dierberg
and Blake, who are executive officers of the Company, are also members of the
Board of Directors and executive officers of FBA. FBA does not have a
compensation committee, but its Board of Directors performs the functions of
such a committee. Except for the foregoing, no executive officer of First Banks
served during 1998 as a member of the Compensation Committee, or any other
committee performing similar functions, or as a director of another entity, any
of whose executive officers or directors served on the Board of Directors of
First Banks.
During 1998, 1997 and 1996, Tidal Insurance Limited (Tidal), a corporation
owned indirectly by First Banks' Chairman and his children, received
approximately $280,000, $214,000 and $326,000, 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 ceded to an unaffiliated
third-party insurer.
<PAGE>
For the years ended December 31, 1998, 1997 and 1996, First Securities
America, Inc. (FSA), a corporation established and administered by and for the
benefit of First Banks' Chairman and members of his immediate family, received
approximately $265,000, $206,000 and $231,000, respectively, in commissions and
insurance premiums for policies purchased by First Banks or customers of the
Subsidiary Banks from unaffiliated, third-party insurors to which First Banc
Insurors placed such policies. FSA received an additional $136,000 in annuity
sales commissions for the year ended December 31, 1996. The insurance premiums
on which the aforementioned commissions were earned were competitively bid and
First Banks deems the commissions FSA earned from unaffiliated third-party
companies to be comparable to those which would have been earned by an
unaffiliated third-party agent.
First Brokerage L.P. and First Brokerage America, L.L.C., entities which
are directly or indirectly owned by First Banks' Chairman and members of his
immediate family, received approximately $1.8 million and $707,000 for the years
ended December 31, 1998 and 1997, respectively, in commissions paid by
unaffiliated third-party companies. The commissions received were primarily in
connection with the sales of annuities and securities and other insurance
products to individuals, including customers of the Subsidiary Banks.
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 $12.2 million, $6.4 million and $3.2 million for the years ended
December 31, 1998, 1997 and 1996, respectively. During 1998 and 1997, First
Services, L.P. paid First Banks $799,000 and $1.1 million, respectively, in
rental fees for the use of data processing and other equipment owned by First
Banks. There were no rental fees paid to First Banks for the year ended December
31, 1996.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the entire ownership of all classes of voting
capital stock of the Company issued and outstanding.
<TABLE>
<CAPTION>
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> <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 Irrevocable Trust (1) ................. 3,459.358(2) 14.621% *
First Trust (Mary W. Dierberg and First Bank
Trustees)... ........................................... 516.830(1) 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>
- ---------------
* Represents 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 Ms. Ellen D. Schepman, formerly Ellen C.
Dierberg, are their adult 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 equal to the book value, the number of shares of common stock into
which the Class A Preferred Stock is convertible at December 31, 1998, is
1,389, which shares are not included in the above table.
(5) Sole voting and investment power.
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.
<PAGE>
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,
1998, the Subsidiary Banks had no loans outstanding to such persons.
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.
<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. The Financial Statements and Supplemental Data filed as part
of this Report are listed under Item 8.
2 Financial Statement Schedules: None
3. Exhibits: See the Exhibit Index at pages 20 through 21 of
this Report.
(b) Reports on Form 8-K during the quarter ended December 31, 1998:
None.
(c) See the Exhibit Index attached hereto.
<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 Operating and
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, 1999
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, 1999
----------------------------------
James F. Dierberg
Chairman of the Board of Directors,
President and Chief Executive Officer
/s/ Donald Gunn, Jr. March 26, 1999
- ------------------------------------
Donald Gunn, Jr.
Director
/s/ George J. Markos March 26, 1999
- ------------------------------------
George J. 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 ended
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 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1997).
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's 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 August 26,
1998 among the Company, The Mercantile Bank National
Association, American National Bank and Trust Company of
Chicago, Harris Trust and Savings Bank, Norwest Bank
Minnesota, National Association, The Frost National Bank and
Mercantile Bank National Association, as Agent (incorporated
herein by reference to Exhibit (b)(1) to the Company's report
filed on Schedule 14D-1, dated January 4, 1999).
10.7 Stock Purchase and Operating Agreement by and between the
Company and BancTEXAS Group, Inc., 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 (incorporated herein by
reference to Exhibit 10.8 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1997).
10.9* Service Agreement by and between First Services, L.P. and
First Bank & Trust dated April 1, 1997 (incorporated herein by
reference to Exhibit 10.9 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1997).
10.10* Service Agreement by and between First Services, L.P. and
BankTEXAS N.A. dated April 1, 1997 (incorporated herein by
reference to Exhibit 10.10 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1997).
10.11* Service Agreement by and between First Services, L.P. And
Sunrise Bank of California dated April 1, 1997 (incorporated
herein by reference to Exhibit 10.11 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1997).
13.1 The Company's 1998 Annual Report to Shareholders (filed herewith).
21.1 Subsidiaries of the Company (filed herewith).
27.1 Financial Data Schedule (EDGAR only).
- -------------------
* Exhibits designated by an asterisk in the Index to Exhibits relate to
management contracts and/or compensatory plans or arrangements.
<PAGE>
EXHIBIT 13
FIRST BANKS, INC.
1998 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 AND
COMPREHENSIVE INCOME......................................... 35
CONSOLIDATED STATEMENTS OF CASH FLOWS.............................. 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS......................... 37
DIRECTORS AND EXECUTIVE OFFICERS........................................ 59
INVESTOR INFORMATION.................................................... 61
<PAGE>
To our Valued Shareholders, Customers and Friends:
First Banks, Inc. is pleased to report our earnings and strategic
achievements for 1998. For 1998, net income was $33.5 million, compared to $33.0
million for 1997. Diluted earnings per common share increased to $1,337.09 from
$1,134.28 for the years ended December 31, 1998 and 1997, respectively. The
increase in diluted earnings per common share is attributable to both the
increase in net income and the redemption of First Banks' Class C preferred
stock in December 1997. The redemption of the Class C preferred stock resulted
in a reduction of First Banks' dividend requirement of $4.3 million for the year
ended December 31, 1998. The funds required for the redemption were borrowed
resulting in an increase in interest expense of $3.4 million for 1998. While the
Class C preferred stock dividend is not deducted in the determination of net
income, interest expense is, the effect of which was to reduce net income by
$2.2 million for the year ended December 31, 1998, when compared to the same
period in 1997.
First Banks' primary strategic objective of generating progressive and
profitable growth was further advanced during the past year. Total assets
increased to $4.6 billion at December 31, 1998 or by $400 million over 1997. The
growth was driven by First Banks' continued emphasis in developing our existing
franchise. Indicative of this development is the growth of the loan portfolio,
which increased by $580 million during 1998. Facilitating the development of
First Banks' presence in our target market areas were the acquisitions of
Republic Bank and Pacific Bay Bank, providing total assets of $124 million and
$38 million, respectively, and three banking locations in southern California
and one banking location in the San Francisco Bay area. In addition, First Banks
is pleased to report the completion of the acquisition of Redwood Bancorp and
its wholly owned subsidiary, Redwood Bank, on March 4, 1999. Redwood Bank will
add a new dimension to our San Francisco Bay area presence through its main
office in downtown San Francisco and its three offices in the surrounding Bay
area of San Rafael, Napa and San Mateo. We are excited about Redwood Bancorp's
decision to join our organization, and welcome its management, staff and
customers.
With respect to Year 2000 concerns, First Banks' Year 2000 Preparedness
Project is continuing according to plan. First Banks, as well as other financial
institutions, are particularly vulnerable to Year 2000 issues because of heavy
reliance in the industry on electronic data processing and funds transfer
systems. As a financial institution, First Banks' efforts are subjected to
regulation and monitoring by bank and bank holding company regulatory agencies.
These agencies, under the auspices of the Federal Financial Institutions
Examination Council, have established guidelines and interim deadlines for
achieving Year 2000 compliance.
First Banks' Year 2000 Plan has been structured to remain consistent with these
guidelines.
In closing, I would like to take this opportunity to extend my
sincerest appreciation for the dedication of our employees, and the continued
support of our customers and shareholders.
Sincerely,
James F. Dierberg
Chairman, President and Chief Executive Officer
<PAGE>
The selected consolidated financial data set forth below, insofar as it
relates to the five years ended December 31, 1998, is derived form the audited
consolidated financial statements of First Banks, Inc. (First Banks). Such data
is qualified by reference to the consolidated financial statements of First
Banks included herein and should be read in conjunction with such consolidated
financial statements and related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Year ended December 31, (1)
-----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(dollars expressed in thousands, except per share data)
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Interest income................................... $ 328,049 295,101 266,021 261,621 162,435
Interest expense.................................. 162,368 148,831 141,670 144,945 70,670
---------- ------- ------- ------- --------
Net interest income............................... 165,681 146,270 124,351 116,676 91,765
Provision for possible loan losses................ 9,000 11,300 11,494 10,361 1,858
---------- ------- ------- ------- --------
Net interest income after provision for
possible loan losses............................ 156,681 134,970 112,857 106,315 89,907
Noninterest income................................ 36,497 25,697 20,721 19,407 13,634
Noninterest expense............................... 138,704 110,287 105,741 91,566 67,734
---------- ------- ------- ------- --------
Income before provision for income taxes an
minority interest in (income) loss of
subsidiaries.................................... 54,474 50,380 27,837 34,156 35,807
Provision for income taxes........................ 19,693 16,083 6,960 11,038 12,012
---------- ------- ------- ------- --------
Income before minority interest in (income) loss
of subsidiaries................................. 34,781 34,297 20,877 23,118 23,795
Minority interest in (income) loss of subsidiaries (1,271) (1,270) (659) 1,353 237
---------- ------- ------- ------- --------
Net income........................................ $ 33,510 33,027 20,218 24,471 24,032
========== ======= ======= ======= ========
Dividends:
Preferred stock................................... $ 786 5,067 5,728 5,736 5,735
Common stock...................................... -- -- -- -- --
Ratio of total dividends declared to net income... 2.35% 15.34% 28.33% 23.44% 23.86%
Per Share Data:
Earnings per common share:
Basic........................................... $ 1,383.04 1,181.69 612.46 791.82 773.31
Diluted......................................... 1,337.09 1,134.28 596.83 759.09 735.28
Weighted average shares of common stock
outstanding..................................... 23,661 23,661 23,661 23,661 23,661
Balance Sheet Data (at year-end):
Investment securities............................. $ 534,796 795,530 552,801 508,323 587,878
Loans, net of unearned discount................... 3,580,105 3,002,200 2,767,969 2,744,219 2,073,570
Total assets...................................... 4,554,810 4,165,014 3,689,154 3,622,962 2,879,570
Total deposits.................................... 3,939,985 3,684,595 3,238,567 3,183,691 2,333,144
Notes payable..................................... 50,048 55,144 76,330 88,135 46,203
Guaranteed preferred beneficial interests in
First Banks, Inc. and First Banks America, Inc.
subordinated debentures.......................... 127,443 83,183 -- -- --
Common stockholders' equity....................... 250,300 218,474 184,439 166,542 149,249
Total stockholders' equity........................ 263,363 231,537 251,389 234,605 217,312
Earnings Ratios:
Return on average total assets.................... 0.78% 0.87% 0.57% 0.70% 1.00%
Return on average total stockholders' equity...... 13.64 12.91 8.43 10.79 11.48
Asset Quality Ratios:
Allowance for possible loan losses to loans....... 1.70 1.68 1.69 1.92 1.37
Nonperforming loans to loans (2).................. 1.22 0.80 1.09 1.44 0.78
Allowance for possible loan losses to
nonperforming loans (2)......................... 140.04 209.88 154.55 133.70 175.37
Nonperforming assets to loans and other
real estate (3).................................. 1.32 1.04 1.47 1.71 1.10
Net loan charge-offs to average loans............. 0.05 0.27 0.72 0.41 0.09
Capital Ratios:
Average total stockholders' equity to average
total assets.................................... 5.73 6.70 6.79 6.49 8.70
Total risk-based capital ratio.................... 10.28 10.26 9.23 9.34 12.68
Leverage ratio.................................... 7.77 6.80 5.99 5.32 7.54
</TABLE>
- ----------------
<PAGE>
(1) The comparability of the selected data presented is affected by the
acquisitions of eleven banks and five 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.
(2) Nonperforming loans consist of nonaccrual loans and certain loans with
restructured terms.
(3) Nonperforming assets consist of nonperforming loans and other real estate.
<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 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, including competition from banking and non-banking
companies with substantially greater resources than First Banks, some of which
may offer and develop products and services not offered by First Banks; and the
ability of First Banks to respond to changes in technology, including effects of
the Year 2000 problem. 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 the 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, 1998, First
Banks had $4.55 billion in total assets, $3.58 billion in total loans, net of
unearned discount, $3.94 billion in total deposits and $263 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:
First Bank Texas N.A., headquartered in Houston, Texas (FB Texas).
First Bank of California, headquartered in Roseville, California
(FB California).
CCB Bancorp, Inc., headquartered in Newport Beach, California (CCB), and
its wholly owned subsidiary: First Bank & Trust, headquartered in
Newport Beach, California (FB&T).
The Subsidiary Banks are wholly owned by their respective parent companies
except for FBA, which was 76.8% owned by First Banks at December 31, 1998. In
addition, on February 17, 1999, First Banks completed its purchase of 314,848
shares of FBA common stock, pursuant to a tender offer to purchase up to 400,000
shares of FBA common stock. This tender offer increased First Banks' ownership
interest in FBA to 82.3% of the outstanding voting stock of FBA.
As discussed under "--Acquisitions," in February 1998, First Commercial
Bancorp, Inc. (FCB), a majority owned subsidiary of First Banks, was acquired by
FBA, and its subsidiary bank, First Commercial Bank (First Commercial), was
merged into FB California. The acquisition of FCB and First Commercial by FBA
and FB California, respectively, did not have a material impact on the results
of operations or financial condition of First Banks.
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.
<PAGE>
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 the
officers and directors.
The following table recaps selected data about the Subsidiary Banks at
December 31, 1998:
<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 $ 3,024,600 2,490,556 2,659,030
CCB:
FB&T........................................ 21 793,217 573,562 701,406
FBA:
FB California............................... 10 410,110 314,977 363,422
FB Texas.................................... 6 300,984 201,426 264,425
</TABLE>
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.
As more fully described under "--Financial Condition and Average Balances"
and Note 8 to the consolidated financial statements, on February 3, 1997, First
Preferred Capital Trust (First Capital), a Delaware statutory business trust
subsidiary of First Banks, issued 3,450,000 shares of 9.25% Guaranteed Preferred
Beneficial Interests in First Banks' Subordinated Debenture (First Capital
Preferred Securities) for $86.25 million. In addition, on July 21 1998, First
America Capital Trust (FACT), a Delaware business trust subsidiary of FBA,
issued 1,840,000 shares of 8.50% Guaranteed Preferred Beneficial Interests in
FBA's Subordinated Debentures (FACT Preferred Securities) for $46.0 million. The
First Capital Preferred Securities and the FACT Preferred Securities are
publicly held and traded on the Nasdaq Stock Market's National Market System and
the New York Stock Exchange, respectively. These preferred securities have no
voting rights except in certain limited circumstances. Distributions on the
preferred securities are payable quarterly in arrears on March 31, June 30,
September 30 and December 31 of each year.
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, in some acquisitions
First Banks may acquire institutions having more significant problems which
thereby reduce their attractiveness to other potential acquirers, and therefore
reduce the amount of acquisition premiums required. Finally, First Banks
realizes that various acquisition markets may become so competitive at times,
that cash transactions are not economically viable, thereby requiring it to
pursue its acquisition strategy in other geographic areas, or pursue internal
growth more aggressively. These patterns have been evident in First Banks'
growth during the five years ended December 31, 1998.
<PAGE>
During 1994 and 1995, First Banks completed twelve acquisitions which
provided an aggregate of $1.96 billion in total assets and 43 locations.
Relative to the entire organization, these acquisitions represented an increase
in First Banks' total assets of 78% over the same two-year time period. These
acquisitions provided First Banks with access into several new major market
areas and, accordingly, an attractive opportunity for future growth and
profitability. As acquisition pricing in these areas escalated dramatically, the
level of acquisition activity decreased in 1996, 1997 and 1998. For a summary of
acquisitions, see "--Acquisitions." During the past three years, management has
continued to meld original entities into its operations, systems and culture,
and achieve the efficiencies and opportunities envisioned when the entities were
acquired. Many of the acquired institutions exhibited elements of financial
distress prior to their acquisitions which contributed to marginal earnings
performance. Generally, these elements 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 banking operations; and (4) management of lawsuits which 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 separate
and distinct entities together to form cohesive organization groups 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 entities to
take advantage of the opportunities available to them. While this contributed to
the increases in noninterest expense during the five years ended December 31,
1998, 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.
While some of these activities did not contribute to reductions of
noninterest expense, they contributed to the commercial and retail business
development efforts of the banks, and ultimately to their overall profile to
improve future profitability. As a result of this, the contribution to
consolidated net income for California (FB&T and FB California), Texas (FB
Texas) and Missouri and Illinois (First Bank) is summarized as follows:
<TABLE>
<CAPTION>
California Texas Missouri and Illinois
--------------------- ------------------ ------------------------------
1998 1997 1996 (1) 1998 1997 1996 (1) 1998 1997 1996 (1)
---- ------------ -------------------- ---------------------
(dollars expressed in thousands)
Year ended December 31:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity in income of subsidiaries.... $ 7,168 7,488 5,259 2,303 1,675 806 33,271 31,686 24,542
Average investment in subsidiaries.. 91,243 76,330 54,114 23,389 25,178 23,202 232,518 220,134 212,850
Return on average investment...... 7.86% 9.81% 9.72% 9.85% 6.65% 3.47% 14.31% 14.39% 11.53%
</TABLE>
- ---------
(1) Excludes the effect of the one-time FDIC special assessment, net of related
tax benefits.
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 of
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 within the organization.
<PAGE>
The enhanced business development resources of First Banks assisted in the
realignment of certain acquired loan portfolios, which were skewed toward loan
types which reflected the abilities and experiences of the management of the
acquired entities. 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 FB Texas, 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 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 of loans. 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, $915
million at December 31, 1997 and $739 million at December 31, 1998. Similarly,
the portfolio of consumer and installment loans, net of unearned discount, the
majority of which is indirect automobile loans, decreased from $414 million at
December 31, 1995, to $333 million, $279 million and $274 million at December
31, 1996, 1997 and 1998, respectively.
