-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LoP3nPdKogxc7gb9Nlhu1/rqoxuKBNI22HiEf9d9sRIugJO/ddxU0z/rdxGa10qm pjRm0uUMVul799+ko+gLIA== 0000950114-98-000317.txt : 19980703 0000950114-98-000317.hdr.sgml : 19980703 ACCESSION NUMBER: 0000950114-98-000317 CONFORMED SUBMISSION TYPE: S-2 PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 19980701 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST BANKS AMERICA INC CENTRAL INDEX KEY: 0000310979 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 751604965 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-2 SEC ACT: SEC FILE NUMBER: 333-58355 FILM NUMBER: 98659485 BUSINESS ADDRESS: STREET 1: P O BOX 630369 CITY: HOUSTON STATE: TX ZIP: 77263-0369 BUSINESS PHONE: 7137817171 FORMER COMPANY: FORMER CONFORMED NAME: BANCTEXAS GROUP INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: COMMERCE SOUTHWEST INC DATE OF NAME CHANGE: 19820831 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST AMERICA CAPITAL TRUST CENTRAL INDEX KEY: 0001065171 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: S-2 SEC ACT: SEC FILE NUMBER: 333-58355-01 FILM NUMBER: 98659486 BUSINESS ADDRESS: STREET 1: 135 NORTH MCRAMEC CITY: ST LOUIS STATE: MO ZIP: 63105 BUSINESS PHONE: 3148544600 S-2 1 FIRST BANKS AMERICA, INC. FORM S-2 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 1, 1998 REGISTRATION NO. 333- REGISTRATION NO. 333- -01 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------- FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------------------- FIRST BANKS AMERICA, INC. FIRST AMERICA CAPITAL TRUST (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS (EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN CHARTER) ITS CHARTER) DELAWARE DELAWARE (STATE OR OTHER JURISDICTION OF INCORPORATION (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) OR ORGANIZATION) 75-1604965 APPLIED FOR (I.R.S. EMPLOYER IDENTIFICATION NO.) (I.R.S. EMPLOYER IDENTIFICATION NO.)
135 NORTH MERAMEC, ST. LOUIS, MISSOURI 63105 (314) 854-4600 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S AND CO-REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE) ----------------------------------------- ALLEN H. BLAKE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND SECRETARY FIRST BANKS AMERICA, INC. 135 NORTH MERAMEC ST. LOUIS, MISSOURI 63105 (314) 854-4600 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ----------------------------------------- WITH COPIES TO: JOHN S. DANIELS, ESQ. JAMES S. RYAN, III, ESQ. JAMES L. NOUSS, JR., ESQ. 8117 PRESTON ROAD, SUITE 800 JACKSON WALKER L.L.P. BRYAN CAVE LLP DALLAS, TEXAS 75225 901 MAIN STREET, SUITE 6000 211 NORTH BROADWAY, SUITE 3600 (214) 696-3200 DALLAS, TEXAS 75202 ST. LOUIS, MISSOURI 63102-2750 (214) 953-6000 (314) 259-2000
-------------------------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / CALCULATION OF REGISTRATION FEE ==================================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED PER UNIT PRICE REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------------------------------- Preferred Securities of First America Capital Trust..................................... 1,840,000 $25.00 $46,000,000 $13,940 - ---------------------------------------------------------------------------------------------------------------------------------- Subordinated Debentures of First Banks America, Inc....................................... -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Guarantee of First Banks America, Inc., with respect to Preferred Securities........... -- -- -- ================================================================================================================================== Includes 240,000 Preferred Securities which may be sold by First America Capital Trust to cover over-allotments. Calculated pursuant to Rule 457 under the Securities Act of 1933. The Subordinated Debentures will be purchased by First America Capital Trust with the proceeds of the sale of the Preferred Securities. Such securities may later be distributed for no additional consideration to the holders of the Preferred Securities of First America Capital Trust upon its dissolution and the distribution of its assets. This Registration Statement is deemed to cover the Subordinated Debentures of First Banks America, Inc., the rights of holders of Subordinated Debentures of First Banks America, Inc. under the Indenture, and the rights of holders of the Preferred Securities under the Trust Agreement, the Guarantee and the Expense Agreement entered into by First Banks America, Inc. No separate consideration will be received for the Guarantee.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. =============================================================================== 2 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A * * REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE * * SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR * * MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT * * BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR * * THE SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE * * SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE * * UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS * * OF ANY SUCH STATE. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * SUBJECT TO COMPLETION, DATED JULY 1, 1998 PROSPECTUS 1,600,000 PREFERRED SECURITIES FIRST AMERICA CAPITAL TRUST % CUMULATIVE TRUST PREFERRED SECURITIES (LIQUIDATION AMOUNT $25 PER PREFERRED SECURITY) GUARANTEED, AS DESCRIBED HEREIN, BY FIRST BANKS AMERICA, INC. ------------------ $40,000,000 % SUBORDINATED DEBENTURES OF FIRST BANKS AMERICA, INC. ------------------ The % Cumulative Trust Preferred Securities (the "Preferred Securities") offered hereby represent preferred undivided beneficial interests in the assets of First America Capital Trust, a statutory business trust created under the laws of the State of Delaware ("the Trust"). First Banks America, Inc., a Delaware corporation ("FBA" or the "Company"), will own all of the common securities (the "Common Securities" and, together with the Preferred Securities, the "Trust Securities") representing undivided beneficial interests in the assets of the Trust. (continued on next page) Application has been made to have the Preferred Securities approved for listing on the New York Stock Exchange (the "NYSE") under the symbol "FBAPrT." -------------------------------- SEE "RISK FACTORS" COMMENCING ON PAGE 8 FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. -------------------------------- THE SECURITIES OFFERED BY THIS PROSPECTUS ARE NOT SAVINGS OR DEPOSIT ACCOUNTS, ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANKING OR NON- BANKING AFFILIATE OF THE COMPANY (EXCEPT TO THE EXTENT THAT PREFERRED SECURITIES ARE GUARANTEED BY THE COMPANY AS DESCRIBED HEREIN), ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY AND INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. THE SECURITIES OFFERED BY THIS PROSPECTUS ARE NOT OBLIGATIONS OF OR GUARANTEED BY FIRST BANKS, INC. -------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ========================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC COMMISSION THE TRUST - ------------------------------------------------------------------------------------------------------------------------ Per Preferred Security............................... $25.00 $25.00 - ------------------------------------------------------------------------------------------------------------------------ Total............................................ $40,000,000 $40,000,000 ======================================================================================================================== The Trust and the Company have each agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." In view of the fact that the proceeds of the sale of the Preferred Securities will be invested in the Subordinated Debentures, the Company has agreed to pay the Underwriters as compensation for their arranging the investment therein of such proceeds $ per Preferred Security, or $ in the aggregate ($ if the over-allotment option is exercised in full). See "Underwriting." The Company has also agreed to pay the expenses of the offering estimated to be $ . The Trust has granted the Underwriters an option exercisable within 30 days from the date of this Prospectus to purchase up to 240,000 additional Preferred Securities on the same terms and conditions set forth above to cover over-allotments, if any. If all such additional Preferred Securities are purchased, the total Price to Public and Proceeds to the Trust will be $46,000,000.
----------------------------------------- The Preferred Securities are offered by the Underwriters subject to receipt and acceptance by them, prior sale and the Underwriters' right to reject any order in whole or in part and to withdraw, cancel or modify the offer without notice. It is expected that delivery of the Preferred Securities will be made on or about , 1998. STIFEL, NICOLAUS & COMPANY HOEFER & ARNETT, INC. INCORPORATED , 1998 3 (continued from previous page) State Street Bank and Trust Company is the Property Trustee (as defined herein) of the Trust. The Trust exists for the purpose of issuing the Preferred Securities and investing the proceeds thereof in an equivalent amount of % Subordinated Debentures (the "Subordinated Debentures") of the Company. The Subordinated Debentures will mature on June 30, 2028, which date may be (i) shortened to a date not earlier than June 30, 2003, or (ii) extended to a date not later than June 30, 2037, in each case if certain conditions are met (including, in the case of shortening the Stated Maturity (as defined herein), the Company having received prior approval of the Board of Governors of the Federal Reserve System ("Federal Reserve") to do so if then required under applicable capital guidelines or policies of the Federal Reserve). The Preferred Securities will have a preference under certain circumstances with respect to cash distributions and amounts payable on liquidation, redemption or otherwise over the Common Securities. See "Description of the Preferred Securities--Subordination of Common Securities." Holders of Preferred Securities are entitled to receive preferential cumulative cash distributions, at the annual rate of % of the liquidation amount of $25 per Preferred Security (the "Liquidation Amount"), accruing from , 1998, the date of original issuance, and payable quarterly in arrears on the last day of March, June, September and December of each year, commencing September 30, 1998 (the "Distributions"). The Company has the right, so long as no Debenture Event of Default (as defined herein) has occurred and is continuing, to defer payment of interest on the Subordinated Debentures at any time or from time to time for a period not to exceed 20 consecutive quarters with respect to each deferral period (each, an "Extension Period"); provided that no Extension Period may extend beyond the Stated Maturity of the Subordinated Debentures. Upon the termination of any such Extension Period and the payment of all amounts then due, the Company may elect to begin a new Extension Period subject to the requirements set forth herein. If interest payments on the Subordinated Debentures are so deferred, Distributions on the Preferred Securities will also be deferred, and the Company will not be permitted, subject to certain exceptions described herein, to declare or pay any cash distributions with respect to its capital stock or debt securities that rank pari passu with or junior to the Subordinated Debentures. WHILE THE COMPANY INTENDS TO TAKE THE POSITION THAT THE SUBORDINATED DEBENTURES WILL NOT BE DEEMED TO BE ISSUED WITH ORIGINAL ISSUE DISCOUNT ("OID"), DURING AN EXTENSION PERIOD, INTEREST ON THE SUBORDINATED DEBENTURES WILL CONTINUE TO ACCRUE (AND THE AMOUNT OF DISTRIBUTIONS TO WHICH HOLDERS OF THE PREFERRED SECURITIES ARE ENTITLED WILL ACCUMULATE) AT THE RATE OF % PER ANNUM, COMPOUNDED QUARTERLY, AND HOLDERS OF THE PREFERRED SECURITIES WILL BE REQUIRED TO INCLUDE INTEREST INCOME AS OID IN THEIR GROSS INCOME FOR UNITED STATES FEDERAL INCOME TAX PURPOSES IN ADVANCE OF RECEIPT OF THE CASH DISTRIBUTIONS WITH RESPECT TO SUCH DEFERRED INTEREST PAYMENTS. A HOLDER OF PREFERRED SECURITIES WHO DISPOSES OF ITS PREFERRED SECURITIES BETWEEN RECORD DATES FOR PAYMENTS OF DISTRIBUTIONS (AND CONSEQUENTLY DOES NOT RECEIVE A DISTRIBUTION FROM THE TRUST FOR THE PERIOD PRIOR TO SUCH DISPOSITION) WILL NEVERTHELESS BE REQUIRED TO INCLUDE ACCRUED BUT UNPAID INTEREST OR OID, IF ANY, ON THE SUBORDINATED DEBENTURES THROUGH THE DATE OF DISPOSITION IN ORDINARY INCOME AND TO ADD THE AMOUNT OF ANY ACCRUED OID TO ITS ADJUSTED TAX BASIS IN ITS PRO RATA SHARE OF THE UNDERLYING SUBORDINATED DEBENTURES DEEMED DISPOSED OF. See "Description of the Subordinated Debentures--Option to Extend Interest Payment Period," "Certain Federal Income Tax Consequences--Potential Extension of Interest Payment Period and Original Issue Discount" and "--Disposition of Preferred Securities." The Company and the Trust believe that, taken together, the obligations of the Company under the Guarantee, the Trust Agreement, the Subordinated Debentures, the Indenture and the Expense Agreement (each as defined herein) provide, in the aggregate, a full, irrevocable and unconditional guarantee, on a subordinated basis, of all of the obligations of the Trust under the Preferred Securities. See "Relationship Among the Preferred Securities, the Subordinated Debentures and the Guarantee--Full and Unconditional Guarantee." The Guarantee of the Company guarantees the payment of Distributions and payments on liquidation or redemption of the Preferred Securities, but only in each case to the extent of funds held by the Trust, as described herein. See "Description of the Guarantee--General." If the Company does not make interest payments on the Subordinated Debentures held by the Trust, the Trust will have insufficient funds to pay Distributions on the Preferred Securities. The Guarantee does not cover payments of Distributions when the Trust does not have sufficient funds to pay such Distributions. In such event, a (continued on next page) 4 (continued from previous page) holder of Preferred Securities may institute a legal proceeding directly against the Company pursuant to the terms of the Indenture to enforce payments of amounts equal to such Distributions to such holder. See "Description of the Subordinated Debentures--Enforcement of Certain Rights by Holders of the Preferred Securities." The obligations of the Company under the Guarantee and the Preferred Securities are subordinate and junior in right of payment to all Senior Debt, Subordinated Debt and Additional Senior Obligations (each as defined herein) of the Company. The Subordinated Debentures are unsecured obligations of the Company and are subordinated to all Senior Debt, Subordinated Debt and Additional Senior Obligations of the Company. The Preferred Securities are subject to mandatory redemption, in whole or in part, upon repayment of the Subordinated Debentures at maturity or their earlier redemption. Subject to Federal Reserve approval, if then required under applicable capital guidelines or policies of the Federal Reserve, the Subordinated Debentures are redeemable prior to maturity at the option of the Company (i) on or after June 30, 2003, in whole at any time or in part from time to time, or (ii) at any time, in whole (but not in part), within 180 days following the occurrence of a Tax Event, a Capital Treatment Event or an Investment Company Event (each as defined herein), in each case at a redemption price equal to the accrued and unpaid interest on the Subordinated Debentures so redeemed to the date fixed for redemption, plus 100% of the principal amount thereof. See "Description of the Preferred Securities--Redemption." The Company has the right at any time to dissolve, wind-up or terminate the Trust, subject to the Company having received prior approval of the Federal Reserve to do so if then required under applicable capital guidelines or policies of the Federal Reserve. In the event of the voluntary or involuntary dissolution, winding up or termination of the Trust, after satisfaction of liabilities to creditors of the Trust as required by applicable law, the holders of Preferred Securities will be entitled to receive a Liquidation Amount of $25 per Preferred Security, plus accumulated and unpaid Distributions thereon to the date of payment, which may be in the form of a Subordinated Debenture having an aggregate principal amount equal to the Liquidation Amount of such Preferred Securities (and carrying with it accumulated interest in an amount equal to the accumulated and unpaid Distributions then due on such Preferred Securities), subject to certain exceptions. See "Description of the Preferred Securities--Redemption" and "--Liquidation Distribution Upon Termination." -------------------------------- The Company will provide Quarterly Reports containing unaudited financial statements to the holders of Preferred Securities if such reports are furnished to the holders of the Company's common stock, and Annual Reports containing financial statements audited by the Company's independent auditors. The Company will also furnish Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q free of charge to holders of Preferred Securities who so request in writing addressed to the Secretary of the Company. -------------------------------- CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE PREFERRED SECURITIES. SUCH TRANSACTIONS MAY INCLUDE OVER-ALLOTMENT, STABILIZING TRANSACTIONS, THE PURCHASE OF PREFERRED SECURITIES TO COVER SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF SUCH ACTIVITIES, SEE "UNDERWRITING." SUCH STABILIZING TRANSACTIONS, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 5 FIRST BANKS AMERICA, INC. AND SUBSIDIARIES MAP OF LOCATIONS [MAP OF USA] - ------------------------------------------------------------------------------- BANKTEXAS N.A. HAS 6 BRANCHES SERVING HOUSTON AND DALLAS, TEXAS . . . - -------------------------------- (DALLAS) Abrams Irving--Las Colinas McKinney (HOUSTON) Allen Parkway Northside Westheimer - -------------------------------- PENDING ACQUISITION . . . Redwood Bank FIRST BANK OF CALIFORNIA HAS 11 BRANCHES SERVING NORTHERN CALIFORNIA . . . - -------------------------------- Campbell Concord Fairfield Rancho Cordova Roseville (3) Sacramento San Francisco San Pablo Vallejo CORPORATE OFFICE . . . - -------------------------------- FIRST BANKS AMERICA, INC. 135 NORTH MERAMEC AVENUE ST. LOUIS, MISSOURI 63105 6 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information appearing elsewhere (or incorporated by reference) in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised. Prospective investors should carefully consider the information set forth under the heading "Risk Factors." THE COMPANY GENERAL First Banks America, Inc. ("FBA" or the "Company") is a bank holding company with two wholly-owned banking subsidiaries, First Bank of California ("FB California"), a bank chartered by the State of California, and BankTEXAS National Association, a national banking association ("BankTEXAS") (collectively, the "Subsidiary Banks"). FBA, through FB California and BankTEXAS, operates a total of eleven banking locations in the San Francisco-Sacramento corridor of Northern California and a total of six banking locations in Houston, Dallas, Irving and McKinney, Texas. As of March 31, 1998, FBA had approximately $692.4 million in total assets, $444.1 million in total loans, net of unearned discount, $600.6 million in total deposits and $56.8 million in total stockholders' equity. Since 1994, FBA has been controlled by First Banks, Inc., a $4.3 billion bank holding company headquartered in St. Louis, Missouri ("First Banks"). In an effort to enhance its banking franchise, FBA places emphasis upon acquiring other financial institutions as a means of accelerating its growth in order to expand its presence in a given market, to increase the scope of its market area or to enter new or noncontiguous market areas. After an acquisition is consummated, FBA endeavors to enhance the franchise of the acquired entity by supplementing the acquired entity's marketing and business development efforts in order to broaden customer bases, strengthen particular business segments or fill voids in its overall market coverage. In addition, the acquisition program enables FBA to further leverage the operational support services available to it through First Banks and to provide the products and services typically available only through such a larger organization. FBA's management philosophy is to centralize overall corporate policies, procedures and administrative functions and to provide operational support functions for the Subsidiary Banks. Primary responsibility for implementation of such policies and management of the Subsidiary Banks resides with the officers and directors of the respective Subsidiary Banks. After First Banks' 1994 acquisition of control of FBA, FBA embarked on a business strategy to improve its operating performance and strengthen its asset quality as prerequisites to initiating an effective acquisition program. The initial stages of this strategy involved substantial restructuring of assets and liabilities and reduction of operating expenses, resulting in significant losses in the sale of investment securities and the establishment of substantial provisions for loan losses. The loan losses related primarily to problems with FBA's portfolio of indirect automobile loans. The losses also included significant nonrecurring expenses in connection with the reduction of non-interest expenses, including personnel and employee benefits, occupancy, data processing and other expenses. Following net losses of $4.8 million and $905,000 for the fiscal years ended December 31, 1995 and 1994, respectively, reflecting the implementation of the new strategy, FBA returned to profitability in 1996, with consolidated net income of $691,000, representing a 0.15% return on average assets. FBA's profitability has continued to improve. FBA has reported consolidated net income of $3.5 million for the fiscal year ended December 31, 1997 and consolidated net income of $1.1 million for the three months ended March 31, 1998. Selected consolidated financial data of FBA and its subsidiaries, including the Subsidiary Banks, as of and for the five years ended December 31, 1997 and the three months ended March 31, 1998 and 1997 are set forth below:
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ------------------------ ----------------------------------------------------------- 1998 1997 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ---- ---- (DOLLARS EXPRESSED IN THOUSANDS) Net income (loss)............... $ 1,100 484 3,533 691 (4,814) (905) 219 Stockholders' equity............ 56,841 38,013 45,091 38,195 40,965 39,714 14,952 Total assets.................... 692,409 530,023 643,664 529,087 468,486 331,790 368,608 Return on average assets........ 0.67% 0.37% 0.65% 0.15% (1.28)% (0.25)% 0.07% Return on average equity........ 8.13 5.11 8.90 1.71 (12.06) (3.66) 1.49 - -------- Ratios as of March 31, 1998 and 1997 are annualized.
2 7 The Subsidiary Banks offer a broad range of commercial and personal banking services, including certificates of deposit, individual retirement and other time deposit accounts, checking and other demand deposit accounts, and interest checking, savings and money market accounts. Loan product offerings include commercial and financial, commercial and residential real estate, real estate construction and development and consumer loans. Other financial services include mortgage banking, automatic teller machines, telephone banking, lockbox deposits, cash management services, sweep accounts, credit-related insurance and safe deposit boxes. FBA and the Subsidiary Banks purchase certain services and supplies, including data processing services, internal auditing, loan review, income tax preparation and assistance, accounting, asset/liability management and investment services, loan servicing and other management and administrative services from First Banks and its affiliates. The following table provides general information regarding FB California and BankTEXAS as of March 31, 1998:
NUMBER OF TOTAL LOANS, NET OF TOTAL LOCATIONS ASSETS UNEARNED DISCOUNT DEPOSITS --------- ------ ----------------- -------- (DOLLARS EXPRESSED IN THOUSANDS) FB California........................... 11 $415,806 270,713 365,405 BankTEXAS............................... 6 271,902 173,386 235,215
While FBA initially focused its acquisition efforts within its primary market areas of Houston and Dallas, Texas and the immediately surrounding areas, increased prices for potential acquisition candidates in the Texas market generally reduced the suitability to FBA of potential acquisition candidates based in such areas. Accordingly, FBA broadened its target market to include California, where FBA perceived pricing to be more attractive. The economic advantages of the California market were enhanced by the geographic proximity of various offices of First Bank & Trust, a subsidiary of First Banks. Between October 1996 and February 1998, FBA completed four acquisitions of banks located in northern California, which banks were subsequently merged together to form FB California. See "Management's Discussion and Analysis--Acquisitions" for a discussion of FBA's recent acquisitions. PENDING ACQUISITION On June 8, 1998, FBA announced the signing of an Agreement in Principle to acquire Redwood Bancorp ("Redwood"), and its wholly owned subsidiary, Redwood Bank, for cash consideration of $26 million. Redwood is headquartered in San Francisco, California and operates four banking locations in the San Francisco Bay area. As of March 31, 1998, Redwood had approximately $152.0 million in total assets, $120.1 million in total loans, net of unearned discount, $130.1 million in total deposits and $17.8 million in total stockholder's equity. The transaction is subject to various conditions, including the negotiation of a definitive agreement and the receipt of regulatory approvals and the approval of Redwood's sole shareholder. FBA anticipates the transaction will be consummated at the end of the fourth quarter of 1998. See "Use of Proceeds" and "Pro Forma Financial Information." Selected consolidated financial data of Redwood and its subsidiaries, as of and for the two years ended December 31, 1997 and the three months ended March 31, 1998 and 1997 are set forth below:
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, -------------------- -------------------- 1998 1997 1997 1996 ---- ---- ---- ---- (DOLLARS EXPRESSED IN THOUSANDS) Net income (loss)....................... $ 425 250 1,420 3,307 Stockholders' equity.................... 17,826 16,127 17,472 15,943 Total assets............................ 152,006 133,157 145,472 134,061 Return on average assets................ 1.14% 0.75% 1.02% 2.63% Return on average equity................ 9.62 6.24 8.50 23.02 - -------- Ratios as of March 31, 1998 and 1997 are annualized.
FBA's principal executive office is located at 135 North Meramec, St. Louis, Missouri 63105, and its telephone number is (314) 854-4600. 3 8 THE TRUST The Trust is a statutory business trust formed under Delaware law pursuant to (i) a trust agreement, dated as of June 18, 1998, executed by the Company, as depositor, and the trustees of the Trust (together with the Property Trustee, the "Trustees"), and (ii) a certificate of trust filed with the Secretary of State of the State of Delaware on June 18, 1998. The initial trust agreement will be amended and restated in its entirety (as so amended and restated, the "Trust Agreement") substantially in the form filed as an exhibit to the Registration Statement of which this Prospectus forms a part. The Trust Agreement will be qualified as an indenture under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). Upon issuance of the Preferred Securities, the purchasers thereof will own all of the Preferred Securities. The Company will acquire all of the Common Securities which will represent an aggregate liquidation amount equal to at least 3% of the total capital of the Trust. The Common Securities will rank pari passu, and payments will be made thereon pro rata, with the Preferred Securities, except that upon the occurrence and during the continuance of an Event of Default (as defined herein) under the Trust Agreement resulting from a Debenture Event of Default, the rights of the Company as holder of the Common Securities to payment in respect of Distributions and payments upon liquidation, redemption or otherwise will be subordinated to the rights of the holders of the Preferred Securities. See "Description of the Preferred Securities--Subordination of Common Securities." The Trust exists for the exclusive purposes of (i) issuing the Trust Securities representing undivided beneficial interests in the assets of the Trust, (ii) investing the gross proceeds of the Trust Securities in the Subordinated Debentures issued by the Company, and (iii) engaging in only those other activities necessary, advisable, or incidental thereto. The Subordinated Debentures and payments thereunder will be the only assets of the Trust and payments under the Subordinated Debentures will be the only revenue of the Trust. The Trust has a term of 55 years, but may terminate earlier as provided in the Trust Agreement. The principal executive office of the Trust is 135 North Meramec, St. Louis, Missouri 63105, and its telephone number is (314) 854-4600. The number of Trustees will, pursuant to the Trust Agreement, initially be five. Three of the Trustees (the "Administrative Trustees") will be persons who are employees or officers of, or who are affiliated with, the Company. The fourth trustee will be a financial institution that is unaffiliated with the Company, which trustee will serve as institutional trustee under the Trust Agreement and as indenture trustee for the purposes of compliance with the provisions of the Trust Indenture Act (the "Property Trustee"). State Street Bank and Trust Company, a state chartered trust company organized under the laws of the Commonwealth of Massachusetts, will be the Property Trustee until removed or replaced by the holder of the Common Securities. For purposes of compliance with the provisions of the Trust Indenture Act, State Street Bank and Trust Company will also act as trustee (the "Guarantee Trustee") under the Guarantee and as Debenture Trustee (as defined herein) under the Indenture. The fifth trustee will be an entity that maintains its principal place of business in the State of Delaware (the "Delaware Trustee"). Wilmington Trust Company, a Delaware chartered trust company, will act as Delaware Trustee. The Property Trustee will hold title to the Subordinated Debentures for the benefit of the holders of the Trust Securities and in such capacity will have the power to exercise all rights, powers and privileges under the Indenture. The Property Trustee will also maintain exclusive control of a segregated non-interest-bearing bank account (the "Property Account") to hold all payments made in respect of the Subordinated Debentures for the benefit of the holders of the Trust Securities. The Property Trustee will make payments of Distributions and payments on liquidation, redemption and otherwise to the holders of the Trust Securities out of funds from the Property Account. The Guarantee Trustee will hold the Guarantee for the benefit of the holders of the Preferred Securities. The Company, as the holder of all the Common Securities, will have the right to appoint, remove or replace any Trustee and to increase or decrease the number of Trustees. The Company will pay all fees and expenses related to the Trust and the offering of the Trust Securities. The rights of the holders of the Preferred Securities, including economic rights, rights to information and voting rights, are set forth in the Trust Agreement, the Delaware Business Trust Act (the "Trust Act") and the Trust Indenture Act. See "Description of the Preferred Securities." 4 9 THE OFFERING Securities Offered................ 1,600,000 Preferred Securities having a Liquidation Amount of $25 per Preferred Security. The Preferred Securities represent preferred undivided beneficial interests in the assets of the Trust, which assets will consist solely of the Subordinated Debentures and payments thereunder. The Trust has granted the Underwriters an option, exercisable within 30 days after the date of this Prospectus, to purchase up to an additional 240,000 Preferred Securities at the initial offering price, solely to cover over-allotments, if any. Distributions..................... The Distributions payable on each Preferred Security will be fixed at a rate per annum of % of the Liquidation Amount of $25 per Preferred Security, will be cumulative, will accrue from , 1998, the date of original issuance of the Preferred Securities, and will be payable quarterly in arrears, on March 31, June 30, September 30 and December 31 of each year, commencing September 30, 1998. See "Description of the Preferred Securities--Distributions--Payment of Distributions." Option to Extend Interest Payment Period.......................... The Company has the right, at any time, so long as no Debenture Event of Default has occurred and is continuing, to defer payments of interest on the Subordinated Debentures for a period not exceeding 20 consecutive quarters; provided, that no Extension Period may extend beyond the Stated Maturity of the Subordinated Debentures. As a consequence of the extension by the Company of the interest payment period, quarterly Distributions on the Preferred Securities will be de- ferred (though such Distributions would continue to accrue with interest thereon compounded quarterly, since interest will continue to accrue and compound on the Subordinated Debentures) during any such Extension Period. During an Extension Period, the Company will be prohibited, subject to certain exceptions described herein, from declaring or paying any cash distributions with respect to its capital stock or debt securities that rank pari passu with or junior to the Subordinated Debentures. Upon the termination of any Extension Period and the payment of all amounts then due, the Company may commence a new Extension Period, subject to the foregoing requirements. See "Description of the Preferred Securities--Distributions--Extension Period" and "Description of the Subordi- nated Debentures--Option to Extend Interest Payment Period." Should an Extension Period occur, holders of Preferred Securities will be required to include deferred interest income in their gross income for United States federal income tax purposes in advance of receipt of the cash distributions with respect to such deferred interest payments. See "Certain Federal Income Tax Consequences--Potential Extension of Interest Payment Period and Original Issue Discount." Optional Redemption............... The Preferred Securities are subject to mandatory redemption, in whole or in part, upon repayment of the Subordinated Debentures at maturity or their earlier redemption. Subject to Federal Reserve approval, if then required under applica- ble capital guidelines or policies of the Federal Reserve, the Subordinated Debentures are redeemable prior to maturity at the option of the Company (i) on or after June 30, 2003, in whole at any time or in part from time to time, or (ii) at any time, in whole (but not in part), within 180 days following the occurrence of a Tax Event, a Capital Treatment Event or an Investment Company Event, in each case at the redemption price equal to 100% of the principal amount of the Subordinated Debentures, together with any accrued but unpaid interest to the date fixed for redemption. See "Description of the Subordinated Debentures--Redemption." 5 10 Distribution of Subordinated Debentures...................... The Company has the right at any time to terminate the Trust and cause the Subordinated Debentures to be distributed to holders of Preferred Securities in liquidation of the Trust, subject to the Company having received prior approval of the Federal Reserve to do so if then required under applicable capital guidelines or policies of the Federal Reserve. See "Description of the Preferred Securities--Redemption" and "Description of the Preferred Securities--Liquidation Distribution Upon Termination." Guarantee......................... The Company has guaranteed the payment of Distributions and payments on liquidation or redemption of the Preferred Securities, but only in each case to the extent of funds held by the Trust, as described herein. The Company and the Trust believe that, taken together, the obligations of the Company under the Guarantee, the Trust Agreement, the Subordinated Debentures, the Indenture and the Expense Agreement provide, in the aggregate, a full, irrevocable and unconditional guarantee, on a subordinated basis, of all of the obligations of the Trust under the Preferred Securities. The obligations of the Company under the Guarantee and the Preferred Securities are subordinate and junior in right of payment to all Senior Debt, Subordinated Debt and Additional Senior Obligations of the Company. If the Company does not make principal or interest payments on the Subordinated Debentures, the Trust will not have sufficient funds to make distributions on the Preferred Securities; in such event, the Guarantee will not apply to such Distributions until the Trust has sufficient funds available therefor. See "Description of the Guarantee." Voting Rights..................... The holders of the Preferred Securities will have no voting rights except in limited circumstances. The affirmative consent of the holders of at least 66 2/3% of the outstanding Preferred Securities will be required by the Trust for amendments to the Trust Agreement that would adversely affect the rights or privileges of the holders of the Preferred Securities. See "Description of the Preferred Securities--Voting Rights; Amendment of Trust Agreement." Use of Proceeds................... The proceeds from the sale of the Preferred Securities offered hereby will be used by the Trust to purchase the Subordinated Debentures issued by the Company. The Company intends to use the net proceeds from the sale of the Subordinated Debentures to repay outstanding indebtedness to First Banks under the terms of a revolving promissory note payable, for general corporate purposes, for acquisi- tions (including the pending acquisition of Redwood), and the possible repurchase of common stock from time to time. The portion of the net proceeds from the sale of Subordinated Debentures which is not used to repay existing obligations will be invested in short term investment securities pending its use for the purposes described above. See "Use of Proceeds" and "Management's Discussion and Analysis--Acquisitions." New York Stock Exchange........... Application has been made to have the Preferred Securities approved for listing on the NYSE under the symbol "FBAPrT".
6 11 SUMMARY CONSOLIDATED FINANCIAL DATA The consolidated financial data below, insofar as it relates to the five years ended December 31, 1997, is derived from the audited consolidated financial statements of FBA. The data for the three month periods ended March 31, 1998 and 1997 has been derived from unaudited interim financial statements; however, in the opinion of the Company, such unaudited interim statements include all adjustments (consisting of normal recurring accruals) necessary to fairly present the data for such periods. The results of operations for the three month period ended March 31, 1998 are not necessarily indicative of results to be achieved for the full year. Such data is qualified in its entirety by reference to the consolidated financial statements of FBA included elsewhere in this Prospectus or incorporated by reference and should be read in conjunction with such financial statements and related notes thereto and "Management's Discussion and Analysis." See "Available Information" and "Incorporation of Certain Documents by Reference."
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ------------------ ------------------------------------------------ 1998 1997 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ---- ---- (DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Interest income......... $ 12,996 9,611 42,517 33,382 26,556 22,649 21,966 Interest expense........ 5,899 4,508 19,155 15,533 13,134 11,072 9,750 -------- ------- ------- ------- ------- ------- ------- Net interest income..... 7,097 5,103 23,362 17,849 13,422 11,577 12,216 Provision for possible loan losses........... 300 550 2,000 2,405 6,416 1,258 490 -------- ------- ------- ------- ------- ------- ------- Net interest income after provision for possible loan losses................ 6,797 4,553 21,362 15,444 7,006 10,319 11,726 Noninterest income...... 1,150 871 3,287 3,585 129 (4,511) 3,068 Noninterest expense..... 6,057 4,493 17,677 17,737 14,148 16,174 14,575 -------- ------- ------- ------- ------- ------- ------- Income (loss) before provision (benefit) for income taxes and minority interest in (income) loss of subsidiary............ 1,890 931 6,972 1,292 (7,013) (10,366) 219 Provision (benefit) for income tax expense.... 790 361 3,145 470 (2,188) (9,461) -- -------- ------- ------- ------- ------- ------- ------- Net income (loss) before minority interest in (income) loss of subsidiary............ 1,100 570 3,827 822 (4,825) (905) 219 Minority interest in (income) loss of subsidiary............ -- (86) (294) (131) 11 -- -- -------- ------- ------- ------- ------- ------- ------- Net income (loss)....... $ 1,100 484 3,533 691 (4,814) (905) 219 ======== ======= ======= ======= ======= ======= ======= DIVIDENDS: Common stock............ $ -- -- -- -- -- -- -- Ratio of total dividends declared to net income................ --% --% --% --% --% --% --% PER SHARE DATA: Earnings (loss) per share: Basic............... $ 0.22 0.12 0.87 0.16 (1.19) (0.41) 0.17 Diluted............. 0.22 0.12 0.86 0.16 (1.19) (0.41) 0.14 Weighted average common stock outstanding (in thousands)............ 4,911 4,082 4,069 4,225 4,032 2,181 1,290 BALANCE SHEET DATA (AT PERIOD END): Investment securities... $141,131 139,682 148,181 125,139 113,586 61,400 160,158 Loans, net of unearned discount.............. 444,099 327,015 431,455 336,371 266,588 203,314 167,732 Total assets............ 692,409 530,023 643,664 529,087 468,486 331,790 368,608 Total deposits.......... 600,557 452,455 556,527 455,942 405,427 241,570 242,897 Promissory note payable............... 13,450 14,000 14,900 14,000 1,054 1,054 1,054 Stockholders' equity.... 56,841 38,013 45,091 38,195 40,965 39,714 14,952 EARNINGS RATIOS: Return on average total assets............ 0.67% 0.37% 0.65% 0.15% (1.28)% (0.25)% 0.07% Return on average stockholders' equity............ 8.13 5.11 8.90 1.71 (12.06) (3.66) 1.49 ASSET QUALITY RATIOS: Allowance for possible loan losses to loans................. 2.72 3.32 2.64 3.19 3.98 1.36 1.57 Nonperforming loans to loans............. 1.35 0.75 0.66 0.88 1.90 0.14 0.37 Allowance for possible loan losses to nonperforming loans............. 200.95 444.66 400.81 363.10 209.18 940.61 423.95 Nonperforming assets to loans and foreclosed assets............ 1.51 1.06 0.80 1.17 2.78 0.90 2.22 Net loan charge-offs to average loans..... 0.49 0.52 0.40 1.69 1.45 0.62 0.52 CAPITAL RATIOS: Average stockholders' equity to average total assets.......... 8.25 7.32 7.34 8.86 10.64 6.80 4.40 Total risk-based capital ratio................. 9.08 6.94 6.88 6.62 9.64 17.50 8.47 Leverage ratio.......... 6.77 4.22 4.96 4.46 5.98 11.97 4.27 RATIO OF EARNINGS (LOSS) TO FIXED CHARGES: Including interest on deposits.............. 1.31x 1.20x 1.35x 1.08x 0.50x 0.11x 1.02x Excluding interest on deposits.............. 3.35 2.17 3.00 1.53 (1.13) (1.28) 1.09 - ---------- The comparability of the selected data presented is affected by FBA's acquisitions of Pacific Bay Bank, Surety Bank and Sunrise Bank of California on February 2, 1998, December 1, 1997 and November 1, 1996, respectively. These acquisitions were accounted for as purchases and, accordingly, the selected data includes the financial position and results of operations of each acquired entity only for the periods subsequent to its date of acquisition. In addition, on February 2, 1998, FBA completed its acquisition of First Commercial Bancorp, Inc. and its subsidiary, First Commercial Bank. As discussed in Note 2 to the consolidated financial statements of FBA, the selected data has been restated to reflect First Banks, Inc.'s interest in First Commercial Bancorp, Inc. for the periods subsequent to August 23, 1995. Ratios for the three month periods are annualized. Nonperforming loans consist of nonaccrual loans and loans with restructured terms. Nonperforming assets consist of nonperforming loans and foreclosed assets. For purposes of calculating the ratio of earnings to fixed charges, earnings consist of income before taxes plus interest and rent expense. Fixed charges consist of interest and rent expense.
7 12 RISK FACTORS Prospective investors should carefully consider, together with the other information contained and incorporated by reference in this Prospectus, the following risk factors in evaluating the Company and its business and the Trust before purchasing the Preferred Securities offered hereby. Prospective investors should note, in particular, that this Prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Act of 1934, as amended (the "Exchange Act"), and that actual results could differ materially from those contemplated by such statements. The considerations listed below represent certain important factors the Company believes could cause such results to differ. These considerations are not intended to represent a complete list of the general or specific risks that may affect the Company and the Trust. It should be recognized that other risks may be significant, presently or in the future, and that the risks set forth below may affect the Company and the Trust to a greater extent than indicated. RISK FACTORS RELATING TO THE PREFERRED SECURITIES RANKING OF SUBORDINATED OBLIGATIONS UNDER THE GUARANTEE AND THE SUBORDINATED DEBENTURES The obligations of the Company under the Guarantee issued for the benefit of the holders of Preferred Securities and under the Subordinated Debentures are unsecured and rank subordinate and junior in right of payment to all Senior Debt, Subordinated Debt and Additional Senior Obligations of the Company, whether now existing or hereafter incurred. At March 31, 1998, the aggregate outstanding Senior Debt, Subordinated Debt and Additional Senior Obligations of the Company was approximately $23.4 million. Because the Company is a holding company, the right of the Company to participate in any distribution of assets of any Subsidiary Bank upon such Subsidiary Bank's liquidation or reorganization or otherwise (and thus the ability of holders of the Preferred Securities to benefit indirectly from such distribution) is subject to the prior claims of creditors of that Subsidiary Bank, except to the extent that the Company may itself be recognized as a creditor of that Subsidiary Bank. The Subordinated Debentures, therefore, will be effectively subordinated to all existing and future liabilities of the Subsidiary Banks and holders of Subordinated Debentures and Preferred Securities should look only to the assets of the Company for payments on the Subordinated Debentures. Neither the Indenture, the Guarantee nor the Trust Agreement places any limitation on the amount of secured or unsecured debt, including Senior Debt, Subordinated Debt and Additional Senior Obligations, that may be incurred by the Company. See "Description of the Guarantee--Status of the Guarantee" and "Description of the Subordinated Debentures--Subordination." The ability of the Trust to pay amounts due on the Preferred Securities is dependent solely upon the Company making payments on the Subordinated Debentures as and when required. OPTION TO EXTEND INTEREST PAYMENT PERIOD, TAX CONSEQUENCES; MARKET PRICE CONSEQUENCES The Company has the right under the Indenture, so long as no Debenture Event of Default has occurred and is continuing, to defer the payment of interest on the Subordinated Debentures at any time or from time to time for a period not exceeding 20 consecutive quarters with respect to each Extension Period; provided that no Extension Period may extend beyond the Stated Maturity of the Subordinated Debentures. As a consequence of any such deferral, quarterly Distributions on the Preferred Securities by the Trust will be deferred (and the amount of Distributions to which holders of the Preferred Securities are entitled will accumulate additional Distributions thereon at the rate of % per annum, compounded quarterly from the relevant payment date for such Distributions) during any such Extension Period. During any such Extension Period, the Company may not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock (other than (a) dividends or distributions in common stock of the Company, any declaration of a non-cash dividend in connection with the implementation of a shareholder rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, and (b) purchases of common stock of the Company related to the rights under any of the Company's benefit plans for its directors, officers or employees), (ii) make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company that rank pari passu with or junior in interest to the Subordinated Debentures or make any guarantee payments with respect to any guarantee by the Company of the debt securities of any subsidiary of the Company if such guarantee ranks pari passu with or junior in interest to the Subordinated Debentures (other than payments under the Guarantee), or (iii) redeem, purchase or acquire less than all of the Subordinated Debentures or any of the Preferred Securities. Prior to the termination of any such Extension Period, the Company may further defer the payment of interest; provided that no Extension Period may exceed 20 8 13 consecutive quarters or extend beyond the Stated Maturity of the Subordinated Debentures. Upon the termination of any Extension Period and the payment of all interest then accrued and unpaid (together with interest thereon at the annual rate of % compounded quarterly, to the extent permitted by applicable law), the Company may elect to begin a new Extension Period, subject to the above requirements. Subject to the foregoing, there is no limitation on the number of times the Company may elect to begin an Extension Period. See "Description of the Preferred Securities--Distributions--Extension Period" and "Description of the Subordinated Debentures--Option to Extend Interest Payment Period." Should an Extension Period occur, each holder of Preferred Securities will be required to accrue and recognize income (in the form of original issue discount ("OID")) in respect of its pro rata share of the interest accruing on the Subordinated Debentures held by the Trust for United States federal income tax purposes. A holder of Preferred Securities must, as a result, include such income in gross income for United States federal income tax purposes in advance of the receipt of cash, and will not receive the cash related to such income from the Trust if the holder disposes of the Preferred Securities prior to the record date for the payment of the related Distributions. See "Certain Federal Income Tax Consequences--Potential Extension of Interest Payment Period and Original Issue Discount." The Company has no current intention of exercising its right to defer payments of interest by extending the interest payment period on the Subordinated Debentures. Should the Company elect, however, to exercise such right in the future, the market price of the Preferred Securities is likely to be adversely affected. A holder that disposes of its Preferred Securities during an Extension Period, therefore, might not receive the same return on its investment as a holder that continues to hold its Preferred Securities. As a result of the existence of the Company's right to defer interest payments, the market price of the Preferred Securities may be more volatile than the market prices of other securities on which OID accrues that are not subject to such optional deferrals. TAX EVENT, CAPITAL TREATMENT EVENT OR INVESTMENT COMPANY EVENT; REDEMPTION The Company has the right to redeem the Subordinated Debentures in whole (but not in part) within 180 days following the occurrence of a Tax Event, a Capital Treatment Event or an Investment Company Event (whether occurring before or after June 30, 2003), and, therefore, cause a mandatory redemption of the Preferred Securities. The exercise of such right is subject to the Company having received prior approval of the Federal Reserve to do so if then required under applicable capital guidelines or policies of the Federal Reserve. See "--Redemption; Exchange of Preferred Securities for Subordinated Debentures." "Tax Event" means the receipt by the Trust of an opinion of counsel rendered by a law firm having a recognized tax and securities law practice to the effect that, as a result of any amendment to, or change (including any announced prospective change) in the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein, or as a result of any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or which pronouncement or decision is announced on or after the date of issuance of the Preferred Securities under the Trust Agreement, there is more than an insubstantial risk that (i) the Trust is, or will be within 90 days of the date of such opinion, subject to United States federal income tax with respect to income received or accrued on the Subordinated Debentures, (ii) interest payable by the Company on the Subordinated Debentures is not, or, within 90 days of such opinion, will not be, deductible by the Company, in whole or in part, for United States federal income tax purposes, or (iii) the Trust is, or will be within 90 days of the date of the opinion, subject to more than a de minimis amount of other taxes, duties or other governmental charges. The Company must request and receive an opinion with regard to such matters within a reasonable period of time after it becomes aware of the possible occurrence of any of the events described in clauses (i) through (iii) above. According to a petition recently filed in the United States Tax Court by a corporation unrelated to the Company and the Trust, the Internal Revenue Service has challenged the deductibility for United States federal income tax purposes of interest payments on certain purported debt instruments for United States federal income tax purposes where the holders of the debt instruments, in turn, issued preferred securities to investors. Although the overall structure of the financing arrangement involved in that case is somewhat similar to the financing structure for the Subordinated Debentures and the Trust, the relevant facts in that case appear to differ significantly from those relating to the Subordinated Debentures and the Trust. Whether the Internal Revenue Service would attempt to challenge the deductibility of interest on the Subordinated Debentures cannot be predicted. The Company intends to 9 14 take the position that interest payments on the Subordinated Debentures will be deductible by the Company for United States federal income tax purposes. See "Certain Federal Income Tax Consequences--Classification of the Subordinated Debentures." Adverse developments relating to the deductibility of interest, whether arising in connection with the case currently pending in the United States Tax Court or not, could give rise to a Tax Event. Consequently, there can be no assurance that a Tax Event will not occur. If the Internal Revenue Service successfully challenged the deductibility of interest on the Subordinated Debentures, and the Subordinated Debentures were determined to constitute equity rather than indebtedness of the Company, the Company would not be entitled to deduct the stated interest payments thereon and thus, the Company's federal income tax liability would likely increase. Consequently, the Company might have less cash on hand with which to make distributions and amounts payable on liquidation, redemption or otherwise, to the holders of the Preferred Securities. "Capital Treatment Event" means the receipt by the Trust of an opinion of counsel rendered by a law firm having a recognized banking law practice to the effect that, as a result of any amendment to or any change (including any announced prospective change) in the laws (or any regulations thereunder) of the United States or any political subdivision thereof or therein, or as a result of any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or which proposed change, pronouncement or decision is announced on or after the date of issuance of the Preferred Securities under the Trust Agreement, there is more than an insubstantial risk of impairment of the Company's ability to treat the aggregate Liquidation Amount of the Preferred Securities (or any substantial portion thereof) as "Tier 1 Capital" (or the then equivalent thereof) for purposes of the capital adequacy guidelines of the Federal Reserve, as then applicable to the Company, provided, however, that the inability of the Company to treat all or any portion of the Liquidation Amount of the Preferred Securities as Tier 1 Capital shall not constitute the basis for a Capital Treatment Event if such inability results from the Company having cumulative preferred capital in excess of the amount which may qualify for treatment as Tier 1 Capital under applicable capital adequacy guidelines of the Federal Reserve. "Investment Company Event" means the receipt by the Trust of an opinion of counsel rendered by a law firm having a recognized tax and securities law practice to the effect that, as a result of the occurrence of a change in law or regulation or a change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority, the Trust is or will be considered an "investment company" that is required to be registered under the Investment Company Act of 1940, as amended (the "Investment Company Act"), which change becomes effective on or after the date of original issuance of the Preferred Securities. See "--Risk Factors Relating to the Preferred Securities--Recent Tax Legislation" for a discussion of certain legislative proposals that, if adopted, could give rise to a Tax Event, which may permit the Company to cause a redemption of the Preferred Securities prior to June 30, 2003. SHORTENING OR EXTENSION OF STATED MATURITY OF SUBORDINATED DEBENTURES The Company has the right, at any time, to shorten the maturity of the Subordinated Debentures to a date not earlier than June 30, 2003. The exercise of such right is subject to the Company having received prior approval of the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve. The Company also has the right to extend the maturity of the Subordinated Debentures (whether or not the Trust is terminated and the Subordinated Debentures are distributed to holders of the Preferred Securities) to a date no later than June 30, 2037, a date approximately 39 years after the initial issuance of the Preferred Securities. Such right may only be exercised, however, if at the time such election is made and at the time of such extension (i) the Company is not in bankruptcy, otherwise insolvent or in liquidation, (ii) the Company is not in default in the payment of any interest or principal on the Subordinated Debentures, and (iii) the Trust is not in arrears on payments of Distributions on the Preferred Securities and no deferred Distributions are accumulated. See "Description of the Subordinated Debentures--General." RIGHTS UNDER THE GUARANTEE The Guarantee guarantees to the holders of the Preferred Securities, to the extent not paid by the Trust, (i) any accrued and unpaid Distributions required to be paid on the Preferred Securities, to the extent that the Trust has funds available therefor at such time, (ii) the Redemption Price (as defined herein) with respect to any Preferred Securities called for redemption, to the extent that the Trust has funds available therefor at such time, and (iii) upon a voluntary or involuntary dissolution, winding-up or liquidation of the Trust (other than in connection with the 10 15 distribution of Subordinated Debentures to the holders of Preferred Securities or a redemption of all of the Preferred Securities), the lesser of (a) the amount of the Liquidation Distribution (as defined herein), to the extent the Trust has funds available therefor at such time, and (b) the amount of assets of the Trust remaining available for distribution to holders of the Preferred Securities in liquidation of the Trust. The holders of not less than a majority in Liquidation Amount of the Preferred Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee in respect of the Guarantee or to direct the exercise of any trust power conferred upon the Guarantee Trustee under the Guarantee. Any holder of the Preferred Securities may institute a legal proceeding directly against the Company to enforce its rights under the Guarantee without first instituting a legal proceeding against the Trust, the Guarantee Trustee or any other Person (as defined in the Guarantee). If the Company were to default on its obligation to pay amounts payable under the Subordinated Debentures, the Trust would lack funds for the payment of Distributions or amounts payable on redemption of the Preferred Securities or otherwise, and, in such event, holders of Preferred Securities would not be able to rely upon the Guarantee for such amounts. In the event, however, that a Debenture Event of Default has occurred and is continuing and such event is attributable to the failure of the Company to pay interest on or principal of the Subordinated Debentures on the payment date on which such payment is due and payable, then a holder of Preferred Securities may institute a legal proceeding directly against the Company for enforcement of payment to such holder of the principal of or interest on such Subordinated Debentures having a principal amount equal to the aggregate Liquidation Amount of the Preferred Securities of such holder (a "Direct Action"). The exercise by the Company of its right, as described herein, to defer the payment of interest on the Subordinated Debentures does not constitute a Debenture Event of Default. In connection with such Direct Action, the Company will have a right of set-off under the Indenture to the extent of any payment made by the Company to such holder of Preferred Securities in the Direct Action. Except as described herein, holders of Preferred Securities will not be able to exercise directly any other remedy available to the holders of the Subordinated Debentures or assert directly any other rights in respect of the Subordinated Debentures. See "Description of the Subordinated Debentures--Enforcement of Certain Rights by Holders of Preferred Securities," "Description of the Subordinated Debentures--Debenture Events of Default" and "Description of the Guarantee." The Trust Agreement provides that each holder of Preferred Securities by acceptance thereof agrees to the provisions of the Guarantee and the Indenture. The Company and the Trust believe that, taken together, the obligations of the Company under the Guarantee, the Trust Agreement, the Subordinated Debentures, the Indenture and the Expense Agreement provide in the aggregate, a full, irrevocable and unconditional guarantee, on a subordinated basis, of all of the obligations of the Trust under the Preferred Securities. See "Relationship Among the Preferred Securities, the Subordinated Debentures and the Guarantee--Full and Unconditional Guarantee." NO VOTING RIGHTS EXCEPT IN LIMITED CIRCUMSTANCES Holders of Preferred Securities will have no voting rights except in limited circumstances relating only to the modification of the Preferred Securities and the exercise of the rights of the Trust as holder of the Subordinated Debentures and the Guarantee. The affirmative consent of the holders of at least 66 2/3% of the outstanding Preferred Securities will be required by the Trust for amendments to the Trust Agreement or the Guarantee that would adversely affect the rights or privileges of the holders of the Preferred Securities. Holders of Preferred Securities will not be entitled to vote to appoint, remove or replace the Property Trustee or the Delaware Trustee, as such voting rights are vested exclusively in the holder of the Common Securities (except upon the occurrence of certain events described herein). The Property Trustee, the Administrative Trustees and the Company may amend the Trust Agreement without the consent of holders of Preferred Securities to ensure that the Trust will be classified for United States federal income tax purposes as a grantor trust even if such action adversely affects the interests of such holders. See "Description of the Preferred Securities--Voting Rights; Amendment of Trust Agreement" and "Description of the Preferred Securities--Removal of the Trust Trustees." RECENT TAX LEGISLATION Certain legislative proposals were made in 1996 and 1997 which, if enacted, could have adversely affected the ability of the Company to deduct interest paid on the Subordinated Debentures. These proposals were not, however, incorporated into the legislation enacted on August 5, 1997 as the Taxpayer Relief Act of 1997. Nevertheless, there can be no assurance that other legislation enacted after the date hereof will not otherwise adversely affect the ability 11 16 of the Company to deduct the interest payable on the Subordinated Debentures. Consequently, there can be no assurance that a Tax Event will not occur. A Tax Event would permit, but not require, the Company, upon approval of the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve, to cause a redemption of the Preferred Securities before, as well as after, June 30, 2003. See "Description of the Subordinated Debentures--Redemption" and "Description of the Preferred Securities--Redemption--Tax Event Redemption, Capital Treatment Event Redemption or Investment Company Event Redemption" and "Certain Federal Income Tax Consequences--Effect of Recent Changes in Tax Laws." REDEMPTION; EXCHANGE OF PREFERRED SECURITIES FOR SUBORDINATED DEBENTURES The Company has the right at any time to dissolve, wind-up or terminate the Trust and cause the Subordinated Debentures to be distributed to the holders of the Preferred Securities in exchange therefor in liquidation of the Trust. The exercise of such right is subject to the Company having received prior approval of the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve. The Company will have the right, in certain circumstances, to redeem the Subordinated Debentures in whole or in part, in lieu of a distribution of the Subordinated Debentures by the Trust, in which event the Trust will redeem the Trust Securities on a pro rata basis to the same extent as the Subordinated Debentures are redeemed by the Company. Any such distribution or redemption prior to the Stated Maturity will be subject to prior approval of the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve. See "Description of the Preferred Securities--Redemption--Tax Event Redemption, Capital Treatment Event Redemption or Investment Company Event Redemption." Under current United States federal income tax law, a distribution of Subordinated Debentures upon the dissolution of the Trust would not be a taxable event to holders of the Preferred Securities. If, however, the Trust were to be recharacterized as an association taxable as a corporation at the time of the dissolution of the Trust, the distribution of the Subordinated Debentures may constitute a taxable event to holders of Preferred Securities. Moreover, upon occurrence of a Tax Event, a dissolution of the Trust in which holders of the Preferred Securities receive cash may be a taxable event to such holders. See "Certain Federal Income Tax Consequences--Receipt of Subordinated Debentures or Cash Upon Liquidation of the Trust." There can be no assurance as to the market prices for the Preferred Securities or the Subordinated Debentures that may be distributed in exchange for Preferred Securities upon a dissolution or liquidation of the Trust. The Preferred Securities or the Subordinated Debentures may trade at a discount to the price that the investor paid to purchase the Preferred Securities offered hereby. Because holders of Preferred Securities may receive Subordinated Debentures, prospective purchasers of Preferred Securities are also making an investment decision with regard to the Subordinated Debentures and should carefully review all the information regarding the Subordinated Debentures contained herein. If the Subordinated Debentures are distributed to the holders of Preferred Securities upon the liquidation of the Trust, the Company will use its best efforts to list the Subordinated Debentures on the NYSE or such stock exchanges, if any, on which the Preferred Securities are then listed. TRADING PRICE; ABSENCE OF PRIOR PUBLIC MARKET FOR THE PREFERRED SECURITIES The Preferred Securities may trade at prices that do not fully reflect the value of accrued but unpaid interest with respect to the underlying Subordinated Debentures. A holder of Preferred Securities that disposes of its Preferred Securities between record dates for payments of Distributions (and consequently does not receive a Distribution from the Trust for the period prior to such disposition) will nevertheless be required to include accrued but unpaid interest on the Subordinated Debentures through the date of disposition in income as ordinary income and to add such amount to its adjusted tax basis in its pro rata share of the underlying Subordinated Debentures deemed disposed of. Such holder will recognize a capital loss to the extent the selling price (which may not fully reflect the value of accrued but unpaid interest) is less than its adjusted tax basis (which will include all accrued but unpaid interest). Subject to certain limited exceptions, capital losses cannot be applied to offset ordinary income for United States federal income tax purposes. See "Certain Federal Income Tax Consequences--Disposition of Preferred Securities." There is no current public market for the Preferred Securities. Although application has been made to approve the Preferred Securities for listing on the NYSE, there can be no assurance that an active public market will develop 12 17 for the Preferred Securities or that, if such market develops, the market price will equal or exceed the public offering price set forth on the cover page of this Prospectus. The public offering price for the Preferred Securities has been determined through negotiations between the Company and the Underwriters. Prices for the Preferred Securities will be determined in the marketplace and may be influenced by many factors, including prevailing interest rates, the liquidity of the market for the Preferred Securities, investor perceptions of the Company and general industry and economic conditions. PREFERRED SECURITIES ARE NOT INSURED The Preferred Securities are not insured by the Bank Insurance Fund (the "BIF") or the Savings Association Insurance Fund (the "SAIF") of the Federal Deposit Insurance Corporation (the "FDIC") or by any other governmental agency. RISK FACTORS RELATING TO THE COMPANY HISTORY OF LOSSES OF FBA Prior to 1996, FBA experienced several years of significant operating losses caused by economic conditions in its markets, loan losses and asset quality deterioration, high overhead and operational problems. Consequently, FBA's positive earnings record occurred only during the period from January 1996 through the present. There can be no assurance that a recurrence of some or all of the problems which led to earlier losses will not cause similar problems in the future, or that FBA will be able to sustain the favorable recent earnings trends. OPERATING REQUIREMENTS ASSOCIATED WITH GEOGRAPHIC DISPERSION Because of the geographic distance between the offices of BankTEXAS and FB California, various operating requirements are placed on FBA's management which are not present in other organizations operating in contiguous markets. These include: (1) the operation of data processing and item processing functions at remote locations; (2) the control of correspondent accounts, reserve balances and wire transfers, particularly where differences in time zones are involved; (3) providing administrative support, including accounting, human resources, loan servicing, internal audit and credit review, at significant distances and (4) establishing and monitoring compliance with corporate policies and procedures. This geographic distance adds to the cost of management, and such additional costs could limit the profitability which might otherwise be expected by investors in FBA. DEPENDENCE ON FUTURE GROWTH THROUGH ACQUISITIONS FBA believes that a business strategy of growth through acquisitions is necessary in order for FBA to achieve the size necessary to compete with larger competitors in the banking industry. There are several risks associated with such a strategy, including the following: (1) There is a general trend toward consolidation among financial institutions, and there are a large number of potential competitors for acquisitions viewed favorably by FBA's management, including, in some cases, much larger organizations with substantially more resources than FBA. (2) The prices at which acquisitions may be made fluctuates with market conditions, and there is no assurance that FBA will continue to identify acquisition prospects at prices which its management and Board of Directors believe are reasonable. To the extent that FBA is able to identify acquisitions that may be made using securities of FBA rather than cash, the prospects for acquisitions without dilution of FBA's stockholders will also depend to some extent on the market for FBA's securities, which is beyond FBA's control and may fluctuate over time. (3) The managerial and operational requirements for completing acquisitions and realizing the benefits therefrom can be burdensome and time-consuming. There is no assurance that FBA will realize the benefits of particular acquisitions in a timely manner or without unanticipated costs. 13 18 UNCERTAINTIES ARISING FROM YEAR 2000 FBA and the Subsidiary Banks are subject to risks associated with the "Year 2000" problem, a term which refers to uncertainties about the ability of various data processing hardware and software systems to interpret dates correctly after the beginning of the year 2000. Since most of these systems are common with those of First Banks, FBA has been working with First Banks to address this problem. Most of the software used by FBA is purchased from outside vendors. Consequently, FBA has been working with these vendors to determine whether these issues are being adequately addressed. FBA's process of evaluating potential effects of Year 2000 issues on customers of the Subsidiary Banks is in its early stages, and it is therefore impossible to quantify the potential adverse effects of incompatible systems on customers of the Subsidiary Banks. The failure of a commercial bank customer to prepare adequately for Year 2000 compatibility could have a significant adverse effect on such customer's operations and profitability, in turn inhibiting its ability to repay loans in accordance with their terms or requiring the use of its deposited funds. Until sufficient information is accumulated from customers of the banks to enable FBA to assess the degree to which customers' operations are susceptible to potential problems, FBA will be unable to quantify the potential effect on its commercial customers. In addressing the uncertainty, FBA has revised its methodology with respect to the adequacy of its allowance for possible loan losses to include an allocation for the estimated risks associated with the Year 2000 issue. ADVERSE CHANGES IN INTEREST RATES With banking as its principal business, FBA has exposure to changes in interest rates, as its assets and liabilities will not necessarily reprice at the same time in a changing interest rate environment. In addition, changes in interest rates may impact the Company with respect to its ability to attract deposits. FBA believes its existing balance sheet structure is appropriate and will allow it to maintain acceptable interest margins in various interest rate environments. However, there can be no assurance that competitive factors will not result in a change in the composition of the balance sheet, or that interest rate movements will not negatively impact the financial condition or results of operations of the Company. Further, should its ability to attract deposits be diminished because of movements in interest rates, FBA would be required to access secondary funding sources, which would be likely to negatively impact its net interest margin. CREDIT RISKS FBA, as a financial institution, is exposed to the risk that customers to whom the Subsidiary Banks have made loans will be unable to repay those loans according to their terms and that collateral securing such loans, if any, may not be sufficient in value to assure repayment. Credit losses could have a material adverse effect on FBA's operating results. See "Management's Discussion and Analysis--Provision for Possible Loan Losses." GOVERNMENT REGULATION Banking organizations are subject to extensive federal and state regulation and supervision. These regulations and laws are primarily intended to protect depositors and the FDIC, not shareholders or other creditors. Regulations and laws affecting the financial institutions industry are undergoing continuous change, and the ultimate effect of such changes cannot be predicted. Regulations and laws affecting FBA and the Subsidiary Banks may be modified at any time, and new legislation affecting financial institutions may be proposed and enacted. There is no assurance that such modifications or new laws will not materially and adversely affect the business, condition or operations of FBA and the Subsidiary Banks or benefit competing entities which may not be subject to the same regulation and supervision. See "Supervision and Regulation--Recent and Pending Legislation." COMPETITION The banking business is highly competitive. The Subsidiary Banks compete with other commercial banks, savings and loan associations, credit unions, mortgage banking companies, securities brokerage companies, insurance companies, and money market mutual funds. Many of these competitors have substantially greater resources than FBA and the Subsidiary Banks and offer certain services that FBA and the Subsidiary Banks do not currently 14 19 provide. Such competitors may also have greater lending limits than the Subsidiary Banks. The number of competitors may increase as a result of the easing of restrictions on interstate banking effected under the Riegle-Neal Interstate Banking and Efficiency Act of 1994. Non-bank competitors are also generally not subject to the extensive regulations applicable to FBA and the Subsidiary Banks. See "Business--Competition and Branch Banking" and "Supervision and Regulation--Recent and Pending Legislation." DIVIDENDS FROM SUBSIDIARY BANKS The ability of FBA to pay interest on the Subordinated Debentures is largely dependent on its receipt of dividends from the Subsidiary Banks. The amount of dividends that the Subsidiary Banks may pay to FBA is limited by various state and federal laws and by the regulations promulgated by their respective primary regulators, which impose certain minimum capital requirements. POTENTIAL LIABILITY FOR UNDERCAPITALIZED SUBSIDIARY BANK Under federal law, a bank holding company may be required to guarantee a capital plan filed by an undercapitalized bank or thrift subsidiary with its primary regulator. If the subsidiary defaults under the plan, the holding company may be required to contribute to the capital of the subsidiary bank an amount equal to the lesser of 5% of the bank's assets at the time it became undercapitalized or the amount necessary to bring the bank into compliance with applicable capital standards. It is, therefore, possible that the Company would be required to contribute capital to a Subsidiary Bank or any other bank it may acquire in the event that a Subsidiary Bank or such other bank becomes undercapitalized. CONTROL OF FBA BY FIRST BANKS, INC. FBA is controlled by First Banks, which exercises effective control over the management and policies of FBA and the election of most or all of the directors of FBA. Furthermore, executive officers of First Banks have significant management responsibility for FBA's business activities, and First Banks performs numerous management and other services for FBA pursuant to contracts between the two companies. Holders of FBA common stock who are not satisfied with the policies and decisions made by the Board of Directors and management of FBA would therefore have less of an opportunity to change such policies through the exercise of voting rights than would stockholders in a comparable corporation with no controlling stockholder. The agreement by which First Banks became the majority stockholder of FBA provides certain anti-dilutive rights which allow First Banks to acquire additional shares of Class B common stock if its ownership is reduced below 55% of the total outstanding voting stock of FBA. In that event, First Banks has the right to purchase sufficient additional shares of Class B common stock to maintain 55% ownership, at 106.7% of the then current tangible book value per share. This right will remain effective until August 1999, after which a comparable right will exist to maintain the same level of ownership by purchasing shares at 113% and 120% of the then current tangible book value per share through August 2000 and February 2002, respectively. Thereafter, First Banks' anti-dilutive right will lapse. All of the voting stock of First Banks is owned by various trusts which were created by and are administered by and for the benefit of Mr. James F. Dierberg, Chairman of the Board, President and Chief Executive Officer of First Banks, and members of his immediate family. Mr. Dierberg, therefore, controls the management and policies of First Banks and FBA and the election of their directors by and through these trusts. 15 20 USE OF PROCEEDS The proceeds from the sale of the Preferred Securities offered hereby will be used by the Trust to purchase the Subordinated Debentures issued by the Company. The Company intends to use the net proceeds from the sale of the Subordinated Debentures to repay outstanding indebtedness to First Banks under the terms of a revolving promissory note (the "First Banks Note"), for general corporate purposes, for acquisitions (including the pending acquisition of Redwood), and for the possible repurchase of common stock from time to time. The amounts borrowed under the First Banks Note have been used by FBA for the acquisitions of Sunrise Bank of California, Surety Bank and Pacific Bay Bank, and for purchases of treasury stock. The First Banks Note bears interest at one quarter of one percent below the prime rate of interest as announced from time to time in The Wall Street Journal (8.25% as of March 31, 1998). Principal and accrued interest on the First Banks Note are due and payable on October 31, 2001. The portion of the net proceeds from the sale of Subordinated Debentures which is not used to repay existing obligations will be invested in short term investment securities pending its use for the purposes described above. MARKET FOR THE PREFERRED SECURITIES Although application has been made to have the Preferred Securities approved for listing on the NYSE under the symbol "FBAPrT", there can be no assurance that an active and liquid trading market will develop or, if developed, that such a market will continue. The offering price and distribution rate have been determined by negotiations among representatives of the Company and the Underwriters, and the offering price of the Preferred Securities may not be indicative of the market price following the offering. See "Underwriting." ACCOUNTING TREATMENT The Trust will be treated, for financial reporting purposes, as a subsidiary of the Company and, accordingly, the accounts of the Trust will be included in the consolidated financial statements of FBA. The Preferred Securities will be presented as a separate line item in the consolidated balance sheet of the Company under the caption "Guaranteed Preferred Beneficial Interests in the Company's Subordinated Debentures," and appropriate disclosures about the Preferred Securities, the Guarantee and the Subordinated Debentures will be included in the notes to consolidated financial statements of FBA. The Company will record Distributions payable on the Preferred Securities as a noninterest expense in its consolidated statements of operations for financial reporting purposes. All future reports of the Company filed under the Exchange Act while the Preferred Securities are outstanding will (a) present the Trust Securities issued by the Trust on the balance sheet as a separate line item entitled "Guaranteed preferred beneficial interests in the Company's subordinated debentures," (b) include in a footnote to the financial statements disclosure that the sole assets of the Trust are the Subordinated Debentures (including the outstanding principal amount, interest rate and maturity date of such Subordinated Debentures), and (c) include in a footnote to the financial statements disclosure that the Company owns all of the Common Securities of the Trust, the sole assets of the Trust are the Subordinated Debentures, and the back-up obligations, in the aggregate, constitute a full and unconditional guarantee by the Company of the obligations of the Trust under the Preferred Securities. 16 21 CAPITALIZATION The following table assumes that the Underwriters' over-allotment option was not exercised and sets forth (i) the unaudited consolidated capitalization of the Company at March 31, 1998, (ii) the unaudited consolidated capitalization of the Company giving effect to the issuance of the Preferred Securities hereby offered by the Trust and the receipt by the Company of the net proceeds from the corresponding sale of the Subordinated Debentures to the Trust (the "Offering"), as if the Offering had been consummated on March 31, 1998, and (iii) the unaudited consolidated capitalization of the Company giving effect to the Offering and the Redwood acquisition as if each had been consummated on March 31, 1998.
MARCH 31, 1998 --------------------------------------------- AS ADJUSTED FOR OFFERING AND PENDING AS ADJUSTED ACQUISITION ACTUAL FOR OFFERING OF REDWOOD ------ ------------ ------------ (DOLLARS IN THOUSANDS) LONG TERM DEBT: Promissory note payable................................. $13,450 -- 1,200 12% convertible debentures.............................. 6,500 6,500 6,500 ------- ------- ------- Total long-term debt............................ 19,950 6,500 7,700 ------- ------- ------- GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S SUBORDINATED DEBENTURES: Guaranteed preferred beneficial interests in the Company's subordinated debentures..................... -- 40,000 40,000 Less expenses relating to the issuance of the Preferred Securities............................................ -- (1,750) (1,750) ------- ------- ------- Net proceeds from the sale of guaranteed preferred beneficial interests in the Company's subordinated debentures:............ -- 38,250 38,250 ------- ------- ------- STOCKHOLDERS' EQUITY: Common stock: Common stock, $0.15 par value; 6,666,666 shares authorized; 3,238,417 shares issued at March 31, 1998.................................................. 486 486 486 Class B common stock, $.15 par value; 4,000,000 shares authorized; 2,500,000 shares issued and outstanding... 375 375 375 Capital surplus......................................... 60,173 60,173 60,173 Retained earnings, since elimination of accumulated deficit of $259,117 effective December 31, 1994....... 2,183 2,183 2,183 Common treasury stock, at cost; 496,056 shares at March 31, 1998.............................................. (6,814) (6,814) (6,814) Net fair value adjustment for securities available for sale.................................................. 438 438 438 ------- ------- ------- Total stockholders' equity...................... 56,841 56,841 56,841 ------- ------- ------- Total capitalization............................ $76,791 101,591 102,791 ======= ======= ======= CAPITAL RATIOS: Stockholders' equity to total assets.................... 8.21% 7.91 6.66 Leverage ratio.............................. 6.77 9.98 6.27 Risk-based capital ratios: Tier 1 capital to risk-weighted assets.............. 7.82 11.41 7.09 Total risk-based capital to risk-weighted assets.... 9.08 16.47 11.19 - -------- The leverage ratio is Tier 1 capital divided by average quarterly assets, after deducting intangible assets and net deferred tax assets in excess of regulatory limits. The capital ratios are computed including the total estimated net proceeds from the sale of the Preferred Securities, in a manner consistent with Federal Reserve calculation guidelines. Federal Reserve guidelines for calculation of Tier 1 capital to risk-weighted assets limit the amount of cumulative preferred stock which can be included in Tier 1 capital to 25% of total Tier 1 core capital elements (including the cumulative preferred stock). Approximately $18.8 million of the aggregate amount of the Preferred Securities offered hereby will be included as Tier 1 capital for the Company. For purposes of this calculation, Redwood balances are assumed to be outstanding for the entire quarter.
17 22 SELECTED CONSOLIDATED AND OTHER FINANCIAL DATA The selected consolidated financial data set forth below, insofar as it relates to the five years ended December 31, 1997, is derived from the audited consolidated financial statements of FBA. The data for the three month periods ended March 31, 1998 and 1997 has been derived from unaudited interim financial statements; however, in the opinion of FBA, such unaudited interim statements include all adjustments (consisting of normal recurring accruals) necessary to fairly present the data for such periods. The results of operations for the three month period ended March 31, 1998 are not necessarily indicative of results to be achieved for the full year. Such data is qualified by reference to the consolidated financial statements of FBA included elsewhere in this Prospectus or incorporated by reference and should be read in conjunction with such financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, --------------- ------------------------------------------------ 1998 1997 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ---- ---- (DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Interest income................................ $ 12,996 9,611 42,517 33,382 26,556 22,649 21,966 Interest expense............................... 5,899 4,508 19,155 15,533 13,134 11,072 9,750 -------- ------- ------- ------- ------- ------- ------- Net interest income............................ 7,097 5,103 23,362 17,849 13,422 11,577 12,216 Provision for possible loan losses............. 300 550 2,000 2,405 6,416 1,258 490 -------- ------- ------- ------- ------- ------- ------- Net interest income after provision for possible loan losses......................... 6,797 4,553 21,362 15,444 7,006 10,319 11,726 Noninterest income............................. 1,150 871 3,287 3,585 129 (4,511) 3,068 Noninterest expense............................ 6,057 4,493 17,677 17,737 14,148 16,174 14,575 -------- ------- ------- ------- ------- ------- ------- Income (loss) before provision (benefit) for income taxes and minority interest in (income) loss of subsidiary.................. 1,890 931 6,972 1,292 (7,013) (10,366) 219 Provision (benefit) for income tax expense..... 790 361 3,145 470 (2,188) (9,461) -- -------- ------- ------- ------- ------- ------- ------- Net income (loss) before minority interest in (income) loss of subsidiary.................. 1,100 570 3,827 822 (4,825) (905) 219 Minority interest in (income) loss of subsidiary................................... -- (86) (294) (131) 11 -- -- -------- ------- ------- ------- ------- ------- ------- Net income (loss).............................. $ 1,100 484 3,533 691 (4,814) (905) 219 ======== ======= ======= ======= ======= ======= ======= DIVIDENDS: Common stock................................... $ -- -- -- -- -- -- -- Ratio of total dividends declared to net income....................................... --% --% --% --% --% --% --% PER SHARE DATA: Earnings (loss) per share: Basic...................................... $ 0.22 0.12 0.87 0.16 (1.19) (0.41) 0.17 Diluted.................................... 0.22 0.12 0.86 0.16 (1.19) (0.41) 0.14 Weighted average common stock outstanding (in thousands)................................... 4,911 4,082 4,069 4,225 4,032 2,181 1,290 BALANCE SHEET DATA (AT PERIOD END): Investment securities.......................... $141,131 139,682 148,181 125,139 113,586 61,400 160,158 Loans, net of unearned discount................ 444,099 327,015 431,455 336,371 266,588 203,314 167,732 Total assets................................... 692,409 530,023 643,664 529,087 468,486 331,790 368,608 Total deposits................................. 600,557 452,455 556,527 455,942 405,427 241,570 242,897 Promissory note payable........................ 13,450 14,000 14,900 14,000 1,054 1,054 1,054 Stockholders' equity........................... 56,841 38,013 45,091 38,195 40,965 39,714 14,952 EARNINGS RATIOS: Return on average total assets............. 0.67% 0.37% 0.65% 0.15% (1.28)% (0.25)% 0.07% Return on average stockholders' equity..... 8.13 5.11 8.90 1.71 (12.06) (3.66) 1.49 ASSET QUALITY RATIOS: Allowance for possible loan losses to loans.... 2.72 3.32 2.64 3.19 3.98 1.36 1.57 Nonperforming loans to loans............... 1.35 0.75 0.66 0.88 1.90 0.14 0.37 Allowance for possible loan losses to nonperforming loans...................... 200.95 444.66 400.81 363.10 209.18 940.61 423.95 Nonperforming assets to loans and foreclosed assets................................... 1.51 1.06 0.80 1.17 2.78 0.90 2.22 Net loan charge-offs to average loans...... 0.49 0.52 0.40 1.69 1.45 0.62 0.52 CAPITAL RATIOS: Average stockholders' equity to average total assets....................................... 8.25 7.32 7.34 8.86 10.64 6.80 4.40 Total risk-based capital ratio................. 9.08 6.94 6.88 6.62 9.64 17.50 8.47 Leverage ratio................................. 6.77 4.22 4.96 4.46 5.98 11.97 4.27 RATIO OF EARNINGS (LOSS) TO FIXED CHARGES: Including interest on deposits................. 1.31x 1.20x 1.35x 1.08x 0.50x 0.11x 1.02x Excluding interest on deposits................. 3.35 2.17 3.00 1.53 (1.13) (1.28) 1.09 - ---------- The comparability of the selected data presented is affected by FBA's acquisitions of Pacific Bay Bank, Surety Bank and Sunrise Bank of California on February 2, 1998, December 1, 1997 and November 1, 1996, respectively. These acquisitions were accounted for as purchases and, accordingly, the selected data includes the financial position and results of operations of each acquired entity only for the periods subsequent to its date of acquisition. In addition, on February 2, 1998, FBA completed its acquisition of First Commercial Bancorp, Inc. and its subsidiary, First Commercial Bank. As discussed in Note 2 to the consolidated financial statements of FBA, the selected data has been restated to reflect First Banks, Inc.'s interest in First Commercial Bancorp, Inc. for the periods subsequent to August 23, 1995. Ratios for the three month periods are annualized. Nonperforming loans consist of nonaccrual loans and loans with restructured terms. Nonperforming assets consist of nonperforming loans and foreclosed assets. For purposes of calculating the ratio of earnings to fixed charges, earnings consist of income before taxes plus interest and rent expense. Fixed charges consist of interest and rent expense.