As these components 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. 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 $2.74 billion at December
31, 1995 to $2.77 billion, $3.00 billion and $3.58 billion at December 31, 1996,
1997 and 1998, 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
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. In
addition, commercial borrowers are encouraged to maintain their operating
deposit accounts with First Banks. 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 total deposits have continued to
increase, total time deposits have remained constant at $1.80 billion, but
decreasing to 45.8% of total deposits at December 31, 1998.
As further discussed under "--Net Interest Income, Comparison of Results of
Operations for 1998 and 1997, and Comparison of Results of Operations for 1997
and 1996," 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.
Acquisitions
In enhancing its banking franchise, First Banks places emphasis upon
acquiring other financial institutions as a means of accelerating its growth to
significantly expand its presence in a given market, to increase the extent of
its market area or to enter new or noncontiguous market areas. After an
acquisition is consummated, First Banks expects to enhance the franchise of the
acquired entity by supplementing the marketing and business development efforts
to broaden the customer bases, strengthening particular segments of the business
or filling voids in the overall market coverage. First Banks has utilized cash,
borrowings and the issuance of additional securities to meet its growth
objectives under the acquisition program.
As summarized below, First Banks' acquisitions during the three years ended
December 31, 1998 have primarily served to increase its presence in markets that
were originally entered into during 1994 and 1995.
<PAGE>
During the three years ended December 31, 1998, First Banks completed four
acquisitions and three deposit purchases. These transactions, as more fully
described in Note 2 to the accompanying consolidated financial statements, are
summarized as follows:
<TABLE>
<CAPTION>
Loans, net of Number of
Total unearned Investment banking
Entity Date assets discount securities Deposits locations
------ ---- ------ -------- ---------- -------- ---------
(dollars expressed in thousands)
1998
----
Republic Bank
<S> <C> <C> <C> <C> <C> <C>
Torrance, California (1)...... September 15, 1998 $ 124,100 97,900 7,500 117,200 3
Bank of America
Solvang, California branch
office (2).................... March 19, 1998 15,500 -- -- 15,500 1
Pacific Bay Bank
San Pablo, California (3)..... February 2, 1998 38,300 29,700 232 35,200 1
--------- -------- -------- ------- ---
$ 177,900 127,600 7,732 167,900 5
========= ======== ======== ======= ===
1997
----
Surety Bank
Vallejo, California (3)....... December 1, 1997 $ 72,800 54,400 11,800 67,500 2
Highland Federal Savings Bank,
F.S.B., Woodland Hills,
California branch office (4).. September 30, 1997 42,400 100 -- 42,400 1
Highland Federal Savings Bank,
F.S.B., Long Beach,
California branch offices (4). March 31, 1997 40,400 100 -- 40,400 2
--------- -------- -------- ------- ---
$ 155,600 54,600 11,800 150,300 5
========= ======== ======== ======= ===
1996
----
Sunrise Bancorp, Inc.
Roseville, California (3)..... November 1, 1996 $ 110,800 61,100 18,100 91,100 3
========= ======== ======== ======= ===
</TABLE>
- ------------------
(1) Republic Bank was merged into FB&T.
(2) The Solvang branch office of Bank of America was acquired by FB&T through a
purchase of certain assets and assumption of deposit liabilities of the
branch office. Total assets consist primarily of cash received upon
assumption of deposit liabilities.
(3) Pacific Bay Bank, Sunrise Bank, Sunrise Bancorp, Inc.'s banking subsidiary,
and Surety Bank were merged into FB California. Sunrise Bancorp, Inc. was
merged into FBA.
(4) 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.
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, borrowings under First
Banks' credit agreement with a group of unaffiliated banks (Credit Agreement)
and the proceeds of the preferred securities. 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 February 2, 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.
<PAGE>
On March 4, 1999, FBA completed the acquisition of Redwood Bancorp and its
wholly owned subsidiary, Redwood Bank, for cash consideration of $26 million.
Redwood Bancorp had $184 million in total assets, $134 million in total loans,
net of unearned discount, $32 million in investment securities and $163 million
in total deposits at the acquisition date. Redwood Bank is headquartered in San
Francisco, California and operates three banking locations in the San Francisco
Bay area. Redwood Bank will operate as a wholly owned subsidiary of FBA.
Financial Condition and Average Balances
First Banks' average total assets were $4.29 billion for the year ended
December 31, 1998, compared to $3.82 billion and $3.53 billion for the years
ended December 31, 1997 and 1996, respectively. Total assets at December 31,
1998 were $4.55 billion, an increase of $380 million, or 9.1%, over total assets
of $4.17 billion at December 31, 1997.
The increase in assets for 1998 was funded by an increase in total deposits
of $260 million to $3.94 billion at December 31, 1998, from $3.68 billion at
December 31, 1997, and the decrease in investment securities of $261 million
during 1998. The increase in deposits for 1998 is attributable to the
acquisitions of Republic Bank, Pacific Bay Bank, the purchase of the deposit
accounts of the Solvang, California banking location of Bank of America and
internal deposit growth of $92.1 million. A summary of the composition of
deposits is presented under "--Deposits."
Loans, net of unearned discount, increased by $580 million to $3.58 billion
at December 31, 1998 from $3.00 billion at December 31, 1997. The acquisitions
of Republic Bank and Pacific Bay Bank provided $127.6 million of loans. In
addition to these loans, $633.6 million of net loan growth was provided by
corporate banking business development, consisting of an increase of $267.7
million of commercial, financial and agricultural loans, $299.4 million of real
estate construction and land development loans and $66.5 million of commercial
real estate loans. These increases were partially offset by continuing
reductions in residential real estate loans of $152.8 million and in consumer
and installment loans, net of unearned discount, which consists primarily of
indirect automobile loans, of $30.5 million. These changes are the result of the
focus which First Banks has placed on its business development efforts and the
portfolio repositioning which began in 1995. This repositioning provided that
substantially all of the conforming residential mortgage loan production of
First Banks be sold in the secondary mortgage market, and that the origination
of indirect automobile loans be substantially reduced. Tables summarizing the
composition of the loan portfolio are presented under "--Lending and Credit
Management."
For the year ended December 31, 1997, total average assets were $3.82
billion compared to $3.53 billion for the year ended December 31, 1996. Total
assets at December 31, 1997 were $4.17 billion, an increase of $480 million from
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.
On July 21, 1998, FACT, a newly-formed Delaware business trust subsidiary
of FBA, issued 1.84 million shares of FACT Preferred Securities at $25 per share
in an underwritten public offering. Proceeds from FACT's offering, net of
underwriting fees and offering expenses, were $44.0 million and were used to
reduce borrowings, to support possible repurchases of FBA's common stock from
time to time and for general corporate purposes. The remaining proceeds were
temporarily invested by FBA in interest-bearing deposits and were used to fund
the acquisition of Redwood Bancorp. In addition, on February 4, 1997, First
Capital, a newly-formed Delaware business trust subsidiary of First Banks,
issued 3.45 million shares of First Capital Preferred Securities at $25 per
share in an underwritten public offering. The proceeds from First Capital's
offering, net of underwriting fees and offering expenses, were $83.1 million and
were used to reduce borrowings, for purchases of shares of Class C 9.00%
Increasing Rate, Redeemable, Cumulative Preferred Stock (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 described above satisfies the regulatory requirements
for inclusion in First Banks' capital base in a manner similar to the Class C
Preferred Stock.
<PAGE>
First Banks' common stockholders' equity has continued to increase to
$250.3 million at December 31, 1998, from $218.5 million and $184.4 million at
December 31, 1997 and 1996, respectively. The increase is attributable to First
Banks' profitability and the current practice of retaining most of its net
income to further support future growth.
The following table sets forth, on a tax-equivalent basis, certain
information relating to First Banks' average balance sheet, and reflects the
average yield earned on interest-earning assets, the average cost of
interest-bearing liabilities and the resulting net interest income for the
periods indicated.
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------------------------------------------
1998 1997 1996
------------------------ ---------------------- -----------------------
Interest Interest Interest
Average income/ Yield/ Average income/ Yield/ Average income/ Yield/
balance expense rate balance expense rate balance expense rate
------- ------- ---- ------- ------- ---- ------- ------- ----
(dollars expressed in thousands)
ASSETS
------
Interest-earning assets:
Loans: (1) (2)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Taxable............................ $3,243,183 283,850 8.75% $2,837,190 252,089 8.89% $2,714,387 236,527 8.71%
Tax-exempt (3)..................... 7,536 794 10.54 8,967 1,042 11.62 11,910 1,311 11.01
Investment securities:
Taxable (4)........................ 657,385 39,898 6.07 598,660 35,248 5.89 469,832 22,650 4.82
Tax-exempt (3) (4)................. 18,318 1,515 8.27 19,056 1,552 8.15 22,648 1,889 8.34
Federal funds sold.................... 46,509 2,630 5.65 125,825 5,322 4.23 63,802 3,352 5.25
Other................................. 2,853 170 5.96 12,138 757 6.24 25,634 1,410 5.50
---------- ------ ---------- ------- --------- ------
Total interest-earning assets.... 3,975,784 328,857 8.27 3,601,836 296,010 8.22 3,308,213 267,139 8.08
------- ------- -------
Nonearning assets......................... 309,811 215,890 224,175
---------- ---------- ---------
Total assets..................... $4,285,595 $3,817,726 $3,532,388
========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Interest-bearing liabilities:
Interest bearing deposits:
Interest-bearing demand
deposits (4).................... $ 357,463 5,135 1.44% $ 332,712 5,648 1.70% $ 304,247 4,845 1.59%
Savings deposits (4)............... 1,076,524 42,591 3.96 761,052 27,383 3.60 683,009 21,769 3.19
Time deposits of $100 or more (4).. 212,691 12,463 5.86 183,223 11,008 6.01 164,453 9,665 5.88
Other time deposits (4)............ 1,669,638 95,739 5.73 1,681,014 100,954 6.01 1,592,657 95,813 6.02
---------- ------ ---------- ------- --------- ------
Total interest-bearing deposits.. 3,316,316 155,928 4.70 2,958,001 144,993 4.90 2,744,366 132,092 4.81
Federal funds purchased, repurchase
agreements and Federal Home
Loan Bank advances (4)......... 61,178 2,965 4.85 75,016 2,463 3.28 64,021 3,964 6.19
Notes payable and other............... 50,718 3,475 6.85 17,883 1,375 7.69 76,892 5,614 7.30
---------- ------ ---------- ------- --------- ------
Total interest-bearing
liabilities.................... 3,428,212 162,368 4.74 3,050,900 148,831 4.88 2,885,279 141,670 4.91
------- -------- -------
Noninterest-bearing liabilities:
Demand deposits....................... 463,939 394,580 368,786
Other liabilities..................... 147,849 116,359 38,413
---------- ---------- ---------
Total liabilities................ 4,040,000 3,561,839 3,292,478
Stockholders' equity...................... 245,595 255,887 239,910
---------- ---------- ---------
Total liabilities and
stockholders' equity........... $4,285,595 $3,817,726 $3,532,388
========== ========== ==========
Net interest income....................... 166,489 147,179 125,469
======= ======= =======
Interest rate spread...................... 3.53 3.34 3.17
Net interest margin....................... 4.19% 4.09% 3.79%
==== ==== ====
</TABLE>
- -------------------
<PAGE>
(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 $808,000, $909,000
and $1.1 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
(4) Includes the effects of interest rate exchange agreements.
<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, 1998 compared December 31, 1997 compared
to December 31, 1997 to December 31, 1996
---------------------------- -------------------------------
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........................... $ 35,689 (3,928) 31,761 10,682 4,880 15,562
Tax-exempt (3).................... (157) (91) (248) (347) 78 (269)
Investment securities:
Taxable (4)....................... 3,545 1,105 4,650 6,962 5,636 12,598
Tax-exempt (3) (4)................ (60) 23 (37) (295) (42) (337)
Federal funds sold................... (5,759) 3,067 (2,692) 2,462 (492) 1,970
Other................................ (554) (33) (587) (877) 224 (653)
-------- ------ ------ ----- ------ ------
Total interest income......... 32,704 143 32,847 18,587 10,284 28,871
-------- ------ ------ ------ ------ ------
Interest paid on:
Interest-bearing demand deposits (4). 486 (999) (513) 462 341 803
Savings deposits (4)................. 12,252 2,956 15,208 2,642 2,972 5,614
Time deposits of $100 or more (4).... 1,722 (267) 1,455 1,125 218 1,343
Other time deposits (4).............. (661) (4,554) (5,215) 5,300 (159) 5,141
Federal funds purchased, repur-
chase agreements and Federal
Home Loan Bank advances (4)....... (315) 817 502 864 (2,365) (1,501)
Notes payable and other.............. 2,233 (133) 2,100 (4,556) 317 (4,239)
-------- ------- ------ ------ ------ ------
Total interest expense........ 15,717 (2,180) 13,537 5,837 1,324 7,161
-------- ------- ------ ----- ------ ------
Net interest income........... $ 16,987 2,323 19,310 12,750 8,960 21,710
======== ====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) For purposes of these computations, nonaccrual loans are included in the
average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Information is presented on a tax-equivalent basis assuming a tax rate of
35%.
(4) Includes the effect of interest rate exchange agreements.
Net Interest Income
First Banks' primary source of earnings is its net interest income, which
is the difference between the interest earned on its earning assets and the
interest paid on its interest-bearing liabilities. Net interest income
(expressed on a tax-equivalent basis) increased to $166.5 million for the year
ended December 31, 1998, from $147.2 million and $125.5 million for the years
ended December 31, 1997 and 1996, 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 during these periods, the net interest margin has continued to remain
below average for commercial banks. For the year ended December 31, 1998, the
net interest margin was 4.19%, compared to 4.09% and 3.79% for the years ended
December 31, 1997 and 1996, 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 addition, since 1990, First Banks has acquired ten thrifts
in various transactions. 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.
<PAGE>
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:
<TABLE>
<CAPTION>
Interest
Average Percent of income/ Yield/
balances total expense rate
-------- ----- ------- ----
(dollars expressed in thousands)
Year ended December 31, 1998:
<S> <C> <C> <C> <C>
Residential mortgage loans........................... $ 928,805 28.57% $ 74,792 8.05%
Other loans.......................................... 2,321,914 71.43 209,852 9.04
----------- ------- ---------
Total loans...................................... $ 3,250,719 100.00% $ 284,644 8.76
=========== ====== ========= ====
Certificates of deposit.............................. $ 1,882,329 56.76% $ 108,202 5.75%
Other interest-bearing deposits...................... 1,433,987 43.24 47,726 3.33
----------- ------- ---------
Total interest-bearing deposits.................... $ 3,316,316 100.00% $ 155,928 4.70
=========== ====== ========= ====
Year ended December 31, 1997:
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.
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 using 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
<PAGE>
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
basis points)
Year ended December 31:
<S> <C> <C> <C> <C> <C>
1998.......................... $ -- 3,999 3,999 (0.10)
1997.......................... -- 6,574 6,574 (0.18)
1996.......................... 3,875 7,623 11,498 (0.35)
</TABLE>
- ---------------
(1) Effect on net interest margin is expressed as a reduction of net interest
income divided by average earning assets.
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 calculates
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 scenarios
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
<PAGE>
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 3% of net interest income for the year
ended December 31, 1998.
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. 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:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1998 1997
Notional Credit Notional Credit
amount exposure amount exposure
------ -------- ------ --------
(dollars expressed in thousands)
<S> <C> <C> <C> <C>
Interest rate swap agreements......................... $ 280,000 -- -- --
Interest rate floor agreements........................ 70,000 204 70,000 26
Interest rate cap agreements.......................... 10,000 55 10,000 222
Forward commitments to sell mortgage-backed securities 95,000 137 60,000 --
</TABLE>
The notional amounts of derivative financial instruments do not represent
amounts exchanged by the parties and, therefore, are not a measure of First
Banks' credit exposure through its use of derivative financial instruments. The
amounts exchanged are determined by reference to the notional amounts and the
other terms of the derivatives.
Interest rate swap agreements are utilized to adjust the repricing
characteristics of certain interest-bearing assets and liabilities with the
objective of stabilizing cash flow, and accordingly, net interest income, over
time. The net interest expense for swap agreements was $3.9 million, $6.4
million and $7.4 million, including $3.7 million, $5.4 million and $4.2 million
of amortized deferred swap losses, for the years ended December 31, 1998, 1997
and 1996, respectively. The maturity dates, notional amounts, interest rates
paid and received, and fair values of interest rate swap agreements outstanding
as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Fair value
Notional Interest rate Interest rate gain
Maturity date and swap type amount paid received (loss)
--------------------------- ------ ---- -------- ------
(dollars expressed in thousands)
December 31, 1998:
Pay variable / receive fixed:
<S> <C> <C> <C> <C> <C>
June 11, 2002............................. $ 15,000 5.24% 6.00% $ 363
September 16, 2002........................ 20,000 5.22 5.36 87
September 16, 2002........................ 175,000 5.22 5.36 761
September 18, 2002........................ 30,000 5.23 5.33 92
September 18, 2002........................ 40,000 5.23 5.33 123
-------- --------
$280,000 5.23 5.48 $ 1,426
======== ==== ==== ========
</TABLE>
<PAGE>
First Banks has experienced a shortening of the expected repricing term of
its loan portfolio. This shortening resulted from the significant decline in
interest rates beginning in 1995, which caused an increase in the principal
prepayments of residential mortgage loans, and a change in the composition of
the loan portfolio. These increased prepayments, as well as First Banks'
projections of future prepayments, and the overall reduction in the residential
loan portfolio disproportionately shortened the expected repricing term of the
loan portfolio in comparison to the effective maturity of certain
interest-bearing liabilities 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 $5.7 million and $9.4 million at December 31, 1998
and 1997, respectively, and were included in other assets.
During 1998, as the effective repricing term of the loan portfolio
continued to shorten, and thus became increasingly mismatched with its funding
source, First Banks entered into $280.0 million notional amount of interest rate
swap agreements (Swap Agreements). The Swap Agreements effectively extended the
repricing term of a selected group of loans to more closely correspond with its
funding source. The primary objective of the Swap Agreements is to stabilize
cash flows, and accordingly, net interest income, over time. In contrast to
previous swap agreements, the Swap Agreements provide for First Banks to receive
a fixed rate of interest and pay an adjustable rate of interest equivalent to
the 90-day London Interbank Offering Rate (LIBOR).
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, 1998 and 1997, the unamortized costs of these agreements were
$159,000 and $290,000, 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, 1998, 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).................................. $ 2,222,531 336,994 444,558 567,527 8,495 3,580,105
Investment securities...................... 122,759 46,190 111,233 231,647 22,967 534,796
Federal funds sold......................... 36,700 -- -- -- -- 36,700
Interest-bearing deposits with other
financial institutions................... 3,483 250 -- -- -- 3,733
----------- -------- --------- --------- -------- ----------
Total interest-earning assets.......... 2,385,473 383,434 555,791 799,174 31,462 4,155,334
Effect of interest rate swap agreements.... (280,000) -- -- 280,000 -- --
----------- -------- --------- --------- -------- ----------
Total interest-earning assets after
the effect of interest rate swap
agreements.......................... $2,105,473 383,434 555,791 1,079,174 31,462 4,155,334
========== ======= ========= ========= ========== =========
Interest-bearing liabilities:
Interest-bearing demand accounts........... $ 139,651 86,810 56,615 41,518 52,841 377,435
Savings accounts........................... 113,649 93,594 80,223 113,649 267,410 668,525
Money market demand accounts............... 530,042 -- -- -- -- 530,042
Time deposits.............................. 428,592 442,366 569,118 361,775 749 1,802,600
Other borrowed funds....................... 170,835 -- -- 544 -- 171,379
----------- -------- --------- -------- -------- ----------
Total interest-bearing liabilities..... $ 1,382,769 622,770 705,956 517,486 321,000 3,549,981
=========== ======== ========= ======== ======== ==========
Interest sensitivity gap:
Periodic................................... $ 722,704 (239,336) (150,165) 561,688 (289,538) 605,353
==========
Cumulative................................. 722,704 483,368 333,203 894,891 605,353
=========== ======== ========= ======== ========
Ratio of interest-sensitive assets to
interest-sensitive liabilities:
Periodic................................. 1.52 0.62 0.79 2.09 0.10 1.17
=====
Cumulative............................... 1.52 1.24 1.12 1.28 1.17
====== ===== ====== ==== ====
</TABLE>
- ------------------
(1) Loans are presented net of unearned discount.
Management makes certain assumptions in preparing the table above.
These include the assumptions 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. A significant variance in actual results from one or more of these
assumptions could materially affect the results reflected in the table.
<PAGE>
At December 31, 1998 and 1997, First Banks was asset sensitive on a
cumulative basis through the twelve-month time horizon by $333 million, or 7.32%
of total assets, and by $178 million, or 4.28% of total assets, respectively.
The increase in the asset-sensitive position for 1998 primarily relates to the
change in the composition of the loan portfolio and the issuance of the First
Capital Preferred Securities and FACT Preferred Securities in 1997 and 1998,
respectively, 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.
For the three years ended December 31, 1998, 1997 and 1996, First Banks
originated and purchased loans for resale totaling $629 million, $174 million
and $136 million and sold loans totaling $521 million, $148 million and $113
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 gain realized upon sale, the interest income
earned while the loan is held awaiting sale and the ongoing loan servicing fees
from the loans sold with servicing rights retained. Mortgage loans serviced for
investors aggregated $923 million, $784 million and $847 million at December 31,
1998, 1997 and 1996, respectively.
The gain on mortgage loans originated for resale, including loans sold and
held for sale, was $5.6 million, $716,000 and $40,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. These gains, net of losses, are
realized at the time of sale determined on a lower of cost or market basis. The
cost basis reflects: (1) adjustments of the carrying values of loans held for
sale to the lower of cost, adjusted to include the cost of hedging the loans
held for sale, or current market values; and (2) adjustments for any gains or
losses on loan commitments for which the interest rate has been established, net
of anticipated underwriting "fallout," adjusted for the cost of hedging these
loan commitments. The increases for 1998 and 1997 are attributable to First
Banks' expansion of its mortgage banking activities into the California market
and the related additional volume of nonconforming loans prominent in that
market.
The interest income on loans held for sale was $6.8 million for the year
ended December 31, 1998 and $3.2 million for the years ended December 31, 1997
and 1996. 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 $102.7 million, $35.4 million and
$36.3 million for the years ended December 31, 1998, 1997 and 1996,
respectively. On an annualized basis, the yield on the portfolio of loans held
for sale was 6.62%, 7.07% and 6.99% for the years ended December 31, 1998, 1997
and 1996, respectively. This compares with First Banks' cost of funds as a
percentage of average interest-bearing liabilities, of 4.74%, 4.88% and 4.91%
for the years ended December 31, 1998, 1997 and 1996, respectively.
<PAGE>
Mortgage loan servicing fees are reported net of amortization of mortgage
servicing rights, interest shortfall and mortgage-backed security guarantee fee
expense. Loan servicing fees, net, were $1.0 million, $1.6 million and $1.8
million for the years ended December 31, 1998, 1997 and 1996, respectively. The
decrease in loan servicing fees is primarily attributable to increased
prepayments resulting in the increase in amortization of mortgage servicing
rights and interest shortfall of $402,000 and $250,000, respectively. In
addition, the mortgage backed security expense increased by $175,000 to $867,000
from $692,000 for the years ended December 31, 1998 and 1997, respectively,
reflecting the increased level of serviced loans sold into the secondary market
in the form of securities. Interest shortfall is the difference between the
interest collected from a loan servicing customer upon prepayment of the loan
and full month's interest which is required to be remitted to the security
owner. Offsetting the decrease was the increase in loan servicing fees resulting
from the increase in the portfolio of loans serviced for others.
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, 1998, 1997 and
1996, First Banks had $103.1 million, $67.4 million and $36.7 million,
respectively, of loans held for sale and related commitments, net of committed
loan sales and estimated underwriting fallout, of which $95.0 million, $60.0
million and $35.0 million, respectively, were hedged through the use of such
forward commitments.
Comparison of Results of Operations for 1998 and 1997
Net Income. Net income for the year ended December 31, 1998 was $33.5
million, compared to $33.0 million for 1997. Earnings per common share were
$1,337.09 per share and $1,134.28 per share, on a diluted basis, for the years
ended December 31, 1998 and 1997, respectively. The increase in diluted earnings
per share primarily reflects the effect of the redemption of the First Banks'
Class C Preferred Stock in 1997, and the resulting reduction of First Banks'
dividend requirement for the year ended December 31, 1998. Dividends paid on the
Class C Preferred Stock totaled $4.3 million for 1997. The funds required for
the redemption were borrowed, resulting in an increase in interest expense of
$3.4 million for 1998. Since the Class C Preferred Stock dividend requirement is
not deducted in the determination of net income, whereas interest expense is,
the effect of this was to reduce 1998 net income by $2.2 million, compared to
1997. The overall improvement in operating results for 1998, as compared to
1997, is attributable to the improvement in the composition of interest earning
assets and liabilities and noninterest income. As previously discussed under
"--Financial Condition and Average Balances" and "--Net Interest Income," net
interest income improved to $166.5 million, or 4.19% of interest earning assets,
from $147.2 million, or 4.09% of interest earning assets, for 1998 and 1997,
respectively. This improvement, coupled with improved noninterest income was
substantially offset by increased noninterest expense. During 1998, noninterest
expense increased to $138.7 million, or 3.24% of average total assets, from
$110.3 million, or 2.89% of average total assets, for 1997. As previously
discussed under "--General" and as more fully described below, the increase in
noninterest expense of $28.4 million, or 0.66% of total average assets, reflects
the additional costs of acquired entities and the continued investment in
improving First Banks' technology and franchise to achieve planned growth.
Provision for Possible Loan Losses. The provision for possible loan losses
was $9.0 million for the year ended December 31, 1998, compared to $11.3 million
for 1997. Net loan charge-offs were $1.7 million for the year ended December 31,
1998, compared to $7.6 million for 1997. The provision for possible loan losses
for 1998 is primarily attributable to the continued growth and changing
composition of the portfolio. As the portfolio has changed 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. Associated with the increased level of commercial lending activities is
the increase in nonperforming and other problem loans of $12.8 million as of
December 31, 1998, compared to December 31, 1997. The increase is primarily
attributable to two loans totaling $6.0 million and the acquisitions of Republic
Bank and Pacific Bay Bank. The following is a summary of loan loss experience
<PAGE>
and nonperforming assets by geographic area for the years ended December 31,
1998 and 1997:
<TABLE>
<CAPTION>
Missouri and
California Texas Illinois Total
------------- -------------- ---------------- ---------------
1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total loans...................... $ 888,540 640,366 201,426 176,341 2,490,139 2,185,493 3,580,105 3,002,200
Total assets..................... 1,203,319 1,042,979 311,732 271,686 3,039,759 2,850,349 4,554,810 4,165,014
Provision for possible loan
losses......................... 1,415 2,500 335 1,500 7,250 7,300 9,000 11,300
Net loan charge-offs............. 344 1,510 245 1,091 1,150 5,001 1,739 7,602
Net loan charge-offs as a
percentage of average loans.... 0.05% 0.30% 0.13% 0.63% 0.05% 0.23% 0.05% 0.27%
Nonperforming loans.............. $ 24,954 5,548 90 211 18,494 18,307 43,538 24,066
Nonperforming assets............. 25,889 7,717 90 296 21,268 23,377 47,247 31,390
</TABLE>
Noninterest Income and Expense. A summary of noninterest income and
noninterest expense for the years ended December 31, 1998
and 1997 appears below:
<TABLE>
<CAPTION>
December 31, Increase (decrease)
------------ -------------------
1998 1997 Amount %
---- ---- ------ -
(dollars expressed in thousands)
Noninterest income:
<S> <C> <C> <C> <C>
Service charges on deposit accounts and customer service fees.... $ 14,876 12,491 2,385 19.09%
Credit card fees................................................. 2,999 2,914 85 2.92
Loan servicing fees, net......................................... 1,017 1,628 (611) (37.53)
Gain on mortgage loans sold and held for sale.................... 5,563 716 4,847 676.96
Trust and brokerage fees......................................... 1,506 893 613 68.65
Net gain on sales of securities.................................. 2,073 2,456 (383) (15.59)
Other............................................................ 8,463 4,599 3,864 84.02
-------- -------- -------
Total noninterest income................................. $ 36,497 25,697 10,800 42.03
======== ======== ======= ======
Noninterest expense:
Salaries and employee benefits................................... $ 55,907 43,011 12,896 29.98%
Occupancy, net of rental income.................................. 11,037 10,617 420 3.96
Furniture and equipment.......................................... 8,122 7,618 504 6.62
Federal Deposit Insurance Corporation premiums................... 1,370 804 566 70.40
Postage, printing and supplies................................... 5,230 4,187 1,043 24.91
Data processing fees............................................. 13,917 8,450 5,467 64.70
Legal, examination and professional fees......................... 5,326 4,587 739 16.11
Credit card...................................................... 3,396 3,343 53 1.59
Communications................................................... 2,874 2,611 263 10.07
Advertising and business development............................. 4,668 4,054 614 15.15
Losses and expenses on other real estate, net of gains........... 81 (331) 412 (124.47)
Guaranteed preferred debentures expense.......................... 9,842 7,322 2,520 34.42
Other............................................................ 16,934 14,014 2,920 20.84
-------- -------- -------
Total noninterest expense............................... $138,704 110,287 28,417 25.77
======== ======== ======= ======
</TABLE>
<PAGE>
Noninterest Income. Noninterest income was $36.5 million for the year ended
December 31, 1998, compared to $25.7 million for 1997. The increase is primarily
attributable to core operating units of First Banks which realized improved
service charges on deposit accounts and customer service fees, gains on mortgage
loans sold and held for sale and trust and brokerage fees.
Service charges on deposit accounts and customer service fees increased to
$14.9 million from $12.5 million for the year ended December 31, 1998 and 1997,
respectively. The increase in service charges corresponds to the increase in
deposit balances provided by internal growth, the acquisitions of Surety Bank,
Pacific Bay Bank and Republic Bank and the additional services available and
utilized by First Banks' commercial customers.
As more fully described under "--Mortgage Banking Activities," First Banks'
mortgage banking revenues consist primarily of loan servicing fees, net, and
gain on mortgage loans sold and held for sale. Loan servicing fees, net,
decreased to $1.0 from $1.6 for the years ended December 31, 1998 and 1997,
respectively. The decrease in loan servicing fees is primarily attributable to
aggregate increases of $827,000 consisting of additional amortization of
mortgage servicing rights and increased interest shortfall and mortgage-backed
security expense. Offsetting the decrease was the increase in loan servicing
fees resulting from the increase in the portfolio of loans serviced for others.
The gain on mortgage loans sold and held for sale increased to $5.6 million
from $716,000 for 1998 and 1997, respectively. This increase is attributable to
an increased volume of loans sold and held for sale including fixed rate
residential mortgage loans, which are sold on a servicing retained basis, and
adjustable-rate and non-conforming residential mortgage loans, which are sold on
a servicing released basis.
The gain on sales of securities was $2.1 and $2.5 million for the years
ended December 31, 1998 and 1997, respectively. For 1998, the gains resulted
from sales of available-for-sale securities to facilitate the funding of loan
growth. As more fully described under "--Comparison of Results of Operations for
1997 and 1996," the gain on sale of securities for 1997 is primarily
attributable to the sales of certain residual securities which had been acquired
by First Banks through an acquisition completed in 1995.
<PAGE>
Other income was $8.5 million and $4.6 million for the years ended December
31, 1998 and 1997, respectively. The primary component of the increase consists
of $3.1 million income on a bank-owned life insurance (BOLI) policy for 1998.
The BOLI balance was $75.7 million and is included in other assets. Other
noninterest income also includes rental fees paid by First Services, L.P. for
the use of data processing and other equipment owned by First Banks of $799,000
and $1.1 million for 1998 and 1997, respectively. See Note 16 to the
consolidated financial statements.. In addition, noninterest income includes
$1.6 million from the repayment of an acquired loan in excess of First Banks'
historical cost basis.
Noninterest Expense. Noninterest expense increased to $138.7 million for
the year ended December 31, 1998 from $110.3 million for 1997. The most
significant changes in noninterest expense were increases in salaries and
employee benefits, data processing fees and guaranteed preferred debentures
expense.
Salaries and employee benefits have increased to $55.9 million from $43.0
million for the years ended December 31, 1998 and 1997, respectively. The
increase is attributable to the newly acquired banks and First Banks' continued
commitment to expanding its commercial, mortgage banking and retail business
development capabilities.
Data processing fees for the year ended December 31, 1998 were $13.9
million, compared to $8.5 million for 1997. Effective April 1, 1997, First
Services, L.P., a limited partnership indirectly owned by First Banks' Chairman
and his immediate family, began providing data processing and related services
for First Banks. FirstServ, Inc. (First Serv), a wholly owned subsidiary of
First Banks, previously provided these services. As a result, expenses related
to data processing and related services were recorded in various noninterest
expense categories for the periods prior to April 1, 1997. Subsequent to that
date, these expenses are reflected as data processing expenses. The increase for
1998 is primarily attributable to the additional services provided by First
Services, L.P. to meet the increasing technology requirements of the banking
industry and the additional costs associated with the data processing
conversions of newly acquired entities and system upgrades. The Year 2000 costs
billed from First Services, L.P. were $600,000 for 1998.
Contributing further to the increase in noninterest expense is the
guaranteed preferred debenture expense. For the years ended December 31, 1998
and 1997, the cost was $9.8 million and $7.3 million, respectively. The increase
for 1998 is attributable to FBA's issuance of FACT Preferred Securities in July
1998 (as described in Note 8 to the consolidated financial statements) and First
Banks' issuance of similar securities in February 1997.
Advertising and business development also increased to $4.7 million from
$4.1 million for the years ended December 31, 1998 and 1997, respectively. The
increase is attributable to programs instituted in prior years and First Banks'
continued commitment to expand its presence in each of its marketplaces. In
addition, other noninterest expense for 1998 includes a $1.1 million charitable
contribution to the Affordable Housing Assistance Program and a $500,000 charge
in settlement of two lawsuits.
<PAGE>
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,
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. See
"--General," Acquisitions" and "Financial Condition and Average Balances."
In February 1997, First Banks, through First Capital, sold $86.25 million
of First Capital Preferred Securities, as described under "--Financial Condition
and Average Balances." Initially, the proceeds of this offering were applied to
the reduction of First Banks' borrowings 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 First Capital 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.
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
improved during 1997, particularly with respect to its Texas and California
banks, First Banks has continued to provide for possible loan losses in
recognition of the overall growth in the loan portfolio as well as its changing
composition. The following is a summary of loan loss experience and
nonperforming assets by geographic area for the years ended December 31, 1997
and 1996:
<TABLE>
<CAPTION>
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>
Noninterest Income and Expense. A summary of noninterest income and
noninterest expense for the years ended December 31, 1997 and 1996 appears
below:
<TABLE>
<CAPTION>
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 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...................................................... 3,343 2,913 430 14.76
Communications................................................... 2,611 2,635 (24) (.91)
Advertising and business development............................. 4,054 2,224 1,830 82.28
(Gain) loss on other 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. 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 Savings 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.
<PAGE>
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.
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. 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
First Capital 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 First Capital 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 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
<PAGE>
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. 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)
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
In connection with its increasing emphasis on internal growth as an
alternative to acquisitions, First Banks' advertising and business development
expense 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 other 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 other 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 of
foreclosure 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 Savings Bank, F.S.B. which were acquired in March and September
1997, and Surety Bank, which was acquired in December 1997.
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
86.7%, 85.7% and 89.2% of total interest income for the years ended December 31,
1998, 1997 and 1996, respectively. Loans, net of unearned discount, were 78.6%,
72.1% and 75.0% of total assets at December 31, 1998, 1997 and 1996,
respectively. Consequently, First Banks views the quality, yield and growth of
the loan portfolio to be primary objectives in its growth and profitability.
As summarized in the composition of the loan portfolio table, during the
five years ended December 31, 1998, total loans, net of unearned discount,
increased 163.2% from $1.36 billion at December 31, 1993 to $3.58 billion at
December 31, 1998. 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, First Banks has been repositioning its portfolio. 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 has been sold in the secondary mortgage market,
and the origination of indirect automobile loans has been substantially reduced.