18 23 PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma combined condensed balance sheet as of March 31, 1998 and unaudited pro forma combined condensed statements of operations for the three months ended March 31, 1998 and 1997, and for the year ended December 31, 1997, have been prepared to reflect the effects on the historical results of FBA of the proposed acquisition of Redwood and its wholly owned subsidiary, Redwood Bank. The unaudited pro forma combined condensed balance sheet has been prepared as if the acquisition of Redwood occurred on March 31, 1998. The unaudited pro forma combined condensed statements of operations have been prepared assuming the acquisition of Redwood occurred on January 1, 1997. In addition, the unaudited pro forma combined condensed statements of operations reflect the acquisitions of Surety Bank, completed on December 1, 1997, and of the minority stockholders' interest in the net assets of FCB, completed on February 2, 1998, as if the transactions occurred on January 1, 1997. The unaudited pro forma combined condensed statements of operations for the year ended December 31, 1997 and for the three months ended March 31, 1997 also reflect the restatement of FBA's results of operations for its acquisition of First Banks' interest in FCB completed on February 2, 1998. The pro forma financial information set forth below is unaudited and not necessarily indicative of the results that will occur in the future. UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
MARCH 31, 1998 ---------------------------------------------------------- PRO FORMA ADJUSTMENTS - PRO FORMA FBA REDWOOD REDWOOD COMBINED --- ------- ------------- --------- ASSETS (DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) Cash and cash equivalents: Cash and due from banks........................ $ 32,651 6,034 -- 38,685 Interest bearing deposits...................... 2,271 -- -- 2,271 Federal funds sold............................. 42,250 3,000 -- 45,250 -------- ------- ----- ------- Total cash and cash equivalents........ 77,172 9,034 -- 86,206 -------- ------- ----- ------- Investment securities--available for sale, at fair value............................................ 141,131 16,667 -- 157,798 Loans: Commercial and financial....................... 113,312 14,893 -- 128,205 Real estate construction and development....... 96,035 9,762 -- 105,797 Real estate mortgage........................... 166,160 82,848 -- 249,008 Consumer and other............................. 71,017 13,069 -- 84,086 -------- ------- ----- ------- Total loans............................ 446,524 120,572 -- 567,096 Unearned discount.............................. (2,425) (512) -- (2,937) Allowance for possible loan losses............. (12,063) (1,180) -- (13,243) -------- ------- ----- ------- Net loans.............................. 432,036 118,880 -- 550,916 -------- ------- ----- ------- Bank premises and equipment, net................... 11,382 784 -- 12,166 Intangibles associated with the purchase of subsidiaries..................................... 8,794 3,920 8,174 20,888 Foreclosed property, net........................... 725 -- -- 725 Deferred tax assets................................ 13,739 1,460 -- 15,199 Other assets....................................... 7,430 1,261 -- 8,691 -------- ------- ----- ------- Total assets........................... $692,409 152,006 8,174 852,589 ======== ======= ===== =======
See notes to pro forma combined condensed financial statements. 19 24 UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET (CONTINUED)
MARCH 31, 1998 ---------------------------------------------------------- PRO FORMA ADJUSTMENTS - PRO FORMA FBA REDWOOD REDWOOD COMBINED --- ------- ------------- --------- (DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) LIABILITIES Deposits: Demand: Non-interest-bearing..................... $101,270 26,232 -- 127,502 Interest-bearing......................... 73,433 28,080 -- 101,513 Savings....................................... 158,625 25,108 -- 183,733 Time deposits: Time deposits of $100 or more............ 57,725 19,864 -- 77,589 Other time deposits...................... 209,504 30,827 -- 240,331 -------- ------- ------- ------- Total deposits......................... 600,557 130,111 -- 730,668 Short-term borrowings.............................. 3,453 2,910 -- 6,363 Promissory note payable............................ 13,450 -- (12,250) 1,200 Deferred tax liabilities........................... 1,049 695 -- 1,744 Accrued expenses and other liabilities............. 10,559 464 -- 11,023 12% convertible debentures......................... 6,500 -- -- 6,500 -------- ------- ------- ------- Total liabilities...................... 635,568 134,180 (12,250) 757,498 -------- ------- ------- ------- Guaranteed preferred beneficial interests in FBA's subordinated debentures.......................... -- -- 38,250 38,250 -------- ------- ------- ------- STOCKHOLDERS' EQUITY Common stock: Common stock................................... 486 833 (833) 486 Class B common stock........................... 375 -- -- 375 Capital surplus.................................... 60,173 10,640 (10,640) 60,173 Retained earnings.................................. 2,183 6,412 (6,412) 2,183 Treasury stock..................................... (6,814) -- -- (6,814) Accumulated other comprehensive income............. 438 (59) 59 438 -------- ------- ------- ------- Total stockholders' equity............. 56,841 17,826 (17,826) 56,841 -------- ------- ------- ------- Total liabilities and stockholders' equity............................... $692,409 152,006 8,174 852,589 ======== ======= ======= =======
See notes to pro forma combined condensed financial statements. 20 25 UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 ------------------------------------------------------ PRO FORMA ADJUSTMENTS - PRO FORMA FBA REDWOOD REDWOOD & FCB COMBINED --- ------- ------------- --------- (DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) Interest income: Interest and fees on loans.......................... $10,568 2,701 -- 13,269 Investment securities............................... 2,033 309 -- 2,342 Federal funds sold and other........................ 395 28 -- 423 ------- ----- ----- ------ Total interest income........................... 12,996 3,038 -- 16,034 ------- ----- ----- ------ Interest expense: Interest on deposits................................ 5,362 1,072 -- 6,434 Note payable and other borrowings................... 537 6 (321) 222 ------- ----- ----- ------ Total interest expense.......................... 5,899 1,078 (321) 6,656 ------- ----- ----- ------ Net interest income............................. 7,097 1,960 321 9,378 Provision for possible loan losses...................... 300 -- -- 300 ------- ----- ----- ------ Net interest income after provision for possible loan losses.......................... 6,797 1,960 321 9,078 ------- ----- ----- ------ Noninterest income: Service charges on deposit accounts................. 739 63 -- 802 Other income........................................ 411 175 -- 586 ------- ----- ----- ------ Total noninterest income........................ 1,150 238 -- 1,388 ------- ----- ----- ------ Noninterest expense: Salary and employee benefits........................ 2,135 800 -- 2,935 Occupancy, furniture and equipment.................. 838 234 -- 1,072 Other noninterest expense........................... 3,084 403 1,056 4,543 ------- ----- ----- ------ Total noninterest expense....................... 6,057 1,437 1,056 8,550 ------- ----- ----- ------ Income before provision for income tax expense....................................... 1,890 761 (735) 1,916 Provision for income tax expense (benefit).............. 790 336 (199) 927 ------- ----- ----- ------ Net income...................................... $ 1,100 425 (536) 989 ======= ===== ===== ====== Weighted average common stock outstanding (in thousands)........................................ 4,911 -- 365 5,276 ======= ===== ===== ====== Earnings per common share: Basic............................................... $ 0.22 0.19 Diluted............................................. 0.22 0.19 ======= ======
See notes to pro forma combined condensed financial statements. 21 26 UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 ----------------------------------------------------------------------------------- PRO FORMA ADJUSTMENTS - PRO FORMA FCB & PRO FORMA ADJUSTMENTS - PRO FORMA FBA SURETY SURETY COMBINED REDWOOD REDWOOD COMBINED --- ------ ------ --------- ------- ------------- --------- (DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) Interest income: Interest and fees on loans.... $7,453 1,145 -- 8,598 2,404 -- 11,002 Investment securities......... 1,781 182 -- 1,963 197 -- 2,160 Federal funds sold............ 377 -- -- 377 68 -- 445 ------ ----- ----- ------ ----- ----- ------ Total interest income..... 9,611 1,327 -- 10,938 2,669 -- 13,607 ------ ----- ----- ------ ----- ----- ------ Interest expense: Interest on deposits.......... 3,963 607 -- 4,570 907 -- 5,477 Note payable and other borrowings.................. 545 2 (126) 421 -- (249) 172 ------ ----- ----- ------ ----- ----- ------ Total interest expense.... 4,508 609 (126) 4,991 907 (249) 5,649 ------ ----- ----- ------ ----- ----- ------ Net interest income....... 5,103 718 126 5,947 1,762 249 7,958 Provision for possible loan losses.......................... 550 35 -- 585 -- -- 585 ------ ----- ----- ------ ----- ----- ------ Net interest income after provision for possible loan losses............. 4,553 683 126 5,362 1,762 249 7,373 ------ ----- ----- ------ ----- ----- ------ Noninterest income: Service charges on deposit accounts.................... 575 101 -- 676 57 -- 733 Other income.................. 296 156 (5) 447 151 -- 598 ------ ----- ----- ------ ----- ----- ------ Total noninterest income.................. 871 257 (5) 1,123 208 -- 1,331 ------ ----- ----- ------ ----- ----- ------ Noninterest expense: Salary and employee benefits.................... 1,550 434 -- 1,984 931 -- 2,915 Occupancy, furniture and equipment................... 838 90 2 930 227 -- 1,157 Other noninterest expense..... 2,105 309 73 2,487 346 1,047 3,880 ------ ----- ----- ------ ----- ----- ------ Total noninterest expense................. 4,493 833 75 5,401 1,504 1,047 7,952 ------ ----- ----- ------ ----- ----- ------ Income before provision for income tax expense and minority interest in income of subsidiary.... 931 107 46 1,084 466 (798) 752 Provision for income tax expense......................... 361 43 42 446 216 (224) 438 ------ ----- ----- ------ ----- ----- ------ Income before minority interest in income of subsidiary.............. 570 64 4 638 250 (574) 314 Minority interest in income of subsidiary...................... (86) -- 86 -- -- -- -- ------ ----- ----- ------ ----- ----- ------ Net income................ $ 484 64 90 638 250 (574) 314 ====== ===== ===== ====== ===== ===== ====== Weighted average common stock equivalents outstanding (in thousands)...................... 4,082 265 1,093 5,440 -- -- 5,440 ====== ===== ===== ====== ===== ===== ====== Earnings per common share: Basic......................... $ 0.12 0.12 0.06 Diluted....................... 0.12 0.12 0.06 ====== ====== ======
See notes to pro forma combined condensed financial statements. 22 27 UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997 ---------------------------------------------------------------------------------- PRO FORMA ADJUSTMENTS - PRO FORMA FCB & PRO FORMA ADJUSTMENTS - PRO FORMA FBA SURETY SURETY COMBINED REDWOOD REDWOOD COMBINED --- ------ ------------- --------- ------- ------------- --------- (DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) Interest income: Interest and fees on loans.... $33,393 4,338 -- 37,731 10,418 -- 48,149 Investment securities......... 7,870 699 -- 8,569 1,018 -- 9,587 Federal funds sold............ 1,254 -- -- 1,254 244 -- 1,498 ------- ----- ----- ------ ------ ------ ------ Total interest income..... 42,517 5,037 -- 47,554 11,680 -- 59,234 ------- ----- ----- ------ ------ ------ ------ Interest expense: Interest on deposits.......... 16,716 2,297 -- 19,013 3,863 -- 22,876 Note payable and other borrowings.................. 2,439 16 (504) 1,951 1 (995) 957 ------- ----- ----- ------ ------ ------ ------ Total interest expense.... 19,155 2,313 (504) 20,964 3,864 (995) 23,833 ------- ----- ----- ------ ------ ------ ------ Net interest income....... 23,362 2,724 504 26,590 7,816 995 35,401 Provision for possible loan losses.......................... 2,000 255 -- 2,255 -- -- 2,255 ------- ----- ----- ------ ------ ------ ------ Net interest income after provision for possible loan losses............. 21,362 2,469 504 24,335 7,816 995 33,146 ------- ----- ----- ------ ------ ------ ------ Noninterest income: Service charges on deposit accounts.................... 2,239 369 -- 2,608 373 -- 2,981 Other income.................. 1,048 952 (20) 1,980 28 -- 2,008 ------- ----- ----- ------ ------ ------ ------ Total noninterest income.................. 3,287 1,321 (20) 4,588 401 -- 4,989 ------- ----- ----- ------ ------ ------ ------ Noninterest expense: Salary and employee benefits.................... 6,226 2,151 -- 8,377 3,362 -- 11,739 Occupancy, furniture and equipment................... 3,315 360 8 3,683 934 -- 4,617 Other noninterest expense..... 8,136 1,580 293 10,009 1,345 4,184 15,538 ------- ----- ----- ------ ------ ------ ------ Total noninterest expense................. 17,677 4,091 301 22,069 5,641 4,184 31,894 ------- ----- ----- ------ ------ ------ ------ Income (loss) before provision for income tax expense (benefit) and minority interest in income of subsidiary.... 6,972 (301) 183 6,854 2,576 (3,189) 6,241 Provision for income tax expense (benefit)....................... 3,145 (120) 167 3,192 1,156 (897) 3,451 ------- ----- ----- ------ ------ ------ ------ Income before minority interest in income of subsidiary.............. 3,827 (181) 16 3,662 1,420 (2,292) 2,790 Minority interest in income of subsidiary...................... (294) -- 294 -- -- -- -- ------- ----- ----- ------ ------ ------ ------ Net income................ $ 3,533 (181) 310 3,662 1,420 (2,292) 2,790 ======= ===== ===== ====== ====== ====== ====== Weighted average common stock equivalents outstanding (in thousands)...................... 4,069 265 1,093 5,427 -- -- 5,427 ======= ===== ===== ====== ====== ====== ====== Earnings per common share: Basic......................... $ 0.87 0.67 0.51 Diluted....................... 0.86 0.67 0.51 ======= ====== ======
See notes to pro forma combined condensed financial statements. 23 28 NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (1) The unaudited pro forma combined condensed balance sheet has been prepared based on the historical financial statements of FBA and Redwood as if the pending acquisition of Redwood had occurred on March 31, 1998. The unaudited pro forma combined condensed statements of operations set forth the results of operations of FBA as if the pending acquisition of Redwood had occurred as of January 1, 1997. In addition, the unaudited pro forma combined condensed statements of operations reflect the acquisitions of Surety Bank and of the minority stockholders' interest in the net assets of FCB as if these transactions were completed on January 1, 1997. The unaudited pro forma combined condensed statements of operations for the year ended December 31, 1997 and for the three months ended March 31, 1997 also reflect the restatement of FBA's results of operations for its acquisition of First Banks' interest in FCB completed on February 2, 1998. For further discussion of FBA's acquisition activities, see "--Management's Discussion and Analysis--Acquisitions" and "Note 2" to the accompanying consolidated financial statements of FBA. No adjustments have been made for any operational synergies that may occur as a result of these transactions. The pro forma financial information is unaudited and not necessarily indicative of the results that will occur in the future. ACQUISITION OF THE MINORITY STOCKHOLDERS' INTEREST IN FCB: (2) The application of the purchase method of accounting gives rise to purchase adjustments to reflect the fair value of assets acquired and liabilities assumed. Intangibles associated with the purchase of subsidiaries includes $1.63 million of goodwill for the acquisition of the minority stockholders' interest in the net assets of FCB. This amount represents the difference between the minority stockholders' interest in the net assets of FCB as of February 2, 1998 of $2.85 million and the estimated market value of that interest. The pro forma combined condensed statements of operations have been adjusted to include the amortization of goodwill generated by this transaction, amortized over a 15 year period using the straight-line method, and the elimination of minority interest in income of subsidiary. (3) The pro forma combined condensed statements of operations have been adjusted to reflect the reduction in interest expense from the exchange of $10 million of the First Banks Note for 804,000 shares of FBA common stock as of February 2, 1998. The First Banks Note carries an interest rate equal to 25 basis points below the prime rate. During 1998 and 1997, the average prime rate of interest was approximately 8.50% and 8.375%, respectively. ACQUISITION OF SURETY: (4) Intangibles associated with the purchase of subsidiaries include $2.77 million in goodwill generated by the transaction between FBA and Surety, representing the difference between the purchase price and the fair value of the net assets acquired. The fair value of the net assets acquired reflects increases of $200,000 and $210,000 relating to bank premises and mortgage servicing rights (MSRs), respectively, offset by the accrual of $389,000 in estimated acquisition costs. The deferred tax effects of these adjustments were recorded using an effective tax rate of 35%. The pro forma combined condensed statements of operations for the year ended December 31, 1997 and for the three months ended March 31, 1997 have been adjusted to include the amortization of goodwill generated by the transaction, amortized over a 15 year period using the straight-line method, and the additional depreciation and amortization relating to the increases in bank premises and MSRs. (5) The pro forma combined condensed statements of operations for the year ended December 31, 1997 and for the three months ended March 31, 1997 have been adjusted to reflect the amount of interest expense which would have been paid on the advance under the First Banks Note to fund the cash portion of the acquisition. The First Banks Note carries an interest rate equal to 25 basis points below the prime rate. During 1997, the average prime rate of interest was approximately 8.375%. PENDING ACQUISITION OF REDWOOD: (6) The pro forma combined condensed balance sheet has been adjusted to reflect the application of the purchase method of accounting. Adjustments to intangibles associated with the purchase of subsidiaries result in $12.1 million of goodwill for the pending acquisition of Redwood. This amount represents the difference between the assumed purchase price of $26.0 million and the fair value of the net assets acquired. 24 29 NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED) (7) The pro forma combined condensed financial statements reflect the assumed issuance of $40 million of Preferred Securities as of January 1, 1997. The proceeds of the offering, net of estimated issuance costs, are assumed to be $38.3 million. The proceeds will be used by the Trust to purchase the Subordinated Debentures issued by FBA. FBA intends to use the proceeds from the sale of the Subordinated Debentures to repay outstanding indebtedness under the First Banks Note, for general corporate purposes, for acquisitions (including the pending acquisition of Redwood), and the possible repurchase of common stock from time to time. See "Use of Proceeds." (8) The pro forma combined condensed statements of operations have been adjusted to include the reduction in interest expense under the First Banks Note, the amortization of goodwill generated by this pending transaction, amortized over a 15 year period using the straight-line method, and the cost of the Subordinated Debentures at an estimated rate of 8.75%, including the amortization of estimated issuance costs. EARNINGS PER SHARE: (9) Pro forma earnings per share were calculated based upon FBA's weighted average shares outstanding plus 289,552 shares issued for the acquisition of the minority stockholders' interest in the fair value of the net assets of FCB, 804,000 shares issued in exchange for $10.0 million of the First Banks Note and 264,622 shares issued in the transaction between FBA and Surety. 25 30 MANAGEMENT'S DISCUSSION AND ANALYSIS The discussion set forth in Management's Discussion and Analysis contains certain forward-looking statements with respect to the financial condition, results of operations and business of the Company. These forward-looking statements are subject to certain risks and uncertainties, not all of which can be predicted or anticipated. Factors that may cause actual results to differ materially from those contemplated by the forward-looking statements herein include general market conditions as well as conditions specifically affecting the banking industry generally and factors having a specific impact on the Company, including, but not limited to, the specific risks and uncertainties identified in the section of this Prospectus entitled "RISK FACTORS--Risk Factors Relating to the Company." Readers should therefore not place undue reliance on forward-looking statements appearing herein. ACQUISITIONS FBA believes in order for a financial institution to prosper in the current environment of rapid restructuring and consolidation in the banking industry, and intense competition both within the industry and from non-banking entities, it must achieve a size sufficient to enable it to take advantage of many of the efficiencies available to its much larger competitors. FBA further believes failure to achieve this growth would place FBA at a competitive disadvantage relative to those larger competitors with respect to its costs of operation which, over time, will be an increasingly difficult obstacle to overcome. FBA projects internal growth alone will not be sufficient to advance FBA to the size which is necessary within an acceptable time frame and, accordingly, views a combination of internal growth and acquisitions as the means by which FBA will achieve its growth objectives. Although FBA originally viewed Texas, particularly the Dallas and Houston areas, as its primary acquisition area, during 1995 and 1996 prices for acquisitions escalated sharply in those areas. Acquisitions at the prices required to successfully consummate these transactions would have caused substantial diminution in the economic benefits which FBA envisioned would be available in its acquisition program. This diminution in benefits resulted in FBA's evaluation of California for acquisition candidates, where acquisition pricing was considerably more favorable, and subsequently led to FBA's acquisition of Sunrise Bank of California, Roseville, California ("Sunrise Bank") in November 1996 and Surety Bank, Vallejo, California in December 1997, as well as the acquisitions of First Commercial Bancorp, Inc., Sacramento, California, ("FCB"), the holding company parent of First Commercial Bank ("First Commercial"), and Pacific Bay Bank, San Pablo, California ("Pacific Bay Bank") in February 1998. In enhancing its banking franchise, FBA places emphasis upon acquiring other financial institutions as a means of accelerating its growth to significantly expand its presence in a given market, to increase the extent of its market area or to enter new or noncontiguous market areas. After an acquisition is consummated, FBA expects to enhance the franchise of the acquired entity by supplementing the marketing and business development efforts to broaden the customer bases, strengthening particular segments of the business or filling voids in the overall market coverage. In addition, the acquisition program enables FBA to further leverage the operational support services available to it through First Banks and its affiliates and to provide the products and services typically available only through such a larger organization. FBA will utilize cash, borrowings and the issuance of additional common stock to meet its growth objectives under the acquisition program. In November 1996, FBA completed its acquisition of Sunrise Bank for $17.5 million in cash. At the time of the transaction, Sunrise Bank had $110.8 million in total assets, $17.7 million in investment securities, $61.1 million in total loans, net of unearned discount, and $91.1 million in deposits. Sunrise Bank conducted its business through two banking locations in Roseville and Rancho Cordova, California. Sunrise Bank was merged into FB California. On December 1, 1997, FBA completed its acquisition of Surety Bank for $3.8 million in cash and 264,622 shares of FBA common stock. At the time of the transaction, Surety Bank had $72.8 million in total assets, $11.8 million in investment securities, $54.4 million in total loans, net of unearned discount, and $67.5 million in deposits. Surety Bank conducted its banking business through two banking locations in Vallejo and Fairfield, California. On December 1, 1997, Surety Bank was merged into FB California. On February 2, 1998, FBA completed two acquisitions, FCB and its wholly owned subsidiary, First Commercial, and Pacific Bay Bank. FCB operated through First Commercial, which had six banking locations located in Sacramento, Roseville (2), Concord, Campbell and San Francisco, California. At the time of the acquisition, FCB had $192.5 million in total assets, $64.4 million in investment securities, $118.9 million in total loans, net of unearned 26 31 discount, and $173.1 million in deposits. Consideration paid for FCB consisted of approximately 752,000 shares of FBA common stock. Additionally, $6.5 million in convertible debentures of FCB owned by First Banks were exchanged for $6.5 million in convertible debentures of FBA. Pacific Bay Bank had one banking location in San Pablo, California and one loan production office in Lafayette, California. At the time of the acquisition, Pacific Bay Bank had $38.3 million in total assets, $2.2 million in total interest-bearing deposits with other financial institutions, $29.7 million in total loans, net of unearned discount, and $35.2 million in deposits. Consideration paid for Pacific Bay consisted of approximately $4.2 million in cash. Both First Commercial and Pacific Bay Bank were merged into FB California. RESTATEMENT OF FINANCIAL INFORMATION In connection with FBA's acquisition of FCB and its wholly owned subsidiary, First Commercial, as of February 2, 1998, FBA's financial information for the period from August 23, 1995 to February 2, 1998 has been restated to include the ownership interest of First Banks, FBA's majority owner, in FCB consistent with the accounting treatment applicable to entities under common control. First Banks' ownership interest in FCB was approximately 96.1% from August 23, 1995 to May 1996 and 61.5% from June 1996 to February 2, 1998. The remaining interest in FCB acquired by FBA is reflected in the consolidated financial statements of FBA as minority interest for the period from August 23, 1995 to February 2, 1998. Accordingly, Management's Discussion and Analysis of Financial Condition and Results of Operations and the accompanying consolidated financial statements of FBA are presented as if FBA and FCB had been consolidated for all periods after August 23, 1995. FINANCIAL CONDITION AND AVERAGE BALANCES FBA's average total assets were $665.2 million and $524.4 million for the three months ended March 31, 1998 and 1997, respectively. The increase is primarily attributable to the acquisitions of Pacific Bay Bank and Surety Bank, and internal loan growth resulting from the expansion of the commercial business development staff. FBA's average total assets were $540.8 million, $456.7 million and $375.1 million for the years ended December 31, 1997, 1996 and 1995, respectively. For 1997, total average assets increased by $84.1 million compared to 1996 primarily due to the acquisitions of Surety Bank and Sunrise Bank on December 1, 1997 and November 1, 1996, respectively, and internal loan growth resulting from the expansion of the business development staff. For 1996, total average assets increased by $81.6 million from 1995. The increase for 1996 is primarily attributable to including the average assets of FCB for the full year in 1996, or $153.7 million, compared to an average of $56.8 million for 1995. As previously discussed under "--Restatement of Financial Information," the historical financial information of FBA was retroactively restated to include FCB as if the acquisition was completed on August 23, 1995. Partially offsetting this increase were reductions in BankTEXAS' consumer indirect automobile loan and investment securities portfolios consistent with strategies employed during 1995. Loans, net of unearned discount, averaged $438.4 million and $326.5 million for the three months ended March 31, 1998 and 1997, and $343.3 million, $273.1 million and $230.5 million for the years ended December 31, 1997, 1996 and 1995, respectively. During 1995, average loans increased by $47.6 million, reflecting FBA's acquisition of FCB and the prior emphasis on indirect automobile lending. As more fully discussed under "--Net Interest Income," during the second quarter of 1995, FBA elected to reduce the level of originations of indirect automobile loans. Accordingly, indirect automobile loans, which initially increased from $147.7 million at December 31, 1994 to $159.5 million at June 30, 1995, have subsequently decreased to $59.0 million at March 31, 1998 and $61.4 million, $86.6 million and $130.3 million at December 31, 1997, 1996 and 1995, respectively. At the same time, FBA expanded its corporate banking activities, resulting in the increase of the commercial and financial, commercial real estate and real estate construction loan portfolios to $314.8 million at March 31, 1998 and $296.7 million and $203.1 million at December 31, 1997 and 1996, respectively, including the loans provided by the acquisition of Surety Bank and Sunrise Bank, from $102.1 million at December 31, 1995. Investment securities previously increased to an average of $141.7 million for the year ended December 31, 1994 from an investment strategy which FBA implemented during 1992. Under this strategy, funds were borrowed, principally through repurchase agreements and advances from the Federal Home Loan Bank ("FHLB"), which were in turn used to purchase investment securities, primarily mortgage-backed securities. As more fully discussed under "--Net Interest Income," this strategy resulted in a declining net interest income and net interest margin. 27 32 Recognizing the need to improve the net interest income and net interest margin, during 1994 FBA commenced the process of restructuring its investment portfolio. The restructuring process consisted initially of hedging the existing investment security portfolio in an attempt to reduce the overall interest rate risk to a more acceptable level. At the same time, FBA began disposing of securities which had greater interest rate risk and reducing the level of short-term borrowings. Remaining funds generated in this process were invested in shorter-term U.S. Treasury and U.S. Government Agency securities which generally have less interest rate risk. The restructuring of the investment security portfolio was completed during 1995 and resulted in a reduction of $51.8 million in the average balance of investment securities to $89.9 million for the year ended December 31, 1995. The average balance of investment securities was $136.5 million and $125.5 million for the three months ended March 31, 1998 and 1997 and $129.9 million and $107.2 million for the years ended December 31, 1997 and 1996, respectively. The increases are attributable to the securities acquired through the acquisitions of Pacific Bay Bank, Surety Bank and Sunrise Bank. Deposits are the primary funding source for FBA and are acquired from a broad base of local markets, including both individual and corporate customers. The average balance of deposits was $573.3 million and $449.3 million for the three months ended March 31, 1998 and 1997, respectively. The increase is attributable to the acquisitions of Pacific Bay Bank and Surety Bank, which provided deposits of $35.2 million and $67.5 million, respectively, and to internal growth resulting from FBA's promotional efforts. For 1997, average deposits were $461.3 million, an increase of $67.1 million, from $394.2 million for 1996. Average deposits increased $94.3 million during 1996, from $299.9 million for the year ended December 31, 1995. These increases are primarily attributable to the acquisitions of Surety Bank, Sunrise Bank and FCB. The average balance of promissory notes payable and short-term borrowings decreased to $26.8 million and $13.8 million for the years ended December 31, 1997 and 1996, respectively, from $31.5 million for 1995. The decrease in the average balance during 1996 is attributable to a strategic decision to reduce FBA's dependence on short-term borrowings as a funding source for its investment securities portfolio. The increase in the average balance for 1997 is attributable to borrowings under the First Banks Note to facilitate its funding of the acquisition of Sunrise Bank as of December 1, 1996. For the three months ended March 31, 1998 and 1997, promissory notes payable and short-term borrowings averaged $24.6 million and $24.4 million, respectively. Stockholders' equity averaged $54.9 million and $38.4 million for the three months ended March 31, 1998 and 1997, respectively. The increase is primarily attributable to net income, to the conversion of $10.0 million of the First Banks Note for common stock and to the issuance of common stock in connection with the acquisition of Surety Bank in December 1997 and the publicly-owned portion of FCB in February 1998. The increase was partially offset by the repurchase of $2.5 million of common stock for treasury during the three months ended March 31, 1998. Stockholders' equity averaged $39.7 million, $40.5 million and $39.9 million for the years ended December 31, 1997, 1996 and 1995, respectively. These fluctuations are primarily attributable to the repurchases of common stock for treasury, repurchases of an outstanding warrant and an option to purchase common stock, and a net loss of $4.8 million for the year ended December 31, 1995, partially offset by net income of $3.5 million and $691,000 for the years ended December 31, 1997 and 1996, respectively. In addition, effective December 31, 1994, stockholders' equity includes the impact of implementing an accounting adjustment referred to as a "quasi-reorganization" as approved by the Board of Directors of FBA. In accordance with the accounting provisions applicable to a quasi-reorganization, the assets and liabilities of FBA were adjusted to fair value and the accumulated deficit was eliminated. Fair value adjustments included a reduction in the carrying value of bank premises and equipment of $4.4 million and the elimination of the net fair value adjustment for securities available for sale of $1.1 million. As a result of implementing the quasi-reorganization, stockholders' equity was reduced by $3.1 million. The implementation of the quasi-reorganization did not have a significant impact on the results of operations of FBA. 28 33 The following table sets forth certain information relating to FBA's average balance sheets, and reflects the average yield earned on interest-bearing assets, the average cost of interest-bearing liabilities and the resulting net interest income for the periods indicated.
THREE MONTHS ENDED MARCH 31, ---------------------------------------------------------------- 1998 1997 ----------------------------- ----------------------------- INTEREST INTEREST AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE BALANCE EXPENSE RATE BALANCE EXPENSE RATE ------- -------- ------- ------- -------- ------- (DOLLARS EXPRESSED IN THOUSANDS) Earning assets: Time deposits with banks.......................... $ 1,985 $ 28 5.72% $ 624 $ 11 7.15% Investment securities..................... 136,501 2,033 6.04 125,544 1,781 5.75 Federal funds sold and securities purchased under agreements to resell............................ 26,077 367 5.71 28,736 366 5.17 Loans..................................... 438,421 10,568 9.78 326,474 7,453 9.26 -------- ------- -------- ------ Total earning assets.......................... 602,984 12,996 8.74 481,378 9,611 8.10 ------- ------ Nonearning assets..................................... 62,166 43,064 -------- -------- Total assets.................................. $665,150 $524,442 ======== ======== Interest-bearing liabilities: Interest-bearing demand and savings deposits...... $224,528 1,803 3.26 $166,263 1,120 2.73 Time deposits of $100 or more..................... 51,594 775 6.09 39,465 529 5.44 Other time deposits............................... 205,975 2,784 5.48 171,480 2,314 5.47 -------- ------- -------- ------ Total interest-bearing deposits............... 482,097 5,362 4.51 377,208 3,963 4.26 Promissory notes payable and short-term borrowings.................................. 24,602 537 8.85 24,393 545 9.06 -------- ------- -------- ------ Total interest-bearing liabilities............ 506,699 5,899 4.72 401,601 4,508 4.55 ------- ------ Non-interest-bearing liabilities: Demand deposits................................... 91,230 72,129 Other liabilities................................. 12,360 12,312 -------- -------- Total liabilities............................. 610,289 486,042 Stockholders' equity.................................. 54,861 38,400 -------- -------- Total liabilities and stockholders' equity.... $665,150 $524,442 ======== ======== Net interest income................................... $ 7,097 $5,103 ======= ====== Interest rate spread.................................. 4.02 3.55 Net interest margin................................... 4.77 4.30 ==== ==== - --------- Nonaccrual loans are included in the average loan amounts. FBA has no tax-exempt income. Includes the effect of an interest rate exchange agreement.
29 34
YEARS ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - ------------------------------------- ------------------------------------- ------------------------------------- INTEREST INTEREST INTEREST AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE - ------- -------- ------- ------- -------- ------- ------- -------- ------- (DOLLARS EXPRESSED IN THOUSANDS) $ 1,019 $ 58 5.69% $ 19,813 $ 1,062 5.36% $ 4,693 $ 319 6.80% 129,865 7,870 6.06 107,211 6,257 5.84 89,860 5,426 6.04 22,058 1,196 5.42 17,347 926 5.34 12,801 724 5.66 343,329 33,393 9.73 273,063 25,137 9.21 230,451 20,087 8.72 - -------- ------- -------- ------- -------- ------- 496,271 42,517 8.57 417,434 33,382 8.00 337,805 26,556 7.86 ------- ------- ------- 44,498 39,295 37,336 - -------- -------- -------- $540,769 $456,729 $375,141 ======== ======== ======== $175,117 5,145 2.94 $134,091 3,575 2.67 $ 99,596 2,967 2.98 39,126 2,144 5.48 36,586 2,008 5.49 29,073 1,610 5.54 168,795 9,427 5.59 152,812 8,353 5.47 116,919 6,258 5.35 - -------- ------- -------- ------- -------- ------- 383,038 16,716 4.36 323,489 13,936 4.31 245,588 10,835 4.41 26,755 2,439 9.12 13,769 1,597 11.60 31,548 2,299 7.29 - -------- ------- -------- ------- -------- ------- 409,793 19,155 4.67 337,258 15,533 4.61 277,136 13,134 4.74 ------- ------- ------- 78,222 70,739 54,288 13,043 8,247 3,807 - -------- -------- -------- 501,058 416,244 335,231 39,711 40,485 39,910 - -------- -------- -------- $540,769 $456,729 $375,141 ======== ======== ======== $23,362 $17,849 $13,422 ======= ======= ======= 3.90 3.39 3.12 4.71 4.28 3.97 ==== ===== ====
30 35 The following table indicates the changes in interest income and interest expense which are attributable to changes in average volume and changes in average rates, in comparison with the same period in the preceding year. The change in interest due to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the dollar amounts of the change in each.
INCREASE (DECREASE) ATTRIBUTABLE TO CHANGES IN: ---------------------------------------------------------------------------------------- MARCH 31, 1998 COMPARED DECEMBER 31, 1997 COMPARED DECEMBER 31, 1996 COMPARED TO MARCH 31, 1997 TO DECEMBER 31, 1996 TO DECEMBER 31, 1995 ----------------------------- ---------------------------- --------------------------- NET NET NET VOLUME RATE CHANGE VOLUME RATE CHANGE VOLUME RATE CHANGE ------ ---- ------ ------ ---- ------ ------ ---- ------ (DOLLARS EXPRESSED IN THOUSANDS) Earning assets: Time deposits with banks.......... $ 19 (2) 17 (1,074) 70 (1,004) 795 (52) 743 Investment securities..... 160 92 252 1,365 248 1,613 1,001 (170) 831 Federal funds sold and securities purchased under agreements to resell.......................... (8) 9 1 256 14 270 240 (38) 202 Loans......................... 2,677 438 3,115 6,761 1,495 8,256 3,865 1,185 5,050 ------ --- ----- ------ ----- ------ ------- ------- ----- Total interest income......... 2,848 537 3,385 7,308 1,827 9,135 5,901 925 6,826 ------ --- ----- ------ ----- ------ ------- ------- ----- Interest-bearing liabilities: Interest-bearing demand and savings deposits................ 440 243 683 1,175 395 1,570 868 (260) 60 Time deposits of $100 or more..... 177 69 246 139 (3) 136 412 (14) 398 Other time deposits............... 466 4 470 884 190 1,074 1,955 140 2,095 Notes payable and short-term borrowings.................. 5 (13) (8) 1,089 (247) 842 13,968 (14,670) (702) ------ --- ----- ------ ----- ------ ------- ------- ----- Total interest expense........ 1,088 303 1,391 3,287 335 3,622 17,203 (14,804) 2,399 ------ --- ----- ------ ----- ------ ------- ------- ----- Net interest income........... $1,760 234 1,994 4,021 1,492 5,513 (11,302) 15,729 4,427 ====== === ===== ====== ===== ====== ======= ======= ===== - ---------- Includes the effect of an interest rate exchange agreement. FBA has no tax-exempt income.
NET INTEREST INCOME The primary source of FBA's income is net interest income, which is the difference between the interest earned on assets and the interest paid on liabilities. Net interest income was $7.1 million, or 4.8% of average earnings assets, compared to $5.1 million, or 4.3% of average earnings assets, for the three months ended March 31, 1998 and 1997, respectively. For the year ended December 31, 1997, net interest income was $23.4 million, or 4.7% of average earning assets, compared with $17.8 million, or 4.3% of average earning assets, and $13.4 million, or 4.0% of average earning assets, for the years ended December 31, 1996 and 1995, respectively. FBA's loan portfolio, which represents its primary interest-earning asset and primary source of net interest income, previously consisted primarily of fixed rate indirect automobile loans. As interest rates began to increase during 1994, the yield on this fixed rate portfolio remained relatively constant. Furthermore, intense competition for automobile loans, particularly from nonbank entities, caused market rates to increase more slowly than interest rates in general. Consequently, both the amounts and rates at which new loans were originated were less than anticipated. The combination of these factors and the continued repayments of the older loans caused the yield on the loan portfolio to increase by only 41 basis points to 8.7% for the year ended December 31, 1995, compared with 8.3% for the year ended December 31, 1994. At the same time, FBA's cost of interest-bearing deposits, the principal source of funding for the loan portfolio, increased by 77 basis points to 4.4% for the year ended December 31, 1995 from 3.6% for the year ended December 31, 1994. During this same time frame, FBA was following an investment strategy whereby funds were borrowed on a short-term basis and were invested in mortgage-backed securities. While these instruments initially generated an incremental spread, as interest rates increased in 1994, the contribution to net interest margin of this investment strategy was substantially reduced. 31 36 The following is a comparison of the yield earned on the investment portfolio and the cost of short-term borrowings for the years ended December 31, 1995 and 1994:
1995 1994 ---- ---- Average yield on investment securities............ 6.04% 4.91% Average cost of borrowings........................ 7.29 4.35 ----- ---- Interest spread................................... (1.25)% 0.56% ===== ====
Concerned with its interest rate risk profile and the overall impact of further increases in interest rates, FBA began the process of restructuring its investment securities portfolio and repositioning its loan portfolio in the latter part of 1994. The restructuring process included sales of investment securities of $71.0 million and $113.9 million, resulting in net losses of $3.0 million and $7.1 million for the years ended December 31, 1995 and 1994, respectively. To reposition the loan portfolio, FBA significantly expanded its ability to originate commercial and financial, commercial real estate and real estate construction and development loans while maintaining a presence in the indirect automobile lending business. The current composition of the loan portfolio and the changes are presented under "--Loans and Allowance for Possible Loan Losses." The culmination of FBA's efforts in repositioning its loan portfolio, including the expansion into the San Francisco-Sacramento corridor of northern California and the restructuring of the investment securities portfolio, has resulted in an improvement of the net interest margin to 4.7% of average interest-earning assets for the year ended December 31, 1997, from 4.3% and 4.0% for the years ended December 31, 1996 and 1995, respectively. This improvement is attributable to the increase in the average yield on the loan portfolio to 9.7% for 1997 from 8.7% for 1995, while the overall cost of funds decreased by approximately four basis points from 1995 to 1997. For the three months ended March 31, 1998, the increase in net interest income over the same period in 1997 is primarily attributable to the net interest-earning assets provided by the acquisitions of Surety Bank and Pacific Bay Bank, the improved yield on BankTEXAS' repositioned loan portfolio and the effect of the exchange of $10.0 million of the First Banks Note for common stock of FBA. COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 NET INCOME. Net income was $1.1 million, or $0.22 per share on a diluted basis, for the three months ended March 31, 1998, compared to $484,000 or $0.12 per share on a diluted basis, for the same period in 1997. The improved operating results of FBA reflect the improved performance of both BankTEXAS and FB California. BankTEXAS' net income increased to $753,000 from $629,000 for the three month periods ended March 31, 1998 and 1997, respectively. FB California recorded net income of $739,000 for the three month period ended March 31, 1998, in comparison to $395,000 for the same period in 1997. The results for the first quarter of 1998 include a net charge after related income taxes of $225,000, or $0.05 per share on a diluted basis, in settlement of certain litigation. Excluding this charge, earnings per share on a diluted basis for the first quarter of 1998 would have been $0.27. As previously discussed, net interest income increased by $2.0 million to $7.1 million, or 4.8% of average interest-earning assets, from $5.1 million, or 4.3% of average interest-earnings assets, for the same period in 1997. PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses was $300,000 and $550,000 for the three month periods ended March 31, 1998 and 1997, respectively. The decrease in the provision for possible loan losses for the first quarter of 1998, compared to the same period in 1997, is primarily attributable to improved asset quality of FBA's existing loan portfolio, as determined by management's review and evaluation of the credit quality of the loans in the portfolio and its assessment of the adequacy of the allowance for possible loan losses. Net loan charge-offs were $529,000 for the three month period ended March 31, 1998, compared to $422,000 for the same period in 1997. The increase in net loan charge-offs is primarily attributable to the loans obtained through the acquisitions of Surety Bank and Pacific Bay Bank. The acquired allowance for possible loan losses for Pacific Bay Bank totaled $885,000 at the acquisition date. See "--Lending and Credit Management" for a summary of nonperforming loans and a summary of loan loss experience. 32 37 NONINTEREST INCOME AND EXPENSE. The following table summarizes noninterest income and noninterest expense for the three months ended March 31, 1998 and 1997.
INCREASE (DECREASE) ------------------- 1998 1997 AMOUNT PERCENT ---- ---- ------ ------- (DOLLARS EXPRESSED IN THOUSANDS) Noninterest income: Service charges on deposit accounts........... $ 739 575 164 28.5% Other income.................................. 319 296 23 7.8 Gain on sales of securities, net.............. 92 -- 92 -- ------ ----- ----- ------- Total noninterest income.................. $1,150 871 279 32.0 ====== ===== ===== ======= Noninterest expense: Salaries and employee benefits................ $2,135 1,550 585 37.7% Occupancy, net of rental income............... 491 571 (80) (14.0) Furniture and equipment....................... 347 267 80 30.0 Federal Deposit Insurance Corporation premiums.................................... 43 38 5 13.2 Postage, printing and supplies................ 167 148 19 12.8 Legal, examination and professional fees...... 890 750 140 18.7 Data processing............................... 475 327 148 45.3 Communications................................ 200 164 36 22.0 Losses and expenses on sale of foreclosed property, net of gains...................... 157 (9) 166 1,844.4 Other......................................... 1,152 687 465 67.7 ------ ----- ----- Total noninterest expense................. $6,057 4,493 1,564 34.8 ====== ===== ===== =======
NONINTEREST INCOME. Noninterest income was $1.2 million for the three month period ended March 31, 1998 compared to $871,000 for the same period in 1997. Noninterest income consists primarily of service charges on deposit accounts and customer service fees. Service charges on deposit accounts and customer service fees increased to $739,000 for the three month period ended March 31, 1998, in comparison to $575,000 for the same period in 1997. This increase is primarily attributable to the acquisitions of Surety Bank and Pacific Bay Bank. NONINTEREST EXPENSE. Noninterest expense was $6.1 million for the three month period ended March 31, 1998, compared to $4.5 million for the same period in 1997. The increase is attributable to the noninterest expense of Surety Bank and Pacific Bay Bank, nonrecurring expenses associated with those acquisitions and the additional noninterest expense attributable to FBA's expansion of its corporate lending and retail banking staff. Specifically, salaries and employee benefits increased by $585,000 to $2.1 million from $1.6 million for the three months ended March 31, 1998 and 1997, respectively. Additionally, other noninterest expense for the three months ended March 31, 1998 includes a $350,000 charge in settlement of certain litigation. During these same periods, occupancy expense, net of rental income, declined to $491,000 for the three months ended March 31, 1998 from $571,000 for the same period in 1997. This decline is the result of increased sub-leasing of excess space within FB California's banking premises and relocation of certain California branches. INCOME TAXES. The accompanying consolidated statements of operations reflect a provision for income taxes of $790,000 for the three month period ended March 31, 1998, compared to $361,000 for the same period in 1997. At March 31, 1998 and December 31, 1997, the accompanying consolidated balance sheets included a deferred tax asset, net of deferred tax liabilities, of $12.7 million and $13.1 million, respectively. The deferred tax asset valuation allowance was $7.0 million at March 31, 1998 and December 31, 1997. 33 38 COMPARISON OF RESULTS OF OPERATIONS FOR YEARS ENDED 1997 AND 1996 NET INCOME. Net income for the year ended December 31, 1997 improved to $3.5 million from $691,000 for the same period in 1996, an increase of 411%. This improvement is primarily attributable to net interest income. As previously discussed, net interest income increased by $5.6 million to $23.4 million, an increase of 30.9% or 4.7% of average earning assets, for 1997, from $17.8 million, or 4.3% of average earning assets, for 1996. PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses was $2.0 million and $2.4 million for the years ended December 31, 1997 and 1996, respectively. Net loan charge-offs were $1.4 million and $4.6 million for the years ended December 31, 1997 and 1996, respectively. The allowance for possible loan losses was $11.4 million, or 2.6% of total loans, net of unearned discount, at December 31, 1997, compared to $10.7 million, or 3.2% of total loans, net of unearned discount, at December 31, 1996. Loans which were either 90 days or more past due and still accruing interest or on nonaccrual status totaled $4.0 million and $3.6 million at December 31, 1997 and 1996, respectively, representing 0.9% and 1.1% of total loans, net of unearned discount, at those dates. Loans which were between 30 and 89 days past due were $7.9 million, or 1.8% of total loans, net of unearned discount, at December 31, 1997, compared to $7.3 million, or 2.2% of total loans, net of unearned discount, at December 31, 1996. Although asset quality has improved, FBA has continued to provide for possible loan losses in recognition of the overall growth in the loan portfolio as well as its changing composition. As the portfolio changes from one with significant preponderance in indirect automobile loans, to one having substantial portions of commercial and financial, real estate construction and development and commercial real estate loans, the credit risk profile also changes. Typically, a larger group of lower balance homogeneous loans, such as the indirect automobile loan portfolio, exhibits certain past due and loan loss experience trends which provides FBA a basis for establishing an adequate level of allowance for possible loan losses. While these same trends are included in FBA's evaluation of its commercial lending activities, the overall credit risk of this type of portfolio is heightened as the possibility of a significant unforeseen loss occurring over time is greater. See "--Loans and Allowance for Possible Loan Losses" for a further discussion of FBA's policies and practices of monitoring and maintaining the allowance for possible loan losses. NONINTEREST INCOME AND EXPENSE. The following table summarizes noninterest income and noninterest expense for the years ended December 31, 1997 and 1996.
INCREASE (DECREASE) ------------------- 1997 1996 AMOUNT PERCENT ---- ---- ------ ------- (DOLLARS EXPRESSED IN THOUSANDS) Noninterest income: Service charges on deposit accounts........... $ 2,239 2,258 (19) (0.8)% Loan sales and servicing income............... 40 70 (30) (42.9) Other income.................................. 932 1,072 (140) (13.1) Gain on sales of securities, net.............. 76 185 (109) (58.9) ------- ------ ------ Total noninterest income.................. $ 3,287 3,585 (298) (8.3) ======= ====== ====== ====== Noninterest expense: Salaries and employee benefits................ $ 6,226 5,249 977 18.6% Occupancy, net of rental income............... 2,166 1,832 334 18.2 Furniture and equipment....................... 1,149 1,003 146 14.6 Federal Deposit Insurance Corporation premiums.................................... 119 497 (378) (76.1) Postage, printing and supplies................ 496 744 (248) (33.3) Legal, examination and professional fees...... 3,241 2,777 464 16.7 Data processing............................... 1,084 735 349 47.5 Communications................................ 673 623 50 8.0 (Gain) loss on sale of foreclosed property, net of gains................................ (350) 1,148 (1,498) (130.5) Other......................................... 2,873 3,129 (256) (8.2) ------- ------ ------ Total noninterest expense................. $17,677 17,737 (60) (0.3) ======= ====== ====== ======
34 39 NONINTEREST INCOME. Noninterest income was $3.3 million for the year ended December 31, 1997, in comparison to $3.6 million for 1996, representing a decrease of $300,000. Service charges on deposit accounts decreased to $2.2 million from $2.3 million for the years ended December 31, 1997 and 1996, respectively. The decrease is primarily attributable to the deposit base of FCB, which experienced both a reduction in the number of demand deposit accounts subject to service charges and which reduced its minimum balance requirements in conjunction with a promotional campaign. The decrease was substantially offset by the additional service charges and fees provided by the acquisition of Sunrise Bank. Loan servicing fees decreased to $40,000 from $70,000 for the years ended December 31, 1997 and 1996, respectively. The decrease is due to a reduction in the amount of indirect automobile loans serviced for others as FBA is no longer selling indirect automobile loans on a servicing retained basis. Other income was $932,000 and $1.1 million for the years ended December 31, 1997 and 1996, respectively. For 1997, other income consists primarily of certain legal settlements received applicable to pending litigation of the former Sunrise Bank and a net gain of $47,000 realized upon sales of repossessed and other assets. Other income for the year ended December 31, 1996 includes a $795,000 gain realized upon FCB's sale and assignment of certain railroad cars and the associated leveraged leases to an unrelated party. In addition, the decrease in noninterest income for the year ended December 31, 1997 is attributable to a gain of $76,000 recognized upon the sale of an investment security for the year ended December 31, 1997, compared to a gain of $185,000 for 1996. NONINTEREST EXPENSE. Noninterest expense decreased by $60,000 to $17.7 million for the year ended December 31, 1997 compared to 1996. The decrease is primarily attributable to a gain on sale of foreclosed property, net of expenses, substantially offset by increases in other noninterest expense categories including salaries and benefits, occupancy, net of rental income, data processing and legal, examination and professional fees. These increases are primarily attributable to the acquisitions of Surety Bank, Sunrise Bank and FBA's expansion of its corporate lending and retail staff. In particular, salaries and employee benefits increased by $980,000 to $6.2 million for 1997 from $5.2 million for 1996. In addition, occupancy expense, net of rental income, and data processing expenses increased by $334,000 and $349,000 for the year ended December 31, 1997, respectively, in comparison to 1996. Legal, examination and professional fees increased to $3.2 million from $2.8 million for the years ended December 31, 1997 and 1996, respectively. The increase is primarily attributable to the costs associated with expanding FBA's organizational capabilities to achieve both internal and external growth as well as its overall growth in 1997. For 1997, FBA realized a gain on sale of foreclosed property, net of expenses, of $350,000, compared to losses and expenses on sale of foreclosed property of $1.1 million for the same period in 1996. The improvement for 1997 is attributable to a gain realized upon sale of a foreclosed property, net of gains, and an overall decrease in the losses and expenses of maintaining a reduced level of foreclosed properties. In addition, for 1996, losses and expenses on foreclosed property, net of gains, included $996,000 of valuation write-downs. Noninterest expense also reflects a decrease in other expense of $256,000 to $2.9 million from $3.1 million for the years ended December 31, 1997 and 1996, respectively. The decrease is primarily attributable to the noncredit provision for possible losses within the indirect automobile dealer lending program of $842,000 recorded in 1996, partially offset by an increase in fees paid to First Banks and its affiliates of approximately $700,000 for 1997 in comparison to 1996. Fees payable to First Banks and its affiliates generally increase as FBA expands through acquisitions and internal growth, reflecting the higher levels of service needed to operate the Subsidiary Banks. See Note 14 to the consolidated financial statements of FBA. INCOME TAXES. The accompanying consolidated statements of operations reflect a deferred income tax charge of $3.1 million for the year ended December 31, 1997, compared to $470,000 in 1996. At December 31, 1997 and 1996, the accompanying consolidated balance sheets include a deferred tax asset, net of deferred tax liabilities, of $13.1 million and $14.6 million, respectively. The deferred tax asset valuation allowance was $7.0 million and $6.6 million at December 31, 1997 and 1996. 35 40 COMPARISON OF RESULTS OF OPERATIONS FOR 1996 AND 1995 NET INCOME. Net income for the year ended December 31, 1996 was $691,000 in comparison to a net loss of $4.8 million for the same period in 1995. As more fully discussed below, the operating results for 1995 reflect an after-tax loss of $2.1 million incurred in connection with the restructuring of FBA's investment portfolio and a sharply higher provision for possible loan losses in comparison to 1996. As previously discussed, net interest income was $17.8 million, or 4.3% of average earning assets, for 1996, compared to $13.4 million, or 4.0% of average earning assets, for 1995. PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses was $2.4 million and $6.4 million for the years ended December 31, 1996 and 1995, respectively. Net loan charge-offs were $4.6 million and $3.4 million for the years ended December 31, 1996 and 1995, respectively. The allowance for possible loan losses was $10.7 million, or 3.2% of total loans, net of unearned discount, at December 31, 1996, compared to $10.6 million, or 4.0% of total loans, net of unearned discount, at December 31, 1995. Loans which were either 90 days or more past due and still accruing interest or on nonaccrual status totaled $3.6 million and $7.8 million at December 31, 1996 and 1995, respectively, representing 1.1% and 2.9% of total loans, net of unearned discount, at those dates. Loans which were between 30 and 89 days past due were $7.3 million, or 2.2% of total loans, net of unearned discount, at December 31, 1996 compared to $9.7 million, or 3.6% of total loans, net of unearned discount, at December 31, 1995. The provision for possible loan losses for 1995 was higher than normal in recognition of increasing loan charge-offs and delinquencies which were experienced during 1995 within the portfolio of indirect automobile loans. NONINTEREST INCOME AND EXPENSE. The following table summarizes noninterest income and noninterest expense for the years ended December 31, 1996 and 1995.
INCREASE (DECREASE) -------------------- 1996 1995 AMOUNT PERCENT ---- ---- ------ ------- (DOLLARS EXPRESSED IN THOUSANDS) Noninterest income: Service charges on deposit accounts..................... $ 2,258 1,682 576 34.2% Loan sales and servicing income......................... 70 159 (89) (56.0) Other income............................................ 1,072 1,284 (212) (16.5) Gain (loss) on sales of securities, net................. 185 (2,996) 3,181 (106.2) ------- ------ ----- Total noninterest income........................ $ 3,585 129 3,456 2,679.1 ======= ====== ===== ======= Noninterest expense: Salaries and employee benefits.......................... $ 5,249 5,358 (109) (2.0)% Occupancy, net of rental income......................... 1,832 1,615 217 13.4 Furniture and equipment................................. 1,003 895 108 12.1 Federal Deposit Insurance Corporation premiums.......... 497 493 4 0.8 Postage, printing and supplies.......................... 744 396 348 87.9 Legal, examination and professional fees................ 2,777 1,337 1,440 107.7 Data processing......................................... 735 755 (20) (2.6) Communications.......................................... 623 619 4 0.6 Losses and expenses on foreclosed property, net of gains................................................. 1,148 643 505 78.5 Other................................................... 3,129 2,037 1,092 53.6 ------- ------ ----- Total noninterest expense....................... $17,737 14,148 3,589 25.4 ======= ====== ===== =======
NONINTEREST INCOME. Noninterest income was $3.6 million for the year ended December 31, 1996 in comparison to $129,000 for 1995. As more fully discussed under "--Net Interest Income and Interest Rate Risk Management," noninterest income for 1995 includes a $3.0 million loss realized upon sales of investment securities. 36 41 Service charges on deposit accounts increased by $580,000 to $2.3 million from $1.7 million for the years ended December 31, 1996 and 1995, respectively. The increase is primarily attributable to the acquisition of FCB. See Note 2 to the accompanying consolidated financial statements of FBA. Loan sales and servicing income decreased to $70,000 from $159,000 for the years ended December 31, 1996 and 1995, respectively. The decrease is due to a reduction in the amount of indirect automobile loans serviced for others. Other income decreased by $210,000 to $1.1 million from $1.3 million for the years ended December 31, 1996 and 1995, respectively. Other income for the year ended December 31, 1995 includes a nonrecurring benefit of $179,000 from the termination of the FBA's Directors' Retirement Plan and an $802,000 nonrecurring benefit from the termination of a self-insurance trust. During 1990, FBA established a trust in lieu of purchasing officer and director liability insurance. Since coverage is now available and in place through First Banks, the trust was terminated and the funds were returned to FBA. For 1996, other income includes a $795,000 gain realized upon FCB's sale and assignment of certain railroad cars and leveraged leases to an unrelated party. NONINTEREST EXPENSE. Noninterest expense increased by $3.6 million to $17.7 million from $14.1 million for the years ended December 31, 1996 and 1995, respectively. The increase, as more fully discussed below, is primarily attributable to the acquisition of FCB on August 23, 1995, offset by cost reductions achieved through the reengineering of FBA's operations and the centralization of various functions with First Banks' systems during 1995. The decrease in salaries and employee benefits of $109,000 to $5.2 million from $5.4 million for the years ended December 31, 1996 and 1995, respectively, relates primarily to reductions in staff during 1995 substantially offset by the acquisition of FCB. FBA's existing staff was reduced from 142 and 162 full-time equivalent employees at December 31, 1994 and 1993, respectively, to 130 full-time equivalent employees at December 31, 1995, including the addition of 63 full-time equivalent employees from the acquisition of FCB. Legal, examination and professional fees increased to $2.8 million from $1.3 million for the years ended December 31, 1996 and 1995, respectively. The increase is primarily attributable to the additional costs associated with the reorganization of FBA and FCB and the amalgamating of acquired entities into FBA's systems and cultures and the costs incurred in expanding FBA's organizational capabilities to achieve its internal and external growth objectives. Losses and expenses on foreclosed property, net of gains, increased by $505,000 to $1.1 million from $643,000 for the years ended December 31, 1996 and 1995, respectively. The increase is attributable to valuation write-downs of $996,000 for 1996, compared to $116,000 for 1995. Other expenses increased $1.1 million to $3.1 million from $2.0 million for the years ended December 31, 1996 and 1995, respectively. The increase is primarily attributable to the noncredit provision for possible losses within the indirect automobile dealer lending program of $842,000 in 1996. Also included in other expenses are fees paid to First Banks and its affiliates for the various services rendered. These fees totaled $2.4 million and $895,000 for the years ended December 31, 1996 and 1995, respectively. Fees payable to First Banks and its affiliates generally increase as FBA expands through acquisitions and internal growth, reflecting the higher levels of service needed to operate the Subsidiary Banks. INCOME TAXES. The accompanying consolidated statements of operations reflect a deferred income tax charge of $470,000 for the year ended December 31, 1996. This compares to a $2.2 million deferred income tax benefit for the same period in 1995. At December 31, 1996 and 1995, the accompanying consolidated balance sheets include a deferred tax asset, net of deferred tax liabilities, of $14.6 million and $13.2 million, respectively. The deferred tax asset valuation allowance was $6.6 million and $5.6 million at December 31, 1996 and 1995, respectively. INVESTMENT SECURITIES FBA classifies the securities within its investment portfolio as held to maturity or available for sale. FBA does not engage in the trading of investment securities. As more fully described in Notes 1 and 3 of the consolidated financial statements of FBA, the investment security portfolio consists solely of securities designated as available-for-sale at December 31, 1997 and 1996. The investment security portfolio was $141.1 million at March 31, 1998, compared to $148.2 million and $125.1 million at December 31, 1997 and 1996, respectively. See, "--General, 37 42 Financial Condition and Average Balances and Net interest Income" for further discussion of the investment security portfolio. LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES Interest earned on the loan portfolio is the primary source of income for FBA. Loans, net of unearned discount, represented 64.1% of total assets as of March 31, 1998, compared to 67.0% and 63.6% as of December 31, 1997 and 1996, respectively. At March 31, 1998 and December 31, 1997, total loans, net of unearned discount, were $444.1 million and $431.5 million, increases of $107.7 million and $95.1 million, from $336.4 million at December 31, 1996. For 1996, total loans, net of unearned discount, increased by $69.8 million from $266.6 million at December 31, 1995. As previously discussed under "--Acquisitions and Financial Condition and Average Balances," the increases are attributable to the loans provided by the acquisitions of Pacific Bay Bank, Surety Bank and Sunrise Bank and the expansion of the commercial and financial, commercial real estate and real estate construction and development loan portfolios, partially offset by the decrease in the portfolio of indirect automobile loans. The following table summarizes the changes in the loan portfolio for the periods indicated:
INCREASE (DECREASE) ------------------------------------ FOR THE THREE MONTHS ENDED FOR THE YEARS ENDED MARCH 31, DECEMBER 31, ------------ --------------------- 1998 1997 1996 ---- ---- ---- (DOLLARS EXPRESSED IN THOUSANDS) Loans provided by acquisition: Pacific Bay Bank........................................ $ 29,700 -- -- Surety Bank............................................. -- 54,400 -- Sunrise Bank............................................ -- -- 61,100 Internal loan volumes: Commercial lending...................................... 3,100 71,200 48,900 Indirect automobile loans............................... (5,800) (28,600) (36,800) Other................................................... (14,400) (1,900) (3,400) -------- ------- ------- Total increase in loans, net of unearned discount...................................... $ 12,600 95,100 69,800 ======== ======= ======= Decrease in potential problem loans..................... $ 600 7,100 4,100 ======== ======= ======= - -------- Potential problem loans include indirect automobile loans 60 days or more past due, loans on nonaccrual status and other loans identified by management as having potential credit problems.
FBA's lending strategy stresses quality, growth and diversification by collateral, geography and industry. A common credit underwriting structure is in place throughout FBA. The commercial lenders focus principally on small to middle-market companies. Retail lenders focus principally on residential loans, including home equity loans, automobile financing and other consumer financing needs arising out of FBA's branch banking network. Commercial and financial loans include loans that are made primarily based on the borrowers' general credit strength and ability to generate repayment cash flows from income sources even though such loans and bonds may also be secured by real estate or other assets. Real estate construction and development loans, primarily relating to residential properties and smaller commercial properties, represent interim financing secured by real estate under construction. Real estate mortgage loans consist primarily of loans secured by single-family owner-occupied properties and various types of commercial properties on which the income from the property is the intended source of repayment. Consumer and installment loans are loans to individuals and consist primarily of loans secured by automobiles. Loans held for sale are generally fixed and adjustable rate residential loans pending sale in the secondary mortgage market in the form of a mortgage-backed security, or to various private third-party investors. 38 43 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:
MARCH 31, DECEMBER 31, ----------------------------------- ------------------------------------------------------ 1998 1997 1997 1996 1995 ---------------- ---------------- ---------------- ---------------- ---------------- AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT % ------ - ------ - ------ - ------ - ------ - Commercial and financial.......... $113,312 25.5% $ 82,978 25.4% $109,763 25.8% $ 80,781 24.0% $ 48,807 18.3% Real estate construction and development..................... 96,035 21.6 58,922 18.0 93,454 22.0 58,045 17.3 30,142 11.3 Real estate mortgage.............. 166,160 37.4 92,070 28.1 149,951 35.2 93,864 27.9 45,530 17.1 Consumer and installment, net of unearned discount............... 68,592 15.5 93,045 28.5 72,579 17.0 103,681 30.8 142,109 53.3 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total loans, excluding loans held for sale............... 444,099 100.0% 327,015 100.0% 425,747 100.0% 336,371 100.0% 266,588 100.0% ===== ===== ===== ===== ===== Loans held for sale............... -- -- 5,708 -- -- -------- -------- -------- -------- -------- Total loans................... $444,099 $327,015 $431,455 $336,371 $266,588 ======== ======== ======== ======== ======== DECEMBER 31, ----------------------------------- 1994 1993 ---------------- ---------------- AMOUNT % AMOUNT % ------ - ------ - Commercial and financial.......... $ 14,556 7.4% $ 7,653 5.2% Real estate construction and development..................... 13,793 7.0 9,072 6.2 Real estate mortgage.............. 14,796 7.6 12,862 8.8 Consumer and installment, net of unearned discount............... 152,916 78.0 117,116 79.8 -------- ----- -------- ----- Total loans, excluding loans held for sale............... 196,061 100.0% 146,703 100.0% ===== ===== Loans held for sale............... 7,253 21,029 -------- -------- Total loans................... $203,314 $167,732 ======== ========
Loans at December 31, 1997 mature as follows:
OVER ONE YEAR THROUGH FIVE YEARS OVER FIVE YEARS ----------------- ----------------- ONE YEAR FIXED FLOATING FIXED FLOATING OR LESS RATE RATE RATE RATE TOTAL -------- ----- -------- ----- -------- ----- (DOLLARS EXPRESSED IN THOUSANDS) Commercial and financial.......................... $ 95,695 10,013 1,584 427 2,044 109,763 Real estate construction and development.......... 92,476 118 419 94 347 93,454 Real estate mortgage.............................. 109,325 14,130 9,686 6,331 10,479 149,951 Consumer and installment, net of unearned discount........................................ 9,315 55,356 150 7,758 -- 72,579 Loans held for sale............................... 5,708 -- -- -- -- 5,708 -------- ------ ------ ------ ------ ------- Total loans................................... $312,519 79,617 11,839 14,610 12,870 431,455 ======== ====== ====== ====== ====== =======
39 44 The following table is a summary of loan loss experience for the three months ended March 31, 1998 and 1997 and for the five years ended December 31, 1997:
MARCH 31, DECEMBER 31, ------------------ ----------------------------------------------- 1998 1997 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ---- ---- (DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) Balance at beginning of period............................ $ 11,407 10,744 10,744 10,616 2,756 2,637 3,044 Acquired allowances for possible loan losses.............. 885 -- 30 2,338 4,797 -- -- -------- ------- ------- ------- ------- ------- ------- 12,292 10,744 10,774 12,954 7,553 2,637 3,044 -------- ------- ------- ------- ------- ------- ------- Loans charged off: Commercial and financial.............................. (376) (64) (966) (2,286) -- (7) (268) Real estate construction and development.............. -- -- (15) (164) (2) -- -- Real estate mortgage.................................. (465) (43) (244) (786) (153) (375) (8) Consumer and installment.............................. (218) (875) (2,430) (3,818) (4,018) (1,876) (1,622) -------- ------- ------- ------- ------- ------- ------- Total loans charged-off....................... (1,059) (982) (3,655) (7,054) (4,173) (2,258) (1,898) -------- ------- ------- ------- ------- ------- ------- Recoveries of loans previously charged off: Commercial and financial.............................. 299 151 926 1,271 223 184 164 Real estate construction and development.............. 25 58 68 15 1 -- -- Real estate mortgage.................................. 30 73 195 109 36 258 154 Consumer and installment.............................. 176 278 1,099 1,044 560 677 683 -------- ------- ------- ------- ------- ------- ------- Total recoveries of loans previously charged off........................................ 530 560 2,288 2,439 820 1,119 1,001 -------- ------- ------- ------- ------- ------- ------- Net loans charged-off......................... (529) (422) (1,367) (4,615) (3,353) (1,139) (897) -------- ------- ------- ------- ------- ------- ------- Provision for possible loan losses........................ 300 550 2,000 2,405 6,416 1,258 490 -------- ------- ------- ------- ------- ------- ------- Balance at end of period.................................. $ 12,063 10,872 11,407 10,744 10,616 2,756 2,637 ======== ======= ======= ======= ======= ======= ======= Loans outstanding: Average............................................... $438,421 326,474 343,329 273,063 230,451 182,922 171,889 End of period......................................... 444,099 327,015 431,455 336,371 266,588 203,314 167,732 Ratio of allowance for possible loan losses to loans outstanding: Average........................................... 2.75% 3.33% 3.32% 3.93% 4.61% 1.51% 1.53% End of period..................................... 2.72 3.32 2.64 3.19 3.98 1.36 1.57 Ratio of net charge-offs to average loans outstanding......................................... 0.49 0.52 .40 1.69 1.45 0.62 0.52 ======== ======= ======= ======= ======= ======= ======= Allocation of allowance for possible loan losses at end of period: Commercial and financial.............................. $ 2,525 3,458 2,552 3,417 2,534 197 229 Real estate construction and development.............. 2,108 1,336 1,680 1,320 1,835 187 237 Real estate mortgage.................................. 3,218 3,688 3,536 3,645 2,210 201 720 Consumer and installment.............................. 1,297 2,390 1,539 2,362 4,037 2,171 1,451 Unallocated........................................... 2,915 -- 2,100 -- -- -- -- -------- ------- ------- ------- ------- ------- ------- Total......................................... $ 12,063 10,872 11,407 10,744 10,616 2,756 2,637 ======== ======= ======= ======= ======= ======= ======= Percent of categories to loans, net of unearned discount: Commercial and financial.............................. 25.5% 25.4% 25.4% 24.0% 18.3% 7.1% 4.6% Real estate construction and development.............. 21.6 18.0 21.7 17.3 11.3 6.8 5.4 Real estate mortgage.................................. 37.4 28.1 34.8 27.9 17.1 7.3 7.7 Consumer and installment.............................. 15.5 28.5 16.8 30.8 53.3 75.2 69.8 Loans held for sale................................... -- -- 1.3 -- -- 3.6 12.5 -------- ------- ------- ------- ------- ------- ------- Total......................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ======== ======= ======= ======= ======= ======= =======
40 45 Nonperforming assets include nonaccrual loans, restructured loans and foreclosed property. The following table presents the categories of nonperforming assets and certain ratios as of the dates indicated:
MARCH 31, DECEMBER 31, ------------------ ----------------------------------------------- 1998 1997 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ---- ---- (DOLLARS EXPRESSED IN THOUSANDS) Nonperforming loans............................ $ 6,003 2,445 2,846 2,959 5,075 293 622 Foreclosed property, net....................... 725 1,035 601 977 2,393 1,553 3,171 -------- ------- ------- ------- ------- ------- ------- Total nonperforming assets......... $ 6,728 3,480 3,447 3,936 7,468 1,846 3,793 ======== ======= ======= ======= ======= ======= ======= Loans, net of unearned discount................ $444,099 327,015 431,455 336,371 266,588 203,314 167,732 ======== ======= ======= ======= ======= ======= ======= Loans past due: Over 30 days to 90 days.................... $ 12,428 6,781 7,866 7,302 9,664 1,368 1,571 Over 90 days and still accruing............ 672 672 1,158 615 2,766 183 803 -------- ------- ------- ------- ------- ------- ------- Total past-due loans............... $ 13,100 7,453 9,024 7,917 12,430 1,551 2,374 ======== ======= ======= ======= ======= ======= ======= Allowance for possible loan losses to loans.... 2.72% 3.32% 2.64% 3.19% 3.98% 1.36% 1.57% Nonperforming loans to loans................... 1.35 0.75 0.66 0.88 1.90 0.14 0.37 Allowance for possible loan losses to nonperforming loans.......................... 200.95 444.66 400.81 363.10 209.18 940.61 423.95 Nonperforming assets to loans and foreclosed property.......................... 1.51 1.06 0.80 1.17 2.78 0.90 2.22 ======== ======= ======= ======= ======= ======= =======
Nonperforming loans, consisting of loans on nonaccrual status and restructured loans, were $6.0 million at March 31, 1998 in comparison to $2.8 million and $2.4 million at December 31, 1997 and March 31, 1997, respectively. The increase is primarily attributable to the loans obtained through the acquisition of Pacific Bay Bank. The acquired allowance for possible loan losses totaled $885,000 at the acquisition date. As of March 31, 1998 and December 31, 1997 and 1996, $5.3 million, $5.9 million and $13.0 million, respectively, of loans not included in the table above were identified by management as having potential credit problems which raised doubts as to the ability of the borrowers to comply with the present loan repayment terms. FBA's credit management policy and procedures focus on identifying, measuring and controlling credit exposure. These procedures employ a lender-initiated system of rating credits, which is ratified in the loan approval process and subsequently tested in internal loan reviews, external audits and regulatory bank examinations. Basically, the system requires rating all loans at the time they are made, except for homogeneous categories of loans, such as residential real estate mortgage loans and indirect automobile loans. These homogeneous loans are assigned an initial rating based on FBA's experience with each type of loan. Adjustments to these ratings are based on payment experience subsequent to their origination. Adversely rated credits, including loans requiring close monitoring which would not normally be considered criticized credits by regulators, are included on a monthly loan watch list. Loans may be added to the watch list for reasons which are temporary and correctable, such as the absence of current financial statements of the borrower, or a deficiency in loan documentation. Other loans are added whenever any adverse circumstance is detected which might affect the borrower's ability to meet the terms of the loan. Such circumstances include the delinquency of a scheduled loan payment, a deterioration in the borrower's financial condition identified in a review of periodic financial statements, a decrease in the value of the collateral securing the loan, or a change in the economic environment within which the borrower operates. Loans on the watch list require detailed loan status reports prepared by the responsible officer every four months, which are then discussed in formal meetings with the loan review and credit administration staffs. Downgrades of loan risk ratings may be initiated by the responsible loan officer at any time. However, upgrades of risk ratings may only be made with the concurrence of the loan review and credit administration staffs generally at the time of the formal watch list review meetings. Each month, the credit administration department provides FBA's management with detailed lists of loans on the watch list and summaries of the entire loan portfolio of each Subsidiary Bank by risk rating. These are coupled with analyses of changes in the risk profiles of the portfolios, changes in past due and nonperforming loans and changes in watch list and classified loans over time. In this manner, the overall increases or decreases in the levels of risk in the portfolios are monitored continually. Factors are applied to the loan portfolios for each category of loan 41 46 risk to determine acceptable levels of allowance for possible loan losses. These factors are derived primarily from the actual loss experience of the Subsidiary Banks and from published national surveys of norms in the industry. The calculated allowances required for the portfolios are then compared to the actual allowance balances to determine the provisions necessary to maintain the allowances at appropriate levels. In addition, management exercises judgment in its analysis of determining the overall level of the allowance for possible losses. In its analysis, management considers the change in the portfolio, including growth and composition, and the economic conditions of the regions in which FBA operates. Based on this quantitative and qualitative analysis, the allowance for possible loan losses is adjusted. Such adjustments are reflected in the consolidated statements of operations. FBA does not engage in lending in foreign countries or based on activities in foreign countries. Additionally, FBA does not have any concentrations of loans exceeding 10% of total loans which are not otherwise disclosed in the loan portfolio composition table and Note 4 to the accompanying consolidated financial statements of FBA. FBA does not have any interest-bearing assets which would have been included in nonaccrual, past due or restructured loans if such assets were loans. DEPOSITS Deposits are the primary source of funds for FBA. FBA's deposits consist principally of core deposits from its local market areas. FBA does not accept brokered deposits. The following table sets forth the distribution of FBA's average deposit accounts at the dates indicated and the weighted average interest rates by category of deposit:
YEARS ENDED DECEMBER 31, MARCH 31, --------------------------------------------------------- 1998 1997 1996 1995 --------------- --------------- --------------- --------------- BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE ------- ---- ------- ---- ------- ---- ------- ---- (DOLLARS EXPRESSED IN THOUSANDS) Non-interest-bearing demand.................. $ 91,230 --% $ 78,222 --% $ 70,739 --% $ 54,288 --% Interest-bearing demand...................... 73,291 1.93 66,687 2.10 43,048 1.76 24,020 2.41 Savings...................................... 151,237 3.90 108,430 3.46 91,043 3.10 75,576 3.16 Time deposits of $100 or more................ 51,594 6.09 39,126 5.48 36,586 5.49 29,073 5.54 Other time................................... 205,975 5.48 168,795 5.59 152,812 5.47 116,919 5.35 -------- ==== -------- ==== -------- ==== -------- ==== Total average deposits........... $573,327 $461,260 $394,228 $299,876 ======== ======== ======== ========
CAPITAL In 1996, FBA purchased an outstanding warrant to acquire 131,336 shares of FBA common stock at $0.75 per share from the FDIC for an aggregate amount of $1.3 million. The purchase of the warrant was applied as a reduction of capital surplus. FBA issued 264,622 shares of common stock in connection with its acquisition of Surety Bank, resulting in an increase to stockholders' equity of $4.8 million. The increase represents the fair value of the net assets exchanged for FBA common stock, as determined by the market value of FBA common stock at the date of exchange. On February 2, 1998, FBA completed its acquisition of FCB. As described under "--Acquisitions" and in Note 2 of the accompanying consolidated financial statements of FBA, in connection with the acquisition, FBA issued approximately 1,555,728 shares of common stock, of which 1,266,176 were issued to First Banks. The consolidated statements of changes in stockholders' equity reflect the accounts of FBA as if the common stock issued to acquire First Banks' interest in FCB had been outstanding since August 23, 1995. The Board of Directors has authorized the purchase of up to a cumulative total of 816,906 shares of common stock for treasury during 1995 through 1998. Aggregate shares purchased for treasury totaled 496,056, 386,458 and 280,430, at an aggregate cost of $6.8 million, $4.4 million and $2.8 million as of March 31, 1998 and December 31, 1997 and 1996, respectively. 42 47 At March 31, 1998 and December 31, 1997, FBA's and the Subsidiary Banks' capital ratios were as follows:
RISK-BASED CAPITAL RATIOS ------------------------------------ TOTAL TIER 1 LEVERAGE RATIO ---------------- ---------------- ---------------- 1998 1997 1998 1997 1998 1997 ---- ---- ---- ---- ---- ---- FBA................................................. 9.08% 6.88% 7.82% 5.62% 6.77% 4.96% BankTEXAS........................................... 12.99 12.26 11.73 11.00 9.24 8.90 FB California....................................... 13.18 12.19 11.91 10.93 11.12 10.40
Management believes as of December 31, 1997 and March 31, 1998, each of the Subsidiaries was "well capitalized" as defined by the Federal Deposit Insurance Corporation Improvement Act of 1991. INTEREST RATE RISK MANAGEMENT For financial institutions, the maintenance of a satisfactory level of net interest income is a primary factor in achieving acceptable income levels. However, the maturity and repricing characteristics of the institution's loan and investment portfolios, relative to those within its deposit structure, may differ significantly. These characteristics are influenced by the nature of the loan and deposit markets within which such institution operates, as well as its objectives for business development within those markets at any point in time. In addition, the ability of borrowers to repay loans and depositors to withdraw funds prior to stated maturity dates introduces divergent option characteristics which operate primarily as interest rates change. These factors cause various elements of the institution's balance sheet to react in different manners and at different times relative to changes in interest rates, thereby leading to increases or decreases in net interest income over time. Depending upon the nature and velocity of interest rate movements and their effect on the specific components of the institution's balance sheet, the effects on net interest income can be substantial. Consequently, a fundamental requirement in managing a financial institution is establishing effective control over the exposure of the institution to changes in interest rates. FBA manages its interest rate risk by: (1) maintaining an Asset Liability Committee ("ALCO") responsible to FBA's Board of Directors to review the overall interest rate risk management activity and approve actions taken to reduce risk; (2) maintaining an effective simulation model to determine FBA's exposure to changes in interest rates; (3) coordinating the lending, investing and deposit-generating functions to control the assumption of interest rate risk; and (4) employing various off-balance-sheet financial instruments to offset inherent interest rate risk when it becomes excessive. The objective of these procedures is to limit the adverse impact which changes in interest rates may have on net interest income. The ALCO has overall responsibility for the effective management of interest rate risk and the approval of policy guidelines. The ALCO includes the Chairman and Chief Executive Officer, the senior executives of investments, credit, retail banking, commercial banking and finance, and certain other officers. The ALCO is supported by the Asset Liability Management Group which monitors interest rate risk, prepares analyses for review by the ALCO and implements actions which are either specifically directed by the ALCO or established by policy guidelines. The objective and primary focus of interest sensitivity management is to optimize earnings results, while managing, within internal policy constraints, interest rate risk. FBA's policy on rate sensitivity is to manage exposure to potential risks associated with changing interest rates by maintaining a balance sheet posture in which annual net interest income is not significantly impacted by reasonably possible near-term changes in interest rates. To measure the effect of interest rate changes, FBA recalculates its net income over two one-year horizons on a pro forma basis. The analysis assumes various scenarios for increases and decreases in interest rates including both instantaneous and gradual and parallel and non-parallel shifts in the yield curve, in varying amounts. For purposes of arriving at reasonably possible near-term changes in interest rates, FBA includes a forecast based on actual changes in interest rates which have occurred over a two year period, simulating both a declining and rising interest rate scenario. Consistent with the table presented on page 45, which indicates FBA is "asset-sensitive," FBA's simulation model indicates a loss of projected net income should interest rates decline. While a decline in interest rates of less than 10% has a diminutive effect on the earnings of FBA, a significant decline in interest rates, resembling the actual decline which occurred over a two-year period commencing in March 1991, indicates a loss of net income equivalent to approximately 7% of net interest income for the year ended December 31, 1997. 43 48 FBA utilizes off-balance-sheet derivative financial instruments to assist in the management of interest rate sensitivity and to modify the repricing, maturity and option characteristics of on-balance-sheet assets and liabilities. Derivative financial instruments held by FBA at March 31, 1998 and December 31, 1997 and 1996 consist of an interest rate cap agreement with a notional amount of $10.0 million and credit exposure of $146,000, $222,000 and $335,000, respectively. The notional amount of the interest rate cap agreement does not represent amounts exchanged by the parties and, therefore, is not a measure of FBA's credit exposure through its use of derivative financial instruments. The amounts actually exchanged are determined by reference to the notional amounts and the other terms of the agreement. FBA's interest rate cap agreement limits the interest expense associated with certain of its interest-bearing liabilities. In exchange for an initial fee, the interest rate cap agreement entitles FBA to receive interest payments when a specified index rate exceeds a predetermined rate. The agreement outstanding at March 31, 1998 and December 31, 1997 and 1996 effectively limits the interest rate to 5.0% on $10.0 million of interest-bearing liabilities from October 15, 1997 to May 15, 2000. Previously, FBA sold interest rate futures contracts and purchased options on interest rate futures contracts to hedge the interest rate risk of its available-for-sale securities portfolio. Interest rate futures contracts are commitments either to purchase or sell designated financial instruments at a future date for a specified price and may be settled in cash or through delivery of such financial instruments. Options on interest rate futures contracts confer the right to purchase or sell financial futures contracts at a specified price and are settled in cash. There were no outstanding interest rate futures contracts or options on interest rate futures contracts at December 31, 1995 and no activity subsequent to December 31, 1995. During 1995, as interest rates declined, FBA incurred losses on the interest rate futures contracts of $5.9 million, of which $806,000 was amortized to income as a yield adjustment to the investment security portfolio and $5.1 million was included in the cost basis in determining the gain or loss upon the sale of the securities. The losses incurred on the interest rate futures contracts were partially offset by gains in the available-for-sale securities portfolio. The overall net loss in net market value of these positions was attributable to an increase in the projected prepayments of principal underlying the available-for-sale securities portfolio. These increased prepayment projections disproportionately shortened the expected lives of the available-for-sale securities portfolio in comparison to the effective maturity created with the hedge position. As a result, beginning in the second quarter of 1995, FBA began to reduce its hedge position to coincide with the current expected life of the available-for-sale securities portfolio by decreasing the number of outstanding interest rate futures contracts. FBA continued to reduce its hedge position during the third and fourth quarters of 1995 as a result of the further declines in interest rates. In addition, on November 3, 1995, upon sales of $48.9 million of securities, which marked the completion of the restructuring of the available-for-sale securities portfolio, the remaining outstanding interest rate futures contracts were closed. 44 49 In addition to the simulation model employed by FBA, a more traditional interest rate sensitivity position is prepared and reviewed in conjunction with the results of the simulation model. The following table presents the projected maturities and periods to repricing of FBA's rate sensitive assets and liabilities as of December 31, 1997, adjusted to account for anticipated prepayments:
OVER THREE OVER SIX THREE THROUGH THROUGH OVER ONE OVER MONTHS SIX TWELVE THROUGH FIVE OR LESS MONTHS MONTHS FIVE YEARS YEARS TOTAL ------- ---------- -------- ---------- ----- ----- (DOLLARS EXPRESSED IN THOUSANDS) Interest-earning assets: Loans............................... $310,342 21,466 35,589 61,820 2,238 431,455 Investment securities................... 26,959 4,162 9,706 101,638 5,716 148,181 Federal funds sold...................... 2,215 -- -- -- -- 2,215 Interest-bearing deposits with other financial institutions................ 690 -- -- -- -- 690 -------- ------- ------- ------- ------- ------- Total interest-earning assets... 340,206 25,628 45,295 163,458 7,954 582,541 -------- ------- ------- ------- ------- ------- Interest-bearing liabilities: Interest-bearing demand accounts........ 27,084 16,835 10,980 8,052 10,248 73,199 Money market demand accounts............ 68,201 -- -- -- -- 68,201 Savings accounts........................ 13,502 11,119 9,531 13,501 31,769 79,422 Time deposits........................... 58,703 49,824 65,196 64,589 -- 238,312 Notes payable and other borrowed funds................................. 18,003 584 -- 6,500 -- 25,087 -------- ------- ------- ------- ------- ------- Total interest-bearing liabilities................... 185,493 78,362 85,707 92,642 42,017 484,221 -------- ------- ------- ------- ------- ------- Interest-sensitivity gap: Periodic................................ $154,713 (52,734) (40,412) 70,816 (34,063) 98,320 ======= Cumulative.............................. 154,713 101,979 61,567 132,383 98,320 ======== ======= ======= ======= ======= Ratio of interest-sensitive assets to interest-sensitive liabilities: Periodic................................ 1.83 0.33 0.53 1.76 0.19 1.20 ======= Cumulative.............................. 1.83 1.39 1.18 1.30 1.20 ======== ======= ======= ======= ======= - -------- Loans presented net of unearned discount.
Management made certain assumptions in preparing the table above. These assumptions included: Loans will repay at historic repayment speeds; mortgage-backed securities, included in investment securities, will repay at projected repayment speeds; interest-bearing demand accounts and savings accounts are interest-sensitive at a rate of 37% and 17%, respectively, of the remaining balance for each period presented; and fixed maturity deposits will not be withdrawn prior to maturity. At December 31, 1997, FBA's asset-sensitive position on a cumulative basis through the twelve-month time horizon was $61.6 million, or 9.6% of total assets. The asset-sensitive position is attributable to the composition of the loan and investment security portfolios. The interest-sensitivity position is one of several measurements of the impact of interest rate changes on net interest income. Its usefulness in assessing the effect of potential changes in net interest income varies with the constant change in the composition of FBA's assets and liabilities. For this reason, FBA places greater emphasis on a simulation model for monitoring its interest rate risk exposure. LIQUIDITY The liquidity of FBA and the Subsidiary Banks is the ability to maintain a cash flow which is adequate to fund operations and meet obligations and other commitments on a timely basis. The Subsidiary Banks receive funds for liquidity from customer deposits, loan payments, maturities of loans and investments, sales of investments and from 45 50 earnings. In addition, the Subsidiary Banks may avail themselves of more volatile sources of funds through the issuance of certificates of deposit in denominations of $100,000 or more, federal funds borrowed, securities sold under agreements to repurchase and through borrowings from the FHLB. The aggregate funds acquired from these more volatile sources were $61.2 million at March 31, 1998 and $56.2 million and $43.8 million at December 31, 1997 and 1996, respectively. The following table presents the maturity structure of volatile funds, which consists of certificates of deposit of $100,000 or more and other short-term borrowings, at March 31, 1998 and December 31, 1997:
MARCH 31, 1998 DECEMBER 31, 1997 -------------- ----------------- (DOLLARS EXPRESSED IN THOUSANDS) 3 months or less............................... $21,562 19,333 Over 3 through 6 months........................ 13,606 11,284 Over 6 through 12 months....................... 13,315 14,142 Over 12 months................................. 12,695 11,400 ------- ------ Total.............................. $61,178 56,159 ======= ======
In addition to these more volatile sources of funds, FBA borrowed $13.5 million, $14.9 million and $14.0 million at March 31, 1998 and December 31, 1997 and 1996, respectively, from First Banks under the $20.0 million First Banks Note to facilitate the funding of its acquisitions. The borrowings under the First Banks Note bear interest at an annual rate of one-quarter percent less than the "Prime Rate" as reported in The Wall Street Journal. The principal and accrued interest under the First Banks Note are due and payable on October 31, 2001. In connection with the acquisition of FCB, $10.0 million of the outstanding principal balance of the First Banks Note was exchanged for 804,000 shares of FBA common stock. Management believes the available liquidity and operating results of the Subsidiary Banks will be sufficient to provide funds for growth and to meet FBA's operating and debt service requirements both on a short-term and long- term basis, including the First Banks Note. YEAR 2000 COMPATIBILITY FBA and its Subsidiary Banks are subject to risks associated with the Year 2000 software problem, a term which refers to uncertainties about the ability of various software systems to interpret dates correctly after the beginning of the Year 2000. FBA and its Subsidiary Banks have significant dependence on various computer equipment and software for their daily operations. Most software systems were originally designed to operate using date fields which contain two digits to correspond to the last two digits of the Year. With the approaching change to the Year 2000, this limitation in these systems could cause the computers to misinterpret years beginning with "20" as instead being years beginning with "19." If not corrected, this could cause miscalculation of data for financial purposes, and operating failure of equipment which is date dependent. While the most obvious part of this problem is the mainframe computer system, there are many other potential ramifications. These can be categorized as: (1) the ancillary software systems which are used for various other purposes throughout FBA on secondary mainframe computers, personal computers or intelligent terminals; (2) other types of equipment which are not related to or connected to computer equipment, such as vault time locks, elevators, security equipment and heating/air conditioning systems, which are used in bank branches for various purposes; and (3) the effects which the transition to the Year 2000 may have on external suppliers and servicers, as well as on the loan and deposit customers of FBA. Recognizing this issue, FBA has established an operating committee, which includes representatives of First Banks, to identify all of the various Year 2000 problems which may arise and to work with the various departments within FBA to address these issues. Since most of the software used by FBA is purchased from outside vendors, FBA has been working with these vendors to ensure the issues are being corrected. In a few instances, there are particular systems or equipment which the vendors do not intend to convert to Year 2000 compatibility. However, generally these are items which are at the end of their economic lives and scheduled for replacement. Consequently, FBA believes its cost of Year 2000 compliance will not be material to its financial position or results of operations. These costs are expensed as incurred. 46 51 FBA's process of evaluating potential effects of Year 2000 issues on customers of the Subsidiary Banks is in its early stages, and it is therefore impossible to quantify the potential adverse effects of incompatible software systems on loan or deposit customers of FBA's Subsidiary Banks. The failure of a commercial bank customer to prepare adequately for Year 2000 compatibility could have a significant adverse effect on such customer's operations and profitability, in turn inhibiting its ability to repay loans in accordance with their terms or requiring it to use its deposit balances. Until sufficient information is accumulated from customers of the Subsidiary Banks to enable FBA to assess the degree to which customers' operations are susceptible to potential problems, FBA will be unable to quantify the potential effect on its commercial customers. FBA has revised its method of determining its adequacy of the allowance for possible loan losses to include an allocation for the risks associated with the year 2000 issue. EFFECT OF NEW ACCOUNTING STANDARDS FBA adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 130--Reporting Comprehensive Income ("SFAS 130") retroactively on January 1, 1998. SFAS 130 established standards for reporting and displaying income and its components (revenues, gains and losses) in a full set of general purpose financial statements. The statement mandates that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Comparative financial statements provided for earlier periods have been restated to reflect the application of SFAS 130. The implementation of SFAS 130 did not have a material impact on FBA's consolidated financial statements of FBA. During 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131--Disclosures about Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131 establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. Additionally, SFAS 131 establishes standards for related disclosures about products and services, geographic areas, and major customers superseding SFAS No. 14--Financial Reporting for Segments of a Business Enterprise. FBA is currently evaluating information required by SFAS 131 and believes expanded disclosure information will be required to be included in FBA's consolidated financial statements of FBA for fiscal years beginning after December 15, 1997. In June 1998, the FASB issued SFAS No. 133--Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge in one of three categories described in the pronouncement. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. Under SFAS 133, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk. SFAS 133 applies to all entities and is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Initial application should be as of the beginning of an entity's fiscal quarter; on that date, hedging relationships must be designated and documented pursuant to the provisions of SFAS 133. Earlier application of all of the provisions is encouraged but is permitted only as of the beginning of any fiscal quarter that begins after issuance of SFAS 133. Additionally, SFAS 133 should not be applied retroactively to financial statements of prior periods. FBA is currently evaluating SFAS 133 to determine its impact on the consolidated financial statements of FBA. EFFECTS OF INFLATION Financial institutions are less affected by inflation than other types of companies. Financial institutions make relatively few significant asset acquisitions which are directly affected by changing prices. Instead, the assets and liabilities are primarily monetary in nature. Consequently, interest rates are more significant to the performance of financial institutions than the effect of general inflation levels. While a relationship exists between the inflation rate and interest rates, FBA believes this is generally manageable through its asset/liability management program. 47 52 BUSINESS GENERAL First Banks America, Inc. ("FBA" or the "Company") is a bank holding company with two wholly-owned banking subsidiaries, First Bank of California ("FB California"), a bank chartered by the State of California, and BankTEXAS National Association, a national banking association ("BankTEXAS") (collectively, the "Subsidiary Banks"). FBA, through FB California and BankTEXAS, operates a total of eleven banking locations in the San Francisco-Sacramento corridor of Northern California and a total of six banking locations in Houston, Dallas, Irving and McKinney, Texas. As of March 31, 1998, FBA had approximately $692.4 million in total assets, $444.1 million in total loans, net of unearned discount, $600.6 million in total deposits and $56.8 million in total stockholders' equity. Since 1994, FBA has been controlled by First Banks, a $4.3 billion bank holding company headquartered in St. Louis, Missouri. First Banks holds, as of March 31, 1998, approximately 72% of FBA's outstanding voting stock. FBA's senior executive officers, as well as a majority of FBA's Board of Directors, are executive officers of First Banks. FBA and the Subsidiary Banks purchase certain services and supplies, including data processing services, internal auditing, loan review, income tax preparation and assistance, accounting, asset/liability management and investment services, loan servicing and other management and administrative services from First Banks and its affiliates. In an effort to enhance its banking franchise, FBA places emphasis upon acquiring other financial institutions as a means of accelerating its growth in order to expand its presence in a given market, to increase the scope of its market area or to enter new or noncontiguous market areas. After an acquisition is consummated, FBA endeavors to enhance the franchise of the acquired entity by supplementing the acquired entity's marketing and business development efforts in order to broaden customer bases, strengthen particular business segments or fill voids in its overall market coverage. In addition, the acquisition program enables FBA to further leverage the operational support services available to it through First Banks and to provide the products and services typically available only through such a larger organization. FBA's management philosophy is to centralize overall corporate policies, procedures and administrative functions and to provide operational support functions for the Subsidiary Banks. Primary responsibility for implementation of such policies and management of the Subsidiary Banks resides with the officers and directors of the respective Subsidiary Banks. After First Banks' 1994 acquisition of control of FBA, FBA embarked on a business strategy to improve its operating performance and strengthen its asset quality as prerequisites to initiating an effective acquisition program. The initial stages of this strategy involved substantial restructuring of assets and liabilities and reduction of operating expenses, resulting in significant losses in the sale of investment securities and the establishment of substantial provisions for loan losses. The loan losses related primarily to problems with FBA's portfolio of indirect automobile loans. The losses also included significant nonrecurring expenses in connection with the reduction of non-interest expenses, including personnel and employee benefits, occupancy, data processing and other expenses. Following net losses of $4.8 million and $905,000 for the fiscal years ended December 31, 1995 and 1994, respectively, reflecting the implementation of the new strategy, FBA returned to profitability in 1996, with consolidated net income of $691,000, representing a 0.15% return on average assets. FBA's profitability has continued to improve. FBA has reported consolidated net income of $3.5 million for the fiscal year ended December 31, 1997 and consolidated net income of $1.1 million for the three months ended March 31, 1998. Selected consolidated financial data of FBA and its subsidiaries, including the Subsidiary Banks, as of and for the five years ended December 31, 1997 and the three months ended March 31, 1998 and 1997 are set forth below:
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ------------------------ -------------------------------------------------- 1998 1997 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ---- ---- (DOLLARS EXPRESSED IN THOUSANDS) Net income (loss)................ $ 1,100 484 3,533 691 (4,814) (905) 219 Stockholders' equity............. 56,841 38,013 45,091 38,195 40,965 39,714 14,952 Total assets..................... 692,409 530,023 643,664 529,087 468,486 331,790 368,608 Return on average assets......... 0.67% 0.37% 0.65% 0.15% (1.28)% (0.25)% 0.07% Return on average equity......... 8.13 5.11 8.90 1.71 (12.06) (3.66) 1.49 - --------- Ratios as of March 31, 1998 and 1997 are annualized.
48 53 The Subsidiary Banks offer a broad range of commercial and personal banking services, including certificates of deposit, individual retirement and other time deposit accounts, checking and other demand deposit accounts, and interest checking, savings and money market accounts. Loan product offerings include commercial and financial, commercial and residential real estate, real estate construction and development and consumer loans. Other financial services include mortgage banking, automatic teller machines, telephone banking, lockbox deposits, cash management services, sweep accounts, credit-related insurance and safe deposit boxes. FBA and the Subsidiary Banks purchase certain services and supplies, including data processing services, internal auditing, loan review, income tax preparation and assistance, accounting, asset/liability management and investment services, loan servicing and other management and administrative services from First Banks and its affiliates. The following table provides general information regarding FB California and BankTEXAS as of March 31, 1998:
NUMBER OF TOTAL LOANS, NET OF TOTAL LOCATIONS ASSETS UNEARNED DISCOUNT DEPOSITS --------- ------ ----------------- -------- (DOLLARS EXPRESSED IN THOUSANDS) FB California.......... 11 $415,806 270,713 365,405 BankTEXAS.............. 6 271,902 173,386 235,215
While FBA initially focused its acquisition efforts within its primary market areas of Houston and Dallas, Texas and the immediately surrounding areas, increased prices for potential acquisition candidates in the Texas market generally reduced the suitability to FBA of potential acquisition candidates based in such areas. Accordingly, FBA broadened its target market to include California, where FBA perceived pricing to be more attractive. The economic advantages of the California market were enhanced by the geographic proximity of various offices of First Bank & Trust, a subsidiary of First Banks. Between October 1996 and February 1998, FBA completed four acquisitions of banks located in northern California, which banks were subsequently merged together to form FB California. See "Management's Discussion and Analysis--Acquisitions" for a discussion of FBA's recent acquisitions. PENDING ACQUISITION On June 8, 1998, FBA announced the signing of an Agreement in Principle to acquire Redwood, and its wholly owned subsidiary Redwood Bank, for cash consideration of $26 million. Redwood is headquartered in San Francisco, California and operates four banking locations in the San Francisco Bay area. As of March 31, 1998, Redwood had approximately $152.0 million in total assets, $120.1 million in total loans, net of unearned discount, $130.1 million in total deposits and $17.8 million in total stockholder's equity. The transaction is subject to various conditions, including the negotiation of a definitive agreement and the receipt of regulatory approvals and the approval of Redwood's sole shareholder. FBA anticipates the transaction will be consummated at the end of the fourth quarter of 1998. See "Use of Proceeds" and "Pro Forma Financial Information." LENDING ACTIVITIES FBA's lending activities are conducted pursuant to a written loan policy which has been adopted by each of the Subsidiary Banks. Each loan officer has a defined lending authority, and loans made by each such officer must be reviewed by a loan committee of the banking facility at which the loan officer is located and by the Subsidiary Bank's board of directors or the Central Finance Committee of FBA, depending upon the amount of the loan request. Loan requests for amounts in excess of $5.0 million, and loan requests for amounts in excess of $1.0 million where the aggregate indebtedness of the borrower exceeds $10.0 million, must also be approved by FBA's Chairman of the Board, Chief Financial Officer or Chief Credit Officer. Loans generally are limited to borrowers residing or doing business in the immediate market area of the originating Subsidiary Bank. FBA's policy is for each Subsidiary Bank to meet the quality loan demand and credit needs of its local community before it considers the purchase of loan participations from an affiliate. FBA offers commercial and financial, real estate construction and development, commercial and residential real estate and consumer loans. Additional information regarding FBA's loan portfolio is included under "Management's Discussion and Analysis--Loans and Allowance for Possible Loan Losses." 49 54 INVESTMENT PORTFOLIO FBA has established a written investment policy which has been adopted by the Subsidiary Banks and is reviewed annually. The investment policy identifies investment criteria and states specific objectives in terms of risk, interest rate sensitivity and liquidity. The investment policy directs management of the Subsidiary Banks to consider, among other criteria, the quality, term and marketability of the securities acquired for their respective investment portfolios. FBA does not engage in the practice of trading securities for the purpose of generating portfolio gains. The composition of the investment portfolio is shown in the Notes to consolidated financial statements of FBA; see also "Management's Discussion and Analysis--Investment Securities." DEPOSITS FBA's deposits consist principally of core deposits from the local market areas of the Subsidiary Banks. The Subsidiary Banks currently do not hold brokered deposits, except for any such deposits which acquired institutions may have had prior to their acquisition by FBA. A table summarizing the distribution of FBA's deposit accounts and the weighted average nominal interest rates on each category of deposits for the three years ending December 31, 1997 and for the three months ended March 31, 1998 is included under "Management's Discussion and Analysis--Deposits." COMPETITION AND BRANCH BANKING The activities in which the Subsidiary Banks are engaged are highly competitive. Those activities and the geographic markets served primarily involve competition with other banks and thrift institutions, some of which are affiliated with large regional or national holding companies. Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans and other credit and service charges, the quality of services rendered, the convenience of banking facilities and, in the case of loans to large commercial borrowers, relative lending limits. In addition to competing with other banks and thrift institutions within their primary service areas, the Subsidiary Banks also compete with other financial intermediaries, such as credit unions, industrial loan associations, securities firms, insurance companies, small loan companies, finance companies, mortgage companies, real estate investment trusts, certain governmental agencies, credit organizations and other enterprises. Additional competition for depositors' funds comes from United States Government securities, private issuers of debt obligations and suppliers of other investment alternatives for depositors. Many of FBA's non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally-insured banks and state regulations governing state-chartered banks. As a result, such non-bank competitors may have certain advantages over FBA in providing some services. The trend in the Subsidiary Banks' markets has been for multi-state holding companies to acquire independent banks and thrifts. FBA believes it will continue to face competition in the acquisition of banks and thrifts from larger holding companies. Many of the financial institutions with which FBA competes are larger than FBA and have substantially greater resources available for making acquisitions. Subject to regulatory approval, both commercial banks and thrift institutions operating in Texas and California are permitted to establish branches throughout each of those states, thereby creating the potential for additional competition in the service areas of the Subsidiary Banks. 50 55 SUPERVISION AND REGULATION GENERAL The Company and the Subsidiary Banks are extensively regulated under federal and state law. These laws and regulations are intended to protect depositors, not stockholders. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Changes in applicable laws or regulations may have a material effect on the business and prospects of the Company. The operations of the Company may be affected by legislative changes and by the policies of various regulatory authorities. The Company is unable to predict the nature or the extent of the effects on its business and earnings that fiscal or monetary policies, economic controls or new federal or state legislation may have in the future. FBA is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHCA") and, as such, is subject to regulation, supervision and examination by the Federal Reserve. FBA is required to file annual reports with the Federal Reserve and to provide the Federal Reserve such additional information as it may require. BankTEXAS and FB California are subject to supervision and regulation by the United States Office of the Comptroller of the Currency (the "OCC") and the State Banking Department of the State of California, respectively. The Subsidiary Banks are also subject to supervision and regulation by the Federal Deposit Insurance Corporation ("FDIC"), which provides deposit insurance to the Subsidiary Banks. LEGISLATION The enactment of the legislation described below has significantly affected the banking industry generally and will have an ongoing effect on the Company and the Subsidiary Banks in the future. FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT OF 1989. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") reorganized and reformed the regulatory structure applicable to financial institutions generally. Among other things, FIRREA enhanced the supervisory and enforcement powers for the federal bank regulatory agencies; required insured financial institutions to guaranty repayment of losses incurred by the FDIC in connection with the failure of an affiliated financial institution; required financial institutions to provide their primary federal regulator with notice, under certain circumstances, of changes in senior management and broadened authority for bank holding companies to acquire savings institutions. Under FIRREA, federal bank regulators were granted expanded enforcement authority over "institution-affiliated parties" (i.e., officers, directors, controlling stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution). Federal banking regulators have power to bring enforcement actions against insured institutions and institution-affiliated parties, including cease and desist orders, prohibition orders, civil money penalties, termination of insurance and the imposition of operating restrictions and capital plan requirements. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Since the enactment of FIRREA, the federal bank regulators have significantly increased the use of written agreements to correct compliance deficiencies with respect to applicable laws and regulations and to ensure safe and sound practices. Violations of such written agreements are grounds for initiation of cease-and-desist proceedings. FIRREA granted the FDIC back-up enforcement authority to recommend enforcement action to an appropriate federal banking agency and to bring such enforcement action against a financial institution or an institution-affiliated party if such federal banking agency fails to follow the FDIC's recommendation. In addition, FIRREA generally requires public disclosure of final enforcement actions by the federal banking agencies. FIRREA also established a cross-guarantee provision ("Cross-Guarantee") pursuant to which the FDIC may recover from a depository institution losses that the FDIC incurs in providing assistance to, or paying off the depositors of, any of such depository institution's affiliated insured banks or thrifts. The Cross-Guarantee thus enables the FDIC to assess a holding company's healthy Bank Insurance Fund (the "BIF") members and Savings Association Insurance Fund (the "SAIF") members for the losses of any of such holding company's failed BIF and SAIF members. Cross-Guarantee liabilities are generally superior in priority to obligations of the depository 51 56 institution to its stockholders due solely to their status as stockholders and obligations to other affiliates. Cross-Guarantee liabilities are generally subordinated to deposit liabilities, secured obligations or any other general or senior liabilities, and any obligations subordinated to depositors or other general creditors. THE FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was adopted to recapitalize the BIF and impose certain supervisory and regulatory reforms on insured depository institutions. FDICIA includes provisions, among others, to: (i) increase the FDIC's line of credit with the U.S. Treasury in order to provide the FDIC with additional funds to cover the losses of federally insured banks; (ii) reform the deposit insurance system, including the implementation of risk-based deposit insurance premiums; (iii) establish a format for closer monitoring of financial institutions to enable prompt corrective action by banking regulators when a financial institution begins to experience financial difficulty; (iv) establish five capital levels for financial institutions ("well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized") that impose more scrutiny and restrictions on less capitalized institutions; (v) require the banking regulators to set operational and managerial standards for all insured depository institutions and holding companies, including limits on excessive compensation to executive officers, directors, employees and principal stockholders, and establish standards for loans secured by real estate; (vi) adopt certain accounting reforms and require annual on-site examinations of federally insured institutions, including the ability to require independent audits of banks and thrifts; (vii) revise risk-based capital standards to ensure that they (a) take adequate account of interest-rate changes, concentration of credit risk and the risks of nontraditional activities, and (b) reflect the actual performance and expected risk of loss of multi-family mortgages; and (viii) restrict state-chartered banks from engaging in activities not permitted for national banks unless they are adequately capitalized and have FDIC approval. Further, FDICIA permits the FDIC to make special assessments on insured depository institutions, in amounts determined by the FDIC to be necessary to give it adequate assessment income to repay amounts borrowed from the U.S. Treasury and other sources or for any other purpose the FDIC deems necessary. FDICIA also grants authority to the FDIC to establish semiannual assessment rates on BIF and SAIF member banks so as to maintain these funds at the designated reserve ratios. As noted above, FDICIA authorizes and, under certain circumstances, requires the federal banking agencies to take certain actions against institutions that fail to meet certain capital-based requirements. Under FDICIA, the federal banking agencies are required to establish five levels of insured depository institutions based on leverage limit and risk-based capital requirements established for institutions subject to their jurisdiction, plus, in their discretion, individual additional capital requirements for such institutions. Under the final rules that have been adopted by each of the federal banking agencies, an institution is designated: (i) well capitalized if the institution has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 8% or greater and a leverage ratio of 5% or greater, and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure; (ii) adequately capitalized if the institution has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater and a leverage ratio of 4% or greater; (iii) undercapitalized if the institution has a total risk-based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is less than 4% or a leverage ratio that is less than 4%; (iv) significantly undercapitalized if the institution has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a leverage ratio that is less than 3%; and (v) critically undercapitalized if the institution has a ratio of tangible equity to total assets that is equal to or less than 2%. Undercapitalized, significantly undercapitalized and critically undercapitalized institutions are required to submit capital restoration plans to the appropriate federal banking agency and are subject to certain operational restrictions. Moreover, companies controlling an undercapitalized institution are required to guarantee the subsidiary institution's compliance with the capital restoration plan, subject to an aggregate limitation of the lesser of 5% of the institution's assets at the time it received notice that it was undercapitalized or the amount of the capital deficiency when the institution first failed to meet the plan. Significantly or critically undercapitalized institutions and undercapitalized institutions that fail to submit or comply with acceptable capital restoration plans are subject to regulatory sanctions. A forced sale of shares or merger, restriction on affiliate transactions and restrictions on rates paid on deposits are required to be imposed by the banking agency unless it is determined that they would not further capital improvement. FDICIA generally requires the appointment of a conservator or receiver within 90 days after an institution becomes critically undercapitalized. The federal banking agencies have adopted uniform procedures for the issuance of directives by the appropriate 52 57 federal banking agency. Under these procedures, an institution is generally provided advance notice when the appropriate federal banking agency proposes to impose one or more of the sanctions set forth above. These procedures provide an opportunity for the institutions to respond to the proposed agency action or, where circumstances warrant immediate agency action, an opportunity for administrative review of the agency's action. As described in "Management's Discussion and Analysis--Capital," management believes each of the Subsidiary Banks was "well capitalized" as of March 31, 1998. Pursuant to FDICIA, the federal banking agencies adopted real estate lending guidelines pursuant to which each insured depository institution is required to adopt and maintain written real estate lending policies in conformity with the prescribed guidelines. Under these guidelines, each institution is expected to set loan-to-value ratios not exceeding the supervisory limits set forth in the guidelines. A loan-to-value ratio is generally defined as the total loan amount divided by the appraised value of the property at the time the loan is originated. The guidelines require that the institution's real estate policy provide for proper loan documentation and prudent underwriting standards. FDICIA also contained the Truth in Savings Act, which requires clear and uniform disclosure of the rates and interest payable on deposit accounts by depository institutions and the fees assessable against deposit accounts, so that consumers can make a meaningful comparison between the competing claims of financial institutions with regard to deposit accounts and products. RIEGLE-NEAL INTERSTATE BANKING AND BRANCHING EFFICIENCY ACT OF 1994. In 1994 Congress enacted the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act"). Beginning in 1995, bank holding companies gained the right to expand, by acquiring existing banks, into all states, even those which had theretofore restricted entry. The legislation also provides that a holding company has the right, commencing in 1997, to convert the banks which its owns in different states to branches of a single bank. The Interstate Act also establishes limits on acquisitions by large banking organizations, providing that no acquisition may be undertaken if it would result in the organization having deposits exceeding either 10% of all bank deposits in the United States or 30% of the bank deposits in the state in which the acquisition would occur. ECONOMIC GROWTH AND REGULATORY PAPERWORK REDUCTION ACT OF 1996. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("EGRPRA") streamlined the non-banking activities application process for well- capitalized and well-managed bank holding companies. Under EGRPRA, qualified bank holding companies may commence a regulatory approved non-banking acquisition or share purchase, assuming the size of the acquisition does not exceed 10% of risk-weighted assets of the acquiring bank holding company and the consideration does not exceed 15% of Tier 1 capital. The foregoing prior notice requirement also applies to commencing a non-banking activity de novo if that activity has been previously approved by order of the Federal Reserve, but has not yet been implemented by regulations. EGRPRA also provided for the recapitalization of the SAIF in order to bring it into parity with the BIF of the FDIC. PENDING LEGISLATION. Because of concerns relating to competitiveness and the safety and soundness of the banking industry, Congress is considering a number of wide-ranging proposals for altering the structure, regulation and competitive relationships of the nation's financial institutions. On May 13, 1998, the House of Representatives passed H.R.10 which, if passed by the Senate and signed into law, would alter the statutory separation of commercial and investment banking and to further expand the powers of banks, bank holding companies and competitors of banks. It cannot be predicted whether or in what form any of these proposals will be adopted or the extent to which the business of the Company may be affected thereby. BANK AND BANK HOLDING COMPANY REGULATION BHCA. Under the BHCA, the activities of a bank holding company are limited to businesses so closely related to banking, managing or controlling banks as to be a proper incident thereto. The Company is also subject to capital requirements applied on a consolidated basis in a form substantially similar to those required of the Subsidiary Banks. The BHCA also requires a bank holding company to obtain approval from the Federal Reserve before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company. The Federal Reserve will not approve any acquisition, 53 58 merger or consolidation that would have a substantially anticompetitive result, unless the anticompetitive effects of the proposed transaction are clearly outweighed by a greater public interest in meeting the convenience and needs of the community to be served. The Federal Reserve also considers capital adequacy and other financial and managerial factors in reviewing acquisitions or mergers. The BHCA also prohibits a bank holding company, with certain limited exceptions: (i) from acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company; or (ii) from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by Federal Reserve regulation or order, have been identified as activities closely related to the business of banking or of managing or controlling banks. In making this determination, the Federal Reserve considers whether the performance of such activities by a bank holding company can be expected to produce benefits to the public such as greater convenience, increased competition or gains in efficiency in resources, which can be expected to outweigh the risks of possible adverse effects such as decreased or unfair competition, conflicts of interest or unsound banking practices. FIRREA, which is described in more detail above, made a significant addition to this list of permitted non-bank activities for bank holding companies by providing that bank holding companies may acquire thrift institutions. INSURANCE OF ACCOUNTS. The FDIC provides insurance to deposit accounts at the Subsidiary Banks to a maximum of $100,000 for each insured depositor. Through December 31, 1992, all FDIC-insured institutions, whether members of the BIF or the SAIF, paid the same premium (23 cents per $100 of domestic deposits) under a flat-rate system mandated by law. FDICIA required the FDIC to raise the reserves of the BIF and the SAIF, implement a risk-related premium system and adopt a long-term schedule for recapitalizing the BIF. Effective in 1993, the FDIC amended its regulations regarding insurance premiums to provide that a bank or thrift would pay an insurance assessment within a range of 23 cents to 31 cents per $100 of domestic deposits, depending on its risk classification. Effective January 1, 1993, the FDIC established a risk-based deposit insurance premium assessment system, with assessment rates ranging from 0.23% of domestic deposits (the same rate as under the previous flat-rate assessment system) for those banks deemed to pose the least risk to the insurance fund to 0.31% for those banks deemed to pose greater risk. The assessment rate applicable to a bank is subject to change with each semi-annual assessment period. Effective September 15, 1995, the FDIC lowered the assessment rate schedule for BIF-insured institutions from a range of 0.23% to 0.31% of domestic deposits to a range of 0.04% to 0.31% of domestic deposits. This reduction in the assessment rate schedule was made retroactive to June 1, 1995 because the FDIC determined that the BIF achieved its statutorily-required reserve ratio of 1.25% on May 31, 1995. On November 14, 1995, the FDIC again lowered the assessment rate schedule for BIF-insured institutions, effective for the semiannual assessment period beginning January 1, 1996, to a range of 0.00% to 0.27% of domestic deposits. The deposits of BankTEXAS consist solely of BIF deposits, and the deposits of FB California include both BIF and SAIF deposits. The statutory semiannual minimum assessment of $1,000 per insured institution was eliminated as part of EGRPRA, which was signed into law on September 30, 1996. EGRPRA provided for the recapitalization of the SAIF through a one-time special assessment on SAIF-insured deposits in order to bring it into parity with the BIF. Since January 1, 1997, BIF and SAIF premiums are assessed at between 0.00% and 0.27%, depending on the supervisory rating assigned. EGRPRA also requires BIF members to pay a portion of the annual interest on the Financing Corporation ("FICO") bonds issued by a government instrumentality in 1987 to begin funding the resolution of the problems of the savings and loan industry. Since January 1, 1997, BIF members have paid a FICO premium on BIF deposits equal to 0.0129%. During that same period, SAIF members have paid a FICO premium on SAIF deposits equal to 0.0644%. Beginning January 1, 2000, BIF members will share in the payment of the FICO assessment with SAIF members on a pro rata basis, with the annual assessment expected to equal approximately 0.0243% until retirement of the FICO bond obligation in approximately 2017. This assessment is not expected to have a material adverse effect on the Subsidiary Banks. THE PREFERRED SECURITIES AND THE SUBORDINATED DEBENTURES OFFERED BY THIS PROSPECTUS ARE NOT SAVINGS OR DEPOSIT ACCOUNTS, ARE NOT OBLIGATIONS OF ANY BANKING OR NONBANKING AFFILIATE OF FBA (EXCEPT TO THE EXTENT THAT PREFERRED SECURITIES ARE GUARANTEED BY FBA AS DESCRIBED HEREIN), ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY AND INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. 54 59 REGULATIONS GOVERNING CAPITAL ADEQUACY. The federal bank regulatory agencies use capital adequacy guidelines in their examination and regulation of bank holding companies and banks. If the capital falls below the minimum levels established by these guidelines, the bank holding company or bank may be denied approval to acquire or establish additional banks or nonbank businesses or to open facilities. The Federal Reserve, the FDIC and the OCC have adopted risk-based capital guidelines for banks and bank holding companies, and the OTS has adopted similar guidelines for thrifts. The risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profile among financial institutions and holding companies, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. The Federal Reserve has noted that bank holding companies contemplating significant expansion programs should not allow expansion to diminish their capital ratios and should maintain ratios well in excess of the minimums. Under these guidelines, all bank holding companies and federally regulated banks must maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must be Tier 1 capital. The Federal Reserve also has implemented a leverage ratio, which is the ratio of Tier 1 capital to total assets, to be used as a supplement to the risk-based guidelines. The principal objective of the leverage ratio is to place a constraint on the maximum degree to which a bank holding company may leverage its equity capital base. The Federal Reserve requires a minimum leverage ratio of 3%. For all but the most highly-rated bank holding companies and for bank holding companies seeking to expand, however, the Federal Reserve expects that additional capital sufficient to increase the ratio by at least 100 to 200 basis points will be maintained. As described in "Management's Discussion and Analysis--Capital," management believes each of the Subsidiary Banks was "well capitalized" as of March 31, 1998. Management of the Company believes that the risk-weighting of assets and the risk-based capital guidelines do not have a material adverse impact on the Company's operations or on the operations of the Subsidiary Banks. The requirement of deducting certain intangibles in computing capital ratios contained in the guidelines, however, could adversely affect the ability of the Company to make acquisitions in the future in transactions that would be accounted for using the purchase method of accounting. COMMUNITY REINVESTMENT ACT. The Community Reinvestment Act of 1977 (the "CRA") requires that, in connection with examinations of financial institutions within their jurisdiction, the federal banking regulators must evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those banks. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility. REGULATIONS GOVERNING EXTENSIONS OF CREDIT. The Subsidiary Banks are subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to FBA or its non-bank subsidiaries and its affiliates, or investments in their securities and on the use of their securities as collateral for loans to any borrowers. These regulations and restrictions may limit the Company's ability to obtain funds from the Subsidiary Banks for its cash needs, including funds for acquisitions and for payment of dividends, interest and operating expenses. Further, under the BHCA and certain regulations of the Federal Reserve, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. For example, the Subsidiary Banks may generally not require a customer to obtain other services from the Subsidiary Banks or any other affiliated bank or the Company and may not require the customer to promise not to obtain other services from a competitor, as a condition to an extension of credit to the customer. The Subsidiary Banks are also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal stockholders or any related interest of such persons. Extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral as, and following credit underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions with persons not covered and who are not employees; and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. The Subsidiary Banks are also subject to certain lending limits and restrictions on overdrafts to such persons. 55 60 RESERVE REQUIREMENTS. The Federal Reserve requires all depository institutions to maintain reserves against their transaction accounts and non-personal time deposits. Reserves of 3% must be maintained against total transaction accounts of $47.8 million or less (subject to adjustment by the Federal Reserve) and an initial reserve of $1,434,000 plus 10% of any amount over $47.8 million (subject to adjustment by the Federal Reserve to a level between 8% and 14%) must be maintained against that portion of total transaction accounts in excess of such amount. The balances maintained to meet the reserve requirements imposed by the Federal Reserve may be used to satisfy liquidity requirements. Institutions are authorized to borrow from the Federal Reserve Bank "discount window," but Federal Reserve regulations require institutions to exhaust other reasonable alternative sources of funds, including advances from Federal Home Loan Banks ("FHLBs"), before borrowing from the Federal Reserve Bank. FEDERAL HOME LOAN BANK SYSTEM. The Subsidiary Banks are members of the Federal Home Loan Bank System ("FHLB System"), which consists of twelve regional FHLBs, each subject to supervision and regulation by the Federal Housing Finance Board, an independent agency created by FIRREA. The FHLBs provide a central credit facility primarily for member institutions. The Subsidiary Banks are required to acquire and hold shares of capital stock in an FHLB in an amount at least equal to 1% of the aggregate principal amount of their respective unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20th of advances (borrowings) from the FHLB, whichever is greater. The Subsidiary Banks were in compliance with these regulations at March 31, 1998, with investments of $857,000 in stock of the FHLB of Dallas held by BankTEXAS and $715,000 in stock of the FHLB San Francisco held by FB California. RESTRICTIONS ON THRIFT ACQUISITIONS. FBA is prohibited from acquiring, without prior approval of the Director of the Office of Thrift Supervision, (i) control of any savings institution or savings and loan holding company or substantially all the assets thereof; or (ii) more than 5% of the voting shares of a savings institution or holding company which is not a subsidiary. Furthermore, such an acquisition would require FBA itself to become registered as a savings and loan holding company subject to all applicable regulations of the OTS. DIVIDENDS. FBA's primary source of funds is the dividends, if any, paid by the Subsidiary Banks. The ability of the Subsidiary Banks to pay dividends is limited by federal laws, by the regulations promulgated by the bank regulatory agencies and by principles of prudent bank management. In addition, the amount of dividends that the Subsidiary Banks may pay to the Company is limited by the provisions of First Bank's credit agreement with a group of unaffiliated lenders, which imposes certain minimum capital requirements. Under the most restrictive of these requirements, dividends from the Subsidiary Banks are limited to approximately $2.5 million as of March 31, 1998, unless prior permission of regulatory authorities is obtained. MONETARY POLICY AND ECONOMIC CONTROL. The commercial banking business is affected not only by general economic conditions, but also by the monetary policies of the Federal Reserve. Changes in the discount rate on member bank borrowings, availability of borrowing at the "discount window," open market operations, the imposition of changes in reserve requirements against member bank deposits and assets of foreign branches, and the imposition of and changes in reserve requirements against certain borrowings by banks and their affiliates are some of the instruments of monetary policy available to the Federal Reserve. These monetary policies are used in varying combinations to influence overall growth and distributions of bank loans, investments and deposits, and this use may affect interest rates charged on loans or paid on deposits. The monetary policies of the Federal Reserve have had a significant effect on the operating results of commercial banks and are expected to do so in the future. The monetary policies of the Federal Reserve are influenced by various factors, including inflation, unemployment, short-term and long-term changes in the international trade balance and in the fiscal policies of the U.S. Government. Future monetary policies and the effect of such policies on the future business and earnings of the Company or the Subsidiary Banks cannot be predicted. 56 61 DESCRIPTION OF THE PREFERRED SECURITIES The Preferred Securities will be issued pursuant to the terms of the Trust Agreement. The Trust Agreement will be qualified as an indenture under the Trust Indenture Act. The Property Trustee, State Street Bank and Trust Company, will act as indenture trustee for the Preferred Securities under the Trust Agreement for purposes of complying with the provisions of the Trust Indenture Act. The terms of the Preferred Securities will include those stated in the Trust Agreement and those made part of the Trust Agreement by the Trust Indenture Act. The following summary of the material terms and provisions of the Preferred Securities and the Trust Agreement does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the Trust Agreement, the Trust Act, and the Trust Indenture Act. Wherever particular defined terms of the Trust Agreement are referred to, but not defined herein, such defined terms are incorporated herein by reference. The form of the Trust Agreement has been filed as an exhibit to the Registration Statement of which this Prospectus forms a part. GENERAL Pursuant to the terms of the Trust Agreement, the Trustees, on behalf of the Trust, will issue the Trust Securities. All of the Common Securities will be owned by the Company. The Preferred Securities will represent preferred undivided beneficial interests in the assets of the Trust and the holders thereof will be entitled to a preference in certain circumstances with respect to Distributions and amounts payable on redemption or liquidation over the Common Securities, as well as other benefits as described in the Trust Agreement. The Trust Agreement does not permit the issuance by the Trust of any securities other than the Trust Securities or the incurrence of any indebtedness by the Trust. The Preferred Securities will rank pari passu, and payments will be made thereon pro rata, with the Common Securities, except as described under "--Subordination of Common Securities." Legal title to the Subordinated Debentures will be held by the Property Trustee in trust for the benefit of the holders of the Trust Securities. The Guarantee executed by the Company for the benefit of the holders of the Preferred Securities will be a guarantee on a subordinated basis with respect to the Preferred Securities, but will not guarantee payment of Distributions or amounts payable on redemption or liquidation of such Preferred Securities when the Trust does not have funds on hand available to make such payments. State Street Bank and Trust Company, as Guarantee Trustee, will hold the Guarantee for the benefit of the holders of the Preferred Securities. See "Description of the Guarantee." DISTRIBUTIONS PAYMENT OF DISTRIBUTIONS. Distributions on each Preferred Security will be payable at the annual rate of % of the stated Liquidation Amount of $25, payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year, to the holders of the Preferred Securities on the relevant record dates (each date on which Distributions are payable in accordance with the foregoing, a "Distribution Date"). The record date will be the 15th day of the month in which the relevant Distribution Date occurs. Distributions will accumulate from , 1998, the date of original issuance. The first Distribution Date for the Preferred Securities will be September 30, 1998. The amount of Distributions payable for any period will be computed on the basis of a 360-day year of twelve 30-day months. In the event that any date on which Distributions are payable on the Preferred Securities is not a Business Day, then payment of the Distributions payable on such date will be made on the next succeeding day that is a Business Day (and without any additional Distributions, interest or other payment in respect of any such delay) with the same force and effect as if made on the date such payment was originally due and payable. "Business Day" means any day other than a Saturday or a Sunday, a day on which banking institutions in the City of New York are authorized or required by law or executive order to remain closed or a day on which the corporate trust office of the Property Trustee or the Debenture Trustee is closed for business. EXTENSION PERIOD. The Company has the right under the Indenture, so long as no Debenture Event of Default has occurred and is continuing, to defer the payment of interest on the Subordinated Debentures at any time, or from time to time (each, an "Extension Period"), which, if exercised, would defer quarterly Distributions on the Preferred Securities during any such Extension Period. Distributions to which holders of the Preferred Securities are entitled will accumulate additional Distributions thereon at the rate per annum of % thereof, compounded quarterly from the relevant Distribution Date. "Distributions," as used herein, includes any such additional Distributions. The right to defer the payment of interest on the Subordinated Debentures is limited, however, to a period, in each 57 62 instance, not exceeding 20 consecutive quarters, and no Extension Period may extend beyond the Stated Maturity of the Subordinated Debentures. During any such Extension Period, the Company may not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire or make a liquidation payment with respect to, any of the Company's capital stock (other than (a) dividends or distributions in common stock of the Company, any declaration of a non-cash dividend in connection with the implementation of a shareholder rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, and (b) purchases of common stock of the Company related to the rights under any of the Company's benefit plans for its directors, officers or employees), (ii) make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company that rank pari passu with or junior in interest to the Subordinated Debentures or make any guarantee payments with respect to any guarantee by the Company of the debt securities of any subsidiary of the Company if such guarantee ranks pari passu with or junior in interest to the Subordinated Debentures (other than payments under the Guarantee), or (iii) redeem, purchase or acquire less than all of the Subordinated Debentures or any of the Preferred Securities. Prior to the termination of any such Extension Period, the Company may further defer the payment of interest; provided that such Extension Period may not exceed 20 consecutive quarters or extend beyond the Stated Maturity of the Subordinated Debentures. Upon the termination of any such Extension Period and the payment of all amounts then due, the Company may elect to begin a new Extension Period, subject to the above requirements. Subject to the foregoing, there is no limitation on the number of times that the Company may elect to begin an Extension Period. The Company has no current intention of exercising its right to defer payments of interest by extending the interest payment period on the Subordinated Debentures. SOURCE OF DISTRIBUTIONS. The funds of the Trust available for distribution to holders of its Preferred Securities will be limited to payments under the Subordinated Debentures in which the Trust will invest the proceeds from the issuance and sale of its Trust Securities. See "Description of the Subordinated Debentures." Distributions will be paid through the Property Trustee who will hold amounts received in respect of the Subordinated Debentures in the Property Account for the benefit of the holders of the Trust Securities. If the Company does not make interest payments on the Subordinated Debentures, the Property Trustee will not have funds available to pay Distributions on the Preferred Securities. The payment of Distributions (if and to the extent the Trust has funds legally available for the payment of such Distributions and cash sufficient to make such payments) is guaranteed by the Company. See "Description of the Guarantee." Distributions on the Preferred Securities will be payable to the holders thereof as they appear on the register of holders of the Preferred Securities on the relevant record dates, which will be the 15th day of the month in which the relevant Distribution Date occurs. REDEMPTION GENERAL. The Subordinated Debentures will mature on June 30, 2028. The Company will have the right to redeem the Subordinated Debentures (i) on or after June 30, 2003, in whole at any time or in part from time to time, or (ii) at any time, in whole (but not in part), within 180 days following the occurrence of a Tax Event, a Capital Treatment Event or an Investment Company Event, in each case subject to receipt of prior approval by the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve. The Company will not have the right to purchase the Subordinated Debentures, in whole or in part, from the Trust until after June 30, 2003. See "Description of the Subordinated Debentures--General." MANDATORY REDEMPTION. Upon the repayment or redemption, in whole or in part, of any Subordinated Debentures, whether at Stated Maturity or upon earlier redemption as provided in the Indenture, the proceeds from such repayment or redemption will be applied by the Property Trustee to redeem a Like Amount (as defined herein) of the Trust Securities, upon not less than 30 nor more than 60 days notice, at a redemption price (the "Redemption Price") equal to the aggregate Liquidation Amount of such Trust Securities plus accumulated but unpaid Distributions thereon to the date of redemption (the "Redemption Date"). See "Description of the Subordinated Debentures--Redemption." If less than all of the Subordinated Debentures are to be repaid or redeemed on a Redemption Date, then the proceeds from such repayment or redemption will be allocated to the redemption of the Trust Securities pro rata. DISTRIBUTION OF SUBORDINATED DEBENTURES. Subject to the Company having received prior approval of the Federal Reserve if so required under applicable capital guidelines or policies of the Federal Reserve, the Company will have 58 63 the right at any time to dissolve, wind-up or terminate the Trust and, after satisfaction of the liabilities of creditors of the Trust as provided by applicable law, cause the Subordinated Debentures to be distributed to the holders of Trust Securities in liquidation of the Trust. See "--Liquidation Distribution Upon Termination." TAX EVENT REDEMPTION, CAPITAL TREATMENT EVENT REDEMPTION OR INVESTMENT COMPANY EVENT REDEMPTION. If a Tax Event, a Capital Treatment Event or an Investment Company Event in respect of the Trust Securities occurs and is continuing, the Company has the right to redeem the Subordinated Debentures in whole (but not in part) and thereby cause a mandatory redemption of such Trust Securities in whole (but not in part) at the Redemption Price within 180 days following the occurrence of such Tax Event, Capital Treatment Event or Investment Company Event. In the event that a Tax Event, a Capital Treatment Event or an Investment Company Event in respect of the Trust Securities has occurred and the Company does not elect to redeem the Subordinated Debentures and thereby cause a mandatory redemption of such Trust Securities or to liquidate the Trust and cause the Subordinated Debentures to be distributed to holders of such Trust Securities in liquidation of the Trust as described below under "--Liquidation Distribution Upon Termination," such Preferred Securities will remain outstanding and Additional Payments (as defined herein) may be payable on the Subordinated Debentures. "Additional Payments" means the additional amounts as may be necessary in order that the amount of Distributions then due and payable by the Trust on the outstanding Trust Securities will not be reduced as a result of any additional taxes, duties and other governmental charges to which the Trust has become subject as a result of a Tax Event. "Like Amount" means (i) with respect to a redemption of Trust Securities, Trust Securities having a Liquidation Amount equal to that portion of the principal amount of Subordinated Debentures to be contemporaneously redeemed in accordance with the Indenture, which will be used to pay the Redemption Price of such Trust Securities, and (ii) with respect to a distribution of Subordinated Debentures to holders of Trust Securities in connection with a dissolution or liquidation of the Trust, Subordinated Debentures having a principal amount equal to the Liquidation Amount of the Trust Securities of the holder to whom such Subordinated Debentures are distributed. Each Subordinated Debenture distributed pursuant to clause (ii) above will carry with it accumulated interest in an amount equal to the accumulated and unpaid interest then due on such Subordinated Debentures. "Liquidation Amount" means the stated amount of $25 per Trust Security. After the liquidation date fixed for any distribution of Subordinated Debentures for Preferred Securities, (i) such Preferred Securities will no longer be deemed to be outstanding, and (ii) any certificates representing Preferred Securities will be deemed to represent the Subordinated Debentures having a principal amount equal to the Liquidation Amount of such Preferred Securities, and bearing accrued and unpaid interest in an amount equal to the accrued and unpaid Distributions on the Preferred Securities until such certificates are presented to the Administrative Trustees or their agent for transfer or reissuance. There can be no assurance as to the market prices for the Preferred Securities or the Subordinated Debentures that may be distributed in exchange for Preferred Securities if a dissolution and liquidation of the Trust were to occur. The Preferred Securities that an investor may purchase, or the Subordinated Debentures that an investor may receive on dissolution and liquidation of the Trust, may, therefore, trade at a discount to the price that the investor paid to purchase the Preferred Securities offered hereby. REDEMPTION PROCEDURES Preferred Securities redeemed on each Redemption Date will be redeemed at the Redemption Price with the applicable proceeds from the contemporaneous redemption of the Subordinated Debentures. Redemptions of the Preferred Securities will be made and the Redemption Price will be payable on each Redemption Date only to the extent that the Trust has funds on hand available for the payment of such Redemption Price. See "--Subordination of Common Securities." If the Trust gives a notice of redemption in respect of its Preferred Securities, then, by 12:00 noon, Eastern Standard Time, on the Redemption Date, to the extent funds are available, the Property Trustee will irrevocably deposit with the paying agent for the Preferred Securities funds sufficient to pay the aggregate Redemption Price and will give the paying agent for the Preferred Securities irrevocable instructions and authority to pay the Redemption Price to the holders thereof upon surrender of their certificates evidencing such Preferred Securities. Notwithstanding 59 64 the foregoing, Distributions payable on or prior to the Redemption Date for any Preferred Securities called for redemption will be payable to the holders of such Preferred Securities on the relevant record dates for the related Distribution Dates. If notice of redemption will have been given and funds deposited as required, then upon the date of such deposit, all rights of the holders of such Preferred Securities so called for redemption will cease, except the right of the holders of such Preferred Securities to receive the Redemption Price, but without interest on such Redemption Price, and such Preferred Securities will cease to be outstanding. In the event that any date fixed for redemption of Preferred Securities is not a Business Day, then payment of the Redemption Price payable on such date will be made on the next succeeding day which is a Business Day (and without any additional Distribution, interest or other payment in respect of any such delay) with the same force and effect as if made on such date. In the event that payment of the Redemption Price in respect of Preferred Securities called for redemption is improperly withheld or refused and not paid either by the Trust, or by the Company pursuant to the Guarantee, Distributions on such Preferred Securities will continue to accrue at the then applicable rate, from the Redemption Date originally established by the Trust for such Preferred Securities to the date such Redemption Price is actually paid, in which case the actual payment date will be considered the date fixed for redemption for purposes of calculating the Redemption Price. See "Description of the Guarantee." Subject to applicable law (including, without limitation, United States federal securities law), and further provided that the Company does not and is not continuing to exercise its right to defer interest payments, the Company or its subsidiaries may at any time and from time to time purchase outstanding Preferred Securities by tender, in the open market or by private agreement. Payment of the Redemption Price on the Preferred Securities and any distribution of Subordinated Debentures to holders of Preferred Securities will be made to the applicable recordholders thereof as they appear on the register for the Preferred Securities on the relevant record date, which date will be the date 15 days prior to the Redemption Date or liquidation date, as applicable. If less than all of the Trust Securities are to be redeemed on a Redemption Date, then the aggregate Liquidation Amount of such Trust Securities to be redeemed will be allocated pro rata to the Trust Securities based upon the relative Liquidation Amounts of such classes. The particular Preferred Securities to be redeemed will be selected by the Property Trustee from the outstanding Preferred Securities not previously called for redemption, by such method as the Property Trustee deems fair and appropriate and which may provide for the selection for redemption of portions (equal to $25 or an integral multiple of $25 in excess thereof) of the Liquidation Amount of Preferred Securities of a denomination larger than $25. The Property Trustee will promptly notify the registrar for the Preferred Securities in writing of the Preferred Securities selected for redemption and, in the case of any Preferred Securities selected for partial redemption, the Liquidation Amount thereof to be redeemed. For all purposes of the Trust Agreement, unless the context otherwise requires, all provisions relating to the redemption of Preferred Securities will relate to the portion of the aggregate Liquidation Amount of Preferred Securities which has been or is to be redeemed. Notice of any redemption will be mailed at least 30 days but not more than 60 days before the Redemption Date to each holder of Trust Securities to be redeemed at its registered address. Unless the Company defaults in payment of the redemption price on the Subordinated Debentures, on and after the Redemption Date interest will cease to accrue on such Subordinated Debentures or portions thereof (and Distributions will cease to accrue on the related Preferred Securities or portions thereof) called for redemption. SUBORDINATION OF COMMON SECURITIES Payment of Distributions on, and the Redemption Price of, the Preferred Securities and Common Securities, as applicable, will be made pro rata based on the Liquidation Amount of the Preferred Securities and Common Securities; provided, however, that if on any Distribution Date or Redemption Date a Debenture Event of Default has occurred and is continuing, no payment of any Distribution on, or Redemption Price of, any of the Common Securities, and no other payment on account of the redemption, liquidation or other acquisition of such Common Securities, will be made unless payment in full in cash of all accumulated and unpaid Distributions on all of the outstanding Preferred Securities for all Distribution periods terminating on or prior thereto, or in the case of payment of the Redemption Price the full amount of such Redemption Price on all of the outstanding Preferred Securities then called for redemption, will have been made or provided for, and all funds available to the Property Trustee will first be 60 65 applied to the payment in full in cash of all Distributions on, or Redemption Price of, the Preferred Securities then due and payable. In the case of any Event of Default resulting from a Debenture Event of Default, the Company as holder of the Common Securities will be deemed to have waived any right to act with respect to any such Event of Default under the Trust Agreement until the effect of all such Events of Default with respect to the Preferred Securities have been cured, waived or otherwise eliminated. Until any such Events of Default under the Trust Agreement with respect to the Preferred Securities has been so cured, waived or otherwise eliminated, the Property Trustee will act solely on behalf of the holders of the Preferred Securities and not on behalf of the Company, as holder of the Common Securities, and only the holders of the Preferred Securities will have the right to direct the Property Trustee to act on their behalf. LIQUIDATION DISTRIBUTION UPON TERMINATION The Company will have the right at any time to dissolve, wind-up or terminate the Trust and cause the Subordinated Debentures to be distributed to the holders of the Preferred Securities. Such right is subject, however, to the Company having received prior approval of the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve. Pursuant to the Trust Agreement, the Trust will automatically terminate upon expiration of its term and will terminate earlier on the first to occur of (i) certain events of bankruptcy, dissolution or liquidation of the Company, (ii) the distribution of a Like Amount of the Subordinated Debentures to the holders of its Trust Securities, if the Company, as depositor, has given written direction to the Property Trustee to terminate the Trust (which direction is optional and wholly within the discretion of the Company, as depositor), (iii) redemption of all of the Preferred Securities as described under "Description of the Preferred Securities--Redemption--Mandatory Redemption," or (iv) the entry of an order for the dissolution of the Trust by a court of competent jurisdiction. If an early termination occurs as described in clause (i), (ii) or (iv) of the preceding paragraph, the Trust will be liquidated by the Trustees as expeditiously as the Trustees determine to be possible by distributing, after satisfaction of liabilities to creditors of the Trust as provided by applicable law, to the holders of such Trust Securities a Like Amount of the Subordinated Debentures, unless such distribution is determined by the Property Trustee not to be practical, in which event such holders will be entitled to receive out of the assets of the Trust available for distribution to holders, after satisfaction of liabilities to creditors of the Trust as provided by applicable law, an amount equal to, in the case of holders of Preferred Securities, the aggregate of the Liquidation Amount plus accrued and unpaid Distributions thereon to the date of payment (such amount being the "Liquidation Distribution"). If such Liquidation Distribution can be paid only in part because the Trust has insufficient assets available to pay in full the aggregate Liquidation Distribution, then the amounts payable directly by the Trust on the Preferred Securities will be paid on a pro rata basis. The Company, as the holder of the Common Securities, will be entitled to receive distributions upon any such liquidation pro rata with the holders of the Preferred Securities, except that, if a Debenture Event of Default has occurred and is continuing, the Preferred Securities will have a priority over the Common Securities. See "--Subordination of Common Securities." Under current United States federal income tax law and interpretations and assuming, as expected, that the Trust is treated as a grantor trust, a distribution of the Subordinated Debentures should not be a taxable event to holders of the Preferred Securities. Should there be a change in law, a change in legal interpretation, a Tax Event or other circumstances, however, the distribution could be a taxable event to holders of the Preferred Securities. See "Certain Federal Income Tax Consequences--Receipt of Subordinated Debentures or Cash Upon Liquidation of the Trust." If the Company elects neither to redeem the Subordinated Debentures prior to maturity nor to liquidate the Trust and distribute the Subordinated Debentures to holders of the Preferred Securities, the Preferred Securities will remain outstanding until the repayment of the Subordinated Debentures. If the Company elects to liquidate the Trust and thereby causes the Subordinated Debentures to be distributed to holders of the Preferred Securities in liquidation of the Trust, the Company will continue to have the right to shorten or extend the maturity of such Subordinated Debentures, subject to certain conditions. See "Description of the Subordinated Debentures--General." 61 66 LIQUIDATION VALUE The amount of the Liquidation Distribution payable on the Preferred Securities in the event of any liquidation of the Trust is $25 per Preferred Security plus accrued and unpaid Distributions thereon to the date of payment, which may be in the form of a distribution of such amount in Subordinated Debentures, subject to certain exceptions. See "--Liquidation Distribution Upon Termination." EVENTS OF DEFAULT; NOTICE Any one of the following events constitutes an event of default under the Trust Agreement (an "Event of Default") with respect to the Preferred Securities (whatever the reason for such Event of Default and whether voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (i) the occurrence of a Debenture Event of Default (see "Description of the Subordinated Debentures--Debenture Events of Default"); or (ii) default by the Trust in the payment of any Distribution when it becomes due and payable, and continuation of such default for a period of 30 days; or (iii) default by the Trust in the payment of any Redemption Price of any Trust Security when it becomes due and payable; or (iv) default in the performance, or breach, in any material respect, of any covenant or warranty of the Trustees in the Trust Agreement (other than a covenant or warranty a default in the performance of which or the breach of which is dealt with in clauses (ii) or (iii) above), and continuation of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the Trustee(s) by the holders of at least 25% in aggregate Liquidation Amount of the outstanding Preferred Securities, a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" under the Trust Agreement; or (v) the occurrence of certain events of bankruptcy or insolvency with respect to the Property Trustee and the failure by the Company to appoint a successor Property Trustee within 60 days thereof. Within five Business Days after the occurrence of any Event of Default actually known to the Property Trustee, the Property Trustee will transmit notice of such Event of Default to the holders of the Preferred Securities, the Administrative Trustees and the Company, as depositor, unless such Event of Default has been cured or waived. The Company, as depositor, and the Administrative Trustees are required to file annually with the Property Trustee a certificate as to whether or not they are in compliance with all the conditions and covenants applicable to them under the Trust Agreement. If a Debenture Event of Default has occurred and is continuing, the Preferred Securities will have a preference over the Common Securities upon termination of the Trust. See "--Liquidation Distribution Upon Termination." The existence of an Event of Default does not entitle the holders of Preferred Securities to accelerate the maturity thereof. REMOVAL OF THE TRUST TRUSTEES Unless a Debenture Event of Default has occurred and is continuing, any Trustee may be removed at any time by the holder of the Common Securities. If a Debenture Event of Default has occurred and is continuing, the Property Trustee and the Delaware Trustee may be removed at such time by the holders of a majority in Liquidation Amount of the outstanding Preferred Securities. In no event, however, will the holders of the Preferred Securities have the right to vote to appoint, remove or replace the Administrative Trustees, which voting rights are vested exclusively in the Company as the holder of the Common Securities. No resignation or removal of a Trustee and no appointment of a successor trustee will be effective until the acceptance of appointment by the successor trustee in accordance with the provisions of the Trust Agreement. 62 67 CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE Unless an Event of Default has occurred and is continuing, at any time or times, for the purpose of meeting the legal requirements of the Trust Indenture Act or of any jurisdiction in which any part of the Trust Property (as defined in the Trust Agreement) may at the time be located, the Company, as the holder of the Common Securities, will have power to appoint one or more Persons (as defined in the Trust Agreement) either to act as a co-trustee, jointly with the Property Trustee, of all or any part of such Trust Property, or to act as separate trustee of any such Trust Property, in either case with such powers as may be provided in the instrument of appointment, and to vest in such Person or Persons in such capacity any property, title, right or power deemed necessary or desirable, subject to the provisions of the Trust Agreement. In case a Debenture Event of Default has occurred and is continuing, the Property Trustee alone will have power to make such appointment. MERGER OR CONSOLIDATION OF TRUSTEES Any Person into which the Property Trustee, the Delaware Trustee or any Administrative Trustee that is not a natural person may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which such Trustee is a party, or any Person succeeding to all or substantially all the corporate trust business of such Trustee, will be the successor of such Trustee under the Trust Agreement, provided such Person is otherwise qualified and eligible. MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST The Trust may not merge with or into, consolidate, amalgamate, or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to any Person, except as described below. The Trust may, at the request of the Company, with the consent of the Administrative Trustees and without the consent of the holders of the Preferred Securities, the Property Trustee or the Delaware Trustee, merge with or into, consolidate, amalgamate, or be replaced by or convey, transfer or lease its properties and assets substantially as an entirety to a trust organized as such under the laws of any State; provided, that (i) such successor entity either (a) expressly assumes all of the obligations of the Trust with respect to the Preferred Securities, or (b) substitutes for the Preferred Securities other securities having substantially the same terms as the Preferred Securities (the "Successor Securities") so long as the Successor Securities rank the same as the Preferred Securities rank in priority with respect to distributions and payments upon liquidation, redemption and otherwise, (ii) the Company expressly appoints a trustee of such successor entity possessing the same powers and duties as the Property Trustee in its capacity as the holder of the Subordinated Debentures, (iii) the Successor Securities are listed, or any Successor Securities will be listed upon notification of issuance, on any national securities exchange or other organization on which the Preferred Securities are then listed (including, if applicable, the NYSE), if any, (iv) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the holders of the Preferred Securities (including any Successor Securities) in any material respect, (v) prior to such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, the Company has received an opinion from independent counsel to the effect that (a) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the holders of the Preferred Securities (including any Successor Securities) in any material respect, and (b) following such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, neither the Trust nor such successor entity will be required to register as an "investment company" under the Investment Company Act, and (vi) the Company owns all of the common securities of such successor entity and guarantees the obligations of such successor entity under the Successor Securities at least to the extent provided by the Guarantee, the Indenture, the Subordinated Debentures, the Trust Agreement and the Expense Agreement. Notwithstanding the foregoing, the Trust will not, except with the consent of holders of 100% in Liquidation Amount of the Preferred Securities, consolidate, amalgamate, merge with or into, or be replaced by or convey, transfer or lease its properties and assets substantially as an entirety to any other Person or permit any other Person to consolidate, amalgamate, merge with or into, or replace it if such consolidation, amalgamation, merger, replacement, conveyance, transfer or lease would cause the Trust or the successor entity to be classified as other than a grantor trust for United States federal income tax purposes. 63 68 VOTING RIGHTS; AMENDMENT OF TRUST AGREEMENT Except as provided below and under "Description of the Guarantee--Voting Rights; Amendments and Assignment" and as otherwise required by the Trust Act, the Trust Agreement and the Guarantee, the holders of the Preferred Securities will have no voting rights. The Trust Agreement may be amended from time to time by the Company, the Property Trustee and the Administrative Trustees, without the consent of the holders of the Preferred Securities (i) with respect to acceptance of appointment by a successor trustee, (ii) to cure any ambiguity, correct or supplement any provisions in such Trust Agreement that may be inconsistent with any other provision, or to make any other provisions with respect to matters or questions arising under the Trust Agreement (provided such amendment is not inconsistent with the other provisions of the Trust Agreement), (iii) to modify, eliminate or add to any provisions of the Trust Agreement to such extent as is necessary to ensure that the Trust will be classified for United States federal income tax purposes as a grantor trust at all times that any Trust Securities are outstanding or to ensure that the Trust will not be required to register as an "investment company" under the Investment Company Act, or (iv) to reduce or increase the Liquidation Amount per Trust Security and simultaneously to increase or reduce the number of Trust Securities issued and outstanding solely for the purpose of maintaining the eligibility of the Preferred Securities for listing or quotation on any national securities exchange or other organization on which the Preferred Securities are then listed or quoted (including, if applicable, the NYSE); provided, however, that in the case of clause (ii), such action may not adversely affect in any material respect the interests of any holder of Trust Securities and that, in the case of clause (iv), the aggregate Liquidation Amount of the Trust Securities outstanding, upon completion of any such reduction or increase, must be the same as the aggregate Liquidation Amount of the Trust Securities outstanding immediately prior to any such reduction or increase, and any amendments of such Trust Agreement will become effective when notice thereof is given to the holders of Trust Securities (or, in the case of an amendment pursuant to clause (iv), as of the date specified in the notice). The Trust Agreement may be amended by the Trustees and the Company with (i) the consent of holders representing not less than a majority in the aggregate Liquidation Amount of the outstanding Trust Securities, and (ii) receipt by the Trustees of an opinion of counsel to the effect that such amendment or the exercise of any power granted to the Trustees in accordance with such amendment will not affect the Trust's status as a grantor trust for United States federal income tax purposes or the Trust's exemption from status as an "investment company" under the Investment Company Act. The affirmative consent of the holders of at least 66 2/3% of the outstanding Preferred Securities will be required by the Trust for amendments to the Trust Agreement that would adversely affect the rights or privileges of the holders of the Preferred Securities. Notwithstanding anything in this paragraph to the contrary, without the consent of each holder of Trust Securities, the Trust Agreement may not be amended to (a) change the amount or timing of any Distribution on the Trust Securities or otherwise adversely affect the amount of any Distribution required to be made in respect of the Trust Securities as of a specified date, or (b) restrict the right of a holder of Trust Securities to institute suit for the enforcement of any such payment on or after such date. The Trustees will not, so long as any Subordinated Debentures are held by the Property Trustee, (i) direct the time, method and place of conducting any proceeding for any remedy available to the Debenture Trustee, of executing any trust or power conferred on the Property Trustee with respect to the Subordinated Debentures, (ii) waive any past default that is waivable under the Indenture, (iii) exercise any right to rescind or annul a declaration that the principal of all the Subordinated Debentures will be due and payable, or (iv) consent to any amendment, modification or termination of the Indenture or the Subordinated Debentures, where such consent is required, without, in each case, obtaining the prior approval of the holders of a majority in aggregate Liquidation Amount of all outstanding Preferred Securities; provided, however, that where a consent under the Indenture requires the consent of each holder of Subordinated Debentures affected thereby, no such consent will be given by the Property Trustee without the prior consent of each holder of the Preferred Securities. The Trustees may not revoke any action previously authorized or approved by a vote of the holders of the Preferred Securities except by subsequent vote of the holders of the Preferred Securities. The Property Trustee will notify each holder of Preferred Securities of any notice of default with respect to the Subordinated Debentures. In addition to obtaining the foregoing approvals of the holders of the Preferred Securities, prior to taking any of the foregoing actions, the Trustees must obtain an opinion of counsel experienced in such matters to the effect that the Trust will not be classified as an association taxable as a corporation for United States federal income tax purposes on account of such action. Any required approval of holders of Preferred Securities may be given at a meeting of holders of Preferred Securities convened for such purpose or pursuant to written consent. The Property Trustee will cause a notice of any 64 69 meeting at which holders of Preferred Securities are entitled to vote, or of any matter upon which action by written consent of such holders is to be taken, to be given to each holder of record of Preferred Securities in the manner set forth in the Trust Agreement. No vote or consent of the holders of Preferred Securities will be required for the Trust to redeem and cancel its Preferred Securities in accordance with the Trust Agreement. Notwithstanding the fact that holders of Preferred Securities are entitled to vote or consent under any of the circumstances described above, any of the Preferred Securities that are owned by the Company, the Trustees or any affiliate of the Company or any Trustee will, for purposes of such vote or consent, be treated as if they were not outstanding. PAYMENT AND PAYING AGENCY Payments in respect of the Preferred Securities will be made by check mailed to the address of the holder entitled thereto as such address will appear on the register of holders of the Preferred Securities. The paying agent for the Preferred Securities will initially be the Property Trustee and any co-paying agent chosen by the Property Trustee and acceptable to the Administrative Trustees and the Company. The paying agent for the Preferred Securities may resign as paying agent upon 30 days' written notice to the Property Trustee and the Company. In the event that the Property Trustee no longer is the paying agent for the Preferred Securities, the Administrative Trustees will appoint a successor (which must be a bank or trust company acceptable to the Administrative Trustees and the Company) to act as paying agent. REGISTRAR AND TRANSFER AGENT The Property Trustee will act as the registrar and the transfer agent for the Preferred Securities. Registration of transfers of Preferred Securities will be effected without charge by or on behalf of the Trust, but upon payment of any tax or other governmental charges that may be imposed in connection with any transfer or exchange. The Trust will not be required to register or cause to be registered the transfer of Preferred Securities after such Preferred Securities have been called for redemption. INFORMATION CONCERNING THE PROPERTY TRUSTEE The Property Trustee, other than upon the occurrence and during the continuance of an Event of Default, undertakes to perform only such duties as are specifically set forth in the Trust Agreement and, upon the occurrence and during the continuance of an Event of Default, must exercise the same degree of care and skill as a prudent person would exercise or use in the conduct of his or her own affairs. Subject to this provision, the Property Trustee is under no obligation to exercise any of the powers vested in it by the Trust Agreement at the request of any holder of Preferred Securities unless it is offered reasonable indemnity against the costs, expenses and liabilities that might be incurred thereby. If no Event of Default has occurred and is continuing and the Property Trustee is required to decide between alternative causes of action, construe ambiguous provisions in the Trust Agreement or is unsure of the application of any provision of the Trust Agreement, and the matter is not one on which holders of Preferred Securities are entitled under the Trust Agreement to vote, then the Property Trustee will take such action as is directed by the Company and if not so directed, will take such action as it deems advisable and in the best interests of the holders of the Trust Securities and will have no liability except for its own bad faith, negligence or willful misconduct. MISCELLANEOUS The Administrative Trustees are authorized and directed to conduct the affairs of and to operate the Trust in such a way that the Trust will not be deemed to be an "investment company" required to be registered under the Investment Company Act or classified as an association taxable as a corporation for United States federal income tax purposes and so that the Subordinated Debentures will be treated as indebtedness of the Company for United States federal income tax purposes. The Company and the Administrative Trustees are authorized, in this connection, to take any action, not inconsistent with applicable law, the certificate of trust of the Trust or the Trust Agreement, that the Company and the Administrative Trustees determine in their discretion to be necessary or desirable for such purposes. 65 70 Holders of the Preferred Securities have no preemptive or similar rights. The Trust Agreement and the Preferred Securities will be governed by, and construed in accordance with, the internal laws of the State of Delaware. DESCRIPTION OF THE SUBORDINATED DEBENTURES Concurrently with the issuance of the Preferred Securities, the Trust will invest the proceeds thereof, together with the consideration paid by the Company for the Common Securities, in the Subordinated Debentures issued by the Company. The Subordinated Debentures will be issued as unsecured debt under the Indenture, to be dated as of , 1998 (the "Indenture"), between the Company and State Street Bank and Trust Company, as trustee (the "Debenture Trustee"). The Indenture will be qualified as an indenture under the Trust Indenture Act. The following summary of the material terms and provisions of the Subordinated Debentures and the Indenture does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the Indenture and to the Trust Indenture Act. Wherever particular defined terms of the Indenture are referred to, but not defined herein, such defined terms are incorporated herein by reference. The form of the Indenture has been filed as an exhibit to the Registration Statement of which this Prospectus forms a part. GENERAL The Subordinated Debentures will be limited in aggregate principal amount to approximately $41,237,125 (or $47,442,700 if the option described under the heading "Underwriting" is exercised by the Underwriters), such amount being the sum of the aggregate stated Liquidation Amount of the Trust Securities. The Subordinated Debentures will bear interest at the annual rate of % of the principal amount thereof, payable quarterly in arrears on March 31, June 30, September 30, and December 31 of each year (each, an "Interest Payment Date") beginning September 30, 1998, to the Person (as defined in the Indenture) in whose name each Subordinated Debenture is registered, subject to certain exceptions, at the close of business on the fifteenth day of the last month of the calendar quarter. It is anticipated that, until the liquidation of the Trust, the Subordinated Debentures will be held in the name of the Property Trustee in trust for the benefit of the holders of the Preferred Securities. The amount of interest payable for any period will be computed on the basis of a 360-day year of twelve 30-day months. In the event that any date on which interest is payable on the Subordinated Debentures is not a Business Day, then payment of the interest payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), with the same force and effect as if made on the date such payment was originally payable. Accrued interest that is not paid on the applicable Interest Payment Date will bear additional interest on the amount thereof (to the extent permitted by law) at the rate per annum of % thereof, compounded quarterly. The term "interest," as used herein, includes quarterly interest payments, interest on quarterly interest payments not paid on the applicable Interest Payment Date and Additional Payments (as herein defined), as applicable. The Subordinated Debentures will mature on June 30, 2028 (such date, as it may be shortened or extended as hereinafter described, the "Stated Maturity"). Such date may be shortened at any time by the Company to any date not earlier than June 30, 2003, subject to the Company having received prior approval of the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve. Such date may also be extended at any time at the election of the Company but in no event to a date later than June 30, 2037, provided that at the time such election is made and at the time of extension (i) the Company is not in bankruptcy, otherwise insolvent or in liquidation, (ii) the Company is not in default in the payment of any interest or principal on the Subordinated Debentures, and (iii) the Trust is not in arrears on payments of Distributions on the Preferred Securities and no deferred Distributions are accumulated. In the event that the Company elects to shorten or extend the Stated Maturity of the Subordinated Debentures, it will give notice thereof to the Debenture Trustee, the Trust and to the holders of the Subordinated Debentures no more than 180 days and no less than 90 days prior to the effectiveness thereof. The Company will not have the right to purchase the Subordinated Debentures, in whole or in part, from the Trust until after June 30, 2003, except if a Tax Event, a Capital Treatment Event or an Investment Company Event has occurred and is continuing. The Subordinated Debentures will be unsecured and will rank junior and be subordinate in right of payment to all Senior Debt, Subordinated Debt and Additional Senior Obligations of the Company. Because the Company is a 66 71 holding company, the right of the Company to participate in any distribution of assets of any Subsidiary Bank, upon any such Subsidiary Bank's liquidation or reorganization or otherwise (and thus the ability of holders of the Subordinated Debentures to benefit indirectly from such distribution), is subject to the prior claim of creditors of such Subsidiary Bank, except to the extent that the Company may itself be recognized as a creditor of such Subsidiary Bank. The Subordinated Debentures will, therefore, be effectively subordinated to all existing and future liabilities of the Subsidiary Banks, and holders of Subordinated Debentures should look only to the assets of the Company for payments on the Subordinated Debentures. The Indenture does not limit the incurrence or issuance of other secured or unsecured debt of the Company, including Senior Debt, Subordinated Debt and Additional Senior Obligations, whether under the Indenture or any existing indenture or other indenture that the Company may enter into in the future or otherwise. See "--Subordination." The Indenture does not contain provisions that afford holders of the Subordinated Debentures protection in the event of a highly leveraged transaction or other similar transaction involving the Company that may adversely affect such holders. OPTION TO EXTEND INTEREST PAYMENT PERIOD The Company has the right under the Indenture at any time during the term of the Subordinated Debentures, so long as no Debenture Event of Default has occurred and is continuing, to defer the payment of interest at any time, or from time to time (each, an "Extension Period"). The right to defer the payment of interest on the Subordinated Debentures is limited, however, to a period, in each instance, not exceeding 20 consecutive quarters, and no Extension Period may extend beyond the Stated Maturity of the Subordinated Debentures. At the end of each Extension Period, the Company must pay all interest then accrued and unpaid (together with interest thereon at the annual rate of %, compounded quarterly, to the extent permitted by applicable law). During an Extension Period, interest will continue to accrue and holders of Subordinated Debentures (or the holders of Preferred Securities if such securities are then outstanding) will be required to accrue and recognize income for United States federal income tax purposes. See "Certain Federal Income Tax Consequences--Potential Extension of Interest Payment Period and Original Issue Discount." During any such Extension Period, the Company may not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire or make a liquidation payment with respect to, any of the Company's capital stock (other than (a) dividends or distributions in common stock of the Company, any declaration of a non-cash dividend in connection with the implementation of a shareholder rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, and (b) purchases of common stock of the Company related to the rights under any of the Company's benefit plans for its directors, officers or employees), (ii) make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company that rank pari passu with or junior in interest to the Subordinated Debentures or make any guarantee payments with respect to any guarantee by the Company of the debt securities of any subsidiary of the Company if such guarantee ranks pari passu or junior in interest to the Subordinated Debentures (other than payments under the Guarantee), or (iii) redeem, purchase or acquire less than all of the Subordinated Debentures or any of the Preferred Securities. Prior to the termination of any such Extension Period, the Company may further defer the payment of interest; provided that no Extension Period may exceed 20 consecutive quarters or extend beyond the Stated Maturity of the Subordinated Debentures. Upon the termination of any such Extension Period and the payment of all amounts then due on any Interest Payment Date, the Company may elect to begin a new Extension Period subject to the above requirements. No interest will be due and payable during an Extension Period, except at the end thereof. The Company has no present intention of exercising its rights to defer payments of interest on the Subordinated Debentures. The Company must give the Property Trustee, the Administrative Trustees and the Debenture Trustee notice of its election of such Extension Period at least two Business Days prior to the earlier of (i) the next succeeding date on which Distributions on the Trust Securities would have been payable except for the election to begin such Extension Period, or (ii) the date the Trust is required to give notice of the record date, or the date such Distributions are payable, to the NYSE (or other applicable self-regulatory organization) or to holders of the Preferred Securities, but in any event at least one Business Day before such record date. Subject to the foregoing, there is no limitation on the number of times that the Company may elect to begin an Extension Period. 67 72 ADDITIONAL SUMS If the Trust or the Property Trustee is required to pay any additional taxes, duties or other governmental charges as a result of the occurrence of a Tax Event, the Company will pay to the recordholders of the Subordinated Debentures as additional amounts (referred to herein as "Additional Payments") on the Subordinated Debentures such additional amounts as may be required so that the net amounts received and retained by the Trust after paying any such additional taxes, duties or other governmental charges will not be less than the amounts the Trust would have received had such additional taxes, duties or other governmental charges not been imposed. REDEMPTION The Company will have the right to redeem the Subordinated Debentures prior to maturity (i) on or after June 30, 2003, in whole at any time or in part from time to time, or (ii) at any time in whole (but not in part), within 180 days following the occurrence of a Tax Event, a Capital Treatment Event or an Investment Company Event, in each case at a redemption price equal to the accrued and unpaid interest on the Subordinated Debentures so redeemed to the date fixed for redemption, plus 100% of the principal amount thereof. Any such redemption prior to the Stated Maturity will be subject to prior approval of the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve. "Tax Event" means the receipt by the Trust of an opinion of counsel rendered by a law firm having a recognized tax and securities law practice to the effect that, as a result of any amendment to, or change (including any announced prospective change) in, the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein, or as a result of any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or which pronouncement or decision is announced on or after the date of issuance of the Preferred Securities under the Trust Agreement, there is more than an insubstantial risk that (i) interest payable by the Company on the Subordinated Debentures is not, or within 90 days of the date of such opinion will not be, deductible by the Company, in whole or in part, for United States federal income tax purposes, (ii) the Trust is, or will be within 90 days after the date of such opinion of counsel, subject to United States federal income tax with respect to income received or accrued on the Subordinated Debentures, or (iii) the Trust is, or will be within 90 days after the date of such opinion of counsel, subject to more than a de minimis amount of other taxes, duties, assessments or other governmental charges. The Company must request and receive an opinion with regard to such matters within a reasonable period of time after it becomes aware of the possible occurrence of any of the events described in clauses (i) through (iii) above. "Capital Treatment Event" means the receipt by the Trust of an opinion of counsel rendered by a law firm having a recognized banking law practice to the effect that, as a result of any amendment to or any change (including any announced prospective change) in the laws (or any regulations thereunder) of the United States or any political subdivision thereof or therein, or as a result of any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or such proposed change, pronouncement or decision is announced on or after the date of issuance of the Preferred Securities under the Trust Agreement, there is more than an insubstantial risk of impairment of the Company's ability to treat the aggregate Liquidation Amount of the Preferred Securities (or any substantial portion thereof) as "Tier 1 Capital" (or the then equivalent thereof) for purposes of the capital adequacy guidelines of the Federal Reserve, as then applicable to the Company, provided, however, that the inability of the Company to treat all or any portion of the Liquidation Amount of the Preferred Securities as Tier 1 Capital shall not constitute the basis for a Capital Treatment Event if such inability results from the Company having cumulative preferred capital in excess of the amount which may qualify for treatment as Tier 1 Capital under applicable capital adequacy guidelines of the Federal Reserve. "Investment Company Event" means the receipt by the Trust of an opinion of counsel rendered by a law firm having a recognized tax and securities law practice to the effect that, as a result of the occurrence of a change in law or regulation or a change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority, the Trust is or will be considered an "investment company" that is required to be registered under the Investment Company Act, which change becomes effective on or after the date of original issuance of the Preferred Securities. Notice of any redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each holder of Subordinated Debentures to be redeemed at its registered address. Unless the Company defaults in 68 73 payment of the redemption price for the Subordinated Debentures, on and after the redemption date interest ceases to accrue on such Subordinated Debentures or portions thereof called for redemption. The Subordinated Debentures will not be subject to any sinking fund. DISTRIBUTION UPON LIQUIDATION As described under "Description of the Preferred Securities--Liquidation Distribution Upon Termination," under certain circumstances involving the termination of the Trust, the Subordinated Debentures may be distributed to the holders of the Preferred Securities in liquidation of the Trust after satisfaction of liabilities to creditors of the Trust as provided by applicable law. Any such distribution will be subject to receipt of prior approval by the Federal Reserve if then required under applicable policies or guidelines of the Federal Reserve. If the Subordinated Debentures are distributed to the holders of Preferred Securities upon the liquidation of the Trust, the Company will use its best efforts to list the Subordinated Debentures on the NYSE or such stock exchanges, if any, on which the Preferred Securities are then listed. There can be no assurance as to the market price of any Subordinated Debentures that may be distributed to the holders of Preferred Securities. RESTRICTIONS ON CERTAIN PAYMENTS If at any time (i) there has occurred a Debenture Event of Default, (ii) the Company is in default with respect to its obligations under the Guarantee, or (iii) the Company has given notice of its election of an Extension Period as provided in the Indenture with respect to the Subordinated Debentures and has not rescinded such notice, or such Extension Period, or any extension thereof, is continuing, the Company will not (1) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock (other than (a) dividends or distributions in common stock of the Company, any declaration of a non-cash dividend in connection with the implementation of a shareholder rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, and (b) purchases of common stock of the Company related to the rights under any of the Company's benefit plans for its directors, officers or employees), (2) make any payment of principal, interest or premium, if any, on or repay or repurchase or redeem any debt securities of the Company that rank pari passu with or junior in interest to the Subordinated Debentures or make any guarantee payments with respect to any guarantee by the Company of the debt securities of any subsidiary of the Company if such guarantee ranks pari passu or junior in interest to the Subordinated Debentures (other than payments under the Guarantee), or (3) redeem, purchase or acquire less than all of the Subordinated Debentures or any of the Preferred Securities. SUBORDINATION The Indenture provides that the Subordinated Debentures are subordinated and junior in right of payment to all Senior Debt, Subordinated Debt and Additional Senior Obligations of the Company. Upon any payment or distribution of assets to creditors upon any liquidation, dissolution, winding up, reorganization, assignment for the benefit of creditors, marshaling of assets or any bankruptcy, insolvency, debt restructuring or similar proceedings in connection with any insolvency or bankruptcy proceedings of the Company, the holders of Senior Debt, Subordinated Debt and Additional Senior Obligations of the Company will first be entitled to receive payment in full of principal of (and premium, if any) and interest, if any, on such Senior Debt, Subordinated Debt and Additional Senior Obligations of the Company before the holders of Subordinated Debentures will be entitled to receive or retain any payment in respect of the principal of or interest on the Subordinated Debentures. In the event of the acceleration of the maturity of any Subordinated Debentures, the holders of all Senior Debt, Subordinated Debt and Additional Senior Obligations of the Company outstanding at the time of such acceleration will first be entitled to receive payment in full of all amounts due thereon (including any amounts due upon acceleration) before the holders of the Subordinated Debentures will be entitled to receive or retain any payment in respect of the principal of or interest on the Subordinated Debentures. No payments on account of principal or interest in respect of the Subordinated Debentures may be made if there has occurred and is continuing a default in any payment with respect to Senior Debt, Subordinated Debt or Additional Senior Obligations of the Company or an event of default with respect to any Senior Debt, Subordinated 69 74 Debt or Additional Senior Obligations of the Company resulting in the acceleration of the maturity thereof, or if any judicial proceeding is pending with respect to any such default. "Debt" means, with respect to any Person, whether recourse is to all or a portion of the assets of such Person and whether or not contingent, (i) every obligation of such person for money borrowed, (ii) every obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, including obligations incurred in connection with the acquisition of property, assets or businesses, (iii) every reimbursement obligation of such Person with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of such Person, (iv) every obligation of such Person issued or assumed as the deferred purchase price of property or services (but excluding trade accounts payable or accrued liabilities arising in the ordinary course of business), (v) every capital lease obligation of such Person, and (vi) and every obligation of the type referred to in clauses (i) through (v) of another Person and all dividends of another Person the payment of which, in either case, such Person has guaranteed or is responsible or liable, directly or indirectly, as obligor or otherwise. "Senior Debt" means, with respect to the Company, the principal of (and premium, if any) and interest, if any (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company whether or not such claim for post-petition interest is allowed in such proceeding), on Debt, whether incurred on or prior to the date of the Indenture or thereafter incurred, unless, in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that such obligations are not superior in right of payment to the Subordinated Debentures or to other Debt which is pari passu with, or subordinated to, the Subordinated Debentures; provided, however, that Senior Debt will not be deemed to include (i) any Debt of the Company which when incurred and without respect to any election under section 1111(b) of the United States Bankruptcy Code of 1978, as amended, was without recourse to the Company, (ii) any Debt of the Company to any of its subsidiaries, (iii) any Debt to any employee of the Company, (iv) any Debt which by its terms is subordinated to trade accounts payable or accrued liabilities arising in the ordinary course of business to the extent that payments made to the holders of such Debt by the holders of the Subordinated Debentures as a result of the subordination provisions of the Indenture would be greater than they otherwise would have been as a result of any obligation of such holders to pay amounts over to the obligees on such trade accounts payable or accrued liabilities arising in the ordinary course of business as a result of subordination provisions to which such Debt is subject, and (v) Debt which constitutes Subordinated Debt. "Subordinated Debt" means, with respect to the Company, the principal of (and premium, if any) and interest, if any (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company whether or not such claim for post-petition interest is allowed in such proceeding), on Debt, whether incurred on or prior to the date of the Indenture or thereafter incurred, which is by its terms expressly provided to be junior and subordinate to other Debt of the Company (other than the Subordinated Debentures). "Additional Senior Obligations" means, with respect to the Company, all indebtedness, whether incurred on or prior to the date of the Indenture or thereafter incurred, for claims in respect of derivative products such as interest and foreign exchange rate contracts, commodity contracts and similar arrangements; provided, however, that Additional Senior Obligations do not include claims in respect of Senior Debt or Subordinated Debt or obligations which, by their terms, are expressly stated to be not superior in right of payment to the Subordinated Debentures or to rank pari passu in right of payment with the Subordinated Debentures. "Claim," as used herein, has the meaning assigned thereto in Section 101(4) of the United States Bankruptcy Code of 1978, as amended. The Indenture places no limitation on the amount of additional Senior Debt, Subordinated Debt or Additional Senior Obligations that may be incurred by the Company. The Company expects from time to time to incur additional indebtedness constituting Senior Debt, Subordinated Debt and Additional Senior Obligations. As of March 31, 1998, the Company had aggregate Senior Debt, Subordinated Debt and Additional Senior Obligations of approximately $23.4 million. Because the Company is a holding company, the Subordinated Debentures are effectively subordinated to all existing and future liabilities of the Company subsidiaries, including obligations to depositors of the Subsidiary Banks. PAYMENT AND PAYING AGENTS Payment of principal of and any interest on the Subordinated Debentures will be made at the office of the Debenture Trustee in Boston, Massachusetts, except that, at the option of the Company, payment of any interest may 70 75 be made (i) by check mailed to the address of the Person entitled thereto as such address appears in the register of holders of the Subordinated Debentures, or (ii) by transfer to an account maintained by the Person entitled thereto as specified in the register of holders of the Subordinated Debentures, provided that proper transfer instructions have been received by the regular record date. Payment of any interest on Subordinated Debentures will be made to the Person in whose name such Subordinated Debenture is registered at the close of business on the regular record date for such interest, except in the case of defaulted interest. The Company may at any time designate additional paying agents for the Subordinated Debentures or rescind the designation of any paying agent for the Subordinated Debentures; however, the Company will at all times be required to maintain a paying agent in each place of payment for the Subordinated Debentures. Any moneys deposited with the Debenture Trustee or any paying agent for the Subordinated Debentures, or then held by the Company in trust, for the payment of the principal of or interest on the Subordinated Debentures and remaining unclaimed for two years after such principal or interest has become due and payable will be repaid to the Company on May 31 of each year or (if then held in trust by the Company) will be discharged from such trust, and the holder of such Subordinated Debenture will thereafter look, as a general unsecured creditor, only to the Company for payment thereof. REGISTRAR AND TRANSFER AGENT The Debenture Trustee will act as the registrar and the transfer agent for the Subordinated Debentures. Subordinated Debentures may be presented for registration of transfer (with the form of transfer endorsed thereon, or a satisfactory written instrument of transfer, duly executed), at the office of the registrar in Boston, Massachusetts. The Company may at any time rescind the designation of any such transfer agent or approve a change in the location through which any such transfer agent acts. The Company may at any time designate additional transfer agents with respect to the Subordinated Debentures. In the event of any redemption, neither the Company nor the Debenture Trustee will be required to (i) issue, register the transfer of or exchange Subordinated Debentures during a period beginning at the opening of business 15 days before the day of selection for redemption of Subordinated Debentures and ending at the close of business on the day of mailing of the relevant notice of redemption, or (ii) transfer or exchange any Subordinated Debentures so selected for redemption, except, in the case of any Subordinated Debentures being redeemed in part, any portion thereof not to be redeemed. MODIFICATION OF INDENTURE The Company and the Debenture Trustee may, from time to time without the consent of the holders of the Subordinated Debentures, amend, waive or supplement the Indenture for specified purposes, including, among other things, curing ambiguities, defects or inconsistencies and qualifying, or maintaining the qualification of, the Indenture under the Trust Indenture Act. The Indenture contains provisions permitting the Company and the Debenture Trustee, with the consent of the holders of not less than a majority in principal amount of the outstanding Subordinated Debentures, to modify the Indenture; provided, that no such modification may, without the consent of the holder of each outstanding Subordinated Debenture affected by such proposed modification, (i) extend the fixed maturity of the Subordinated Debentures, or reduce the principal amount thereof, or reduce the rate or extend the time of payment of interest thereon, or (ii) reduce the percentage of principal amount of Subordinated Debentures, the holders of which are required to consent to any such modification of the Indenture; provided that so long as any of the Preferred Securities remain outstanding, no such modification may be made that requires the consent of the holders of the Subordinated Debentures, and no termination of the Indenture may occur, and no waiver of any Debenture Event of Default may be effective, without the prior consent of the holders of at least a majority of the aggregate Liquidation Amount of the Preferred Securities and that if the consent of the holder of each Subordinated Debenture is required, such modification will not be effective until each holder of Trust Securities has consented thereto. 71 76 DEBENTURE EVENTS OF DEFAULT The Indenture provides that any one or more of the following described events with respect to the Subordinated Debentures that has occurred and is continuing constitutes an event of default (each, a "Debenture Event of Default") with respect to the Subordinated Debentures: (i) failure for 30 days to pay any interest on the Subordinated Debentures, when due (subject to the deferral of any due date in the case of an Extension Period); or (ii) failure to pay any principal on the Subordinated Debentures when due whether at maturity, upon redemption by declaration or otherwise; or (iii) failure to observe or perform in any material respect certain other covenants contained in the Indenture for 90 days after written notice to the Company from the Debenture Trustee or the holders of at least 25% in aggregate outstanding principal amount of the Subordinated Debentures; or (iv) certain events in bankruptcy, insolvency or reorganization of the Company. The holders of a majority in aggregate outstanding principal amount of the Subordinated Debentures have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Debenture Trustee. The Debenture Trustee, or the holders of not less than 25% in aggregate outstanding principal amount of the Subordinated Debentures, may declare the principal due and payable immediately upon a Debenture Event of Default. The holders of a majority in aggregate outstanding principal amount of the Subordinated Debentures may annul such declaration and waive the default if the default (other than the non-payment of the principal of the Subordinated Debentures which has become due solely by such acceleration) has been cured and a sum sufficient to pay all matured installments of interest and principal due otherwise than by acceleration has been deposited with the Debenture Trustee. Should the holders of the Subordinated Debentures fail to annul such declaration and waive such default, the holders of a majority in aggregate Liquidation Amount of the Preferred Securities will have such right. The Company is required to file annually with the Debenture Trustee a certificate as to whether or not the Company is in compliance with all the conditions and covenants applicable to it under the Indenture. If a Debenture Event of Default has occurred and is continuing, the Property Trustee will have the right to declare the principal of and the interest on such Subordinated Debentures, and any other amounts payable under the Indenture, to be forthwith due and payable and to enforce its other rights as a creditor with respect to such Subordinated Debentures. ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF THE PREFERRED SECURITIES If a Debenture Event of Default has occurred and is continuing and such event is attributable to the failure of the Company to pay interest on or principal of the Subordinated Debentures on the payment date on which such payment is due and payable, then a holder of Preferred Securities may institute a legal proceeding directly against the Company for enforcement of payment to such holder of the principal of or interest on such Subordinated Debentures having a principal amount equal to the aggregate Liquidation Amount of the Preferred Securities of such holder (a "Direct Action"). In connection with such Direct Action, the Company will have a right of set-off under the Indenture to the extent of any payment made by the Company to such holder of Preferred Securities in the Direct Action. The Company may not amend the Indenture to remove the foregoing right to bring a Direct Action without the prior written consent of the holders of all of the Preferred Securities. If the right to bring a Direct Action is removed, the Trust may become subject to the reporting obligations under the Exchange Act. The Company has the right under the Indenture to set-off any payment made to such holder of Preferred Securities by the Company in connection with a Direct Action. The holders of the Preferred Securities will not be able to exercise directly any remedies, other than those set forth in the preceding paragraph, available to the holders of the Subordinated Debentures unless there has been an Event of Default under the Trust Agreement. See "Description of the Preferred Securities--Events of Default; Notice." 72 77 CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS The Company may not consolidate with or merge into any other Person or convey or transfer its properties and assets substantially as an entirety to any Person, and any Person may not consolidate with or merge into the Company or sell, convey, transfer or otherwise dispose of its properties and assets substantially as an entirety to the Company, unless (i) in the event the Company consolidates with or merges into another Person or conveys or transfers its properties and assets substantially as an entirety to any Person, the successor Person is organized under the laws of the United States or any State or the District of Columbia, and such successor Person expressly assumes by supplemental indenture the Company's obligations on the Subordinated Debentures, (ii) immediately after giving effect thereto, no Debenture Event of Default, and no event which, after notice or lapse of time or both, would become a Debenture Event of Default, has occurred and is continuing, and (iii) certain other conditions as prescribed in the Indenture are met. SATISFACTION AND DISCHARGE The Indenture will cease to be of further effect (except as to the Company's obligations to pay certain sums due pursuant to the Indenture and to provide certain officers' certificates and opinions of counsel described therein) and the Company will be deemed to have satisfied and discharged the Indenture when, among other things, all Subordinated Debentures not previously delivered to the Debenture Trustee for cancellation (i) have become due and payable, or (ii) will become due and payable at their Stated Maturity within one year or are to be called for redemption within one year, and the Company deposits or causes to be deposited with the Debenture Trustee funds, in trust, for the purpose and in an amount sufficient to pay and discharge the entire indebtedness on the Subordinated Debentures not previously delivered to the Debenture Trustee for cancellation, for the principal and interest to the date of the deposit or to the Stated Maturity or redemption date, as the case may be. GOVERNING LAW The Indenture and the Subordinated Debentures will be governed by and construed in accordance with the laws of the State of Delaware. INFORMATION CONCERNING THE DEBENTURE TRUSTEE The Debenture Trustee has and is subject to all the duties and responsibilities specified with respect to an indenture trustee under the Trust Indenture Act. Subject to such provisions, the Debenture Trustee is under no obligation to exercise any of the powers vested in it by the Indenture at the request of any holder of Subordinated Debentures, unless offered reasonable indemnity by such holder against the costs, expenses and liabilities which might be incurred thereby. The Debenture Trustee is not required to expend or risk its own funds or otherwise incur personal financial liability in the performance of its duties if the Debenture Trustee reasonably believes that repayment or adequate indemnity is not reasonably assured to it. MISCELLANEOUS The Company has agreed, pursuant to the Indenture, for so long as Trust Securities remain outstanding, (i) to maintain directly or indirectly 100% ownership of the Common Securities of the Trust (provided that certain successors which are permitted pursuant to the Indenture may succeed to the Company's ownership of the Common Securities), (ii) not to voluntarily terminate, wind up or liquidate the Trust, except upon prior approval of the Federal Reserve if then so required under applicable capital guidelines or policies of the Federal Reserve, and (a) in connection with a distribution of Subordinated Debentures to the holders of the Preferred Securities in liquidation of the Trust, or (b) in connection with certain mergers, consolidations or amalgamations permitted by the Trust Agreement, and (iii) to use its reasonable efforts, consistent with the terms and provisions of the Trust Agreement, to cause the Trust to remain classified as a grantor trust and not as an association taxable as a corporation for United States federal income tax purposes. 