Consequently, these sectors of the portfolio declined substantially. As a
result, part of the growth in corporate lending has been offset by reductions in
residential real estate and indirect automobile lending.
<PAGE>
In addition, First Banks' acquisitions added substantial portfolios of new
loans. However, many of these portfolios, particularly the acquisitions
completed in 1995, 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 existing relationships.
A summary of the effects of these factors on the loan portfolio for the
four years ended December 31, 1998 follows:
<TABLE>
<CAPTION>
Increase (decrease) in loans for the year ended December 31,
------------------------------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(dollars expressed in thousands)
Internal loan volumes:
<S> <C> <C> <C> <C>
Commercial lending............................. $ 633,660 378,882 209,251 119,017
Residential real estate lending................ (152,849) (144,707) (164,400) (127,648)
Consumer lending, net of unearned discount..... (30,506) (54,305) (82,231) (42,453)
Loans provided by acquisitions...................... 127,600 54,361 61,130 721,733
--------- ---------- --------- ---------
Total increase in loans........................ $ 577,905 234,231 23,750 670,649
========= ========== ========= =========
Increase (decrease) in potential problem loans (1).. $ 12,800 (9,800) (25,500) 52,700
========= ========== ========= =========
</TABLE>
- ---------------------
(1) Potential problem loans include nonperforming loans and other loans
identified by management as having potential credit problems.
First Banks' lending strategy stresses quality, growth and diversification
by 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 and agricultural 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>
The following table shows the composition of the loan portfolio by major
category and the percent of each category to the total portfolio as of the dates
presented:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996 1995 1994
-------------- ------------- ------------- ------------ ------------
Amount % Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ - ------ -
(dollars expressed in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural.. $ 920,007 26.7% $621,618 21.1% $ 457,186 16.7% $ 364,018 13.5% $208,649 10.2%
Real estate construction and
development......................... 720,910 20.9 413,107 14.02 89,378 10.5 209,802 7.8 122,912 6.0
Real estate mortgage:
One-to-four-family residential loans. 739,442 21.5 915,205 31.1 1,059,770 38.7 1,199,491 44.4 967,129 47.1
Other real estate loans.............. 789,735 22.9 713,910 24.3 600,810 21.9 512,264 19.0 332,075 16.1
Consumer and installment, net of
unearned discount................... 274,392 8.0 279,279 9.5 333,340 12.2 413,609 15.3 422,461 20.6
---------- ----- --------- ----- ------- ---- --------- ---- --------- ----
Total loans, excluding
loans held for sale......... 3,444,486 100.0% 2,943,119 100.0% 2,740,484 100.0% 2,699,184 100.0% 2,053,226 100.0%
===== ===== ===== ===== =====
Loans held for sale..................... 135,619 59,081 27,485 45,035 20,344
---------- --------- -------- --------- ---------
Total loans.................... $3,580,105 $3,002,200 $2,767,969 $2,744,219 $2,073,570
========== ========== ========== ========== ==========
</TABLE>
Loans at December 31, 1998 mature as follows:
<TABLE>
<CAPTION>
Over one year
through five
years Over five years
----------------- ---------------
One year Fixed Floating Fixed Floating
or less rate rate rate rate Total
------- ---- ---- ---- ---- -----
(dollars expressed in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural................ $ 755,580 133,905 23,568 6,954 -- 920,007
Real estate construction and development.............. 685,158 17,801 15,979 1,972 -- 720,910
Real estate mortgage.................................. 616,204 612,223 145,003 155,213 534 1,529,177
Consumer and installment, net of unearned discount.... 56,788 205,581 209 11,814 -- 274,392
Loans held for sale................................... 135,619 -- -- -- -- 135,619
---------- ------- ------- -------- ------ ----------
Total loans.................................. $2,249,349 969,510 184,759 175,953 534 3,580,105
========== ======= ========= ======== ====== ==========
</TABLE>
<PAGE>
Following is a summary of loan loss experience for the five years ended
December 31, 1998:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(dollars expressed in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for possible loan losses, beginning
of period......................................... $ 50,509 46,781 52,665 28,410 23,053
Acquired allowances for possible loan losses......... 3,200 30 2,338 24,655 5,026
---------- ---------- -------- --------- ---------
53,709 46,811 55,003 53,065 28,079
---------- ---------- -------- --------- ---------
Loans charged-off:
Commercial, financial and agricultural........... (3,908) (2,308) (8,918) (2,337) (813)
Real estate construction and development......... (185) (2,242) (1,241) (275) (119)
Real estate mortgage............................. (2,389) (6,250) (10,308) (5,948) (1,282)
Consumer and installment......................... (3,701) (6,032) (8,549) (7,060) (4,482)
---------- ---------- --------- --------- ---------
Total.................................... (10,183) (16,832) (29,016) (15,620) (6,696)
---------- ---------- --------- --------- ---------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural........... 3,417 2,146 2,642 1,714 831
Real estate construction and development......... 342 269 495 666 401
Real estate mortgage............................. 2,029 3,666 3,255 290 840
Consumer and installment......................... 2,656 3,149 2,908 2,189 3,097
---------- ---------- -------- --------- ---------
Total.................................... 8,444 9,230 9,300 4,859 5,169
---------- ---------- -------- --------- ---------
Net loans charged-off.................... (1,739) (7,602) (19,716) (10,761) (1,527)
---------- ---------- -------- --------- ---------
Provision for possible loan losses................... 9,000 11,300 11,494 10,361 1,858
---------- ---------- -------- --------- ---------
Allowance for possible loan losses, end of period.... $ 60,970 50,509 46,781 52,665 28,410
========== ========== ======== ========= =========
Loans outstanding:
Average.......................................... $3,250,719 2,846,157 2,726,297 2,598,936 1,616,634
End of period.................................... 3,580,105 3,002,200 2,767,969 2,744,219 2,073,570
End of period, excluding loans held for sale..... 3,444,486 2,943,119 2,740,484 2,699,184 2,053,226
========== ========== ========= ========= =========
Ratio of allowance for possible loan losses to
loans outstanding:
Average..................................... 1.88% 1.77% 1.72% 2.03% 1.76%
End of period............................... 1.70 1.68 1.69 1.92 1.37
End of period, excluding loans held
for sale....................................... 1.77 1.72 1.71 1.95 1.38
Ratio of net charge-offs to average loans
outstanding.................................... .05 0.27 0.72 0.41 0.09
========= ======== ========= ========= =========
Allocation of allowance for possible loan losses
at end of period:
Commercial, financial and agricultural........... $ 19,239 14,879 13,579 12,501 4,160
Real estate construction and development......... 15,073 7,148 4,584 4,665 2,440
Real estate mortgage............................. 18,774 18,317 14,081 19,849 8,051
Consumer and installment......................... 5,180 5,089 10,296 10,016 6,225
Unallocated...................................... 2,704 5,076 4,241 5,634 7,534
---------- --------- -------- --------- ---------
Total.................................... $ 60,970 50,509 46,781 52,665 28,410
========== ========= ======== ========= =========
Percent of categories to loans, net of
unearned discount:
Commercial, financial and agricultural........... 25.70% 20.71% 16.52% 13.27% 10.06%
Real estate construction and development......... 20.14 13.76 10.45 7.65 5.93
Real estate mortgage............................. 42.71 54.26 60.00 62.49 62.66
Consumer and installment......................... 7.66 9.30 12.04 14.95 20.37
Loans held for sale.............................. 3.79 1.97 0.99 1.64 0.98
---------- --------- -------- --------- --------
Total.................................... 100.00% 100.00% 100.00% 100.00% 100.00%
========== ========= ======== ========= ========
</TABLE>
<PAGE>
Following is a summary of nonperforming assets by category:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(dollars expressed in thousands)
Commercial, financial and agricultural:
<S> <C> <C> <C> <C> <C>
Nonaccrual....................................... $ 15,385 4,017 4,113 9,930 2,540
Restructured terms............................... -- -- 130 -- 60
Real estate construction and development:
Nonaccrual....................................... 3,858 4,097 817 2,002 1,448
Real estate mortgage:
Nonaccrual....................................... 18,858 10,402 24,486 27,159 11,637
Restructured terms............................... 5,221 5,456 278 -- 222
Consumer and installment:
Nonaccrual....................................... 216 94 440 300 293
Restructured terms............................... -- -- 5 -- --
---------- -------- --------- --------- ---------
Total nonperforming loans.................. 43,538 24,066 30,269 39,391 16,200
Other real estate.................................... 3,709 7,324 10,607 7,753 6,740
---------- -------- --------- --------- ---------
Total nonperforming assets................ $ 47,247 31,390 40,876 47,144 22,940
========== ======== ========= ========= =========
Loans, net of unearned discount...................... $3,580,105 3,002,200 2,767,969 2,744,219 2,073,570
========== ========= ========= ========= =========
Loans past due 90 days or more and still accruing.... $ 4,674 2,725 3,779 8,474 1,885
========== ======== ========= ========= =========
Allowance for possible loan losses to loans.......... 1.70% 1.68% 1.69% 1.92% 1.37%
Nonperforming loans to loans......................... 1.22 0.80 1.09 1.44 0.78
Allowance for possible loan losses to
nonperforming loans.............................. 140.04 209.88 154.55 133.70 175.37
Nonperforming assets to loans and
other real estate................................ 1.32 1.04 1.47 1.71 1.10
=========== ========= ========= ========= ========
</TABLE>
As of December 31, 1998 and 1997, $21.3 million and $27.9 million,
respectively, of loans not included in the table above were identified by
management as having potential credit problems (Problem Loans) which raised
doubt as to the ability of the borrowers to comply with the present loan
repayment terms. These loans totaled $31.5 million and $47.9 million as of
December 31, 1996 and 1995, respectively.
As previously discussed, certain acquired loan portfolios, particularly
those acquired during 1994 and 1995, exhibited varying degrees of distress prior
to their purchase by First Banks. While these problems had been identified and
considered in the acquisition pricing, the acquisition led to an increase in
nonperforming assets and Problem Loans to $95.0 million at December 31, 1995
from $41.3 million at December 31, 1994. As First Banks worked to correct these
asset quality problems, such assets were reduced to $59.3 million at December
31, 1997. At December 31, 1998, nonperforming assets and Problem Loans increased
to $68.5 million from $59.3 million at December 31, 1997. The increase for 1998
is primarily attributable to two commercial loans totaling $6.0 million, net of
charge-off, the acquisitions of Republic Bank and Pacific Bay Bank and the
overall growth of the loan portfolio, principally within commercial, financial
and agricultural, real estate construction and development, and commercial real
estate loans. While nonperforming assets and Problem Loans have increased during
1998, First Banks does not believe it to be indicative of distress or negative
trends within any of the major loan concentration areas.
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 originated, 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
<PAGE>
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 loan review and
credit administration staff members. 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 loan review and credit
administration staff members generally at the time of the formal watch list
review meetings.
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' average deposit accounts at the dates indicated and the weighted average
interest rates on each category of deposit:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------
1998 1997 1996
---------------------- ------------------------- ------------------------
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................. $ 463,939 12.27% -- $ 394,580 11.77% -- $ 368,786 11.85% --
Interest-bearing demand
deposit...................... 357,463 9.45 1.44 332,712 9.92 1.70 304,247 9.77 1.59
Savings deposits................ 1,076,524 28.48 3.96 761,052 22.70 3.60 683,009 21.94 3.19
Time deposits of $100 or more... 212,691 5.63 5.86 183,223 5.47 6.01 164,453 5.28 5.88
Other time deposits............. 1,669,638 44.17 5.73 1,681,014 50.14 6.01 1,592,657 51.16 6.02
--------- ------ ==== ---------- ------ ==== ---------- ------ ====
Total deposits......... $3,780,255 100.00% $3,352,581 100.00% $3,113,152 100.00%
========== ====== ========== ======= ========== ======
</TABLE>
<PAGE>
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, 1998, 1997 and 1996. The dividends paid on the Class C Preferred Stock,
which was redeemed on December 1, 1997, were $4.28 million and $4.94 million for
the years ended December 31, 1997 and 1996, 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 and 1998, First Banks and FBA formed First Capital
and FACT for the purpose of issuing $86.25 million of First Capital Preferred
Securities and $46.0 of FACT Preferred Securities, respectively. Preferred
securities of these type are considered Tier 1 capital for regulatory purposes.
See Note 18 to the consolidated financial statements.
Liquidity
The liquidity of First Banks and its Subsidiary Banks is the ability to
maintain a cash flow which is adequate to fund operations, service its debt
obligations and meet other commitments on a timely basis. The Subsidiary Banks'
primary sources for liquidity are customer deposits, loan payments, maturities
and sales of investment securities and earnings. In addition, First Banks and
its Subsidiary Banks may avail themselves of more volatile sources of funds
through the issuance of certificates of deposit in denominations of $100,000 or
more, federal funds borrowed, securities sold under agreements to repurchase,
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 $391.4 million and $328.7 million at December
31, 1998 and 1997, respectively.
At December 31, 1998, First Banks' more volatile sources of funds mature as
follows:
(dollars expressed
in thousands)
Three months or less................................... $ 186,526
Over three months through six months................... 59,312
Over six months through twelve months.................. 117,332
Over twelve months..................................... 28,205
----------
Total......................................... $ 391,375
==========
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 First
Capital Preferred Securities and FACT Preferred Securities.
Year 2000 Compatibility
First Banks and the Subsidiary Banks are subject to risks associated with
the "Year 2000" problem, a term which refers to uncertainties about the ability
of various data processing hardware and software systems to interpret dates
correctly surrounding the beginning of the Year 2000. Financial institutions are
particularly vulnerable to Year 2000 issues because of heavy reliance in the
industry on electronic data processing and funds transfer systems.
As described in Note 16 to the consolidated financial statements, data
processing services are provided to First Banks by First Services, L.P. under
the terms of data processing agreements. To address the Year 2000 problem, First
Banks, working jointly with First Services, L.P., has established a dedicated
team to coordinate the overall Year 2000 Preparedness Program (Program) under
the guidelines of the Comprehensive Year 2000 Plan (Plan) as approved by the
Board of Directors. The Plan summarizes each major phase of the Program and the
estimated costs to remediate and test systems in preparation for the Year 2000.
The Plan addresses both Information Technology (IT) projects, such as data
processing and data network applications, and non-IT projects, such as building
facilities and security systems. The major phases of the Program are awareness,
assessment, remediation, validation and implementation.
<PAGE>
The awareness phase included a company-wide campaign to communicate the
Year 2000 problem and the potential ramifications to the organization.
Concurrent with this phase, the Year 2000 Program Team (Team) began the
assessment phase of the Program. The assessment phase included the inventorying
of systems that may be impacted by the Year 2000 problem. The business use of
each inventoried item was analyzed and prioritized from critical to
non-critical, based upon the perceived adverse effect on the financial condition
of First Banks in the event of a loss or interruption in the use of each system.
The awareness and assessment phases of the Program were completed as scheduled.
First Banks' critical systems are purchased from industry-known vendors.
Such systems are generally used in their standard configuration, with minor
modification. Focusing on these critical systems, First Banks is closely
reviewing and monitoring the Year 2000 progress as reported by each vendor and
testing, in most cases, on a system separate from the on-line production system.
The review and testing of critical data processing service providers has
commenced and should be completed by March 31, 1999.
For the critical systems that have been modified, the vendors provided
remediation for such systems that were not otherwise reported as "Year 2000
ready." As the remediation phase was completed within the stated deadline, First
Banks did not invoke any remediation contingency efforts.
Concurrent with the completion of the remediation phase of the Program,
First Banks commenced the final analysis of the validation phase for critical
systems, including remediated systems provided by third party vendors. This
portion of the Program was substantially complete as of December 31, 1998, with
approximately 95% of critical systems tested.
First Banks has accelerated the replacement of its existing teller system
(ISC), since certain functions of ISC were not Year 2000 compliant. Planning for
the replacement of the ISC has been underway for several years with the primary
objectives of adding functionality to meet expanding product and service
offerings and improving efficiency in serving customers. As the newly selected
teller system (CFI) also provided a solution for the Year 2000 problem, the
overall implementation schedule was accelerated. Recognizing the heightened
risks of deploying CFI within the narrowed timeline created by the Year 2000
issue, emphasis was first given to the Year 2000 solution for ISC, with
simultaneous deployment of CFI throughout 1999 and early 2000. The testing of
the Year 2000 solution for ISC has been completed and is available to be
implemented throughout First Banks' branch network by June 30, 1999.
<PAGE>
The testing of CFI was completed by December 31, 1998. The CFI was installed
in selected First Banks test locations during the fourth quarter of 1998. The
estimated cost of the teller replacement is $8.0 million and will be depreciated
to expense over a 60-month period upon installation at each branch location.
First Banks is also upgrading its local area network-based systems, networks and
core processor, and has purchased certain item processing equipment, as the
previous equipment, which is fully depreciated, was not Year 2000 compliant. The
estimated cost of these upgrades and the item processing equipment is $3.9
million and $1.4 million, respectively, and is expected to be depreciated to
expense over 60 months commencing in the first quarter of 1999.
The final phase of the Program is the implementation of remediated and other
systems into the operating environment of First Banks. The final phase of the
Program is scheduled to be completed by June 30, 1999.
First Banks has also assessed the Year 2000 risks relating to its lines of
business separate from its dependence on data processing. The assessment
includes a review of larger commercial loan and deposit customers to ascertain
their overall preparedness regarding Year 2000 risks. The process requires
lending and other banking officers to meet with certain of their customers to
review and assess their overall preparedness for Year 2000 risks. While the
process of evaluating the potential adverse effects of Year 2000 risks on these
customers revealed no probable adverse effect to First Banks, it is not possible
to quantify the overall potential adverse effects to First Banks resulting from
the failure of these customers, or other customers not meeting the review
criteria, to adequately prepare for the Year 2000. The failure of a commercial
bank customer to adequately prepare for Year 2000 could have a significant
adverse effect on such customer's operations and profitability, in turn
inhibiting its ability to repay loans in accordance with their terms or
requiring the use of its deposited funds. First Banks continues to review and
structure certain funding sources to facilitate the Subsidiary Banks' liquidity
requirements under varying cash flow assumptions.