73 78 DESCRIPTION OF THE GUARANTEE The Preferred Securities Guarantee Agreement (the "Guarantee") will be executed and delivered by the Company concurrently with the issuance of the Preferred Securities for the benefit of the holders of the Preferred Securities. The Guarantee will be qualified as an indenture under the Trust Indenture Act. The Guarantee Trustee will act as indenture trustee under the Guarantee for purposes of complying with the provisions of the Trust Indenture Act. The Guarantee Trustee, State Street Bank and Trust Company, will hold the Guarantee for the benefit of the holders of the Preferred Securities. The following summary of the material terms and provisions of the Guarantee does not purport to be complete and is subject to, and qualified in its entirety by reference to, all of the provisions of the Guarantee and the Trust Indenture Act. Wherever particular defined terms of the Guarantee are referred to, but not defined herein, such defined terms are incorporated herein by reference. The form of the Guarantee has been filed as an exhibit to the Registration Statement of which this Prospectus forms a part. GENERAL The Company will, pursuant to the Guarantee, irrevocably agree to pay in full on a subordinated basis, to the extent set forth therein, the Guarantee Payments (as defined below) to the holders of the Preferred Securities, as and when due, regardless of any defense, right of set-off or counterclaim that the Trust may have or assert other than the defense of payment; provided, however, that only when the Guarantee is taken together with the obligations of the Company under the Trust Agreement, the Subordinated Debentures, the Indenture and the Expense Agreement do the Company and the Trust believe that the Company's guarantee of the obligations of the Trust under the Preferred Securities constitute a full and unconditional guarantee. The following payments with respect to the Preferred Securities, to the extent not paid by or on behalf of the Trust (the "Guarantee Payments"), will be subject to the Guarantee: (i) any accrued and unpaid Distributions required to be paid on the Preferred Securities, to the extent that the Trust has funds available therefor at such time, (ii) the Redemption Price with respect to any Preferred Securities called for redemption to the extent that the Trust has funds available therefor at such time, and (iii) upon a voluntary or involuntary dissolution, winding up or liquidation of the Trust (other than in connection with the distribution of Subordinated Debentures to the holders of Preferred Securities or a redemption of all of the Preferred Securities), the lesser of (a) the amount of the Liquidation Distribution, to the extent the Trust has funds available therefor at such time, and (b) the amount of assets of the Trust remaining available for distribution to holders of Preferred Securities in liquidation of the Trust. The obligation of the Company to make a Guarantee Payment may be satisfied by direct payment of the required amounts by the Company to the holders of the Preferred Securities or by causing the Trust to pay such amounts to such holders. The Guarantee will not apply to any payment of Distributions except to the extent the Trust has funds available therefor. If the Company does not make interest payments on the Subordinated Debentures held by the Trust, the Trust will not pay Distributions on the Preferred Securities and will not have funds legally available therefor. STATUS OF THE GUARANTEE The Guarantee will constitute an unsecured obligation of the Company and will rank subordinate and junior in right of payment to all Senior Debt, Subordinated Debt and Additional Senior Obligations of the Company in the same manner as the Subordinated Debentures. The Guarantee does not place a limitation on the amount of additional Senior Debt, Subordinated Debt or Additional Senior Obligations that may be incurred by the Company. The Company expects from time to time to incur additional indebtedness constituting Senior Debt, Subordinated Debt and Additional Senior Obligations. The Guarantee will constitute a guarantee of payment and not of collection (that is, the guaranteed party may institute a legal proceeding directly against the Company to enforce its rights under the Guarantee without first instituting a legal proceeding against any other Person). The Guarantee will not be discharged except by payment of the Guarantee Payments in full to the extent not paid by the Trust or upon distribution of the Subordinated Debentures to the holders of the Preferred Securities. Because the Company is a holding company, the right of the Company to participate in any distribution of assets of any Subsidiary Bank upon such Subsidiary Bank's liquidation or reorganization or otherwise is subject to the prior claims of creditors of that Subsidiary Bank, except to the extent the Company may itself be recognized as a creditor of that Subsidiary Bank. The Company's obligations under the 74 79 Guarantee, therefore, will be effectively subordinated to all existing and future liabilities of the Company subsidiaries, and claimants should look only to the assets of the Company for payments thereunder. VOTING RIGHTS; AMENDMENTS AND ASSIGNMENT The affirmative consent of the holders of at least 66 2/3% of the outstanding Preferred Securities will be required by the Trust for amendments to the Guarantee that would adversely affect the rights or privileges of the holders of the Preferred Securities. No vote of the holders of Preferred Securities will be required with respect to any amendments to the Guarantee which do not adversely affect the rights or privileges of such holders. See "Description of the Preferred Securities--Voting Rights; Amendment of Trust Agreement." All guarantees and agreements contained in the Guarantee will bind the successors, assigns, receivers, trustees and representatives of the Company and will inure to the benefit of the holders of the Preferred Securities then outstanding. EVENTS OF DEFAULT An event of default under the Guarantee will occur upon the failure of the Company to perform any of its payment or other obligations thereunder. The holders of not less than a majority in aggregate Liquidation Amount of the Preferred Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee in respect of the Guarantee or to direct the exercise of any trust or power conferred upon the Guarantee Trustee under the Guarantee. Any holder of Preferred Securities may institute a legal proceeding directly against the Company to enforce its rights under the Guarantee without first instituting a legal proceeding against the Trust, the Guarantee Trustee or any other Person. The Company, as guarantor, is required to file annually with the Guarantee Trustee a certificate as to whether or not the Company is in compliance with all the conditions and covenants applicable to it under the Guarantee. INFORMATION CONCERNING THE GUARANTEE TRUSTEE The Guarantee Trustee, other than during the occurrence and continuance of a default by the Company in performance of the Guarantee, undertakes to perform only such duties as are specifically set forth in the Guarantee and, after default with respect to the Guarantee, must exercise the same degree of care and skill as a prudent person would exercise or use in the conduct of his or her own affairs. Subject to such provisions, the Guarantee Trustee is under no obligation to exercise any of the powers vested in it by the Guarantee at the request of any holder of any Preferred Securities, unless it is offered reasonable indemnity against the costs, expenses and liabilities that might be incurred thereby. TERMINATION OF THE GUARANTEE The Guarantee will terminate and be of no further force and effect upon (a) full payment of the Redemption Price of the Preferred Securities, (b) full payment of the amounts payable upon liquidation of the Trust, or (c) distribution of the Subordinated Debentures to the holders of the Preferred Securities. The Guarantee will continue to be effective or will be reinstated, as the case may be, if at any time any holder of the Preferred Securities must restore payment of any sums paid under such Preferred Securities or the Guarantee. GOVERNING LAW The Guarantee will be governed by and construed in accordance with the laws of the State of Delaware. EXPENSE AGREEMENT The Company will, pursuant to the Agreement as to Expenses and Liabilities entered into by it under the Trust Agreement (the "Expense Agreement"), irrevocably and unconditionally guarantee to each person or entity to whom the Trust becomes indebted or liable, the full payment of any costs, expenses or liabilities of the Trust, other than obligations of the Trust to pay to the holders of the Preferred Securities or other similar interests in the Trust of the amounts due such holders pursuant to the terms of the Preferred Securities or such other similar interests, as the 75 80 case may be. Third party creditors of the Trust may proceed directly against the Company under the Expense Agreement, regardless of whether such creditors had notice of the Expense Agreement. RELATIONSHIP AMONG THE PREFERRED SECURITIES, THE SUBORDINATED DEBENTURES AND THE GUARANTEE FULL AND UNCONDITIONAL GUARANTEE Payments of Distributions and other amounts due on the Preferred Securities (to the extent the Trust has funds available for the payment of such Distributions) are irrevocably guaranteed by the Company as and to the extent set forth under "Description of the Guarantee." The Company and the Trust believe that, taken together, the obligations of the Company under the Subordinated Debentures, the Indenture, the Trust Agreement, the Expense Agreement, and the Guarantee provide, in the aggregate, a full, irrevocable and unconditional guarantee, on a subordinated basis, of payment of Distributions and other amounts due on the Preferred Securities. No single document standing alone or operating in conjunction with fewer than all of the other documents constitutes such guarantee. It is only the combined operation of these documents that has the effect of providing a full, irrevocable and unconditional guarantee of the obligations of the Trust under the Preferred Securities. If and to the extent that the Company does not make payments on the Subordinated Debentures, the Trust will not pay Distributions or other amounts due on the Preferred Securities. The Guarantee does not cover payment of Distributions when the Trust does not have sufficient funds to pay such Distributions. In such event, the remedy of a holder of Preferred Securities is to institute a legal proceeding directly against the Company for enforcement of payment of such Distributions to such holder. The obligations of the Company under the Guarantee are subordinate and junior in right of payment to all Senior Debt, Subordinated Debt and Additional Senior Obligations of the Company. SUFFICIENCY OF PAYMENTS As long as payments of interest and other payments are made when due on the Subordinated Debentures, such payments will be sufficient to cover Distributions and other payments due on the Preferred Securities, primarily because (i) the aggregate principal amount of the Subordinated Debentures will be equal to the sum of the aggregate stated Liquidation Amount of the Trust Securities, (ii) the interest rate and interest and other payment dates on the Subordinated Debentures will match the Distribution rate and Distribution and other payment dates for the Preferred Securities, (iii) the Company will pay for all and any costs, expenses and liabilities of the Trust (except the obligations of the Trust to holders of the Preferred Securities), and (iv) the Trust Agreement further provides that the Trust will not engage in any activity that is not consistent with the limited purposes of the Trust. ENFORCEMENT RIGHTS OF HOLDERS OF PREFERRED SECURITIES A holder of any Preferred Security may institute a legal proceeding directly against the Company to enforce its rights under the Guarantee without first instituting a legal proceeding against the Guarantee Trustee, the Trust or any other Person. A default or event of default under any Senior Debt, Subordinated Debt or Additional Senior Obligations of the Company would not constitute a default or Event of Default. In the event, however, of payment defaults under, or acceleration of, Senior Debt, Subordinated Debt or Additional Senior Obligations of the Company, the subordination provisions of the Indenture provide that no payments may be made in respect of the Subordinated Debentures until such Senior Debt, Subordinated Debt or Additional Senior Obligations has been paid in full or any payment default thereunder has been cured or waived. Failure to make required payments on the Subordinated Debentures would constitute an Event of Default. LIMITED PURPOSE OF THE TRUST The Preferred Securities evidence a preferred undivided beneficial interest in the assets of the Trust. The Trust exists for the exclusive purposes of (i) issuing the Trust Securities representing undivided beneficial interests in the assets of the Trust, (ii) investing the gross proceeds of the Trust Securities in the Subordinated Debentures issued by the Company, and (iii) engaging in only those other activities necessary, advisable, or incidental thereto. A principal 76 81 difference between the rights of a holder of a Preferred Security and the rights of a holder of a Subordinated Debenture is that a holder of a Subordinated Debenture is entitled to receive from the Company the principal amount of and interest accrued on Subordinated Debentures held, while a holder of Preferred Securities is entitled to receive Distributions from the Trust (or from the Company under the Guarantee) if and to the extent the Trust has funds available for the payment of such Distributions. RIGHTS UPON TERMINATION Upon any voluntary or involuntary termination, winding-up or liquidation of the Trust involving the liquidation of the Subordinated Debentures, the holders of the Preferred Securities will be entitled to receive, out of assets held by the Trust, the Liquidation Distribution in cash. See "Description of the Preferred Securities--Liquidation Distribution Upon Termination." Upon any voluntary or involuntary liquidation or bankruptcy of the Company, the Property Trustee, as holder of the Subordinated Debentures, would be a subordinated creditor of the Company, subordinated in right of payment to all Senior Debt, Subordinated Debt and Additional Senior Obligations of the Company (as set forth in the Indenture), but entitled to receive payment in full of principal and interest before any shareholders of the Company receive payments or distributions. Since the Company is the guarantor under the Guarantee and has agreed to pay for all costs, expenses and liabilities of the Trust (other than the obligations of the Trust to the holders of its Preferred Securities), the positions of a holder of the Preferred Securities and a holder of the Subordinated Debentures relative to other creditors and to shareholders of the Company in the event of liquidation or bankruptcy of the Company are expected to be substantially the same. 77 82 CERTAIN FEDERAL INCOME TAX CONSEQUENCES GENERAL The following is a summary of the material United States federal income tax consequences to purchasers of the Preferred Securities and, insofar as it relates to matters of law and legal conclusions, reflects the opinion of Jackson Walker L.L.P., counsel to the Company. This summary is based upon current provisions of the Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations issued thereunder and current administrative rulings and court decisions, all of which are subject to change at any time, with possible retroactive effect. Subsequent changes may cause the federal income tax consequences to vary substantially from the consequences described below. Furthermore, the authorities on which the following summary is based are subject to various interpretations, and it is therefore possible that the United States federal income tax treatment of the purchase, ownership, and disposition of the Preferred Securities may differ from the treatment described below. No attempt has been made in the following summary to comment on all United States federal income tax matters affecting purchasers of the Preferred Securities. Moreover, this summary generally focuses on holders of the Preferred Securities who are individual citizens or residents of the United States, corporations and partnerships created or organized in or under the laws of the United States or any political subdivision thereof, an estate, the income of which is includible in its gross income for United States federal income tax purposes without regard to its source, or a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust ("U.S. Holders"), and who acquire the Preferred Securities on their original issue at their offering price and hold the Preferred Securities as capital assets. This summary has only limited application to dealers in securities, corporations, estates, trusts or nonresident aliens and does not address all the federal income tax consequences that may be relevant to holders who may be subject to special tax treatment, such as, for example, banks, thrifts, real estate investment trusts, regulated investment companies, insurance companies, dealers in securities or currencies, tax-exempt investors, or persons that will hold the Preferred Securities as a position in a "straddle," as part of a "synthetic security" or "hedge," as part of a "conversion transaction" or other integrated investment, or as other than a capital asset. This summary also does not address the tax consequences to persons that have a functional currency other than the U.S. dollar or the tax consequences to shareholders, partners or beneficiaries of a holder of the Preferred Securities. Further, it does not include any description of any alternative minimum tax consequences or the tax laws of any state or local government or of any foreign government that may be applicable to the Preferred Securities. Accordingly, each prospective investor should consult, and should rely exclusively on, the investor's own tax advisors in analyzing the federal, state, local and foreign tax consequences of the purchase, ownership or disposition of the Preferred Securities. CLASSIFICATION OF THE SUBORDINATED DEBENTURES The Company intends to take the position that the Subordinated Debentures will be classified for United States federal income tax purposes as indebtedness of the Company under current law, and, by acceptance of a Preferred Security, each holder covenants to treat the Subordinated Debentures as indebtedness and the Preferred Securities as evidence of an indirect beneficial ownership interest in the Subordinated Debentures. The determination for United States federal income tax purposes of whether an instrument is to be classified as indebtedness or equity of the issuer is highly factual and the controlling authorities are subject to varying interpretations. Therefore, no assurance can be given that the Company's position and a holder's agreed treatment will not be challenged by the Internal Revenue Service or, if challenged, that such a challenge will not be successful. The Company is aware of at least one case, currently pending in the United States Tax Court, in which the Internal Revenue Service is challenging the issuer's classification as indebtedness of certain instruments with features similar to but not the same as those of the Subordinated Debentures. If the Subordinated Debentures were determined to constitute equity rather than indebtedness of the Company, the Company would not be entitled to deduct the stated interest payments thereon and a Tax Event would occur. The remainder of this summary assumes that the Subordinated Debentures will be classified for United States federal income tax purposes as indebtedness of the Company. 78 83 CLASSIFICATION OF THE TRUST Under current law and assuming full compliance with the terms of the Trust Agreement and Indenture (and certain other documents described herein), the Trust will be classified for United States federal income tax purposes as a grantor trust and not as an association taxable as a corporation. Accordingly, for United States federal income tax purposes, each holder of the Preferred Securities generally will be treated as owning an undivided beneficial interest in the Subordinated Debentures, and upon the occurrence of an Extension Period each holder will be required to include in its gross income any accrued OID with respect to its allocable share of the Subordinated Debentures whether or not cash is actually distributed to such holder. POTENTIAL EXTENSION OF INTEREST PAYMENT PERIOD AND ORIGINAL ISSUE DISCOUNT Pursuant to current Treasury regulations (the "Regulations"), a debt instrument will be deemed to be issued with OID if there is more than a "remote" contingency that periodic stated interest payments due on the instrument will not be timely paid. Because the exercise by the Company of its option to defer the payment of stated interest on the Subordinated Debentures would prevent the Company from declaring dividends on any class of equity and would prevent the Company from making any payments with respect to debt securities that rank pari passu or junior to the Subordinated Debentures, the Company believes that the likelihood of its exercising the option is "remote" within the meaning of the Regulations. As a result, the Company intends to take the position that the Subordinated Debentures will not be deemed to be issued with OID. Accordingly, based on this position, stated interest payments on the Subordinated Debentures will be includible in the ordinary income of a holder at the time that such payments are paid or accrued in accordance with the holder's regular method of accounting. Because the Regulations have not yet been addressed in any published rulings or other published interpretations issued by the Internal Revenue Service, it is possible that the Internal Revenue Service could take a position contrary to the position taken by the Company. If the Company were to exercise its option to defer the payment of stated interest on the Subordinated Debentures, the Subordinated Debentures would be treated, solely for purposes of the OID rules, as being "reissued" at such time with OID. The amount of interest income includible in the taxable income of a holder of the Subordinated Debentures would be determined on the basis of a constant yield method over the remaining term of the instrument regardless of the holder's method of tax accounting, and the actual receipt of future payments of stated interest on the Subordinated Debentures would no longer be separately reported as taxable income. Consequently, a holder of the Preferred Securities would be required to include OID in ordinary income, on a current basis, over the period that the instrument is held even though the Company would not be making any actual cash payments during the Extension Period. The amount of OID that would accrue, in the aggregate, during the Extension Period would be approximately equal to the amount of the cash payment due at the end of such period. If the Company's option to defer interest payments is not treated as "remote," the Subordinated Debentures would be treated as originally issued with OID in an amount equal to the aggregate stated interest payable over the term of the Subordinated Debentures. That OID generally would be included in a holder's gross income over such term on an economic accrual basis, regardless of the holder's regular method of accounting. Because income on the Preferred Securities will constitute interest income for United States federal income tax purposes, corporate holders of the Preferred Securities will not be entitled to claim a dividends received deduction in respect of such income. MARKET DISCOUNT AND ACQUISITION PREMIUM Holders of the Preferred Securities other than a holder who purchased the Preferred Securities upon original issuance may be considered to have acquired their undivided interests in the Subordinated Debentures with "market discount" or "acquisition premium" as such phrases are defined for United States federal income tax purposes. Such holders are advised to consult their tax advisors as to the income tax consequences of the acquisition, ownership and disposition of the Preferred Securities. 79 84 RECEIPT OF SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF THE TRUST Under certain circumstances, as described under "Description of the Preferred Securities--Redemption" and "--Liquidation Distribution Upon Termination," the Subordinated Debentures may be distributed to holders of the Preferred Securities upon a liquidation of the Trust. Under current United States federal income tax law, such a distribution would be treated as a nontaxable event to each such holder and would result in such holder having an adjusted tax basis in the Subordinated Debentures received in the liquidation equal to such holder's adjusted tax basis in the Preferred Securities immediately before the distribution. A holder's holding period in the Subordinated Debentures so received in liquidation of the Trust would include the period for which such holder held the Preferred Securities. If, however, a Tax Event were to occur which resulted in the Trust being treated as an association taxable as a corporation, the distribution would likely constitute a taxable event to holders of the Preferred Securities. Under certain circumstances described herein, the Subordinated Debentures may be redeemed for cash and the proceeds of such redemption distributed to holders in redemption of their Preferred Securities. Under current law, such a redemption would, for United States federal income tax purposes, constitute a taxable disposition of the redeemed Preferred Securities, and a holder would recognize gain or loss as if the holder sold such Preferred Securities for cash. See "Description of the Preferred Securities--Redemption" and "--Liquidation Distribution Upon Termination." DISPOSITION OF PREFERRED SECURITIES Upon the sale of the Preferred Securities, a holder will recognize a gain or loss in an amount equal to the difference between its adjusted tax basis in the Preferred Securities and the amount realized in the sale (except to the extent of any amount received in respect of accrued but unpaid interest not previously included in income). A holder's adjusted tax basis in the Preferred Securities generally will be its initial purchase price increased by OID (if any) previously includible in the holder's gross income to the date of disposition and decreased by payments (if any) received on the Preferred Securities in respect of OID to the date of disposition. Such gain or loss generally will be a capital gain or loss. In the case of non-corporate taxpayers, the tax rates applicable to capital gains from the disposition of Preferred Securities generally will vary depending upon whether, at the time of disposition, the Preferred Securities have been held for more than 12 months or more than 18 months. Pending legislation, if enacted, will eliminate the 18-month holding period effective for taxable years ending after December 31, 1997. The Preferred Securities may trade at a price that does not accurately reflect the value of accrued but unpaid interest (or OID if the Subordinated Debentures are treated as having been issued, or reissued, with OID) with respect to the underlying Subordinated Debentures. A holder who disposes of its Preferred Securities between record dates for payments of distributions thereon will be required to include in ordinary income (i) any portion of the amount realized that is attributable to such accrued but unpaid interest to the extent not previously included in income, or (ii) any amount of OID, in either case, that has accrued on its pro rata share of the underlying Subordinated Debentures during the taxable year of sale through the date of disposition. Any such income inclusion will increase the holder's adjusted tax basis in its Preferred Securities disposed of. To the extent that the amount realized in the sale is less than the holder's adjusted tax basis, a holder will recognize a capital loss. Subject to certain limited exceptions applicable to non-corporate taxpayers, capital losses cannot be applied to offset ordinary income for United States federal income tax purposes. EFFECT OF CHANGES IN TAX LAWS Certain legislative proposals were made in 1996 and 1997 that, if enacted, could have adversely affected the ability of the Company to deduct interest paid on the Subordinated Debentures. These proposals were not, however, incorporated into the legislation enacted on August 5, 1997 as the Taxpayer Relief Act of 1997. Nevertheless, there can be no assurance that other legislation enacted after the date hereof will not otherwise adversely affect the ability of the Company to deduct the interest payable on the Subordinated Debentures. Consequently, there can be no assurance that a Tax Event will not occur. A Tax Event would permit the Company, upon approval of the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve, to cause a redemption of the Preferred Securities before, as well as after, June 30, 2003. See "Risk Factors--Risk Factors Relating to the Preferred Securities--Tax Event, Capital Treatment Event or Investment Company Event; Redemption." 80 85 BACKUP WITHHOLDING AND INFORMATION REPORTING Interest paid on the Subordinated Debentures, or the amount of OID accrued on the Subordinated Debentures, if applicable, held of record by individual citizens or residents of the United States, or certain trusts, estates, and partnerships, will be reported to the Internal Revenue Service on Forms 1099, which forms should be mailed to such holders of the Preferred Securities by January 31 following each calendar year. Payments made on, and proceeds from the sale of, the Preferred Securities may be subject to a "backup" withholding tax (currently at 31%) unless the holder complies with certain identification and other requirements. Any amounts withheld under the backup withholding rules generally will be allowed as a credit against the holder's United States federal income tax liability, provided the required information is timely provided to the Internal Revenue Service. THE UNITED STATES FEDERAL INCOME TAX SUMMARY SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON THE PARTICULAR SITUATION OF A HOLDER OF THE PREFERRED SECURITIES. HOLDERS OF THE PREFERRED SECURITIES SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER TAX LAWS. ERISA CONSIDERATIONS Employee benefit plans that are subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Code ("Plans"), generally may purchase Preferred Securities, subject to the investing fiduciary's determination that the investment in Preferred Securities satisfies ERISA's fiduciary standards and other requirements applicable to investments by the Plan. In any case, the Company and/or any of its affiliates may be considered a "party in interest" (within the meaning of ERISA) or a "disqualified person" (within the meaning of Section 4975 of the Code) with respect to certain plans (generally, Plans maintained or sponsored by, or contributed to by, any such persons with respect to which the Company or an affiliate is a fiduciary or Plans for which the Company or an affiliate provides services). The acquisition and ownership of Preferred Securities by a Plan (or by an individual retirement arrangement or other Plans described in Section 4975(e)(1) of the Code) with respect to which the Company or any of its affiliates is considered a party in interest or a disqualified person may constitute or result in a prohibited transaction under ERISA or Section 4975 of the Code, unless such Preferred Securities are acquired pursuant to and in accordance with an applicable exemption. As a result, Plans with respect to which the Company or any of its affiliates is a party in interest or a disqualified person should not acquire Preferred Securities unless such Preferred Securities are acquired pursuant to and in accordance with an applicable exemption. Any other Plans or other entities whose assets include Plan assets subject to ERISA or Section 4975 of the Code proposing to acquire Preferred Securities should consult with their own counsel. 81 86 UNDERWRITING The Underwriters named below, represented by Stifel, Nicolaus & Company, Incorporated and Hoefer & Arnett, Inc. (collectively, the "Representatives"), have severally agreed, subject to the terms and conditions set forth in the Underwriting Agreement, the form of which is filed as an exhibit to the Registration Statement of which this Prospectus forms a part, to purchase from the Trust the number of Preferred Securities set forth opposite their respective names below. The several Underwriters have agreed in the Underwriting Agreement, subject to the terms and conditions set forth therein, to purchase all the Preferred Securities offered hereby if any of the Preferred Securities are purchased. In the event of default by an Underwriter, the Underwriting Agreement provides that, in certain circumstances, purchase commitments of the nondefaulting Underwriters may be increased or the Underwriting Agreement may be terminated.
UNDERWRITER NUMBER OF SHARES ----------- ---------------- Stifel, Nicolaus & Company, Incorporated............................................................ Hoefer & Arnett, Inc................................................................................
The Representatives have advised the Trust that they propose initially to offer the Preferred Securities to the public at the public offering price set forth on the cover page of this Prospectus, and to certain dealers at such price less a concession not in excess of $ per Preferred Security. The Underwriters may allow, and such dealers may reallow, a discount not in excess of $ per Preferred Security to certain other dealers. After the initial public offering, the public offering price, concession and discount may be changed. Because the National Association of Securities Dealers, Inc. ("NASD") is expected to view the Preferred Securities as interests in a direct participation program, the offering of the Preferred Securities is being made in compliance with the applicable provisions of Rule 2810 of the NASD's Conduct Rules. In view of the fact that the proceeds of the sale of the Preferred Securities will be used to purchase the Subordinated Debentures of the Company, the Underwriting Agreement provides that the Company will pay as compensation to the Underwriters for arranging the investment therein of such proceeds, an amount in immediately available funds of $ per Preferred Security (or $ in the aggregate) for the accounts of the several Underwriters. The Trust has granted the Underwriters an option to purchase up to an additional 240,000 Preferred Securities at the initial public offering price. Such option, which expires 30 days from the date of this Prospectus, may be exercised solely to cover over-allotments. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage of the additional Preferred Securities that the number of Preferred Securities to be purchased initially by the Underwriter is of the 1,600,000 Preferred Securities initially purchased by the Underwriters. To the extent that the Underwriters exercise their option to purchase additional Preferred Securities, the Trust will issue and sell to the Company additional Common Securities in an aggregate Liquidation Amount equal to at least 3% of the total capital of the Trust, and the Company will issue and sell to the Trust Subordinated Debentures in an aggregate principal amount equal to the aggregate Liquidation Amount of the additional Preferred Securities being purchased pursuant to the option. Although application has been made to have the Preferred Securities approved for listing on the New York Stock Exchange, no assurances can be made as to the liquidity of such Preferred Securities or that an active and liquid trading market will develop or, if developed, that it will continue. The offering price and distribution rate have been determined by negotiations among representatives of the Company and the Underwriters, and the offering price of the Preferred Securities may not be indicative of the market price following the offering. The Trust and the Company have agreed to indemnify the Underwriters against, or contribute to payments that the Underwriters may be required to make in respect of, certain liabilities, including liabilities under the Securities Act. Certain of the Underwriters engage in transactions with, and, from time to time, have performed services for, the Company and its subsidiaries and affiliates in the ordinary course of business. 82 87 In connection with the offering of the Preferred Securities, the Underwriters and any selling group members and their respective affiliates may engage in transactions effected in accordance with Rule 104 of the Securities and Exchange Commission's Regulation M that are intended to stabilize, maintain or otherwise affect the market price of the Preferred Securities. Such transactions may include over-allotment transactions in which an Underwriter creates a short position for its own account by selling more Preferred Securities than it is committed to purchase from the Trust. In such case, to cover all or part of the short position, the Underwriters may exercise the over-allotment option described above or may purchase Preferred Securities in the open market following completion of the initial offering of the Preferred Securities. The Underwriters also may engage in stabilizing transactions in which they bid for, and purchase, Preferred Securities at a level above that which might otherwise prevail in the open market for the purpose of preventing or retarding a decline in the market price of the Preferred Securities. The Underwriters also may reclaim any selling concessions allowed to a dealer if the Underwriters repurchase Preferred Securities distributed by that dealer. Any of the foregoing transactions may result in the maintenance of a price for the Preferred Securities at a level above that which might otherwise prevail in the open market. Neither the Company nor any Underwriter makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Preferred Securities. The Underwriters are not required to engage in any of the foregoing transactions and, if commenced, such transactions may be discontinued at any time without notice. VALIDITY OF SECURITIES Certain matters of Delaware law relating to the validity of the Preferred Securities, the enforceability of the Trust Agreement and the formation of the Trust will be passed upon by Richards, Layton & Finger, special Delaware counsel to the Company and the Trust. Certain legal matters for the Company and the Trust, including the validity of the Guarantee and the Subordinated Debentures, will be passed upon for the Company and the Trust by Jackson Walker L.L.P., Dallas, Texas, counsel to the Company and the Trust. Certain legal matters will be passed upon for the Underwriters by Bryan Cave LLP, St. Louis, Missouri. Counsel for the Company, the Trust and the Underwriters will rely on the opinion of Richards, Layton & Finger as to matters of Delaware law. Certain matters relating to United States federal income tax considerations will be passed upon for the Company by Jackson Walker L.L.P. EXPERTS The consolidated financial statements of FBA and FCB are included in this Prospectus in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, for the periods indicated in their reports thereon which appear elsewhere herein and upon authority of said firm as experts in accounting and auditing. The consolidated financial statements of Redwood are included in this Prospectus in reliance upon the report of Coopers & Lybrand, L.L.P., independent certified public accountants, for the periods indicated in their reports thereon which appear elsewhere herein and upon authority of said firm as experts in accounting and auditing. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Company's annual report on Form 10-K for the year ended December 31, 1997 and its quarterly report on Form 10-Q for the quarter ended March 31, 1998 which have been filed by the Company with the Commission (File No. 0-8937) are incorporated herein by reference. Any statement contained in a document incorporated hereby reference shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM THIS PROSPECTUS IS DELIVERED, ON THE WRITTEN OR ORAL REQUEST OF ANY SUCH PERSON, A COPY OF ANY OR ALL OF THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE (OTHER THAN EXHIBITS TO SUCH DOCUMENTS WHICH ARE NOT SPECIFICALLY INCORPORATED BY REFERENCE IN SUCH DOCUMENTS). WRITTEN REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED TO ALLEN H. BLAKE, VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, FIRST BANKS AMERICA, INC., 11901 OLIVE BOULEVARD, CREVE COEUR, MISSOURI 63141. TELEPHONE REQUESTS MAY BE DIRECTED TO (314) 995-8700. 83 88 AVAILABLE INFORMATION This Prospectus constitutes a part of a Registration Statement on Form S-2 (together with all amendments and exhibits thereto, the "Registration Statement") filed by the Company and the Trust with the Securities and Exchange Commission (the "Commission") under the Securities Act, with respect to the Preferred Securities, the Subordinated Debentures and the Guarantee. This Prospectus does not contain all of the information set forth in such Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission, although it does include a summary of the material terms of the Trust Agreement, the Indenture and the Guarantee. Reference is made to such Registration Statement and to the exhibits relating thereto for further information with respect to the Company, the Trust, the Preferred Securities, the Subordinated Debentures and the Guarantee. Any statements contained herein concerning the provisions of any document filed as an exhibit to the Registration Statement or otherwise filed with the Commission or incorporated by reference herein are not necessarily complete, and, in each instance, reference is made to the copy of such document so filed for a more complete description of the matter involved. Each such statement is qualified in its entirety by such reference. The Company is subject to the informational requirements of the Exchange Act and, in accordance therewith, files reports, proxy statements and other information with the Commission. The Trust is not currently subject to the information reporting requirements of the Exchange Act and, although the Trust will become subject to such requirements upon the effectiveness of the Registration Statement, the Trust intends to seek and expects to receive an exemption therefrom. Accordingly, it is not expected that the Trust will be filing separate reports under the Exchange Act. The Company's reports, proxy statements and other information can be inspected and copied at the following public reference facilities maintained by the Commission: 450 Fifth Street, N.W., Washington, D.C. 20549; 7 World Trade Center, Suite 1300, New York, New York 10048; and the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material may also be obtained by mail from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed rates. The Commission maintains an Internet web site that contains reports, proxy and information statements and other information regarding issuers who file electronically with the Commission. The address of that site is http://www.sec.gov. No separate financial statements of the Trust have been included herein. The Company does not consider that such financial statements would be material to holders of Preferred Securities because (i) all of the voting securities of the Trust will be owned by the Company, a reporting company under the Exchange Act; (ii) the Trust has no independent operations but exists solely for the sole purpose of issuing securities representing undivided beneficial interests in the assets of the Trust and investing the proceeds thereof in Subordinated Debentures issued by the Company, and (iii) the obligations of the Company described herein to provide certain indemnities in respect of and be responsible for certain costs, expenses, debts and liabilities of the Trust under the Indenture and pursuant to the Trust Agreement, the guarantee issued by Company with respect to the Preferred Securities, the Subordinated Debentures purchased by the Trust and the related Indenture, taken together, constitute, in the belief of the Company and the Trust, a full and unconditional guarantee of payments due on the Preferred Securities. See "Description of the Subordinated Debentures" and "Description of the Guarantee." 84 89 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FIRST BANKS AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report........................................................................ F-2 Consolidated Balance Sheets as of March 31, 1998 (unaudited) and December 31, 1997 and 1996......... F-3 Consolidated Statements of Operations for the three months ended March 31, 1998 and 1997 (unaudited) and for each of the years ended December 31, 1997, 1996 and 1995.................................. F-5 Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 1998 (unaudited) and for each of the years ended December 31, 1997, 1996 and 1995...................... F-6 Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1997 (unaudited) and for each of the years ended December 31, 1997, 1996 and 1995.................................. F-7 Notes to Consolidated Financial Statements.......................................................... F-8 FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report........................................................................ F-28 Consolidated Balance Sheets as of December 31, 1997 and 1996........................................ F-29 Consolidated Statements of Operations for each of the years ended December 31, 1997 and 1996........ F-31 Consolidated Statements of Changes in Stockholders' Equity for each of the years ended December 31, 1997 and 1996..................................................................................... F-32 Consolidated Statements of Cash Flows for each of the years ended December 31, 1997 and 1996........ F-33 Notes to Consolidated Financial Statements.......................................................... F-34 REDWOOD BANCORP AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report........................................................................ F-49 Consolidated Statements of Financial Condition as of March 31, 1998 (unaudited) and December 31, 1997 and 1996..................................................................................... F-50 Consolidated Statements of Operations for the three months ended March 31, 1998 and 1997 (unaudited) and for each of the years ended December 31, 1997 and 1996........................................ F-51 Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 1998 (unaudited) and for each of the years ended December 31, 1997 and 1996............................ F-52 Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1997 (unaudited) and for each of the years ended December 31, 1997 and 1996........................................ F-53 Notes to Consolidated Financial Statements.......................................................... F-54
F-1 90 FIRST BANKS AMERICA, INC. AND SUBSIDIARIES INDEPENDENT AUDITORS' REPORT KPMG PEAT MARWICK LLP LOGO The Board of Directors and Stockholders First Banks America, Inc.: We have audited the accompanying consolidated balance sheets of First Banks America, Inc. and subsidiaries (the Company) as of December 31, 1997, 1996 and 1995, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated financial statements give retroactive effect to the merger of First Commercial Bancorp, Inc. and subsidiary on February 2, 1998, which has been accounted for as a combination of entities under common control as described in the notes to the consolidated financial statements. Generally accepted accounting principles prescribe giving effect to a consummated business combination accounted for as a combination of entities under common control in financial statements that do not include the dates of consummation. These financial statements do not extend through the date of consummation; however, they will become the historical consolidated financial statements of First Banks America, Inc. and subsidiaries after financial statements covering the date of consummation of the business combination are issued. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Banks America, Inc. and subsidiaries as of December 31, 1997, 1996, and 1995, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles applicable after financial statements are issued for a period which includes the date of consummation of the business combination. /s/ KPMG PEAT MARWICK LLP June 5, 1998 F-2 91 FIRST BANKS AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, MARCH 31, ------------------ 1998 1997 1996 --------- ---- ---- (UNAUDITED) ASSETS Cash and cash equivalents: Cash and due from banks........................................... $ 32,651 32,257 21,753 Interest-bearing deposits with other financial institutions with maturities of three months or less.............................. 2,271 690 146 Federal funds sold................................................ 42,250 2,215 20,975 -------- ------- ------- Total cash and cash equivalents........................... 77,172 35,162 42,874 -------- ------- ------- Investment securities available for sale, at fair value............... 141,131 148,181 125,139 Loans: Commercial and financial.......................................... 113,312 109,763 80,781 Real estate construction and development.......................... 96,035 93,454 58,045 Real estate mortgage.............................................. 166,160 149,951 93,864 Consumer and installment.......................................... 71,017 75,023 105,340 Loans held for sale............................................... -- 5,708 -- -------- ------- ------- Total loans................................................... 446,524 433,899 338,030 Unearned discount................................................. (2,425) (2,444) (1,659) Allowance for possible loan losses................................ (12,063) (11,407) (10,744) -------- ------- ------- Net loans..................................................... 432,036 420,048 325,627 -------- ------- ------- Bank premises and equipment, net of accumulated depreciation.......... 11,382 10,697 8,263 Intangibles associated with the purchase of subsidiaries.............. 8,794 7,189 3,999 Accrued interest receivable........................................... 4,062 4,819 3,545 Foreclosed property, net.............................................. 725 601 977 Deferred tax assets................................................... 13,739 14,164 15,602 Other assets.......................................................... 3,368 2,803 3,061 -------- ------- ------- Total assets...................................................... $692,409 643,664 529,087 ======== ======= ======= The accompanying notes are an integral part of the consolidated financial statements. F-3 92 FIRST BANKS AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, (CONTINUED) (DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) DECEMBER 31, MARCH 31, ------------------ 1998 1997 1996 --------- ---- ---- (UNAUDITED) LIABILITIES Deposits: Demand: Non-interest-bearing.......................................... $101,270 97,393 80,187 Interest-bearing.............................................. 73,433 73,199 70,266 Savings........................................................... 158,625 147,623 96,565 Time deposits: Time deposits of $100 or more................................. 57,725 52,472 40,963 Other time deposits........................................... 209,504 185,840 167,961 -------- ------- ------- Total deposits............................................ 600,557 556,527 455,942 Short-term borrowings................................................. 3,453 3,687 2,797 Promissory note payable............................................... 13,450 14,900 14,000 Accrued interest payable.............................................. 4,803 4,185 2,002 Deferred tax liabilities.............................................. 1,049 1,092 968 Payable to former shareholders of Surety Bank......................... -- 3,829 -- Accrued expenses and other liabilities................................ 5,756 5,058 6,178 12% convertible debentures............................................ 6,500 6,500 6,500 Minority interest in subsidiary....................................... -- 2,795 2,505 -------- ------- ------- Total liabilities......................................... 635,568 598,573 490,892 -------- ------- ------- STOCKHOLDERS' EQUITY Common stock: Common stock, $0.15 par value; 6,666,666 shares authorized; 3,238,417 shares, 2,144,865 shares and 1,875,076 shares issued at March 31, 1998, December 31, 1997 and 1996, respectively..... 486 322 282 Class B common stock, $.15 par value; 4,000,000 shares authorized; 2,500,000 shares issued and outstanding......................... 375 375 375 Capital surplus....................................................... 60,173 47,329 42,862 Retained earnings (deficit), since elimination of accumulated deficit of $259,117 effective December 31, 1994............................. 2,183 1,083 (2,450) Common treasury stock, at cost; 496,056 shares, 386,458 shares and 280,430 shares at March 31, 1998, December 31, 1997 and 1996, respectively........................................................ (6,814) (4,350) (2,838) Accumulated other comprehensive income................................ 438 332 (36) -------- ------- ------- Total stockholders' equity................................ 56,841 45,091 38,195 -------- ------- ------- Total liabilities and stockholders' equity................ $692,409 643,664 529,087 ======== ======= ======= The accompanying notes are an integral part of the consolidated financial statements.
F-4 93 FIRST BANKS AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31, ----------------- ------------------------------ 1998 1997 1997 1996 1995 ---- ---- ---- ---- ---- (UNAUDITED) Interest income: Interest and fees on loans.............................. $10,568 7,453 33,393 25,137 20,087 Investment securities................................... 2,033 1,781 7,870 6,257 5,426 Federal funds sold and other............................ 395 377 1,254 1,988 1,043 ------- ----- ------ ------ ------ Total interest income............................... 12,996 9,611 42,517 33,382 26,556 ------- ----- ------ ------ ------ Interest expense: Deposits: Interest-bearing demand............................. 349 354 1,398 756 578 Savings............................................. 1,454 766 3,747 2,819 2,389 Time deposits of $100 or more....................... 775 529 2,144 2,008 1,610 Other time deposits................................. 2,784 2,314 9,427 8,353 6,258 Promissory note payable and other borrowings............ 537 545 2,439 1,597 2,299 ------- ----- ------ ------ ------ Total interest expense.............................. 5,899 4,508 19,155 15,533 13,134 ------- ----- ------ ------ ------ Net interest income................................. 7,097 5,103 23,362 17,849 13,422 Provision for possible loan losses.......................... 300 550 2,000 2,405 6,416 ------- ----- ------ ------ ------ Net interest income after provision for possible loan losses....................................... 6,797 4,553 21,362 15,444 7,006 ------- ----- ------ ------ ------ Noninterest income: Service charges on deposit accounts..................... 739 575 2,239 2,258 1,682 Loan sales and servicing income......................... -- -- 40 70 159 Other income............................................ 319 296 932 1,072 1,284 Gain (loss) on sales of securities, net................. 92 -- 76 185 (2,996) ------- ----- ------ ------ ------ Total noninterest income............................ 1,150 871 3,287 3,585 129 ------- ----- ------ ------ ------ Noninterest expense: Salaries and employee benefits.......................... 2,135 1,550 6,226 5,249 5,358 Occupancy, net of rental income......................... 491 571 2,166 1,832 1,615 Furniture and equipment................................. 347 267 1,149 1,003 895 Federal Deposit Insurance Corporation premiums.......... 43 38 119 497 493 Postage, printing and supplies.......................... 167 148 496 744 396 Legal, examination and professional fees................ 890 750 3,241 2,777 1,337 Data processing......................................... 475 327 1,084 735 755 Communications.......................................... 200 164 673 623 619 Losses and expenses on sale of foreclosed property, net of gains.............................................. 157 (9) (350) 1,148 643 Other................................................... 1,152 687 2,873 3,129 2,037 ------- ----- ------ ------ ------ Total noninterest expense........................... 6,057 4,493 17,677 17,737 14,148 ------- ----- ------ ------ ------ Income (loss) before provision for income tax expense (benefit) and minority interest in (income) loss of subsidiary....................... 1,890 931 6,972 1,292 (7,013) Provision for income tax expense (benefit).................. 790 361 3,145 470 (2,188) ------- ----- ------ ------ ------ Income (loss) before minority interest in (income) loss of subsidiary................................ 1,100 570 3,827 822 (4,825) Minority interest in (income) loss of subsidiary............ -- (86) (294) (131) 11 ------- ----- ------ ------ ------ Net income (loss)................................... $ 1,100 484 3,533 691 (4,814) ======= ===== ====== ====== ====== Earnings (loss) per common share: Basic................................................... $ 0.22 0.12 0.87 0.16 (1.19) Diluted................................................. 0.22 0.12 0.86 0.16 (1.19) ======= ===== ====== ====== ====== Weighted average common stock outstanding (in thousands).... 4,911 4,082 4,069 4,225 4,032 ======= ===== ====== ====== ====== The accompanying notes are an integral part of the consolidated financial statements.
F-5 94 FIRST BANKS AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) THREE YEARS ENDED DECEMBER 31, 1997 AND THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
ACCUM- ULATED OTHER TOTAL CLASS B COMPRE- RETAINED COMMON COMPRE- STOCK- COMMON COMMON CAPITAL HENSIVE EARNINGS TREASURY HENSIVE HOLDERS' STOCK STOCK SURPLUS INCOME (DEFICIT) STOCK INCOME EQUITY ------ ------- ------- ------- --------- -------- ------- -------- Consolidated balances, January 1, 1995........ $206 375 39,133 -- -- -- -- 39,714 Year ended December 31, 1995: Comprehensive income: Net loss.............................. -- -- -- (4,814) (4,814) -- -- (4,814) Other comprehensive income, net of tax-- Unrealized gains on securities, net of reclassification adjustment..... -- -- -- 81 -- -- 81 81 ------ Comprehensive income.................. (4,733) ====== Exercise of stock options................. 4 -- 111 -- -- -- 115 Issuance of common stock for acquisition of FCB.................................. 70 -- 6,600 -- -- -- 6,670 Compensation paid in stock................ -- -- 27 -- -- -- 27 Repurchases of common stock............... -- -- -- -- (828) -- (828) ---- --- ------ ------ ------ ---- ------ Consolidated balances, December 31, 1995...... 280 375 45,871 (4,814) (828) 81 40,965 Year ended December 31, 1996: Comprehensive income: Net income............................ -- -- -- 691 691 -- -- 691 Other comprehensive income, net of tax-- Unrealized losses on securities, net of reclassification adjustment.. -- -- -- (17) -- -- (17) (17) ------ Comprehensive income.................. 674 ====== Exercise of stock options................. 2 -- 36 -- -- -- 38 Compensation paid in stock................ -- -- 10 -- -- -- 10 Repurchase of outstanding warrants........ -- -- (1,281) -- -- -- (1,281) Repurchases of common stock............... -- -- -- -- (2,010) -- (2,010) Pre-merger transactions of FCB............ -- -- (1,774) 1,673 -- (100) (201) ---- --- ------ ------ ------ ---- ------ Consolidated balances, December 31, 1996...... 282 375 42,862 (2,450) (2,838) (36) 38,195 Year ended December 31, 1997: Comprehensive income: Net income............................ -- -- -- 3,533 3,533 -- -- 3,533 Other comprehensive income, net of tax-- Unrealized gains on securities, net of reclassification adjustments.... -- -- -- 368 -- -- 368 368 ------ Comprehensive income.................. 3,901 ====== Issuance of common stock for purchase accounting acquisition of Surety Bank... 40 -- 4,723 -- -- -- 4,763 Exercise of stock options................. -- -- 15 -- -- -- 15 Redemption of stock options............... -- -- (290) -- -- -- (290) Compensation paid in stock................ -- -- 13 -- -- -- 13 Repurchases of common stock............... -- -- -- -- (1,512) -- (1,512) Pre-merger transactions of FCB............ -- -- 6 -- -- -- 6 ---- --- ------ ------ ------ ---- ------ Consolidated balances, December 31, 1997...... 322 375 47,329 1,083 (4,350) 332 45,091 Quarter ended March 31, 1998 (unaudited): Comprehensive income: Net income............................ -- -- -- 1,100 1,100 -- -- 1,100 Other comprehensive income, net of tax-- Unrealized gains on securities, net of reclassification adjustment..... -- -- -- 106 -- -- 106 106 ------ Comprehensive income.................. 1,206 ====== Issuance of common stock for acquisition of minority interest of FCB............. 43 -- 2,965 -- -- -- 3,008 Conversion of note payable................ 121 -- 9,879 -- -- -- 10,000 Repurchases of common stock............... -- -- -- -- (2,464) -- (2,464) ---- --- ------ ------ ------ ---- ------ Consolidated balances, March 31, 1998......... $486 375 60,173 2,183 (6,814) 438 56,841 ==== === ====== ====== ====== ==== ====== - ---------- Components of other comprehensive income are shown net of tax. Disclosure of reclassification amount: DECEMBER 31, MARCH 31, -------------------------- 1998 1997 1996 1995 --------- ---- ---- ---- Unrealized gains (losses) arising during the period......... 198 444 168 (2,915) Less: reclassification adjustment for gains (losses) included in net income.................................... 92 76 185 (2,996) --- --- --- ------ Unrealized gains (losses) on securities..................... 106 368 (17) 81 === === === ====== The accompanying notes are an integral part of the consolidated financial statements.
F-6 95 FIRST BANKS AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS EXPRESSED IN THOUSANDS)
MARCH 31, YEARS ENDED DECEMBER 31, -------------- -------------------------- 1998 1997 1997 1996 1995 ---- ---- ---- ---- ---- (UNAUDITED) Cash flows from operating activities: Net income (loss)....................................... $ 1,100 484 3,533 691 (4,814) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, amortization and accretion, net....... 467 89 1,169 153 509 Provision for possible loan losses.................. 300 550 2,000 2,405 6,416 Provision (benefit) for income taxes................ 790 361 3,145 470 (2,188) Payments of income taxes............................ (196) -- (1,943) -- -- (Gain) loss on sales of securities, net............. (92) -- (76) (185) 2,996 Decrease (increase) in accrued interest receivable........................................ 967 197 (1,274) (852) 114 Interest accrued on liabilities..................... 5,899 4,508 19,155 15,533 13,134 Payments of interest on liabilities................. (5,345) (4,010) (16,972) (14,913) (12,862) Other operating activities, net..................... 550 (471) (29) 274 269 -------- ------- -------- -------- -------- Net cash provided by operating activities....... 4,440 1,708 8,708 3,576 3,574 -------- ------- -------- -------- -------- Cash flows from investing activities: Cash paid for acquired entities, net of cash and cash equivalents received.................................. 3,241 -- 3,072 10,715 51,423 Sales of investment securities.......................... -- -- 11,073 20,564 70,995 Maturities of investment securities..................... 32,850 41,365 91,362 248,107 55,351 Purchases of investment securities...................... (25,399) (56,208) (112,730) (256,304) (149,205) Net decrease (increase) in loans........................ 15,739 8,318 (44,872) (17,093) 15,899 Recoveries of loans previously charged-off.............. 530 560 2,288 2,439 820 Purchases of bank premises and equipment................ (807) (89) (822) (240) (725) Net decrease in lease financing......................... -- -- -- 991 -- Proceeds from sales of other real estate................ 230 59 1,500 2,805 2,394 Other investing activities.............................. (11) (22) (259) (23) (6,414) -------- ------- -------- -------- -------- Net cash provided by (used in) investing activities................................... 26,373 (6,017) (49,388) 11,961 40,538 -------- ------- -------- -------- -------- Cash flows from financing activities: Other (decreases) increases in deposits: Demand and savings deposits......................... (1,452) (4,382) 34,675 (20,290) (6,279) Time deposits....................................... 10,321 895 (1,540) (20,341) 6,727 Decrease in federal funds purchased and other short-term borrowings............................................ (3,524) -- -- (352) (5,257) Decrease in Federal Home Loan Bank advances............. (291) (271) (1,122) (3,957) (13,749) Increase (decrease) in securities sold under agreements to repurchase......................................... 57 4,791 1,836 (324) (18,722) Increase in promissory note payable..................... 8,550 -- 900 12,946 -- Repurchase of common stock for treasury and warrant..... (2,464) (331) (1,512) (3,290) (828) Repurchase of stock option.............................. -- -- (290) -- -- Proceeds from exercise of stock options................. -- 4 15 38 115 Proceeds from the issuance of convertible debentures.... -- -- -- -- 6,500 Pre-merger transactions of FCB.......................... -- -- 6 3,217 -- -------- ------- -------- -------- -------- Net cash provided by (used in) financing activities................................... 11,197 706 32,968 (32,353) (31,493) -------- ------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents.................................. 42,010 (3,603) (7,712) (16,816) 12,619 Cash and cash equivalents, beginning of year................ 35,162 42,874 42,874 59,690 47,071 -------- ------- -------- -------- -------- Cash and cash equivalents, end of year...................... $ 77,172 39,271 35,162 42,874 59,690 ======== ======= ======== ======== ======== Noncash investing and financing activities: Loans transferred to foreclosed real estate............. $ 245 309 585 1,385 1,274 Issuance of common stock in purchase accounting acquisition........................................... 3,008 -- 4,763 -- -- Conversion of promissory note payable to common stock... 10,000 -- -- -- -- Loans transferred from loans held for sale.............. -- -- -- -- 7,253 Pre-merger transaction of FCB--exchange of common stock for dividend payable.................................. -- -- -- 643 -- Receivable from sale of investment securities........... -- -- -- -- 4,915 ======== ======= ======== ======== ======== The accompanying notes are an integral part of the consolidated financial statements.
F-7 96 FIRST BANKS AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements of First Banks America, Inc. and subsidiaries (FBA or the Company), have been prepared in accordance with generally accepted accounting principles and conform to practices prevalent among financial institutions. The following is a summary of the more significant policies followed by FBA: BASIS OF PRESENTATION The consolidated financial statements of FBA have been prepared in accordance with generally accepted accounting principles and conform to predominant practices within the banking industry. Management of FBA has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare the consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Certain 1996 and 1995 amounts have been reclassified to conform with the 1997 presentation. The Board of Directors of FBA elected to implement an accounting adjustment referred to as a "quasi-reorganization," effective December 31, 1994. In accordance with accounting provisions applicable to a quasi-reorganization, the assets and liabilities of FBA were adjusted to fair value and the accumulated deficit was eliminated as of December 31, 1994. RESTATEMENT Effective February 2, 1998, FBA completed its acquisition of First Commercial Bancorp, Inc. (FCB) and FCB's wholly owned subsidiary, First Commercial Bank (First Commercial), in a transaction accounted for as a combination of entities under common control. First Banks, Inc., St. Louis, Missouri (First Banks), owned a majority interest in both FBA and FCB. The consolidated financial statements give retroactive effect to the transaction and, as a result, the consolidated balance sheets, statements of operations and statements of cash flows are presented as if the combining entities had been consolidated for all periods presented, which are subsequent to First Banks' acquisition of FCB on August 23, 1995. As required by generally accepted accounting principles, the restated consolidated financial statements become the historical consolidated financial statements upon issuance of the financial statements for the period that includes the date of the transaction. The consolidated statements of stockholders' equity reflect the accounts of FBA as if the common stock issued to First Banks in exchange for its majority interest in FCB had been outstanding for all periods subsequent to August 23, 1995. First Banks' ownership interest in FCB was approximately 96.1% from August 23, 1995 to May 1996 and 61.5% from June 1996 to February 2, 1998. The remaining interest in FCB acquired by FBA is reflected in the consolidated financial statements as minority interest for the period from August 23, 1995 to February 2, 1998. First Banks owned 71.8% of FBA as of March 31, 1998. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the parent company and its subsidiaries, all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated. FBA operates through three banking subsidiaries, BankTEXAS National Association, headquartered in Houston, Texas (BankTEXAS), First Bank of California, headquartered in Roseville, California (FB California) and First Commercial, headquartered in Sacramento, California, collectively referred to as the Subsidiary Banks. CASH AND CASH EQUIVALENTS Cash, due from banks, federal funds sold, and interest-bearing deposits with original maturities of three months or less are considered to be cash and cash equivalents for purposes of the consolidated statements of cash flows. F-8 97 FIRST BANKS AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Subsidiary Banks are required to maintain certain daily reserve balances in accordance with regulatory requirements. These reserve balances were $4.6 million and $3.5 million at December 31, 1997 and 1996, respectively. INVESTMENT SECURITIES The classification of investment securities as available for sale or held to maturity is determined at the date of purchase. FBA does not engage in the trading of investment securities. Investment securities classified as available for sale are those debt and equity securities for which FBA has no immediate plan to sell, but which may be sold in the future if circumstances warrant. Available-for-sale securities are stated at current fair value. Realized gains and losses are included in noninterest income upon commitment to sell, based on the amortized cost of the individual security sold. Unrealized gains and losses are recorded, net of related income tax effects, in a separate component of stockholders' equity. All previous fair value adjustments included in stockholders' equity are reversed upon sale. Investment securities designated as held to maturity are those debt securities which FBA has the positive intent and ability to hold until maturity. Held-to-maturity securities are stated at amortized cost, in which the amortization of premiums and accretion of discounts are recognized over the contractual maturities or estimated lives of the individual securities, adjusted for anticipated prepayments, using the level-yield method. At December 31, 1997 and 1996, all investment securities were classified as available for sale. LOANS Loans held for portfolio are carried at cost, adjusted for amortization of premiums and accretion of discounts using a method which approximates the level-yield method. Interest and fees on loans are recognized as income using the interest method. Loans held for portfolio are stated at cost as FBA has the ability and it is management's intention to hold them to maturity. The accrual of interest on loans is discontinued when it appears that interest or principal may not be paid in a timely manner in the normal course of business. Generally, payments received on nonaccrual and impaired loans are recorded as principal reductions. Interest income is recognized after all principal has been repaid or an improvement in the condition of the loan has occurred which would warrant resumption of interest accruals. A loan is considered impaired when it is probable a creditor will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan agreement. When measuring impairment, the expected future cash flows of an impaired loan are discounted at the loan's effective interest rate. Alternatively, impairment is measured by reference to an observable market price, if one exists, or the fair value of the collateral for a collateral-dependent loan. Regardless of the historical measurement method used, FBA measures impairment based on the fair value of the collateral when the creditor determines foreclosure is probable. Additionally, impairment of a restructured loan is measured by discounting the total expected future cash flows at the loan's effective rate of interest as stated in the original loan agreement. FBA continues to use its existing nonaccrual methods for recognizing interest income on impaired loans. LOANS HELD FOR SALE Mortgage loans held for sale are carried at the lower of cost or market value which is determined on an individual loan basis. Gains or losses on the sale of loans held for sale are determined on a specific identification method. ALLOWANCE FOR POSSIBLE LOAN LOSSES The allowance for possible loan losses is maintained at a level considered adequate to provide for potential losses. The provision for possible loan losses is based on a periodic analysis of the loans by management, considering, among other factors, current economic conditions, loan portfolio composition, past loan loss experience, independent F-9 98 FIRST BANKS AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) appraisals, loan collateral and payment experience. In addition to the allowance for estimated losses on impaired loans, an overall unallocated allowance is established to provide for unidentified credit losses which are inherent in the portfolio. As adjustments become necessary, they are reflected in the results of operations in the periods in which they become known. BANK PREMISES AND EQUIPMENT Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed primarily using the straight-line method over the estimated useful lives of the related assets. Amortization of leasehold improvements is calculated using the straight-line method over the shorter of the useful life of the improvement or term of the lease. Bank premises and improvements are depreciated over 15 to 29 years and equipment over two to ten years. INTANGIBLES ASSOCIATED WITH THE PURCHASE OF SUBSIDIARIES The excess of cost over net assets acquired of purchased subsidiaries is amortized using the straight-line method over the estimated periods to be benefitted, which has been estimated at 15 years. FORECLOSED PROPERTY Foreclosed property, consisting of real estate acquired through foreclosure or deed in lieu of foreclosure, is stated at the lower of fair value less applicable selling costs or cost at the time the property is acquired. The excess of cost over fair value of the property at the date of acquisition is charged to the allowance for possible loan losses. INCOME TAXES FBA and its eligible subsidiaries file a consolidated federal income tax return. Each subsidiary pays its allocation of federal income taxes to FBA, or receives payment from FBA to the extent that tax benefits are realized. Separate state franchise tax returns are filed in Texas and Delaware for the appropriate entities. FBA and its subsidiaries join in filing Illinois and California unitary income tax returns with First Banks, as First Banks' ownership is greater than 50%. FCB and First Commercial file separate federal income tax returns which are separate from that of FBA. FINANCIAL INSTRUMENTS A financial instrument is defined as cash, evidence of an ownership interest in an entity, or a contract that conveys or imposes on an entity the contractual right or obligation to either receive or deliver cash or another financial instrument. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK FBA uses financial instruments to reduce the interest rate risk arising from its financial assets and liabilities. These instruments involve, in varying degrees, elements of interest rate risk and credit risk in excess of the amount recognized in the consolidated balance sheets. "Interest rate risk" is defined as the possibility that interest rates may move unfavorably from the perspective of FBA. The risk that a counterparty to an agreement entered into by FBA may default is defined as "credit risk." These financial instruments include one interest rate cap agreement. FBA is party to commitments to extend credit and commercial and standby letters of credit in the normal course of business to meet the financing needs of its customers. These commitments involve, in varying degrees, elements of interest rate risk and credit risk in excess of the amount recognized in the consolidated balance sheets. F-10 99 FIRST BANKS AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INTEREST RATE FUTURES CONTRACTS Prior to 1996, interest rate futures contracts were utilized to manage the interest rate risk of the available-for-sale securities portfolio. Gains and losses on interest rate futures contracts, which qualified as hedges, were deferred. Amortization of the net deferred gains or losses was applied to the interest income of the available-for-sale securities portfolio using the straight-line method. The net deferred gains and losses were applied to the carrying value of the available-for-sale securities portfolio as part of the mark to market valuation. When the hedged assets were sold, the related gain or loss on the interest rate futures contract was immediately recognized in the consolidated statements of operations. INTEREST RATE CAP AGREEMENTS Interest rate cap agreements are accounted for on an accrual basis with the net interest differential being recognized as an adjustment to interest expense of the related liability. Premiums and fees paid upon the purchase of interest rate cap agreements are amortized to interest expense over the life of the agreements using the interest method. In the event of early termination of an interest rate cap agreement, the net proceeds received or paid are deferred and amortized over the shorter of the remaining contract life or the maturity of the related liability. If, however, the amount of the underlying hedged liability is repaid, then the gain or loss on the agreement is recognized immediately in the consolidated statements of operations. The unamortized premiums and fees paid are included in other assets in the accompanying consolidated balance sheets. EARNINGS (LOSS) PER COMMON SHARE FBA adopted the provisions of SFAS 128, Earnings Per Share (SFAS 128), on a retroactive basis effective December 31, 1997. Accordingly, earnings (loss) per common share (EPS) data has been restated to conform with the provisions of SFAS 128. SFAS 128 provides for the calculation of "Basic" and "Diluted" EPS. Basic EPS is computed by dividing the income (loss) available to common stockholders (the numerator) by the weighted average number of common shares outstanding (the denominator) during the year. The computation of diluted EPS is similar except the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential shares had been issued. In addition, in computing the dilutive effect of convertible securities, the numerator is adjusted to add back (a) any convertible preferred dividends and (b) the after-tax amount of interest recognized in the period associated with any convertible debt. The implementation of SFAS 128 did not have a material impact on the calculation of EPS. (2) ACQUISITIONS On November 1, 1996, FBA completed its acquisition of Sunrise Bancorp, a California corporation (Sunrise), and its wholly owned subsidiary, Sunrise Bank, in exchange for $17.5 million in cash. At the time of the transaction, Sunrise had $110.8 million in total assets, $45.5 million in cash and cash equivalents and investment securities, $61.1 million in total loans, net of unearned discount, and $91.1 million in total deposits. The acquisition was funded from available cash and borrowings of $14.0 million under a promissory note payable (Note Payable) with First Banks. First Banks owns a majority of the outstanding voting stock of FBA, representing 65.9% and 68.8% at December 31, 1997 and 1996, respectively. On December 1, 1997, FBA completed its acquisition of Surety Bank in exchange for 264,622 shares of FBA common stock and cash of $3.8 million. The cash portion of this transaction, which was paid to the former shareholders of Surety Bank in January 1998, was funded by an advance under the Note Payable. At the time of the transaction, Surety had $72.8 million in total assets, $14.9 million in cash and cash equivalents and investment securities, $54.4 million in total loans, net of unearned discount, and $67.5 million in total deposits. F-11 100 FIRST BANKS AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Sunrise was merged into a wholly owned subsidiary of FBA. Sunrise Bank and Surety Bank were merged into FB California, a newly-formed commercial bank charter of FBA. The acquisitions of Sunrise and Surety Bank were accounted for under the purchase method of accounting and, accordingly, the consolidated financial statements include the financial position and results of operations for the period subsequent to the acquisition dates, and the assets acquired and liabilities assumed were recorded at fair value at the acquisition date. The excess of the cost over the fair value of the net assets acquired was $3.2 million and $2.8 million for Sunrise and Surety Bank, respectively, and is being amortized over 15 years. On February 2, 1998, FBA and FCB were merged. Under the terms of the Agreement and Plan of Merger (Agreement), FCB was merged into FBA, and FCB's wholly owned subsidiary, First Commercial Bank, was merged into FB California, an indirect subsidiary bank of FBA. The FCB shareholders received .8888 shares of FBA common stock for each share of FCB common stock that they held. In total, FCB shareholders received approximately 751,728 shares of FBA common stock. The transaction also provided for First Banks to receive 804,000 shares of FBA common stock in exchange for $10.0 million of the Note Payable. In addition, FCB's convertible debentures of $6.5 million, which are owned by First Banks, were exchanged for convertible debentures of FBA. FCB had six banking offices located in Sacramento, Roseville (2), San Francisco, Concord and Campbell, California. At December 31, 1997, FCB had total assets of $191.6 million and net income of $764,000 for the year then ended. First Banks owned a majority interest in both FBA and FCB. Consistent with the accounting treatment for a combination of entities under common control, the merger was accounted for by FBA as follows: * First Banks' interest in FCB was accounted for by FBA at First Banks' historical cost. First Banks' historical cost basis in FCB was determined under the purchase method of accounting, effective upon First Banks' acquisition of First Commercial on August 23, 1995. Accordingly, the consolidated financial statements of First Banks include the financial position and results of operations for the periods subsequent to the acquisition date, and the assets acquired and liabilities assumed were recorded at fair value at the acquisition date. Effective with the merger, because the two entities were under the common control of First Banks, the consolidated financial statements of FBA were restated in 1998 to reflect First Banks' interest in the financial condition and results of operations of FCB for the periods subsequent to August 23, 1995. * The amount attributable to the interests of the minority shareholders in the fair value of the net assets of FCB was accounted for by FBA under the purchase method of accounting. Accordingly, such amount was reflected by FBA at fair value, as determined by the market value of FBA common stock exchanged for the minority interest pursuant to the Agreement. F-12 101 FIRST BANKS AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following information presents unaudited pro forma condensed results of operations of FBA, combined with the acquisition of Surety Bank, as if FBA had completed the transaction on January 1, 1996. In addition, the minority shareholders' interest in the net assets of FCB is presented as if FBA had acquired First Banks' interest on January 1, 1996:
DECEMBER 31, ----------------------- 1997 1996 ---- ---- (DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) Net interest income...................................... $26,589 20,442 Provision for possible loan losses....................... 2,255 2,730 Net income (loss)........................................ 3,662 57 ======= ====== Weighted average shares of common stock outstanding (in thousands)......................................... 5,427 4,913 ======= ====== Earnings (loss) per common share: Basic................................................ $ 0.67 0.01 Diluted.............................................. 0.67 0.01 ======= ======
The unaudited pro forma condensed results of operations reflect the application of the purchase method of accounting and certain other assumptions. Purchase accounting adjustments have been applied to investment securities, bank premises and equipment, deferred tax assets and liabilities and excess cost to reflect the assets acquired and liabilities assumed at fair value. The resulting premiums and discounts are amortized or accreted to income consistent with the accounting policies of FBA. The results of operations of Sunrise are not included in the pro forma combined condensed statements of operations for the year ended December 31, 1996 as the historical results of operations for the period are not representative of normal operating results subsequent to its acquisition by FBA. On February 2, 1998, FBA completed its acquisition of Pacific Bay Bank in exchange for cash of $4.2 million. This transaction was funded by an advance under the Note Payable. At the time of the transaction, Pacific Bay Bank had $38.3 million in total assets; $7.4 million in cash and cash equivalents; $29.7 million in total loans, net of unearned discount; and, $35.2 million in total deposits. F-13 102 FIRST BANKS AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) INVESTMENTS IN DEBT AND EQUITY SECURITIES The amortized cost, contractual maturity, unrealized gains and losses and fair value of investment securities available for sale at December 31, 1997 and 1996 were as follows:
MATURITY ------------------------------------ TOTAL GROSS AFTER AMOR- UNREALIZED WEIGHTED 1 YEAR 1-5 5-10 10 TIZED --------------- FAIR AVERAGE OR LESS YEARS YEARS YEARS COST GAINS LOSSES VALUE YIELD ------- ----- ----- ----- ----- ----- ------ ----- -------- (DOLLARS EXPRESSED IN THOUSANDS) December 31, 1997: Carrying value: U.S. Treasury.................... $21,061 56,249 -- -- 77,310 498 (1) 77,807 6.04% U.S. government agencies and corporations: Mortgage-backed.............. -- 14,059 47 6,755 20,861 38 (28) 20,871 6.03 Other........................ 8,488 34,974 -- -- 43,462 41 (38) 43,465 6.15 Federal Home Loan Bank and Federal Reserve Bank stock (no stated maturity)............... 6,038 -- -- -- 6,038 -- -- 6,038 5.87 ------- ------- ---- ----- ------- ------ ----- ------- ---- Total................... $35,587 105,282 47 6,755 147,671 577 (67) 148,181 6.07 ======= ======= ==== ===== ======= ====== ===== ======= ==== Market value: Debt securities.................. $29,575 105,728 47 6,793 Equity securities................ 6,038 -- -- -- ------- ------- ---- ----- Total................... $35,613 105,728 47 6,793 ======= ======= ==== ===== Weighted average yield............... 5.87% 6.06% 6.56% 7.23% ======= ======= ==== ===== December 31, 1996: Carrying value: U.S. Treasury.................... $35,051 14,119 -- -- 49,170 81 -- 4,9251 5.52% U.S. government agencies and corporations: Mortgage-backed.............. 470 24,373 -- 8,857 33,700 29 (153) 33,576 6.01 Other........................ 24,988 12,040 -- -- 37,028 14 (26) 37,016 5.41 Federal Home Loan Bank and Federal Reserve Bank stock (no stated maturity)............... 5,296 -- -- -- 5,296 -- -- 5,296 5.87 ------- ------- ---- ----- ------- ------ ----- ------- ---- Total................... $65,805 50,532 -- 8,857 125,194 124 (179) 125,139 5.63 ======= ======= ==== ===== ======= ====== ===== ======= ==== Market value: Debt securities.................. $60,528 50,455 -- 8,860 Equity securities................ 5,296 -- -- -- ------- ------- ---- ----- Total................... $65,824 50,455 -- 8,860 ======= ======= ==== ===== Weighted average yield............... 5.30% 5.80% --% 7.17% ======= ======= ==== =====
Proceeds from sales of securities were $11.1 million, $20.6 million and $71.0 million for the years ended December 31, 1997, 1996 and 1995, respectively. Gross gains of $76,000, $185,000 and $2.2 million were realized on those sales for the years ended December 31, 1997, 1996 and 1995, respectively. No losses were realized on those sales for the years ended December 31, 1997, 1996 and 1995. For 1995, the net gains on sales of securities were offset by the recognition of $5.1 million of hedging losses. The Subsidiary Banks maintain investments in the Federal Home Loan Bank (FHLB) and the Federal Reserve Bank (FRB). These investments are recorded at cost, which represents redemption value. The investment in FHLB stock is maintained at a minimum amount equal to the greater of 1% of the aggregate outstanding balance of loans secured by residential real estate, or 5% of advances from the FHLB. The investment in the FRB stock is maintained at a minimum of 6% of the Subsidiary Banks' capital stock and capital surplus. Investment securities with a carrying value of approximately $22.5 million and $12.1 million at December 31, 1997 and 1996, respectively, were pledged in connection with deposits of public and trust funds, securities sold under agreements to repurchase and for other purposes as required by law. F-14 103 FIRST BANKS AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (4) LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES Changes in the allowance for possible loan losses for the years ended December 31 were as follows:
1997 1996 1995 ---- ---- ---- (DOLLARS EXPRESSED IN THOUSANDS) Balance, January 1.......................... $10,744 10,616 2,756 Acquired allowance for possible loan losses.................................... 30 2,338 4,797 ------- ------ ------ 10,774 12,954 7,553 ------- ------ ------ Loans charged-off........................... (3,655) (7,054) (4,173) Recoveries of loans previously charged-off............................... 2,288 2,439 820 ------- ------ ------ Net loans charged-off........... (1,367) (4,615) (3,353) ------- ------ ------ Provision charged to operations............. 2,000 2,405 6,416 ------- ------ ------ Balance, December 31........................ $11,407 10,744 10,616 ======= ====== ======
At December 31, 1997 and 1996, FBA had $2.8 million and $3.0 million, respectively, of loans on nonaccrual status. Interest on nonaccrual loans which would have been recorded under the original terms of the loans was $385,000, $476,000 and $93,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Of these amounts, $297,000, $256,000 and $70,000 was actually recorded as interest income on such loans in 1997, 1996 and 1995, respectively. In conjunction with the restatement of the financial statements (see Note 1), the interest amounts for 1995 do not include FCB, as the information was not practicable to obtain due to the discontinuance of FCB's former data processing system. At December 31, 1997 and 1996, FBA had $3.3 million and $4.6 million of impaired loans, which is represented by loans on nonaccrual status and consumer installment loans 60 days or more past due. The impaired loans had no specific reserves at December 31, 1997 and 1996. The average recorded investment in impaired loans was $3.7 million and $5.1 million for the years ended December 31, 1997 and 1996, respectively. FBA's primary market areas are Houston, Dallas, Irving and McKinney, Texas and Sacramento, San Francisco, Roseville, Rancho Cordova, Concord, Campbell, Vallejo and Fairfield, California. At December 31, 1997, approximately 60.5% of the total loan portfolio and 61.4% of the commercial, financial and agricultural loan portfolio were to borrowers within these regions. In general, FBA is a secured lender. At December 31, 1997, approximately 96.6% of the loan portfolio was secured. Collateral is required in accordance with the normal credit evaluation process based upon the creditworthiness of the customer and the credit risk associated with the particular transaction. (5) BANK PREMISES AND EQUIPMENT Bank premises and equipment were comprised of the following at December 31:
1997 1996 ---- ---- (DOLLARS EXPRESSED IN THOUSANDS) Land..................................................... $ 4,114 3,314 Buildings and improvements............................... 5,684 3,929 Furniture, fixtures and equipment........................ 4,384 2,923 Construction in progress................................. 387 46 ------- ------ Total........................................ 14,569 10,212 Less accumulated depreciation............................ 3,872 1,949 ------- ------ Bank premises and equipment, net............. $10,697 8,263 ======= ======
F-15 104 FIRST BANKS AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Depreciation expense for the years ended December 31, 1997, 1996 and 1995 totaled $851,000, $858,000 and $1.2 million, respectively. FBA leases land, office properties and some items of equipment under operating leases. Certain of the leases contain renewal options and escalation clauses. Total rent expense was $1.0 million, $826,000 and $1.0 million for the years ended December 31, 1997, 1996 and 1995, respectively. Future minimum lease payments under noncancellable operating leases extend through 2019 as follows:
(DOLLARS EXPRESSED IN THOUSANDS) Year ending December 31: 1998............................................ $1,378 1999............................................ 859 2000............................................ 550 2001............................................ 389 2002............................................ 287 Thereafter...................................... 3,055 ------ Total minimum lease payments............ $6,518 ======
FBA leases a portion of its owned banking facilities to unrelated parties. Total rental income was $762,000, $428,000 and $322,000 for the years ended December 31, 1997, 1996 and 1995, respectively. (6) PROMISSORY NOTE PAYABLE FBA borrowed $14.9 million and $14.0 million at December 31, 1997 and 1996, respectively, from First Banks under a $20.0 million Note Payable. The borrowings under the Note Payable bear interest at an annual rate of one- quarter percent less than the "Prime Rate" as reported in the Wall Street Journal. The principal and accrued interest under the Note Payable are due and payable on October 31, 2001. The interest expense under the Note Payable was $1.18 million and $194,000 for the years ended December 31, 1997 and 1996, respectively. The accrued and unpaid interest under the Note Payable was $1.37 million and $194,000 at December 31, 1997 and 1996, respectively. There were no balances outstanding during 1995. (7) EARNINGS PER COMMON SHARE The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for the periods indicated:
INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- (DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) Year ended December 31, 1997: Basic EPS--income available to common stockholders...... $3,533 4,069 $0.87 Effect of dilutive securities--stock options............ -- 27 ------ ----- Diluted EPS--income available to common stockholders.... $3,533 4,096 $0.86 ====== ===== ===== Year ended December 31, 1996: Basic EPS--income available to common stockholders...... $ 691 4,225 $0.16 Effect of dilutive securities: Stock options....................................... -- 61 Warrants............................................ -- 91 ------ ----- Diluted EPS--income available to common stockholders.... $ 691 4,377 $0.16 ====== ===== =====
F-16 105 FIRST BANKS AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The 12% convertible debentures were anti-dilutive for the periods presented and therefore, have not been included in the EPS calculations. As a result of the net loss incurred in 1995, the effects of stock options and warrants were anti-dilutive for the year then ended. (8) INCOME TAXES Total income tax expense of $3.1 million, $470,000, and a tax benefit of $2.2 million for the years ended December 31, 1997, 1996 and 1995, respectively, were attributable to income from continuing operations. Income tax expense (benefit) for the years ended December 31 consists of:
1997 1996 1995 ---- ---- ---- (DOLLARS EXPRESSED IN THOUSANDS) Current income tax expense (benefit): Federal..................................... $ 947 (509) (105) State....................................... 383 2 -- ------ ---- ------ 1,330 (507) (105) ------ ---- ------ Deferred income tax expense (benefit): Federal...................................... 1,356 23 (2,083) State........................................ 55 588 -- ------ ---- ------ 1,411 611 (2,083) ------ ---- ------ Change in valuation allowance.................... 404 366 -- ------ ---- ------ Total................................ $3,145 470 (2,188) ====== ==== ======
The effective rates of federal income taxes for the years ended December 31 differ from statutory rates of taxation as follows:
1997 1996 1995 ------------------- ------------------- -------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------ ------- (DOLLARS EXPRESSED IN THOUSANDS) Income (loss) before provision for income tax expense (benefit).............................. $6,972 $1,292 $(7,013) ====== ====== ======= Tax expense (benefit) at federal income tax rate........................................... $2,440 35% 452 35.0% $(2,455) (35.0)% Effects of differences in tax reporting: Change in the deferred tax valuation allowance.................................. 404 5.8 366 28.3 -- -- Change in tax attributes available to be carried forward............................ -- -- (605) (46.8) -- -- State income taxes........................... 285 4.1 385 29.8 -- -- Other........................................ 16 0.2 (128) (9.9) 267 3.8 ------ ---- ------ ----- ------- ----- Income tax expense (benefit) at effective rate... $3,145 45.1% $ 470 36.4% $(2,188) (31.2)% ====== ==== ====== ===== ======= =====
F-17 106 FIRST BANKS AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
DECEMBER 31, ------------------------ 1997 1996 ---- ---- (DOLLARS EXPRESSED IN THOUSANDS) Deferred tax assets: Allowance for possible loan losses..................... $ 3,971 3,488 Foreclosed property.................................... 677 1,959 Alternative minimum tax credit......................... 736 727 Postretirement medical plan............................ 247 353 Quasi-reorganization adjustment of bank premises....... 1,377 1,427 Other.................................................. 1,104 1,321 Net operating loss carryforwards....................... 13,092 12,906 ------- ------ Gross deferred tax assets........................... 21,204 22,181 Valuation allowance..................................... (7,040) (6,579) ------- ------ Net deferred tax assets............................. 14,164 15,602 ------- ------ Deferred tax liabilities: FHLB stock dividends.................................... 409 230 Bank premises and equipment............................. 533 466 Other................................................... 150 272 ------- ------ Gross deferred tax liabilities...................... 1,092 968 ------- ------ Net deferred tax assets............................. $13,072 14,634 ======= ======
The realization of FBA's net deferred tax assets is based on the expectation of future taxable income and the utilization of tax planning strategies. Based on these factors, management believes it is more likely than not that FBA will realize the recognized net deferred tax asset of $13.1 million. The net change in the valuation allowance, related to deferred tax assets, was an increase of $461,000 for the year ended December 31, 1997. FCB files a separate tax return and based on the surrounding facts and circumstances, management believes the realization of the tax benefit related to these tax net operating losses is not likely to occur. Changes to the deferred tax asset valuation allowance for the years ended December 31 were as follows:
1997 1996 ---- ---- (DOLLARS EXPRESSED IN THOUSANDS) Balance, January 1...................................... $6,579 5,554 Current year deferred provision, change in deferred tax valuation allowance................................... 404 366 Purchase acquisitions................................... 57 659 ------ ----- Balance, December 31.................................... $7,040 6,579 ====== =====
The valuation allowance for deferred tax assets at December 31, 1997 and 1996 includes $747,000 which, if recognized, will be credited to intangibles associated with the purchase of subsidiaries. The valuation allowance for deferred tax assets at December 31, 1997 and 1996 includes $5.9 million, respectively, which, if recognized, will be credited to capital surplus under the terms of the quasi-reorganizations implemented for FBA and FCB as of December 31, 1994 and 1996, respectively. F-18 107 FIRST BANKS AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At December 31, 1997, FBA has separate limitation year (SRLY) net operating loss carryforwards (NOLs) of $22.5 million and alternative minimum tax credits of $288,000. Their utilization is subject to annual limitations. Additionally, FBA has non-SRLY NOLs of $11.8 million. The NOLs for FBA at December 31, 1997 expire as follows:
(DOLLARS EXPRESSED IN THOUSANDS) Year ending December 31: 1998.......................................... $ 4,140 1999.......................................... 2,641 2000.......................................... 103 2001 through 2010............................. 27,417 ------- Total..................................... $34,301 =======
With the completion of the acquisition of FCB, the NOL carryforwards generated prior to the transaction were subject to an annual limitation in subsequent tax years. The following schedule reflects the NOL carryforwards that will be available to offset future taxable income of FCB and do not affect the taxable income of FBA. At December 31, 1997, for federal income tax purposes, FCB had NOL carryforwards of approximately $2.9 million. The NOL carryforwards at December 31, 1997 expire as follows:
(DOLLARS EXPRESSED IN THOUSANDS) Year ending December 31: 2008.......................................... $ 394 2009.......................................... 747 2011.......................................... 660 2017.......................................... 1,064 ------ Total..................................... $2,865 ======
(9) 12% CONVERTIBLE DEBENTURES In 1995, FCB issued to First Banks two 5-year, 12% convertible debentures in exchange for $6.5 million. The principal and any accrued but unpaid interest thereon is convertible at any time prior to maturity, at the option of First Banks, into FBA common stock at $14.06 per share. At maturity, any unpaid principal and accrued interest will be converted into FBA common stock at $14.06 per share. The initial debenture of $1.5 million was issued on October 31, 1995 and matures on October 31, 2000. The second debenture was issued on December 28, 1995 and matures on December 28, 2000. Cash may be paid with respect to either the principal or interest on the debentures only when, in the sole and absolute discretion of the Board of Directors of FBA, it is determined that FBA has sufficient funds to make such payment in accordance with all applicable regulatory requirements. Accrued and unpaid interest on the debentures was $1.6 million and $831,000 at December 31, 1997 and 1996, respectively. At December 31, 1997, the principal and accrued but unpaid interest on the debentures could have been converted into an aggregate of 577,632 shares of FBA common stock. (10) EMPLOYEE BENEFIT PLANS 401(K) PLAN FBA has a savings and incentive plan covering substantially all employees. Under the plan, employer matching contributions are determined annually by FBA's Board of Directors. Employee contributions are limited to 15% of an employee's compensation not to exceed $9,500 for 1997. Total employer contributions under the plan were F-19 108 FIRST BANKS AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) $63,000, $40,000 and $41,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The plan assets are held and managed under a trust agreement with the trust department of an affiliated bank. PENSION PLAN FBA has a noncontributory defined benefit pension plan covering substantially all officers and employees. The accumulation of benefits under the plan were discontinued during 1994. During 1997, 1996 and 1995, no contributions were made to the pension plan and FBA did not incur any expenditures associated with the pension plan. FBA is in the process of terminating this plan and does not expect to incur a significant gain or loss. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Prior to August 31, 1994, FBA made certain health care and life insurance benefits available for substantially all of its retired employees, a portion of the cost of which was paid by FBA. The estimated cost of such postretirement benefits was accrued as an expense during the period of an employee's active service to FBA. During 1994, FBA reevaluated the cost of this plan and changed it to provide contributions for coverage only to those individuals receiving benefits on August 31, 1994. In conjunction with the plan restructuring, FBA fully recognized the estimated cost of the future benefits payable under the plan. Employees retiring after that date are allowed to purchase coverage, but must pay the entire cost associated with such coverage. (11) DIRECTORS' STOCK BONUS PLAN The 1993 Directors' Stock Bonus Plan provides for annual grants of FBA common stock to the nonemployee directors of FBA. Directors' compensation of $13,000, $10,000 and $27,000 was recorded relating to this plan for the years ended December 31, 1997, 1996 and 1995, respectively. These amounts represented the market values of the 1,000 shares granted for the years ended December 31, 1997, 1996 and 1995, respectively. The plan is self-operative, and the timing, amounts, recipients and terms of individual grants are determined automatically. On July 1 of each year, each nonemployee director automatically receives a grant of 500 shares of common stock. The maximum number of plan shares that may be issued shall not exceed 16,667 shares and 9,667 shares remain to be issued at December 31, 1997. The plan will expire on July 1, 2001. (12) COMMITMENTS AND CONTINGENCIES FBA is a party to commitments to extend credit and commercial and standby letters of credit in the normal course of business to meet the financing needs of its customers. These instruments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The interest rate risk associated with these credit commitments relates primarily to the commitments to originate fixed-rate loans. The credit risk amounts are equal to the contractual amounts, assuming the amounts are fully advanced and the collateral or other security is of no value. FBA uses the same credit policies in granting commitments and conditional obligations as it does for on-balance-sheet items. Commitments to extend credit at December 31 are as follows:
1997 1996 ---- ---- (DOLLARS EXPRESSED IN THOUSANDS) Credit card commitments.............. $ 1,978 3,140 Other loan commitments............... 237,973 134,879 Standby letters of credit............ 2,173 226 ======== =======
Credit card and other loan commitments are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being F-20 109 FIRST BANKS AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant, equipment, income-producing commercial properties and single family residential properties. Collateral is generally required except for consumer credit card commitments. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The letters of credit are primarily issued to support private borrowing arrangements and commercial transactions. Most letters of credit extend for less than one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Upon issuance of the commitments, FBA holds marketable securities, certificates of deposit, inventory or other assets as collateral supporting those commitments for which collateral is deemed necessary. (13) STOCKHOLDERS' EQUITY STOCK OPTIONS On April 19, 1990, the Board of Directors of FBA adopted the 1990 Stock Option Plan (1990 Plan). The 1990 Plan currently provides that no more than 200,000 shares of common stock will be available for stock options. One-fourth of each stock option becomes exercisable at the date of the grant and at each anniversary date of the grant. The options expire ten years from the date of the grant. There were no options granted under this plan during the three years ended December 31, 1997. At December 31, 1997, there were 36,833 shares available for future stock options and 13,334 shares of common stock reserved for the exercise of outstanding options. Transactions relating to the 1990 Plan for the years ended December 31 are as follows:
1997 1996 1995 -------------------- -------------------- -------------------- AVERAGE AVERAGE AVERAGE OPTION OPTION OPTION AMOUNT PRICE AMOUNT PRICE AMOUNT PRICE ------ ------- ------ ------- ------ ------- Outstanding options, January 1................ 57,500 $3.75 67,500 $3.75 98,133 $3.75 Options exercised and redeemed................ (44,166) 3.75 (10,000) 3.75 (30,633) 3.75 ------- ------- ------- Outstanding options, December 31.............. 13,334 3.75 57,500 3.75 67,500 3.75 ======= ===== ======= ===== ======= ===== Options exercisable, December 31.............. 13,334 57,500 67,500 ======= ======= =======
WARRANTS In connection with a previous restructuring of FBA, a warrant to purchase common stock was granted to the Federal Deposit Insurance Corporation (FDIC). On October 1, 1996, FBA purchased the outstanding warrant to acquire 131,336 shares of FBA common stock at $0.75 per share from the FDIC for an aggregate amount of $1.28 million. The purchase of the warrant was applied as a reduction of capital surplus. DISTRIBUTION OF EARNINGS OF THE SUBSIDIARY BANKS The Subsidiary Banks are restricted by various state and federal regulations as to the amount of dividends which are available for payment of dividends to FBA. Under the most restrictive of these requirements, the future payment of dividends from the Subsidiary Banks is limited to approximately $2.6 million at December 31, 1997, unless prior permission of the regulatory authorities is obtained. F-21 110 FIRST BANKS AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (14) TRANSACTIONS WITH RELATED PARTIES FBA purchases certain services and supplies from or through First Banks. FBA's financial position and operating results could significantly differ from those that would be obtained if FBA's relationship with First Banks did not exist. First Banks provides management services to FBA and its Subsidiary Banks. Management services are provided under a management fee agreement whereby FBA compensates First Banks on an hourly basis for its use of personnel for various functions including internal audit, loan review, income tax preparation and assistance, accounting, asset/liability and investment services, loan servicing and other management and administrative services. Fees paid under this agreement were $1.4 million, $1.3 million and $521,000 for the years ended December 31, 1997, 1996 and 1995 respectively. The fees paid for management services are at least as favorable as could have been obtained from an unaffiliated third party. Because of the affiliation with First Banks and the geographic proximity of certain of their offices, FBA shares the cost of certain personnel and services used by FBA and First Banks. This includes the salaries and benefits of certain loan and administrative personnel. The allocation of the shared costs are charged and/or credited under the terms of cost sharing agreements entered into during 1996. Because this involves distributing essentially fixed costs over a larger asset base, it allows each bank to receive the benefit of personnel and services at a reduced cost. Fees paid under these agreements were $709,000 and $412,000 for the years ended December 31, 1997 and 1996, respectively. Effective April 1, 1997, First Services L.P., a limited partnership indirectly owned by First Banks' Chairman and his children through its general partners and limited partners, began providing data processing and various related services to FBA under the terms of data processing agreements. Previously, these services were provided by a subsidiary of First Banks. Fees paid under these agreements were $1.0 million, $692,000 and $374,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The fees paid for data processing services are at least as favorable as could have been obtained from an unaffiliated third party. FBA's Subsidiary Banks had $66.9 million and $39.3 million in whole loans and loan participations outstanding at December 31, 1997 and 1996, respectively, that were purchased from banks affiliated with First Banks. In addition, FBA's Subsidiary Banks had sold $54.7 million and $28.7 million in whole loans and loan participations to affiliates of First Banks at December 31, 1997 and 1996, respectively. These loans and loan participations were acquired and sold at interest rates and terms prevailing at the dates of their purchase or sale and under standards and policies followed by FBA's Subsidiary Banks. FBA has borrowed $14.9 million and $14.0 million at December 31, 1997 and 1996, respectively, from First Banks under a $20 million Note Payable, dated November 4, 1997. This Note Payable replaces a $15 million note payable under similar terms to First Banks. The borrowings under the Note Payable bear interest at an annual rate of one-quarter percent less than the "Prime Rate" as reported in the Wall Street Journal. The interest expense was $1.18 million and $194,000 for the years ended December 31, 1997 and 1996, respectively. The principal and accrued interest under the Note Payable are due and payable on October 31, 2001. The accrued and unpaid interest under the Note Payable was $1.37 million and $194,000 at December 31, 1997 and 1996, respectively. First Banks purchased convertible debentures of FCB of $1.5 million and $5.0 million on October 31, 1995 and December 28, 1995, respectively, as more fully discussed in Note 9. The related interest expense for these debentures was $791,000, $793,000 and $38,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Outside of normal customer relationships, no directors, executive officers or stockholders holding over 5% of FBA's voting stock, and no corporations or firms with which such persons or entities are associated, currently maintain or have maintained, any significant business or personal relationships with FBA or its subsidiaries, other than that which arises by virtue of such position or ownership interest in FBA, except as described above. F-22 111 FIRST BANKS AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (15) INTEREST RATE RISK MANAGEMENT AND DERIVATIVE FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK Derivative financial instruments held by FBA at December 31, 1997 and 1996 consist of an interest rate cap agreement with a notional amount of $10.0 million and credit exposure of $222,000 and $335,000, respectively. FBA's interest rate cap agreement limits the interest expense associated with certain of its interest-bearing liabilities. In exchange for an initial fee, the interest rate cap agreement entitles FBA to receive interest payments when a specified index rate exceeds a predetermined rate. The agreement outstanding at December 31, 1997 and 1996 effectively limits the interest rate to 5.0% on $10 million of interest-bearing liabilities from October 15, 1997 to May 15, 2000. At December 31, 1997 and 1996, the unamortized costs were $242,000 and $353,000, respectively, and were included in other assets. The amount receivable under the agreement was $8,000 at December 31, 1997. There were no amounts receivable under the agreement at December 31, 1996. Previously, FBA sold interest rate futures contracts and purchased options on interest rate futures contracts to hedge the interest rate risk of its available-for-sale securities portfolio. There were no outstanding positions of interest rate futures for the years ended December 31, 1997 and 1996. For the year ended December 31, 1995, FBA incurred a net loss on interest rate futures contracts of $5.95 million, of which $806,000 was amortized to income as a yield adjustment to the investment security portfolio and $5.14 million was included in the cost basis in determining the gain or loss upon the sale of the securities. There were no gains or losses from interest rate futures contracts for the years ended December 31, 1997 and 1996. (16) FAIR VALUE OF FINANCIAL INSTRUMENTS Fair values of financial instruments are management's estimate of the values at which the instruments could be exchanged in a transaction between willing parties. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including deferred tax assets and bank premises and equipment. Further, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in any of the estimates. F-23 112 FIRST BANKS AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The estimated fair value of FBA's financial instruments at December 31 were as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996 ------------------------- ------------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- ---------- -------- ---------- (DOLLARS EXPRESSED IN THOUSANDS) Assets: Cash and cash equivalents.......................... $ 35,162 35,162 42,874 42,874 Investment securities.............................. 148,181 148,181 125,139 125,139 Net loans.......................................... 420,048 421,874 325,627 328,166 Accrued interest receivable........................ 4,819 4,819 3,545 3,545 Liabilities: Demand and savings deposits........................ $318,215 318,215 247,018 247,018 Time deposits...................................... 238,312 239,344 208,924 209,291 Accrued interest payable........................... 4,185 4,185 2,002 2,002 12% convertible debentures......................... 6,500 6,500 6,500 6,500 Borrowings......................................... 18,587 18,587 16,797 16,797 Off-balance-sheet: Interest rate cap agreement........................ $ 242 222 353 335 Unfunded loan commitments.......................... -- -- -- --
The following methods and assumptions were used in estimating the fair value of financial instruments: FINANCIAL ASSETS: Cash and cash equivalents and accrued interest receivable: The carrying values reported in the consolidated balance sheets approximate fair value. Investment securities: Fair value for securities available for sale were the amounts reported in the consolidated balance sheets. If quoted market prices were not available, fair values were based upon quoted market prices of comparable instruments. Net loans: The fair value for most loans was estimated utilizing discounted cash flow calculations that applied interest rates currently being offered for similar loans to borrowers with similar risk profiles. The carrying values for loans are net of the allowance for possible loan losses and unearned discount. FINANCIAL LIABILITIES: Deposits: The fair value disclosed for deposits generally payable on demand (i.e., non-interest-bearing and interest-bearing demand, savings and money market accounts) were considered equal to their respective carrying amounts as reported in the consolidated balance sheets. The fair value disclosed for demand deposits does not include the benefit that results from the low-cost funding provided by deposit liabilities compared to the cost of borrowing funds in the market. The fair value for certificates of deposit was estimated utilizing a discounted cash flow calculation that applied interest rates currently being offered on similar certificates to a schedule of aggregated monthly maturities of time deposits. Borrowings, 12% convertible debentures and accrued interest payable: The carrying values reported in the consolidated balance sheets approximate fair value. F-24 113 FIRST BANKS AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) OFF-BALANCE-SHEET: Interest rate cap agreement: The fair value of the interest rate cap agreement is estimated by comparison to market rates quoted on new agreements with similar creditworthiness. Unfunded loan commitments: The majority of the commitments to extend credit and commercial and standby letters of credit contain variable interest rates and credit deterioration clauses and, therefore, the carrying value of these credit commitments approximates fair value. (17) REGULATORY CAPITAL The Subsidiary Banks are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Subsidiary Banks' financial statements. Under capital adequacy guidelines and the regulatory framework for Prompt Corrective Action, the Subsidiary Banks must meet specific capital guidelines that involve quantitative measures of the Subsidiary Banks' assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Subsidiary Banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Subsidiary Banks to maintain certain minimum capital ratios. The Subsidiary Banks are required to maintain a minimum risk-based capital to risk-weighted assets ratio of 8.0%, with at least 4.0% being "Tier 1" capital (as defined in the regulations). In addition, a minimum leverage ratio (Tier 1 capital to average assets) of 3.0% plus an additional cushion of 100 to 200 basis points is expected. In order to be considered well capitalized under Prompt Corrective Action provisions, a bank is required to maintain a risk weighted asset ratio of at least 10%, a Tier 1 to risk weighted assets ratio of at least 6%, and a leverage ratio of at least 5%. As of December 31, 1996, the date of the most recent notification from FBA's primary regulator, each of the Subsidiary Banks were categorized as well capitalized under the regulatory framework for Prompt Corrective Action. Management believes, as of December 31, 1997, each of the Subsidiary Banks was well capitalized as defined by the FDIC Improvement Act. At December 31, 1997 and 1996, FBA's and the Subsidiary Banks' capital ratios were as follows:
RISK-BASED CAPITAL RATIOS -------------------------------------- TOTAL TIER 1 LEVERAGE RATIO --------------- --------------- --------------- 1997 1996 1997 1996 1997 1996 ---- ---- ---- ---- ---- ---- FBA................................................ 6.88% 6.62% 5.62% 5.35% 4.96% 4.46% BankTEXAS.......................................... 12.26 10.29 11.00 9.04 8.90 7.53 FB California...................................... 13.03 -- 11.77 -- 13.80 -- Sunrise Bank................................... -- 17.67 -- 16.39 -- 10.88 First Commercial............................... 11.25 12.18 9.98 10.89 7.96 8.21 - -------- Sunrise Bank was merged into FB California on December 1, 1997. First Commercial was merged into FB California on February 2, 1998.