The Plan also provides for the identification and communication with
significant non-data processing third party vendors regarding their preparedness
for Year 2000 risks. While the results of this process have not revealed any
quantifiable loss to First Banks, the absence of certain basic services such as
telecommunications, electric power and service provided by other financial
institutions and governmental agencies would have a serious impact on the
operations of First Banks. The review of significant non-data processing third
party vendors regarding their preparedness for Year 2000 risks will continue in
1999.
The total cost of the Program is currently estimated at $16.2 million,
comprised of capital improvements of $13.3 million and direct expenses
reimbursable to First Services L.P. of $2.9 million. The capital improvements,
as previously discussed, will be charged to expense in the form of depreciation
expense or lease expense, generally over a period of 60 months. First Banks
incurred direct expenses related to the Program of approximately $600,000 for
1998. In addition, First Banks is estimating direct expenses of $1.8 million for
the duration of the Program. The total cost could vary significantly from that
currently estimated for unforeseen circumstances which could develop in carrying
out the Program.
<PAGE>
Concurrent with the development and execution of the Plan is the evolution
of First Banks' Year 2000 Contingency Plan (Contingency Plan). The Contingency
Plan is intended to be a living document changing and developing to reflect the
results, progress and current status of the Program. The Contingency Plan
includes the remediation and business resumption procedures for common systems,
coordinated by the Team, and departmental specific systems, coordinated by the
appropriate departmental manager and the assigned Team member. The Contingency
Plan addresses a variety of issues including critical systems, credit risk,
liquidity, loan and deposit customers, facilities, supplies and computer
hot-site location.
While First Banks is making a substantial effort to become Year 2000
compliant, there is no assurance the Year 2000 problem would not have a material
adverse effect on its financial condition or results of operations.
Effects of New Accounting Standards
First Banks adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 130 -- Reporting Comprehensive Income (SFAS 130)
retroactively on January 1, 1998. SFAS 130 established standards for reporting
and displaying income and its components (revenues, gains and losses) in a full
set of general purpose financial statements. SFAS 130 mandates that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Comparative financial
statements provided for earlier periods have been restated to reflect the
application of SFAS 130. The implementation of SFAS 130 did not have a material
impact on First Banks' consolidated financial statements.
First Banks adopted the provisions of SFAS No. 131 -- Disclosures about
Segments of an Enterprise and Related Information (SFAS 131) on December 31,
1998. SFAS 131 established standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires those enterprises to report selected information about operating
segments in interim financial reports issued to shareholders beginning in 1999.
Additionally, SFAS 131 established 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. The
implementation of SFAS 131 resulted in no effect on First Banks' consolidated
financial statements other than additional disclosure requirements included in
the notes to the consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133 -- Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge in one of three categories described in the pronouncement. The accounting
for changes in the fair value of a derivative (that is, gains and losses)
depends on the intended use of the derivative and the resulting designation.
Under SFAS 133, an entity that elects to apply hedge accounting is required to
establish at the inception of the hedge the method it will use for assessing the
effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. Those methods must be
consistent with the entity's approach to managing risk. SFAS 133 applies to all
entities and is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application should be as of the beginning of an
entity's fiscal quarter; on that date, hedging relationships must be designated
and documented pursuant to the provisions of SFAS 133. Earlier application of
all of the provisions is encouraged but is permitted only as of the beginning of
any fiscal quarter that begins after the issuance date of SFAS 133.
Additionally, SFAS 133 should not be applied retroactively to financial
statements of prior periods. First Banks is currently evaluating SFAS 133 to
determine its potential impact on the consolidated financial statements.
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>
Quarterly Condensed Financial Data (Unaudited)
<TABLE>
<CAPTION>
1998 Quarter Ended
-------------------------------------------
Septem- Decem-
March 31 June 30 ber 30 ber 31
-------- ------- ------ ------
(dollars expressed in thousands)
<S> <C> <C> <C> <C>
Interest income................................................. $ 78,930 80,940 83,777 84,402
Interest expense................................................ 40,601 41,121 40,323 40,323
-------- ------- ------- --------
Net interest income............................. 38,329 39,819 43,454 44,079
Provision for possible loan losses.............................. 2,100 1,850 2,275 2,775
-------- ------- ------- --------
Net interest income after provision
for possible loan losses...................... 36,229 37,969 41,179 41,304
Noninterest income.............................................. 7,794 8,357 9,000 11,346
Noninterest expense............................................. 32,059 35,037 36,106 35,502
-------- ------- ------- --------
Income before provision for income taxes
and minority interest in income
of subsidiaries............................... 11,964 11,289 14,073 17,148
Provision for income taxes...................................... 4,256 4,134 5,079 6,224
-------- ------- ------- --------
Income before minority interest in
income of subsidiaries........................ 7,708 7,155 8,994 10,924
Minority interest in income of subsidiaries..................... 342 279 407 243
-------- ------- ------- --------
Net income...................................... $ 7,366 6,876 8,587 10,681
======== ======= ======= ========
Earnings per share:
Basic....................................................... $ 302.99 285.02 354.65 440.38
Diluted..................................................... 293.85 274.34 343.73 428.42
======== ======= ======= ========
1997 Quarter Ended
------------------------------------------
Septem- Decem-
March 31 June 30 ber 30 ber 31
-------- ------- ------ ------
(dollars expressed in thousands)
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
of subsidiary................................. 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 subsidiary....................... 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
======== ======= ======= ========
</TABLE>
<PAGE>
KPMG 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, 1998 and 1997, and the
related consolidated statements of income, changes in stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/KPMG LLP
-----------
St. Louis, Missouri
March 17, 1999
<PAGE>
Consolidated Balance Sheets
(dollars expressed in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
---- ----
ASSETS
------
Cash and cash equivalents:
<S> <C> <C>
Cash and due from banks........................................................ $ 174,329 142,125
Interest-bearing deposits with other financial institutions
with maturities of three months or less...................................... 3,733 2,840
Federal funds sold............................................................. 36,700 23,515
------------ ---------
Total cash and cash equivalents..................................... 214,762 168,480
------------ ---------
Investment securities:
Trading, at fair value......................................................... 3,425 3,110
Available for sale, at fair value.............................................. 509,695 773,271
Held to maturity, at amortized cost (fair value of $22,568 and
$19,835 at December 31, 1998 and 1997, respectively)......................... 21,676 19,149
------------ ---------
Total investment securities......................................... 534,796 795,530
------------ ---------
Loans:
Commercial, financial and agricultural......................................... 920,007 621,618
Real estate construction and development....................................... 720,910 413,107
Real estate mortgage........................................................... 1,529,177 1,629,115
Consumer and installment....................................................... 282,549 287,752
Loans held for sale............................................................ 135,619 59,081
------------ ---------
Total loans......................................................... 3,588,262 3,010,673
Unearned discount.............................................................. (8,157) (8,473)
Allowance for possible loan losses............................................. (60,970) (50,509)
------------ ---------
Net loans........................................................... 3,519,135 2,951,691
------------ ---------
Bank premises and equipment, net of accumulated
depreciation and amortization.................................................. 63,848 51,505
Intangibles associated with the purchase of subsidiaries........................... 36,534 25,835
Mortgage servicing rights, net of amortization..................................... 9,825 9,046
Accrued interest receivable........................................................ 28,465 28,358
Other real estate.................................................................. 3,709 7,324
Deferred income taxes.............................................................. 46,848 43,355
Other assets....................................................................... 96,888 83,890
------------ ---------
Total assets........................................................ $ 4,554,810 4,165,014
============ =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Consolidated Balance Sheets (Continued)
(dollars expressed in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
---- ----
LIABILITIES
-----------
Deposits:
Demand:
<S> <C> <C>
Non-interest-bearing........................................................ $ 561,383 485,222
Interest-bearing............................................................ 377,435 348,080
Savings....................................................................... 1,198,567 947,029
Time:
Time deposits of $100 or more............................................... 219,996 219,417
Other time deposits......................................................... 1,582,604 1,684,847
----------- ----------
Total deposits.......................................................... 3,939,985 3,684,595
Other borrowings.................................................................. 121,331 54,153
Notes payable..................................................................... 50,048 55,144
Accrued interest payable.......................................................... 5,817 9,976
Deferred income taxes............................................................. 10,920 9,029
Accrued and other liabilities..................................................... 20,652 20,990
Minority interest in subsidiaries................................................. 15,251 16,407
----------- ----------
Total liabilities....................................................... 4,164,004 3,850,294
----------- ----------
Guaranteed preferred beneficial interests in:
First Banks, Inc. subordinated debenture...................................... 83,288 83,183
First Banks America, Inc. subordinated debenture.............................. 44,155 --
----------- -----------
Total guaranteed preferred beneficial interests in
subordinated debentures............................................. 127,443 83,183
----------- -----------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock:
$1.00 par value, 5,000,000 shares authorized, no shares issued
and outstanding at December 31, 1998 and 1997............................... -- --
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................................................................... 780 3,978
Retained earnings................................................................. 231,867 199,143
Accumulated other comprehensive income............................................ 11,738 9,438
----------- ----------
Total stockholders' equity.............................................. 263,363 231,537
----------- ----------
Total liabilities and stockholders' equity.............................. $ 4,554,810 4,165,014
=========== ==========
</TABLE>
<PAGE>
Consolidated Statements of Income
(dollars expressed in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------
1998 1997 1996
---- ---- ----
Interest income:
<S> <C> <C> <C>
Interest and fees on loans............................................... $ 284,366 252,766 237,379
Investment securities:
Taxable............................................................... 39,898 35,248 22,639
Nontaxable............................................................ 985 1,008 1,240
Federal funds sold and other............................................. 2,800 6,079 4,763
--------- -------- -------
Total interest income............................................... 328,049 295,101 266,021
--------- -------- -------
Interest expense:
Deposits:
Interest-bearing demand............................................... 5,135 5,648 4,845
Savings............................................................... 42,591 27,383 22,687
Time deposits of $100 or more......................................... 12,024 10,386 8,977
Other time deposits................................................... 92,305 95,244 88,228
Interest rate exchange agreements, net................................... 3,999 6,574 7,623
Notes payable and other borrowings....................................... 6,314 3,596 9,310
--------- -------- -------
Total interest expense.............................................. 162,368 148,831 141,670
--------- -------- -------
Net interest income................................................. 165,681 146,270 124,351
Provision for possible loan losses........................................... 9,000 11,300 11,494
--------- -------- -------
Net interest income after provision for possible loan losses........ 156,681 134,970 112,857
--------- -------- -------
Noninterest income:
Service charges on deposit accounts and customer service fees............ 14,876 12,491 12,521
Credit card fees......................................................... 2,999 2,914 2,475
Loan servicing fees, net................................................. 1,017 1,628 1,837
Gain on mortgage loans sold and held for sale............................ 5,563 716 40
Net gain (loss) on sales of available for sale securities................ 1,466 2,335 (311)
Net gain on sales of trading securities.................................. 607 121 --
Other.................................................................... 9,969 5,492 4,159
--------- -------- -------
Total noninterest income............................................ 36,497 25,697 20,721
--------- -------- -------
Noninterest expense:
Salaries and employee benefits........................................... 55,907 43,011 39,995
Occupancy, net of rental income.......................................... 11,037 10,617 9,758
Furniture and equipment.................................................. 8,122 7,618 7,218
Federal Deposit Insurance Corporation premiums........................... 1,370 804 11,715
Postage, printing and supplies........................................... 5,230 4,187 4,687
Data processing fees..................................................... 13,917 8,450 4,477
Legal, examination and professional fees................................. 5,326 4,587 4,901
Credit card.............................................................. 3,396 3,343 2,913
Communications........................................................... 2,874 2,611 2,635
Advertising and business development..................................... 4,668 4,054 2,224
Losses and expenses on other real estate, net of gains................... 81 (331) 1,927
Guaranteed preferred debentures.......................................... 9,842 7,322 --
Other.................................................................... 16,934 14,014 13,291
--------- -------- -------
Total noninterest expense........................................... 138,704 110,287 105,741
--------- -------- -------
Income before provision for income taxes and minority interest
in income of subsidiary........................................... 54,474 50,380 27,837
Provision for income taxes................................................... 19,693 16,083 6,960
--------- -------- -------
Income before minority interest in income of subsidiary............. 34,781 34,297 20,877
Minority interest in income of subsidiary.................................... 1,271 1,270 659
--------- -------- -------
Net income.......................................................... 33,510 33,027 20,218
Preferred stock dividends.................................................... 786 5,067 5,728
--------- -------- -------
Net income available to common stockholders......................... $ 32,724 27,960 14,490
========= ======== =======
Earnings per common share:
Basic.................................................................... $1,383.04 1,181.69 612.46
Diluted.................................................................. 1,337.09 1,134.28 596.83
========= ======== =======
Weighted average shares of common stock outstanding.......................... 23,661 23,661 23,661
========= ======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
and Comprehensive Income
(dollars expressed in thousands, except per share data)
Three years ended December 31, 1998
<TABLE>
<CAPTION>
Class C Accu-
preferred Adjustable rate mulated
stock, preferred stock other Total
---------------
increasing Class A Compre- compre- stock-
rate, conver- Common Capital hensive Retained hensive holders'
redeemable tible Class B tock surplus income earnings income equity
---------- ----- ------- ----- ------- ------ -------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated balances, January 1, 1996........... $ 55,000 12,822 241 5,915 4,307 156,692 (372) 234,605
Year ended December 31, 1996:
Comprehensive income:
Net income................................. -- -- -- -- -- 20,218 20,218 -- 20,218
Other comprehensive income, net of tax (1)
Unrealized gains on securities, net of
reclassification adjustment (2)......... -- -- -- -- -- 4,425 -- 4,425 4,425
------
Comprehensive income....................... -- -- -- -- -- 24,643
======
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 stock........................... (1,113) -- -- -- (26) -- -- (1,139)
Effect of capital stock transactions of
majority-owned subsidiaries............... -- -- -- -- (992) -- -- (992)
------- ----- ---- ---- ----- ------- ----- --------
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:
Comprehensive income:
Net income................................. -- -- -- -- -- 33,027 33,027 -- 33,027
Other comprehensive income, net of tax (1)
Unrealized gains on securities, net of
reclassification adjustment (2)......... -- -- -- -- -- 5,385 -- 5,385 5,385
-------
Comprehensive income....................... -- -- -- -- -- 38,412
=======
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 stock........................... (6,774) -- -- -- (161) -- -- (6,935)
Redemption of Class C preferred stock........ (47,113) -- -- -- -- -- -- (47,113)
Effect of capital stock transactions of
majority-owned subsidiaries............... -- -- -- -- 850 -- -- 850
------- ----- ---- ---- ----- ------- ----- -------
Consolidated balances, December 31, 1997......... -- 12,822 241 5,915 3,978 199,143 9,438 231,537
Year ended December 31, 1998:
Comprehensive income:
Net income................................. -- -- -- -- -- 33,510 33,510 -- 33,510
Other comprehensive income, net of tax (1)
Unrealized gains on securities, net of
reclassification adjustment (2)......... -- -- -- -- -- 2,300 -- 2,300 2,300
-------
Comprehensive income....................... -- -- -- -- -- 35,810
=======
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 subsidiaries............... -- -- -- -- (3,198) -- -- (3,198)
-------- ----- ---- ----- ------ ------- ----- -------
Consolidated balances, December 31, 1998......... $ -- 12,822 241 5,915 780 231,867 11,738 263,363
======== ====== ==== ===== ====== ======= ====== =======
</TABLE>
- ---------------
<PAGE>
(1) Components of other comprehensive income are shown net of tax.
(2) Disclosure of reclassification adjustment:
<TABLE>
<CAPTION>
Three years ended December 31, 1998
-----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Unrealized gains arising during the period................................................... $3,253 6,903 4,223
Less: reclassification adjustment for gains (losses) included in net income.................. 953 1,518 (202)
------ ----- -----
Unrealized gain on securities................................................................ $2,300 5,385 4,425
====== ===== =====
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Consolidated Statements of Cash Flows
(dollars expressed in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income.................................................................. $ 33,510 33,027 20,218
Adjustments to reconcile net income to net cash (used in
provided by operating activities:
Depreciation and amortization of bank premises and equipment............. 5,293 5,687 5,784
Amortization, net of accretion........................................... 10,494 9,512 12,481
Originations and purchases of loans held for sale........................ (628,544) (174,330) (135,792)
Proceeds from the sale of loans held for sale............................ 520,994 148,350 113,074
Provision for possible loan losses....................................... 9,000 11,300 11,494
Provision for income taxes............................................... 19,693 16,083 6,960
Payments of income taxes................................................. (16,091) (17,976) (7,655)
Decrease (increase) in accrued interest receivable....................... 256 (5,107) (623)
Net decrease in trading securities....................................... (315) (3,110) --
Interest accrued on liabilities.......................................... 162,368 148,831 141,670
Payments of interest on liabilities...................................... (167,090) (149,380) (142,210)
Other operating activities, net.......................................... (5,582) (7,284) (6,637)
Minority interest in income of subsidiaries.............................. 1,271 1,270 659
-------- ------- --------
Net cash (used in) provided by operating activities.................... (54,743) 16,873 19,423
-------- ------- --------
Cash flows from investing activities:
Cash paid for acquired entities, net of cash and cash equivalents received.. 29,339 84,556 10,715
Proceeds from sales of investment securities available for sale............. 136,042 20,930 91,147
Maturities of investment securities available for sale...................... 395,961 447,547 440,314
Maturities of investment securities held to maturity........................ 2,314 1,804 14,643
Purchases of investment securities available for sale....................... (167,082) (686,474) (527,091)
Purchases of investment securities held to maturity......................... (4,910) (844) (916)
Net (increase) decrease in loans............................................ (443,741) (174,804) 20,350
Recoveries of loans previously charged-off.................................. 8,444 9,230 9,300
Purchases of bank premises and equipment.................................... (14,851) (6,413) (3,299)
Other investing activities.................................................. (13,919) (54,681) 10,657
-------- ------- --------
Net cash (used in) provided by investing activities.................... (72,403) (359,149) 65,820
-------- -------- --------
Cash flows from financing activities:
Increase (decrease) in demand and savings deposits.......................... 258,757 304,193 (20,466)
Decrease in time deposits................................................... (171,207) (8,348) (15,804)
Decrease in federal funds purchased......................................... -- -- (3,000)
Increase (decrease) in Federal Home Loan Bank advances...................... 48,485 (37,218) (10,606)
Increase in securities sold under agreements to repurchase.................. 18,692 21,390 13,525
Decrease in notes payable................................................... (24,637) (21,186) (13,284)
Purchase and retirement of Class C preferred stock.......................... -- (54,048) (1,139)
Proceeds from issuance of guaranteed preferred subordinated debentures...... 44,124 83,086 --
Payment of preferred stock dividends........................................ (786) (5,067) (5,728)
-------- ------- --------
Net cash provided by (used in) financing activities.................... 173,428 282,802 (56,502)
-------- ------- --------
Net increase (decrease) in cash and cash equivalents................... 46,282 (59,474) 28,741
Cash and cash equivalents, beginning of year.................................... 168,480 227,954 199,213
-------- ------- --------
Cash and cash equivalents, end of year.......................................... $214,762 168,480 227,954
======== ======= ========
Noncash investing and financing activities:
Loans transferred to other real estate...................................... $ 3,067 4,295 10,451
Loans exchanged for and transferred to available-for-sale
investment securities..................................................... 65,361 -- --
Loans held for sale exchanged for and transferred to
available-for-sale investment securities.................................. 23,898 -- --
Loans transferred to held for sale.......................................... -- -- 39,996
======== ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements of First Banks, Inc. and
subsidiaries (First Banks) have been prepared in accordance with generally
accepted accounting principles and conform to practices prevalent among
financial institutions. The following is a summary of the more significant
accounting 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 1997 and 1996 amounts have been reclassified to conform with
the classifications and format used for 1998.
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 wholly owned subsidiaries:
First Bank Texas N.A., headquartered in Houston, Texas (FB Texas).
First Bank of California, headquartered in Roseville, California (FB
California).
CCB Bancorp, Inc., headquartered in Newport Beach, California
(CCB), and its wholly owned subsidiary:
First Bank & Trust, headquartered in Newport Beach, California (FB&T).
The Subsidiary Banks are wholly owned by their respective parent companies
except FBA, which was 76.8% owned by First Banks at December 31, 1998. In
addition, on February 17, 1999, First Banks completed its purchase of 314,848
shares of FBA common stock, pursuant to a tender offer to purchase up to 400,000
shares of FBA common stock. This tender offer increased First Banks' ownership
interest in FBA to 82.3% of the outstanding voting stock of FBA.
On February 2, 1998, First Commercial Bancorp, Inc., a majority-owned
subsidiary of First Banks' was acquired by FBA, and its subsidiary bank, First
Commercial Bank, was merged into FB California. The combination of these
entities did not have a material impact on the results of operations of First
Banks.
Cash and Cash Equivalents. Cash, due from banks, federal funds sold, and
interest-bearing deposits with original maturities of three months or less are
considered to be cash and cash equivalents for purposes of the consolidated
statements of cash flows. The Subsidiary Banks are required to maintain certain
daily reserve balances on hand in accordance with regulatory requirements. The
reserve balances maintained in accordance with such requirements at December 31,
1998 and 1997 were $49.4 million and $31.3 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.
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.
<PAGE>
Loans Held for Portfolio. Loans held for portfolio are carried at cost,
adjusted for amortization of premiums and accretion of discounts using the
interest 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 that First Banks 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 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
utilizes 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 mortgage
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. The excess of cost over net assets acquired of purchased
subsidiaries is amortized using the straight-line method over the estimated
periods to be benefited, which range from approximately 10 to 15 years.
Mortgage Servicing Rights. Mortgage servicing rights are amortized in
proportion to the related estimated net servicing income on a disaggregated,
discounted basis over the estimated lives of the related mortgages considering
the level of current and anticipated repayments, which range from five to 12
years.
Other Real Estate. Other real estate, consisting of real estate acquired
through foreclosure or deed in lieu of foreclosure, is stated at the lower of
fair value less applicable selling costs. 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.
<PAGE>
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 Banks 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
subsidiaries file a consolidated federal income tax return which is separate
from that of First Banks.
Earnings Per Common Share. 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.
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.
First Banks is party to commitments to extend credit and commercial and
standby letters of credit in the normal course of business to meet the financing
needs of its customers. These commitments involve, in varying degrees, elements
of interest rate risk and credit risk in excess of the amount recognized in the
consolidated balance sheets.
Interest Rate Swap, Floor and Cap Agreements. Interest rate swap, floor and
cap agreements are accounted for on an accrual basis with the net interest
differential being recognized as an adjustment to interest expense of the
related liability. Premiums and fees paid upon the purchase of interest rate
swap, floor and cap agreements are amortized to interest expense over the life
of the agreement using the interest method. In the event of early termination of
these derivative financial instruments, the net proceeds received or paid are
deferred and amortized over the shorter of the remaining contract life of the
derivative financial instrument or the maturity of the related liability. If,
however, the amount of the underlying hedged liability is repaid, then the gains
or losses on the agreements are recognized immediately in the consolidated
statements of income. The unamortized premiums, fees paid and deferred losses on
early terminations are included in other assets in the accompanying consolidated
balance sheets.
Interest Rate Futures Contracts. Gains and losses on interest rate futures,
which qualify as hedges, are deferred. Amortization of the net deferred gains or
losses is applied to the interest income of the securities available-for-sale
portfolio using the straight-line method. The net deferred gains and losses are
applied to the carrying value of the securities available-for-sale portfolio as
part of the mark-to-market valuation. In the event the hedged assets are sold,
the related gain or loss of the interest rate futures contracts is immediately
recognized in the consolidated statements of income.
Forward Contracts to Sell Mortgage-Backed Securities. Gains and losses on
forward contracts, which qualify as hedges, are deferred. The net unamortized
balance of such deferred gains and losses is applied to the carrying value of
the loans held for sale as part of the lower of cost or market valuation.
<PAGE>
(2) ACQUISITIONS
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
Savings Bank, F.S.B. 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.
On February 2, 1998, FBA completed its acquisition of Pacific Bay Bank, San
Pablo, California (Pacific Bay). Under the terms of the Pacific Bay Agreement,
Pacific Bay shareholders received $14.00 per share in cash for their stock, an
aggregate of $4.2 million. At the time of the transaction, Pacific Bay Bank had
$38.3 million in total assets, $7.4 million in cash and cash equivalents, $29.7
million in total loans, net of unearned discount, and $35.2 million in total
deposits. The excess of the cost over the fair value of the net assets acquired
was $1.5 million and is being amortized over 15 years. This transaction was
funded from an advance under First Banks' $90 million credit agreement with a
group of unaffiliated financial institutions (Credit Agreement).
On March 19, 1998, First Banks completed its assumption of the deposits and
purchase of selected assets of the Solvang, California banking location of Bank
of America. The transaction resulted in the acquisition of approximately $15.5
million in deposits and one office that operates as a branch of FB&T. The excess
of the cost over the fair value of the net assets acquired was $1.8 million and
is being amortized over 15 years.
On September 15, 1998, First Banks completed its acquisition of Republic
Bank for cash consideration of $19.3 million. Republic Bank had $124.1 million
in total assets, $97.9 million in loans, net of unearned discount, and $117.2
million in deposits at the date of acquisition. Republic Bank, previously
headquartered in Torrance, California, was merged into and operates as branch
offices of FB&T. The transaction was funded from available cash of $3.3 million
and borrowings of $16.0 million under the Credit Agreement. The excess of the
cost over the fair value of the net assets acquired was $10.2 million and is
being amortized over 15 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.
In addition, on March 4, 1999, FBA completed its acquisition of Redwood
Bancorp and its wholly owned subsidiary, Redwood Bank, for cash consideration of
$26.0 million. Redwood Bank is headquartered in San Francisco, California and
operates four banking locations in the San Francisco Bay area. Redwood Bank had
$184 million in total assets, $134 million in loans, net of unearned discount,
$32 million in investment securities and $163 million in deposits at the
acquisition date. Redwood Bank is operating as a subsidiary of FBA.
<PAGE>
(1) 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, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
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, 1998:
Carrying value:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury.................. $ 54,288 84,990 -- -- 139,278 2,312 -- 141,590 5.98%
U.S. government agencies
and corporations:
Mortgage-backed............. 11,642 27,334 32,352 113,912 185,240 1,082 (171) 186,151 6.35
Other....................... 16,893 78,047 35,524 6,980 137,444 1,060 (15) 138,489 6.07
Equity investments in other
financial institutions....... 8,805 -- -- -- 8,805 14,061 -- 22,866 4.75
Federal Home Loan Bank and
Federal Reserve Bank stock... 20,599 -- -- -- 20,599 -- -- 20,599 6.36
--------- -------- ------- ------- ------- ----- ----- ------
Total................. $ 112,227 190,371 67,876 120,892 491,366 18,515 (186) 509,695 6.14
========= ======== ======= ======= ======= ====== ===== ======= ======
Market value:
Debt securities................ $ 83,324 193,231 68,135 121,540
Equity securities.............. 43,465 -- -- --
--------- -------- ------- -------
Total................. $ 126,789 193,231 68,135 121,540
========= ======== ======= =======
Weighted average yield............ 5.92% 5.96% 6.36% 6.51%
==== ==== ==== ====
December 31, 1997:
Carrying value:
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%
==== ==== ==== ====
</TABLE>
<PAGE>
Securities Held to Maturity. The amortized cost, contractual maturity,
unrealized gains and losses and fair value of investment securities held to
maturity at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
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, 1998:
Carrying value:
U.S. Government Agencies
and Corporations:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed........... $ -- -- -- 2,507 2,507 -- (13) 2,494 6.41%
State and political
subdivisions............. 776 7,323 8,700 2,085 18,884 897 -- 19,781 5.38
Other........................ 75 210 -- -- 285 8 -- 293 6.68
------ ----- ----- ----- ------- --- ---- -------
Total.................. $ 851 7,533 8,700 4,592 21,676 905 (13) 22,568 5.51
====== ===== ===== ===== ======= ==== ==== ======= ====
Market value:
Debt securities........ $ 862 7,777 8,986 4,943
====== ===== ===== =====
Weighted average yield............. 5.21% 5.43% 4.96% 6.69%
==== ==== ==== ====
December 31, 1997:
Carrying value:
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%
==== ==== ==== ====
</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 trading were $311 million
and $215 million for the years ended December 31, 1998 and 1997, respectively.
Gross gains of $879,000 and $233,000 and gross losses of $234,000 and $122,000
were realized on these sales for the years ended December 31, 1998 and 1997,
respectively. There was no trading activity during 1996.
Proceeds from sales of securities designated as available for sale were
$136.0 million and $20.9 million for the years ended December 31, 1998 and 1997,
respectively. Gross gains of $1.5 million and $2.3 million were realized on
these sales. No losses were realized in 1998 and 1997.
Proceeds from the sales of debt securities classified as available for sale
during 1996 were $91.1 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.
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 FB Texas 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 FB Texas are
members of the FRB system.
Investment securities with a carrying value of approximately $263.0 million
and $209.1 million were pledged in connection with deposits of public and trust
funds and for other purposes as required by law at December 31, 1998 and 1997,
respectively.
<PAGE>
(4) LOANS
Changes in the allowance for possible loan losses for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(dollars expressed in thousands)
<S> <C> <C> <C>
Balance, January 1..................................... $ 50,509 46,781 52,665
Acquired allowances for possible loan losses........... 3,200 30 2,338
-------- -------- --------
53,709 46,811 55,003
-------- -------- --------
Loans charged-off...................................... (10,183) (16,832) (29,016)
Recoveries of loans previously charged-off............. 8,444 9,230 9,300
-------- -------- --------
Net loans charged-off.................................. (1,739) (7,602) (19,716)
-------- -------- --------
Provision charged to operations........................ 9,000 11,300 11,494
-------- -------- --------
Balance, December 31................................... $ 60,970 50,509 46,781
======== ======== ========
</TABLE>
At December 31, 1998 and 1997, First Banks had $38.3 million and $18.6
million, respectively, of loans on nonaccrual status. Interest on nonaccrual
loans, which would have been recorded under the original terms of the loans, was
$4.5 million, $4.7 million and $4.2 million for the years ended December 31,
1998, 1997 and 1996, respectively. Of these amounts, $1.9 million, $2.0 million
and $2.7 million was actually recorded as interest income on such loans in 1998,
1997 and 1996, respectively. At December 31, 1998 and 1997, First Banks had
impaired loans in the amount of $43.5 million and $29.5 million, respectively,
consisting of $38.3 million and $24.1 million of loans on nonaccrual status,
respectively. At December 31, 1998, impaired loans also include $5.2 million of
restructured loans. Impaired loans had an allocation of the allowance for
possible loan losses of $8.3 million and $5.7 million at December 31, 1998 and
1997, respectively. In addition, certain impaired loans had specific reserves of
$1.7 million at December 31, 1997. There were no specific reserves at December
31, 1998 relating to impaired loans. The average recorded investment in impaired
loans was $35.7 million, $28.3 million and $36.2 for the years ended December
31, 1998, 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 $2.3 million and $2.4 million in 1998 and 1997, respectively.
First Banks' primary market areas are the states of Missouri, Illinois and
California. At December 31, 1998 and 1997, 89% and 88% of the total loan
portfolio and 91% and 93% of the commercial, financial and agricultural loan
portfolio were to borrowers within these regions, respectively.
Real estate lending constituted the only other significant concentration of
credit risk. Real estate loans comprised approximately 67% and 70% of the loan
portfolio at December 31, 1998 and 1997, respectively, of which 38% and 48% 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, 1998 and
1997, 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, 1998 and 1997, First Banks serviced loans for others
amounting to $923 million and $784 million, respectively. Borrowers' escrow
balances held by First Banks on such loans were $1.2 million and $2.2 million at
December 31, 1998 and 1997, respectively.
<PAGE>
Changes in the mortgage servicing rights for the years ended December 31
were as follows:
1998 1997
---- ----
(dollars expressed
in thousands)
Balance, January 1................................ $ 9,046 10,230
Originated mortgage servicing rights.............. 2,195 718
Purchases of mortgage servicing rights............ 893 5
Amortization...................................... (2,309) (1,907)
------ ------
Balance, December 31.............................. 9,825 9,046
======= =======
(6) BANK PREMISES AND EQUIPMENT
Bank premises and equipment were comprised of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
(dollars expressed in thousands)
<S> <C> <C>
Land................................................................. $ 15,703 14,213
Buildings and improvements........................................... 49,082 39,922
Furniture, fixtures and equipment.................................... 42,161 37,597
Leasehold improvements............................................... 8,657 6,851
Construction in progress............................................. 3,466 3,536
--------- --------
119,069 102,119
Less accumulated depreciation and amortization....................... 55,221 50,614
--------- --------
Bank premises and equipment, net................................. $ 63,848 51,505
========= ========
</TABLE>
First Banks leases land, office properties and some equipment under
operating leases. Certain of the leases contain renewal options and escalation
clauses. Total rent expense was $5.3 million, $5.0 million and $4.2 million for
the years ended December 31, 1998, 1997 and 1996, respectively. Future minimum
lease payments under noncancellable operating leases extend through 2019 as
follows:
<TABLE>
<CAPTION>
(dollars expressed in thousands)
Year ending December 31:
<S> <C> <C>
1999.......................................................... $ 4,652
2000.......................................................... 4,209
2001.......................................................... 3,461
2002.......................................................... 2,414
2003.......................................................... 2,230
Thereafter.................................................... 7,630
---------
Total minimum lease payments.............................. $ 24,596
=========
</TABLE>
First Banks leases to unrelated parties a portion of its owned banking
facilities. Total rental income was $2.5 million, $2.3 million and $1.7 million
for the years ended December 31, 1998, 1997 and 1996, respectively.
(7) NOTES PAYABLE
First Banks has a $90.0 million revolving line of credit (Credit Agreement)
with a group of unaffiliated banks. The Credit Agreement, dated August 26, 1998,
replaced a similar revolving and term credit agreement dated November 24, 1997.
Interest under the Credit Agreement is payable at the lead bank's corporate base
rate or, at the option of First Banks, is payable at the Eurodollar Rate plus a
margin based upon the outstanding loans and First Banks' profitability. The
interest rate for borrowings under the Credit Agreement was 6.26% at December
31, 1998, or the applicable Eurodollar Rate plus a margin of 1.00%. Interest is
generally paid monthly. Amounts may be borrowed under the Credit Agreement until
August 23, 1999, at which date the 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 $50 million in outstanding borrowings at December 31, 1998. There was
$55.0 million in outstanding borrowings under the previous credit agreement at
December 31, 1997.
<PAGE>
The Credit Agreement requires maintenance of certain minimum capital ratios
for each financial institution subsidiary. In addition, it prohibits the payment
of dividends on First Banks' common stock. At December 31, 1998 and 1997, First
Banks and the Subsidiary Banks were in compliance with all restrictions and
requirements of the respective credit agreements.
The balance of the other note payable was $48,000 and $144,000 at December
31, 1998 and 1997, respectively. Interest under the note payable is 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:
<TABLE>
<CAPTION>
1998 1997
---- ----
(dollars expressed in thousands)
<S> <C> <C>
Average balance........................................................... $ 50,718 17,883
Maximum month-end balance................................................. 55,096 75,213
======== ======
</TABLE>
The average rates paid on notes payable outstanding during the years ended
December 31, 1998, 1997 and 1996 were 6.85%, 7.69% and 7.30%, respectively.
(8) GUARANTEED PREFERRED BENEFICIAL INTERESTS IN FIRST BANKS, INC. AND FIRST
BANKS AMERICA, 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 (First Capital
Preferred Securities) at $25 per share in an underwritten public offering, and
issued 106,702 shares of common securities to First Banks at $25 per share.
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 Debenture (First Banks Subordinated Debenture) 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 are met. The First Banks Subordinated Debentures are the
sole asset of First Capital. In connection with the issuance of the First
Capital Preferred Securities, First Banks made certain guarantees and
commitments. First Banks' proceeds from the issuance of the First Banks
Subordinated Debentures to First Capital, net of underwriting fees and offering
expenses, were $83.1 million. Distributions payable on the First Capital
Preferred Securities were $8.0 million and $7.3 million for the years ended
December 31, 1998 and 1997, respectively, and are included in noninterest
expense in the consolidated financial statements.