(18) CONTINGENT LIABILITIES In the ordinary course of business, there are various legal proceedings pending against FBA and/or the Subsidiary Banks. Management, in consultation with legal counsel, is of the opinion the ultimate resolution of these proceedings will have no material effect on the financial condition or results of operations of FBA or the Subsidiary Banks. F-25 114 FIRST BANKS AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (19) PARENT COMPANY ONLY FINANCIAL INFORMATION CONDENSED BALANCE SHEETS
DECEMBER 31, ----------------------- 1997 1996 ---- ---- (DOLLARS EXPRESSED IN THOUSANDS) Assets: Cash.................................................... $ 1,075 802 Investment in subsidiaries.............................. 68,095 55,469 Deferred tax assets..................................... 3,532 3,297 Other assets............................................ 659 667 ------- ------ Total assets........................................ $73,361 60,235 ======= ====== Liabilities and stockholders' equity: Dividends payable....................................... $ -- 251 Promissory note payable................................. 14,900 14,000 12% convertible debentures.............................. 6,500 6,500 Accrued and other liabilities........................... 6,870 1,289 ------- ------ Total liabilities................................... 28,270 22,040 Stockholders' equity........................................ 45,091 38,195 ------- ------ Total liabilities and stockholders' equity.............. $73,361 60,235 ======= ====== CONDENSED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 ---- ---- ---- (DOLLARS EXPRESSED IN THOUSANDS) Income: Dividends from subsidiaries............................. $ 1,625 -- -- Other................................................... 31 219 315 ------- ------ ------ Total income........................................ 1,656 219 315 ------- ------ ------ Expense: Interest................................................ 2,064 1,138 140 Other................................................... 686 505 32 ------- ------ ------ Total expense....................................... 2,750 1,643 172 ------- ------ ------ (Loss) income before income tax (benefit) expense... (1,094) (1,424) 143 Income tax (benefit) expense............................ (686) (492) 68 ------- ------ ------ (Loss) income before equity in undistributed income (loss) of subsidiaries............................ (408) (932) 75 Equity in undistributed income (loss) of subsidiaries... 3,941 1,623 (4,889) ------- ------ ------ Net income (loss)................................... $ 3,533 691 (4,814) ======= ====== ======
F-26 115 FIRST BANKS AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 ---- ---- ---- (DOLLARS EXPRESSED IN THOUSANDS) Operating activities: Net income (loss)....................................... $ 3,533 691 (4,814) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Credit for deferred income taxes.................... 688 126 -- Equity in undistributed (income) loss of subsidiaries...................................... (3,941) (1,623) 4,889 Dividends from subsidiaries......................... 1,625 -- -- Other, net.......................................... (1,028) (2,134) (552) ------- ------- ------- Net cash provided by (used in) operating activities.................................... 877 (2,940) (477) ------- ------- ------- Investing activities: Cash received from acquired entities.................... -- -- 200 Purchase of investment securities....................... -- (12,618) (21,191) Proceeds from maturity of investment securities......... -- 7,152 8,345 Proceeds from sales of investment securities............ -- 4,496 25,752 Capital contributions to subsidiaries................... -- (17,052) (3,750) Pre-merger transactions of FCB.......................... -- (1,938) -- ------- ------- ------- Net cash provided by (used in) investing activities.................................... -- (19,960) 9,356 ------- ------- ------- Financing activities: Increase in promissory note payable..................... 900 14,000 -- Exercise of stock options............................... 15 38 115 Repurchase of common stock for treasury................. (1,512) (2,010) (828) Pre-merger transactions of FCB.......................... (7) 2,933 -- ------- ------- ------- Net cash provided by (used in) financing activities.................................... (604) 14,961 (713) ------- ------- ------- Net increase (decrease) in cash and cash equivalents................................... 273 (7,939) 8,166 Cash and cash equivalents at beginning of year.............. 802 8,741 575 ------- ------- ------- Cash and cash equivalents at end of year.................... $ 1,075 802 8,741 ======= ======= ======= Noncash investing and financing activities: Issuance of common stock in purchase accounting acquisition........................................... $ 4,763 -- -- Cash paid for interest.................................. -- 475 110 Pre-merger transaction of FCB--exchange of common stock for dividend payable.................................. -- 643 -- ======= ======= =======
(20) SUBSEQUENT EVENTS As described in Note 2 to the consolidated financial statements, FBA completed the acquisitions of FCB and Pacific Bay Bank on February 2, 1998 in exchange for 751,728 shares of FBA common stock and cash of $4.2 million, respectively. The total assets of FCB and Pacific Bay Bank were $192.5 million and $38.3 million, respectively, at the date of the transactions. The accounting treatment for the acquisition of FCB is summarized in Note 2 to the consolidated financial statements. The acquisition of Pacific Bay Bank was accounted for under the purchase method of accounting and was funded through an advance under the Note Payable. The excess of the cost over the fair value of the net assets acquired was $1.63 million and $1.52 million for FCB and Pacific Bay Bank, respectively, and is being amortized over 15 years. F-27 116 FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY INDEPENDENT AUDITORS' REPORT KPMG PEAT MARWICK LLP LOGO The Board of Directors and Stockholders First Commercial Bancorp, Inc.: We have audited the accompanying consolidated balance sheets of First Commercial Bancorp, Inc. and subsidiary (the Company) as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Commercial Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP May 22, 1998 F-28 117 FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, ------------------ 1997 1996 ---- ---- ASSETS Cash and cash equivalents: Cash and due from banks................................. $ 8,720 9,410 Federal funds sold...................................... -- 11,500 -------- ------- Total cash and cash equivalents..................... 8,720 20,910 -------- ------- Investment securities available for sale, at fair value..... 64,390 38,229 Loans: Commercial and financial................................ 40,672 32,756 Real estate construction and development................ 26,853 13,807 Real estate mortgage.................................... 46,233 39,103 Consumer and installment................................ 5,100 9,244 -------- ------- Total loans......................................... 118,858 94,910 Unearned discount....................................... (840) (413) Allowance for possible loan losses...................... (4,692) (4,597) -------- ------- Net loans........................................... 113,326 89,900 -------- ------- Bank premises and equipment, net of accumulated depreciation.............................................. 2,018 1,894 Accrued interest receivable................................. 1,856 1,197 Other real estate........................................... 220 192 Other assets................................................ 1,113 711 -------- ------- Total assets........................................ $191,643 153,033 ======== ======= The accompanying notes are an integral part of the consolidated financial statements. F-29 118 FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (CONTINUED) (DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) DECEMBER 31, ------------------ 1997 1996 ---- ---- LIABILITIES Deposits: Demand: Non-interest-bearing................................ $ 30,997 24,026 Interest-bearing.................................... 16,188 16,956 Savings................................................. 56,850 30,042 Time deposits: Time deposits of $100 or more....................... 14,095 9,284 Other time deposits................................. 54,455 55,828 -------- ------- Total deposits.................................. 172,585 136,136 Short-term borrowings....................................... 880 705 Accrued interest payable.................................... 1,939 1,098 Accrued expenses and other liabilities...................... 2,082 2,264 Notes payable............................................... 400 -- 12% convertible debentures.................................. 6,500 6,500 -------- ------- Total liabilities............................... 184,386 146,703 -------- ------- STOCKHOLDERS' EQUITY Preferred stock, $.01 par value, 5,000,000 shares authorized; no shares issued and outstanding.............. -- -- Common stock, $1.25 par value, 10,000,000 shares authorized; 845,779 and 846,127 shares issued and outstanding at December 31, 1997 and 1996, respectively.................. 1,058 1,058 Capital surplus............................................. 5,265 5,272 Retained earnings since elimination of accumulated deficit of $30,881, effective December 31, 1996................... 764 -- Net fair value adjustment for securities available for sale...................................................... 170 -- -------- ------- Total stockholders' equity...................... 7,257 6,330 -------- ------- Total liabilities and stockholders' equity...... $191,643 153,033 ======== ======= The accompanying notes are an integral part of the consolidated financial statements.
F-30 119 FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, ------------------ 1997 1996 ---- ---- Interest income: Interest and fees on loans.............................. $ 10,234 8,643 Investment securities................................... 2,797 2,738 Federal funds sold and other............................ 603 555 -------- ------- Total interest income............................... 13,634 11,936 -------- ------- Interest expense: Deposits: Interest-bearing demand............................. 224 269 Savings............................................. 1,397 965 Time deposits of $100 or more....................... 513 599 Other time deposits................................. 3,268 2,802 Other borrowings........................................ 919 905 -------- ------- Total interest expense.............................. 6,321 5,540 -------- ------- Net interest income................................. 7,313 6,396 Provision for possible loan losses.......................... -- 1,155 -------- ------- Net interest income after provision for possible loan losses....................................... 7,313 5,241 -------- ------- Noninterest income: Service charges on deposit accounts and customer service fees.................................................. 607 751 Other income............................................ 116 986 -------- ------- Total noninterest income............................ 723 1,737 -------- ------- Noninterest expense: Salaries and employee benefits.......................... 2,007 2,177 Occupancy, net of rental income......................... 726 881 Furniture and equipment................................. 344 390 Federal Deposit Insurance Corporation premiums.......... 17 337 Postage, printing and supplies.......................... 150 477 Legal, examination and professional fees................ 1,236 1,501 Data processing......................................... 369 401 Communications.......................................... 152 202 (Gain) loss on sale of other real estate, net of expenses.............................................. (47) 1,002 Other................................................... 931 712 -------- ------- Total noninterest expense........................... 5,885 8,080 -------- ------- Income (loss) before provision (benefit) for income taxes.............................................. 2,151 (1,102) Provision (benefit) for income taxes........................ 1,387 (532) -------- ------- Net income (loss) available to common stockholders....................................... $ 764 (570) ======== ======= Net earnings (loss) per common share: Basic................................................... $ 0.90 (0.77) Diluted................................................. 0.90 (0.77) ======== ======= Weighted average common stock outstanding................... 845,779 738,260 ======== ======= The accompanying notes are an integral part of the consolidated financial statements.
F-31 120 FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY TWO YEARS ENDED DECEMBER 31, 1997 (DOLLARS EXPRESSED IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
NET FAIR VALUE ADJUSTMENT FOR TOTAL RETAINED SECURITIES STOCK- COMMON CAPITAL EARNINGS AVAILABLE HOLDERS' STOCK SURPLUS (DEFICIT) FOR SALE EQUITY ------ ------- --------- ---------- -------- Balance, January 1, 1996..................... $ 697 33,251 (30,311) (58) 3,579 Net loss..................................... -- -- (570) -- (570) Net fair value adjustment for securities available for sale......................... -- -- -- 104 104 Proceeds received from sale of 288,720 shares of common stock............................ 361 2,856 -- -- 3,217 Effect of quasi-reorganization, effective December 31, 1996.......................... -- (30,835) 30,881 (46) -- ------ ------- -------- ------ ------ Balance, December 31, 1996................... 1,058 5,272 -- -- 6,330 Net income................................... -- -- 764 -- 764 Repurchase of fractional shares.............. -- (7) -- -- (7) Net fair value adjustment for securities available for sale......................... -- -- -- 170 170 ------ ------- -------- ------ ------ Balance, December 31, 1997................... $1,058 5,265 764 170 7,257 ====== ======= ======== ====== ====== The accompanying notes are an integral part of the consolidated financial statements.
F-32 121 FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS EXPRESSED IN THOUSANDS)
YEARS ENDED DECEMBER 31, ---------------------- 1997 1996 ---- ---- Cash flows from operating activities: Net income (loss)....................................... $ 764 (570) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, amortization and accretion, net....... 359 148 Provision for possible loan losses.................. -- 1,155 Provision (benefit) for income taxes................ 1,387 (532) Payments of income taxes............................ (1,730) -- (Increase) decrease in accrued interest receivable......................................... (659) 232 Interest accrued on liabilities..................... 6,321 5,540 Payments of interest on liabilities................. (5,480) (4,929) Other operating activities, net..................... (257) 1,979 -------- ------- Net cash provided by operating activities....... 705 3,023 -------- ------- Cash flows from investing activities: Proceeds from maturities of investment securities....... 36,557 86,884 Purchases of investment securities...................... (62,604) (50,643) Recoveries of loans previously charged-off.............. 1,006 1,047 Net increase in loans................................... (24,841) (24,574) Purchases of bank premises and equipment................ (335) (49) Net decrease in lease financing......................... -- 991 Proceeds from sales of other real estate................ 480 2,297 Other investing activities.............................. -- (23) -------- ------- Net cash (used in) provided by investing activities.................................... (49,737) 15,930 -------- ------- Cash flows from financing activities: Other increases (decreases) in deposits: Demand and savings deposits......................... 33,011 (12,846) Time deposits....................................... 3,438 (7,182) Proceeds from the issuance of common stock.............. -- 3,217 Increase in notes payable............................... 400 -- Repurchase of fractional shares......................... (7) -- -------- ------- Net cash provided by (used in) financing activities.................................... 36,842 (16,811) -------- ------- Net (decrease) increase in cash and cash equivalents................................... (12,190) 2,142 Cash and cash equivalents at beginning of year.............. 20,910 18,768 -------- ------- Cash and cash equivalents at end of year.................... $ 8,720 20,910 ======== ======= Noncash investing and financing activities: Exchange of common stock for dividends payable.......... $ -- 643 Net decrease in other real estate as a result of foreclosure or financing, and other related transactions........................................... 409 1,099 ======== ======= The accompanying notes are an integral part of the consolidated financial statements.
F-33 122 FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements of First Commercial Bancorp, Inc. and subsidiary (FCB or the Company) have been prepared in accordance with generally accepted accounting principles and conform to practices prevalent among financial institutions. FCB operates a commercial banking business through its banking subsidiary, First Commercial Bank (First Commercial or the Bank or the Subsidiary Bank). First Commercial is headquartered in Sacramento with five branch offices located in Roseville (two branches), San Francisco, Concord and Campbell, California. FCB is majority owned by First Banks, Inc., St. Louis, Missouri (First Banks). First Banks owns 61.5% of the outstanding stock at December 31, 1997 and 1996, and accordingly, has effective control over the management and policies of FCB and the election of its directors. The following is a summary of the more significant policies followed by FCB: BASIS OF PRESENTATION The consolidated financial statements of FCB have been prepared in accordance with generally accepted accounting principles and conform to predominant practices within the banking industry. Management of FCB has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare the consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Certain 1996 amounts have been reclassified to conform with the 1997 presentation. The Board of Directors of FCB elected to implement an accounting adjustment referred to as a "quasi-reorganization," effective December 31, 1996. In accordance with accounting provisions applicable to a quasi-reorganization, the assets and liabilities were adjusted to fair value and the accumulated deficit was eliminated. The implementation of the quasi-reorganization did not have a significant impact on the results of operations of FCB. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the parent company and the Bank. All significant intercompany accounts and transactions have been eliminated. CASH AND CASH EQUIVALENTS Cash, due from banks and federal funds sold are considered to be cash and cash equivalents for purposes of the consolidated statements of cash flows. The Subsidiary Bank is required to maintain certain daily reserve balances in accordance with regulatory requirements. These reserve balances were $1.0 million and $918,000 at December 31, 1997 and 1996, respectively. INVESTMENT SECURITIES The classification of investment securities as available for sale or held to maturity is determined at the date of purchase. FCB does not engage in the trading of investment securities. Investment securities classified as available for sale are those debt and equity securities for which FCB has no immediate plan to sell, but which may be sold in the future if circumstances warrant. Available-for-sale securities are stated at current fair value. Realized gains and losses are included in noninterest income upon commitment to sell, based on the amortized cost of the individual security sold. Unrealized gains and losses are recorded, net of related income tax effects, in a separate component of stockholders' equity. All previous fair value adjustments included in stockholders' equity are reversed upon sale. F-34 123 FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Investment securities designated as held to maturity are those debt securities which FCB has the positive intent and ability to hold until maturity. Held-to-maturity securities are stated at amortized cost, in which the amortization of premiums and accretion of discounts are recognized over the contractual maturities or estimated lives of the individual securities, adjusted for anticipated prepayments, using the level-yield method. At December 31, 1997 and 1996, all investment securities were classified as available for sale. LOANS Loans are carried at cost, adjusted for amortization of premiums and accretion of discounts using a method which approximates the level-yield method. Interest and fees on loans are recognized as income using the interest method. Loans are stated at cost as FCB has the ability and it is management's intention to hold them to maturity. The accrual of interest on loans is discontinued when it appears that interest or principal may not be paid in a timely manner in the normal course of business. Generally, payments received on nonaccrual and impaired loans are recorded as principal reductions. Interest income is recognized after all principal has been repaid or an improvement in the condition of the loan has occurred which would warrant resumption of interest accruals. A loan is considered impaired when it is probable a creditor will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan agreement. When measuring impairment, the expected future cash flows of an impaired loan are discounted at the loan's effective interest rate. Alternatively, impairment is measured by reference to an observable market price, if one exists, or the fair value of the collateral for a collateral-dependent loan. Regardless of the historical measurement method used, FCB measures impairment based on the fair value of the collateral when the creditor determines foreclosure is probable. Additionally, impairment of a restructured loan is measured by discounting the total expected future cash flows at the loan's effective rate of interest as stated in the original loan agreement. FCB continues to use its existing nonaccrual methods for recognizing interest income on impaired loans. ALLOWANCE FOR POSSIBLE LOAN LOSSES The allowance for possible loan losses is maintained at a level considered adequate to provide for potential losses. The provision for possible loan losses is based on a periodic analysis of the loans by management, considering, among other factors, current economic conditions, loan portfolio composition, past loan loss experience, independent appraisals, loan collateral and payment experience. In addition to the allowance for estimated losses on impaired loans, an overall unallocated allowance is established to provide for unidentified credit losses which are inherent in the portfolio. As adjustments become necessary, they are reflected in the results of operations in the periods in which they become known. BANK PREMISES AND EQUIPMENT Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed primarily using the straight-line method over the estimated useful lives of the related assets. Amortization of leasehold improvements is calculated using the straight-line method over the shorter of the useful life of the improvement or term of the lease. Bank premises and improvements are depreciated over 15 to 29 years and equipment over two to ten years. OTHER REAL ESTATE Real estate acquired through foreclosure or deed in lieu of foreclosure, is stated at the lower of fair value less applicable selling costs or cost at the time the property is acquired. The excess of cost over fair value of the property at the date of acquisition is charged to the allowance for possible loan losses. Subsequent reductions in carrying value to reflect current fair value or costs incurred in maintaining the properties are charged to expense as incurred. F-35 124 FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INCOME TAXES FCB and First Commercial will file separate federal income tax returns for the periods subsequent to the common stock offering, as more fully discussed in Note 2 to the accompanying consolidated financial statements. FCB and First Commercial will each pay their respective portion of federal income taxes or receive payments to the extent that tax benefits are realized. For the periods prior to the common stock offering, FCB and First Commercial each paid their respective portion of federal income taxes to, or received payments from, First Banks to the extent that tax benefits were available within First Banks' consolidated group. FINANCIAL INSTRUMENTS A financial instrument is defined as cash, evidence of an ownership interest in an entity, or a contract that conveys or imposes on an entity the contractual right or obligation to either receive or deliver cash or another financial instrument. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK FCB is party to commitments to extend credit and commercial and standby letters of credit in the normal course of business to meet the financing needs of its customers. These commitments involve, in varying degrees, elements of interest rate risk and credit risk in excess of the amount recognized in the consolidated balance sheets. EARNINGS (LOSS) PER COMMON SHARE FCB adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share (SFAS 128), on a retroactive basis effective December 31, 1997. Accordingly, earnings (loss) per common share (EPS) data has been restated to conform with the provisions of SFAS 128. SFAS 128 provides for the calculation of a "Basic" and "Diluted" EPS. Basic EPS is computed by dividing the income (loss) available to common shareholders (the numerator) by the weighted average number of common shares outstanding (the denominator) during the year. The computation of dilutive EPS is similar except the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential shares had been issued. In addition, in computing the dilutive effect of convertible securities, the numerator is adjusted to add back (a) any convertible preferred dividends and (b) the after-tax amount of interest recognized in the period associated with any convertible debt. The implementation of SFAS 128 did not have a material impact on the calculation of EPS. (2) CAPITAL TRANSACTION On February 16, 1996, after its Amended Registration Statement was declared effective by the Securities and Exchange Commission, FCB commenced an offering of an aggregate of 477,520 shares of newly-issued common stock (Rights Offering). The Rights Offering was composed of: (a) an offering to its existing shareholders, other than First Banks, of 400,000 shares at $12.50 per share; (b) an offering to individuals who were not shareholders of FCB of a maximum of 80,000 of the shares available in the Rights Offering which were not otherwise subscribed; and (c) an offering of 77,520 shares in exchange for certain outstanding dividend obligations and accrued interest thereon of FCB. The Rights Offering was completed during the second quarter of 1996 and approximately 288,720 shares were issued in exchange for $2.97 million in cash and $643,000 of outstanding dividend obligations. The Rights Offering provided $3.22 million of capital to FCB, net of underwriting expenditures of $373,000. As a result of the Rights Offering, First Banks' ownership was reduced from 93.3% at December 31, 1995 to 61.5% at the end of the second quarter in 1996. F-36 125 FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) INVESTMENTS IN DEBT SECURITIES As part of the quasi-reorganization discussed in Note 1, effective December 31, 1996, carrying values of the Company's investment security portfolio were adjusted to current fair value and the balance of the net fair value adjustment of securities available for sale, reflected as a separate component of stockholders' equity, was eliminated. As a result of this procedure, the carrying value was increased by $70,000. The amortized cost, contractual maturity, unrealized gains and losses and fair value of investment securities available for sale at December 31, 1997 and 1996 were as follows:
MATURITY TOTAL GROSS ------------------- AMOR- UNREALIZED WEIGHTED 1 YEAR 1-5 TIZED -------------- FAIR AVERAGE OR LESS YEARS COST GAINS LOSSES VALUE YIELD ------- ----- ----- ----- ------ ----- -------- (DOLLARS EXPRESSED IN THOUSANDS) December 31, 1997: Carrying value: U.S. Treasury.................... $10,061 29,179 39,240 258 -- 39,498 6.08% U.S. government agencies and corporations: Mortgage-backed............ -- 610 610 -- (8) 602 5.05 Other...................... 2,005 22,273 24,278 35 (23) 24,290 6.17 ------- ------ ------ ----- --- ------ Total.................. $12,066 52,062 64,128 293 (31) 64,390 6.10 ======= ====== ====== ===== === ====== ==== Market value-debt securities........... $12,085 52,305 ======= ====== Weighted average yield................. 5.94% 6.14% ======= ====== December 31, 1996: Carrying value: U.S. Treasury...................... $15,035 8,047 23,082 -- -- 23,082 5.66% U.S. government agencies and corporations: Mortgage-backed................ 470 705 1,175 -- -- 1,175 4.92 Other.......................... 6,901 7,071 13,972 -- -- 13,972 5.59 ------- ------ ------ ----- --- ------ Total.................. $22,406 15,823 38,229 -- -- 38,229 5.61 ======= ====== ====== ===== === ====== ==== Market value-debt securities........... $22,406 15,823 ======= ====== Weighted average yield................. 5.23% 6.16% ======= ======
The expected maturities of investment securities may differ from contractual maturities since borrowers have the right to call or prepay the obligations with or without prepayment penalties. There were no sales of securities for the years ended December 31, 1997 and 1996. Investment securities with a carrying value of approximately $8.6 million and $3.7 million at December 31, 1997 and 1996, respectively, were pledged in connection with deposits of public and trust funds, securities sold under agreements to repurchase and for other purposes as required or permitted by law. F-37 126 FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (4) LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES Changes in the allowance for possible loan losses for the years ended December 31 were as follows:
1997 1996 ---- ---- (DOLLARS EXPRESSED IN THOUSANDS) Balance, January 1................................... $4,597 5,388 ------ ------ Loans charged-off.................................... (911) (2,993) Recoveries of loans previously charged-off........... 1,006 1,047 ------ ------ Net loans (charged-off) recovered............ 95 (1,946) ------ ------ Provision charged to operations...................... -- 1,155 ------ ------ Balance, December 31................................. $4,692 4,597 ====== ======
At December 31, 1997 and 1996, FCB had $435,000 and $864,000, respectively, of loans on nonaccrual status. Interest on nonaccrual loans which would have been recorded under the original terms of the loans was $87,000 and $315,000 for the years ended December 31, 1997 and 1996, respectively. Of these amounts, $38,000 and $184,000 was actually recorded as interest income on such loans in 1997 and 1996, respectively. Impaired loans, which is represented by loans on nonaccrual status, had no specific reserves at December 31, 1997 and 1996. The average recorded investment in impaired loans was $761,000 and $2.9 million for the years ended December 31, 1997 and 1996, respectively. (5) BANK PREMISES AND EQUIPMENT Bank premises and equipment were comprised of the following at December 31:
1997 1996 ---- ---- (DOLLARS EXPRESSED IN THOUSANDS) Land.................................................. $ 890 890 Buildings and improvements............................ 689 695 Furniture, fixtures and equipment..................... 345 304 Construction in progress.............................. 301 5 ------ ----- Total......................................... 2,225 1,894 Less accumulated depreciation......................... 207 -- ------ ----- Bank premises and equipment, net of accumulated depreciation.................... $2,018 1,894 ====== =====
Depreciation expense for the years ended December 31, 1997 and 1996 totaled $211,000 and $305,000, respectively. F-38 127 FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FCB leases land, office properties and some items of equipment under operating leases. Certain of the leases contain renewal options and escalation clauses. Total rent expense was $376,000 and $476,000 for the years ended December 31, 1997 and 1996, respectively. Future minimum lease payments under noncancellable operating leases extend through 2019 as follows:
(DOLLARS EXPRESSED IN THOUSANDS) Year ending December 31: 1998.................................................... $ 365 1999.................................................... 328 2000.................................................... 328 2001.................................................... 194 2002.................................................... 103 Thereafter.............................................. 560 ------ Total minimum lease payments........................ $1,878 ======
FCB leases a portion of its owned banking facilities to unrelated parties. Total rental income was $22,000 and $9,000 for the years ended December 31, 1997 and 1996, respectively. (6) PROMISSORY NOTE PAYABLE On December 31, 1997, FCB borrowed $400,000 under a $1.0 million promissory note payable (Note Payable) to First Banks. There were no similar borrowings during 1996. The borrowings under the Note Payable bear interest at an annual rate of one-quarter percent less than the "Prime Rate" as reported in the Wall Street Journal. The principal and accrued interest under the Note Payable are due and payable on October 31, 2001. (7) EARNINGS PER COMMON SHARE The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for the periods indicated:
INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- (DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) Year ended December 31, 1997: Basic EPS--income available to common stockholders...... $ 764 846 $ 0.90 ====== Effect of 12% convertible debentures.................... -- -- ----- --- Diluted EPS--income available to common stockholders.... $ 764 846 $ 0.90 ===== === ====== Year ended December 31, 1996: Basic EPS--income available to common stockholders...... $(570) 738 $(0.77) ====== Effect of 12% convertible debentures.................... -- -- ----- --- Diluted EPS--income available to common stockholders.... $(570) 738 $(0.77) ===== === ======
Effects of the 12% convertible debentures were anti-dilutive for the years presented. F-39 128 FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (8) INCOME TAXES Income tax expense (benefit) attributable to income from continuing operations for the years ended December 31 consists of:
1997 1996 ---- ---- (DOLLARS EXPRESSED IN THOUSANDS) Current income tax expense (benefit):............... $ 947 (509) Federal......................................... 383 2 ------ ---- State........................................... 1,330 (507) ------ ---- Deferred income tax expense (benefit): Federal......................................... (347) (982) State........................................... -- 591 ------ ---- (347) (391) ------ ---- Increase in valuation allowance..................... 404 366 ------ ---- Total....................................... $1,387 (532) ====== ====
The effective rates of federal income taxes for the years ended December 31 differ from statutory rates of taxation as follows:
1997 1996 ------------------- -------------------- AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- (DOLLARS EXPRESSED IN THOUSANDS) Income (loss) before provision (benefit) for income taxes... $2,151 $(1,102) ====== ======= Tax expense (benefit) at federal income tax rate............ $ 753 35.0% $ (386) (35.0)% Effects of differences in tax reporting: Change in the deferred tax valuation allowance.......... 404 18.8 366 33.2 Change in tax attributes available to be carried forward............................................... -- -- (605) (54.9) State income taxes.......................................... 249 11.6 385 34.9 Other, net.................................................. (19) (0.9) (292) (26.5) ------ ---- ------- ----- Provision (benefit) for income taxes.................... $1,387 64.5% $ (532) (48.3)% ====== ==== ======= =====
F-40 129 FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
DECEMBER 31, ------------------ 1997 1996 ---- ---- (DOLLARS EXPRESSED IN THOUSANDS) Deferred tax assets: Allowance for possible loan losses..................... $ 1,769 1,734 Other real estate...................................... 44 103 Alternative minimum tax credit......................... 448 448 Depreciation on bank premises and equipment............ 152 144 Interest on nonaccrual loans........................... 5 24 Other.................................................. 521 425 Net operating loss carryforwards....................... 1,006 394 ------- ------ Gross deferred tax assets........................... 3,945 3,272 Valuation allowance.................................... (3,593) (3,189) ------- ------ Net deferred tax assets............................. 352 83 ------- ------ Deferred tax liabilities: Gains on investment securities currently not allowable for tax purposes...................................... 92 25 Accretion.............................................. 17 34 ------- ------ Gross deferred tax liabilities...................... 109 59 ------- ------ Net deferred tax assets............................. $ 243 24 ======= ======
Changes to the deferred tax asset valuation allowance for the years ended December 31 were as follows:
1997 1996 ---- ---- (DOLLARS EXPRESSED IN THOUSANDS) Balance, January 1.................................... $3,189 2,823 Current year deferred provision, change in deferred tax valuation allowance............................. 404 366 ------ ----- Balance, December 31.................................. $3,593 3,189 ====== =====
Due to the uncertainty of future operating results, it was determined the valuation allowance established for FCB should substantially offset any net deferred tax asset. The valuation allowance for deferred tax assets at December 31, 1997 and 1996, respectively, includes $3.2 million which, if recognized, will be credited to capital surplus under the terms of the quasi-reorganization implemented by FCB as of December 31, 1996. With the completion of the acquisition of FCB and the Bank by First Banks, the federal and state net operating loss carryforwards (NOLs) generated prior to the transactions are subject to an annual limitation under Internal Revenue Code and California Revenue and Taxation Code for all subsequent tax years. The federal and state annual limitation is $87,739. The following schedules reflect the NOLs that will be available, after consideration of these limitations, to offset future taxable income. If taxable income for a post-transaction year does not equal or exceed the annual limitation, the unused limitation is carried forward to increase the limitation amount for the succeeding years until the excess limitation is utilized. FCB has alternative minimum tax credits of $448,000 which have no expiration date. These credits are also subject to an annual limitation and can be utilized subsequent to the utilization of the NOLs. F-41 130 FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The NOLs for FCB were approximately $2.9 million at December 31, 1997 and expire as follows:
(DOLLARS EXPRESSED IN THOUSANDS) Year ending December 31: 2008.................................................... $ 394 2009.................................................... 747 2011.................................................... 660 2017.................................................... 1,064 ------ Total............................................... $2,865 ======
For California income tax purposes, FCB had NOLs of approximately $106,000 at December 31, 1997. These NOLs expire as follows:
(DOLLARS EXPRESSED IN THOUSANDS) Year ending December 31: 1998.................................................... $ 77 1999.................................................... 29 ---- Total............................................... $106 ====
(9) 12% CONVERTIBLE DEBENTURES In 1995, FCB issued to First Banks two 5-year, 12% convertible debentures in exchange for $6.5 million. The principal and any accrued but unpaid interest thereon is convertible at any time prior to maturity, at the option of First Banks, into FCB common stock at $12.50 per share. At maturity, any unpaid principal and accrued interest will be converted into FCB common stock at $12.50 per share. The initial debenture of $1.5 million was issued on October 31, 1995 and matures on October 31, 2000. The second debenture was issued on December 28, 1995 and matures on December 28, 2000. Cash may be paid with respect to either the principal or interest on the debentures only when, in the sole and absolute discretion of the Board of Directors of FCB, it is determined that FCB has sufficient funds to make such payment in accordance with all applicable regulatory requirements. The debentures are secured by all of the shares of the Bank common stock held by FCB. Accrued and unpaid interest on the debentures was $1.6 million and $831,000 at December 31, 1997 and 1996, respectively. At December 31, 1997, the principal and accrued interest on the debentures could have been converted into an aggregate of 649,720 shares of FCB common stock. If the debentures had been converted as of December 31, 1997, First Banks' ownership interest would have been 78.2%. (10) DIVIDENDS PAYABLE On December 31, 1991, the Board of Directors of FCB declared a $40.00 per share cash dividend on its common stock. This dividend was payable in four installments during 1992. On July 9, 1992, the Company made a decision to suspend payment of the third and fourth quarter dividends which totaled $20.00 per share. FCB continued to accrue interest on these suspended dividends at the current legal rate until such time as the dividends were paid to stockholders of record as of June 15, 1992 and September 14, 1992. In connection with its Rights Offering to shareholders, as described in Note 2, FCB exchanged common stock with certain of those individuals eligible to receive the accrued and unpaid 1992 dividends. FCB exchanged one share of FCB common stock for each $12.50 of dividends and accrued interest in satisfaction of $643,000 of that obligation. As of December 31, 1996, the aggregate accrued dividends and accrued but unpaid interest thereon was $351,000, and such obligation was fully paid in 1997. F-42 131 FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (11) EMPLOYEE BENEFIT PLANS 401(K) PLAN FCB has a self-administered savings and incentive plan covering substantially all employees. Under the plan, employer matching contributions are determined annually by FCB's Board of Directors. Employee contributions are limited to 15% of an employee's compensation not to exceed $9,500 for 1997. Total employer contributions under the plan were $20,000 and $17,000 for the years ended December 31, 1997 and 1996, respectively. The plan assets are held and managed under a trust agreement with the trust department of an affiliated bank. Postretirement benefits other than pensions and postemployment benefits are generally not provided for FCB's employees. (12) COMMITMENTS AND CONTINGENCIES FCB is a party to commitments to extend credit and commercial and standby letters of credit in the normal course of business to meet the financing needs of its customers. These instruments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The interest rate risk associated with these credit commitments relates primarily to the commitments to originate fixed-rate loans. The credit risk amounts are equal to the contractual amounts, assuming the amounts are fully advanced and the collateral or other security is of no value. FCB uses the same credit policies in granting commitments and conditional obligations as it does for on-balance-sheet items. Commitments to extend credit at December 31 are as follows:
1997 1996 ---- ---- (DOLLARS EXPRESSED IN THOUSANDS) Commitments to extend credit.............................. $99,129 42,425 Standby letters of credit................................. 250 49 ======= ======
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant, equipment, income-producing commercial properties and single family residential properties. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The letters of credit are primarily issued to support private borrowing arrangements and commercial transactions. Most letters of credit extend for less than one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Upon issuance of the commitments, FCB holds marketable securities, certificates of deposit, inventory or other assets as collateral supporting those commitments for which collateral is deemed necessary. (13) DISTRIBUTION OF EARNINGS OF THE SUBSIDIARY BANK The Subsidiary Bank is restricted by various state and federal regulations as to the amount of dividends which are available for payment to FCB. Under the most restrictive of these requirements, the future payment of dividends from the Subsidiary Bank is limited to approximately $1.6 million at December 31, 1997, unless prior permission of the regulatory authorities is obtained. F-43 132 FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (14) TRANSACTIONS WITH RELATED PARTIES FCB purchases certain services and supplies from or through First Banks. FCB's financial position and operating results could significantly differ from those that would be obtained if FCB's relationship with First Banks did not exist. First Banks provides management services to FCB and its Subsidiary Bank. Management services are provided under a management fee agreement whereby FCB compensates First Banks on an hourly basis for its use of personnel for various functions including internal audit, loan review, income tax preparation and assistance, accounting, asset/liability and investment services, loan servicing and other management and administrative services. Fees paid under this agreement were $478,000 and $618,000 for the years ended December 31, 1997 and 1996, respectively. The fees paid for management services are at least as favorable as could have been obtained from an unaffiliated third party. In addition, FCB paid First Banks $183,000 and $66,000 for correspondent banking services for the years ending of December 31, 1997 and 1996, respectively. Because of the affiliation with First Banks and the geographic proximity of certain of their offices, FCB shares the cost of certain personnel and services used by FCB and First Banks. This includes the salaries and benefits of certain loan and administrative personnel. The allocation of the shared costs are charged and/or credited under the terms of cost sharing agreements entered into during 1997. Because this involves distributing essentially fixed costs over a larger asset base, it allows each bank to receive the benefit of personnel and services at a reduced cost. Net fees paid under these agreements were $326,000 and $412,000 for the years ended December 31, 1997 and 1996, respectively. Effective April 1, 1997, First Services L.P., a limited partnership indirectly owned by First Banks' Chairman and his children through its general partners and limited partners, began providing data processing and various related services to FCB under the terms of data processing agreements. Previously, these services were provided by a subsidiary of First Banks. Fees paid under these agreements were $362,000 and $381,000 for the years ended December 31, 1997 and 1996, respectively. The fees paid for data processing services are at least as favorable as could have been obtained from an unaffiliated third party. First Commercial had $24.9 million and $17.9 million in whole loans and loan participations outstanding at December 31, 1997 and 1996, respectively, that were purchased from banks affiliated with First Banks. In addition, First Commercial had sold $12.0 million and $2.0 million in whole loans and loan participations to affiliates of First Banks at December 31, 1997 and 1996, respectively. These loans and loan participations were acquired and sold at interest rates and terms prevailing at the dates of their purchase or sale and under standards and policies followed by First Commercial. As more fully discussed in Note 6, FCB borrowed $400,000 from First Banks on December 31, 1997. Outside of normal customer relationships, no directors, executive officers or stockholders holding over 5% of FCB's voting stock, and no corporations or firms with which such persons or entities are associated, currently maintain or have maintained, any significant business or personal relationships with FCB or its subsidiary, other than that which arises by virtue of such position or ownership interest in FCB, except as described above. (15) FAIR VALUE OF FINANCIAL INSTRUMENTS Fair values of financial instruments are management's estimate of the values at which the instruments could be exchanged in a transaction between willing parties. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including deferred tax assets and bank premises and equipment. Further, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in any of the estimates. F-44 133 FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The estimated fair value of FCB's financial instruments at December 31 were as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996 ------------------------ ------------------------ CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- ---------- -------- ---------- (DOLLARS EXPRESSED IN THOUSANDS) Assets: Cash and cash equivalents............................. $ 8,720 8,720 20,910 20,910 Investment securities................................. 64,390 64,390 38,229 38,229 Net loans............................................. 113,326 113,963 89,900 89,900 Accrued interest receivable........................... 1,856 1,856 1,197 1,197 ======== ======== ======= ======== Liabilities: Demand and savings deposits........................... $104,035 104,035 71,024 71,024 Time deposits......................................... 68,550 68,907 65,112 65,112 Accrued interest payable.............................. 1,939 1,939 1,098 1,098 12% convertible debentures............................ 6,500 6,500 6,500 6,500 Notes payable and other short-term borrowings......... 1,280 1,280 705 705 ======== ======== ======= ======== Off-balance-sheet: Unfunded loan commitments............................. $ -- -- -- -- ======== ======== ======= ========
The following methods and assumptions were used in estimating the fair value of financial instruments: FINANCIAL ASSETS: Cash and cash equivalents and accrued interest receivable: The carrying values reported in the consolidated balance sheets approximate fair value. Investment securities: Fair value for securities available for sale were the amounts reported in the consolidated balance sheets. If quoted market prices were not available, fair values were based upon quoted market prices of comparable instruments. Net loans: The fair value for most loans was estimated utilizing discounted cash flow calculations that applied interest rates currently being offered for similar loans to borrowers with similar risk profiles. The carrying values for loans are net of the allowance for possible loan losses and unearned discount. FINANCIAL LIABILITIES: Deposits: The fair value disclosed for deposits generally payable on demand (i.e., non-interest-bearing and interest-bearing demand, savings and money market accounts) was considered equal to their respective carrying amounts as reported in the consolidated balance sheets. The fair value disclosed for demand deposits does not include the benefit that results from the low-cost funding provided by deposit liabilities compared to the cost of borrowing funds in the market. The fair value for certificates of deposit was estimated utilizing a discounted cash flow calculation that applied interest rates currently being offered on similar certificates to a schedule of aggregated monthly maturities of time deposits. Convertible debentures, notes payable, short-term borrowings and accrued interest payable: The carrying values reported in the consolidated balance sheets approximate fair value. F-45 134 FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) OFF-BALANCE-SHEET: Unfunded loan commitments: The majority of the commitments to extend credit and commercial and standby letters of credit contain variable interest rates and credit deterioration clauses and, therefore, the carrying value of these credit commitments approximates fair value. (16) REGULATORY CAPITAL The Subsidiary Bank is subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Subsidiary Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for Prompt Corrective Action, the Subsidiary Bank must meet specific capital guidelines that involve quantitative measures of the Subsidiary Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Subsidiary Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Subsidiary Bank to maintain certain minimum capital ratios. The Subsidiary Bank is required to maintain a minimum risk-based capital to risk-weighted assets ratio of 8.0%, with at least 4.0% being "Tier 1" capital (as defined in the regulations). In addition, a minimum leverage ratio (Tier 1 capital to average assets) of 3.0% plus an additional cushion of 100 to 200 basis points is expected. In order to be considered well capitalized under Prompt Corrective Action provisions, a bank is required to maintain a risk weighted asset ratio of at least 10%, a Tier 1 to risk weighted assets ratio of at least 6%, and a leverage ratio of at least 5%. As of December 31, 1996, the date of the most recent notification from FCB's primary regulator, First Commercial was categorized as well capitalized under the regulatory framework for Prompt Corrective Action. Management believes, as of December 31, 1997, First Commercial was well capitalized as defined by the FDIC Improvement Act. At December 31, 1997 and 1996, FCB's and the Bank's capital ratios were as follows:
RISK-BASED CAPITAL RATIOS -------------------------------------- TOTAL TIER 1 LEVERAGE RATIO --------------- --------------- -------------- 1997 1996 1997 1996 1997 1996 ---- ---- ---- ---- ---- ---- FCB.............................................. 6.34% 6.95% 5.06% 5.66% 4.03% 4.25% First Commercial................................. 11.89 13.13 10.61 11.84 8.43 8.87
(17) CONTINGENT LIABILITIES In the ordinary course of business, there are various legal proceedings pending against FCB and/or the Subsidiary Bank. Management, in consultation with legal counsel, is of the opinion the ultimate resolution of these proceedings will have no material effect on the financial condition or results of operations of FCB or the Subsidiary Bank. F-46 135 FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (18) PARENT COMPANY ONLY FINANCIAL INFORMATION CONDENSED BALANCE SHEETS
DECEMBER 31, -------------------- 1997 1996 ---- ---- (DOLLARS EXPRESSED IN THOUSANDS) Assets: Cash.................................................... $ 153 363 Investment in subsidiary................................ 14,943 13,144 Deferred tax assets..................................... 225 -- Other assets............................................ 502 524 ------- ------ Total assets........................................ $15,823 14,031 ======= ====== Liabilities and stockholders' equity: Dividends payable....................................... $ -- 251 Promissory note payable................................. 400 -- 12% convertible debentures.............................. 6,500 6,500 Accrued and other liabilities........................... 1,666 950 ------- ------ Total liabilities................................... 8,566 7,701 Stockholders' equity........................................ 7,257 6,330 ------- ------ Total liabilities and stockholders' equity.............. $15,823 14,031 ======= ======
CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ------------------------ 1997 1996 ---- ---- (DOLLARS EXPRESSED IN THOUSANDS) Income: Dividends from subsidiary............................... $ 200 -- Other................................................... 15 8 ------ ------ Total income........................................ 215 8 ------ ------ Expense: Interest................................................ 888 892 Other................................................... 190 167 ------ ------ Total expense....................................... 1,078 1,059 ------ ------ Loss before income tax expense (benefit) and equity in undistributed income of subsidiary............. (863) (1,051) Income tax expense (benefit)............................ 2 (366) ------ ------ Loss before equity in undistributed income of subsidiary........................................ (865) (685) Equity in undistributed income of subsidiary............ 1,629 115 ------ ------ Net income (loss)................................... $ 764 (570) ====== ======
F-47 136 FIRST COMMERCIAL BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------ 1997 1996 ---- ---- (DOLLARS EXPRESSED IN THOUSANDS) Operating activities: Net income (loss)....................................... $ 764 (570) Adjustments to reconcile net income (loss) to net cash used in operating activities Equity in undistributed income of subsidiary........ (1,629) (115) Dividends from subsidiary........................... 200 -- Other, net.......................................... 62 (147) ------- ------ Net cash used in operating activities........... (603) (832) ------- ------ Investing activities--capital contributions to subsidiary... -- (1,938) ------- ------ Financing activities: Proceeds from the issuance of common stock.............. -- 3,217 Repurchase of fractional shares......................... (7) -- Increase in promissory note payable..................... 400 -- Decrease in advances from subsidiary.................... -- (284) ------- ------ Net cash provided by financing activities....... 393 2,933 ------- ------ Net increase (decrease) in cash and cash equivalents.................................. (210) 163 Cash and cash equivalents at beginning of year.......... 363 200 ------- ------ Cash and cash equivalents at end of year................ $ 153 363 ======= ====== Noncash financing activities: Exchange of common stock for dividends payable.......... $ -- (643) ======= ======
(19) SUBSEQUENT EVENTS On February 2, 1998, FCB and First Banks America, Inc., St. Louis, Missouri (FBA), a 71.8% owned subsidiary of First Banks, were merged. Under the terms of the Agreement and Plan of Merger (Agreement), FCB was merged into FBA, and First Commercial was merged into First Bank of California, an indirect subsidiary bank of FBA. The FCB shareholders received .8888 shares of FBA common stock for each share of FCB common stock that they held. In total, FCB shareholders received approximately 751,728 shares of FBA common stock, including 462,176 shares received by First Banks in exchange for its 61.5% ownership of FCB. The transaction also provided for First Banks to receive 804,000 shares of FBA common stock in exchange for $10.0 million of FBA's promissory note payable to First Banks. In addition, FCB's convertible debentures of $6.5 million, which are owned by First Banks, were exchanged for comparable debentures in FBA. F-48 137 REDWOOD BANCORP AND SUBSIDIARIES REPORT OF INDEPENDENT ACCOUNTANTS Shareholder and Board of Directors of Redwood Bancorp and Subsidiaries: We have audited the consolidated statements of financial condition of Redwood Bancorp and its subsidiaries (the Company) as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholder's equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Redwood Bancorp and its subsidiaries at December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. San Francisco, California June 19, 1998 F-49 138 REDWOOD BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS MARCH 31, DECEMBER 31, DECEMBER 31, 1998 1997 1996 --------- ------------ ------------ (UNAUDITED) Cash and due from banks................................ $ 6,033,556 $ 8,672,217 $ 8,140,106 Federal funds sold..................................... 3,000,000 1,200,000 5,000,000 Investment securities: Held-to-maturity................................... 6,224,893 4,228,570 2,249,207 Available-for-sale................................. 10,442,575 14,489,971 9,347,368 Loans, net............................................. 118,880,353 109,483,706 100,994,646 Bank premises and equipment, net....................... 783,633 796,241 785,118 Interest receivable.................................... 954,064 921,150 804,215 Goodwill............................................... 3,919,862 3,964,918 4,145,142 Other assets........................................... 1,767,394 1,715,421 2,594,849 ------------ ------------ ------------ Total assets............................... $152,006,330 $145,472,194 $134,060,651 ============ ============ ============ LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities: Deposits........................................... $130,110,833 $126,772,656 $117,379,755 Interest payable and other liabilities............. 1,159,278 1,227,427 737,717 Other borrowings................................... 2,910,000 -- -- ------------ ------------ ------------ Total liabilities.......................... 134,180,111 128,000,083 118,117,472 ------------ ------------ ------------ Shareholder's equity: Common stock, $3.33 par value; authorized 1,000,000 shares; issued and outstanding 250,000 shares in 1997 and 1996.................................... 832,500 832,500 832,500 Surplus............................................ 10,639,969 10,639,969 10,639,969 Retained earnings.................................. 6,412,661 5,988,022 4,567,627 Accumulated other comprehensive income (loss)...... (58,911) 11,620 (96,917) ------------ ------------ ------------ Total shareholder's equity................. 17,826,219 17,472,111 15,943,179 ------------ ------------ ------------ Total liabilities and shareholder's equity.............................. $152,006,330 $145,472,194 $134,060,651 ============ ============ ============ The accompanying notes are an integral part of these consolidated financial statements.
F-50 139 REDWOOD BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED YEARS ENDED MARCH 31, DECEMBER 31, --------------------- ---------------------- 1998 1997 1997 1996 ---- ---- ---- ---- (UNAUDITED) Interest income: Interest and fees on loans............... $2,700,750 $2,404,315 $10,417,676 $ 8,791,684 Interest on federal funds sold........... 28,323 67,688 243,921 232,516 Interest on investment securities........ 309,244 197,446 1,018,486 967,244 Interest on deposits in other financial institutions........................... -- -- -- 13,572 ---------- ---------- ----------- ----------- Total interest income............ 3,038,317 2,669,449 11,680,083 10,005,01 Interest expense............................. 1,078,079 907,212 3,863,742 3,442,833 ---------- ---------- ----------- ----------- Net interest income before provision for loan losses...... 1,960,238 1,762,237 7,816,341 6,562,183 Provision for loan losses.................... -- -- -- -- ---------- ---------- ----------- ----------- Net interest income after provision for loan losses...... 1,960,238 1,762,237 7,816,341 6,562,183 ---------- ---------- ----------- ----------- Noninterest income: Customer service fees.................... 63,134 56,587 372,429 363,706 Other.................................... 174,626 150,985 28,317 30,247 ---------- ---------- ----------- ----------- Total noninterest income......... 237,760 207,572 400,746 393,953 ---------- ---------- ----------- ----------- Noninterest expense: Salaries and employee benefits........... 799,503 931,258 3,362,288 3,085,229 Occupancy and equipment.................. 233,574 226,523 933,728 966,284 Deposit insurance and regulatory assessments............................ 9,387 8,482 35,220 35,371 Professional services.................... 74,910 30,500 82,729 166,700 Insurance................................ 34,889 38,324 143,729 147,695 Data processing.......................... 56,282 57,012 216,326 221,279 Forms and supplies....................... 26,616 29,360 105,065 101,007 Telecommunication and postage............ 44,647 40,142 147,366 150,085 Corporate expenses....................... 9,000 21,000 56,000 57,000 Goodwill amortization.................... 45,056 45,056 180,224 180,224 Other.................................... 103,145 75,877 378,166 311,541 ---------- ---------- ----------- ----------- Total noninterest expense........ 1,437,009 1,503,534 5,640,841 5,422,415 ---------- ---------- ----------- ----------- Income before income taxes....... 760,989 466,275 2,576,246 1,533,721 Income tax expense (benefit)................. 336,350 216,000 1,155,851 (1,773,000) ---------- ---------- ----------- ----------- Net income................................... $ 424,639 $ 250,275 $ 1,420,395 $ 3,306,721 ========== ========== =========== =========== Net income per share--basic.................. $ 1.70 $ 1.00 $ 5.68 $ 13.23 ========== ========== =========== =========== Net income per share--diluted................ $ 1.70 $ 1.00 $ 5.68 $ 13.23 ========== ========== =========== =========== Weighted average common stock outstanding.... $ 250,000 $ 250,000 $ 250,000 $ 250,000 ========== ========== =========== =========== The accompanying notes are an integral part of these consolidated financial statements.
F-51 140 REDWOOD BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
ACCUMU- LATED OTHER COMMON STOCK COMPRE- COMPRE- ------------------ HENSIVE RETAINED HENSIVE SHARES AMOUNT SURPLUS INCOME EARNINGS INCOME TOTAL ------ ------ ------- ------- -------- ----------- ----- Balance, December 31, 1995... 250,000 $832,500 $10,639,969 $1,260,906 $ 55,971 $12,789,346 Comprehensive Income: Net Income............... -- -- -- $3,306,721 3,306,721 -- 3,306,721 Other comprehensive income--Unrealized losses on securities... -- -- -- (152,888) -- (152,888) (152,888) ---------- Comprehensive Income..... -- -- -- $3,153,833 -- -- -- -------- -------- ----------- ========== ========== ========= =========== Balance, December 31, 1996... 250,000 832,500 10,639,969 4,567,627 (96,917) 15,943,179 Comprehensive Income: Net Income............... -- -- -- $1,420,395 1,420,395 -- 1,420,395 Other comprehensive income--Unrealized losses on securities... -- -- -- 108,537 -- 108,537 108,537 ---------- Comprehensive Income..... -- -- -- $1,528,932 -- -- -- -------- -------- ----------- ========== ========== ========= =========== Balance, December 31, 1997... 250,000 832,500 10,639,969 5,988,022 11,620 17,472,111 Quarter ended March 31, 1998 (unaudited): Comprehensive Income: Net Income............... -- -- -- $ 424,639 424,639 -- 424,639 Other comprehensive income--Unrealize losses on securities... -- -- -- (70,531) -- (70,531) (70,531) ---------- Comprehensive Income..... -- -- -- $ 354,108 -- -- -- -------- -------- ----------- ========== ---------- --------- ----------- Balance, March 31, 1998...... 250,000 $832,500 $10,639,969 $6,412,661 $ (58,911) $17,826,219 ======== ======== =========== ========== ========= =========== The accompanying notes are an integral part of these consolidated financial statements.
F-52 141 REDWOOD BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEARS ENDED MARCH 31, DECEMBER 31, ---------------------- ----------------------- 1998 1997 1997 1996 ---- ---- ---- ---- (UNAUDITED) Cash flows from operating activities: Net income........................... $ 424,639 $ 250,275 $ 1,420,395 $ 3,306,721 Reconciliation to net cash provided by operating activities: Deferred income tax.............. -- 160,300 826,000 (1,982,000) Depreciation and leasehold amortization................... 57,457 50,550 212,703 225,429 Amortization and accretion of premiums and discounts......... (31,062) 26,551 (219,090) (185,772) Goodwill amortization............ 45,046 45,046 180,224 180,224 Net increase (decrease) in deferred loan fees............. 33,982 10,554 (6,734) 81,407 Increase in interest receivable and other assets............... (84,887) (51,408) (63,513) (3,752) Increase (decrease) in interest payable and other liabilities.. (68,149) (155,826) 489,710 (144,076) Gain on sale of other real estate owned.......................... -- -- (12,084) -- ----------- ----------- ------------ ------------ Net cash provided by operating activities....... 377,026 336,042 2,827,611 1,478,181 ----------- ----------- ------------ ------------ Cash flows from investing activities: Purchase of: Held-to-maturity securities...... (4,997,500) (1,000,000) (5,000,000) (2,940,333) Available-for-sale securities.... (5,000,000) (1,497,500) (9,970,184) (7,455,899) Proceeds from: Maturities of held-to-maturity securities..................... 3,000,000 -- 3,041,583 2,181,859 Maturities of available-for-sale securities..................... 9,009,114 -- 5,134,262 9,670,112 Net change in interest-earning deposits in other financial institutions........ -- -- -- 322,520 Loan originations and purchases, net of repayments and participations.......... (9,430,629) 2,087,656 (8,608,504) (21,611,266) Purchase of bank premises and equipment.............................. (44,849) (10,273) (223,820) (165,133) Proceeds from sale of other real estate owned.................................. -- -- 138,262 -- ----------- ----------- ------------ ------------ Net cash used in investing activities................. (7,463,864) (420,117) (15,488,401) (19,998,140) ----------- ----------- ------------ ------------ Cash flows from financing activities: Net change in deposits............... 3,338,177 (929,896) 9,392,901 13,237,354 Net change in other borrowings....... 2,910,000 -- -- -- ----------- ----------- ------------ ------------ Net cash provided by financing activities....... 6,248,177 (929,896) 9,392,901 13,237,354 ----------- ----------- ------------ ------------ Net decrease in cash and cash equivalents................ (838,661) (1,013,971) (3,267,889) (5,282,605) Cash and cash equivalents at beginning of year................................... 9,872,217 13,140,106 13,140,106 18,422,711 ----------- ----------- ------------ ------------ Cash and cash equivalents at end of year................................... $ 9,033,556 $12,126,135 $ 9,872,217 $ 13,140,106 =========== =========== ============ ============ Other cash flow information: Interest paid........................ $ 1,047,453 $ 902,925 $ 3,824,888 $ 3,436,800 =========== =========== ============ ============ Income taxes paid.................... -- -- $ 260,000 $ 211,500 =========== =========== ============ ============ The accompanying notes are an integral part of these consolidated financial statements.
F-53 142 REDWOOD BANCORP AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Redwood Bancorp (Bancorp or the Company) is owned by Empire Holdings, Inc., a wholly owned subsidiary of Empire Holdings, Ltd., a closely held bank holding company with no other significant operations. Redwood Bank (the Bank) is Bancorp's principal subsidiary and the primary operating entity of the consolidated group. All intercompany transactions have been eliminated. NATURE OF OPERATIONS Bancorp operates four branches in the San Francisco Bay Area. Bancorp's primary source of revenue is through providing commercial and real estate loans to customers, who are predominantly small and middle-market businesses. The cost of funds relates to various deposit products offered to these same businesses and individuals. INTERIM RESULTS (UNAUDITED) The accompanying statements of financial position as of March 31, 1998, and statements of operations, shareholder's equity and cash flows for the three-month periods ended March 31, 1998 and 1997, are unaudited. In the opinion of management, these statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of the results of the interim periods. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and certain liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of certain revenues and certain expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS For the purposes of reporting cash flows, cash equivalents include federal funds sold. Generally, federal funds are sold for one-day periods. Substantially all cash equivalents held in other financial institutions exceed existing deposit insurance coverage. INTEREST-EARNING DEPOSITS IN OTHER FINANCIAL INSTITUTIONS Interest-earning deposits in other financial institutions generally have one year original maturities and no individual deposit exceeds $100,000. Accordingly, these deposits are recorded at cost, which approximates market. INVESTMENT SECURITIES: Bancorp classifies and accounts for debt and equity securities as follows: * Held-to-Maturity--Debt securities that management has the positive intent and ability to hold until maturity are classified as held-to-maturity and are carried at their remaining unpaid principal balance, net of unamortized premiums or unaccreted discounts. Premiums are amortized and discounts are accreted using the level interest yield method over the estimated remaining term of the underlying security. F-54 143 REDWOOD BANCORP AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) * Trading Securities--Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at market value, with unrealized gains and losses included in earnings. The Bank held no trading securities during 1997 and 1996. * Available-For-Sale--Debt and equity securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, needs for liquidity and changes in the availability of and the yield of alternative investments are classified as available-for-sale. After amortization or accretion of any premiums or discounts, these assets are carried at market value. Market value is determined using published quotes as of the close of business. Unrealized gains and losses are excluded from earnings and reported net of tax as a separate component of stockholders' equity until realized. Realized gains and losses on held-to-maturity and available-for-sale securities are computed using the specific identification method using amortized cost. LOANS Loans held for investment are carried at amortized cost. Bancorp's loan portfolio consists of commercial, installment, real estate construction and other real estate loans generally collateralized by first and second deeds of trust on real estate, business assets, or personal property. Interest income is accrued daily on the outstanding loan balances using the simple interest method. Loans are generally placed on nonaccrual status when the borrowers are past due 90 days and when payment in full of principal or interest is not expected. At the time a loan is placed on nonaccrual status, any interest income previously accrued but not collected is reversed. Bancorp charges loan origination and commitment fees. Net loan origination fees are deferred and amortized to interest income over the life of the loan on a method that produces a level yield. Loan commitment fees related to lines of credit are amortized to interest income over the commitment period. If a loan is paid-off prior to maturity, the remaining unamortized deferred fee is immediately recognized to interest income. ALLOWANCE FOR LOAN LOSSES An allowance for loan losses is maintained at a level deemed appropriate by management to provide for known and unidentified losses in the loan portfolio. The allowance is based upon management's assessment of various factors affecting the collectibility of the loans and commitments to extend credit, including current and projected economic conditions, past credit experience, delinquency status, the value of the underlying collateral, if any, and the continuing review of the portfolio of loans and commitments. The allowance for loan losses is based on estimates, and ultimate losses may vary from the current estimates. These estimates are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. A loan is considered impaired based on current information and events, if it is probable that the Bancorp will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The allowance for losses on impaired loans is measured under one of three prescribed methods. Since most of the Bancorp's loans are collateral dependent, the calculation of the allowance on impaired loans is generally based on the fair value of the collateral. Income recognition on impaired loans conforms to the method the Bancorp uses for income recognition on nonaccrual loans. BANK PREMISES AND EQUIPMENT Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line basis over the shorter of the estimated useful lives of the assets or the term of the lease. F-55 144 REDWOOD BANCORP AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) OTHER REAL ESTATE OWNED Other real estate owned consists of properties acquired through foreclosure and is stated at the lower of cost or fair market value less estimated costs to sell. Estimated losses that result from the ongoing periodic valuation of these properties are charged to current earnings with a provision for losses on foreclosed property in the period in which they are identified. Operating expenses of such properties, net of related income, are included in other expenses. INCOME TAXES Bancorp is included in the consolidated federal income tax returns of Empire Holdings, Inc. and files its own state income tax returns. Income taxes have been computed on the separate results of Bancorp based on the provisions of its tax sharing agreements with Empire Holdings, Inc. These agreements generally provide that Bancorp will be charged or reimbursed based on the tax effect of its earnings or losses in the combined and consolidated tax returns. Deferred income taxes reflect the estimated future tax effects of temporary differences between amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. GOODWILL Goodwill represents the excess of the purchase price over the estimated fair value of identifiable net assets associated with the purchase of Bancorp in March 1980. Goodwill is being amortized over 40 years on a straight-line basis. PER SHARE DATA Net income per share is stated in accordance with SFAS No. 128, Earnings Per Share. Basic net income per share is computed by dividing net income available to common shareholders (the numerator) by the weighted average number of common shares outstanding during the year (denominator). Diluted net income per share is computed by dividing diluted net income available to common shareholders by the weighted average number of common shares and common equivalent shares outstanding. There were no common equivalent shares outstanding during 1997 and 1996. (2) INVESTMENT SECURITIES The amortized cost and estimated market values of investment securities at December 31, 1997 and 1996 were as follows:
1997 --------------------------------------------------------- UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ---- ---------- ---------- ------ Held-to-maturity: U.S. Government Agencies................... $ 4,228,570 $ 754 -- $ 4,229,324 ----------- ------- --------- ----------- 4,228,570 754 -- 4,229,324 ----------- ------- --------- ----------- Available-for-sale: U.S. Treasury Securities................... 2,000,348 1,527 -- 2,001,875 U.S. Government Agencies................... 12,478,003 10,093 -- 12,488,096 ----------- ------- --------- ----------- 14,478,351 11,620 -- 14,489,971 ----------- ------- --------- ----------- $18,706,921 $12,374 -- $18,719,295 =========== ======= ========= ===========
F-56 145 REDWOOD BANCORP AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1996 --------------------------------------------------------- UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ---- ---------- ---------- ------ Held-to-maturity: U.S. Treasury Securities................... $ 979,385 $3,256 -- $ 982,641 U.S. Government Agencies................... 1,269,822 -- $ (4,280) 1,265,542 ----------- ------ --------- ----------- 2,249,207 3,256 (4,280) 2,248,183 ----------- ------ --------- ----------- Available-for-sale: U.S. Treasury Securities................... 1,999,864 1,387 -- 2,001,251 U.S. Government Agencies................... 7,444,421 -- (98,304) 7,346,117 ----------- ------ --------- ----------- 9,444,285 1,387 (98,304) 9,347,368 ----------- ------ --------- ----------- $11,693,492 $4,643 $(102,584) $11,595,551 =========== ====== ========= ===========
At December 31, 1997 and 1996, securities with carrying amounts of $6,992,099 and $8,965,398 were pledged to secure public deposits. The amortized cost and estimated market value of investment securities at December 31, 1997 by contractual maturity, is as follows:
AMORTIZED MARKET COST VALUE --------- ------ Held-to-maturity: Over five through ten years................. $ 3,000,000 $ 3,007,454 Over ten years.............................. 1,228,570 1,221,870 ----------- ----------- 4,228,570 4,229,324 ----------- ----------- Available for Sale: One year or less............................ 7,992,634 7,997,174 Over one through five years................. 5,983,500 5,988,494 Over five through ten years................. 502,217 504,303 ----------- ----------- 14,478,351 14,489,971 ----------- ----------- $18,706,921 $18,719,295 =========== ===========
(3) LOANS AND ALLOWANCE FOR LOAN LOSSES The loan portfolio at December 31, 1997 and 1996 consisted of the following:
1997 1996 ---- ---- Commercial.................................... $ 12,219,400 $ 12,600,149 Real estate--mortgage......................... 80,168,678 69,257,087 Real estate--construction..................... 10,566,258 11,557,092 Installment and other loans................... 8,193,617 8,258,278 Acceptances of other banks.................... -- 999,855 ------------ ------------ 111,147,953 102,672,461 Less: Deferred loan fees........................ (477,622) (484,356) Allowance for loan losses................. (1,186,625) (1,193,459) ------------ ------------ $109,483,706 $100,994,646 ============ ============
F-57 146 REDWOOD BANCORP AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) Bancorp concentrates its lending activities in commercial loans and real estate loans made primarily to businesses and individuals within the San Francisco Bay Area. The change in the allowance for loan losses for the years ended December 31, 1997 and 1996 are as follows:
1997 1996 ---- ---- Balance at beginning of year...................... $1,193,459 $1,210,127 Provision for loan losses......................... -- -- Loans charged off................................. (13,249) (38,170) Recoveries........................................ 6,415 21,502 ---------- ---------- Balance at end of year............................ $1,186,625 $1,193,459 ========== ==========
At December 31, 1997 and 1996, loans on nonaccrual status totaled $1,354,003 and $2,470,127. Foregone interest on these loans for 1997 and 1996 were $123,941 and $230,667. At December 31, 1997 and 1996, the recorded investment in loans for which impairment has been recognized in accordance with SFAS No. 114 totaled $641,431 and $626,689 with a corresponding valuation allowance of $103,792 and $239,176, respectively. The average recorded investment in impaired loans in 1997 and 1996 was $634,060 and $370,845, respectively. From the time each loan was classified as impaired, no interest income was recognized on such loans in 1997 or 1996. At December 31, 1997 and 1996, loans pledged to secure public deposits were $322,660 and $425,394, respectively. (4) BANK PREMISES AND EQUIPMENT Bank premises and equipment at December 31, 1997 and 1996 consisted of the following:
1997 1996 ---- ---- Land............................................ $ 228,923 $ 228,923 Building........................................ 661,392 672,368 Furniture and fixtures.......................... 447,662 696,769 Equipment....................................... 1,515,192 2,424,191 Leasehold improvements.......................... 1,872,058 1,830,899 ----------- ----------- 4,725,227 5,853,150 Less accumulated depreciation and amortization.................................. (3,928,986) (5,068,032) ----------- ----------- $ 796,241 $ 785,118 =========== ===========
Depreciation and amortization expense for the year ended December 31, 1997 and 1996 were $212,697 and $225,429. (5) DEPOSITS At December 31, 1997 and 1996, deposits consisted of the following:
1997 1996 ---- ---- Noninterest-bearing demand.................... $ 27,427,159 $ 27,115,692 Savings and interest-bearing demand........... 55,152,181 50,545,444 Certificates of deposit issued in amounts less than $100,000............................... 26,936,714 26,246,053 Certificates of deposit of $100,000 or more... 17,256,602 13,472,566 ------------ ------------ Total............................. $126,772,656 $117,379,755 ============ ============
F-58 147 REDWOOD BANCORP AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) The maturity of certificates accounts are as follows: 1998........................... $39,545,316 1999........................... 3,829,000 2000........................... 479,000 2001........................... 120,000 2002 and thereafter.................. 220,000 ----------- $44,193,316 ===========
(6) INCOME TAXES The components of the provision (benefit) for federal and state income taxes are as follows:
1997 1996 ---- ---- Currently payable: Federal...................................... $ 30,851 $ 23,000 State........................................ 265,000 186,000 ---------- ----------- Total................................ 295,851 209,000 ---------- ----------- Deferred: Federal...................................... 19,000 27,000 State........................................ (45,000) 14,000 Reduction of income tax due to utilization of net operating loss carryforward............ 886,000 514,000 Reduction in valuation allowance............. -- (2,537,000) ---------- ----------- Total................................ 860,000 (1,982,000) ---------- ----------- Income tax expense (benefit)..... $1,155,851 $(1,773,000) ========== ===========
Reconciliation of the statutory tax rate to the effective tax rate is as follows:
1997 1996 ---- ---- Statutory federal tax rate............................. 35.0% 35.0% State tax, net of federal income tax effect.............. 5.6% 8.9% Reduction in deferred tax asset valuation allowance...... -- (165.4)% Other, net............................................... 4.3% 5.9% ---- ------ 44.9% (115.6)% ==== ======
The components of net deferred income tax assets and liabilities as of December 31 are as follows:
1997 1996 ---- ---- Allowance for loan losses......................... $ 237,000 $ 239,000 Fixed assets...................................... 148,000 147,000 Deferred loan fees................................ 20,000 32,000 Net operating loss carryforward................... 803,000 1,689,000 State tax, net of federal income tax effect....... 196,000 151,000 AMT credit carryforward........................... 53,000 34,000 Other............................................. 3,000 (6,000) ---------- ---------- Total deferred tax assets............. $1,460,000 $2,286,000 ========== ==========
As of December 31, 1997, Bancorp had federal net operating loss carryforwards of $2,363,000 available to reduce future financial statement income based on the provisions of its tax sharing, agreement with Empire Holdings, Inc. In addition, Bancorp is a member of the Empire Holdings, Inc. and subsidiaries consolidated tax return filing group. F-59 148 REDWOOD BANCORP AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) As of December 31, 1997, the Empire Holdings consolidated group had federal net operating loss carryforwards available, on a tax basis, to reduce future taxable income as follows:
NET OPERATING EXPIRATION LOSS CARRYOVER DATE - -------------- ---------- $ 70,000 ........................................... 2002 2,846,000 ........................................... 2003 245,000 ........................................... 2004 3,000 ........................................... 2005 658,000 ........................................... 2006 5,000 ........................................... 2007 164,000 ........................................... 2008 26,000 ........................................... 2009 ---------- $4,017,000 ==========
(7) EMPLOYEE BENEFIT PLAN Bancorp has a 401(k) savings plan covering substantially all employees of Bancorp. Under the provisions of the plan, employees who elect to participate are allowed to make "deferred contributions" (as defined in the Plan Agreement) of up to 15% of their annual salary. In addition, the Bank will make matching contributions equal to 50% of each employee's elective deferral and at year end 1% of the employee's annual salary. Contributions by Bancorp for the year ended December 31, 1997 and 1996 amounted to $107,200 and $104,954, respectively. (8) RELATED PARTY TRANSACTIONS In the ordinary course of business, the Bancorp has made loans and advances under lines of credit to directors and officers and their related interests. An analysis of loans to related parties for 1997 and 1996 are shown below:
1997 1996 ---- ---- Balance, beginning of year.......... -- $ 100,000 Advances............................ -- 886,000 Payments............................ -- (986,000) --------- --------- Balance, end of year................ -- -- ========= =========
(9) COMMITMENTS AND CONTINGENCIES The Bank is required by federal regulations to maintain certain minimum average balances with the Federal Reserve Bank, based primarily on the Bank's daily demand deposit balances. Required deposits held with the Federal Reserve Bank as of December 31, 1997 and 1996 were $1,479,000 and $1,482,000, and the Bank had a balance of $6,213,000 and $5,177,000 with the Federal Reserve Bank at these dates. Bancorp has entered into various noncancelable operating lease arrangements for three branch offices. Future minimum lease payments as of December 31, 1997 are as follows:
FUTURE MINIMUM LEASE PAYMENTS -------------- 1998.......................................... $385,683 1999.......................................... 19,400 -------- $405,083 ========
F-60 149 REDWOOD BANCORP AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) Certain of the leases contain renewal options and rent escalation clauses based upon certain economic indices. Net rental expense for bank premises and equipment under operating leases for the year ended December 31, 1997 and 1996 was $477,398 and $475,395. Bancorp is involved in legal actions arising from normal business activities. Management, upon the advice of legal counsel handling such actions, believes that the ultimate resolution of these actions will not have a material effect on the financial position of Bancorp. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK Bancorp is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. To date, these financial instruments include commitments to extend credit which involve elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bancorp upon commitments to extend credit, is based on management's credit evaluation of the counter-party. Collateral held varies but usually consists of residential and commercial property. Standby letters of credit are performance assurances made on behalf of customers who have a contractual obligation to produce or deliver goods or services or otherwise perform. Credit risk in these transactions arises from the possibility that a customer may not be able to repay the Bank if the letter of credit is drawn upon. As with commitments to extend credit, the Bank evaluates each customer's creditworthiness on a case-by-case basis. At December 31, 1997 and 1996, Bancorp had $18,883,206 and $16,244,782 of commitments to extend credit and $366,968 and $226,968 in standby letters of credit. (10) REGULATORY CAPITAL REQUIREMENTS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1997, that the Bank meets all capital adequacy requirements to which it is subject. F-61 150 REDWOOD BANCORP AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) The following table sets forth the regulatory capital position of the Bank as of December 31, 1997 and 1996 (in thousands):
TO BE WELL- CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS -------------------- -------------------- --------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- As of December 31, 1997: Total Capital (to Risk Weighted Assets).......................... $13,803 12.0% >=$9,237 >=8.0% >=$11,546 >=10.0% Tier I Capital (to Risk Weighted Assets).......................... $12,617 10.9% >=$4,618 >=4.0% >=$ 6,928 >= 6.0% Tier I Capital (to Average Assets).......................... $12,617 9.0% >=$5,611 >=4.0% >=$ 7,014 >= 5.0% As of December 31, 1996: Total Capital (to Risk Weighted Assets).......................... $11,514 10.6% >=$8,663 >=8.0% >=$10,829 >=10.0% Tier I Capital (to Risk Weighted Assets).......................... $10,320 9.5% >=$4,331 >=4.0% >=$ 6,497 >= 6.0% Tier I Capital (to Average Assets).......................... $10,320 8.5% >=$4,837 >=4.0% >=$ 6,046 >= 5.0%
As of December 31, 1997 and 1996, the regulatory capital position of Bancorp approximated the Bank's. As of December 31, 1997, the Bank was categorized as "well-capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well-capitalized," the Bank must maintain minimum total risk-based, Tier I risk-based, Tier I leverage ratios as set forth in the table, and not be subject to a capital directive. In addition, the California State Banking Department limits the amount of dividends that can be paid without its prior approval for all state chartered banks. The limitation for a given year is the lesser of the Bank's retained earnings or its net income for the last three fiscal years, less the amount of any distributions made by the Bank's during such period. As of December 31, 1997, the Bank could pay dividends of up to $4,829,074 without prior approval. Lastly, in September 1992, Bancorp entered into an agreement with the Federal Reserve Bank whereby Bancorp cannot pay dividends unless the Bank maintains a Tier 1 capital ratio of at least 7.0%, a Tier 1 risk-based capital ratio of at least 4% and a total risk-based capital ratio of 8%. (11) FAIR VALUES OF FINANCIAL INSTRUMENTS Fair value estimates are determined as of a specific date in time utilizing quoted market prices, where available, or various assumptions and estimates. As the assumptions underlying these estimates change, the fair value of the financial instruments will change. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, will likely reduce the comparability of fair value disclosures between financial institutions. Additionally, Bancorp has not disclosed highly subjective values of other nonfinancial instruments. Accordingly, the aggregate fair value amounts presented do not represent and should not be construed to represent the full underlying value of the Bank. The methods and assumptions used to estimate the fair values of each class of financial instruments are as follows: CASH AND CASH EQUIVALENTS The carrying value of cash and cash equivalents approximates fair value due to the relatively short term nature of these instruments. INTEREST EARNING DEPOSITS IN OTHER FINANCIAL INSTITUTIONS The carrying value of interest earning deposits in other financial institutions approximates fair value due to the short term nature of all such deposits in the Bancorp's portfolio. F-62 151 REDWOOD BANCORP AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) INVESTMENT SECURITIES, HELD TO MATURITY Fair value of securities and investments is based on quoted market prices. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. LOANS RECEIVABLE In order to determine the fair values for loans, the loan portfolio was segmented based on loan type, credit quality and repricing characteristics. For certain variable rate loans with no significant credit concerns and frequent pricings, estimated fair values are based on the carrying values. The fair values of other loans are estimated using discounted cash flow analyses. The discount rates used in these analyses are generally based on origination rates for similar loans of comparable credit quality. Maturity estimates of installment loans are based on historical experience with prepayments. DEPOSITS The fair values for deposits, subject to immediate withdrawal such as interest and noninterest bearing, and savings deposit accounts, are equal to the amount payable on demand at the reporting date (i.e., their carrying amount on the balance sheet). Fair values for fixed rate certificates of deposits are estimated by discounting future cash flows using interest rates currently offered on time deposits with similar remaining maturities.
DECEMBER 31, 1997 DECEMBER 31, 1996 ------------------------- ------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ----- -------- ----- Financial assets: Cash and cash equivalents.......... $ 9,872,217 $ 9,872,217 $ 13,140,106 $ 13,140,106 Investment securities.............. 18,718,541 18,719,295 11,596,575 11,595,551 Loans receivable, net.............. 109,483,706 109,442,971 100,994,646 100,924,569 ------------ ------------ ------------ ------------ $138,074,464 $138,034,483 $125,731,327 $125,660,226 ============ ============ ============ ============ Financial liabilities: Deposits........................... $126,772,656 $126,832,967 $117,379,755 $117,420,827 ============ ============ ============ ============
(12) PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS The financial statements of Bancorp (parent company only) follow:
1997 1996 ---- ---- BALANCE SHEETS Cash........................................................ $ 307 $ 567 Investment in subsidiaries.................................. 16,594,254 14,369,612 Deferred tax assets......................................... 877,550 1,573,000 ----------- ----------- Total assets.................................... $17,472,111 $15,943,179 =========== =========== Shareholder's equity: Common stock............................................ $ 832,500 $ 832,500 Surplus................................................. 10,639,969 10,639,969 Retained earnings....................................... 5,988,022 4,567,627 Accumulated other comprehensive income (loss), net of tax................................................... 11,620 (96,917) ----------- ----------- Total shareholder's equity.................................. $17,472,111 $15,943,179 =========== ===========
F-63 152 REDWOOD BANCORP AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1997 1996 ---- ---- INCOME STATEMENTS Expenses: Goodwill amortization................................... $ (180,224) $ (180,224) ----------- ----------- Total expenses.......................................... (180,224) (180,224) Loss before taxes and equity in undistributed net income of subsidiaries.............................................. (180,224) (180,224) Income tax benefit.......................................... -- 1,573,000 ----------- ----------- Income (loss) before equity in undistributed net income of subsidiaries.............................................. (180,224) 1,392,776 Equity in undistributed net income of subsidiaries.......... 1,600,619 1,913,945 ----------- ----------- Net Income.................................................. $ 1,420,395 $ 3,306,721 =========== =========== 1997 1996 ---- ---- STATEMENTS OF CASH FLOWS Cash flows--operating activities: Net Income.............................................. $ 1,420,395 $ 3,306,721 Reconciliation of net income to net cash from operations: Equity in undistributed net income of subsidiaries...................................... (1,600,619) (1,913,945) Goodwill amortization............................... 180,224 180,224 Deferred income tax................................. 695,450 (1,573,000) ----------- ----------- Operating cash flows, net................................... 695,450 -- Cash flows--investing activities: Capital contribution to the subsidiaries................ (695,710) -- ----------- ----------- Investing cash flows, net........................... (695,710) -- Net decrease in cash........................................ (260) -- ----------- ----------- Cash at beginning of the year............................... 567 567 Cash at end of the year..................................... $ 307 $ 567 =========== ===========
(13) SUBSEQUENT EVENT On June 8, 1998, the sole shareholder of Bancorp signed an Agreement in Principle to sell all of Bancorp's outstanding shares to First Banks AmericaInc. The transaction is expected to be completed in the fourth quarter of 1998, subject to regulatory approval. F-64 153 - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary................................ 2 Summary Consolidated Financial Data............... 7 Risk Factors...................................... 8 Use of Proceeds................................... 16 Market for the Preferred Securities............... 16 Accounting Treatment.............................. 16 Capitalization.................................... 17 Pro Forma Financial Information................... 19 Management's Discussion and Analysis.............. 26 Business.......................................... 48 Supervision and Regulation........................ 51 Description of the Preferred Securities........... 57 Description of the Subordinated Debentures........ 66 Description of the Guarantee...................... 74 Relationship Among the Preferred Securities, the Subordinated Debentures and the Guarantee....... 76 Certain Federal Income Tax Consequences........... 78 ERISA Considerations.............................. 81 Underwriting...................................... 82 Validity of Securities............................ 83 Experts........................................... 83 Incorporation of Certain Documents by Reference... 83 Available Information............................. 84 Index to Consolidated Financial Statements........ F-1
------------------------------------ NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND REPRESENTATIONS MUST BE RELIED UPON AS HAVING BEEN AUTHORIZED BY FIRST BANKS AMERICA, INC., FIRST AMERICA CAPITAL TRUST OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF FIRST BANKS AMERICA, INC. SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1,600,000 PREFERRED SECURITIES FIRST AMERICA CAPITAL TRUST % CUMULATIVE TRUST PREFERRED SECURITIES (LIQUIDATION AMOUNT $25 PER PREFERRED SECURITY) GUARANTEED, AS DESCRIBED HEREIN, BY FIRST BANKS AMERICA, INC. ------------------------ $40,000,000 % SUBORDINATED DEBENTURES OF FIRST BANKS AMERICA, INC. ------------------------ Prospectus , 1998 ------------------------ STIFEL, NICOLAUS & COMPANY INCORPORATED HOEFER & ARNETT, INC. - -------------------------------------------------------------------------------- 154 FIRST BANKS AMERICA, INC. PART II--INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION SEC Registration Fee........................................ $ 13,940 NASD Filing Fee............................................. 5,100 New York Stock Exchange Listing Fee......................... 27,140 Blue Sky Qualification Fees and Expenses.................... 3,000 Accounting Fees and Expenses................................ 65,000 Legal Fees and Expenses..................................... 100,000 Trustees' Fees and Expenses................................. 12,000 Printing and Engraving Expenses............................. 15,000 Miscellaneous............................................... 8,820 -------- Total............................................... $250,000 ========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law (the "DGCL") permits a corporation to indemnify its directors and officers or former directors or officers and to purchase insurance with respect to liability arising out of their capacity or status as directors and officers. Such law provides further that the indemnification permitted thereunder shall not be deemed exclusive of any other rights to which the directors and officers may be entitled under FBA's Restated Certificate of Incorporation, By-laws, any agreement or otherwise. Reference is made to Article X of FBA's By-laws, which provides for indemnification of directors, officers, employees and agents of FBA under certain circumstances. The provisions of such By-laws and Section 145 of the DGCL may be sufficiently broad to indemnify FBA's directors, officers, employees and agents for certain liabilities arising under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling FBA pursuant to the foregoing provisions, FBA has been informed that, in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. Pursuant to a policy of directors' and officers' liability insurance, with total annual limits of $10.0 million, officers and directors of FBA are insured, subject to the limits, retention, exceptions and other terms and conditions of such policy, against liability for any actual or alleged error, misstatement, misleading statement, act or omission, or neglect or breach of duty by the directors or officers of FBA in the discharge of their duties solely in their capacity as directors or officers of FBA, individually or collectively, or any matter claimed against them solely by reason of their being directors or officers of FBA. Under the Trust Agreement, FBA will agree to indemnify each of the Trustees of the Trust or any predecessor Trustee for the Trust, and to hold each Trustee harmless against, any loss, damage, claims, liability or expense incurred without negligence or bad faith on its part, arising out of or including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties under the Trust Agreement. FBA and the Trust have agreed to indemnify the Underwriters, and the Underwriters have agreed to indemnify the Trust and FBA against certain civil liabilities, including liabilities under the Securities Act of 1933, as amended. Reference is made to the form of Underwriting Agreement filed as Exhibit 1.1 herewith. II-1 155 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits 1.1 Form of Underwriting Agreement. 4.1 Form of Indenture. 4.2 Form of Subordinated Debenture (included as an exhibit to Exhibit 4.1). 4.3 Certificate of Trust of First America Capital Trust. 4.4 Trust Agreement of First America Capital Trust. 4.5 Form of Amended and Restated Trust Agreement. 4.6 Form of Preferred Security Certificate (included as an exhibit to Exhibit 4.5). 4.7 Form of Preferred Securities Guarantee Agreement. 4.8 Form of Agreement as to Expenses and Liabilities (included as an exhibit to Exhibit 4.5). 5.1 Opinion of Jackson Walker L.L.P. as to the validity of the issuance of the Subordinated Debentures. 5.2 Opinion of Richards, Layton & Finger, special Delaware counsel, as to the legality of the Preferred Securities. 8.1 Opinion of Jackson Walker L.L.P. as to certain federal income tax matters. 10(a) BancTEXAS Group Inc. 1990 Stock Option Plan (as amended July 22, 1993)(filed as Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, and incorporated herein by reference). 10(b) 1993 Directors' Stock Bonus Plan (filed as Exhibit 10(k) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 and incorporated herein by reference). 10(c) Stock Purchase and Operating Agreement by and between First Banks, Inc., a Missouri Corporation and the Company, dated May 19, 1994 (filed as Exhibit 10(d) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 and incorporated herein by reference). 10(d) Management Agreement by and between First Banks, Inc., and BankTEXAS N.A., dated November 17, 1994 (filed as Exhibit 10(h) to the Company's Annual Report on From 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10(e) Financial Management Policy by and between First Banks, Inc., and the Company, dated September 15, 1994 (filed as Exhibit 10(j) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10(f) Federal Funds Agency Agreement by and between First Banks, Inc., and the Company, dated September 15, 1994 (filed as Exhibit 10(k) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10(g) Funds Management Policy by and between First Bank and BankTEXAS N.A., dated December 1, 1997. 10(h) Management Services Agreement by and between First Banks, Inc., and Sunrise Bank of California dated December 16, 1996 (filed as Exhibit 10(j) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). II-2 156 10(i) Service Agreement by and between First Serv, Inc., and Sunrise Bank of California (relating to data processing services) dated November 21, 1996 (filed as Exhibit 10(k) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 10(j) Federal Funds Agency Agreement by and between First Banks, Inc., and Sunrise Bank of California dated November 19, 1996 (filed as Exhibit 10(1) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 10(k) Funds Management Policy by and between First Banks, Inc., and Sunrise Bank of California dated November 19, 1996 (filed as Exhibit 10(m) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 10(l) Agreement and Plan of Reorganization dated July 28, 1997, by and between FBA and Surety Bank (filed as Exhibit 2 to the Company's Current Report on Form 8-K dated August 7, 1997 and incorporated herein by reference). 10(m) Agreement and Plan of Merger by and between FBA and Pacific Bay Bank dated September 22, 1997 (filed as Exhibit 2(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference). 10(n) Agreement and Plan of Merger by and between FBA and FCB dated October 3, 1997 (filed as Exhibit 2(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference). 10(o) Promissory note payable to First Banks, Inc., dated November 4, 1997 (filed as Exhibit 0(o) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference. 10(p) Cost sharing agreement by and among First Bank & Trust, Sunrise Bank of California, Sundowner Corporation and First Banks America, Inc. (filed as Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference). 10(q) Service Agreement by and between First Services, L.P., and BankTEXAS, N.A., dated April 1, 1997 (filed as Exhibit 10(r) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference). 10(r) Service Agreement by and between First Services, L.P., and First Bank of California, dated April 1, 1997 (filed as Exhibit 10(s) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference). 10(s) Debenture by and between First Bank America, Inc., and First Banks, Inc., dated February 2, 1998 (filed as Exhibit 10(t) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference). 10(t) Brokerage Service/Lease Agreement by and between BankTEXAS, N.A. and First Brokerage America L.L.C. dated June 1, 1998. 12.1 Statements Regarding Computation of Ratio of Earnings to Fixed Charges. 13.1 Annual Report on Form 10-K for the year ended December 31, 1997. 13.2 Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. 23.1 Consents of KPMG Peat Marwick LLP, Independent Accountants. 23.2 Consent of Jackson Walker L.L.P. (included in their opinions filed herewith as Exhibits 5.1 and 8.1). 23.3 Consent of Richards, Layton & Finger (included in their opinions filed herewith as Exhibit 5.2). 23.4 Consent of Coopers & Lybrand, L.L.P., Independent Accountants. II-3 157 24.1 Power of Attorney (included on the signature page). 25.1 Form T-1 Statement of Eligibility of State Street Bank and Trust Company to act as trustee under the Indenture. 25.2 Form T-1 Statement of Eligibility of State Street Bank and Trust Company to act as trustee under the Amended and Restated Trust Agreement. 25.3 Form T-1 Statement of Eligibility of State Street Bank and Trust Company to act as trustee under the Preferred Securities Guarantee Agreement. (b) Financial Statement Schedules--Not applicable as all required information is contained in the financial statements and the notes thereto or in the selected financial data.
ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, (the "Act") may be permitted to directors, officers and controlling persons of the Company pursuant to the provisions described under "Item 15--Indemnification of Directors and Officers" above, or otherwise, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The Company hereby undertakes that: (1) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this Registration Statement as of the time it was declared effective; and (2) For the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 158 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in St. Louis, Missouri on July 1, 1998. FIRST BANKS AMERICA, INC. By: /s/ JAMES F. DIERBERG --------------------------- James F. Dierberg Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, the undersigned registrant certifies that it has reasonable grounds to believe that it meets all the requirements for filing on Form S-2 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in St. Louis, Missouri on July 1, 1998. FIRST AMERICA CAPITAL TRUST By: /s/ JAMES F. DIERBERG --------------------------- James F. Dierberg, Trustee Chief Executive Officer By: /s/ ALLEN H. BLAKE --------------------------- Allen H. Blake, Trustee By: /s/ LAURENCE J. BROST --------------------------- Laurence J. Brost, Trustee II-5 159 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James F. Dierberg, and Allen H. Blake, and each of them (with full power to each of them to act alone), his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to this Registration Statement, including any Registration Statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JAMES F. DIERBERG Chairman of the Board, President and July 1, 1998 - ---------------------------------------- Chief Executive Officer James F. Dierberg /s/ ALLEN H. BLAKE Chief Financial Officer and Principal July 1, 1998 - ---------------------------------------- Accounting Officer) Allen H. Blake /s/ CHARLES A. CROCCO, JR. Director July 1, 1998 - ---------------------------------------- Charles A. Crocco, Jr. /s/ ALBERT M. LAVEZZO Director July 1, 1998 - ---------------------------------------- Albert M. Lavezzo /s/ EDWARD T. STORY, JR. Director July 1, 1998 - ---------------------------------------- Edward T. Story, Jr. /s/ MARK T. TURKCAN Director July 1, 1998 - ---------------------------------------- Mark T. Turkcan /s/ DONALD W. WILLIAMS Director July 1, 1998 - ---------------------------------------- Donald W. Williams
II-6 160 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1 Form of Underwriting Agreement. 4.1 Form of Indenture. 4.2 Form of Subordinated Debenture (included as an exhibit to Exhibit 4.1). 4.3 Certificate of Trust of First America Capital Trust. 4.4 Trust Agreement of First America Capital Trust. 4.5 Form of Amended and Restated Trust Agreement. 4.6 Form of Preferred Security Certificate (included as an exhibit to Exhibit 4.5). 4.7 Form of Preferred Securities Guarantee Agreement. 4.8 Form of Agreement as to Expenses and Liabilities (included as an exhibit to Exhibit 4.5). 5.1 Opinion of Jackson Walker L.L.P. as to the validity of the issuance of the Subordinated Debentures. 5.2 Opinion of Richards, Layton & Finger, special Delaware counsel, as to the legality of the Preferred Securities. 8.1 Opinion of Jackson Walker L.L.P. as to certain federal income tax matters. 10(a) BancTEXAS Group Inc. 1990 Stock Option Plan (as amended July 22, 1993)(filed as Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, and incorporated herein by reference). 10(b) 1993 Directors' Stock Bonus Plan (filed as Exhibit 10(k) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 and incorporated herein by reference). 10(c) Stock Purchase and Operating Agreement by and between First Banks, Inc., a Missouri Corporation and the Company, dated May 19, 1994 (filed as Exhibit 10(d) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 and incorporated herein by reference). 10(d) Management Agreement by and between First Banks, Inc., and BankTEXAS N.A., dated November 17, 1994 (filed as Exhibit 10(h) to the Company's Annual Report on From 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10(e) Financial Management Policy by and between First Banks, Inc., and the Company, dated September 15, 1994 (filed as Exhibit 10(j) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10(f) Federal Funds Agency Agreement by and between First Banks, Inc., and the Company, dated September 15, 1994 (filed as Exhibit 10(k) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10(g) Funds Management Policy by and between First Bank and BankTEXAS N.A., dated December 1, 1997. 10(h) Management Services Agreement by and between First Banks, Inc., and Sunrise Bank of California dated December 16, 1996 (filed as Exhibit 10(j) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 10(i) Service Agreement by and between First Serv, Inc., and Sunrise Bank of California (relating to data processing services) dated November 21, 1996 (filed as Exhibit 10(k) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 10(j) Federal Funds Agency Agreement by and between First Banks, Inc., and Sunrise Bank of California dated November 19, 1996 (filed as Exhibit 10(l) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). II-7 161 EXHIBIT NUMBER DESCRIPTION ------- ----------- 10(k) Funds Management Policy by and between First Banks, Inc., and Sunrise Bank of California dated November 19, 1996 (filed as Exhibit 10(m) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 10(l) Agreement and Plan of Reorganization dated July 28, 1997, by and between FBA and Surety Bank (filed as Exhibit 2 to the Company's Current Report on Form 8-K dated August 7, 1997 and incorporated herein by reference). 10(m) Agreement and Plan of Merger by and between FBA and Pacific Bay Bank dated September 22, 1997 (filed as Exhibit 2(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference). 10(n) Agreement and Plan of Merger by and between FBA and FCB dated October 3, 1997 (filed as Exhibit 2(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference). 10(o) Promissory note payable to First Banks, Inc., dated November 4, 1997 (filed as Exhibit 0(o) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference. 10(p) Cost sharing agreement by and among First Bank & Trust, Sunrise Bank of California, Sundowner Corporation and First Banks America, Inc. (filed as Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference). 10(q) Service Agreement by and between First Services, L.P., and BankTEXAS, N.A., dated April 1, 1997 (filed as Exhibit 10(r) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference). 10(r) Service Agreement by and between First Services, L.P., and First Bank of California, dated April 1, 1997 (filed as Exhibit 10(s) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference). 10(s) Debenture by and between First Bank America, Inc., and First Banks, Inc., dated February 2, 1998 (filed as Exhibit 10(t) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference). 10(t) Brokerage Service/Lease Agreement by and between BankTEXAS, N.A. and First Brokerage America L.L.C. dated June 1, 1998. 12.1 Statements Regarding Computation of Ratio of Earnings to Fixed Charges. 13.1 Annual Report on Form 10-K for the year ended December 31, 1997. 13.2 Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. 23.1 Consents of KPMG Peat Marwick LLP, Independent Accountants. 23.2 Consent of Jackson Walker L.L.P. (included in their opinions filed herewith as Exhibits 5.1 and 8.1). 23.3 Consent of Richards, Layton & Finger (included in their opinions filed herewith as Exhibit 5.2). 23.4 Consent of Coopers & Lybrand, L.L.P., Independent Accountants. 24.1 Power of Attorney (included on the signature page). 25.1 Form T-1 Statement of Eligibility of State Street Bank and Trust Company to act as trustee under the Indenture. 25.2 Form T-1 Statement of Eligibility of State Street Bank and Trust Company to act as trustee under the Amended and Restated Trust Agreement. 25.3 Form T-1 Statement of Eligibility of State Street Bank and Trust Company to act as trustee under the Preferred Securities Guarantee Agreement.
II-8 EX-1.1 2 UNDERWRITING AGREEMENT 1 1,600,000 Preferred Securities First America Capital Trust % Cumulative Trust Preferred Securities ----- (Liquidation Amount of $25 per Preferred Security) UNDERWRITING AGREEMENT ---------------------- , 1998 -------------- STIFEL, NICOLAUS & COMPANY, INCORPORATED 500 North Broadway St. Louis, Missouri 63102 HOEFER & ARNETT, INC. 353 Sacramento Street, 10th Floor San Francisco, California 94111 As Representatives of the Several Underwriters named in Schedule I hereto Dear Sirs: First Banks America, Inc., a Delaware corporation (the "Company") and its financing subsidiary, First America Capital Trust, a Delaware business trust (the "Trust", and hereinafter together with the Company, the "Offerors"), propose that the Trust issue and sell to the several underwriters listed on Schedule I hereto (the "Underwriters"), pursuant to the terms of this Agreement, 1,600,000 of the Trust's % Cumulative Trust ---- Preferred Securities, with a liquidation amount of $25.00 per preferred security (the "Preferred Securities"), to be issued under the Trust Agreement (as hereinafter defined), the terms of which are more fully described in the Prospectus (as hereinafter defined). The aforementioned 1,600,000 Preferred Securities to be sold to the Underwriters are herein called the "Firm Preferred Securities". Solely for the purpose of covering over-allotments in the sale of the Firm Preferred Securities, the Offerors further propose that the Trust issue and sell to the Underwriters, at their option, up to an additional 240,000 Preferred Securities (the "Option Preferred Securities") upon exercise of the over-allotment option granted in Section 1 hereof. The Firm Preferred Securities and any Option Preferred Securities are herein collectively referred to as the "Designated Preferred Securities". Stifel, Nicolaus & Company, Incorporated and Hoefer & Arnett, Inc. are acting jointly as representatives of the Underwriters and in such capacity are sometimes herein referred to as the "Representatives." The Offerors hereby confirm as follows their agreement with each of the Underwriters in connection with the proposed purchase of the Designated Preferred Securities. 2 1. Sale, Purchase and Delivery of Designated Preferred Securities; --------------------------------------------------------------- Description of Designated Preferred Securities. - ----------------------------------------------- (a) On the basis of the representations, warranties and agreements herein contained, and subject to the terms and conditions herein set forth, the Offerors hereby agree that the Trust shall issue and sell to each of the Underwriters and each of the Underwriters agrees, severally and not jointly, to purchase from the Trust, at a purchase price of $25.00 per share (the "Purchase Price"), the respective number of Firm Preferred Securities set forth opposite the name of such Underwriter in Schedule I hereto. Because the proceeds from the sale of the Firm Preferred Securities will be used to purchase from the Company its Debentures (as hereinafter defined and as described in the Prospectus), the Company shall pay to each Underwriter a commission of $ per Firm Preferred Security purchased (the ----- "Firm Preferred Securities Commission"). The Representatives may by notice to the Company amend Schedule I to add, eliminate or substitute names set forth therein (other than to eliminate the name of the Representatives) and to amend the number of firm Preferred Securities to be purchased by any firm or corporation listed thereon, provided that the total number of Firm Preferred Securities listed on Schedule I shall equal 1,600,000. In addition, on the basis of the representations, warranties and agreements herein contained and subject to the terms and conditions herein set forth, the Trust hereby grants to the Underwriters, severally and not jointly, an option to purchase all or any portion of the 240,000 Option Preferred Securities, and upon the exercise of such option in accordance with this Section 1, the Offerors hereby agree that the Trust shall issue and sell to the Underwriters, severally and not jointly, all or any portion of the Option Preferred Securities at the same Purchase Price per share paid for the Firm Preferred Securities. If any Option Preferred Securities are to be purchased, each Underwriter, severally and not jointly, agrees to purchase from the Trust that proportion (subject to adjustment as the Representatives may determine to avoid fractional shares) of the number of Option Preferred Securities to be purchased that the number of Firm Preferred Securities set forth opposite the name of such Underwriter in Schedule I hereto (or such number increased as set forth in Section 9 hereof) bears to 1,600,000. Because the proceeds from the sale of the Option Preferred Securities will be used to purchase from the Company its Debentures, the Company shall pay to the Underwriters a commission of $ per Option Preferred Security for ----- each Option Preferred Security purchased (the "Option Preferred Securities Commission"). The option hereby granted (the "Option") shall expire 30 days after the date upon which the Registration Statement (as hereinafter defined) becomes effective and may be exercised only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Firm Preferred Securities. The Option may be exercised in whole or in part at any time (but not more than once) by you giving notice (confirmed in writing) to the Trust setting forth the number of Option Preferred Securities as to which the Underwriters are exercising the Option and the time, date and place for payment and delivery of certificates for such Option Preferred Securities. Such time and date of payment and delivery for the Option Preferred Securities (the "Option Closing Date") shall be determined by you, but shall not be earlier than two nor later than five full business days after the exercise of such Option, nor in any event prior to the Closing Date (as hereinafter defined). The Option Closing Date may be the same as the Closing Date. 2 3 Payment of the Purchase Price and the Firm Preferred Securities Commission and delivery of certificates for the Firm Preferred Securities shall be made at the offices of Stifel, Nicolaus & Company, Incorporated, 500 North Broadway, St. Louis, Missouri 63102, or such other place as shall be agreed to by you and the Offerors, at 10:00 a.m., St. Louis time, on , 1998, or at such other time not more than five full business - ------------- days thereafter as the Offerors and you shall determine (the "Closing Date"). If the Underwriters exercise the option to purchase any or all of the Option Preferred Securities, payment of the Purchase Price and Option Preferred Securities Commission and delivery of certificates for such Option Preferred Securities shall be made on the Option Closing Date at the Underwriters' offices, or at such other place as the Offerors and you shall determine. Such payments shall be made to an account designated by the Trust by wire transfer or certified or bank cashier's check, in same day funds, in the amount of the Purchase Price therefor, against delivery by or on behalf of the Trust to you for the respective accounts of the several Underwriters of certificates for the Designated Preferred Securities to be purchased by the Underwriters. The Agreement contained herein with respect to the timing of the Closing Date and Option Closing Date is intended to, and does, constitute an express agreement, as described in Rule 15c6-1(c) and (d) promulgated under the 1934 Act (as defined herein), for a settlement date other than four business days after the date of the contract. Certificates for Designated Preferred Securities to be purchased by the Underwriters shall be delivered by the Offerors in fully registered form in such authorized denominations and registered in such names as you shall request in writing not later than 12:00 noon, St. Louis time, two business days prior to the Closing Date and, if applicable, the Option Closing Date. Certificates for Designated Preferred Securities to be purchased by the Underwriters shall be made available by the Offerors to you for inspection, checking and packaging at such office as you may designate in writing not later than 1:00 p.m., St. Louis time, on the last business day prior to the Closing Date and, if applicable, on the last business day prior to the Option Closing Date. Time shall be of the essence, and delivery of the certificates for the Designated Preferred Securities at the time and place specified pursuant to this Agreement is a further condition of the obligations of each Underwriter hereunder. (b) The Offerors propose that the Trust issue the Designated Preferred Securities pursuant to an Amended and Restated Trust Agreement among State Street Bank and Trust Company, as Property Trustee, Wilmington Trust Company, as Delaware Trustee, the Administrative Trustees named therein, (collectively, the "Trustees"), and the Company, in substantially the form heretofore delivered to the Underwriters, said Agreement being hereinafter referred to as the "Trust Agreement". In connection with the issuance of the Designated Preferred Securities, the Company proposes (i) to issue its Subordinated Debentures ( the "Debentures") pursuant to an Indenture, to be dated as of , 1998, between the Company and ------------ State Street Bank and Trust Company, as Trustee (the "Indenture") and (ii) to guarantee certain payments on the Designated Preferred Securities pursuant to a Guarantee 3 4 Agreement between the Company and State Street Bank and Trust Company, as guarantee trustee (the "Guarantee"), to the extent described therein. 2. Representations and Warranties. ------------------------------ (a) The Offerors jointly and severally represent and warrant to, and agree with, each of the Underwriters that: (i) The reports filed with the Securities and Exchange Commission (the "Commission") by the Company under the Securities Exchange Act of 1934, as amended (the "1934 Act") and the rules and regulations thereunder (the "1934 Act Regulations") at the time they were filed with the Commission, complied as to form in all material respects with the requirements of the 1934 Act and the 1934 Act Regulations and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. (ii) The Offerors have prepared and filed with the Commission a registration statement on Form S-2 (File Numbers 333- ----- and 333- -01) for the registration of the Designated Preferred ----- Securities, the Guarantee and $46,000,000 aggregate principal amount of Debentures under the Securities Act of 1933, as amended (the "1933 Act"), including the related prospectus subject to completion, and one or more amendments to such registration statement may have been so filed, in each case in conformity in all material respects with the requirements of the 1933 Act, the rules and regulations promulgated thereunder (the "1933 Act Regulations") and the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act") and the rules and regulations thereunder. Copies of such registration statement, including any amendments thereto, each Preliminary Prospectus (as defined herein) contained therein and the exhibits, financial statements and schedules to such registration statement, as finally amended and revised, have heretofore been delivered by the Offerors to the Representatives. After the execution of this Agreement, the Offerors will file with the Commission (A) if such registration statement, as it may have been amended, has been declared by the Commission to be effective under the 1933 Act, a prospectus in the form most recently included in an amendment to such registration statement (or, if no such amendment shall have been filed, in such registration statement), with such changes or insertions as are required by Rule 430A of the 1933 Act Regulations ("Rule 430A") or permitted by Rule 424(b) of the 1933 Act Regulations ("Rule 424(b)") and as have been provided to and not objected to by the Representatives prior to (or as are agreed to by the Representatives subsequent to) the execution of this Agreement, or (B) if such registration statement, as it may have been amended, has not been declared by the Commission to be effective under the 1933 Act, an amendment to such registration statement, including a form of final prospectus, necessary to permit such registration statement to become effective, a copy of which amendment has been furnished to and not objected to by the Representatives prior to (or is agreed to by the Representatives subsequent to) the execution of this Agreement. As used in this Agreement, the term "Registration Statement" means such registration 4 5 statement, as amended at the time when it was or is declared effective under the 1933 Act, including (1) all financial schedules and exhibits thereto, (2) all documents (or portions thereof) incorporated by reference therein filed under the 1934 Act, and (3) any information omitted therefrom pursuant to Rule 430A and included in the Prospectus (as hereinafter defined); the term "Preliminary Prospectus" means each prospectus subject to completion filed with such registration statement or any amendment thereto including all documents (or portions thereof) incorporated by reference therein under the 1934 Act (including the prospectus subject to completion, if any, included in the Registration Statement and each prospectus filed pursuant to Rule 424(a) under the 1933 Act); and the term "Prospectus" means the prospectus first filed with the Commission pursuant to Rule 424(b)(1) or (4) or, if no prospectus is required to be filed pursuant to Rule 424(b)(1) or (4), the prospectus included in the Registration Statement, in each case including the financial schedules and all documents (or portions thereof) incorporated by reference therein under the 1934 Act. The date on which the Registration Statement becomes effective is hereinafter referred to as the "Effective Date." (iii) The documents incorporated by reference in the Preliminary Prospectus or Prospectus or from which information is so incorporated by reference, when they became effective or were filed with the Commission, as the case may be, complied in all material respects with the requirements of the 1934 Act and the 1934 Act Regulations, and when read together and with the other information in the Preliminary Prospectus or Prospectus, as the case may be, at the time the Registration Statement became or becomes effective and at the Closing Date and any Option Closing Date, did not or will not, as the case may be, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (iv) No order preventing or suspending the use of any Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) has been issued by the Commission, nor has the Commission, to the knowledge of the Offerors, threatened to issue such an order or instituted proceedings for that purpose. Each Preliminary Prospectus, at the time of filing thereof, (A) complied in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and (B) did not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, --------- however, that this representation and warranty does not apply to -------- statements or omissions made in reliance upon and in conformity with information furnished in writing to the Offerors by any of the Underwriters expressly for inclusion in the Prospectus beneath the heading "Underwriting" and the last sentence on the cover page of the Prospectus (such information referred to herein as the "Underwriters' Information"). (v) At the Effective Date and at all times subsequent thereto, up to and including the Closing Date and, if applicable, the Option Closing Date, the Registration Statement and any post-effective amendment thereto (A) complied and will comply in all 5 6 material respects with the requirements of the 1933 Act, the 1933 Act Regulations and the Trust Indenture Act (and the rules and regulations thereunder) and (B) did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, not misleading. At the Effective Date and at all times when the Prospectus is required to be delivered in connection with offers and sales of Designated Preferred Securities, including, without limitation, the Closing Date and, if applicable, the Option Closing Date, the Prospectus, as amended or supplemented, (A) complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and the Trust Indenture Act (and the rules and regulations thereunder) and (B) did not contain and will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, --------- however, that this representation and warranty does not apply to -------- Underwriters' Information. (vi) (A) The Company is duly organized, validly existing and in good standing under the laws of the State of Delaware, with full corporate and other power and authority to own, lease and operate its properties and conduct its business as described in and contemplated by the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and as currently being conducted and is duly registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). (B) The Trust has been duly created and is validly existing as a statutory business trust in good standing under the Delaware Business Trust Act with the power and authority (trust and other) to own its property and conduct its business as described in the Registration Statement and Prospectus, to issue and sell its common securities (the "Common Securities") to the Company pursuant to the Trust Agreement, to issue and sell the Designated Preferred Securities, to enter into and perform its obligations under this Agreement and to consummate the transactions herein contemplated; the Trust has no subsidiaries and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or the ownership of its property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Trust; the Trust has conducted and will conduct no business other than the transactions contemplated by this Agreement and described in the Prospectus; the Trust is not a party to or bound by any agreement or instrument other than this Agreement, the Trust Agreement and the agreements and instruments contemplated by the Trust Agreement and described in the Prospectus; the Trust has no liabilities or obligations other than those arising out of the transactions contemplated by this Agreement and the Trust Agreement and described in the Prospectus; the Trust is not a party to or subject to any action, suit or proceeding of any nature; the Trust is not, and at the Closing Date or any Option Closing Date will not be, to the knowledge of the Offerors, classified as an association taxable as a corporation for United States federal income tax purposes; and the Trust is, and as of 6 7 the Closing Date or any Option Closing Date will be, treated as a consolidated subsidiary of the Company pursuant to generally accepted accounting principles. (vii) The Company has three (3) subsidiaries. They are listed on Exhibit A attached hereto and incorporated herein (the --------- "Subsidiaries"). The Company does not own or control, directly or indirectly, more than 5% of any class of equity security of any corporation, association or other entity other than the Subsidiaries. BankTEXAS National Association and First Bank of California are collectively referred to as the "Banks". Each Subsidiary is a bank, bank holding company or business trust duly incorporated, validly existing and in good standing under the laws of its respective jurisdiction of incorporation. Each such Subsidiary has full corporate and other power and authority to own, lease and operate its properties and to conduct its business as described in and contemplated by the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and as currently being conducted. The deposit accounts of each Bank are insured by the Bank Insurance Fund administered by the Federal Deposit Insurance Corporation (the "FDIC") up to the maximum amount provided by law, except to the extent the Prospectus discloses such deposit accounts are insured by the Savings Association Insurance Fund ("SAIF") and to such extent the deposit accounts are so insured up to the maximum amount provided by law; and no proceedings for the modification, termination or revocation of any such insurance are pending or, to the knowledge of the Offerors, threatened. (viii) The Company and each of the Subsidiaries is duly qualified to transact business as a foreign corporation and is in good standing in each other jurisdiction in which it owns or leases property or conducts its business so as to require such qualification and in which the failure to so qualify would, individually or in the aggregate, have a material adverse effect on the condition (financial or otherwise), earnings, business, prospects or results of operations of the Company and the Subsidiaries on a consolidated basis. All of the issued and outstanding shares of capital stock of the Subsidiaries (A) have been duly authorized and are validly issued, (B) are fully paid and nonassessable except to the extent such shares may be deemed assessable under 12 U.S.C. Section 55 or 12 U.S.C. Section 1831o or under applicable state banking law, and (C) except as disclosed in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), are directly owned by the Company free and clear of any security interest, mortgage, pledge, lien, encumbrance, restriction upon voting or transfer, preemptive rights, claim or equity. (ix) The capital stock of the Company and the equity securities of the Trust conform to the description thereof contained in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). The outstanding shares of capital stock and equity securities of each Offeror have been duly authorized and validly issued and are fully paid and nonassessable, and no such shares were issued in violation of the preemptive or similar rights of any security holder of an Offeror; no person has any preemptive or similar right to purchase any shares of capital stock or equity securities of the Offerors. Except as disclosed in the Prospectus, (or, if the Prospectus is not in 7 8 existence, the most recent Preliminary Prospectus) there are no outstanding rights, options or warrants to acquire any securities of the Offerors or the Subsidiaries, and there are no outstanding securities convertible into or exchangeable for any securities of the Offerors or the Subsidiaries and no restrictions upon the voting or transfer of any capital stock of the Company or equity securities of the Trust pursuant to the Company's corporate charter or bylaws, the Trust Agreement or any agreement or other instrument to which an Offeror is a party or by which an Offeror is bound other than the restrictions on transfer of the Company's Class B Common Stock as set forth in that certain Stock Purchase and Operating Agreement by and between First Banks, Inc. and the Company dated May 19, 1994. (x) (A) The Trust has all requisite power and authority to issue, sell and deliver the Designated Preferred Securities in accordance with and upon the terms and conditions set forth in this Agreement, the Trust Agreement, the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). All corporate and trust action required to be taken by the Offerors for the authorization, issuance, sale and delivery of the Designated Preferred Securities in accordance with such terms and conditions has been validly and sufficiently taken. The Designated Preferred Securities, when delivered in accordance with this Agreement, will be duly and validly issued and outstanding, will be fully paid and nonassessable undivided beneficial interests in the assets of the Trust, will be entitled to the benefits of the Trust Agreement, will not be issued in violation of or subject to any preemptive or similar rights, and will conform to the description thereof in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and the Trust Agreement. None of the Designated Preferred Securities, immediately prior to delivery, will be subject to any security interest, lien, mortgage, pledge, encumbrance, restriction upon voting or transfer, preemptive rights, claim, equity or other defect. (B) The Debentures have been duly and validly authorized, and, when duly and validly executed, authenticated and issued as provided in the Indenture and delivered to the Trust pursuant to the Trust Agreement, will constitute valid and legally binding obligations of the Company entitled to the benefits of the Indenture and will conform to the description thereof contained in the Prospectus. (C) The Guarantee has been duly and validly authorized, and, when duly and validly executed and delivered to the guarantee trustee for the benefit of the Trust, will constitute a valid and legally binding obligation of the Company and will conform to the description thereof contained in the Prospectus. (D) The Agreement as to Expenses and Liabilities between the Company and the Trust (the "Expense Agreement") has been duly and validly authorized, and, when duly and validly executed and delivered by the Company, will constitute a valid and legally binding obligation of the Company and will conform to the description thereof contained in the Prospectus. 8 9 (xi) The Offerors and the Subsidiaries have complied in all material respects with all federal, state and local statutes, regulations, ordinances and rules applicable to the ownership and operation of their properties or the conduct of their businesses as described in and contemplated by the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and as currently being conducted. (xii) The Offerors and the Subsidiaries have all material permits, easements, consents, licenses, franchises and other governmental and regulatory authorizations from all appropriate federal, state, local or other public authorities ("Permits") as are necessary to own and lease their properties and conduct their businesses in the manner described in and contemplated by the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and as currently being conducted in all material respects. All such Permits are in full force and effect and each of the Offerors and the Subsidiaries are in all material respects complying therewith, and no event has occurred that allows, or after notice or lapse of time would allow, revocation or termination thereof or will result in any other material impairment of the rights of the holder of any such Permit, subject in each case to such qualification as may be adequately disclosed in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). Such Permits contain no restrictions that would materially impair the ability of the Company or the Subsidiaries to conduct their businesses in the manner consistent with their past practices. Neither the Offerors nor any of the Subsidiaries has received notice or otherwise has knowledge of any proceeding or action relating to the revocation or modification of any such Permit. (xiii) Neither of the Offerors nor any of the Subsidiaries is in breach or violation of its corporate charter, by-laws or other governing documents (including without limitation, the Trust Agreement) in any material respect. Neither of the Offerors nor any of the Subsidiaries is, and to the knowledge of the Offerors no other party is, in violation, breach or default (with or without notice or lapse of time or both) in the performance or observance of any term, covenant, agreement, obligation, representation, warranty or condition contained in (A) any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease, franchise, license, Permit or any other agreement or instrument to which it is a party or by which it or any of its properties may be bound, which breach, violation or default could have material adverse consequences to the Offerors and the Subsidiaries on a consolidated basis, and to the knowledge of the Offerors, no other party has asserted that the Offerors or any of the Subsidiaries is in such violation, breach or default (provided that the foregoing shall not apply to defaults by borrowers from the Banks), or (B) except as disclosed in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), any order, decree, judgment, rule or regulation of any court, arbitrator, government, or governmental agency or instrumentality, domestic or foreign, having jurisdiction over the Offerors or the Subsidiaries or any of their respective properties the breach, violation or default of which could have a material adverse effect on the condition, financial or otherwise, earnings, 9 10 affairs, business, prospects, or results of operations of the Offerors and the Subsidiaries on a consolidated basis. (xiv) The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated by this Agreement, the Trust Agreement, the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) do not and will not conflict with, result in the creation or imposition of any material lien, claim, charge, encumbrance or restriction upon any property or assets of the Offerors or the Subsidiaries or the Designated Preferred Securities pursuant to, constitute a breach or violation of, or constitute a default under, with or without notice or lapse of time or both, any of the terms, provisions or conditions of the charter or by-laws of the Company or the Subsidiaries, the Trust Agreement, the Guarantee, the Indenture, any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease, franchise, license, Permit or any other agreement or instrument to which the Offerors or the Subsidiaries is a party or by which any of them or any of their respective properties may be bound or any order, decree, judgment, rule or regulation of any court, arbitrator, government, or governmental agency or instrumentality, domestic or foreign, having jurisdiction over the Offerors or the Subsidiaries or any of their respective properties which conflict, creation, imposition, breach, violation or default would have either singly or in the aggregate a material adverse effect on the condition, financial or otherwise, earnings, affairs, business, prospects or results of operations of the Offerors and the Subsidiaries on a consolidated basis. No authorization, approval, consent or order of or filing, registration or qualification with, any person (including, without limitation, any court, governmental body or authority) is required in connection with the transactions contemplated by this Agreement, the Trust Agreement, the Indenture, the Guarantee, the Registration Statement and the Prospectus, except such as have been obtained under the 1933 Act, the Trust Indenture Act and from the New York Stock Exchange relating to the listing of the Designated Preferred Securities, and such as may be required under state securities laws or Interpretations or Rules of the National Association of Securities Dealers, Inc. ("NASD") in connection with the purchase and distribution of the Designated Preferred Securities by the Underwriters. (xv) The Offerors have all requisite corporate power and authority to enter into this Agreement and this Agreement has been duly and validly authorized, executed and delivered by the Offerors and constitutes the legal, valid and binding agreement of the Offerors, enforceable against the Offerors in accordance with its terms, except as the enforcement thereof may be limited by general principles of equity and by bankruptcy or other laws relating to or affecting creditors' rights generally and except as any indemnification or contribution provisions thereof may be limited under applicable securities laws. Each of the Indenture, the Trust Agreement, the Guarantee and the Expense Agreement has been duly authorized by the Company, and, when executed and delivered by the Company on the Closing Date, each of said agreements will constitute a valid and legally binding obligation of the Company and will be enforceable against the Company in accordance with its terms, except as the enforcement thereof may be limited 10 11 by general principles of equity and by bankruptcy or other laws relating to or affecting creditors' rights generally and except as any indemnification or contribution provisions thereof may be limited under applicable securities laws. Each of the Indenture, the Trust Agreement and the Guarantee has been duly qualified under the Trust Indenture Act and will conform to the description thereof contained in the Prospectus. (xvi) The Company and the Subsidiaries have good and marketable title in fee simple to all real property and good title to all personal property owned by them and material to their business, in each case free and clear of all security interests, liens, mortgages, pledges, encumbrances, restrictions, claims, equities and other defects except such as are referred to in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) or such as do not materially affect the value of such property in the aggregate and do not materially interfere with the use made or proposed to be made of such property; and all of the leases under which the Company or the Subsidiaries hold real or personal property are valid, existing and enforceable leases and in full force and effect with such exceptions as are not material and do not materially interfere with the use made or proposed to be made of such real or personal property, and neither the Company nor any of the Subsidiaries is in default in any material respect of any of the terms or provisions of any leases. (xvii) KPMG Peat Marwick LLP, who have certified certain of the consolidated financial statements of the Company and the Subsidiaries including the notes thereto, included by incorporation by reference or otherwise in the Registration Statement and Prospectus, are independent public accountants with respect to the Company and the Subsidiaries, as required by the 1933 Act and the 1933 Act Regulations. (xviii) Coopers & Lybrand, who have certified certain of the consolidated financial statements of Redwood Bancorp, a California corporation ("Redwood"), including the notes thereto, included by incorporation by reference or otherwise in the Registration Statement and Prospectus, are independent public accountants with respect to Redwood, as required by the 1933 Act and the 1933 Act Regulations. (xix) The consolidated financial statements including the notes thereto, included by incorporation by reference or otherwise in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) with respect to the Company and the Subsidiaries comply in all material respects with the 1933 Act and the 1933 Act Regulations and present fairly the consolidated financial position of the Company and the Subsidiaries as of the dates indicated and the consolidated results of operations, cash flows and shareholders' equity of the Company and the Subsidiaries for the periods specified and have been prepared in conformity with generally accepted accounting principles applied on a consistent basis. The selected and summary consolidated financial data concerning the Offerors and the Subsidiaries included in the Registration Statement and the Prospectus (or such Preliminary Prospectus) comply in all material respects with the 1933 Act and the 1933 11 12 Act Regulations, present fairly the information set forth therein, and have been compiled on a basis consistent with that of the consolidated financial statements of the Offerors and the Subsidiaries in the Registration Statement and the Prospectus (or such Preliminary Prospectus). The other financial, statistical and numerical information included in the Registration Statement and the Prospectus (or such Preliminary Prospectus) complies in all material respects with the 1933 Act and the 1933 Act Regulations, presents fairly the information shown therein, and to the extent applicable have been compiled on a basis consistent with the consolidated financial statements of the Company and the Subsidiaries included in the Registration Statement and the Prospectus (or such Preliminary Prospectus). (xx) To the best knowledge and belief of the Company after due inquiry the consolidated financial statements of Redwood and its subsidiaries, including Redwood's wholly owned banking subsidiary, Redwood Bank, a California state banking corporation, including the notes thereto, included by incorporation by reference or otherwise in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) with respect to Redwood and its subsidiaries comply in all material respects with the 1933 Act and the 1933 Act Regulations and present fairly the consolidated financial position of Redwood and its subsidiaries as of the dates indicated and the consolidated results of operations, cash flows and shareholders' equity of Redwood and its subsidiaries for the periods specified and have been prepared in conformity with generally accepted accounting principles applied on a consistent basis. To the best knowledge and belief of the Company after due inquiry the selected and summary consolidated financial data concerning Redwood and its subsidiaries and included in the Registration Statement and the Prospectus (or such Preliminary Prospectus) comply in all material respects with the 1933 Act and the 1933 Act Regulations, present fairly the information set forth therein, and have been compiled on a basis consistent with that of the consolidated financial statements of Redwood and its subsidiaries in the Registration Statement and the Prospectus (or such Preliminary Prospectus). To the best knowledge and belief of the Company after due inquiry the other financial, statistical and numerical information included in the Registration Statement and the Prospectus (or such Preliminary Prospectus) complies in all material respects with the 1933 Act and the 1933 Act Regulations, presents fairly the information shown therein, and to the extent applicable have been compiled on a basis consistent with the consolidated financial statements of Redwood and its subsidiaries included in the Registration Statement and the Prospectus (or such Preliminary Prospectus). (xxi) The pro forma condensed consolidating financial statements of the Company, the Subsidiaries, Redwood and Redwood's subsidiaries and the pro forma summary information for such entities included by incorporation by reference or otherwise in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) comply in form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act 12 13 Regulations and the pro forma adjustments to the historical amounts in the compilation of those statements comply with such accounting requirements and are reasonable. (xxii) All of the representations and warranties of the Company, and to the best knowledge and belief of the Company after due inquiry all of the representations and warranties of Redwood, contained in that certain [Acquisition Agreement] by and between Redwood and the Company dated as of , 1998 ("[Acquisition] Agreement") are ----------- true and correct in all material respects, and all of the covenants and agreements of the Company contained in the [Acquisition] Agreement which by their terms were to be complied with as of the date hereof have been complied with by the Company in all material respects, except to the extent that a breach of such representations and warranties or noncompliance with such covenants and agreements does not have a material adverse effect on the condition (financial or otherwise), earnings, business, prospects or results of the Company, the Subsidiaries, Redwood and its subsidiaries on a consolidated basis. The Company does not know of any facts or circumstances inconsistent with the consummation of the transactions contemplated by the [Acquisition] Agreement in accordance with its terms and as described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence the most recent Preliminary Prospectus) or of any facts and circumstances which lead the Company to believe that such consummation in accordance with the terms of the [Acquisition] Agreement and as described in the Registration Statement or such Prospectus will not occur. The Company is not aware of any material disagreements between the Company and Redwood regarding the terms of the [Acquisition] Agreement or interpretation thereof. (xxiii) Since the respective dates as of which information is given in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), except as otherwise stated therein: (A) neither of the Offerors nor any of the Subsidiaries has sustained any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree which is material to the condition (financial or otherwise), earnings, business, prospects or results of operations of the Offerors and the Subsidiaries on a consolidated basis; (B) there has not been any material adverse change in, or any development which is reasonably likely to have a material adverse effect on, the condition (financial or otherwise), earnings, business, prospects or results of operations of the Offerors and the Subsidiaries on a consolidated basis, whether or not arising in the ordinary course of business; (C) neither of the Offerors nor any of the Subsidiaries has incurred any liabilities or obligations, direct or contingent, or entered into any material transactions, other than in the ordinary course of business which is 13 14 material to the condition (financial or otherwise), earnings, business, prospects or results of operations of the Offerors and the Subsidiaries on a consolidated basis; (D) neither of the Offerors have declared or paid any dividend and neither of the Offerors nor any of the Subsidiaries has become delinquent in the payment of principal or interest on any outstanding borrowings; and (E) there has not been any change in the capital stock, equity securities, long-term debt, obligations under capital leases or, other than in the ordinary course of business, short-term borrowings of the Offerors or the Subsidiaries. (xxiv) Except as set forth in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), no charge, investigation, action, suit or proceeding is pending or, to the knowledge of the Offerors, threatened, against or affecting the Offerors or the Subsidiaries or any of their respective properties before or by any court or any regulatory, administrative or governmental official, commission, board, agency or other authority or body, or any arbitrator, wherein an unfavorable decision, ruling or finding could have a material adverse effect on the consummation of this Agreement or the transactions contemplated herein or the condition (financial or otherwise), earnings, affairs, business, prospects or results of operations of the Offerors and the Subsidiaries on a consolidated basis or which is required to be disclosed in the Registration Statement or the Prospectus (or such Preliminary Prospectus) and is not so disclosed. (xxv) There are no contracts or other documents required to be filed as exhibits to the Registration Statement by the 1933 Act or the 1933 Act Regulations or the Trust Indenture Act (or any rules or regulations thereunder) which have not been filed as exhibits or incorporated by reference to the Registration Statement, or that are required to be summarized in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) that are not so summarized. (xxvi) Neither of the Offerors has taken, directly or indirectly, any action causing or resulting in or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of any security of the Offerors in connection with the sale or resale of the Designated Preferred Securities in violation of the Commission's rules and regulations, including, but not limited to, Regulation M, nor is either Offeror aware of any such action having been taken or to be taken by any affiliate of the Offerors. (xxvii) The Offerors and the Subsidiaries own, or possess adequate rights to use, all patents, copyrights, trademarks, service marks, trade names and other rights necessary to conduct the businesses now conducted by them in all material respects or as described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and neither the Offerors nor the Subsidiaries have received any notice of infringement or conflict with asserted rights of others with respect to any 14 15 patents, copyrights, trademarks, service marks, trade names or other rights which, individually or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect on the condition (financial or otherwise), earnings, affairs, business, prospects or results of operations of the Offerors and the Subsidiaries on a consolidated basis, and the Offerors do not know of any basis for any such infringement or conflict. (xxviii) Except as adequately disclosed in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), no labor dispute involving the Company or the Subsidiaries exists or, to the knowledge of the Offerors, is imminent which might be expected to have a material adverse effect on the condition (financial or otherwise), earnings, affairs, business, prospects or results of operations of the Offerors and the Subsidiaries on a consolidated basis or which is required to be disclosed in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). Neither the Company nor any of the Subsidiaries have received notice of any existing or threatened labor dispute by the employees of any of its principal suppliers, customers or contractors which might be expected to have a material adverse effect on the condition (financial or otherwise), earnings, affairs, business, prospects or results of operations of the Company and the Subsidiaries on a consolidated basis. (xxix) The Offerors and the Subsidiaries have timely and properly prepared and filed all necessary federal, state, local and foreign tax returns which are required to be filed and have paid all taxes shown as due thereon and have paid all other taxes and assessments to the extent that the same shall have become due, except such as are being contested in good faith or where the failure to so timely and properly prepare and file would not have a material adverse effect on the condition (financial or otherwise), earnings, affairs, business, prospects or results of operations of the Offerors and the Subsidiaries on a consolidated basis. The Offerors have no knowledge of any tax deficiency which has been or might be assessed against the Offerors or the Subsidiaries which, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect on the condition (financial or otherwise), earnings, affairs, business, prospects or results of operations of the Offerors and the Subsidiaries on a consolidated basis. (xxx) Each of the material contracts, agreements and instruments described or referred to in the Registration Statement or the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and each contract, agreement and instrument filed as an exhibit to the Registration Statement is in full force and effect and is the legal, valid and binding agreement of the Offerors or the Subsidiaries, enforceable in accordance with its terms, except as the enforcement thereof may be limited by general principles of equity and by bankruptcy or other laws relating to or affecting creditors' rights generally. Except as disclosed in the Prospectus (or such Preliminary Prospectus), to the knowledge of the Offerors, no other party to any such agreement is (with or without notice or lapse of time or both) in breach or default in any material respect thereunder. 15 16 (xxxi) No relationship, direct or indirect, exists between or among the Offerors or the Subsidiaries, on the one hand, and the directors, officers, trustees, shareholders, customers or suppliers of the Offerors or the Subsidiaries, on the other hand, which is required to be described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) which is not adequately described therein. (xxxii) No person has the right to request or require the Offerors or the Subsidiaries to register any securities for offering and sale under the 1933 Act by reason of the filing of the Registration Statement with the Commission or the issuance and sale of the Designated Preferred Securities except as adequately disclosed in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (xxxiii) The Designated Preferred Securities have been approved for listing on the New York Stock Exchange subject to official notice of issuance. (xxxiv) Except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), there are no contractual encumbrances or restrictions or material legal restrictions required to be described therein, on the ability of the Subsidiaries (A) to pay dividends or make any other distributions on its capital stock or to pay any indebtedness owed to the Offerors, (B) to make any loans or advances to, or investments in, the Offerors or (C) to transfer any of its property or assets to the Offerors. (xxxv) Neither of the Offerors is an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "Investment Company Act"). (xxxvi) The Offerors have not distributed and will not distribute prior to the Closing Date any prospectus in connection with the Offering, other than a Preliminary Prospectus, the Prospectus, the Registration Statement and the other materials permitted by the 1933 Act and the 1933 Act Regulations and reviewed by the Representatives. 3. Offering by the Underwriters. After the Registration Statement ---------------------------- becomes effective or, if the Registration Statement is already effective, after this Agreement becomes effective, the Underwriters propose to offer the Firm Preferred Securities for sale to the public upon the terms and conditions set forth in the Prospectus. The Underwriters may from time to time thereafter reduce the public offering price and change the other selling terms, provided the proceeds to the Trust shall not be reduced as a result of such reduction or change. Because the NASD is expected to view the Preferred Securities as interests in a direct participation program, the offering of the Preferred Securities is being made in compliance with the applicable provisions of Rule 2810 of the NASD's Conduct Rules. 16 17 The Underwriters may reserve and sell such of the Designated Preferred Securities purchased by the Underwriters as the Underwriters may elect to dealers chosen by it (the "Selected Dealers") at the public offering price set forth in the Prospectus less the applicable Selected Dealers' concessions set forth therein, for re-offering by Selected Dealers to the public at the public offering price. The Underwriters may allow, and Selected Dealers may re-allow, a concession set forth in the Prospectus to certain other brokers and dealers. 4. Certain Covenants of the Offerors. The Offerors jointly and --------------------------------- severally covenant with the Underwriters as follows: (a) The Offerors shall use their best efforts to cause the Registration Statement and any amendments thereto, if not effective at the time of execution of this Agreement, to become effective as promptly as possible. If the Registration Statement has become or becomes effective pursuant to Rule 430A and information has been omitted therefrom in reliance on Rule 430A, then, the Offerors will prepare and file in accordance with Rule 430A and Rule 424(b) copies of the Prospectus or, if required by Rule 430A, a post-effective amendment to the Registration Statement (including the Prospectus) containing all information so omitted and will provide evidence satisfactory to the Representatives of such timely filing. (b) The Offerors shall notify you immediately, and confirm such notice in writing: (i) when the Registration Statement, or any post- effective amendment to the Registration Statement, has become effective, or when the Prospectus or any supplement to the Prospectus or any amended Prospectus has been filed; (ii) of the receipt of any comments or requests from the Commission relating to the Registration Statement or the Prospectus; (iii) of any request of the Commission to amend or supplement the Registration Statement, any Preliminary Prospectus or the Prospectus or for additional information; and (iv) of the issuance by the Commission or any state or other regulatory body of any stop order or other order suspending the effectiveness of the Registration Statement, preventing or suspending the use of any Preliminary Prospectus or the Prospectus, or suspending the qualification of any of the Designated Preferred Securities for offering or sale in any jurisdiction or the institution or threat of institution of any proceedings for any of such purposes. The Offerors shall use their best efforts to prevent the issuance of any such stop order or of any other such order and if any such order is issued, to cause such order to be withdrawn or lifted as soon as possible. (c) The Offerors shall furnish to the Underwriters, from time to time without charge, as soon as available, as many copies as the Underwriters may reasonably request of (i) the registration statement as originally filed and of all amendments thereto, in executed form, including exhibits, whether filed before or after the Registration Statement becomes effective, (ii) 17 18 all exhibits and documents incorporated therein or filed therewith, (iii) all consents and certificates of experts in executed form, (iv) each Preliminary Prospectus and all amendments and supplements thereto, and (v) the Prospectus, and all amendments and supplements thereto. (d) During the time when a prospectus is required to be delivered under the 1933 Act, the Offerors shall comply to the best of their ability with the 1933 Act and the 1933 Act Regulations and the 1934 Act and the 1934 Act Regulations so as to permit the completion of the distribution of the Designated Preferred Securities as contemplated herein and in the Trust Agreement and the Prospectus. The Offerors shall not file any amendment to the registration statement as originally filed or to the Registration Statement and shall not file any amendment thereto or make any amendment or supplement to any Preliminary Prospectus or to the Prospectus of which you shall not previously have been advised in writing and provided a copy a reasonable time prior to the proposed filings thereof or to which you or counsel for the Underwriters shall object. If it is necessary, in the Company's reasonable opinion or in the reasonable opinion of the Company's counsel to amend or supplement the Registration Statement or the Prospectus in connection with the distribution of the Designated Preferred Securities, the Offerors shall forthwith amend or supplement the Registration Statement or the Prospectus, as the case may be, by preparing and filing with the Commission (provided the Underwriters or counsel for the Underwriters does not reasonably object), and furnishing to you, such number of copies as you may reasonably request of an amendment or amendments of, or a supplement or supplements to, the Registration Statement or the Prospectus, as the case may be (in form and substance reasonably satisfactory to you and counsel for the Underwriters). If any event shall occur as a result of which it is necessary to amend or supplement the Prospectus to correct an untrue statement of a material fact or to include a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or if for any reason it is necessary at any time to amend or supplement the Prospectus to comply with the 1933 Act and the 1933 Act Regulations, the Offerors shall, subject to the second sentence of this subsection (d), forthwith amend or supplement the Prospectus by preparing and filing with the Commission, and furnishing to you, such number of copies as you may reasonably request of an amendment or amendments of, or a supplement or supplements to, the Prospectus (in form and substance satisfactory to you and counsel for the Underwriters) so that, as so amended or supplemented, the Prospectus shall not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (e) The Offerors shall cooperate with you and counsel for the Underwriters in order to qualify the Designated Preferred Securities for offering and sale under the securities or blue sky laws of such jurisdictions as you may reasonably request and shall continue such qualifications in effect so long as may be advisable for distribution of the Designated Preferred Securities; provided, however, that the Offerors shall not be required to qualify to do business as a foreign corporation or file a general consent to service of process in any jurisdiction in connection with the foregoing. The Offerors shall file such statements and reports as may be required by the laws of each jurisdiction in which the Designated Preferred Securities have been qualified as above. The Offerors will notify you immediately of, and confirm in writing, the 18 19 suspension of qualification of the Designated Preferred Securities or threat thereof in any jurisdiction. (f) The Offerors shall make generally available to their security holders in the manner contemplated by Rule 158 of the 1933 Act Regulations and furnish to you as soon as practicable, but in any event not later than 16 months after the Effective Date, a consolidated earnings statement of the Offerors conforming with the requirements of Section 11(a) of the 1933 Act and Rule 158. (g) The Offerors shall use the proceeds from the sale of the Designated Preferred Securities to be sold by the Trust hereunder in the manner specified in the Prospectus under the caption "Use of Proceeds." (h) For five years from the Effective Date, the Offerors shall furnish to the Representatives copies of all reports and communications (financial or otherwise) furnished by the Offerors to the holders of the Designated Preferred Securities as a class, copies of all reports and financial statements filed with or furnished to the Commission (other than portions for which confidential treatment has been obtained from the Commission) or with any national securities exchange or self-regulatory organization, and such other documents, reports and information concerning the business and financial conditions of the Offerors as the Representatives may reasonably request, other than such documents, reports and information for which the Offerors has the legal obligation not to reveal to the Representatives. (i) For a period of 30 days from the Effective Date, the Offerors shall not, directly or indirectly, offer for sale, sell or agree to sell or otherwise dispose of any Designated Preferred Securities other than pursuant to this Agreement, any other beneficial interests in the assets of the Trust or any securities of the Trust or the Company that are substantially similar to the Designated Preferred Securities or the Debentures, including any guarantee of such beneficial interests or substantially similar securities, or securities convertible into or exchangeable for or that represent the right to receive any such beneficial interest or substantially similar securities, without the prior written consent of the Representatives. (j) The Offerors shall use their best efforts to cause the Designated Preferred Securities to become listed on the New York Stock Exchange, or in lieu thereof another national securities exchange or the Nasdaq National Market, and to remain so listed for at least five years from the Effective Date or for such shorter period as may be specified in a written consent of the Representatives, provided this shall not prevent the Company from redeeming the Designated Preferred Securities pursuant to the terms of the Trust Agreement. If the Designated Preferred Securities are exchanged for Debentures, the Company will use its best efforts to have the Debentures promptly listed on the New York Stock Exchange or other organization on which the Designated Preferred Securities are then listed, and to have the Debentures promptly registered under the Exchange Act. (k) Subsequent to the date of this Agreement and through the date which is the later of (i) the day following the date on which the Underwriters' option to purchase the Option Preferred Securities shall expire or (ii) the day following the Option Closing Date with respect to 19 20 any Option Preferred Securities that the Underwriters shall elect to purchase, except as described in or contemplated by the Prospectus, neither the Offerors nor any of the Subsidiaries shall take any action (or refrain from taking any action) which will result in the Offerors or the Subsidiaries incurring any material liability or obligation, direct or contingent, or enter into any material transaction, except in the ordinary course of business, and there will not be any material change in the financial position, capital stock, or any material increase in long-term debt, obligations under capital leases or short-term borrowings of the Offerors and the Subsidiaries on a consolidated basis. (l) The Offerors shall not, for a period of 180 days after the date hereof, without the prior written consent of the Representatives, purchase, redeem or call for redemption, or prepay or give notice of prepayment (or announce any redemption or call for redemption, or any repayment or notice of prepayment) of the Offerors' securities. (m) The Offerors shall not take, directly or indirectly, any action designed to result in or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Offerors in connection with the sale or resale of the Designated Preferred Securities in violation of the Commission's rules and regulations, including, but not limited to, Regulation M, and the Offerors are not aware of any such action taken or to be taken by any affiliate of the Offerors. (n) Prior to the Closing Date (and, if applicable, the Option Closing Date), the Offerors will not issue any press release or other communication directly or indirectly or hold any press conference with respect to the Offerors, the Subsidiaries or the offering of the Designated Preferred Securities (the "Offering") without your prior written consent. 5. Payment of Expenses. Whether or not this Agreement is terminated ------------------- or the sale of the Designated Preferred Securities to the Underwriters is consummated, the Company covenants and agrees that it will pay or cause to be paid (directly or by reimbursement) all costs and expenses incident to the performance of the obligations of the Offerors under this Agreement, including: (a) the preparation, printing, filing, delivery and shipping of the initial registration statement, the Preliminary Prospectus or Prospectuses, the Registration Statement and the Prospectus and any amendments or supplements thereto, and the printing, delivery and shipping of this Agreement and any other underwriting documents (including, without limitation, selected dealers agreements), the certificates for the Designated Preferred Securities and the Preliminary and Final Blue Sky Memoranda and any legal investment surveys and any supplements thereto; (b) all fees, expenses and disbursements of the Offerors' counsel and accountants; (c) all fees and expenses incurred in connection with the qualification of the Designated Preferred Securities, Debentures and the Guarantee under the securities or blue sky laws of such jurisdictions as you may request, including all filing fees and fees and 20 21 disbursements of counsel for the Underwriters in connection therewith, including, without limitation, in connection with the preparation of the Preliminary and Final Blue Sky Memoranda and any legal investment surveys and any supplements thereto; (d) all fees and expenses incurred in connection with filings made with the NASD; (e) any applicable fees and other expenses incurred in connection with the listing of the Designated Preferred Securities and, if applicable, the Guarantee and the Debentures on the New York Stock Exchange; (f) the cost of furnishing to you copies of the initial registration statements, any Preliminary Prospectus, the Registration Statement and the Prospectus and all amendments or supplements thereto; (g) the costs and charges of any transfer agent or registrar and the fees and disbursements of counsel for any transfer agent or registrar; (h) all costs and expenses (including stock transfer taxes) incurred in connection with the printing, issuance and delivery of the Designated Preferred Securities to the Underwriters; (i) all expenses incident to the preparation, execution and delivery of the Trust Agreement, the Indenture and the Guarantee; and (j) all other costs and expenses incident to the performance of the obligations of the Company hereunder and under the Trust Agreement that are not otherwise specifically provided for in this Section 5. If the sale of Designated Preferred Securities contemplated by this Agreement is not completed due to the termination pursuant to the terms hereof (other than pursuant to Section 9 hereof), the Company will pay you your accountable out-of-pocket expenses in connection herewith or in contemplation of the performance of your obligations hereunder, including without limitation travel expenses, reasonable fees, expenses and disbursements of counsel or other out-of-pocket expenses incurred by you in connection with any discussion of the Offering or the contents of the Registration Statement, any investigation of the Offerors and the Subsidiaries, or any preparation for the marketing, purchase, sale or delivery of the Designated Preferred Securities, in each case following presentation of reasonably detailed invoices therefor. If the sale of Designated Preferred Securities contemplated by this Agreement is completed, the Company shall not be responsible for payment of fees or disbursements of counsel for the Underwriters other than in accordance with paragraph (c) above, or for the reimbursement of any expenses of the Underwriters. 6. Conditions of the Underwriters' Obligations. The obligations of ------------------------------------------- the Underwriters to purchase and pay for the Firm Preferred Securities and, following exercise of the option 21 22 granted by the Offerors in Section 1 of this Agreement, the Option Preferred Securities, are subject, in your sole discretion, to the accuracy of and compliance with the representations and warranties and agreements of the Offerors herein as of the date hereof and as of the Closing Date (or in the case of the Option Preferred Securities, if any, as of the Option Closing Date), to the accuracy of the written statements of the Offerors made pursuant to the provisions hereof, to the performance by the Offerors of their covenants and obligations hereunder and to the following additional conditions: (a) If the Registration Statement or any amendment thereto filed prior to the Closing Date has not been declared effective prior to the time of execution hereof, the Registration Statement shall become effective not later than 10:00 a.m., St. Louis time, on the first business day following the time of execution of this Agreement, or at such later time and date as you may agree to in writing. If required, the Prospectus and any amendment or supplement thereto shall have been timely filed in accordance with Rule 424(b) and Rule 430A under the 1933 Act and Section 4(a) hereof. No stop order suspending the effectiveness of the Registration Statement or any amendment or supplement thereto shall have been issued under the 1933 Act or any applicable state securities laws and no proceedings for that purpose shall have been instituted or shall be pending, or, to the knowledge of the Offerors or the Representatives, shall be contemplated by the Commission or any state authority. Any request on the part of the Commission or any state authority for additional information (to be included in the Registration Statement or Prospectus or otherwise) shall have been disclosed to you and complied with to your satisfaction and to the satisfaction of counsel for the Underwriters. (b) No Underwriter shall have advised the Company at or before the Closing Date (and, if applicable, the Option Closing Date) that the Registration Statement or any post-effective amendment thereto, or the Prospectus or any amendment or supplement thereto, contains an untrue statement of a fact which, in your opinion, is material or omits to state a fact which, in your opinion, is material and is required to be stated therein or is necessary to make statements therein (in the case of the Prospectus or any amendment or supplement thereto, in light of the circumstances under which they were made) not misleading. (c) All corporate proceedings and other legal matters incident to the authorization, form and validity of this Agreement, the Trust Agreement, and the Designated Preferred Securities, and the authorization and form of the Registration Statement and Prospectus, other than financial statements and other financial data, and all other legal matters relating to this Agreement and the transactions contemplated hereby or by the Trust Agreement shall be satisfactory in all material respects to counsel for the Underwriters, and the Offerors and the Subsidiaries shall have furnished to such counsel all documents and information relating thereto that they may reasonably request to enable them to pass upon such matters. (d) Jackson Walker L.L.P., counsel for the Offerors, shall have furnished to you their signed opinion, dated the Closing Date or the Option Closing Date, as the case may be, in form and substance satisfactory to counsel for the Underwriters, to the effect that: 22 23 (i) The Company has been duly incorporated and is validly existing and in good standing under the laws of the State of Delaware, and is duly registered as a bank holding company under the BHC Act. Each of the Subsidiaries is duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation. Each of the Company and the Subsidiaries has full corporate power and authority to own or lease its properties and to conduct its business as such business is described in the Prospectus and is currently conducted in all material respects. To the best of such counsel's knowledge, all outstanding shares of capital stock of the Subsidiaries have been duly authorized and validly issued and are fully paid and nonassessable except to the extent such shares may be deemed assessable under 12 U.S.C. Section 1831 and, to the best of such counsel's knowledge, except as disclosed in the Prospectus, there are no outstanding rights, options or warrants to purchase any such shares or securities convertible into or exchangeable for any such shares; (ii) The capital stock, Debentures and Guarantee of the Company and the equity securities of the Trust conform to the description thereof contained in the Prospectus in all material respects. To the best of such counsel's knowledge, the capital stock of the Company authorized and issued as of March 31, 1998 is as set forth under the caption "Capitalization" in the Prospectus, has been duly authorized and validly issued, and is fully paid and nonassessable. To the best of such counsel's knowledge, there are no outstanding rights, options or warrants to purchase, no other outstanding securities convertible into or exchangeable for, and no commitments, plans or arrangements to issue, any shares of capital stock of the Company or equity securities of the Trust, except as described in the Prospectus; (iii) The issuance, sale and delivery of the Designated Preferred Securities and Debentures in accordance with the terms and conditions of this Agreement and the Indenture have been duly authorized by all necessary actions of the Offerors. All of the Designated Preferred Securities have been duly and validly authorized and, when delivered in accordance with this Agreement will be duly and validly issued, fully paid and nonassessable, and will conform to the description thereof in the Registration Statement, the Prospectus and the Trust Agreement. The Designated Preferred Securities have been approved for listing on the New York Stock Exchange subject to official notice of issuance. There are no preemptive or other rights to subscribe for or to purchase, and other than as disclosed in the Prospectus no restrictions upon the voting or transfer of, any shares of capital stock or equity securities of the Offerors or the Subsidiaries pursuant to the corporate charter, by-laws or other governing documents (including without limitation, the Trust Agreement) of the Offerors or the Subsidiaries, or, to the best of such counsel's knowledge, any agreement or other instrument to which either Offeror or any of the Subsidiaries is a party or by which either Offeror or any of the Subsidiaries may be bound; (iv) The Offerors have all requisite corporate and trust power to enter into and perform their obligations under this Agreement, and this Agreement has been duly and validly authorized, executed and delivered by the Offerors and constitutes the 23 24 legal, valid and binding obligations of the Offerors enforceable in accordance with its terms, except as the enforcement hereof or thereof may be limited by general principles of equity and by bankruptcy or other laws relating to or affecting creditors' rights generally, and except as the indemnification and contribution provisions hereof may be limited under applicable laws and certain remedies may not be available in the case of a non-material breach; (v) Each of the Indenture, the Trust Agreement and the Guarantee has been duly qualified under the Trust Indenture Act, has been duly authorized, executed and delivered by the Company, and is a valid and legally binding obligation of the Company enforceable in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, receivership, moratorium and other laws affecting the rights and remedies of creditors generally and of general principles of equity; (vi) The Debentures have been duly authorized, executed, authenticated and delivered by the Company, are entitled to the benefits of the Indenture and are legal, valid and binding obligations of the Company enforceable against the Company in accordance with their terms, subject to the effect of bankruptcy, insolvency, reorganization, receivership, moratorium and other laws affecting the rights and remedies of creditors generally and of general principles of equity; (vii) The Expense Agreement has been duly authorized, executed and delivered by the Company, and is a valid and legally binding obligation of the Company enforceable in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, receivership, moratorium and other laws affecting the rights and remedies of creditors generally and of general principles of equity; (viii) To the best of such counsel's knowledge, neither of the Offerors nor any of the Subsidiaries is in breach or violation of, or default under, with or without notice or lapse of time or both, its corporate charter, by-laws or governing document (including without limitation, the Trust Agreement). The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated by this Agreement, and the Trust Agreement do not and will not conflict with, result in the creation or imposition of any material lien, claim, charge, encumbrance or restriction upon any property or assets of the Offerors or the Subsidiaries or the Designated Preferred Securities pursuant to, or constitute a material breach or violation of, or constitute a material default under, with or without notice or lapse of time or both, any of the terms, provisions or conditions of the charter, by-laws or governing document (including without limitation, the Trust Agreement) of the Offerors or the Subsidiaries, or to the best of such counsel's knowledge, any material contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease, franchise, license or any other agreement or instrument to which either Offeror or the Subsidiaries is a party or by which any of them or any of their respective properties may be bound or any order, decree, judgment, franchise, license, Permit, rule or regulation of any court, arbitrator, government, or governmental agency or instrumentality, domestic or foreign, known to such counsel 24 25 having jurisdiction over the Offerors or the Subsidiaries or any of their respective properties which, in each case, is material to the Offerors and the Subsidiaries on a consolidated basis. No authorization, approval, consent or order of, or filing, registration or qualification with, any person (including, without limitation, any court, governmental body or authority) is required under Delaware law in connection with the transactions contemplated by this Agreement in connection with the purchase and distribution of the Designated Preferred Securities by the Underwriters; (ix) To the best of such counsel's knowledge, holders of securities of the Offerors either do not have any right that, if exercised, would require the Offerors to cause such securities to be included in the Registration Statement or have waived such right. To the best of such counsel's knowledge, neither the Offerors nor any of the Subsidiaries is a party to any agreement or other instrument which grants rights for or relating to the registration of any securities of the Offerors; (x) Except as set forth in the Registration Statement and the Prospectus, to the best of such counsel's knowledge, (i) no action, suit or proceeding at law or in equity is pending or threatened in writing to which the Offerors or the Subsidiaries is or may be a party, and (ii) no action, suit or proceeding is pending or threatened in writing against or affecting the Offerors or the Subsidiaries or any of their properties, before or by any court or governmental official, commission, board or other administrative agency, authority or body, or any arbitrator, wherein an unfavorable decision, ruling or finding could reasonably be expected to have a material adverse effect on the consummation of this Agreement or the issuance and sale of the Designated Preferred Securities as contemplated herein or the condition (financial or otherwise), earnings, affairs, business, or results of operations of the Offerors and the Subsidiaries on a consolidated basis or which is required to be disclosed in the Registration Statement or the Prospectus and is not so disclosed; (xi) No authorization, approval, consent or order of or filing, registration or qualification with, any person (including, without limitation, any court, governmental body or authority) is required in connection with the transactions contemplated by this Agreement, the Trust Agreement, the Registration Statement and the Prospectus, except such as have been obtained under the 1933 Act, and the Trust Indenture Act, and except such as may be required under state securities laws or Interpretations or Rules of the NASD in connection with the purchase and distribution of the Designated Preferred Securities by the Underwriters; (xii) The Registration Statement and the Prospectus and any amendments or supplements thereto and any documents incorporated therein by reference (other than the financial statements or other financial data included therein or omitted therefrom and Underwriters' Information, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations as of their respective dates of effectiveness; 25 26 (xiii) To the best of such counsel's knowledge, there are no contracts, agreements, leases or other documents of a character required to be disclosed in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement that are not so disclosed or filed; (xiv) The statements under the captions "Supervision and Regulation", "Description of the Preferred Securities", "Description of the Subordinated Debentures", "Description of the Guarantee", "Relationship Among the Preferred Securities, the Subordinated Debentures and the Guarantee", "Certain Federal Income Tax Consequences", and "ERISA Considerations" in the Prospectus, insofar as such statements constitute a summary of legal and regulatory matters, documents or instruments referred to therein are accurate descriptions of the matters summarized therein in all material respects and fairly present the information called for with respect to such legal matters, documents and instruments, other than financial and statistical data as to which said counsel shall not be required to express any opinion or belief; (xv) Such counsel has been advised by the staff of the Commission that the Registration Statement has become effective under the 1933 Act; any required filing of the Prospectus pursuant to Rule 424(b) has been made within the time period required by Rule 424(b); to the best of such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for a stop order are pending or threatened by the Commission; (xvi) Except as described in or contemplated by the Prospectus, to the best of such counsel's knowledge, there are no contractual encumbrances or restrictions, or material legal restrictions required to be described therein on the ability of the Subsidiaries (A) to pay dividends or make any other distributions on its capital stock or to pay indebtedness owed to the Offerors, (B) to make any loans or advances to, or investments in, the Offerors or (C) to transfer any of its property or assets to the Offerors; and (xvii) To the best of such counsel's knowledge, (A) the business and operations of the Offerors and the Subsidiaries comply in all material respects with all statutes, ordinances, laws, rules and regulations applicable thereto and which are material to the Offerors and the Subsidiaries on a consolidated basis, except in those instances where non-compliance would not materially impair the ability of the Offerors and the Subsidiaries to conduct their business; and (B) the Offerors and the Subsidiaries possess and are operating in all material respects in compliance with the terms, provisions and conditions of all Permits that are required to conduct their businesses as described in the Prospectus and that are material to the Offerors and the Subsidiaries on a consolidated basis, except in those instances where the loss thereof or non-compliance therewith would not have a material adverse effect on the condition (financial or otherwise), earnings, affairs, business, prospects or results of operations of the Offerors and the Subsidiaries on a consolidated basis; to the best of such counsel's knowledge, all such Permits are valid and in full force and effect, and, to the best of such counsel's knowledge, no action, suit 26 27 or proceeding is pending or threatened which may lead to the revocation, termination, suspension or non-renewal of any such Permit, except in those instances where the loss thereof or non-compliance therewith would not materially impair the ability of the Offerors or the Subsidiaries to conduct their businesses. In giving the above opinion, such counsel may state that, insofar as such opinion involves factual matters, they have relied upon certificates of officers of the Offerors including, without limitation, certificates as to the identity of any and all material contracts, indentures, mortgages, deeds of trust, loans or credit agreements, notes, leases, franchises, licenses or other agreements or instruments, and all material permits, easements, consents, licenses, franchises and government regulatory authorizations, for purposes of paragraphs (viii), (xiii) and (xvii) hereof and certificates of public officials. In giving such opinion, such counsel may rely as to matters of Delaware law upon the opinion of Richards, Layton and Finger described herein. Such counsel shall also confirm that, in connection with the preparation of the Registration Statement and Prospectus, such counsel has participated in conferences with officers and Representatives of the Offerors and with their independent public accountants and with you and your counsel, at which conferences such counsel made inquiries of such officers, Representatives and accountants and discussed in detail the contents of the Registration Statement and Prospectus and the documents incorporated therein by reference (without taking further action to verify independently the statements made in the Registration Statement and the Prospectus, and without assuming responsibility for the accuracy or completeness of such statements, except to the extent expressly provided above) and such counsel has no reason to believe (A) that the Registration Statement or any amendment thereto (except for the financial statements and related schedules and statistical data included therein or omitted therefrom or Underwriters' Information, as to which such counsel need express no opinion), at the time the Registration Statement or any such amendment became effective, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading or (B) that the Prospectus or any amendment or supplement thereto or the documents incorporated therein by reference (except for the financial statements and related schedules and statistical data included therein or omitted therefrom or Underwriters' Information, as to which such counsel need express no opinion), at the time the Registration Statement became effective (or, if the term "Prospectus" refers to the prospectus first filed pursuant to Rule 424(b) of the 1933 Act Regulations, at the time the Prospectus was issued), at the time any such amended or supplemented Prospectus was issued, at the Closing Date and, if applicable, the Option Closing Date, contained or contains any untrue statement of a material fact or omitted or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made, or (C) that there is any amendment to the Registration Statement required to be filed that has not already been filed. (e) Richards, Layton and Finger, special Delaware counsel to the Offerors, shall have furnished to you their signed opinion, dated as of Closing Date or the Option Closing Date, as the case may be, in form and substance satisfactory to such counsel, to the effect that: 27 28 (i) The Trust has been duly created and is validly existing in good standing as a business trust under the Delaware Business Trust Act and, under the Trust Agreement and the Delaware Business Trust Act, has the trust power and authority to conduct its business as described in the Prospectus. (ii) The Trust Agreement is a legal, valid and binding agreement of the Company, as sponsor, and the Trustees, and is enforceable against the Company, as sponsor, and the Trustees, in accordance with its terms. (iii) Under the Trust Agreement and the Delaware Business Trust Act, the execution and delivery of the Underwriting Agreement by the Trust, and the performance by the Trust of its obligations thereunder, have been authorized by all requisite trust action on the part of the Trust. (iv) The Designated Preferred Securities have been duly authorized by the Trust Agreement, and when issued and sold in accordance with the Trust Agreement, the Designated Preferred Securities will be, subject to the qualifications set forth in paragraph (v) below, fully paid and nonassessable beneficial interest in the assets of the Trust and entitled to the benefits of the Trust Agreement. The form of certificates to evidence the Designated Preferred Securities has been approved by the Trust and is in due and proper form and complies with all applicable requirements of the Delaware Business Trust Act. (v) Holders of Designated Preferred Securities, as beneficial owners of the Trust, will be entitled to the same limitation of personal liability extended to shareholders of private, for-profit corporations organized under the General Corporation Law of the State of Delaware. Such opinion may note that the holders of Designated Preferred Securities may be obligated to make payments as set forth in the Trust Agreement. (vi) Under the Delaware Business Trust Act and the Trust Agreement, the issuance of the Designated Preferred Securities is not subject to preemptive rights. (vii) The issuance and sale by the Trust of the Designated Preferred Securities and the Common Securities, the execution, delivery and performance by the Trust of this Agreement, and the consummation of the transactions contemplated by this Agreement, do not violate (a) the Trust Agreement, or (b) any applicable Delaware law, rule or regulation. Such opinion may state that it is limited to the laws of the State of Delaware and that the opinion expressed in paragraph (ii) above is subject to the effect upon the Trust Agreement of (i) bankruptcy, insolvency, moratorium, receivership, reorganization, liquidation, fraudulent conveyance and other similar laws relating to or affecting the rights and remedies of creditors generally, (ii) principles of equity, including applicable law relating to fiduciary duties (regardless of whether considered and applied in a proceeding in equity or at law), and (iii) the 28 29 effect of applicable public policy on the enforceability of provisions relating to indemnification or contribution. (f) Bryan Cave LLP, counsel for the Underwriters, shall have furnished you their signed opinion, dated the Closing Date or the Option Closing Date, as the case may be, with respect to the sufficiency of all corporate procedures and other legal matters relating to this Agreement, the validity of the Designated Preferred Securities, the Registration Statement, the Prospectus and such other related matters as you may reasonably request and there shall have been furnished to such counsel such documents and other information as they may request to enable them to pass on such matters. In giving such opinion, Bryan Cave LLP may rely as to matters of fact upon statements and certifications of officers of the Offerors and of other appropriate persons and may rely as to matters of law, other than law of the United States and the State of Missouri, and upon the opinions of Jackson Walker L.L.P. and Richards, Layton and Finger described herein. (g) On the date of this Agreement and on the Closing Date (and, if applicable, any Option Closing Date), the Representatives shall have received from KPMG Peat Marwick LLP a letter, dated the date of this Agreement and the Closing Date (and, if applicable, the Option Closing Date), respectively, in form and substance satisfactory to the Representatives, confirming that they are independent public accountants with respect to Company (which shall be inclusive of the Subsidiaries for purposes of this Section 6(g)), within the meaning of the 1933 Act and the 1933 Act Regulations, and stating in effect that: (i) In their opinion, the consolidated financial statements of the Company audited by them and included in the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations. (ii) On the basis of the procedures specified by the American Institute of Certified Public Accountants as described in SAS No. 71, "Interim Financial Information", inquiries of officials of the Company responsible for financial and accounting matters, and such other inquiries and procedures as may be specified in such letter, which procedures do not constitute an audit in accordance with U.S. generally accepted auditing standards, nothing came to their attention that caused them to believe that, if applicable, the unaudited interim consolidated financial statements of the Company included in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and 1933 Act Regulations or are not in conformity with U.S. generally accepted accounting principles applied on a basis substantially consistent, except as noted in the Registration Statement, with the basis for the audited consolidated financial statements of the Company included in the Registration Statement. (iii) On the basis of limited procedures, not constituting an audit in accordance with U.S. generally accepted auditing standards, consisting of a reading of the unaudited interim financial statements and other information referred to below, a reading 29 30 of the latest available unaudited condensed consolidated financial statements of the Company, inspection of the minute books of the Company since the date of the latest audited financial statements of the Company included or incorporated by reference in the Registration Statement, inquiries of officials of the Company responsible for financial and accounting matters and such other inquiries and procedures as may be specified in such letter, nothing came to their attention that caused them to believe that: (A) as of a specified date not more than five days prior to the date of such letter, there have been any changes in the consolidated capital stock of the Company, any increase in the consolidated debt of the Company, any decreases in consolidated total assets or shareholders equity of the Company, or any changes, decreases or increases in other items specified by the Representatives, in each case as compared with amounts shown in the latest unaudited interim consolidated statement of financial condition of the Company included in the Registration Statement except in each case for changes, increases or decreases which the Registration Statement specifically discloses, have occurred or may occur or which are described in such letter; and (B) for the period from the date of the latest unaudited interim consolidated financial statements of the Company included in the Registration Statement to the specified date referred to in Clause (iii)(A), there were any decreases in the consolidated interest income, net interest income, or net income of the Company or in the per share amount of net income of the Company, or any changes, decreases or increases in any other items specified by the Representatives, in each case as compared with the comparable period of the preceding year and with any other period of corresponding length specified by the Representatives, except in each case for increases or decreases which the Registration Statement discloses have occurred or may occur, or which are described in such letter. (iv) In addition to the audit referred to in their report included in the Registration Statement and the limited procedures, inspection of minute books, inquiries and other procedures referred to in paragraphs (ii) and (iii) above, they have carried out certain specified procedures, not constituting an audit in accordance with U.S. generally accepted auditing standards, with respect to certain amounts, percentages and financial information specified by the Representatives which are derived from the general accounting records and consolidated financial statements of the Company which appear in the Registration Statement, and have compared such amounts, percentages and financial information with the accounting records and the material derived from such records and consolidated financial statements of the Company have found them to be in agreement. In the event that the letters to be delivered referred to above set forth any such changes, decreases or increases as specified in Clauses (iii)(A) or (iii)(B) above, or any exceptions from such agreement specified in Clause (iv) above, it shall be a further condition to 30 31 the obligations of the Underwriters that the Representatives shall have determined, after discussions with officers of the Company responsible for financial and accounting matters, that such changes, decreases, increases or exceptions as are set forth in such letters do not (x) reflect a material adverse change in the items specified in Clause (iii)(A) above as compared with the amounts shown in the latest unaudited consolidated statement of financial condition of the Company included in the Registration Statement, (y) reflect a material adverse change in the items specified in Clause (iii)(B) above as compared with the corresponding periods of the prior year or other period specified by the Representatives, or (z) reflect a material change in items specified in Clause (iv) above from the amounts shown in the Preliminary Prospectus distributed by the Underwriters in connection with the offering contemplated hereby or from the amounts shown in the Prospectus. (h) On the date of this Agreement and on the Closing Date (and, if applicable, any Option Closing Date), the Representatives shall have received from Coopers & Lybrand a letter, dated the date of this Agreement and the Closing Date (and, if applicable, the Option Closing Date), respectively, in form and substance satisfactory to the Representatives, confirming that it is an independent public accounting firm with respect to Empire within the meaning of the 1933 Act and the 1933 Act Regulations, and stating in effect that: (i) In its opinion, the consolidated financial statements of Empire audited by it and included in the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations. (ii) On the basis of the procedures specified by the American Institute of Certified Public Accountants as described in SAS No. 71, "Interim Financial Information," inquiries of officials of Empire responsible for financial and accounting matters, and such other inquiries and procedures as may be specified in such letter, which procedures do not constitute an audit in accordance with U.S. generally accepted auditing standards, nothing came to their attention that caused them to believe that, if applicable, the unaudited interim consolidated financial statements of Empire included in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and 1933 Act Regulations or are not in conformity with U.S. generally accepted accounting principles applied on a basis substantially consistent, except as noted in the Registration Statement, with the basis for the audited consolidated financial statements of Empire included in the Registration Statement. (iii) On the basis of limited procedures, not constituting an audit in accordance with U.S. generally accepted auditing standards, consisting of a reading of the unaudited interim financial statements and other information referred to below, a reading of the latest available unaudited condensed consolidated financial statements of Empire, inspection of the minute books of Empire since the date of the latest audited financial statements of Empire included or incorporated by reference in the Registration Statement, inquiries of officials of Empire responsible for financial and accounting matters and such 31 32 other inquiries and procedures as may be specified in such letter, nothing came to its attention that caused it to believe that: (A) as of a specified date not more than five days prior to the date of such letter, there have been any changes in the consolidated capital stock of Empire, any increase in the consolidated debt of Empire, any decreases in consolidated total assets or shareholders' equity of Empire, or any changes, decreases or increases in other items specified by the Representatives, in each case as compared with amounts shown in the latest unaudited interim consolidated statement of financial condition of Empire included in the Registration Statement except in each case for changes, increases or decreases which the Registration Statement specifically discloses, have occurred or may occur or which are described in such letter; and (B) for the period from the date of the latest unaudited interim consolidated financial statements of Empire included in the Registration Statement to the specified date referred to in Clause (iii)(A), there were any decreases in the consolidated interest income, net interest income, or net income of Empire or in the per share amount of net income of Empire, or any changes, decreases or increases in any other items specified by the Representatives, in each case as compared with the comparable period of the preceding year and with any other period of corresponding length specified by the Representatives, except in each case for increases or decreases which the Registration Statement discloses have occurred or may occur, or which are described in such letter; (iv) In addition to the audit referred to in its report included in the Registration Statement and the limited procedures, inspection of minute books, inquiries and other procedures referred to in paragraphs (ii) and (iii) above, they have carried out certain specified procedures, not constituting an audit in accordance with U.S. generally accepted auditing standards, with respect to certain amounts, percentages and financial information specified by the Representatives which are derived from the general accounting records and consolidated financial statements of Empire which appear in the Registration Statement, and have compared such amounts, percentages and financial information with the accounting records and the material derived from such records and consolidated financial statements of Empire and have found them to be in agreement. In the event that the letters to be delivered referred to above set forth any such changes, decreases or increases as specified in Clauses (iii)(A) or (iii)(B), above, or any exceptions from such agreement specified in Clause (iv) above, it shall be a further condition to the obligations of the Underwriters that the Representatives shall have determined, after discussions with officers of Empire responsible for financial and accounting matters, that such changes, decreases, increases or exceptions as are set forth in such letters do not (x) reflect a material adverse change in the items 32 33 specified in Clause (iii)(A) above as compared with the amounts shown in the latest unaudited consolidated statement of financial condition of Empire included in the Registration Statement, (y) reflect a material adverse change in the items specified in Clause (iii)(B) above as compared with the corresponding periods of the prior year or other period specified by the Representatives, or (z) reflect a material change in items specified in Clause (iv) above from the amounts shown in the Preliminary Prospectus distributed by the Underwriters in connection with the offering contemplated hereby or from the amounts shown in the Prospectus. (i) At the Closing Date and, if applicable, the Option Closing Date, you shall have received certificates of the chief executive officer and the chief financial and accounting officer of the Company, which certificates shall be deemed to be made on behalf of the Company dated as of the Closing Date and, if applicable, the Option Closing Date, evidencing satisfaction of the conditions of Section 6(a) and stating that (i) the representations and warranties of the Company set forth in Section 2(a) hereof are accurate as of the Closing Date and, if applicable, the Option Closing Date, and that the Offerors have complied with all agreements and satisfied all conditions on their part to be performed or satisfied at or prior to such Closing Date; (ii) since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any material adverse change in the condition (financial or otherwise), earnings, affairs, business, prospects or results of operations of the Offerors and the Subsidiaries on a consolidated basis; (iii) since such dates there has not been any material transaction entered into by the Offerors or the Subsidiaries other than transactions in the ordinary course of business; and (iv) they have carefully examined the Registration Statement and the Prospectus as amended or supplemented and nothing has come to their attention that would lead them to believe that either the Registration Statement or the Prospectus, or any amendment or supplement thereto as of their respective effective or issue dates, contained, and the Prospectus as amended or supplemented at such Closing Date (and, if applicable, the Option Closing Date), contains any untrue statement of a material fact, or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (v) covering such other matters as you may reasonably request. The officers' certificate of the Company shall further state that no stop order affecting the Registration Statement is in effect or, to their knowledge, threatened. (j) At the Closing Date and, if applicable, the Option Closing Date, you shall have received a certificate of an authorized representative of the Trust to the effect that to the best of his or her knowledge based upon a reasonable investigation, the representations and warranties of the Trust in this Agreement are true and correct as though made on and as of the Closing Date (and, if applicable, the Option Closing Date); the Trust has complied with all the agreements and satisfied all the conditions required by this Agreement to be performed or satisfied by the Trust on or prior to the Closing Date and since the most recent date as of which information is given in the Prospectus, except as contemplated by the Prospectus, the Trust has not incurred any material liabilities or obligations, direct or contingent, or entered into any material transactions not in the ordinary course of business and there has not been any material adverse change in the condition (financial or otherwise) of the Trust. (k) On the Closing Date, you shall have received duly executed counterparts of the Trust Agreement, the Guarantee, the Indenture and the Expense Agreement. 