On July 21, 1998, First America Capital Trust (FACT), a newly-formed
Delaware business trust subsidiary of FBA, issued 1.84 million shares of 8.50%
cumulative trust preferred securities (FACT Preferred Securities) at $25 per
share in an underwritten public offering, and issued 56,908 shares of common
securities to FBA at $25 per share. FBA owns all of FACT's common securities.
The gross proceeds of the offering were used by FACT to purchase $47.4 million
of 8.50% Subordinated Debentures (FBA Subordinated Debentures) from FBA,
maturing on June 30, 2028. The maturity date may be shortened to a date not
earlier than June 30, 2003 or extended to a date not later than June 30, 2037 if
certain conditions are met. The FBA Subordinated Debentures are the sole asset
of FACT. FBA made certain guarantees and commitments relating to the FACT
Preferred Securities. FBA's proceeds from the issuance of the FBA Subordinated
Debentures to First Capital, net of underwriting fees and offering expenses,
were $44.1 million. Distributions payable on the FACT Preferred Securities were
$1.8 million for the year ended December 31, 1998 and are included in
noninterest expense in the consolidated financial statements.
<PAGE>
(9) INCOME TAXES
Income tax expense attributable to income from continuing operations for the
years ended December 31 is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(dollars expressed in thousands)
Current income taxes:
<S> <C> <C> <C>
Federal..................................................... $ 16,801 15,062 6,106
State....................................................... 1,292 169 1,068
-------- ------- -------
18,093 15,231 7,174
-------- ------- -------
Deferred income taxes:
Federal..................................................... 1,895 2,608 1,837
State....................................................... 273 24 3,192
-------- ------- -------
2,168 2,632 5,029
-------- ------- -------
Reduction in valuation allowance................................ (568) (1,780) (5,243)
-------- ------- -------
Total............................................... $ 19,693 16,083 6,960
======== ======= =======
</TABLE>
The federal income tax rates and amounts are reconciled with the effective
income tax rates and amounts as follows:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------------
1998 1997 1996
----------------- -------------- ---------------
% of % of % of
pretax pretax pretax
Amount income Amount income Amount income
------ ------ ------ ------ ------ ------
(dollars expressed in thousands)
Income before provision for income taxes and
<S> <C> <C> <C>
minority interest in income of subsidiary.. $54,474 $50,380 $ 27,837
======= ======= ==========
Taxes on income calculated at statutory rates.. $19,066 35.0% $17,633 35.0% $ 9,743 35.0%
Effects of differences in tax reporting:
Tax-exempt interest income.................. (529) (1.0) (576) (1.1) (730) (2.6)
Tax preference adjustment of
interest income.......................... 68 0.1 69 0.1 82 0.3
Amortization of excess cost................. 864 1.6 754 1.5 729 2.6
State income taxes.......................... 1,018 1.9 126 0.3 715 2.6
Change in deferred valuation allowance...... (568) (1.0) (1,780) (3.5) (5,243) (18.8)
Other, net.................................. (226) (0.4) (143) (0.4) 1,664 5.9
------- ----- ------- ---- ------- -----
Provision for income taxes.......... $19,693 36.2% $16,083 31.9% $ 6,960 25.0%
======= ===== ======= ==== ======== ======
</TABLE>
<PAGE>
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.
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
---- ----
(dollars expressed in thousands)
Deferred tax assets:
<S> <C> <C>
Allowance for possible loan losses.................................... $ 22,596 19,665
Other real estate..................................................... 1,228 971
Alternative minimum tax credits....................................... 2,612 2,067
Book losses on investment securities currently not allowable
for tax purposes................................................... 2,266 1,958
Net operating loss carryforwards...................................... 31,311 33,080
Other................................................................. 4,014 3,361
-------- --------
Gross deferred tax assets..................................... 64,027 61,102
Less valuation allowance.............................................. (17,179) (17,747)
-------- --------
Deferred tax assets, net of valuation allowance............... 46,848 43,355
-------- --------
Deferred tax liabilities:
Depreciation on bank premises and equipment........................... 2,707 1,860
FHLB stock dividends.................................................. 1,114 1,269
State taxes........................................................... 518 307
Net fair value adjustment for securities available for sale........... 6,414 5,142
Other................................................................. 167 451
-------- --------
Deferred tax liabilities...................................... 10,920 9,029
-------- --------
Net deferred tax assets....................................... $ 35,928 34,326
======== ========
</TABLE>
At December 31, 1998 and 1997, the accumulation of prior years' earnings
representing tax bad debt deductions of First Bank and FB&T were approximately
$30.8 million and $600,000, respectively. If these tax bad debt reserves were
charged for losses other than bad debt losses, First Bank and FB&T would be
required to recognize taxable income in the amount of the charge. It is not
contemplated that such tax-restricted retained earnings will be used in a
manner, which would create federal income tax liabilities.
<PAGE>
At December 31, 1998 and 1997, for federal income taxes purposes, First
Banks had net operating loss (NOL) carryforwards of approximately $59.0 million
and $57.3 million, respectively, exclusive of the NOL carryforwards available to
FBA as further described below. The NOL carryforwards for First Banks expire as
follows:
(dollars expressed in thousands)
Year ending December 31:
2002...................................... $ 689
2003...................................... 7,470
2004...................................... 1,703
2005...................................... 13,171
2006 - 2017............................... 35,960
---------
$ 58,993
=========
At December 31, 1998 and 1997, for federal income tax purposes, FBA had NOL
carryforwards of approximately $30.5 million and $34.3 million, respectively.
With the completion of the acquisitions of FBA and FCB and their subsequent
merger, the NOL carryforwards generated prior to the transactions 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. The NOL carryforwards
at December 31, 1998 expire as follows:
(dollars expressed in thousands)
Year ending December 31:
1999............................................. $ 4,883
2000............................................. 103
2001............................................. 1,667
2002............................................. 2,316
2003 - 2018...................................... 21,498
--------
$ 30,467
========
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 $35.9 million. The net change
in the valuation allowance, related to deferred tax assets, was a decrease of
$568,000 for the year ended December 31, 1998. The decrease was comprised of the
following components: (1) a reduction of $600,000 related to the recognition of
deferred tax assets for certain loans and other real estate and utilization of
NOL carryforwards; and (2) the establishment of $32,000 of additional valuation
reserves resulting from NOLs at First Commercial Bancorp, Inc., which occurred
prior to the merger with FBA.
Changes to the deferred tax assets valuation allowance are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997
---- ----
(dollars expressed in thousands)
<S> <C> <C>
Balance, beginning of year................................................ $ 17,747 19,527
Current year deferred provision, change in deferred
tax valuation allowance............................................... (568) (1,780)
-------- --------
Balance, end of year...................................................... $ 17,179 17,747
======== =======
</TABLE>
The valuation allowance for deferred tax assets at December 31, 1998 and
1997 includes $2.0 million which when recognized, will be credited to
intangibles associated with the purchase of subsidiaries. The valuation
allowance for deferred tax assets at December 31, 1998 and 1997 includes $6.0
million 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 for per share data)
Year ended December 31, 1998:
<S> <C> <C> <C>
Basic EPS-income available to common stockholders......... $ 32,724 23,661 $1,383.04
=========
Effect of dilutive securities:
Class A convertible preferred stock..................... 769 1,389
-------- --------
Diluted EPS-income available to common stockholders....... $ 33,493 25,050 $1,337.09
======== ======== =========
Year ended December 31, 1997:
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
======== ======== =========
</TABLE>
<PAGE>
(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 risk exposure of First Banks.
Derivative financial instruments held by First Banks are summarized as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1998 1997
---------------------- ----------------------
Notional Credit Notional Credit
amount exposure amount exposure
------ -------- ------ --------
(dollars expressed in thousands)
<S> <C> <C> <C> <C>
Interest rate swap agreements................ $ 280,000 -- -- --
Interest rate floor agreements............... 70,000 204 70,000 26
Interest rate cap agreements................. 10,000 55 10,000 222
Forward commitments to sell
mortgage-backed securities.............. 95,000 137 60,000 --
</TABLE>
The notional amounts of derivative financial instruments do not represent
amounts exchanged by the parties and, therefore, are not a measure of First
Banks' credit exposure through its use of derivative financial instruments. The
amounts exchanged are determined by reference to the notional amounts and the
other terms of the derivatives.
Previously, First Banks sold interest rate futures contracts and purchased
options on interest rate futures contracts to hedge the interest rate risk of
its available-for-sale securities portfolio. There were no unamortized net
deferred losses on interest rate futures contracts remaining at December 31,
1998, 1997 or 1996. The unamortized balance of net deferred losses on interest
rate futures contracts was $4.6 million at December 31, 1995, of which $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 are utilized to adjust the repricing
characteristics of certain interest-bearing assets and liabilities with the
objective of stabilizing cash flow, and accordingly, net interest income, over
time. The net interest expense for swap agreements was $3.9 million, $6.4
million and $7.4 million, including $3.7 million, $5.4 million and $4.2 million
of amortized deferred swap losses, for the years ended December 31, 1998, 1997
and 1996, respectively. The maturity dates, notional amounts, interest rates
paid and received, and fair values of interest rate swap agreements outstanding
as of December 31, 1998 are summarized below. There were no interest rate swap
agreements outstanding at December 31, 1997.
<TABLE>
<CAPTION>
Notional Interest rate Interest rate Fair value
Maturity date and swap type amount paid received gain
--------------------------- ------ ---- -------- ----
(dollars expressed in thousands)
December 31, 1998:
Pay variable / receive fixed:
<S> <C> <C> <C> <C> <C>
June 11, 2002............................. $ 15,000 5.24% 6.00% $ 363
September 16, 2002........................ 20,000 5.22 5.36 87
September 16, 2002........................ 175,000 5.22 5.36 761
September 18, 2002........................ 30,000 5.23 5.33 92
September 18, 2002........................ 40,000 5.23 5.33 123
---------- --------
$ 280,000 5.23 5.48 $ 1,426
========== ==== ==== ========
</TABLE>
<PAGE>
First Banks has experienced a shortening of the expected repricing term of
its loan portfolio. This shortening resulted from the significant decline in
interest rates during 1995, which caused an increase in the principal
prepayments of residential mortgage loans, and the change in the composition of
the loan portfolio. These increased prepayments, as well as First Banks'
projections of future prepayments, and the overall reduction in the residential
loan portfolio disproportionately shortened the expected repricing term of the
loan portfolio in comparison to the effective maturity of certain
interest-bearing liabilities 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 $5.7 million and $9.4 million at December 31, 1998
and 1997, respectively, and is included in other assets.
During 1998, as the effective repricing term of the loan portfolio
continued to shorten, and became increasingly mismatched with its funding
source, First Banks entered into $280.0 million notional amount of interest rate
swap agreements (Swap Agreements). The Swap Agreements effectively extended the
repricing term of a selected group of loans to more closely correspond with its
funding source. The primary objective of the Swap Agreements was to stabilize
cash flows, and accordingly, net interest income, over time. In contrast to
previous swap agreements, the Swap Agreements provide for First Banks to receive
a fixed rate of interest and pay an adjustable rate equivalent to the 90-day
London Interbank Offering Rate (LIBOR). The terms of the Swap Agreements provide
for First Banks to pay quarterly and receive semi-annually. The net amount due
to First Banks under the Swap Agreements was $3.5 million at December 31, 1998.
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, 1998 and 1997, the unamortized costs for these agreements were
$159,000 and $290,000, 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
$103.1 million and $67.4 million at December 31, 1998 and 1997, respectively.
These net loan commitments and loans held for sale are hedged with forward
contracts to sell mortgage-backed securities of $95 million and $60 million at
December 31, 1998 and 1997, respectively. Gains and losses from forward
contracts are deferred and included in the cost basis of loans held for sale. At
December 31, 1998 and 1997, the net unamortized losses were $237,000 and
$783,000, respectively, which were applied to the carrying value of the loans
held for sale as part of the lower of cost or market valuation.
<PAGE>
(12) CREDIT COMMITMENTS
First Banks is party to commitments to extend credit and commercial and
standby letters of credit in the normal course of business to meet the financing
needs of its customers. These commitments involve, in varying degrees, elements
of interest rate risk and credit risk in excess of the amount recognized in the
consolidated balance sheets.
The interest rate risk associated with these credit commitments relates
primarily to the commitments to originate residential fixed-rate loans. As more
fully discussed in Note 11 to the accompanying consolidated financial
statements, the interest rate risk of the commitments to originate fixed-rate
loans has been hedged with forward contracts to sell mortgage-backed securities.
The credit risk amounts are equal to the contractual amounts, assuming 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.
Commitments to extend credit at December 31 are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
---- ----
(dollars expressed in thousands)
<S> <C> <C>
Commitments to extend credit............................................. $1,189,950 898,723
Commercial and standby letters of credit................................. 62,096 33,672
---------- --------
$1,252,046 932,395
========== =======
</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>
The estimated fair value of First Banks' financial instruments at December
31 were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- -----------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
----- ---------- ----- ----------
Financial assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents...................... $ 214,762 214,762 168,480 168,480
Investment securities:
Trading..................................... 3,425 3,425 3,110 3,110
Available for sale.......................... 509,695 509,695 773,271 773,271
Held to maturity............................ 21,676 22,568 19,149 19,835
Net loans...................................... 3,519,135 3,532,393 2,951,691 2,964,115
Accrued interest receivable.................... 28,465 28,465 28,358 28,358
========= ========= ========= ========
Financial liabilities:
Deposits:
Demand:
Non-interest-bearing..................... $ 561,383 561,383 485,222 485,222
Interest-bearing......................... 377,435 377,435 348,080 348,080
Savings and money market................. 1,198,567 1,198,567 947,029 947,029
Time deposits............................... 1,802,600 1,813,305 1,904,264 1,912,461
Preferred Securities........................... 127,443 137,722 83,183 93,150
Borrowings..................................... 171,379 171,379 109,297 109,297
Accrued interest payable....................... 5,817 5,817 9,976 9,976
========= ========= ========= ========
Off-balance-sheet:
Interest rate swap, cap and floor agreements... $ 5,815 259 9,689 248
Forward contracts to sell mortgage-backed
securities.................................. 137 137 (341) (341)
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 the 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.
Preferred Securities: Fair value is based on quoted market prices.
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 $10,000 for 1998. Total employer contributions under
the plan were $648,000, $506,000 and $576,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
(15) PREFERRED STOCK
First Banks had two classes of preferred stock outstanding during the
years ended December 31, 1998 and three classes of preferred stock outstanding
during the year December 31, 1997.
On September 15, 1992, First Banks issued and sold 2,200,000 shares of
Class C 9% cumulative increasing rate, redeemable, preferred stock (Class C
Preferred Stock). 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, as described in Note 8 to the
consolidated financial statements, satisfies the regulatory requirements to be
included in First Banks' capital base in a manner similar to the Class C
Preferred Stock. Dividends on the Class C preferred stock were 9% through
November 30, 1997.
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.
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.
The annual dividend rates were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Class A preferred stock........................... 6.0 6.0 6.0
Class B preferred stock........................... 7.0 7.0 7.0
Class C preferred stock........................... -- 9.0 9.0
</TABLE>
<PAGE>
(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 1998, 1997 and 1996, Tidal Insurance Limited (Tidal), a corporation
owned indirectly by First Banks' Chairman and his children, received
approximately $280,000, $214,000 and $326,000, 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 ceded to an unaffiliated
third-party insurer.
For the years ended December 31, 1998, 1997 and 1996, First Securities
America, Inc. (FSA), a trust established and administered by and for the benefit
of First Banks' Chairman and members of his immediate family, received
approximately $265,000, $206,000 and $231,000, respectively, in commissions and
insurance premiums for policies purchased by First Banks or customers of the
Subsidiary Banks from unaffiliated, third-party insurors to which First Banc
Insurors placed such policies. FSA received an additional $136,000 in annuity
sales commissions for the year ended December 31, 1996. The insurance premiums
on which the aforementioned commissions were earned were competitively bid and
First Banks deems the commissions FSA earned from unaffiliated third-party
companies to be comparable to those which would have been earned by an
unaffiliated third-party agent.
First Brokerage L.P. and First Brokerage America, L.L.C., entities which
are directly or indirectly owned by First Banks' Chairman and members of his
immediate family, received approximately $1.8 million and $707,000 for the years
ended December 31, 1998 and 1997, respectively, in commissions paid by
unaffiliated third-party companies. The commissions received were primarily in
connection with the sales of annuities and securities and other insurance
products to individuals, including customers of the Subsidiary Banks.
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 $12.2 million, $6.4 million and $3.2 million for the years ended December
31, 1998, 1997 and 1996, respectively. During 1998 and 1997, First Services,
L.P. paid First Banks $799,000 and $1.1 million, respectively, in rental fees
for the use of data processing and other equipment owned by First Banks. There
were no rental fees paid to First Banks for the year ended December 31, 1996.
(17) CAPITAL STOCK OF FIRST BANKS AMERICA, INC.
First Banks owned 100% of the Class B common stock and 1,895,733 shares of
common stock of FBA at December 31, 1998 representing 76.84 % of the outstanding
voting stock of FBA. First Banks owned 65.9% of all outstanding voting stock at
December 31, 1997. In addition, in February 1999, First Banks completed its
purchase of 314,848 shares of FBA common stock, pursuant to a tender offer to
purchase up to 400,000 shares of FBA common stock. This tender offer increased
First Banks' ownership interest in FBA to 82.3% of the outstanding voting stock
of FBA. FBA common stock is publicly traded on the New York Stock Exchange.
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 Bank 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
were owned by First Banks, were exchanged for a comparable debenture in FBA.
Such debentures were subsequently converted into 629,557 shares of FBA common
stock, effective December 4, 1998. The merger of FBA and FCB did not have a
significant impact on the financial condition or results of operations of First
Banks.
<PAGE>
(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, 1997, 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, 1998, each of
the Subsidiary Banks were well capitalized.
At December 31, 1998 and 1997, First Banks' and the subsidiary depository
institutions' capital ratios were as follows:
<TABLE>
<CAPTION>
Risk-based capita ratios
------------------------------------
Total Tier 1 Leverage ratio
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
First Banks.................................... 10.28% 10.26% 9.03% 8.78% 7.77% 6.80%
First Bank..................................... 10.01 10.78 8.75 9.52 7.46 7.19
FB&T........................................... 10.39 12.71 9.13 11.45 7.60 7.70
FB Texas....................................... 11.37 12.26 10.11 11.00 9.15 8.90
FB California.................................. 10.63 13.03 9.37 11.77 8.34 13.80
</TABLE>
(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 are available for payment to First Banks,
Inc. Under the most restrictive of these requirements, the future payment of
dividends from subsidiary financial institutions is limited to approximately
$46.3 million, unless prior permission of the regulatory authorities or the
lending banks is obtained.
(20) BUSINESS SEGMENT RESULTS
First Banks has defined its business segments to be First Bank, FB&T, FB
California, FB Texas and First Bank Mortgage (FBM). The reportable business
segments are consistent with the management structure of First Banks and the
internal reporting system that monitors performance.
<PAGE>
Through the respective branch networks, First Bank, FB&T, FB California and
FB Texas provide similar products and services in four defined geographic areas.
The products and services offered include a broad range of commercial and
personal banking services, including certificates of deposit, individual
retirement and other time deposit accounts, checking and other demand deposit
accounts, interest checking accounts, savings accounts and money market
accounts. Loans include commercial and financial, commercial and residential
real estate, real estate construction and development and consumer loans. Other
financial services include automatic teller machines, telephone account access,
cash management services, credit related insurance and safe deposit boxes. The
revenues generated by each business segment consist primarily of interest
income, generated from the loan and investment security portfolios, and service
charges and fees, generated from the deposit products and services. The
geographic areas are defined to be Missouri and Illinois, southern California,
the San Francisco - Sacramento corridor of northern California and Houston,
Dallas, Irving and McKinney Texas. The products and services are offered to
customers primarily within their respective geographic areas, with the exception
of loan participations executed between these operating segments of First Banks.
FBM conducts the mortgage banking activities of First Banks. The mortgage
banking activities consist primarily of the origination and purchase of
conforming and nonconforming residential real estate loans, which are generally
<PAGE>
sold into the secondary market. The related mortgage servicing rights are
generally maintained for conforming loans while the nonconforming loans are sold
on a servicing released basis. FBM's revenues include the interest income earned
while loans are held pending sale, net gains on the sale of loans and mortgage
loan servicing fees earned from its loan servicing portfolio. The products and
services are offered to customers primarily within First Banks' four geographic
areas. FBM also services certain residential real estate loans for the
Subsidiary Banks for which it receives loan servicing fees.
<TABLE>
<CAPTION>
First Bank FB California FB Texas
--------------------------- ---------------------- ----------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities................. $ 252,165 401,450 334,922 53,449 83,165 73,292 59,914 65,016 51,847
Loans, net of unearned discount....... 2,354,937 2,115,641 2,083,223 314,977 255,114 156,303 201,426 176,341 180,068
Total assets.......................... 2,869,648 2,761,173 2,671,979 410,110 370,917 257,834 300,984 267,152 266,571
Deposits.............................. 2,623,157 2,533,837 2,394,279 363,422 325,562 223,435 264,425 231,175 233,710
Stockholders' equity.................. 236,010 224,662 211,013 42,825 40,176 29,696 30,249 29,761 26,773
========== ========= ======== ======= ======= ======= ====== ======== =======
Income statement information:
Interest income:
Loans, external customers.......... $ 180,731 181,585 177,255 22,540 16,233 9,538 12,411 14,456 15,421
Loans, other operating segments
and affiliates of First Banks.... 8,981 3,894 1,931 5,390 1,183 -- 4,777 1,521 178
Investment securities.............. 21,187 19,466 14,961 4,131 4,293 3,030 3,852 3,576 3,049
Other.............................. 1,470 2,569 4,090 483 707 621 674 546 1,355
---------- --------- -------- ------- ------- ------- ------ -------- -------
Total interest income.......... 212,369 207,514 198,237 32,544 22,416 13,189 21,714 20,099 20,003
---------- --------- -------- ------- ------- ------- ------ -------- -------
Interest expense:
Deposits........................... 105,348 102,388 97,838 13,254 8,640 5,154 8,742 8,093 8,822
Other.............................. 6,427 8,399 12,743 101 89 14 158 286 464
Intercompany funds charge (benefit) (4,847) (1,696) (808) -- -- -- -- -- --
---------- -------- -------- ------- ------- ------- -------- -------- -------
Total interest expense......... 106,928 109,091 109,773 13,355 8,729 5,168 8,900 8,379 9,286
---------- -------- -------- ------- ------- ------- -------- -------- -------
Net interest income................ 105,441 98,423 88,464 19,189 13,687 8,021 12,814 11,720 10,717
Provision for possible loan losses.... 7,250 7,300 4,615 565 500 1,405 335 1,500 1,000
---------- -------- -------- ------- ------- ------- -------- -------- -------
Net interest income after provision
for possible loan losses..... 98,191 91,123 83,849 18,624 13,187 6,616 12,479 10,220 9,717
---------- -------- -------- ------- ------- ------- -------- -------- -------
Noninterest income.................... 21,883 16,637 12,273 2,732 1,847 1,813 1,790 1,901 1,888
Noninterest expense................... 72,312 62,410 66,706 15,548 10,356 8,634 8,749 6,960 8,501
---------- --------- -------- ------- ------- ------- -------- -------- -------
Net income before income taxes. 47,762 45,350 29,416 5,808 4,678 (205) 5,520 5,161 3,104
Provision (benefit) for income taxes.. 16,267 14,860 10,884 2,736 2,027 (208) 1,888 1,815 1,168
---------- --------- -------- ------- ------- ------- ------- -------- -------
Income (loss) before minority
interest in income
of subsidiary.............. 31,495 30,490 18,532 3,072 2,651 3 3,632 3,346 1,936
Minority interest income
of subsidiary.................... -- -- -- -- -- -- -- -- --
---------- -------- -------- ------- ------- ------- ------ ------- ------
Net income..................... $ 31,495 30,490 18,532 3,072 2,651 3 3,632 3,346 1,936
========== ======== ======== ======= ======= ======= ====== ======= ======
</TABLE>
- -----------------
(1) Includes intercompany loan servicing fees of $1.0 million, $1.5 million
and $1.6 million for years ended December 31 1998, 1997 and 1996,
respectively.
(2) Includes $9.8 million and $7.3 million of guaranteed preferred debenture
expense for the year ended December 31, 1998 and 1997, respectively. (See
Note 8 to the consolidated financial statements).
<PAGE>
The business segment results shown below are consistent with First Banks'
internal reporting system which is consistent, in all material respects, with
generally accepted accounting principles and practices prominent in the banking
and mortgage banking industries. Such principles and practices are summarized in
Note 1 to the consolidated financial statements. First Banks has no foreign
operations.
<TABLE>
<CAPTION>
Corporate, other and
First Bank & Trust First Bank Mortgage intercompany reclassifications Consolidated Totals
------------------ ------------------- ------------------------------ --------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
134,203 224,618 80,676 12,199 -- -- 22,866 21,281 12,064 534,796 795,530 552,801
573,562 385,251 310,929 135,619 69,853 37,251 (416) -- 195 3,580,105 3,002,200 2,767,969
793,217 672,410 472,801 154,952 82,404 50,191 25,899 10,958 (30,222) 3,939,985 3,684,595 3,238,567
701,406 598,560 400,388 35,873 26,131 2,748 (48,298) (30,670) (15,993) 4,554,810 4,165,014 3,689,154
75,165 54,438 48,776 7,663 3,760 3,175 (128,549) (121,260) (68,044) 263,363 231,537 251,389
======= ======= ======= ======= ====== ====== ======== ======== ======== ========= ========= ========
35,279 30,075 30,840 6,805 3,196 3,149 26,600 7,221 1,176 27,157 8,223 2,109
8,009 1,624 -- -- -- -- (27,157) (8,222) (2,109) 257,209 244,543 235,270
10,391 8,360 2,702 569 -- -- 753 561 137 40,883 36,256 23,879
781 2,586 1,038 -- -- -- (608) (329) (2,341) 2,800 6,079 4,763
------ ------ ------ ------ ------ ------ -------- -------- -------- -------- -------- --------
54,460 42,645 34,580 7,374 3,196 3,149 (412) (769) (3,137) 328,049 295,101 266,021
------ ------ ------ ------ ------ ------ -------- --------- -------- -------- -------- --------
25,287 19,896 13,044 15 12 -- (591) (368) (121) 152,055 138,661 124,737
834 508 618 -- -- -- 2,793 888 3,094 10,313 10,170 16,933
-- -- -- 4,847 1,696 808 -- -- -- -- -- --
------ ------ ------ ----- ------ ------ -------- -------- -------- -------- -------- --------
26,121 20,404 13,662 4,862 1,708 808 2,202 520 2,973 162,368 148,831 141,670
------ ------ ------ ------ ------ ------ -------- -------- -------- -------- -------- --------
28,339 22,241 20,918 2,512 1,488 2,341 (2,614) (1,289) (6,110) 165,681 146,270 124,351
850 2,000 4,474 -- -- -- -- -- -- 9,000 11,300 11,494
------ ------ ------ ------ ------ ------ -------- -------- -------- -------- -------- --------
27,489 20,241 16,444 2,512 1,488 2,341 (2,614) (1,289) (6,110) 156,681 134,970 112,857
------ ------ ------ ------ ------ ------ -------- -------- -------- -------- -------- --------
3,800 3,269 2,723 7,699(1) 4,512(1) 4,197(1) (1,407) (2,469) (2,173) 36,497 25,697 20,721
22,808 15,720 16,765 7,436 4,160 4,506 11,851 (2) 10,681 (2) 629 138,704 110,287 105,741
------ ------ ------ ------ ------ ------ -------- -------- -------- -------- -------- --------
8,481 7,790 2,402 2,775 1,840 2,032 (15,872) (14,439) (8,912) 54,474 50,380 27,837
3,539 1,111 (1,521) 971 644 683 (5,708) (4,374) (4,046) 19,693 16,083 6,960
------ ------ ------ ----- ------ ------ -------- -------- -------- -------- -------- --------
4,942 6,679 3,923 1,804 1,196 1,349 (10,164) (10,065) (4,866) 34,781 34,297 20,877
-- -- -- -- -- -- 1,271 1,270 659 1,271 1,270 659
------ ------ ------ ------ ------ ------ -------- -------- -------- -------- -------- --------
4,942 6,679 3,923 1,804 1,196 1,349 (11,435) (11,335) (5,525) 33,510 33,027 20,218
====== ====== ====== ====== ====== ====== ======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
(21) PARENT COMPANY ONLY FINANCIAL INFORMATION
Following are condensed balance sheets of First Banks, Inc. as of December
31, 1998 and 1997, and condensed statements of income and cash flows for the
years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31,
---------------
1998 1997
---- ----
(dollars expressed in thousands)
Assets
------
<S> <C> <C>
Cash deposited in subsidiary banks.................................................... $ 4,775 8,327
Investment in subsidiaries, at equity................................................. 373,236 317,092
Investment securities................................................................. 19,317 27,781
Other assets.......................................................................... 13,987 32,408
---------- ----------
Total assets............................................................... $ 411,315 385,608
========== ========
Liabilities and Stockholders' Equity
------------------------------------
Notes payable......................................................................... $ 50,048 55,144
Subordinated debentures payable to First Capital...................................... 88,918 88,918
Accrued expenses and other liabilities................................................ 8,986 10,009
---------- --------
Total liabilities.......................................................... 147,952 154,071
Stockholders' equity.................................................................. 263,363 231,537
---------- --------
Total liabilities and stockholders' equity................................. $ 411,315 385,608
========== ========
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(dollars expressed in thousands)
Income:
<S> <C> <C> <C>
Dividends from subsidiaries........................................... $ 23,000 17,221 20,714
Management fees from subsidiaries..................................... 10,154 9,010 7,393
Other income.......................................................... 2,796 3,094 1,684
--------- ------ -------
Total income....................................................... 35,950 29,325 29,791
--------- ------ -------
Expenses:
Interest expense...................................................... 3,411 8,815 5,461
Salaries and employee benefits........................................ 7,307 7,072 5,538
Legal and professional fees........................................... 1,988 1,765 1,978
Other expenses........................................................ 12,639 5,221 3,415
--------- ------ -------
Total expenses..................................................... 25,345 22,873 16,392
--------- ------ -------
Income before income tax benefit and equity in undistributed
earnings of subsidiaries......................................... 10,605 6,452 13,399
Income tax benefit........................................................ (3,999) (2,831) (1,880)
--------- ------ -------
Income before equity in undistributed earnings of subsidiaries..... 14,604 9,283 15,279
Equity in undistributed earnings of subsidiaries, net of dividends paid... 18,906 23,744 4,939
--------- ------ -------
Net income......................................................... $ 33,510 33,027 20,218
========= ====== =======
</TABLE>
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1998 1997 1996
---- ---- ----
(dollars expressed in thousands)
Cash flows from operating activities:
<S> <C> <C> <C>
Net income......................................................... $ 33,510 33,027 20,218
Adjustments to reconcile net income to net cash provided by
operating activities:
Net income of subsidiaries.................................... (42,107) (41,015) (25,610)
Dividends from subsidiaries................................... 23,000 17,221 20,714
Other, net.................................................... 4,963 (2,773) (998)
--------- -------- -------
Net cash provided by operating activities................... 19,366 6,460 14,324
--------- -------- -------
Cash flows from investing activities:
Decrease (increase) in investment securities....................... 3,000 (3,000) --
Investment in common securities of First Capital................... -- (2,668) --
Acquisitions of subsidiaries....................................... (31,586) -- --
Capital contributions to subsidiaries.............................. -- (190) (200)
Return of subsidiary capital....................................... -- 2,000 7,786
Decrease (increase) in advances to subsidiaries.................... 14,900 (121) (950)
Other, net......................................................... (3,350) (6,659) 268
--------- -------- -------
Net cash provided by (used in) investing activities......... (17,036) (10,638) 6,904
--------- -------- -------
Cash flows from financing activities:
Decrease in notes payable.......................................... (5,096) (21,186) (11,805)
Increase in long term debt......................................... -- 88,918 --
Payment of preferred stock dividends............................... (786) (5,066) (5,728)
Purchase and retirement of Class C preferred stock................. -- (54,048) (1,139)
--------- -------- ------
Net cash provided by (used in) financing activities......... (5,882) 8,618 (18,672)
---------- -------- -------
Net increase (decrease) in cash and cash equivalents........ (3,552) 4,440 2,556
Cash and cash equivalents, beginning of year........................... 8,327 3,887 1,331
--------- -------- -------
Cash and cash equivalents, end of year................................. $ 4,775 8,327 3,887
========= ======== =======
</TABLE>
(22) 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.
(23) SUBSEQUENT EVENT
On March 4, 1999, FBA completed its acquisition of Redwood Bancorp and its
wholly owned subsidiary, Redwood Bank, for cash consideration of $26.0 million.
Redwood Bank is headquartered in San Francisco, California and operates four
banking locations in the San Francisco Bay area. Redwood Bank had $184 million
in total assets, $134 million in loans, net of unearned discount, $32 million of
investment securities and $163 million in deposits at the acquisition date.
Redwood Bank is operating as a subsidiary of FBA.
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
First Banks, Inc.
<S> <C> <C>
James F. Dierberg Chairman of the Board, President and Chief Executive Officer
Allen H. Blake Director, Executive Vice President and Chief Operating and 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, Consumer Lending and Mortgage Banking
Donald W. Williams Executive Vice President and Chief Credit Officer
Thomas A. 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, Executive Vice President, Chief Operating Officer, Chief Financial Officer and
Secretary
Charles A. Crocco, Jr. Counsel to the law firm of Jackson & Nash, LLP, 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.
Ellen D. Schepman Director
Donald W. Williams Director
David F. Weaver Executive Vice President
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
First Bank
<S> <C> <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 Senior 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
Fred D. Jensen Chairman of the Board, President and Chief Executive Officer
Karkutla "Bala" Balkrishna Director, Senior Vice President-Commercial Banking
Tom LaCroix Director, Senior Vice President-Commercial Banking
Timothy M. Marme Director, Central Coast Regional President
Alan G. Rye Director, Senior Vice President-Commercial Real Estate
Arleen R. Scavone Director, Senior Vice President and Charter Retail Manager
Donald W. Williams Director
Kathryn L. Perrine Director, Senior Vice President and Chief Financial Officer
Norman O. Broyer Director, Senior Vice President and Chief Credit Officer
First Bank of California
Terrance M. McCarthy Chairman of the Board, President and Chief Executive Officer
James E. Culleton Director, Retired Chief Operating Officer and Secretary of the Company
Albert M. Lavezzo Director; Partner in the law firm of Favaro, Lavezzo, Gill,
Caretti & Neppell, Vallejo, California
Fred K. Sibley Director, Retired Bank President, Vallejo, California
Gary M. Sanders Director and Regional President
Donald W. Williams Director
First Bank Texas N.A.
(Formerly known as BankTEXAS N.A.)
David F. Weaver Chairman of the Board, President and Chief Executive Officer
Donald W. Williams Director
Monica J. Rinehart Director, Controller and Secretary
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
1998 High Low declared
---- ---- --- --------
First Quarter $ 27 7/8 26 3/4 $ .578125
Second Quarter 27 1/4 26 .578125
Third Quarter 27 3/4 25 1/4 .578125
Fourth Quarter 26 3/4 25 1/2 .578125
======= ====== ----------
$ 2.312500
==========
Market price (1) Dividend
1997 High Low declared
---- ---- --- --------
First Quarter $ 26 1/8 25 $ .385425
Second Quarter 26 3/4 25 1/8 .578125
Third Quarter 27 25 5/8 .578125
Fourth Quarter 28 3/4 25 7/8 .578125
======== ====== ----------
$ 2.119800
==========
- -------------------
(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 Operating and Services L.L.C.
Financial Officer 85 Challenger Road
First Banks, Inc. Overpeck Centre
11901 Olive Boulevard Ridgefield Park, New Jersey 07660
Creve Coeur, Missouri 63141 (888) 213-0965
(314) 995-8700 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 of Organization
------------------ ---------------
First Bank Missouri
CCB Bancorp, Inc. (1) California
First Banks America, Inc. (2) Delaware
- ------------
(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 First Bank Texas N.A., a national association,
and First Bank of California, a state chartered bank.
<TABLE> <S> <C>
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<CIK> 0000710507
<NAME> First Banks, Inc.
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<S> <C>
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0
13,063
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