33 34 (l) The NASD, upon review of the terms of the public offering of the Designated Preferred Securities, shall not have objected to the Underwriters' participation in such offering. (m) Prior to the Closing Date and, if applicable, the Option Closing Date, the Offerors shall have furnished to you and counsel for the Underwriters all such other documents, certificates and opinions as they have reasonably requested. All opinions, certificates, letters and other documents shall be in compliance with the provisions hereof only if they are reasonably satisfactory in form and substance to you. The Offerors shall furnish you with conformed copies of such opinions, certificates, letters and other documents as you shall reasonably request. If any of the conditions referred to in this Section 6 shall not have been fulfilled when and as required by this Agreement, this Agreement and all of the Underwriters' obligations hereunder may be terminated by you on notice to the Company at, or at any time before, the Closing Date or the Option Closing Date, as applicable. Any such termination shall be without liability of the Underwriters to the Offerors. 7. Indemnification and Contribution. -------------------------------- (a) The Offerors agree to jointly and severally indemnify and hold harmless each Underwriter, each of its directors, officers and agents, and each person, if any, who controls any Underwriter within the meaning of the 1933 Act, against any and all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation and reasonable attorney fees and expenses), joint or several, arising out of or based: (i) upon any untrue statement or alleged untrue statement of a material fact made by the Company or the Trust contained in Section 2(a) of this Agreement (or any certificate delivered by the Company or the Trust pursuant to Sections 6(i), 6(j) or 6(m) hereof) or the registration statement as originally filed or the Registration Statement, any Preliminary Prospectus or the Prospectus, or in any amendment or supplement thereto; (ii) upon any blue sky application or other document executed by the Company or the Trust specifically for that purpose or based upon written information furnished by the Company or the Trust filed in any state or other jurisdiction in order to qualify any of the Designated Preferred Securities under the securities laws thereof (any such application, document or information being hereinafter referred to as a "Blue Sky Application"); (iii) upon any omission or alleged omission to state a material fact in the registration statement as originally filed or the Registration Statement, the Preliminary Prospectus or the Prospectus, or in any amendment or supplement thereto, or in any Blue Sky Application required to be stated therein or necessary to make the statements therein not misleading, and against any and all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation and attorney fees), joint or several, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus, or in any amendment or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which 34 35 they were made, not misleading; (iv) upon any failure of the consolidated financial statements of Redwood and its subsidiaries described in Section 2(a)(xx) hereof, (x) to comply in all material respects with the 1933 Act and the 1933 Act Regulations, (y) to present fairly the consolidated financial position of Redwood and its subsidiaries as of the dates indicated, or (z) to have been prepared in conformity with generally accepted accounting principles applied on a consistent basis; (v) upon any failure of the selected and summary financial data concerning Redwood and its subsidiaries described in Section 2(a)(xx) hereof, (x) to comply in all material respects with the 1933 Act and the 1933 Act Regulations, (y) to present fairly the information set forth therein, or (z) to have been compiled on a basis consistent with that of the consolidated financial statements of Redwood and its subsidiaries in the Registration Statement and the Prospectus (or such Preliminary Prospectus); (vi) upon any failure of the financial, statistical and numerical information concerning Redwood and its subsidiaries described in Section 2(a)(xx) hereof and included in the Registration Statement and the Prospectus (or such Preliminary Prospectus), (x) to comply in all material respects with the 1933 Act and the 1933 Act Regulations, (y) to present fairly the information shown therein, or (z) to the extent applicable, to have been compiled on a basis consistent with the consolidated financial statements of Redwood and its subsidiaries included in the Registration Statement and the Prospectus (or such Preliminary Prospectus); or (vii) the enforcement of this indemnification provision or the contribution provisions of Section 7(d); and shall reimburse each such indemnified party for any reasonable legal or other expenses as incurred, but in no event less frequently than 30 days after each invoice is submitted, incurred by them in connection with investigating or defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action, notwithstanding the possibility that payments for such expenses might later be held to be improper, in which case such payments shall be promptly refunded; provided, however, that the Offerors shall not be liable in any such case to the extent, but only to the extent, that any such losses, claims, damages, liabilities and expenses arise out of or are based upon any untrue statement or omission or allegation thereof that has been made therein or omitted therefrom in reliance upon and in conformity with the Underwriters' Information; provided, that the indemnification contained in this paragraph with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter (or of any person controlling any Underwriter) to the extent any such losses, claims, damages, liabilities or expenses directly results from the fact that such Underwriter sold Designated Preferred Securities to a person to whom there was not sent or given, at or prior to the written confirmation of such sale, a copy of the Prospectus (as amended or supplemented if any amendments or supplements thereto shall have been furnished to you in sufficient time to distribute same with or prior to the written confirmation of the sale involved), if required by law, and if such loss, claim, damage, liability or expense would not have arisen but for the failure to give or send such person such document. The foregoing indemnity agreement is in addition to any liability the Company or the Trust may otherwise have to any such indemnified party. (b) Each Underwriter, severally and not jointly, agrees to indemnify and hold harmless each Offeror, each of its directors, each of its officers who signed the Registration Statement and each person, if any, who controls an Offeror within the meaning of the 1933 Act, to the same extent as required by the foregoing indemnity from the Company to each Underwriter, but only with respect to the Underwriters' Information or in a Blue Sky Application. The foregoing indemnity agreement is in addition to any liability which any Underwriter may otherwise have to any such indemnified party. (c) If any action or claim shall be brought or asserted against any indemnified party or any person controlling an indemnified party in respect of which indemnity may be sought from the indemnifying party, such indemnified party or controlling person shall promptly notify the indemnifying party in writing, and the indemnifying party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the indemnified party and the payment of all expenses; provided, however, ----------------- that the failure so to notify the indemnifying party shall not relieve it from any liability which it may have to an indemnified party otherwise than under such paragraph, and further, shall only relieve it from liability under such paragraph to the extent prejudiced thereby. Any indemnified party or any such controlling person shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such indemnified party or such controlling person unless (i) the employment thereof has been specifically authorized by the indemnifying party in writing, (ii) the indemnifying party has failed to assume the defense or to employ counsel reasonably satisfactory to the indemnified party or (iii) the named parties to any such action (including any impleaded parties) include both such indemnified 35 36 party or such controlling person and the indemnifying party and such indemnified party or such controlling person shall have been advised by such counsel that there may be one or more legal defenses available to it that are different from or in addition to those available to the indemnifying party (in which case, if such indemnified party or controlling person notifies the indemnifying party in writing that it elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such action on behalf of such indemnified party or such controlling person) it being understood, however, that the indemnifying party shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time and for all such indemnified party and controlling persons, which firm shall be designated in writing by the indemnified party (and, if such indemnified parties are Underwriters, by you, as Representatives). Each indemnified party and each controlling person, as a condition of such indemnity, shall use reasonable efforts to cooperate with the indemnifying party in the defense of any such action or claim. The indemnifying party shall not be liable for any settlement of any such action effected without its written consent, but if there be a final judgment for the plaintiff in any such action, the indemnifying party agrees to indemnify and hold harmless any indemnified party and any such controlling person from and against any loss, claim, damage, liability or expense by reason of such settlement or judgment. An indemnifying party shall not, without the prior written consent of each indemnified party, settle, compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnity may be sought hereunder (whether or not such indemnified party or any person who controls such indemnified party within the meaning of the 1933 Act is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes a release of each such indemnified party reasonably satisfactory to each such indemnified party and each such controlling person from all liability arising out of such claim, action, suit or proceeding or unless the indemnifying party shall confirm in a written agreement with each indemnified party, that notwithstanding any federal, state or common law, such settlement, compromise or consent shall not alter the right of any indemnified party or controlling person to indemnification or contribution as provided in this Agreement. (d) If the indemnification provided for in this Section 7 is unavailable or insufficient to hold harmless an indemnified party under paragraphs (a), (b) or (c) hereof in respect of any losses, claims, damages, liabilities or expenses referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the Offerors on the one hand and the Underwriters on the other from the offering of the Designated Preferred Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Offerors on the one hand 36 37 and the Underwriters on the other in connection with the statements or omissions that resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Offerors on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering of the Designated Preferred Securities (before deducting expenses) received by the Offerors bear to the total underwriting discounts, commissions and compensation received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Offerors on the one hand and of the Underwriters on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Offerors or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The Offerors and the Underwriters agree that it would not be just and equitable if contribution pursuant to this paragraph (d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities and expenses referred to in the first sentence of this paragraph (d) shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this paragraph (d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Designated Preferred Securities underwritten by such Underwriter and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this paragraph (d), each person who controls an Underwriter within the meaning of the 1933 Act shall have the same rights to contribution as such Underwriter, and each person who controls an Offeror within the meaning of the 1933 Act, each officer and trustee of an Offeror who shall have signed the Registration Statement and each director of an Offeror shall have the same rights to contribution as the Offerors subject in each case to the preceding sentence. The obligations of the Offerors under this paragraph (d) shall be in addition to any liability which the Offerors may otherwise have and the obligations of the Underwriters under this paragraph (d) shall be in addition to any liability that the Underwriters may otherwise have. (e) The indemnity and contribution agreements contained in this Section 7 and the representations and warranties of the Offerors set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling an Underwriter or by or on behalf of the Offerors, or such directors, trustees or officers (or any person controlling an Offeror, (ii) acceptance of any Designated Preferred Securities and payment therefor hereunder and (iii) any termination of this Agreement. A successor of any Underwriter or of an Offeror, such directors, trustees or officers 37 38 (or of any person controlling an Underwriter or an Offeror) shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 7. (f) The Company agrees to indemnify the Trust against any and all losses, claims, damages or liabilities that may become due from the Trust under this Section 7. 8. Termination. You shall have the right to terminate this ----------- Agreement at any time at or prior to the Closing Date or, with respect to the Underwriters' obligation to purchase the Option Preferred Securities, at any time at or prior to the Option Closing Date, without liability on the part of the Underwriters to the Offerors, if: (a) Either Offeror shall have failed, refused, or been unable to perform any agreement on its part to be performed under this Agreement, or any of the conditions referred to in Section 6 shall not have been fulfilled, when and as required by this Agreement; (b) The Offerors or any of the Subsidiaries shall have sustained any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree which in the judgment of the Representatives materially impairs the investment quality of the Designated Preferred Securities; (c) There has been since the respective dates as of which information is given in the Registration Statement or the Prospectus, any materially adverse change in, or any development which is reasonably likely to have a material adverse effect on, the condition (financial or otherwise), earnings, affairs, business, prospects or results of operations of the Offerors and the Subsidiaries on a consolidated basis, whether or not arising in the ordinary course of business; (d) There has occurred any outbreak of hostilities or other calamity or crisis or material change in general economic, political or financial conditions, or internal conditions, the effect of which on the financial markets of the United States is such as to make it, in your reasonable judgment, impracticable to market the Designated Preferred Securities or enforce contracts for the sale of the Designated Preferred Securities; (e) Trading generally on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market shall have been suspended, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required, by any of said exchanges or market system or by the Commission or any other governmental authority; (f) A banking moratorium shall have been declared by either federal, Missouri, Texas or California authorities; or (g) Any action shall have been taken by any government in respect of its monetary affairs which, your reasonable judgment, has a material adverse effect on the United States securities markets. 38 39 If this Agreement shall be terminated pursuant to this Section 8, the Offerors shall not then be under any liability to the Underwriters except as provided in Sections 5 and 7 hereof. 9. Default of Underwriters. If any Underwriter or Underwriters ----------------------- shall default in its or their obligations to purchase Designated Preferred Securities hereunder, the other Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Designated Preferred Securities which such defaulting Underwriter or Underwriters agreed but failed to purchase; provided, however, that the ----------------- non-defaulting Underwriters shall be under no obligation to purchase such Designated Preferred Securities if the aggregate number of Designated Preferred Securities to be purchased by such non-defaulting Underwriters shall exceed 110% of the aggregate underwriting commitments set forth in Schedule I hereto, and provided further, that no non-defaulting Underwriter - ---------- ---------------- shall be obligated to purchase Designated Preferred Securities to the extent that the number of such Designated Preferred Securities is more than 110% of such Underwriter's underwriting commitment set forth in Schedule I hereto. ---------- In the event that the non-defaulting Underwriters are not obligated under the above paragraph to purchase the Designated Preferred Securities which the defaulting Underwriter or Underwriters agreed but failed to purchase, the Representatives may in their discretion arrange for one or more of the Underwriters or for another party or parties to purchase such Designated Preferred Securities on the terms contained herein. If within one business day after such default the Representatives do not arrange for the purchase of such Designated Preferred Securities, then the Company shall be entitled to a further period of one business day within which to procure another party or parties satisfactory to the Representatives to purchase such Designated Preferred Securities on such terms. In the event that the Representatives or the Company do not arrange for the purchase of any Designated Preferred Securities to which a default relates as provided above, this Agreement shall be terminated. If the remaining Underwriters or substituted underwriters are required hereby or agree to take up all or a part of the Designated Preferred Securities of a defaulting Underwriter or Underwriters as provided in this Section 9, (i) you shall have the right to postpone the Closing Date for a period of not more than five full business days, in order to effect any changes that, in the opinion of counsel for the Underwriters or the Company, may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or agreements, and the Company agrees promptly to file any amendments to the Registration Statement or supplements to the Prospectus which, in its opinion, may thereby be made necessary and (ii) the respective numbers of Designated Preferred Securities to be purchased by the remaining Underwriters or substituted underwriters shall be taken as the basis of their underwriting obligation for all purposes of this Agreement. Nothing herein contained shall relieve any defaulting Underwriter of any liability it may have for damages occasioned by its default hereunder. Any termination of this Agreement pursuant to this Section 9 shall be without liability on the part of any non-defaulting Underwriter or the Company, except for expenses to be paid or reimbursed pursuant to Section 5 and except for the provisions of Section 7. 39 40 10. Effective Date of Agreement. If the Registration Statement is --------------------------- not effective at the time of execution of this Agreement, this Agreement shall become effective on the Effective Date at the time the Commission declares the Registration Statement effective. The Company shall immediately notify the Underwriters when the Registration Statement becomes effective. If the Registration Statement is effective at the time of execution of this Agreement, this Agreement shall become effective at the earlier of 11:00 a.m. St. Louis time, on the first full business day following the day on which this Agreement is executed, or at such earlier time as the Representatives shall release the Designated Preferred Securities for initial public offering. The Representatives shall notify the Offerors immediately after they have taken any action which causes this Agreement to become effective. Until such time as this Agreement shall have become effective, it may be terminated by the Offerors, by notifying you or by you, as Representatives of the several Underwriters, by notifying either Offeror, except that the provisions of Sections 5 and 7 shall at all times be effective. 11. Representations, Warranties and Agreements to Survive Delivery. -------------------------------------------------------------- The representations, warranties, indemnities, agreements and other statements of the Offerors and their officers and trustees set forth in or made pursuant to this Agreement and the agreements of the Underwriters contained in Section 7 hereof shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Offerors or controlling persons of either Offeror, or by or on behalf of the Underwriters or controlling persons of the Underwriters or any termination or cancellation of this Agreement and shall survive delivery of and payment for the Designated Preferred Securities. 12. Notices. Except as otherwise provided in this Agreement, all ------- notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand, mailed by registered or certified mail, return receipt requested, or transmitted by any standard form of telecommunication and confirmed. Notices to either Offeror shall be sent to 11901 Olive Boulevard, St. Louis, Missouri 63141, Attention: Allen H. Blake (with a copy to Jackson Walker L.L.P., 901 Main Street, Suite 6000, Dallas, Texas 75202, Attention: James S. Ryan, III, Esq. and to John S. Daniels, Esq., 8117 Preston Road, Suite 800, Dallas, Texas 75225; and notices to the Underwriters shall be sent to Stifel, Nicolaus & Company, Incorporated, 500 North Broadway, Suite 1500, St. Louis, Missouri 63102, Attention: Rick E. Maples and to Hoefer & Arnett, Inc., 353 Sacramento Street, 10th Floor, San Francisco, California 94111, Attention: Peter H. Peracca (with a copy to Bryan Cave LLP, 211 North Broadway, Suite 3600, St. Louis, Missouri 63102, Attention: James L. Nouss, Jr., Esq.). In all dealings with the Company under this Agreement, Stifel, Nicolaus & Company, Incorporated and Hoefer & Arnett, Inc. shall act jointly as representatives of and on behalf of the several Underwriters, and the Company shall be entitled to Act and rely upon any statement, request, notice or agreement on behalf of the Underwriters, made or given jointly by Stifel, Nicolaus & Company, Incorporated and Hoefer & Arnett, Inc. on behalf of the Underwriters, as if the same shall have been made or given in writing by the Underwriters. No statement, request, notice, agreement or action issued or taken in connection with the Offering by either Stifel, Nicolaus & 40 41 Company, Incorporated or Hoefer & Arnett, Inc., acting alone, without the express written agreement of the other party, shall be valid and binding against the other or the several Underwriters. 13. Parties. The Agreement herein set forth is made solely for the ------- benefit of the Underwriters and the Offerors and, to the extent expressed, directors, trustees and officers of the Offerors, any person controlling the Offerors or the Underwriters, and their respective successors and assigns. No other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include any purchaser, in his status as such purchaser, from the Underwriters of the Designated Preferred Securities. 14. Governing Law. This Agreement shall be governed by the laws of ------------- the State of Missouri, without giving effect to the choice of law or conflicts of law principles thereof. 15. Counterparts. This Agreement may be executed in one or more ------------ counterparts, and when a counterpart has been executed by each party hereto all such counterparts taken together shall constitute one and the same Agreement. 41 42 If the foregoing is in accordance with the your understanding of our agreement, please sign and return to us a counterpart hereof, whereupon this shall become a binding agreement between the Company, the Trust and you in accordance with its terms. Very truly yours, FIRST BANKS AMERICA, INC. By: --------------------------------- Name: Title: FIRST AMERICA CAPITAL TRUST By: --------------------------------- Name: Title: CONFIRMED AND ACCEPTED, as of , 1998. ------------ STIFEL, NICOLAUS & COMPANY, INCORPORATED By: -------------------------------------------- Name: Title: For itself and as Representative of the several Underwriters named in Schedule I hereto. HOEFER & ARNETT, INCORPORATED By: -------------------------------------------- Name: Title: For itself and as Representative of the several Underwriters named in Schedule I hereto. 42 43 SCHEDULE I ----------
Underwriter Number of Preferred Securities ----------- ------------------------------ Stifel, Nicolaus & Company, Incorporated ---------------- Hoefer & Arnett, Inc. ---------------- ---------------- Total 1,600,000 ================
43 44 EXHIBIT A LIST OF SUBSIDIARIES BankTEXAS National Association First Bank of California First America Capital Trust EX-4.1 3 FORM OF INDENTURE 1 ================================================================================ FIRST BANKS AMERICA, INC. AND STATE STREET BANK AND TRUST COMPANY, AS TRUSTEE INDENTURE -----% SUBORDINATED DEBENTURES DUE 2028 DATED AS OF -------------, 1998. ================================================================================ 2 TABLE OF CONTENTS
Page ARTICLE I. DEFINITIONS 2 Section 1.1. Definitions of Terms 2 ARTICLE II. ISSUE, DESCRIPTION, TERMS, CONDITIONS REGISTRATION AND EXCHANGE OF THE DEBENTURES 10 Section 2.1 Designation and Principal Amount 10 Section 2.2. Maturity 10 Section 2.3. Form and Payment 11 Section 2.4. [Intentionally Omitted] 11 Section 2.5. Interest 11 Section 2.6. Execution and Authentication 12 Section 2.7. Registration of Transfer and Exchange 13 Section 2.8. Temporary Debentures 14 Section 2.9. Mutilated, Destroyed, Lost or Stolen Debentures 14 Section 2.10. Cancellation 15 Section 2.11. Benefit of Indenture 15 Section 2.12. Authentication Agent 15 ARTICLE III. REDEMPTION OF DEBENTURES 16 Section 3.1. Redemption 16 Section 3.2. Special Event Redemption 16 Section 3.3. Optional Redemption by the Company 17 Section 3.4. Notice of Redemption 17 Section 3.5. Payment upon Redemption 18 Section 3.6. No Sinking Fund 19 ARTICLE IV. EXTENSION OF INTEREST PAYMENT PERIOD 19 Section 4.1. Extension of Interest Payment Period 19 Section 4.2. Notice of Extension 20 Section 4.3. Limitation on Transactions 20 ARTICLE V. PARTICULAR COVENANTS OF THE COMPANY 21 Section 5.1. Payment of Principal and Interest 21 Section 5.2. Maintenance of Agency 21 Section 5.3. Paying Agents 21 Section 5.4. Appointment to Fill Vacancy in Office of the Trustee 22 Section 5.5. Compliance with Consolidation Provisions 22 Section 5.6. Limitation on Transactions 22 Section 5.7. Covenants as to the Trust 23 Section 5.8. Covenants as to Purchases 23 3 ARTICLE VI. THE DEBENTUREHOLDERS' LISTS AND REPORTS. BY THE COMPANY AND THE TRUSTEE 23 Section 6.1. The Company to Furnish the Trustee Names and Addresses of the Debentureholders 23 Section 6.2. Preservation of Information Communications with the Debentureholders 24 Section 6.3. Reports by the Company 24 Section 6.4. Reports by the Trustee 25 ARTICLE VII. REMEDIES OF THE TRUSTEE AND DEBENTUREHOLDERS ON EVENT OF DEFAULT 25 Section 7.1. Events of Default 25 Section 7.2. Collection of Indebtedness and Suits for Enforcement by the Trustee 27 Section 7.3. Application of Moneys Collected 28 Section 7.4. Limitation on Suits 29 Section 7.5. Rights and Remedies Cumulative; Delay or Omission not Waiver 29 Section 7.6. Control by the Debentureholders 30 Section 7.7. Undertaking to Pay Costs 31 ARTICLE VIII. 31 Section 8.1. Form of Debenture 31 Section 8.2. Original Issue of the Debentures 31 ARTICLE IX. CONCERNING THE TRUSTEE 31 Section 9.1. Certain Duties and Responsibilities of the Trustee 31 Section 9.2. Notice of Defaults 33 Section 9.3. Certain Rights of the Trustee 33 Section 9.4. The Trustee not Responsible for Recitals, Etc. 34 Section 9.5. May Hold the Debentures 34 Section 9.6. Moneys Held in Trust 35 Section 9.7. Compensation and Reimbursement 35 Section 9.8. Reliance on Officers' Certificate 35 Section 9.9. Disqualification; Conflicting Interests 35 Section 9.10. Corporate Trustee Required; Eligibility 36 Section 9.11. Resignation and Removal; Appointment of Successor 36 Section 9.12. Acceptance of Appointment by Successor 37 Section 9.13. Merger, Conversion, Consolidation or Succession to Business 38 Section 9.14. Preferential Collection of Claims against the Company 38 ARTICLE X. CONCERNING THE DEBENTUREHOLDERS 38 Section 10.1. Evidence of Action by the Holders 38 ii 4 Section 10.2. Proof of Execution by the Debentureholders 39 Section 10.3. Who May be Deemed Owners 39 Section 10.4. Certain Debentures Owned by Company Disregarded 40 Section 10.5. Actions Binding on the Future Debentureholders 40 ARTICLE XI. SUPPLEMENTAL INDENTURES 40 Section 11.1. Supplemental Indentures without the Consent of the Debentureholders 40 Section 11.2. Supplemental Indentures with Consent of the Debentureholders 41 Section 11.3. Effect of Supplemental Indentures 42 Section 11.4. The Debentures Affected by Supplemental Indentures 42 Section 11.5. Execution of Supplemental Indentures 42 ARTICLE XII. SUCCESSOR CORPORATION 43 Section 12.1. The Company may Consolidate, Etc. 43 Section 12.2. Successor Corporation Substituted 43 Section 12.3. Evidence of Consolidation, Etc. to Trustee 44 ARTICLE XIII. SATISFACTION AND DISCHARGE 44 Section 13.1. Satisfaction and Discharge of Indenture 44 Section 13.2. Discharge of Obligations 44 Section 13.3. Deposited Moneys to be Held in Trust 45 Section 13.4. Payment of Monies Held by Paying Agents 45 Section 13.5. Repayment to the Company 45 ARTICLE XIV. IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS 45 Section 14.1. No Recourse 45 ARTICLE XV. MISCELLANEOUS PROVISIONS 46 Section 15.1. Effect on Successors and Assigns 46 Section 15.2. Actions by Successor 46 Section 15.3. Surrender of the Company Powers 46 Section 15.4. Notices 46 Section 15.5. Governing Law 47 Section 15.6. Treatment of the Debentures as Debt 47 Section 15.7. Compliance Certificates and Opinions 47 Section 15.8. Payments on Business Days 47 Section 15.9. Conflict with Trust Indenture Act 47 Section 15.10. Counterparts 47 Section 15.11. Separability 48 Section 15.12. Assignment 48 Section 15.13. Acknowledgment of Rights 48 iii 5 ARTICLE XVI. SUBORDINATION OF THE DEBENTURES 49 Section 16.1. Agreement to Subordinate 49 Section 16.2. Default on Senior Debt, Subordinated Debt or Additional Senior Obligations 49 Section 16.3. Liquidation; Dissolution; Bankruptcy 49 Section 16.4. Subrogation 51 Section 16.5. The Trustee to Effectuate Subordination 52 Section 16.6. Notice by the Company 52 Section 16.7. Rights of the Trustee; Holders of the Senior Indebtedness 52 Section 16.8. Subordination may not be Impaired 53
iv 6 CROSS-REFERENCE TABLE
Section of Trust Indenture Act Section of of 1939, as amended Indenture - ------------------- --------- 310(a) 9.10 310(b) 9.9, 9.11 310(c) Not Applicable 311(a) 9.14 311(b) 9.14 311(c) Not Applicable 312(a) 6.1, 6.2(a) 312(b) 6.2(c) 312(c) 6.2(c) 313(a) 6.4(a) 313(b) 6.4(b) 313(c) 6.4(a), 6.4(b) 313(d) 6.4(c) 314(a) 6.3(a) 314(b) Not Applicable 314(c) 15.7 314(d) Not Applicable 314(e) 15.7 314(f) Not Applicable 315(a) 9.1(a), 9.3 315(b) 9.2 315(c) 9.1(a) 315(d) 9.1(b) 315(e) 7.7 316(a) 1.1, 7.6 316(b) 7.4(b) 316(c) 10.1(b) 317(a) 7.2 317(b) 5.3 318(a) 15.9 Note: This Cross-Reference Table does not constitute part of this Indenture and shall not affect the interpretation of any of its terms or provisions.
v 7 INDENTURE INDENTURE, dated as of June --, 1998, between FIRST BANKS AMERICA, INC. a Delaware corporation (the "Company") and STATE STREET BANK AND TRUST COMPANY, a trust company duly organized and existing under the laws of the Commonwealth of Massachusetts, as trustee (the "Trustee"); RECITALS WHEREAS, for its lawful corporate purposes, the Company has duly authorized the execution and delivery of this Indenture to provide for the issuance of securities to be known as its ------% Subordinated Debentures due 2028 (hereinafter referred to as the "Debentures"), the form and substance of such Debentures and the terms, provisions and conditions thereof to be set forth as provided in this Indenture; WHEREAS, First America Capital Trust, a Delaware statutory business trust (the "Trust"), has offered to the public $40,000,000 aggregate liquidation amount of its Preferred Securities (as defined herein) ($46,000,000 if the Underwriters exercise their Option (as defined herein)) and proposes to invest the proceeds from such offering, together with the proceeds of the issuance and sale by the Trust to the Company of $1,237,125 aggregate liquidation amount of its Common Securities (as defined herein) ($1,422,700 if the Underwriters exercise their option), in $41,237,125 aggregate principal amount of the Debentures ($47,422,700 if the Underwriters exercise their Option); and WHEREAS, the Company has requested that the Trustee execute and deliver this Indenture; and WHEREAS, all requirements necessary to make this Indenture a valid instrument in accordance with its terms, and to make the Debentures, when executed by the Company and authenticated and delivered by the Trustee, the valid obligations of the Company, have been performed, and the execution and delivery of this Indenture have been duly authorized in all respects; and WHEREAS, to provide the terms and conditions upon which the Debentures are to be authenticated, issued and delivered, the Company has duly authorized the execution of this Indenture; and WHEREAS, all things necessary to make this Indenture a valid agreement of the Company, in accordance with its terms, have been done. NOW, THEREFORE, in consideration of the premises and the purchase of the Debentures by the holders thereof, it is mutually covenanted and agreed as follows for the equal and ratable benefit of the holders of the Debentures: 8 ARTICLE I. DEFINITIONS Section 1.1. Definitions of Terms. The terms defined in this Section 1.1 (except as in this Indenture otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.1 and shall include the plural as well as the singular. All other terms used in this Indenture that are defined in the Trust Indenture Act, or that are by reference in the Trust Indenture Act defined in the Securities Act (except as herein otherwise expressly provided or unless the context otherwise requires), shall have the meanings assigned to such terms in the Trust Indenture Act and in the Securities Act as in force at the date of the execution of this instrument. All accounting terms used herein and not expressly defined shall have the meanings assigned to such terms in accordance with Generally Accepted Accounting Principles. "Accelerated Maturity Date" means if the Company elects to accelerate the Maturity Date in accordance with Section 2.2(c), the date selected by the Company which is prior to the Scheduled Maturity Date, but is after June 30, 2003. "Additional Payments" shall have the meaning set forth in Section 2.5(c). "Additional Senior Obligations" means all indebtedness of the Company whether incurred on or prior to the date of this Indenture or thereafter incurred, for claims in respect of derivative products such as interest and foreign exchange rate contracts, commodity contracts and similar arrangements; provided, however, that Additional Senior Obligations does not include claims - -------- ------- in respect of Senior Debt or Subordinated Debt or obligations which, by their terms, are expressly stated to be not superior in right of payment to the Debentures or to rank pari passu in right of payment with the Debentures. For purposes of this definition, "claim" shall have the meaning assigned thereto in Section 101(4) of the United States Bankruptcy Code of 1978, as amended. "Administrative Trustees" shall have the meaning set forth in the Trust Agreement. "Affiliate" means, with respect to a specified Person, (a) any Person directly or indirectly owning, controlling or holding with power to vote 10% or more of the outstanding voting securities or other ownership interests of the specified Person; (b) any Person 10% or more of whose outstanding voting securities or other ownership interests are directly or indirectly owned, controlled or held with power to vote by the specified Person; (c) any Person directly or indirectly controlling, controlled by, or under common control with the specified Person; (d) a partnership in which the specified Person is a general partner; (e) any officer or director of the specified Person; and (f) if the specified Person is an individual, any entity of which the specified Person is an officer, director or general partner. "Authenticating Agent" means an authenticating agent with respect to the Debentures appointed by the Trustee pursuant to Section 2.12. 2 9 "Bankruptcy Law" means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors. "Board of Directors" means the Board of Directors of the Company or any duly authorized committee of such Board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification. "Business Day" means, with respect to the Debentures, any day other than a Saturday or a Sunday or a day on which federal or state banking institutions in the Borough of Manhattan, the City of New York, are authorized or required by law, executive order or regulation to close, or a day on which the Corporate Trust Office of the Trustee or the Property Trustee is closed for business. "Capital Treatment Event" means the receipt by the Trust of an Opinion of Counsel, rendered by a law firm having a recognized banking law practice, to the effect that, as a result of any amendment to or any change (including any announced prospective change) in the laws (or any regulations thereunder) of the United States or any political subdivision thereof or therein, or as a result of any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or such proposed change, pronouncement or decision is announced on or after the date of issuance of the Preferred Securities under the Trust Agreement, there is more than an insubstantial risk of impairment of the Company's ability to treat the aggregate Liquidation Amount of the Preferred Securities (or any substantial portion thereof) as "Tier 1 Capital" (or the then equivalent thereof) for purposes of the capital adequacy guidelines of the Federal Reserve, as then in effect and applicable to the Company, provided, however, that the inability of the Company to treat all or any - -------- ------- portion of the Liquidation Amount of the Preferred Securities as Tier 1 Capital shall not constitute the basis for a Capital Treatment Event if such inability results from the Company having cumulative preferred stock, minority interests in consolidated subsidiaries, or any other class of security or interest which the Federal Reserve now or may hereafter accord Tier 1 Capital treatment in excess of the amount which may qualify for treatment as Tier 1 Capital under applicable capital adequacy guidelines of the Federal Reserve. "Certificate" means a certificate signed by the principal executive officer, the principal financial officer, the principal accounting officer, the treasurer or any vice president of the Company. The Certificate need not comply with the provisions of Section 15.7. "Change in 1940 Act Law" shall have the meaning set forth in the definition of "Investment Company Event." "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this 3 10 instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Common Securities" means undivided beneficial interests in the assets of the Trust which rank pari passu with the Preferred Securities; provided, -------- however, that upon the occurrence of an Event of Default, the rights of - ------- holders of Common Securities to payment in respect of (i) distributions, and (ii) payments upon liquidation, redemption and otherwise, are subordinated to the rights of holders of Preferred Securities. "Company" means First Banks America, Inc., a corporation duly organized and existing under the laws of the State of Delaware, and, subject to the provisions of Article XII, shall also include its successors and assigns. "Compounded Interest" shall have the meaning set forth in Section 4.1. "Corporate Trust Office" means the office of the Trustee at which, at any particular time, its corporate trust business shall be principally administered, which office at the date hereof is located at Two International Place, 4th Floor, Boston, Massachusetts 02110, Attention: Corporate Trust Department. "Coupon Rate" shall have the meaning set forth in Section 2.5(a). "Custodian" means any receiver, trustee, assignee, liquidator, or similar official under any Bankruptcy Law. "Debentures" shall have the meaning set forth in the Recitals hereto. "Debentureholder," "holder of Debentures," "registered holder," or other similar term, means the Person or Persons in whose name or names a particular Debenture shall be registered on the books of the Company or the Trustee kept for that purpose in accordance with the terms of this Indenture. "Debenture Register" shall have the meaning set forth in Section 2.7(b). "Debenture Registrar" shall have the meaning set forth in Section 2.7(b). "Debt" means with respect to any Person, whether recourse is to all or a portion of the assets of such Person and whether or not contingent, (a) every obligation of such Person for money borrowed; (b) every obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, including obligations incurred in connection with the acquisition of property, assets or businesses; (c) every reimbursement obligation of such Person with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of such Person; (d) every obligation of such Person issued or assumed as the deferred purchase price of property or services (but excluding trade accounts payable or accrued liabilities arising in the ordinary course of business); (e) every capital lease obligation of such Person; and (f) and every 4 11 obligation of the type referred to in clauses (a) through (e) of another Person and all dividends of another Person the payment of which, in either case, such Person has guaranteed or is responsible or liable, directly or indirectly, as obligor or otherwise. "Default" means any event, act or condition that with notice or lapse of time, or both, would constitute an Event of Default. "Deferred Payments" shall have the meaning set forth in Section 4.1. "Dissolution Event" means that as a result of the occurrence and continuation of a Special Event, the Trust is to be dissolved in accordance with the Trust Agreement and the Debentures held by the Property Trustee are to be distributed to the holders of the Trust Securities issued by the Trust pro rata in accordance with the Trust Agreement. "Distribution" shall have the meaning set forth in the Trust Agreement. "Event of Default" means, with respect to the Debentures, any event specified in Section 7.1, which has continued for the period of time, if any, and after the giving of the notice, if any, therein designated. "Exchange Act," means the Securities Exchange Act of 1934, as amended, as in effect at the date of execution of this instrument. "Extended Maturity Date" means if the Company elects to extend the Maturity Date in accordance with Section 2.2(b), the date selected by the Company which is after the Scheduled Maturity Date but before June 30, 2037. "Extension Period" shall have the meaning set forth in Section 4.1. "Federal Reserve" means the Board of Governors of the Federal Reserve System. "Generally Accepted Accounting Principles" means such accounting principles as are generally accepted at the time of any computation required hereunder. "Governmental Obligations" means securities that are (a) direct obligations of the United States of America for the payment of which its full faith and credit is pledged; or (b) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America, the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America that, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depositary receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as custodian with respect to any such Governmental Obligation or a specific payment of principal of or interest on any such Governmental Obligation held by such custodian for the account of the holder of such depositary receipt; provided, however, that (except as -------- ------- required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depositary receipt from any 5 12 amount received by the custodian in respect of the Governmental Obligation or the specific payment of principal of or interest on the Governmental Obligation evidenced by such depositary receipt. "Herein," "hereof," and "hereunder," and other words of similar import, refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into in accordance with the terms hereof. "Interest Payment Date" shall have the meaning set forth in Section 2.5(a). "Investment Company Act," means the Investment Company Act of 1940, as amended, as in effect at the date of execution of this instrument. "Investment Company Event" means the receipt by the Trust of an Opinion of Counsel, rendered by a law firm having a recognized tax and securities law practice, to the effect that, as a result of the occurrence of a change in law or regulation or a change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority (a "Change in 1940 Act Law"), the Trust is or shall be considered an "investment company" that is required to be registered under the Investment Company Act, which Change in 1940 Act Law becomes effective on or after the date of original issuance of the Preferred Securities under the Trust Agreement. "Maturity Date" means the date on which the Debentures mature and on which the principal shall be due and payable together with all accrued and unpaid interest thereon including Compounded Interest and Additional Payments, if any. "Ministerial Action" shall have the meaning set forth in Section 3.2. "Officers' Certificate" means a certificate signed by the President or a Vice President and by the Treasurer or an Assistant Treasurer or the Controller or an Assistant Controller or the Secretary or an Assistant Secretary of the Company that is delivered to the Trustee in accordance with the terms hereof. Each such certificate shall include the statements provided for in Section 15.7, if and to the extent required by the provisions thereof. "Opinion of Counsel" means an opinion in writing of legal counsel, who may be an employee of or counsel for the Company, that is delivered to the Trustee in accordance with the terms hereof. Each such opinion shall include the statements provided for in Section 15.7, if and to the extent required by the provisions thereof. "Outstanding," when used with respect to the Debentures, means, as of the date of determination, all of the Debentures theretofore executed and delivered by the Trustee under this Indenture, except: 6 13 (a) the Debentures theretofore canceled by the Trustee or any Paying Agent, or delivered to the Trustee or any Paying Agent for cancellation; (b) the Debentures for whose payment or redemption Governmental Obligations or money in the necessary amount has been theretofore deposited in trust with the Trustee or any Paying Agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own paying agent) for the holders of such Debentures; provided that, if such Debentures are to be redeemed, notice of such redemption has been duly given pursuant to Article III hereof; and (c) the Debentures which have been paid or in lieu of which other Debentures have been executed and delivered pursuant to Section 2.7; provided, however, that in determining whether the holders of a majority or - -------- ------- specified percentage in aggregate principal amount of the Debentures have given any request, demand, authorization, direction, notice, consent or waiver hereunder, the Debentures owned by the Company or any other obligor on the Debentures or by any Person directly or indirectly controlling or controlled by or under common control with the Company or any other obligor on the Debentures shall be disregarded and deemed not to be Outstanding, except that (i) in determining whether any Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only the Debentures that such Trustee knows to be so owned shall be so disregarded; and (ii) for purposes hereof, the Trust shall be deemed not to be controlled by the Company. The Debentures so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Debentures and the pledgee is not a Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other obligor. "Paying Agent" means any paying agent or co-paying agent appointed pursuant to Section 5.3. "Person" means any individual, corporation, partnership, joint-venture, trust, limited liability company, joint-stock company, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Debenture" means every previous Debenture evidencing all or a portion of the same debt as that evidenced by such particular Debenture; and, for the purposes of this definition, any Debenture authenticated and delivered under Section 2.9 in lieu of a lost, destroyed or stolen Debenture shall be deemed to evidence the same debt as the lost, destroyed or stolen Debenture. "Preferred Securities" means undivided beneficial interests in the assets of the Trust which rank pari passu with Common Securities issued by the Trust; provided, however, that upon the occurrence of an Event of -------- ------- Default, the rights of holders of Common Securities to payment in respect of (a) distributions, and (b) payments upon liquidation, redemption and otherwise, are subordinated to the rights of holders of Preferred Securities. 7 14 "Preferred Securities Guarantee" means any guarantee that the Company may enter into with the Trustee or other Persons that operates directly or indirectly for the benefit of holders of Preferred Securities. "Property Trustee" has the meaning set forth in the Trust Agreement. "Responsible Officer" when used with respect to the Trustee means the Chairman of the Board of Directors, the President, any Vice President, the Secretary, the Treasurer, any trust officer, any corporate trust officer or any other officer or assistant officer of the Trustee customarily performing functions similar to those performed by the Persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of his or her knowledge of and familiarity with the particular subject. "Scheduled Maturity Date" means June 30, 2028. "Securities Act," means the Securities Act of 1933, as amended, as in effect at the date of execution of this instrument. "Senior Debt" means the principal of (and premium, if any) and interest, if any (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company whether or not such claim for post-petition interest is allowed in such proceeding), on Debt, whether incurred on or prior to the date of this Indenture or thereafter incurred, unless, in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that such obligations are not superior in right of payment to the Debentures or to other Debt which is pari passu with, or subordinated to, the Debentures; provided, however, that Senior Debt shall not be deemed to include (a) any - -------- ------- Debt of the Company which when incurred and without respect to any election under section 1111(b) of the United States Bankruptcy Code of 1978, as amended, was without recourse to the Company; (b) any Debt of the Company to any of its subsidiaries; (c) Debt to any employee of the Company; (d) Debt which by its terms is subordinated to trade accounts payable or accrued liabilities arising in the ordinary course of business to the extent that payments made to the holders of such Debt by the holders of the Debentures as a result of the subordination provisions of this Indenture would be greater than they otherwise would have been as a result of any obligation of such holders to pay amounts over to the obligees on such trade accounts payable or accrued liabilities arising in the ordinary course of business as a result of subordination provisions to which such Debt is subject; and (e) Debt which constitutes Subordinated Debt. "Senior Indebtedness" shall have the meaning set forth in Section 16.1. "Special Event" means a Tax Event, a Capital Treatment Event or an Investment Company Event. "Subordinated Debt" means the principal of (and premium, if any) and interest, if any (including interest accruing on or after the filing of any petition in bankruptcy or for 8 15 reorganization relating to the Company whether or not such claim for post-petition interest is allowed in such proceeding), on Debt (other than the Debentures), whether incurred on or prior to the date of this Indenture or thereafter incurred, which is by its terms expressly provided to be junior and subordinate to other Debt of the Company. "Subsidiary" means, with respect to any Person, (a) any corporation at least a majority of whose outstanding Voting Stock shall at the time be owned, directly or indirectly, by such Person or by one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries; (b) any general partnership, joint venture, trust or similar entity, at least a majority of whose outstanding partnership or similar interests shall at the time be owned by such Person, or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries; and (c) any limited partnership of which such Person or any of its Subsidiaries is a general partner. "Tax Event" means the receipt by the Trust of an Opinion of Counsel, rendered by a law firm having a recognized tax and securities law practice, to the effect that, as a result of any amendment to, or change (including any announced prospective change) in, the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein, or as a result of any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or which pronouncement or decision is announced on or after the date of issuance of the Preferred Securities under the Trust Agreement, there is more than an insubstantial risk that (a) the Trust is, or shall be within 90 days after the date of such Opinion of Counsel, subject to United States federal income tax with respect to income received or accrued on the Debentures; (b) interest payable by the Company on the Debentures is not, or within 90 days after the date of such Opinion of Counsel, shall not be, deductible by the Company, in whole or in part, for United States federal income tax purposes; or (c) the Trust is, or shall be within 90 days after the date of such Opinion of Counsel, subject to more than a de minimis amount of other taxes, duties, assessments or other governmental charges. The Trust or the Company shall request and receive such Opinion of Counsel with regard to such matters within a reasonable period of time after the Trust or the Company shall have become aware of the occurrence or the possible occurrence of any of the events described in clauses (a) through (c) above. "Trust" means First America Capital Trust, a Delaware statutory business trust. "Trust Agreement" means the Amended and Restated Trust Agreement, dated June --, 1998, of the Trust. "Trustee" means State Street Bank and Trust Company and, subject to the provisions of Article IX, shall also include its successors and assigns, and, if at any time there is more than one Person acting in such capacity hereunder, "Trustee" shall mean each such Person. "Trust Indenture Act," means the Trust Indenture Act of 1939, as amended, subject to the provisions of Sections 11.1, 11.2, and 12.1, as in effect at the date of execution of this instrument. 9 16 "Trust Securities" means the Common Securities and Preferred Securities, collectively. "Voting Stock," as applied to stock of any Person, means shares, interests, participations or other equivalents in the equity interest (however designated) in such Person having ordinary voting power for the election of a majority of the directors (or the equivalent) of such Person, other than shares, interests, participations or other equivalents having such power only by reason of the occurrence of a contingency. ARTICLE II. ISSUE, DESCRIPTION, TERMS, CONDITIONS REGISTRATION AND EXCHANGE OF THE DEBENTURES Section 2.1. Designation and Principal Amount. There is hereby authorized Debentures designated the "----% Subordinated Debentures due 2028," limited in aggregate principal amount up to $47,422,700, which amount shall be as set forth in any written order of the Company for the authentication and delivery of Debentures pursuant to Section 2.6. Section 2.2. Maturity. (a) The Maturity Date shall be either: (i) the Scheduled Maturity Date; or (ii) if the Company elects to extend the Maturity Date beyond the Scheduled Maturity Date in accordance with Section 2.2(b), the Extended Maturity Date; or (iii) if the Company elects to accelerate the Maturity Date to be a date prior to the Scheduled Maturity Date in accordance with Section 2.2(c), the Accelerated Maturity Date. (b) The Company may at any time before the day which is 90 days before the Scheduled Maturity Date, elect to extend the Maturity Date to the Extended Maturity Date, provided that the Company has received the prior approval of the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve and further provided that the following conditions in this Section 2.2(b) are satisfied both at the date the Company gives notice in accordance with Section 2.2(d) of its election to extend the Maturity Date and at the Scheduled Maturity Date: (i) the Company is not in bankruptcy, otherwise insolvent or in liquidation; (ii) the Company is not in default in the payment of any interest or principal on the Debentures; and (iii) the Trust is not in arrears on payments of Distributions on the Trust Securities issued by it and no deferred Distributions are accumulated. 10 17 (c) The Company may, on one occasion, at any time before the day which is 90 days before the Scheduled Maturity Date and after June 30, 2003, elect to shorten the Maturity Date to the Accelerated Maturity Date provided that the Company has received the prior approval of the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve. (d) If the Company elects to extend the Maturity Date in accordance with Section 2.2(b), the Company shall give notice to the registered holders of the Debentures, the Property Trustee and the Trust of the extension of the Maturity Date and the Extended Maturity Date at least 90 days and no more than 180 days before the Scheduled Maturity Date. (e) If the Company elects to accelerate the Maturity Date in accordance with Section 2.2(c), the Company shall give notice to the registered holders of the Debentures, the Property Trustee and the Trust of the acceleration of the Maturity Date and the Accelerated Maturity Date at least 90 days and no more than 180 days before the Accelerated Maturity Date. Section 2.3. Form and Payment. The Debentures shall be issued in fully registered certificated form without interest coupons. Principal and interest on the Debentures issued in certificated form shall be payable, the transfer of such Debentures shall be registrable and such Debentures shall be exchangeable for Debentures bearing identical terms and provisions at the office or agency of the Trustee; provided, however, that payment of interest -------- ------- may be made at the option of the Company by check mailed to the holder at such address as shall appear in the Debenture Register or by wire transfer to an account maintained by the holder as specified in the Debenture Register, provided that the holder provides proper transfer instructions by the regular record date. Notwithstanding the foregoing, so long as the holder of any Debentures is the Property Trustee, the payment of the principal of and interest (including Compounded Interest and Additional Payments, if any) on such Debentures held by the Property Trustee shall be made at such place and to such account as may be designated by the Property Trustee. Section 2.4. [Intentionally Omitted]. Section 2.5. Interest. (a) Each Debenture shall bear interest at a rate of -----% per annum (the "Coupon Rate") from the original date of issuance until the principal thereof becomes due and payable, and on any overdue principal and (to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the Coupon Rate, compounded quarterly, payable (subject to the provisions of Article IV) quarterly in arrears on March 31, June 30, September 30, and December 31 of each year (each, an "Interest Payment Date," commencing on September 30, 1998), to the Person in whose name such Debenture or any Predecessor Debenture is registered, at the close of business on the regular record date for such interest installment, which shall be the fifteenth day of the last month of the calendar quarter. 11 18 (b) The amount of interest payable for any period shall be computed on the basis of a 360-day year of twelve 30-day months. The amount of interest payable for any period shorter than a full quarterly period for which interest is computed shall be computed on the basis of the number of days elapsed in a 360-day year of twelve 30-day months. In the event that any date on which interest is payable on the Debentures is not a Business Day, then payment of interest payable on such date shall be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay) with the same force and effect as if made on the date such payment was originally payable. (c) If, at any time while the Property Trustee is the holder of any Debentures, the Trust or the Property Trustee is required to pay any taxes, duties, assessments or governmental charges of whatever nature (other than withholding taxes) imposed by the United States, or any other taxing authority, then, in any case, the Company shall pay as additional payments ("Additional Payments") on the Debentures held by the Property Trustee, such additional amounts as shall be required so that the net amounts received and retained by the Trust and the Property Trustee after paying such taxes, duties, assessments or other governmental charges shall be equal to the amounts the Trust and the Property Trustee would have received had no such taxes, duties, assessments or other government charges been imposed. Section 2.6. Execution and Authentication. (a) The Debentures shall be signed on behalf of the Company by its Chief Executive Officer, President or one of its Vice Presidents, under its corporate seal attested by its Secretary or one of its Assistant Secretaries. Signatures may be in the form of a manual or facsimile signature. The Company may use the facsimile signature of any Person who shall have been a Chief Executive Officer, President or Vice President thereof, or of any Person who shall have been a Secretary or Assistant Secretary thereof, notwithstanding the fact that at the time the Debentures shall be authenticated and delivered or disposed of such Person shall have ceased to be the Chief Executive Officer, President or a Vice President, or the Secretary or an Assistant Secretary, of the Company. The seal of the Company may be in the form of a facsimile of such seal and may be impressed, affixed, imprinted or otherwise reproduced on the Debentures. The Debentures may contain such notations, legends or endorsements required by law, stock exchange rule or usage. Each Debenture shall be dated the date of its authentication by the Trustee. (b) A Debenture shall not be valid until manually authenticated by an authorized signatory of the Trustee, or by an Authenticating Agent. Such signature shall be conclusive evidence that the Debenture so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture. (c) At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Debentures executed by the Company to the Trustee for authentication, together with a written order of the Company for the authentication and delivery of such Debentures signed by its Chief Executive Officer, President or any Vice President and its 12 19 Treasurer or any Assistant Treasurer, and the Trustee in accordance with such written order shall authenticate and deliver such Debentures. (d) In authenticating such Debentures and accepting the additional responsibilities under this Indenture in relation to such Debentures, the Trustee shall be entitled to receive, and (subject to Section 9.1) shall be fully protected in relying upon, an Opinion of Counsel stating that the form and terms thereof have been established in conformity with the provisions of this Indenture. (e) The Trustee shall not be required to authenticate such Debentures if the issue of such Debentures pursuant to this Indenture shall affect the Trustee's own rights, duties or immunities under the Debentures and this Indenture or otherwise in a manner that is not reasonably acceptable to the Trustee. Section 2.7. Registration of Transfer and Exchange. (a) Debentures may be exchanged upon presentation thereof at the office or agency of the Company designated for such purpose or at the office of the Debenture Registrar, for other Debentures and for a like aggregate principal amount, upon payment of a sum sufficient to cover any tax or other governmental charge in relation thereto, all as provided in this Section 2.7. In respect of any Debentures so surrendered for exchange, the Company shall execute, the Trustee shall authenticate and such office or agency shall deliver in exchange therefor the Debenture or Debentures that the Debentureholder making the exchange shall be entitled to receive, bearing numbers not contemporaneously outstanding. (b) The Company shall keep, or cause to be kept, at its office or agency designated for such purpose or at the office of the Debenture Registrar, or such other location designated by the Company a register or registers (herein referred to as the "Debenture Register") in which, the Company shall register the Debentures and the transfers of Debentures as in this Article II provided and which at all reasonable times shall be open for inspection by the Trustee. The registrar for the purpose of registering Debentures and transfer of Debentures as herein provided shall initially be the Trustee and thereafter as may be appointed by the Company as authorized by Board Resolution (the "Debenture Registrar"). Upon surrender for transfer of any Debenture at the office or agency of the Company designated for such purpose, the Company shall execute, the Trustee shall authenticate and such office or agency shall deliver in the name of the transferee or transferees a new Debenture or Debentures for a like aggregate principal amount. All Debentures presented or surrendered for exchange or registration of transfer, as provided in this Section 2.7, shall be accompanied (if so required by the Company or the Debenture Registrar) by a written instrument or instruments of transfer, in form satisfactory to the Company or the Debenture Registrar, duly executed by the registered holder or by such holder's duly authorized attorney in writing. (c) No service charge shall be made for any exchange or registration of transfer of Debentures, or issue of new Debentures in case of partial redemption, but the Company may 13 20 require payment of a sum sufficient to cover any tax or other governmental charge in relation thereto, other than exchanges pursuant to Section 2.8, Section 3.5(b) and Section 11.4 not involving any transfer. (d) The Company shall not be required (i) to issue, exchange or register the transfer of any Debentures during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of less than all the Outstanding Debentures and ending at the close of business on the day of such mailing; nor (ii) to register the transfer of or exchange any Debentures or portions thereof called for redemption. Section 2.8. Temporary Debentures. Pending the preparation of definitive Debentures, the Company may execute, and the Trustee shall authenticate and deliver, temporary Debentures (printed, lithographed, or typewritten). Such temporary Debentures shall be substantially in the form of the definitive Debentures in lieu of which they are issued, but with such omissions, insertions and variations as may be appropriate for temporary Debentures, all as may be determined by the Company. Every temporary Debenture shall be executed by the Company and be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with like effect, as the definitive Debentures. Without unnecessary delay the Company shall execute and shall furnish definitive Debentures and thereupon any or all temporary Debentures may be surrendered in exchange therefor (without charge to the holders), at the office or agency of the Company designated for the purpose and the Trustee shall authenticate and such office or agency shall deliver in exchange for such temporary Debentures an equal aggregate principal amount of definitive Debentures, unless the Company advises the Trustee to the effect that definitive Debentures need not be executed and furnished until further notice from the Company. Until so exchanged, the temporary Debentures shall be entitled to the same benefits under this Indenture as definitive Debentures authenticated and delivered hereunder. Section 2.9. Mutilated, Destroyed, Lost or Stolen Debentures. (a) In case any temporary or definitive Debenture shall become mutilated or be destroyed, lost or stolen, the Company (subject to the next succeeding sentence) shall execute, and upon the Company's request the Trustee (subject as aforesaid) shall authenticate and deliver, a new Debenture bearing a number not contemporaneously outstanding, in exchange and substitution for the mutilated Debenture, or in lieu of and in substitution for the Debenture so destroyed, lost or stolen. In every case the applicant for a substituted Debenture shall furnish to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company and the Trustee evidence to their satisfaction of the destruction, loss or theft of the applicant's Debenture and of the ownership thereof. The Trustee shall authenticate any such substituted Debenture and deliver the same upon the written request or authorization of the Chairman, President or any Vice President and the Treasurer or any Assistant Treasurer of the Company. Upon the issuance of any substituted Debenture, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed 14 21 in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. In case any Debenture that has matured or is about to mature shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a substitute Debenture, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Debenture) if the applicant for such payment shall furnish to the Company and the Trustee such security or indemnity as they may require to save them harmless, and, in case of destruction, loss or theft, evidence to the satisfaction of the Company and the Trustee of the destruction, loss or theft of such Debenture and of the ownership thereof. (b) Every replacement Debenture issued pursuant to the provisions of this Section 2.9 shall constitute an additional contractual obligation of the Company whether or not the mutilated, destroyed, lost or stolen Debenture shall be found at any time, or be enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Debentures duly issued hereunder. All Debentures shall be held and owned upon the express condition that the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Debentures, and shall preclude (to the extent lawful) any and all other rights or remedies, notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender. Section 2.10. Cancellation. All Debentures surrendered for the purpose of payment, redemption, exchange or registration of transfer shall, if surrendered to the Company or any Paying Agent, be delivered to the Trustee for cancellation, or, if surrendered to the Trustee, shall be canceled by it, and no Debentures shall be issued in lieu thereof except as expressly required or permitted by any of the provisions of this Indenture. On request of the Company at the time of such surrender, the Trustee shall deliver to the Company canceled Debentures held by the Trustee. In the absence of such request the Trustee may dispose of canceled Debentures in accordance with its standard procedures and deliver a certificate of disposition to the Company. If the Company shall otherwise acquire any of the Debentures, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Debentures unless and until the same are delivered to the Trustee for cancellation. Section 2.11. Benefit of Indenture. Nothing in this Indenture or in the Debentures, express or implied, shall give or be construed to give to any Person, other than the parties hereto and the holders of the Debentures (and, with respect to the provisions of Article XVI, the holders of the Senior Indebtedness) any legal or equitable right, remedy or claim under or in respect of this Indenture, or under any covenant, condition or provision herein contained; all such covenants, conditions and provisions being for the sole benefit of the parties hereto and of the holders of the Debentures (and, with respect to the provisions of Article XVI, the holders of the Senior Indebtedness). 15 22 Section 2.12. Authentication Agent. (a) So long as any of the Debentures remain Outstanding there may be an Authenticating Agent for any or all such Debentures, which the Trustee shall have the right to appoint. Said Authenticating Agent shall be authorized to act on behalf of the Trustee to authenticate Debentures issued upon exchange, transfer or partial redemption thereof, and Debentures so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. All references in this Indenture to the authentication of Debentures by the Trustee shall be deemed to include authentication by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall be a corporation that has a combined capital and surplus, as most recently reported or determined by it, sufficient under the laws of any jurisdiction under which it is organized or in which it is doing business to conduct a trust business, and that is otherwise authorized under such laws to conduct such business and is subject to supervision or examination by federal or state authorities. If at any time any Authenticating Agent shall cease to be eligible in accordance with these provisions, it shall resign immediately. (b) Any Authenticating Agent may at any time resign by giving written notice of resignation to the Trustee and to the Company. The Trustee may at any time (and upon request by the Company shall) terminate the agency of any Authenticating Agent by giving written notice of termination to such Authenticating Agent and to the Company. Upon resignation, termination or cessation of eligibility of any Authenticating Agent, the Trustee may appoint an eligible successor Authenticating Agent acceptable to the Company. Any successor Authenticating Agent, upon acceptance of its appointment hereunder, shall become vested with all the rights, powers and duties of its predecessor hereunder as if originally named as an Authenticating Agent pursuant hereto. ARTICLE III. REDEMPTION OF DEBENTURES Section 3.1. Redemption. Subject to the Company having received prior approval of the Federal Reserve, if then required under the applicable capital guidelines or policies of the Federal Reserve, the Company may redeem the Debentures issued hereunder on and after the dates set forth in and in accordance with the terms of this Article III. Section 3.2. Special Event Redemption. Subject to the Company having received the prior approval of the Federal Reserve, if then required under the applicable capital guidelines or policies of the Federal Reserve, if a Special Event has occurred and is continuing, then, notwithstanding Section 3.3(a) but subject to Section 3.3(b), the Company shall have the right upon not less than 30 days' nor more than 60 days' notice to the holders of the Debentures to redeem the Debentures, in whole but not in part, for cash within 180 days following the occurrence of such Special Event (the "180-Day Period") at a redemption price equal to 100% of the principal amount to be redeemed plus any accrued and unpaid interest thereon to the date of such redemption (the "Redemption Price"), provided that if at the time there is available to the Company the opportunity to eliminate, within the 180-Day Period, a Tax Event by taking some ministerial action (a "Ministerial Action"), such as filing a form or making an election, or pursuing 16 23 some other similar reasonable measure which has no adverse effect on the Company, the Trust or the holders of the Trust Securities issued by the Trust, the Company shall pursue such Ministerial Action in lieu of redemption, and, provided further, that the Company shall have no right to redeem the Debentures - ---------------- while it is pursuing any Ministerial Action pursuant to its obligations hereunder, and, provided further, that, if it is determined that the taking of a Ministerial Action would not eliminate the Tax Event within the 180 Day Period, the Company's right to redeem the Debentures shall be restored and it shall have no further obligations to pursue the Ministerial Action. The Redemption Price shall be paid prior to 12:00 noon, New York time, on the date of such redemption or such earlier time as the Company determines, provided that the Company shall deposit with the Trustee an amount sufficient to pay the Redemption Price by 10:00 a.m., New York time, on the date such Redemption Price is to be paid. Section 3.3. Optional Redemption by the Company. (a) Subject to the provisions of Section 3.3(b), except as otherwise may be specified in this Indenture, the Company shall have the right to redeem the Debentures, in whole or in part, from time to time, on or after June 30, 2003, at a Redemption Price equal to 100% of the principal amount to be redeemed plus any accrued and unpaid interest thereon to the date of such redemption, plus Deferred Payments, if any. Any redemption pursuant to this Section 3.3(a) shall be made upon not less than 30 days' nor more than 60 days' notice to the holder of the Debentures, at the Redemption Price. If the Debentures are only partially redeemed pursuant to this Section 3.3, the Debentures shall be redeemed pro rata or by lot or in such other manner as the Trustee shall deem appropriate and fair in its discretion. The Redemption Price shall be paid prior to 12:00 noon, New York time, on the date of such redemption or at such earlier time as the Company determines provided that the Company shall deposit with the Trustee an amount sufficient to pay the Redemption Price by 10:00 a.m., New York time, on the date such Redemption Price is to be paid. (b) If a partial redemption of the Debentures would result in the delisting of the Preferred Securities issued by the Trust from the New York Stock Exchange or any national securities exchange or other organization on which the Preferred Securities are then listed or quoted, the Company shall not be permitted to effect such partial redemption and may only redeem the Debentures in whole. Section 3.4. Notice of Redemption. (a) In case the Company shall desire to exercise such right to redeem all or, as the case may be, a portion of the Debentures in accordance with the right reserved so to do, the Company shall, or shall cause the Trustee to upon receipt of 45 days' written notice from the Company (which notice shall, in the event of a partial redemption, include a representation to the effect that such partial redemption shall not result in the delisting of the Preferred Securities as described in Section 3.3(b) above), give notice of such redemption to holders of the Debentures to be redeemed by mailing, first class postage prepaid, a notice of such redemption not less than 30 17 24 days and not more than 60 days before the date fixed for redemption to such holders at their last addresses as they shall appear upon the Debenture Register unless a shorter period is specified in the Debentures to be redeemed. Any notice that is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the registered holder receives the notice. In any case, failure duly to give such notice to the holder of any Debenture designated for redemption in whole or in part, or any defect in the notice, shall not affect the validity of the proceedings for the redemption of any other Debentures. In the case of any redemption of Debentures prior to the expiration of any restriction on such redemption provided in the terms of such Debentures or elsewhere in this Indenture, the Company shall furnish the Trustee with an Officers' Certificate evidencing compliance with any such restriction. Each such notice of redemption shall specify the date fixed for redemption and the Redemption Price and shall state that payment of the Redemption Price shall be made at the Corporate Trust Office, upon presentation and surrender of such Debentures, that interest accrued to the date fixed for redemption shall be paid as specified in said notice and that from and after said date interest shall cease to accrue. If less than all the Debentures are to be redeemed, the notice to the holders of the Debentures shall specify the particular Debentures to be redeemed. If the Debentures are to be redeemed in part only, the notice shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the redemption date, upon surrender of such Debenture, a new Debenture or Debentures in principal amount equal to the unredeemed portion thereof shall be issued. (b) If less than all the Debentures are to be redeemed, the Company shall give the Trustee at least 45 days' written notice in advance of the date fixed for redemption as to the aggregate principal amount of Debentures to be redeemed, and thereupon the Trustee shall select, by lot or in such other manner as it shall deem appropriate and fair in its discretion, the portion or portions (equal to $25 or any integral multiple thereof) of the Debentures to be redeemed and shall thereafter promptly notify the Company in writing of the numbers of the Debentures to be redeemed, in whole or in part. The Company may, if and whenever it shall so elect pursuant to the terms hereof, by delivery of instructions signed on its behalf by its President or any Vice President, instruct the Trustee or any Paying Agent to call all or any part of the Debentures for redemption and to give notice of redemption in the manner set forth in this Section 3.4, such notice to be in the name of the Company or its own name as the Trustee or such Paying Agent may deem advisable. In any case in which notice of redemption is to be given by the Trustee or any such Paying Agent, the Company shall deliver or cause to be delivered to, or permit to remain with, the Trustee or such Paying Agent, as the case may be, such Debenture Register, transfer books or other records, or suitable copies or extracts therefrom, sufficient to enable the Trustee or such Paying Agent to give any notice by mail that may be required under the provisions of this Section 3.4. Section 3.5. Payment upon Redemption. (a) If the giving of notice of redemption shall have been completed as above provided, the Debentures or portions of Debentures to be redeemed specified in such notice shall become 18 25 due and payable on the date and at the place stated in such notice at the applicable Redemption Price, and interest on such Debentures or portions of Debentures shall cease to accrue on and after the date fixed for redemption, unless the Company shall default in the payment of such Redemption Price with respect to any such Debenture or portion thereof. On presentation and surrender of such Debentures on or after the date fixed for redemption at the place of payment specified in the notice, said Debentures shall be paid and redeemed at the Redemption Price (but if the date fixed for redemption is an Interest Payment Date, the interest installment payable on such date shall be payable to the registered holder at the close of business on the applicable record date pursuant to Section 3.3). (b) Upon presentation of any Debenture that is to be redeemed in part only, the Company shall execute and the Trustee shall authenticate and the office or agency where the Debenture is presented shall deliver to the holder thereof, at the expense of the Company, a new Debenture of authorized denomination in principal amount equal to the unredeemed portion of the Debenture so presented. Section 3.6. No Sinking Fund. The Debentures are not entitled to the benefit of any sinking fund. ARTICLE IV. EXTENSION OF INTEREST PAYMENT PERIOD Section 4.1. Extension of Interest Payment Period. So long as no Event of Default has occurred and is continuing, the Company shall have the right, at any time and from time to time during the term of the Debentures, to defer payments of interest by extending the interest payment period of such Debentures for a period not exceeding 20 consecutive quarters (the "Extension Period"), during which Extension Period no interest shall be due and payable; provided that no Extension Period may extend beyond the Maturity Date. Interest, the payment of which has been deferred because of the extension of the interest payment period pursuant to this Section 4.1, shall bear interest thereon at the Coupon Rate compounded quarterly for each quarter of the Extension Period ("Compounded Interest"). At the end of the Extension Period, the Company shall calculate (and deliver such calculation to the Trustee) and pay all interest accrued and unpaid on the Debentures, including any Additional Payments and Compounded Interest (together, "Deferred Payments") that shall be payable to the holders of the Debentures in whose names the Debentures are registered in the Debenture Register on the first record date after the end of the Extension Period. Before the termination of any Extension Period, the Company may further extend such period, provided that such period together with all such further extensions thereof shall not exceed 20 consecutive quarters, or extend beyond the Maturity Date of the Debentures. Upon the termination of any Extension Period and upon the payment of all Deferred Payments then due, the Company may commence a new Extension Period, subject to the foregoing requirements. No interest shall be due and payable during an 19 26 Extension Period, except at the end thereof, but the Company may prepay at any time all or any portion of the interest accrued during an Extension Period. Section 4.2. Notice Of Extension. (a) If the Property Trustee is the only registered holder of the Debentures at the time the Company selects an Extension Period, the Company shall give written notice to the Administrative Trustees, the Property Trustee and the Trustee of its selection of such Extension Period 2 Business Days before the earlier of (i) the next succeeding date on which Distributions on the Trust Securities issued by the Trust are payable; or (ii) the date the Trust is required to give notice of the record date, or the date such Distributions are payable, to the New York Stock Exchange or other applicable self-regulatory organization or to holders of the Preferred Securities issued by the Trust, but in any event at least 1 Business Day before such record date. (b) If the Property Trustee is not the only holder of the Debentures at the time the Company selects an Extension Period, the Company shall give the holders of the Debentures and the Trustee written notice of its selection of such Extension Period at least 2 Business Days before the earlier of (i) the next succeeding Interest Payment Date; or (ii) the date the Company is required to give notice of the record or payment date of such interest payment to the New York Stock Exchange or other applicable self-regulatory organization or to holders of the Debentures. (c) The quarter in which any notice is given pursuant to paragraphs (a) or (b) of this Section 4.2 shall be counted as one of the 20 quarters permitted in the maximum Extension Period permitted under Section 4.1. Section 4.3. Limitation on Transactions. If (a) the Company shall exercise its right to defer payment of interest as provided in Section 4.1; or (b) there shall have occurred any Event of Default, then (i) the Company shall not declare or pay any dividend on, make any distributions with respect to, or redeem, purchase, acquire or make a liquidation payment with respect to, any of its capital stock (other than (A) dividends or distributions in common stock of the Company, or any declaration of a non-cash dividend in connection with the implementation of a shareholder rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, and (B) purchases of common stock of the Company related to the rights under any of the Company's benefit plans for its directors, officers or employees); (ii) the Company shall not make any payment of interest, principal or premium, if any, or repay, repurchase or redeem any debt securities issued by the Company that rank pari passu with or junior to the Debentures or make any guarantee payments with respect to any guarantee by the Company of the debt securities of any subsidiary of the Company if such guarantee ranks pari passu with or junior in interest to the Debentures; provided, however, that notwithstanding -------- ------- the foregoing the Company may make payments pursuant to its obligations under the Preferred Securities Guarantee; and (iii) the Company shall not redeem, purchase or acquire less than all of the Outstanding Debentures or any of the Preferred Securities. 20 27 ARTICLE V. PARTICULAR COVENANTS OF THE COMPANY Section 5.1. Payment of Principal and Interest. The Company shall duly and punctually pay or cause to be paid the principal of and interest on the Debentures at the time and place and in the manner provided herein. Each such payment of the principal of and interest on the Debentures shall relate only to the Debentures, shall not be combined with any other payment of the principal of or interest on any other obligation of the Company, and shall be clearly and unmistakably identified as pertaining to the Debentures. Section 5.2. Maintenance of Agency. So long as any of the Debentures remain Outstanding, the Company shall maintain an office or agency at such other location or locations as may be designated as provided in this Section 5.2, where (a) Debentures may be presented for payment; (b) Debentures may be presented as hereinabove authorized for registration of transfer and exchange; and (c) notices and demands to or upon the Company in respect of the Debentures and this Indenture may be given or served, such designation to continue with respect to such office or agency until the Company shall, by written notice signed by its President or a Vice President and delivered to the Trustee, designate some other office or agency for such purposes or any of them. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, notices and demands. The Company shall give the Trustee prompt written notice of any such designation or rescission thereof. Section 5.3. Paying Agents. (a) The Trustee shall initially act as the Paying Agent. If the Company shall appoint one or more Paying Agents for the Debentures, other than the Trustee, the Company shall cause each such Paying Agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section 5.3: (i) that it shall hold all sums held by it as such agent for the payment of the principal of or interest on the Debentures (whether such sums have been paid to it by the Company or by any other obligor of such Debentures) in trust for the benefit of the Persons entitled thereto; (ii) that it shall give the Trustee notice of any failure by the Company (or by any other obligor of such Debentures) to make any payment of the principal of or interest on the Debentures when the same shall be due and payable; (iii) that it shall, at any time during the continuance of any failure referred to in the preceding paragraph (a)(ii) above, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent; and 21 28 (iv) that it shall perform all other duties of Paying Agent as set forth in this Indenture. (b) If the Company shall act as its own Paying Agent with respect to the Debentures, it shall on or before each due date of the principal of or interest on such Debentures, set aside, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay such principal or interest so becoming due on Debentures until such sums shall be paid to such Persons or otherwise disposed of as herein provided and shall promptly notify the Trustee of such action, or any failure (by it or any other obligor on such Debentures) to take such action. Whenever the Company shall have one or more Paying Agents for the Debentures, it shall, prior to each due date of the principal of or interest on any Debentures, deposit with the Paying Agent a sum sufficient to pay the principal or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal or interest, and (unless such Paying Agent is the Trustee) the Company shall promptly notify the Trustee of this action or failure so to act. (c) Notwithstanding anything in this Section 5.3 to the contrary, (i) the agreement to hold sums in trust as provided in this Section 5.3 is subject to the provisions of Section 13.3 and 13.4; and (ii) the Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same terms and conditions as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Section 5.4. Appointment to Fill Vacancy in Office of the Trustee. The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, shall appoint, in the manner provided in Section 9.11, a Trustee, so that there shall at all times be a Trustee hereunder. Section 5.5. Compliance with Consolidation Provisions. The Company shall not, while any of the Debentures remain Outstanding, consolidate with, or merge into, or merge into itself, or sell or convey all or substantially all of its property to any other company unless the provisions of Article XII hereof are complied with. Section 5.6. Limitation on Transactions. If Debentures are issued to the Trust or a trustee of the Trust in connection with the issuance of Trust Securities by the Trust and (a) there shall have occurred any event that would constitute an Event of Default; (b) the Company shall be in default with respect to its payment of any obligations under the Preferred Securities Guarantee relating to the Trust; or (c) if the Company shall have given notice of its election to defer payments of interest on such Debentures by extending the interest payment period as provided in this Indenture and such Extension Period, or any extension thereof, shall be continuing, then (i) the Company shall not declare or pay any dividend on, make any distributions with respect to, or redeem, purchase, acquire or make a liquidation payment with respect to, any of its capital stock (other than (A) dividends or distributions in common stock of 22 29 the Company, or any declaration of a non-cash dividend in connection with the implementation of a shareholder rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, and (B) purchases of common stock of the Company related to the rights under any of the Company's benefit plans for its directors, officers or employees); (ii) the Company shall not make any payment of principal, interest or premium, if any, or repay, repurchase or redeem any debt securities issued by the Company which rank pari passu with or junior in interest to the Debentures; provided, however, that the Company may make payments pursuant to -------- ------- its obligations under the Preferred Securities Guarantee; and (iii) the Company shall not redeem, purchase or acquire less than all of the Outstanding Debentures or any of the Preferred Securities. Section 5.7. Covenants as to the Trust. For so long as the Trust Securities of the Trust remain outstanding, the Company shall (a) maintain 100% direct or indirect ownership of the Common Securities of the Trust; provided, however, that any permitted successor of the Company under this - -------- ------- Indenture may succeed to the Company's ownership of the Common Securities; (b) not voluntarily terminate, wind up or liquidate the Trust, except upon prior approval of the Federal Reserve if then so required under applicable capital guidelines or policies of the Federal Reserve; (c) use its reasonable efforts to cause the Trust (i) to remain a business trust, except in connection with a distribution of Debentures, the redemption of all of the Trust Securities of the Trust or certain mergers, consolidations or amalgamations, each as permitted by the Trust Agreement; and (ii) to otherwise continue not to be treated as an association taxable as a corporation or partnership for United States federal income tax purposes; and (d) use its reasonable efforts to cause each holder of Trust Securities to be treated as owning an individual beneficial interest in the Debentures. In connection with the distribution of the Debentures to the holders of the Preferred Securities issued by the Trust upon a Dissolution Event, the Company shall use its best efforts to list such Debentures on the New York Stock Exchange or on such other exchange as the Preferred Securities are then listed. Section 5.8. Covenants as to Purchases. Except upon the exercise by the Company of its right to redeem the Debentures pursuant to Section 3.2 upon the occurrence and continuation of a Special Event, the Company shall not purchase any Debentures, in whole or in part, from the Trust prior to June 30, 2003. ARTICLE VI. THE DEBENTUREHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE Section 6.1. The Company to Furnish the Trustee Names and Addresses of the Debentureholders. The Company shall furnish or cause to be furnished to the Trustee (a) on a quarterly basis on each regular record date (as described in Section 2.5) a list, in such form as the Trustee may reasonably require, of the names and addresses of the holders of the Debentures as of such regular record date, provided that the Company shall not be obligated to furnish or cause to furnish such list at any time that the list shall not differ in any respect from the most recent 23 30 list furnished to the Trustee by the Company (in the event the Company fails to provide such list on a quarterly basis, the Trustee shall be entitled to rely on the most recent list provided by the Company); and (b) at such other times as the Trustee may request in writing within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; provided, however, -------- ------- that, in either case, no such list need be furnished if the Trustee shall be the Debenture Registrar. Section 6.2. Preservation of Information Communications with the Debentureholders. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of Debentures contained in the most recent list furnished to it as provided in Section 6.1 and as to the names and addresses of holders of Debentures received by the Trustee in its capacity as Debenture Registrar for the Debentures (if acting in such capacity). (b) The Trustee may destroy any list furnished to it as provided in Section 6.1 upon receipt of a new list so furnished. (c) Debentureholders may communicate as provided in Section 312(b) of the Trust Indenture Act with other Debentureholders with respect to their rights under this Indenture or under the Debentures. Section 6.3. Reports by the Company. (a) The Company covenants and agrees to file with the Trustee, within 15 days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) that the Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if the Company is not required to file information, documents or reports pursuant to either of such sections, then to file with the Trustee and the Commission, in accordance with the rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and reports that may be required pursuant to Section 13 of the Exchange Act in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations. (b) The Company covenants and agrees to file with the Trustee and the Commission, in accordance with the rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants provided for in this Indenture as may be required from time to time by such rules and regulations. 24 31 (c) The Company covenants and agrees to transmit by mail, first class postage prepaid, or reputable overnight delivery service that provides for evidence of receipt, to the Debentureholders, as their names and addresses appear upon the Debenture Register, within 30 days after the filing thereof with the Trustee, such summaries of any information, documents and reports required to be filed by the Company pursuant to subsections (a) and (b) of this Section 6.3 as may be required by rules and regulations prescribed from time to time by the Commission. Section 6.4. Reports by the Trustee. (a) On or before July 15 in each year in which any of the Debentures are Outstanding, the Trustee shall transmit by mail, first class postage prepaid, to the Debentureholders, as their names and addresses appear upon the Debenture Register, a brief report dated as of the preceding May 15, if and to the extent required under Section 313(a) of the Trust Indenture Act. (b) The Trustee shall comply with Section 313(b) and 313(c) of the Trust Indenture Act. (c) A copy of each such report shall, at the time of such transmission to Debentureholders, be filed by the Trustee with the Company, with each stock exchange upon which any Debentures are listed (if so listed) and also with the Commission. The Company agrees to notify the Trustee when any Debentures become listed on any stock exchange. ARTICLE VII. REMEDIES OF THE TRUSTEE AND DEBENTUREHOLDERS ON EVENT OF DEFAULT Section 7.1. Events of Default. (a) Whenever used herein with respect to the Debentures, "Event of Default" means any one or more of the following events that has occurred and is continuing: (i) the Company defaults in the payment of any installment of interest upon any of the Debentures, as and when the same shall become due and payable, and continuance of such default for a period of 30 days; provided, however, that a valid extension of an interest payment -------- ------- period by the Company in accordance with the terms of this Indenture shall not constitute a default in the payment of interest for this purpose; 25 32 (ii) the Company defaults in the payment of the principal on the Debentures as and when the same shall become due and payable whether at maturity, upon redemption, by declaration or otherwise; provided, however, -------- ------- that a valid extension of the maturity of such Debentures in accordance with the terms of this Indenture shall not constitute a default in the payment of principal; (iii) the Company fails to observe or perform any other of its covenants or agreements with respect to the Debentures for a period of 90 days after the date on which written notice of such failure, requiring the same to be remedied and stating that such notice is a "Notice of Default" hereunder, shall have been given to the Company by the Trustee, by registered or certified mail, or to the Company and the Trustee by the holders of at least 25% in principal amount of the Debentures at the time Outstanding; (iv) the Company pursuant to or within the meaning of any Bankruptcy Law (A) commences a voluntary case; (B) consents to the entry of an order for relief against it in an involuntary case; (C) consents to the appointment of a Custodian of it or for all or substantially all of its property; or (D) makes a general assignment for the benefit of its creditors; (v) a court of competent jurisdiction enters an order under any Bankruptcy Law that (A) is for relief against the Company in an involuntary case; (B) appoints a Custodian of the Company for all or substantially all of its property; or (C) orders the liquidation of the Company, and the order or decree remains unstayed and in effect for 90 days; or (vi) the Trust shall have voluntarily or involuntarily dissolved, wound-up its business or otherwise terminated its existence except in connection with (A) the distribution of Debentures to holders of Trust Securities in liquidation of their interests in the Trust; (B) the redemption of all of the outstanding Trust Securities of the Trust; or (C) certain mergers, consolidations or amalgamations, each as permitted by the Trust Agreement. (b) In each and every such case referred to in items (i) through (vi) of Section 7.1(a), unless the principal of all the Debentures shall have already become due and payable, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Debentures then Outstanding hereunder, by notice in writing to the Company (and to the Trustee if given by such Debentureholders) may declare the principal of all the Debentures to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable, notwithstanding anything contained in this Indenture or in the Debentures. (c) At any time after the principal of the Debentures shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, the holders of a majority in aggregate principal amount of the Debentures then Outstanding hereunder, by written notice to the Company and 26 33 the Trustee, may rescind and annul such declaration and its consequences if: (i) the Company has paid or deposited with the Trustee a sum sufficient to pay all matured installments of interest upon all the Debentures and the principal of any and all Debentures that shall have become due otherwise than by acceleration (with interest upon such principal, and upon overdue installments of interest, at the rate per annum expressed in the Debentures to the date of such payment or deposit) and the amount payable to the Trustee under Section 9.7; and (ii) any and all Events of Default under this Indenture, other than the nonpayment of principal on Debentures that shall not have become due by their terms, shall have been remedied or waived as provided in Section 7.6. No such rescission and annulment shall extend to or shall affect any subsequent default or impair any right consequent thereon. (d) In case the Trustee shall have proceeded to enforce any right with respect to Debentures under this Indenture and such proceedings shall have been discontinued or abandoned because of such rescission or annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company and the Trustee shall be restored respectively to their former positions and rights hereunder, and all rights, remedies and powers of the Company and the Trustee shall continue as though no such proceedings had been taken. Section 7.2. Collection of Indebtedness and Suits for Enforcement by the Trustee. (a) The Company covenants that (i) in case it shall default in the payment of any installment of interest on any of the Debentures, and such default shall have continued for a period of 30 days; or (ii) in case it shall default in the payment of the principal of any of the Debentures when the same shall have become due and payable, whether upon maturity of the Debentures or upon redemption or upon declaration or otherwise, then, upon demand of the Trustee, the Company shall pay to the Trustee, for the benefit of the holders of the Debentures, the whole amount that then shall have been become due and payable on all such Debentures for principal or interest, or both, as the case may be, with interest upon the overdue principal; and (if the Debentures are held by the Trust or a trustee of the Trust, without duplication of any other amounts paid by the Trust or trustee in respect thereof) upon overdue installments of interest at the rate per annum expressed in the Debentures; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, and the amount payable to the Trustee under Section 9.7. (b) If the Company shall fail to pay such amounts set forth in Section 7.2(a) forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any action or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or other obligor upon the Debentures and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or other obligor upon the Debentures, wherever situated. 27 34 (c) In case of any receivership, insolvency, liquidation, bankruptcy, reorganization, readjustment, arrangement, composition or judicial proceedings affecting the Company or the creditors or property thereof, the Trustee shall have power to intervene in such proceedings and take any action therein that may be permitted by the court and shall (except as may be otherwise provided by law) be entitled to file such proofs of claim and other papers and documents as may be necessary or advisable in order to have the claims of the Trustee and of the holders of the Debentures allowed for the entire amount due and payable by the Company under this Indenture at the date of institution of such proceedings and for any additional amount that may become due and payable by the Company after such date, and to collect and receive any moneys or other property payable or deliverable on any such claim, and to distribute the same after the deduction of the amount payable to the Trustee under Section 9.7; and any receiver, assignee or trustee in bankruptcy or reorganization is hereby authorized by each of the holders of the Debentures to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such payments directly to such Debentureholders, to pay to the Trustee any amount due it under Section 9.7. (d) All rights of action and of asserting claims under this Indenture, or under any of the terms established with respect to the Debentures, may be enforced by the Trustee without the possession of any of such Debentures, or the production thereof at any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for payment to the Trustee of any amounts due under Section 9.7, be for the ratable benefit of the holders of the Debentures. In case of an Event of Default hereunder, the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either at law or in equity or in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. Nothing contained herein shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Debentureholder any plan of reorganization, arrangement, adjustment or composition affecting the Debentures or the rights of any holder thereof or to authorize the Trustee to vote in respect of the claim of any Debentureholder in any such proceeding. Section 7.3. Application of Moneys Collected. Any moneys collected by the Trustee pursuant to this Article VII with respect to the Debentures shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such moneys on account of principal or interest, upon presentation of the Debentures, and notation thereon of the payment, if only partially paid, and upon surrender thereof if fully paid: FIRST: To the payment of costs and expenses of collection and of all amounts payable to the Trustee under Section 9.7; 28 35 SECOND: To the payment of all Senior Indebtedness if and to the extent required by Article XVI; and THIRD: To the payment of the amounts then due and unpaid upon the Debentures for principal and interest, in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Debentures for principal and interest, respectively. Section 7.4. Limitation on Suits. (a) Except as provided in Section 15.13 hereof, no holder of any Debenture shall have any right by virtue or by availing of any provision of this Indenture to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Indenture or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (i) such holder previously shall have given to the Trustee written notice of an Event of Default and of the continuance thereof with respect to the Debentures specifying such Event of Default, as hereinbefore provided; (ii) the holders of not less than 25% in aggregate principal amount of the Debentures then Outstanding shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as trustee hereunder; (iii) such holder or holders shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby; and (iv) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such action, suit or proceeding and during such 60 day period, the holders of a majority in principal amount of the Debentures do not give the Trustee a direction inconsistent with the request. (b) Notwithstanding anything contained herein to the contrary or any other provisions of this Indenture, the right of any holder of the Debentures to receive payment of the principal of and interest on the Debentures, as therein provided, on or after the respective due dates expressed in such Debenture (or in the case of redemption, on the redemption date), or to institute suit for the enforcement of any such payment on or after such respective dates or redemption date, shall not be impaired or affected without the consent of such holder and by accepting a Debenture hereunder it is expressly understood, intended and covenanted by the taker and holder of every Debenture with every other such taker and holder and the Trustee that no one or more holders of the Debentures shall have any right in any manner whatsoever by virtue or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of the holders of any other of such Debentures, or to obtain or seek to obtain priority over or preference to any other such holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of the Debentures. For the protection and enforcement of the provisions of this Section 7.4, each and every Debentureholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. 29 36 Section 7.5. Rights and Remedies Cumulative; Delay or Omission not Waiver. (a) All powers and remedies given by this Article VII to the Trustee or to the Debentureholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any other powers and remedies available to the Trustee or the holders of the Debentures, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture or otherwise established with respect to such Debentures. (b) No delay or omission of the Trustee or of any holder of any of the Debentures to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right or power, or shall be construed to be a waiver of any such default or an acquiescence therein; and, subject to the provisions of Section 7.4, every power and remedy given by this Article VII or by law to the Trustee or the Debentureholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Debentureholders. Section 7.6. Control by the Debentureholders. The holders of a majority in aggregate principal amount of the Debentures at the time Outstanding, determined in accordance with Section 10.4, shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee; provided, however, that such direction shall not be in -------- ------- conflict with any rule of law or with this Indenture. Subject to the provisions of Section 9.1, the Trustee shall have the right to decline to follow any such direction if the Trustee in good faith shall, by a Responsible Officer or Officers of the Trustee, determine that the proceeding so directed would involve the Trustee in personal liability. The holders of a majority in aggregate principal amount of the Debentures at the time Outstanding affected thereby, determined in accordance with Section 10.4, may on behalf of the holders of all of the Debentures waive any past default in the performance of any of the covenants contained herein and its consequences, except (i) a default in the payment of the principal of or interest on any of the Debentures as and when the same shall become due by the terms of such Debentures otherwise than by acceleration (unless such default has been cured and a sum sufficient to pay all matured installments of principal and interest has been deposited with the Trustee (in accordance with Section 7.1(c)); (ii) a default in the covenants contained in Section 5.6; or (iii) in respect of a covenant or provision hereof which cannot be modified or amended without the consent of the holder of each Outstanding Debenture affected; provided, however, that if the Debentures are held by the -------- ------- Trust or a trustee of the Trust, such waiver or modification to such waiver shall not be effective until the holders of a majority in liquidation preference of Trust Securities of the Trust shall have consented to such waiver or modification to such waiver; provided further, that if the ---------------- Debentures are held by the Trust or a trustee of the Trust, and if the consent of the holder of each Outstanding Debenture is required, such waiver shall not be effective until each holder of the Trust Securities of the Trust shall have consented to such waiver. Upon any such waiver, the default covered thereby shall be deemed to be cured for all purposes of this Indenture and the Company, the Trustee and the holders of the Debentures shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. 30 37 Section 7.7. Undertaking to Pay Costs. All parties to this Indenture agree, and each holder of any Debentures by such holder's acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as the Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section 7.7 shall not apply to any suit instituted by the Trustee, to any suit instituted by any Debentureholder, or group of the Debentureholders holding more than 10% in aggregate principal amount of the Outstanding Debentures, or to any suit instituted by any Debentureholder for the enforcement of the payment of the principal of or interest on the Debentures, on or after the respective due dates expressed in such Debenture or established pursuant to this Indenture. ARTICLE VIII. FORM OF THE DEBENTURE AND ORIGINAL ISSUE Section 8.1. Form of Debenture. The Debenture and the Trustee's Certificate of Authentication to be endorsed thereon are to be substantially in the forms contained as Exhibit A attached hereto and incorporated herein by reference. Section 8.2. Original Issue of the Debentures. Debentures in the aggregate principal amount of $41,237,125 may, upon execution of this Indenture, be executed by the Company and delivered to the Trustee for authentication. If the Underwriters exercise their Option and there is an Option Closing Date (as such terms are defined in the Underwriting Agreement dated --------------, 1998, by and among the Company, the Trust and Stifel, Nicolaus & Company, Inc. and Hoefer & Arnett, Inc., for themselves and as representatives of the Underwriters named therein), then on such Option Closing Date, Debentures in the additional aggregate principal amount of $6,185,575 may be executed by the Company and delivered to the Trustee for authentication. In either such event, the Trustee shall thereupon authenticate and deliver said Debentures to or upon the written order of the Company, signed by its Chairman, its Vice Chairman, its President, or any Vice President and its Treasurer or an Assistant Treasurer, without any further action by the Company. ARTICLE IX. CONCERNING THE TRUSTEE Section 9.1. Certain Duties and Responsibilities of the Trustee. (a) The Trustee, prior to the occurrence of an Event of Default and after the curing of all Events of Default that may have occurred, shall undertake to perform with respect to the Debentures such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants shall be read into this Indenture against the Trustee. In case an Event of Default has occurred that has not been cured or waived, the Trustee shall exercise such of the 31 38 rights and powers vested in it by this Indenture, and use the same degree of care and skill in its exercise, as a prudent Person would exercise or use under the circumstances in the conduct of his or her own affairs. (b) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) prior to the occurrence of an Event of Default and after the curing or waiving of all such Events of Default that may have occurred: (A) the duties and obligations of the Trustee shall with respect to the Debentures be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable with respect to the Debentures except for the performance of such duties and obligations as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (B) in the absence of bad faith on the part of the Trustee, the Trustee may with respect to the Debentures conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Responsible Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (iii) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the holders of not less than a majority in principal amount of the Debentures at the time Outstanding relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee under this Indenture with respect to the Debentures; and (iv) none of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if there is reasonable ground for believing that the repayment of such funds or liability is not reasonably assured to it under the terms of this Indenture or adequate indemnity against such risk is not reasonably assured to it. 32 39 Section 9.2. Notice of Defaults. Within 90 days after actual knowledge by a Responsible Officer of the Trustee of the occurrence of any default hereunder with respect to the Debentures, the Trustee shall transmit by mail to all holders of the Debentures, as their names and addresses appear in the Debenture Register, notice of such default, unless such default shall have been cured or waived; provided, however, that, except in the case of a -------- ------- default in the payment of the principal or interest (including any Additional Payments) on any Debenture, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of the directors and/or Responsible Officers of the Trustee determines in good faith that the withholding of such notice is in the interests of the holders of such Debentures; and provided, further, that -------- ------- in the case of any default of the character specified in section 7.1(a)(iii), no such notice to holders of Debentures need be sent until at least 30 days after the occurrence thereof. For the purposes of this Section 9.2, the term "default" means any event which is, or after notice or lapse of time or both, would become, an Event of Default with respect to the Debentures. Section 9.3. Certain Rights of the Trustee. Except as otherwise provided in Section 9.1: (a) The Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, security or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) Any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by a Board Resolution or an instrument signed in the name of the Company by the President or any Vice President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer thereof (unless other evidence in respect thereof is specifically prescribed herein); (c) The Trustee shall not be deemed to have knowledge of a default or an Event of Default, other than an Event of Default specified in Section 7.1(a)(i) or (ii), unless and until it receives written notification of such Event of Default from the Company or by holders of at least 25% of the aggregate principal amount of the Debentures at the time Outstanding; (d) The Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or suffered or omitted hereunder in good faith and in reliance thereon; (e) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Debentureholders, pursuant to the provisions of this Indenture, unless such Debentureholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities that may be incurred therein or thereby; nothing contained herein shall, however, relieve the Trustee of the obligation, upon the occurrence of an Event of Default (that has not been cured or waived) to 33 40 exercise with respect to the Debentures such of the rights and powers vested in it by this Indenture, and to use the same degree of care and skill in its exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs; (f) The Trustee shall not be liable for any action taken or omitted to be taken by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; (g) The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, security, or other papers or documents, unless requested in writing so to do by the holders of not less than a majority in principal amount of the Outstanding Debentures (determined as provided in Section 10.4); provided, however, that if the payment -------- ------- within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such costs, expenses or liabilities as a condition to so proceeding, and the reasonable expense of every such examination shall be paid by the Company or, if paid by the Trustee, shall be repaid by the Company upon demand; and (h) The Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. Section 9.4. The Trustee not Responsible for Recitals, Etc.. (a) The Recitals contained herein and in the Debentures shall be taken as the statements of the Company, and the Trustee assumes no responsibility for the correctness of the same. (b) The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Debentures. (c) The Trustee shall not be accountable for the use or application by the Company of any of the Debentures or of the proceeds of such Debentures, or for the use or application of any moneys paid over by the Trustee in accordance with any provision of this Indenture, or for the use or application of any moneys received by any Paying Agent other than the Trustee. Section 9.5. May Hold the Debentures. The Trustee or any Paying Agent or Debenture Registrar for the Debentures, in its individual or any other capacity, may become the owner or pledgee of the Debentures with the same rights it would have if it were not Trustee, Paying Agent or Debenture Registrar. 34 41 Section 9.6. Moneys Held in Trust. Subject to the provisions of Section 13.5, all moneys received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any moneys received by it hereunder except such as it may agree with the Company to pay thereon. Section 9.7. Compensation and Reimbursement. (a) The Company covenants and agrees to pay to the Trustee, and the Trustee shall be entitled to, such reasonable compensation (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust), as the Company and the Trustee may from time to time agree in writing, for all services rendered by it in the execution of the trusts hereby created and in the exercise and performance of any of the powers and duties hereunder of the Trustee, and, except as otherwise expressly provided herein, the Company shall pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all Persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence or bad faith. The Company also covenants to indemnify the Trustee (and its officers, agents, directors and employees) for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on the part of the Trustee and arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim of liability in the premises. (b) The obligations of the Company under this Section 9.7 to compensate and indemnify the Trustee and to pay or reimburse the Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder. Such additional indebtedness shall be secured by a lien prior to that of the Debentures upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Debentures. Section 9.8. Reliance on Officers' Certificate. Except as otherwise provided in Section 9.1, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering or omitting to take any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or bad faith on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee and such certificate, in the absence of negligence or bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken, suffered or omitted to be taken by it under the provisions of this Indenture upon the faith thereof. Section 9.9. Disqualification; Conflicting Interests. If the Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture 35 42 Act, the Trustee and the Company shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act. Section 9.10. Corporate Trustee Required; Eligibility. There shall at all times be a Trustee with respect to the Debentures issued hereunder which shall at all times be a corporation organized and doing business under the laws of the United States or any state or territory thereof or of the District of Columbia, or a corporation or other Person permitted to act as trustee by the Commission, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $50,000,000, and subject to supervision or examination by federal, state, territorial, or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section 9.10, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. The Company may not, nor may any Person directly or indirectly controlling, controlled by, or under common control with the Company, serve as Trustee. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 9.10, the Trustee shall resign immediately in the manner and with the effect specified in Section 9.11. Section 9.11. Resignation and Removal; Appointment of Successor. (a) The Trustee or any successor hereafter appointed, may at any time resign by giving written notice thereof to the Company and by transmitting notice of resignation by mail, first class postage prepaid, to the Debentureholders, as their names and addresses appear upon the Debenture Register. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee with respect to Debentures by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee. If no successor trustee shall have been so appointed and have accepted appointment within 30 days after the mailing of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor trustee with respect to Debentures, or any Debentureholder who has been a bona fide holder of a Debenture or Debentures for at least six months may, subject to the provisions of Section 9.10, on behalf of himself or herself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee. (b) In case at any time any one of the following shall occur: (i) the Trustee shall fail to comply with the provisions of Section 9.9 after written request therefor by the Company or by any Debentureholder who has been a bona fide holder of a Debenture or Debentures for at least six months; or 36 43 (ii) the Trustee shall cease to be eligible in accordance with the provisions of Section 9.10 and shall fail to resign after written request therefor by the Company or by any such Debentureholder; or (iii) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or commence a voluntary bankruptcy proceeding, or a receiver of the Trustee or of its property shall be appointed or consented to, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation; then, in any such case, the Company may remove the Trustee with respect to all Debentures and appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee, or, subject to the provisions of Section 9.10, unless the Trustee's duty to resign is stayed as provided herein, any Debentureholder who has been a bona fide holder of a Debenture or Debentures for at least six months may, on behalf of that holder and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee. Such court may thereupon after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee. (c) The holders of a majority in aggregate principal amount of the Debentures at the time Outstanding may at any time remove the Trustee by so notifying the Trustee and the Company and may appoint a successor Trustee with the consent of the Company. (d) Any resignation or removal of the Trustee and appointment of a successor trustee with respect to the Debentures pursuant to any of the provisions of this Section 9.11 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 9.12. Section 9.12. Acceptance of Appointment by Successor. (a) In case of the appointment hereunder of a successor trustee with respect to the Debentures, every successor trustee so appointed shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the Company or the successor trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor trustee all the rights, powers, and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor trustee all property and money held by such retiring Trustee hereunder. 37 44 (b) Upon request of any successor trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor trustee all such rights, powers and trusts referred to in paragraph (a) of this Section 9.12. (c) No successor trustee shall accept its appointment unless at the time of such acceptance such successor trustee shall be qualified and eligible under this Article IX. (d) Upon acceptance of appointment by a successor trustee as provided in this Section 9.12, the Company shall transmit notice of the succession of such trustee hereunder by mail, first class postage prepaid, to the Debentureholders, as their names and addresses appear upon the Debenture Register. If the Company fails to transmit such notice within ten days after acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be transmitted at the expense of the Company. Section 9.13. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided that such corporation shall be qualified under the provisions of Section 9.9 and eligible under the provisions of Section 9.10, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. In case any Debentures shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Debentures so authenticated with the same effect as if such successor Trustee had itself authenticated such Debentures. Section 9.14. Preferential Collection of Claims against the Company. The Trustee shall comply with Section 311(a) of the Trust Indenture Act, excluding any creditor relationship described in Section 311(b) of the Trust Indenture Act. A Trustee who has resigned or been removed shall be subject to Section 311(a) of the Trust Indenture Act to the extent included therein. ARTICLE X. CONCERNING THE DEBENTUREHOLDERS Section 10.1. Evidence of Action by the Holders. (a) Whenever in this Indenture it is provided that the holders of a majority or specified percentage in aggregate principal amount of the Debentures may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action), the fact that at the time of taking any such action the holders of such majority or specified percentage have joined therein may be evidenced by any instrument or any 38 45 number of instruments of similar tenor executed by such holders of Debentures in Person or by agent or proxy appointed in writing. (b) If the Company shall solicit from the Debentureholders any request, demand, authorization, direction, notice, consent, waiver or other action, the Company may, at its option, as evidenced by an Officers' Certificate, fix in advance a record date for the determination of Debentureholders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other action, but the Company shall have no obligation to do so. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other action may be given before or after the record date, but only the Debentureholders of record at the close of business on the record date shall be deemed to be Debentureholders for the purposes of determining whether Debentureholders of the requisite proportion of Outstanding Debentures have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other action, and for that purpose the Outstanding Debentures shall be computed as of the record date; provided, however, that -------- ------- no such authorization, agreement or consent by such Debentureholders on the record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six (6) months after the record date. Section 10.2. Proof of Execution by the Debentureholders. Subject to the provisions of Section 9.1, proof of the execution of any instrument by a Debentureholder (such proof shall not require notarization) or such Debentureholder's agent or proxy and proof of the holding by any Person of any of the Debentures shall be sufficient if made in the following manner: (a) The fact and date of the execution by any such Person of any instrument may be proved in any reasonable manner acceptable to the Trustee. (b) The ownership of Debentures shall be proved by the Debenture Register of such Debentures or by a certificate of the Debenture Registrar thereof. (c) The Trustee may require such additional proof of any matter referred to in this Section 10.2 as it shall deem necessary. Section 10.3. Who May be Deemed Owners. Prior to the due presentment for registration of transfer of any Debenture, the Company, the Trustee, any Paying Agent, any Authenticating Agent and any Debenture Registrar may deem and treat the Person in whose name such Debenture shall be registered upon the books of the Company as the absolute owner of such Debenture (whether or not such Debenture shall be overdue and notwithstanding any notice of ownership or writing thereon made by anyone other than the Debenture Registrar) for the purpose of receiving payment of or on account of the principal of and interest on such Debenture (subject to Section 2.3) and for all other purposes; and neither the Company nor the Trustee nor any Paying Agent nor any Authenticating Agent nor any Debenture Registrar shall be affected by any notice to the contrary. 39 46 Section 10.4. Certain Debentures Owned by Company Disregarded. In determining whether the holders of the requisite aggregate principal amount of the Debentures have concurred in any direction, consent or waiver under this Indenture, the Debentures that are owned by the Company or any other obligor on the Debentures or by any Person directly or indirectly controlling or controlled by or under common control with the Company or any other obligor on the Debentures shall be disregarded and deemed not to be Outstanding for the purpose of any such determination, except that (a) for the purpose of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver, only Debentures that the Trustee actually knows are so owned shall be so disregarded; and (b) for purposes of this Section 10.4, the Trust shall be deemed not to be controlled by the Company. The Debentures so owned that have been pledged in good faith may be regarded as Outstanding for the purposes of this Section 10.4, if the pledgee shall establish to the satisfaction of the Trustee the pledgee's right so to act with respect to such Debentures and that the pledgee is not a Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other obligor. In case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. Section 10.5. Actions Binding on the Future Debentureholders. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 10.1, of the taking of any action by the holders of the majority or percentage in aggregate principal amount of the Debentures specified in this Indenture in connection with such action, any holder of a Debenture that is shown by the evidence to be included in the Debentures the holders of which have consented to such action may, by filing written notice with the Trustee, and upon proof of holding as provided in Section 10.2, revoke such action so far as concerns such Debenture. Except as aforesaid any such action taken by the holder of any Debenture shall be conclusive and binding upon such holder and upon all future holders and owners of such Debenture, and of any Debenture issued in exchange therefor, on registration of transfer thereof or in place thereof, irrespective of whether or not any notation in regard thereto is made upon such Debenture. Any action taken by the holders of the majority or percentage in aggregate principal amount of the Debentures specified in this Indenture in connection with such action shall be conclusively binding upon the Company, the Trustee and the holders of all the Debentures. ARTICLE XI. SUPPLEMENTAL INDENTURES Section 11.1. Supplemental Indentures without the Consent of the Debentureholders. In addition to any supplemental indenture otherwise authorized by this Indenture, the Company and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act as then in effect), without the consent of the Debentureholders, for one or more of the following purposes: (a) to cure any ambiguity, defect, or inconsistency herein, or in the Debentures; 40 47 (b) to provide for uncertificated Debentures in addition to or in place of certificated Debentures; (c) to add to the covenants of the Company for the benefit of the holders of all or any of the Debentures or to surrender any right or power herein conferred upon the Company; (d) to make any change that does not adversely affect the rights of any Debentureholder in any material respect; (e) to qualify or maintain the qualification of this Indenture under the Trust Indenture Act; or (f) to evidence a consolidation or merger involving the Company as permitted under Section 12.1. The Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, and to make any further appropriate agreements and stipulations that may be therein contained, but the Trustee shall not be obligated to enter into any such supplemental indenture that affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section 11.1 may be executed by the Company and the Trustee without the consent of the holders of any of the Debentures at the time Outstanding, notwithstanding any of the provisions of Section 11.2. Section 11.2. Supplemental Indentures with Consent of the Debentureholders. With the consent (evidenced as provided in Section 10.1) of the holders of not less than a majority in aggregate principal amount of the Debentures at the time Outstanding, the Company, when authorized by Board Resolutions, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act as then in effect) for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner not covered by Section 11.1 the rights of the holders of the Debentures under this Indenture; provided, however, that no such supplemental -------- ------- indenture shall without the consent of the holders of each Debenture then Outstanding and affected thereby, (a) extend the fixed maturity of any Debentures, reduce the principal amount thereof, or reduce the rate or extend the time of payment of interest thereon; or (b) reduce the aforesaid percentage of Debentures, the holders of which are required to consent to any such supplemental indenture; provided further, that if the Debentures are ---------------- held by the Trust or a trustee of the Trust, such supplemental indenture shall not be effective until the holders of a majority in liquidation preference of Trust Securities of the Trust shall have consented to such supplemental indenture; provided further, that if the Debentures are held by ---------------- the Trust or a trustee of the Trust and if the consent of the holder of each Outstanding Debenture is required, such supplemental indenture shall not be effective until each holder of the Trust Securities of the Trust shall have consented to such supplemental indenture. It shall not be necessary for the 41 48 consent of the Debentureholders affected thereby under this Section 11.2 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. Section 11.3. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture pursuant to the provisions of this Article XI, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Debentures shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments, and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. Section 11.4. The Debentures Affected by Supplemental Indentures. The Debentures affected by a supplemental indenture, authenticated and delivered after the execution of such supplemental indenture pursuant to the provisions of this Article XI, may bear a notation in form approved by the Company, provided such form meets the requirements of any exchange upon which the Debentures may be listed, as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Debentures so modified as to conform, in the opinion of the Board of Directors of the Company, to any modification of this Indenture contained in any such supplemental indenture may be prepared by the Company, authenticated by the Trustee and delivered in exchange for the Debentures then Outstanding. Section 11.5. Execution of Supplemental Indentures. (a) Upon the request of the Company, accompanied by its Board Resolutions authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of the Debentureholders required to consent thereto as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion but shall not be obligated to enter into such supplemental indenture. The Trustee, subject to the provisions of Sections 9.1, may receive an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant to this Article XI is authorized or permitted by, and conforms to, the terms of this Article XI and that it is proper for the Trustee under the provisions of this Article XI to join in the execution thereof. (b) Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section 11.5, the Trustee shall transmit by mail, first class postage prepaid, a notice, setting forth in general terms the substance of such supplemental indenture, to the Debentureholders as their names and addresses appear upon the Debenture Register. Any failure of the Trustee to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. 42 49 ARTICLE XII. SUCCESSOR CORPORATION Section 12.1. The Company may Consolidate, Etc. Nothing contained in this Indenture or in any of the Debentures shall prevent any consolidation or merger of the Company with or into any other corporation or corporations (whether or not affiliated with the Company, as the case may be), or successive consolidations or mergers in which the Company, as the case may be, or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance, transfer or other disposition of the property of the Company, as the case may be, or its successor or successors as an entirety, or substantially as an entirety, to any other corporation (whether or not affiliated with the Company, as the case may be, or its successor or successors) authorized to acquire and operate the same; provided, however, -------- ------- that the Company hereby covenants and agrees that (a) upon any such consolidation, merger, sale, conveyance, transfer or other disposition, the due and punctual payment, in the case of the Company, of the principal of and interest on all of the Debentures, according to their tenor and the due and punctual performance and observance of all the covenants and conditions of this Indenture to be kept or performed by the Company as the case may be, shall be expressly assumed, by supplemental indenture (which shall conform to the provisions of the Trust Indenture Act, as then in effect) satisfactory in form to the Trustee executed and delivered to the Trustee by the entity formed by such consolidation, or into which the Company, as the case may be, shall have been merged, or by the entity which shall have acquired such property; (b) in case the Company consolidates with or merges into another Person or conveys or transfers its properties and assets substantially as an entirety to any Person, the successor Person is organized under the laws of the United States or any state or the District of Columbia; and (c) immediately after giving effect thereto, an Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have occurred and be continuing. Section 12.2. Successor Corporation Substituted. (a) In case of any such consolidation, merger, sale, conveyance, transfer or other disposition and upon the assumption by the successor corporation, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the principal of and interest on all of the Debentures Outstanding and the due and punctual performance of all of the covenants and conditions of this Indenture to be performed by the Company, such successor corporation shall succeed to and be substituted for the Company, with the same effect as if it had been named as the Company herein and thereupon the predecessor corporation shall be relieved of all obligations and covenants under this Indenture and the Debentures. 43 50 (b) In case of any such consolidation, merger, sale, conveyance, transfer or other disposition such changes in phraseology and form (but not in substance) may be made in the Debentures thereafter to be issued as may be appropriate. (c) Nothing contained in this Indenture or in any of the Debentures shall prevent the Company from merging into itself or acquiring by purchase or otherwise, all or any part of, the property of any other Person (whether or not affiliated with the Company). Section 12.3. Evidence of Consolidation, Etc. to Trustee. The Trustee, subject to the provisions of Section 9.1, may receive an Opinion of Counsel as conclusive evidence that any such consolidation, merger, sale, conveyance, transfer or other disposition, and any such assumption, comply with the provisions of this Article XII. ARTICLE XIII. SATISFACTION AND DISCHARGE Section 13.1. Satisfaction and Discharge of Indenture. If at any time: (a) the Company shall have delivered to the Trustee for cancellation all Debentures theretofore authenticated (other than any Debentures that shall have been destroyed, lost or stolen and that shall have been replaced or paid as provided in Section 2.9) and all Debentures for whose payment money or Governmental Obligations have theretofore been deposited in trust or segregated and held in trust by the Company (and thereupon repaid to the Company or discharged from such trust, as provided in Section 13.5); or (b) all such Debentures not theretofore delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and the Company shall deposit or cause to be deposited with the Trustee as trust funds the entire amount in moneys or Governmental Obligations sufficient, or a combination thereof sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay at maturity or upon redemption all Debentures not theretofore delivered to the Trustee for cancellation, including principal and interest due or to become due to such date of maturity or date fixed for redemption, as the case may be, and if the Company shall also pay or cause to be paid all other sums payable hereunder by the Company; then this Indenture shall thereupon cease to be of further effect except for the provisions of Sections 2.3, 2.7, 2.9, 5.1, 5.2, 5.3, 9.7 and 9.10, that shall survive until the date of maturity or redemption date, as the case may be, and Sections 9.6 and 13.5, that shall survive to such date and thereafter, and the Trustee, on demand of the Company and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture. Section 13.2. Discharge of Obligations. If at any time all Debentures not heretofore delivered to the Trustee for cancellation or that have not become due and payable as described in Section 13.1 shall have been paid by the Company by depositing irrevocably with the Trustee as trust funds moneys or an amount of Governmental Obligations sufficient in the opinion of a 44 51 nationally recognized certified public accounting firm to pay at maturity or upon redemption all Debentures not theretofore delivered to the Trustee for cancellation, including principal and interest due or to become due to such date of maturity or date fixed for redemption, as the case may be, and if the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then after the date such moneys or Governmental Obligations, as the case may be, are deposited with the Trustee, the obligations of the Company under this Indenture shall cease to be of further effect except for the provisions of Sections 2.3, 2.7, 2.9, 5.1, 5.2, 5.3, 9.6, 9.7, 9.10 and 13.5 hereof that shall survive until such Debentures shall mature and be paid. Thereafter, Sections 9.6 and 13.5 shall survive. Section 13.3. Deposited Moneys to be Held in Trust. All monies or Governmental Obligations deposited with the Trustee pursuant to Sections 13.1 or 13.2 shall be held in trust and shall be available for payment as due, either directly or through any Paying Agent (including the Company acting as its own Paying Agent), to the holders of the Debentures for the payment or redemption of which such moneys or Governmental Obligations have been deposited with the Trustee. Section 13.4. Payment Of Monies Held by Paying Agents. In connection with the satisfaction and discharge of this Indenture, all moneys or Governmental Obligations then held by any Paying Agent under the provisions of this Indenture shall, upon demand of the Company, be paid to the Trustee and thereupon such Paying Agent shall be released from all further liability with respect to such moneys or Governmental Obligations. Section 13.5. Repayment to the Company. Any monies or Governmental Obligations deposited with any Paying Agent or the Trustee, or then held by the Company in trust, for payment of principal of or interest on the Debentures that are not applied but remain unclaimed by the holders of such Debentures for at least two years after the date upon which the principal of or interest on such Debentures shall have respectively become due and payable, shall be repaid to the Company, as the case may be, on May 31 of each year or (if then held by the Company) shall be discharged from such trust; and thereupon the Paying Agent and the Trustee shall be released from all further liability with respect to such moneys or Governmental Obligations, and the holder of any of the Debentures entitled to receive such payment shall thereafter, as an unsecured general creditor, look only to the Company for the payment thereof. ARTICLE XIV. IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS Section 14.1. No Recourse. No recourse under or upon any obligation, covenant or agreement of this Indenture, or of the Debentures, or for any claim based thereon or otherwise in respect thereof, shall be had against any incorporator, stockholder, officer or director, past, present or future, as such, of the Company or of any predecessor or successor corporation, either directly or through the Company or any such predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or 45 52 penalty or otherwise; it being expressly understood that this Indenture and the obligations issued hereunder are solely corporate obligations, and that no such personal liability whatever, shall attach to, or is or shall be incurred by, the incorporators, stockholders, officers or directors as such, of the Company or of any predecessor or successor corporation, or any of them, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any of the Debentures or implied therefrom; and that any and all such personal liability of every name and nature, either at common law or in equity or by constitution or statute, and any and all such rights and claims against, every such incorporator, stockholder, officer or director as such, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any of the Debentures or implied therefrom, are hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issuance of such Debentures. ARTICLE XV. MISCELLANEOUS PROVISIONS Section 15.1. Effect on Successors and Assigns. All the covenants, stipulations, promises and agreements in this Indenture contained by or on behalf of the Company shall bind its respective successors and assigns, whether so expressed or not. Section 15.2. Actions by Successor. Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the corresponding board, committee or officer of any corporation that shall at the time be the lawful sole successor of the Company. Section 15.3. Surrender of the Company Powers. The Company by instrument in writing executed by appropriate authority of its Board of Directors and delivered to the Trustee may surrender any of the powers reserved to the Company, and thereupon such power so surrendered shall terminate both as to the Company, as the case may be, and as to any successor corporation. Section 15.4. Notices. Except as otherwise expressly provided herein any notice or demand that by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the holders of Debentures to or on the Company may be given or served by being deposited first class postage prepaid in a post-office letterbox addressed (until another address is filed in writing by the Company with the Trustee), as follows: First Banks America, Inc., 135 North Meramec, Clayton, Missouri 63105 Attention: Chief Financial Officer. Any notice, election, request or demand by the Company or any Debentureholder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the Corporate Trust Office of the Trustee. 46 53 Section 15.5. Governing Law. This Indenture and each Debenture shall be deemed to be a contract made under the internal laws of the State of Delaware and for all purposes shall be construed in accordance with the laws of said State. Section 15.6. Treatment of the Debentures as Debt. It is intended that the Debentures shall be treated as indebtedness and not as equity for federal income tax purposes. The provisions of this Indenture shall be interpreted to further this intention. Section 15.7. Compliance Certificates and Opinions. (a) Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent have been complied with, except that in the case of any such application or demand as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or demand, no additional certificate or opinion need be furnished. (b) Each certificate or opinion of the Company provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant in this Indenture shall include (i) a statement that the Person making such certificate or opinion has read such covenant or condition; (ii) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (iii) a statement that, in the opinion of such Person, he or she has made such examination or investigation as, in the opinion of such Person, is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been complied with; and (iv) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been complied with. Section 15.8. Payments on Business Days. In any case where the date of maturity of interest or principal of any Debenture or the date of redemption of any Debenture shall not be a Business Day, then payment of interest or principal may be made on the next succeeding Business Day with the same force and effect as if made on the nominal date of maturity or redemption, and no interest shall accrue for the period after such nominal date. Section 15.9. Conflict with Trust Indenture Act. If and to the extent that any provision of this Indenture limits, qualifies or conflicts with the duties imposed by Sections 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control. Section 15.10. Counterparts. This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. 47 54 Section 15.11. Separability. In case any one or more of the provisions contained in this Indenture or in the Debentures shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Indenture or of the Debentures, but this Indenture and the Debentures shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein. Section 15.12. Assignment. The Company shall have the right at all times to assign any of its respective rights or obligations under this Indenture to a direct or indirect wholly owned Subsidiary of the Company, provided that, in the event of any such assignment, the Company shall remain liable for all such obligations. Subject to the foregoing, this Indenture is binding upon and inures to the benefit of the parties thereto and their respective successors and assigns. This Indenture may not otherwise be assigned by the parties thereto. Section 15.13. Acknowledgment of Rights . (a) The Company acknowledges that, with respect to any Debentures held by the Trust or a trustee of the Trust, if the Property Trustee fails to enforce its rights under this Indenture as the holder of the Debentures held as the assets of the Trust, any holder of Preferred Securities may institute legal proceedings directly against the Company to enforce such Property Trustee's rights under this Indenture without first instituting any legal proceedings against such Property Trustee or any other person or entity. Notwithstanding the foregoing, and notwithstanding the provisions of Section 7.4(a) hereof, if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Company to pay principal or interest on the Debentures on the date such principal or interest is otherwise payable (or in the case of redemption, on the redemption date), the Company acknowledges that a holder of Preferred Securities may directly institute a proceeding for enforcement of payment to such holder of the principal of or interest on the Debentures having a principal amount equal to the aggregate liquidation amount of the Preferred Securities of such holder on or after the respective due date specified in the Debentures. (b) Notwithstanding anything to the contrary contained in this Indenture, the Company shall have the right to setoff any payment it is otherwise required to make hereunder in respect of any Trust Securities to the extent that the Company has previously made, or is concurrently making, a payment to the holder of such Trust Securities under the Preferred Securities Guarantee or in connection with a proceeding for enforcement of payment of the principal of or interest on the Debentures directly brought by holders of any Trust Securities. (c) For so long as any of the Preferred Securities remain Outstanding, if, upon an Event of Default, the Property Trustee fails or the holders of not less than 25% in principal amount of the Outstanding Debentures fail to declare the principal of all of the Debentures to be immediately due and payable, the holders of at least 25% in liquidation amount of the Preferred Securities then Outstanding shall have the right to make such declaration by a notice in writing to the Depositor and the Property Trustee; and upon any such declaration such principal amount of 48 55 and the accrued interest on all of the Debentures shall become immediately due and payable, provided that the payment of principal and interest on such Debentures shall remain subordinated to the extent provided in this Indenture. ARTICLE XVI. SUBORDINATION OF THE DEBENTURES Section 16.1. Agreement to Subordinate. The Company covenants and agrees, and each holder of the Debentures issued hereunder by such holder's acceptance thereof likewise covenants and agrees, that all the Debentures shall be issued subject to the provisions of this Article XVI; and each holder of a Debenture, whether upon original issue or upon transfer or assignment thereof, accepts and agrees to be bound by such provisions. The payment by the Company of the principal of and interest on all the Debentures issued hereunder shall, to the extent and in the manner hereinafter set forth, be subordinated and junior in right of payment to the prior payment in full of all Senior Debt, Subordinated Debt and Additional Senior Obligations of the Company (collectively, "Senior Indebtedness") to the extent provided herein, whether outstanding at the date of this Indenture or thereafter incurred. No provision of this Article XVI shall prevent the occurrence of any default or Event of Default hereunder. Section 16.2. Default on Senior Debt, Subordinated Debt or Additional Senior Obligations. In the event and during the continuation of any default by the Company in the payment of principal, premium, interest or any other payment due on any Senior Indebtedness, or in the event that the maturity of any Senior Indebtedness has been accelerated because of a default, then, in either case, no payment shall be made by the Company with respect to the principal (including redemption payments) of or interest on the Debentures. In the event that, notwithstanding the foregoing, any payment shall be received by the Trustee when such payment is prohibited by the preceding sentence of this Section 16.2, such payment shall be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior Indebtedness or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any of such Senior Indebtedness may have been issued, as their respective interests may appear, but only to the extent that the holders of the Senior Indebtedness (or their representative or representatives or a trustee) notify the Trustee in writing within 90 days of such payment of the amounts then due and owing on the Senior Indebtedness and only the amounts specified in such notice to the Trustee shall be paid to the holders of the Senior Indebtedness. Section 16.3. Liquidation; Dissolution; Bankruptcy. (a) Upon any payment by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding-up or liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due upon all Senior Indebtedness shall first be paid in full, or payment thereof provided for in money in accordance with its terms, before any payment is made by the Company on account of the principal or interest on the Debentures; and upon any such dissolution or winding-up or liquidation or 49 56 reorganization, any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the holders of the Debentures or the Trustee would be entitled to receive from the Company, except for the provisions of this Article XVI, shall be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the holders of the Debentures or by the Trustee under this Indenture if received by them or it, directly to the holders of Senior Indebtedness (pro rata to such holders on the basis of the respective amounts of Senior Indebtedness held by such holders, as calculated by the Company) or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay such Senior Indebtedness in full, in money or money's worth, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness, before any payment or distribution is made to the holders of the Debentures or to the Trustee. (b) In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, prohibited by the foregoing, shall be received by the Trustee before all Senior Indebtedness is paid in full, or provision is made for such payment in money in accordance with its terms, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered to the holders of such Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, as calculated by the Company, for application to the payment of all Senior Indebtedness, as the case may be, remaining unpaid to the extent necessary to pay such Senior Indebtedness in full in money in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the benefit of the holders of such Senior Indebtedness. (c) For purposes of this Article XVI, the words "cash, property or securities" shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in this Article XVI with respect to the Debentures to the payment of all Senior Indebtedness, as the case may be, that may at the time be outstanding, provided that (i) such Senior Indebtedness is assumed by the new corporation, if any, resulting from any such reorganization or readjustment; and (ii) the rights of the holders of such Senior Indebtedness are not, without the consent of such holders, altered by such reorganization or readjustment. The consolidation of the Company with, or the merger of the Company into, another corporation or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided for in Article XII shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section 16.3 if such other corporation shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Article XII. Nothing in Section 16.2 or in this Section 16.3 shall apply to claims of, or payments to, the Trustee under or pursuant to Section 9.7. 50 57 Section 16.4. Subrogation. (a) Subject to the payment in full of all Senior Indebtedness, the rights of the holders of the Debentures shall be subrogated to the rights of the holders of such Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company, as the case may be, applicable to such Senior Indebtedness until the principal of and interest on the Debentures shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of such Senior Indebtedness of any cash, property or securities to which the holders of the Debentures or the Trustee would be entitled except for the provisions of this Article XVI, and no payment over pursuant to the provisions of this Article XVI to or for the benefit of the holders of such Senior Indebtedness by holders of the Debentures or the Trustee, shall, as between the Company, its creditors other than holders of Senior Indebtedness of the Company, and the holders of the Debentures, be deemed to be a payment by the Company to or on account of such Senior Indebtedness. It is understood that the provisions of this Article XVI are and are intended solely for the purposes of defining the relative rights of the holders of the Debentures, on the one hand, and the holders of such Senior Indebtedness on the other hand. (b) Nothing contained in this Article XVI or elsewhere in this Indenture or in the Debentures is intended to or shall impair, as between the Company, its creditors (other than the holders of Senior Indebtedness), and the holders of the Debentures, the obligation of the Company, which is absolute and unconditional, to pay to the holders of the Debentures the principal of and interest on the Debentures as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the holders of the Debentures and creditors of the Company, as the case may be, other than the holders of Senior Indebtedness, as the case may be, nor shall anything herein or therein prevent the Trustee or the holder of any Debenture from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article XVI of the holders of such Senior Indebtedness in respect of cash, property or securities of the Company, as the case may be, received upon the exercise of any such remedy. (c) Upon any payment or distribution of assets of the Company referred to in this Article XVI, the Trustee, subject to the provisions of Article IX, and the holders of the Debentures shall be entitled to conclusively rely upon any order or decree made by any court of competent jurisdiction in which such dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidation trustee, agent or other Person making such payment or distribution, delivered to the Trustee or to the holders of the Debentures, for the purposes of ascertaining the Persons entitled to participate in such distribution, the holders of Senior Indebtedness and other indebtedness of the Company, as the case may be, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XVI. 51 58 Section 16.5. The Trustee to Effectuate Subordination. Each holder of Debentures by such holder's acceptance thereof authorizes and directs the Trustee on such holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article XVI and appoints the Trustee such holder's attorney-in-fact for any and all such purposes. Section 16.6. Notice by the Company. (a) The Company shall give prompt written notice to a Responsible Officer of the Trustee of any fact known to the Company that would prohibit the making of any payment of monies to or by the Trustee in respect of the Debentures pursuant to the provisions of this Article XVI. Notwithstanding the provisions of this Article XVI or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment of monies to or by the Trustee in respect of the Debentures pursuant to the provisions of this Article XVI, unless and until a Responsible Officer of the Trustee shall have received written notice thereof from the Company or a holder or holders of Senior Indebtedness or from any trustee therefor; and before the receipt of any such written notice, the Trustee, subject to the provisions of Section 9.1, shall be entitled in all respects to assume that no such facts exist; provided, however, -------- ------- that if the Trustee shall not have received the notice provided for in this Section 16.6 at least 2 Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of or interest on any Debenture), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and to apply the same to the purposes for which they were received, and shall not be affected by any notice to the contrary that may be received by it within 2 Business Days prior to such date. (b) The Trustee, subject to the provisions of Section 9.1, shall be entitled to conclusively rely on the delivery to it of a written notice by a Person representing himself or herself to be a holder of Senior Indebtedness (or a trustee on behalf of such holder) to establish that such notice has been given by a holder of such Senior Indebtedness or a trustee on behalf of any such holder or holders. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of such Senior Indebtedness to participate in any payment or distribution pursuant to this Article XVI, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of such Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article XVI, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. 52 59 Section 16.7. Rights of the Trustee; Holders of the Senior Indebtedness. (a) The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article XVI in respect of any Senior Indebtedness at any time held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. The Trustee's right to compensation and reimbursement of expenses as set forth in Section 9.7 shall not be subject to the subordination provisions of the Article XVI. (b) With respect to the holders of the Senior Indebtedness, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article XVI, and no implied covenants or obligations with respect to the holders of such Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of such Senior Indebtedness and, subject to the provisions of Section 9.1, the Trustee shall not be liable to any holder of such Senior Indebtedness if it shall pay over or deliver to holders of Debentures, the Company or any other Person money or assets to which any holder of such Senior Indebtedness shall be entitled by virtue of this Article XVI or otherwise. Section 16.8. Subordination may not be Impaired. (a) No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof that any such holder may have or otherwise be charged with. (b) Without in any way limiting the generality of Section 16.8(a), the holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Trustee or the holders of the Debentures, without incurring responsibility to the holders of the Debentures and without impairing or releasing the subordination provided in this Article XVI or the obligations hereunder of the holders of the Debentures to the holders of such Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, such Senior Indebtedness, or otherwise amend or supplement in any manner such Senior Indebtedness or any instrument evidencing the same or any agreement under which such Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing such Senior Indebtedness; (iii) release any Person liable in any manner for the collection of such Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Company and any other Person. 53 60 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. FIRST BANKS AMERICA, INC. By: ---------------------------------------- Name: Title: Attest: - ------------------------------ STATE STREET BANK AND TRUST COMPANY, as trustee By: ---------------------------------------- Name: Title: Attest: - ------------------------------ 54 61 STATE OF MISSOURI ) ) ss COUNTY OF ---------- ) On this -- day of -------------, 1998, before me appeared -------------, to me personally known, who, being by me duly sworn, did say that he is the - ----------------- of FIRST BANKS AMERICA, INC., and that the seal affixed to said instrument is the corporate seal of said corporation, and that said instrument was signed and sealed in behalf of said corporation by authority of its board of directors and said --------------- acknowledged said instrument to be the free act and deed of said corporation. In testimony whereof I have hereunto set my hand and affixed my official seal at my office in said county and state the day and year last above written. ---------------------------------------- Notary Public My term expires: ------------------------ [seal] COMMONWEALTH OF MASSACHUSETTS ) ) ss COUNTY OF SUFFOLK ) On this --- day of June, 1998, before me appeared -------------------, to me personally known, who, being by me duly sworn, did say that he is the - --------------------- of STATE STREET BANK AND TRUST COMPANY, and that the seal affixed to said instrument is the corporate seal of said corporation, and that said instrument was signed and sealed in behalf of said corporation by authority of its board of directors and said -----------------------------, acknowledged said instrument to be the free act and deed of said corporation. In testimony whereof I have hereunto set my hand and affixed my official seal at my office in said county and commonwealth the day and year last above written. ---------------------------------------- Notary Public My term expires: ------------------------ [seal] 55 62 EXHIBIT A (Form of Face of Debenture) No. 1 $------------------------ CUSIP No. ----------- FIRST BANKS AMERICA, INC. ----% SUBORDINATED DEBENTURE DUE June 30, 2028 FIRST BANKS AMERICA, INC., a Delaware corporation (the "Company," which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to State Street Bank and Trust Company as Property Trustee for First America Capital Trust, or registered assigns, the principal sum of -------------------------------------------------- on June 30, 2028 (the "Stated Maturity"), and to pay interest on said principal sum from June --, 1998, or from the most recent interest payment date (each such date, an "Interest Payment Date") to which interest has been paid or duly provided for, quarterly (subject to deferral as set forth herein) in arrears on March 31, June 30, September 30 and December 31 of each year commencing September 30, 1998, at the rate of -----% per annum until the principal hereof shall have become due and payable, and on any overdue principal and (without duplication) on any overdue installment of interest at the same rate per annum compounded quarterly. The amount of interest payable on any Interest Payment Date shall be computed on the basis of a 360-day year of twelve 30-day months. The amount of interest for any partial period shall be computed on the basis of the number of days elapsed in a 360-day year of twelve 30-day months. In the event that any date on which interest is payable on this Debenture is not a business day, then payment of interest payable on such date shall be made on the next succeeding day that is a Business Day (as defined in the Indenture) (and without any interest or other payment in respect of any such delay) with the same force and effect as if made on such date. The interest installment so payable, and punctually paid or duly provided for, on any Interest Payment Date shall, as provided in the Indenture, be paid to the person in whose name this Debenture (or one or more Predecessor Debentures, as defined in said Indenture) is registered at the close of business on the regular record date for such interest installment, which shall be the close of business on the fifteenth day of the last month of the calendar quarter in which the Interest Payment Date occurs unless otherwise provided in the Indenture. The principal of and the interest on this Debenture shall be payable at the office or agency of the Trustee maintained for that purpose in any coin or currency of the United States of America that at the time of payment is legal tender for payment of public and private debts; provided, however, that -------- ------- 63 payment of interest may be made at the option of the Company by check mailed to the registered holder at such address as shall appear in the Debenture Register. Notwithstanding the foregoing, so long as the holder of this Debenture is the Property Trustee, the payment of the principal of and interest on this Debenture shall be made at such place and to such account as may be designated by the Trustee. This Debenture may be redeemed at any time by the Company on any date not earlier than June 30, 2003, subject to the Company having received prior approval of the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve. Such date may also be extended at any time at the election of the Company for one or more periods, but in no event to a date later than June 30, 2037, subject to certain limitations described in the Indenture. The indebtedness evidenced by this Debenture is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Indebtedness (as defined in the Indenture). This Debenture is issued subject to the provisions of the Indenture with respect thereto. Each holder of this Debenture, by accepting the same, (a) agrees to and shall be bound by such provisions; (b) authorizes and directs the Trustee on his or her behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided; and (c) appoints the Trustee his or her attorney-in-fact for any and all such purposes. Each holder hereof, by his or her acceptance hereof, hereby waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Indebtedness, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions. This Debenture shall not be entitled to any benefit under the Indenture hereinafter referred to, be valid or become obligatory for any purpose until the Certificate of Authentication hereon shall have been signed by or on behalf of the Trustee. The provisions of this Debenture are continued on the reverse side hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place. 64 IN WITNESS WHEREOF, the Company has caused this instrument to be executed. Dated: June --, 1998 FIRST BANKS AMERICA, INC. By: ---------------------------------------- Name: Title: Attest: By: ----------------------------- Name: Title: 65 [Form of Certificate of Authentication] CERTIFICATE OF AUTHENTICATION This is one of the Debentures described in the within-mentioned Indenture. Dated: STATE STREET BANK AND TRUST COMPANY, ----------------------------- as Trustee or Authenticating Agent By: ------------------------------- By: -------------------------- Authorized Signatory 66 [Form of Reverse of Debenture] ----------% SUBORDINATED DEBENTURE (CONTINUED) This Debenture is one of the subordinated debentures of the Company (herein sometimes referred to as the "Debentures"), all issued or to be issued under and pursuant to an Indenture dated as of June --, 1998 (the "Indenture") duly executed and delivered between the Company and State Street Bank and Trust Company, as Trustee (the "Trustee"), to which Indenture reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Debentures. The Debentures are limited in aggregate principal amount as specified in the Indenture. The Company shall have the right as set forth in the Indenture to redeem this Debenture at the option of the Company, without premium or penalty, in whole or in part at any time on or after June 30, 2003 (an "Optional Redemption"), or at any time in certain circumstances upon the occurrence of a Special Event (as defined in the Indenture), at a redemption price (the "Redemption Price") equal to 100% of the principal amount hereof plus any accrued but unpaid interest hereon, to the date of such redemption, plus Additional Payments, if any. Any redemption pursuant to this paragraph shall be made upon not less than 30 days nor more than 60 days notice, at the Redemption Price. The Redemption Price shall be paid at the time and in the manner provided therefor in the Indenture. If the Debentures are only partially redeemed by the Company pursuant to an Optional Redemption, the Debentures shall be redeemed pro rata or by lot or by any other method utilized by the Trustee as described in the Indenture. In the event of an Optional Redemption of this Debenture in part only, a new Debenture or Debentures for the unredeemed portion hereof shall be issued in the name of the holder hereof upon the cancellation hereof. In case an Event of Default (as defined in the Indenture) shall have occurred and be continuing, the principal of all of the Debentures may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than a majority in aggregate principal amount of the Debentures at the time Outstanding (as defined in the Indenture), to execute supplemental indentures for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Debentures; provided, however, that no such supplemental indenture shall without the - -------- ------- consent of the holders of each Debenture then Outstanding and affected thereby, (i) extend the fixed maturity of the Debentures, reduce the principal amount thereof, or reduce the rate or extend the time of payment of interest thereon; or 67 (ii) reduce the aforesaid percentage of the Debentures, the holders of which are required to consent to any such supplemental indenture. The Indenture also contains provisions permitting the holders of a majority in aggregate principal amount of the Debentures at the time Outstanding, on behalf of all of the holders of the Debentures, to waive any past default in the performance of any of the covenants contained in the Indenture, or established pursuant to the Indenture, and its consequences, except a default in the payment of the principal of or interest on any of the Debentures. Any such consent or waiver by the registered holder of this Debenture (unless revoked as provided in the Indenture) shall be conclusive and binding upon such holder and upon all future holders and owners of this Debenture and of any Debenture issued in exchange herefor or in place hereof (whether by registration of transfer or otherwise), irrespective of whether or not any notation of such consent or waiver is made upon this Debenture. No reference herein to the Indenture and no provision of this Debenture or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal and interest on this Debenture at the time and place and at the rate and in the money herein prescribed. The Company, as further described in the Indenture, shall have the right at any time during the term of the Debentures and from time to time to defer payments of interest by extending the interest payment period of such Debentures for up to 20 consecutive quarters (each, an "Extension Period"), at the end of which period the Company shall calculate (and deliver such calculation to the Trustee) and pay all interest then accrued and unpaid on the Debentures, including any Additional Payments and Compounded Interest (as defined in the Indenture and together, the "Deferred Payments") that shall be payable to the holders of the Debentures in whose names the Debentures are registered in the Debenture Register on the first record date after the end of the Extension Period. Before the termination of any such Extension Period, the Company may further extend such Extension Period, provided that such Extension Period together with all such further extensions thereof shall not exceed 20 consecutive quarters. At the termination of any such Extension Period and upon the payment of all Deferred Payments then due, the Company may commence a new Extension Period. As provided in the Indenture and subject to certain limitations therein set forth, this Debenture is transferable by the registered holder hereof on the Debenture Register (as defined in the Indenture) of the Company, upon surrender of this Debenture for registration of transfer at the office or agency of the Trustee accompanied by a written instrument or instruments of transfer in form satisfactory to the Company or the Trustee duly executed by the registered holder hereof or his or her attorney duly authorized in writing, and thereupon one or more new Debentures of authorized denominations and for the same aggregate principal amount shall be issued to the designated transferee or transferees. No service charge shall be made for any such transfer, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in relation thereto. Prior to due presentment for registration of transfer of this Debenture, the Company, the Trustee, any Paying Agent (as defined in the Indenture) and the Debenture 68 Registrar may deem and treat the registered holder hereof as the absolute owner hereof (whether or not this Debenture shall be overdue and notwithstanding any notice of ownership or writing hereon made by anyone other than the Debenture Registrar) for the purpose of receiving payment of or on account of the principal hereof and interest due hereon and for all other purposes, and neither the Company nor the Trustee nor any Paying Agent nor any Debenture Registrar shall be affected by any notice to the contrary. No recourse shall be had for the payment of the principal of or the interest on this Debenture, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture, against any incorporator, stockholder, officer or director, past, present or future, as such, of the Company or of any predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issuance hereof, expressly waived and released. The Debentures are issuable only in registered form without coupons in denominations of $25 and any integral multiple thereof (or such other denominations and any integral multiple thereof as may be deemed necessary by the Company for the purpose of maintaining the eligibility of the Debentures for listing on the American Stock Exchange, Inc. or any successor thereto). All terms used in this Debenture that are defined in the Indenture shall have the meanings assigned to them in the Indenture. EX-4.3 4 CERTIFICATE OF TRUST 1 CERTIFICATE OF TRUST OF FIRST AMERICA CAPITAL TRUST THIS CERTIFICATE OF TRUST of FIRST AMERICA CAPITAL TRUST (the "Trust"), dated as of June 18, 1998, is being duly executed and filed by WILMINGTON TRUST COMPANY, a Delaware banking corporation, JAMES F. DIERBERG, ALLEN H. BLAKE and LAURENCE J. BROST, each an individual, as trustees, to form a business trust under the Delaware Business Trust Act (12 Delaware Code Section 3801 et seq.). 1. NAME. The name of the business trust formed hereby is FIRST AMERICA CAPITAL TRUST. 2. DELAWARE TRUSTEE. The name and business address of the trustee of the Trust in the State of Delaware is Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attention: Corporate Trust Administration. 3. EFFECTIVE DATE. This Certificate of Trust shall be effective on June 18, 1998. IN WITNESS WHEREOF, the undersigned have executed this Certificate of Trust as of the date first above written, in accordance with Section 3811(a) of the Delaware Business Trust Act. WILMINGTON TRUST COMPANY, as trustee By: /s/ James P. Lawler ----------------------------------------- Its: Vice President ---------------------------------------- /s/ James F. Dierberg -------------------------------------------- JAMES F. DIERBERG as Trustee /s/ Allen H. Blake -------------------------------------------- ALLEN H. BLAKE as Trustee /s/ Laurence J. Brost -------------------------------------------- LAURENCE J. BROST as Trustee EX-4.4 5 TRUST AGREEMENT 1 TRUST AGREEMENT This TRUST AGREEMENT, dated as of June 18, 1998 (this "Trust Agreement"), among (i) First Banks America, Inc., a Delaware corporation (the "Depositor"), (ii) Wilmington Trust Company, a Delaware banking corporation, as trustee, and (iii) James F. Dierberg, Allen H. Blake and Laurence J. Brost, each an individual, as trustees (each of such trustees in (ii) and (iii) a "Trustee" and collectively, the "Trustees"). The Depositor and the Trustees hereby agree as follows: 1. The trust created hereby (the "Trust") shall be known as "First America Capital Trust," in which name the Trustees, or the Depositor to the extent provided herein, may engage in the transactions contemplated hereby, make and execute contracts, and sue and be sued. 2. The Depositor hereby assigns, transfers, conveys and sets over to the Trustees the sum of $10.00. The Trustees hereby acknowledge receipt of such amount in trust from the Depositor, which amount shall constitute the initial trust estate. The Trustees hereby declare that they will hold the trust estate in trust for the Depositor. It is the intention of the parties hereto that the Trust created hereby constitute a business trust under Chapter 38 of Title 12 of the Delaware Code, 12 Del. C. Section 3801, et seq. (the "Business Trust Act"), and that this document constitutes the governing instrument of the Trust. The Trustees are hereby authorized and directed to execute and file a certificate of trust with the Delaware Secretary of State in accordance with the provisions of the Business Trust Act. 3. The Depositor and the Trustees will enter into an amended and restated Trust Agreement, satisfactory to each such party and substantially in the form included as an exhibit to the 1933 Act Registration Statement (as defined below), to provide for the contemplated operation of the Trust created hereby and the issuance of the Preferred Securities and Common Securities referred to therein. Prior to the execution and delivery of such amended and restated Trust Agreement, the Trustees shall not have any duty or obligation hereunder or with respect to the trust estate, except as otherwise required by applicable law or as may be necessary to obtain prior to such execution and delivery of any licenses, consents or approvals required by applicable law or otherwise. 4. The Depositor and the Trustees hereby authorize and direct the Depositor, as the sponsor of the Trust, (i) to file with the Securities and Exchange Commission (the "Commission") and execute, in each case on behalf of the Trust, (a) the Registration Statement on Form S-2 (the "1933 Act Registration Statement"), including any pre-effective or post-effective amendments to the 1933 Act Registration Statement, relating to the registration under the Securities Act of 1933, as amended, of the Preferred Securities of the Trust and possibly certain other securities and (b) a Registration Statement on Form 8-A (the "1934 Act Registration Statement") (including all pre-effective and post-effective amendments thereto) relating to the registration of the Preferred Securities of the Trust under the Securities Exchange Act of 1934, as amended; (ii) to file with the Nasdaq Stock Market National Market or a national stock exchange (each, an "Exchange") and execute on behalf of the Trust one or more listing applications and all other applications, statements, certificates, agreements and other instruments as shall be necessary or desirable to cause the Preferred Securities to be listed on any of the Exchanges; (iii) to file and execute on behalf of the Trust such applications, reports, surety bonds, irrevocable consents, appointments of attorney for service of process and other papers and documents as shall be necessary or desirable to register the Preferred Securities under the securities or blue sky laws of such jurisdictions as the Depositor, on behalf of the Trust, may deem necessary or desirable; and (iv) to execute on behalf of the Trust that certain Underwriting Agreement relating to the Preferred Securities, among the Trust, the Depositor and the several Underwriters named therein, substantially in the form included as an exhibit to the 1933 Act Registration Statement. In the event that any filing referred to in clauses (i), (ii) and (iii) above is required by the rules and regulations of the Commission, an Exchange or state securities or blue sky laws to be executed on behalf of the Trust by one or more of the Trustees, each of the Trustees, in its or his capacity as a Trustee of the Trust, is hereby authorized and, to the extent so required, directed to join in any such filing and to execute on behalf of the Trust any and all of the foregoing, it being understood that Wilmington Trust Company in its capacity as a Trustee of the Trust shall not be required to join in any such filing or execute on behalf of the Trust any such document unless required by the rules and regulations of the Commission, an Exchange or state securities or blue sky 2 laws. In connection with the filings referred to above, the Depositor and James F. Dierberg, Allen H. Blake and Laurence J. Brost, each as Trustees and not in their individual capacities, hereby constitutes and appoints James F. Dierberg, Allen H. Blake and Laurence J. Brost, and each of them, as its true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for the Depositor or such Trustee or in the Depositor's or such Trustees' name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to the 1933 Act Registration Statement and the 1934 Act Registration Statement and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Commission, the Exchange and administrators of the state securities or blue sky laws, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as the Depositor or such Trustee might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their respective substitute or substitutes, shall do or cause to be done by virtue hereof. 5. This Trust Agreement may be executed in one or more counterparts. 6. The number of Trustees initially shall be four, and thereafter the number of Trustees shall be such number as shall be fixed from time to time by a written instrument signed by the Depositor which may increase or decrease the number of Trustees; provided, however, that to the extent required by the Business Trust Act, one Trustee shall either be a natural person who is a resident of the State of Delaware or, if not a natural person, an entity which has its principal place of business in the State of Delaware and otherwise meets the requirements of applicable Delaware law. Subject to the foregoing, the Depositor is entitled to appoint or remove without cause any Trustee at any time. The Trustees may resign upon 30 days' prior notice to the Depositor. 7. This Trust Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware (without regard to conflict of laws of principles). [Signatures on Next Page] 2 3 IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement to be duly executed as of the day and year first above written. FIRST BANKS AMERICA, INC. as Depositor By: /s/ Allen H. Blake ----------------------------------- Its: /s/ Vice President ---------------------------------- WILMINGTON TRUST COMPANY as Trustee By: /s/ Patricia Evans ----------------------------------- Its: Financial Services Officer ---------------------------------- /s/ James F. Dierberg -------------------------------------- JAMES F. DIERBERG, as Trustee /s/ Allen H. Blake -------------------------------------- ALLEN H. BLAKE, as Trustee /s/ Laurence J. Brost -------------------------------------- LAURENCE J. BROST, as Trustee 3 EX-4.5 6 AMENDED AND RESTATED TRUST AGREEMENT 1 FIRST AMERICA CAPITAL TRUST AMENDED AND RESTATED TRUST AGREEMENT AMONG FIRST BANKS AMERICA, INC., AS DEPOSITOR STATE STREET BANK AND TRUST COMPANY, AS PROPERTY TRUSTEE WILMINGTON TRUST COMPANY, AS DELAWARE TRUSTEE, AND THE ADMINISTRATIVE TRUSTEES NAMED HEREIN DATED AS OF , 1998 --------, --- 2 TABLE OF CONTENTS
PAGE ARTICLE I - DEFINED TERMS 2 Section 101. Definitions 2 ARTICLE II - ESTABLISHMENT OF THE TRUST 9 Section 201. Name 9 Section 202. Office of the Delaware Trustee; Principal Place of Business 9 Section 203. Initial Contribution of Trust Property; Organizational Expenses 9 Section 204. Issuance of the Preferred Securities 10 Section 205. Issuance of the Common Securities; Subscription and Purchase of Debentures 10 Section 206. Declaration of Trust 11 Section 207. Authorization to Enter into Certain Transactions 11 Section 208. Assets of Trust 14 Section 209. Title to Trust Property 14 ARTICLE III - PAYMENT ACCOUNT 14 Section 301. Payment Account 14 ARTICLE IV - DISTRIBUTIONS; REDEMPTION 15 Section 401. Distributions 15 Section 402. Redemption 15 Section 403. Subordination of Common Securities 17 Section 404. Payment Procedures 17 Section 405. Tax Returns and Reports 18 Section 406. Payment of Taxes, Duties, etc. of the Trust 18 Section 407. Payments Under Indenture 18 ARTICLE V - TRUST SECURITIES CERTIFICATES 18 Section 501. Initial Ownership 18 Section 502. The Trust Securities Certificates 18 Section 503. Execution, Authentication and Delivery of Trust Securities Certificates 19 Section 504. Registration of Transfer and Exchange of Preferred Securities Certificates 19 Section 505. Mutilated, Destroyed, Lost or Stolen Trust Securities Certificates 20 Section 506. Persons Deemed Securityholders 20 Section 507. Access to List of Securityholders' Names and Addresses 21 Section 508. Maintenance of Office or Agency 21 Section 509. Appointment of Paying Agent 21 Section 510. Ownership of Common Securities by Depositor 22 Section 511. Preferred Securities Certificates 22 Section 512. Rights of Securityholders 22 ii 3 ARTICLE VI - ACTS OF SECURITYHOLDERS; MEETINGS; VOTING 23 Section 601. Limitations on Voting Rights 23 Section 602. Notice of Meetings 24 Section 603. Meetings of Preferred Securityholders 24 Section 604. Voting Rights 24 Section 605. Proxies, etc. 25 Section 606. Securityholder Action by Written Consent 25 Section 607. Record Date for Voting and Other Purposes 25 Section 608. Acts of Securityholders 25 Section 609. Inspection of Records 26 ARTICLE VII - REPRESENTATIONS AND WARRANTIES 26 Section 701. Representations and Warranties of the Bank and the Property Trustee 26 Section 702. Representations and Warranties of the Delaware Bank and the Delaware Trustee 27 Section 703. Representations and Warranties of the Depositor 28 ARTICLE VIII - TRUSTEES 29 Section 801. Certain Duties and Responsibilities 29 Section 802. Certain Notices 30 Section 803. Certain Rights of Property Trustee 30 Section 804. Not Responsible for Recitals or Issuance of Securities 32 Section 805. May Hold Securities 32 Section 806. Compensation; Indemnity; Fees 33 Section 807. Corporate Property Trustee Required; Eligibility of Trustees 33 Section 808. Conflicting Interests 34 Section 809. Co-Trustees and Separate Trustee 34 Section 810. Resignation and Removal; Appointment of Successor 35 Section 811. Acceptance of Appointment by Successor 36 Section 812. Merger, Conversion, Consolidation or Succession to Business 37 Section 813. Preferential Collection of Claims Against Depositor or Trust 37 Section 814. Reports by Property Trustee 37 Section 815. Reports to the Property Trustee 38 Section 816. Evidence of Compliance with Conditions Precedent 38 Section 817. Number of Trustees 38 Section 818. Delegation of Power 38 Section 819. Voting 39 ARTICLE IX - TERMINATION, LIQUIDATION AND MERGER 39 Section 901. Termination Upon Expiration Date 39 Section 902. Early Termination 39 Section 903. Termination 39 Section 904. Liquidation 40 Section 905. Mergers, Consolidations, Amalgamations or Replacements of the Trust 41 iii 4 ARTICLE X - MISCELLANEOUS PROVISIONS 42 Section 1001. Limitation of Rights of Securityholders 42 Section 1002. Amendment 42 Section 1003. Separability 43 Section 1004. Governing Law 43 Section 1005. Payments Due on Non-Business Day 43 Section 1006. Successors 43 Section 1007. Headings 44 Section 1008. Reports, Notices and Demands 44 Section 1009. Agreement Not to Petition 44 Section 1010. Trust Indenture Act; Conflict with Trust Indenture Act 45 Section 1011. Acceptance of Terms of Trust Agreement, Guarantee and Indenture 45 Signatures 46 Exhibit A Certificate of Trust Exhibit B Form of Common Securities Certificate Exhibit C Form of Expense Agreement Exhibit D Form of Preferred Securities Certificate
iv 5 CROSS-REFERENCE TABLE
Section of Section of Trust Indenture Act Amended and Restated of 1939, as amended Trust Agreement - ------------------- --------------- 310(a)(1) 807 310(a)(2) 807 310(a)(3) 807 310(a)(4) 207(a)(ii) 310(b) 808 311(a) 813 311(b) 813 312(a) 507 312(b) 507 312(c) 507 313(a) 814(a) 313(a)(4) 814(b) 313(b) 814(b) 313(c) 1008 313(d) 814(c) 314(a) 815 314(b) Not Applicable 314(c)(1) 816 314(c)(2) 816 314(c)(3) Not Applicable 314(d) Not Applicable 314(e) 101, 816 315(a) 801(a), 803(a) 315(b) 802, 1008 315(c) 801(a) 315(d) 801, 803 316(a)(2) Not Applicable 316(b) Not Applicable 316(c) 607 317(a)(1) Not Applicable 317(a)(2) Not Applicable 317(b) 509 318(a) 1010 Note: This Cross-Reference Table does not constitute part of this Agreement and should not affect the interpretation of any of its terms or provisions.
v 6 AMENDED AND RESTATED TRUST AGREEMENT AMENDED AND RESTATED TRUST AGREEMENT, dated as of , -------------- 1998, among (i) FIRST BANKS AMERICA, INC., a Delaware corporation (including any successors or assigns, the "Depositor"), (ii) STATE STREET BANK AND TRUST COMPANY, a trust company duly organized and existing under the laws of the Commonwealth of Massachusetts, as property trustee (the "Property Trustee" and, in its separate corporate capacity and not in its capacity as Property Trustee, the "Bank"), (iii) WILMINGTON TRUST COMPANY, a Delaware banking corporation duly organized and existing under the laws of the State of Delaware, as Delaware trustee (the "Delaware Trustee," and, in its separate corporate capacity and not in its capacity as Delaware Trustee, the "Delaware Bank"), (iv) JAMES F. DIERBERG, an individual, ALLEN H. BLAKE, an individual, and LAURENCE J. BROST, an individual, each of whose address is c/o First Banks America, Inc., 11901 Olive Boulevard, St. Louis, Missouri 63141 (each an "Administrative Trustee" and collectively the "Administrative Trustees") (the Property Trustee, the Delaware Trustee and the Administrative Trustees referred to collectively as the "Trustees"), and (v) the several Holders (as hereinafter defined). RECITALS WHEREAS, the Depositor, the Delaware Trustee, and James F. Dierberg, Allen H. Blake and Laurence J. Brost, each as an Administrative Trustee, have heretofore duly declared and established a business trust pursuant to the Delaware Business Trust Act by entering into that certain Trust Agreement, dated as of June ____, 1998 (the "Original Trust Agreement"), and by the execution and filing by the Delaware Trustee, the Depositor and the Administrative Trustees with the Secretary of State of the State of Delaware of the Certificate of Trust, filed on June _____, 1998, the form of which is attached as Exhibit A; and WHEREAS, the Depositor, the Delaware Trustee, the Property Trustee and the Administrative Trustees desire to amend and restate the Original Trust Agreement in its entirety as set forth herein to provide for, among other things, (i) the issuance of the Common Securities (as defined herein) by the Trust (as defined herein) to the Depositor; (ii) the issuance and sale of the Preferred Securities (as defined herein) by the Trust pursuant to the Underwriting Agreement (as defined herein); (iii) the acquisition by the Trust from the Depositor of all of the right, title and interest in the Debentures (as defined herein); and (iv) the appointment of the Trustees; NOW THEREFORE, in consideration of the agreements and obligations set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each party, for the benefit of the other parties and for the benefit of the Securityholders (as defined herein), hereby amends and restates the Original Trust Agreement in its entirety and agrees as follows: 7 ARTICLE I DEFINED TERMS SECTION 101. DEFINITIONS. For all purposes of this Trust Agreement, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article I have the meanings assigned to them in this Article I and include the plural as well as the singular; (b) all other terms used herein that are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (c) unless the context otherwise requires, any reference to an "Article" or a "Section" refers to an Article or a Section, as the case may be, of this Trust Agreement; and (d) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Trust Agreement as a whole and not to any particular Article, Section or other subdivision. "Act" has the meaning specified in Section 608. "Additional Amount" means, with respect to Trust Securities of a given Liquidation Amount and/or a given period, the amount of additional interest accrued on interest in arrears and paid by the Depositor on a Like Amount of Debentures for such period. "Additional Interest" has the meaning specified in Section 1.1 of the Indenture. "Administrative Trustee" means each of James F. Dierberg, Allen H. Blake and Laurence J. Brost, solely in his capacity as Administrative Trustee of the Trust formed and continued hereunder and not in his individual capacity, or such Administrative Trustee's successor in interest in such capacity, or any successor trustee appointed as herein provided. "Affiliate" means, with respect to a specified Person, (a) any Person directly or indirectly owning, controlling or holding with power to vote 10% or more of the outstanding voting securities or other ownership interests of the specified Person, any Person 10% or more of whose outstanding voting securities or other ownership interests are directly or indirectly owned, controlled or held with power to vote by the specified Person; (c) any Person directly or indirectly controlling, controlled by, or under common control with the specified Person; (d) a partnership in which the specified Person is a general partner; (e) any officer or director of the specified Person; and (f) if the specified Person is an individual, any entity of which the specified Person is an officer, director or general partner. "Authenticating Agent" means an authenticating agent with respect to the Preferred Securities appointed by the Property Trustee pursuant to Section 503. "Bank" has the meaning specified in the Preamble to this Trust Agreement. "Bankruptcy Event" means, with respect to any Person: (a) the entry of a decree or order by a court having jurisdiction in the premises adjudging such Person a bankrupt or insolvent, or approving as properly filed a petition seeking liquidation or reorganization of or in respect of such Person under the United States Bankruptcy Code of 1978, as amended, or any other similar applicable federal or state law, and the continuance of any such decree or order unvacated and unstayed for a period of 90 days; or the commencement of an involuntary case under the United States Bankruptcy Code of 1978, as amended, in respect of such Person, which shall continue undismissed for a period of 90 days or entry of an order for relief 2 8 in such case; or the entry of a decree or order of a court having jurisdiction in the premises for the appointment on the ground of insolvency or bankruptcy of a receiver, custodian, liquidator, trustee or assignee in bankruptcy or insolvency of such Person or of its property, or for the winding up or liquidation of its affairs, and such decree or order shall have remained in force unvacated and unstayed for a period of 90 days; or (b) the institution by such Person of proceedings to be adjudicated a voluntary bankrupt, or the consent by such Person to the filing of a bankruptcy proceeding against it, or the filing by such Person of a petition or answer or consent seeking liquidation or reorganization under the United States Bankruptcy Code of 1978, as amended, or other similar applicable Federal or State law, or the consent by such Person to the filing of any such petition or to the appointment on the ground of insolvency or bankruptcy of a receiver or custodian or liquidator or trustee or assignee in bankruptcy or insolvency of such Person or of its property, or shall make a general assignment for the benefit of creditors. "Bankruptcy Laws" has the meaning specified in Section 1009. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Depositor to have been duly adopted by the Depositor's Board of Directors, or such committee of the Board of Directors or officers of the Depositor to which authority to act on behalf of the Board of Directors has been delegated, and to be in full force and effect on the date of such certification, and delivered to the appropriate Trustee. "Business Day" means a day other than a Saturday or Sunday, a day on which banking institutions in The City of New York are authorized or required by law, executive order or regulation to remain closed, or a day on which the Property Trustee's Corporate Trust Office or the Corporate Trust Office of the Debenture Trustee is closed for business. "Certificate of Trust" means the certificate of trust filed with the Secretary of State of the State of Delaware with respect to the Trust, as amended or restated from time to time. "Change in 1940 Act Law" shall have the meaning set forth in the definition of "Investment Company Event." "Closing Date" means the date of execution and delivery of this Trust Agreement. "Code" means the Internal Revenue Code of 1986, as amended. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Common Security" means an undivided beneficial interest in the assets of the Trust, having a Liquidation Amount of $25 and having the rights provided therefor in this Trust Agreement, including the right to receive Distributions and a Liquidation Distribution as provided herein. "Common Securities Certificate" means a certificate evidencing ownership of Common Securities, substantially in the form attached as Exhibit B. "Common Securityholder" means the Holder of the Common Security. "Corporate Trust Office" means the office at which, at any particular time, the corporate trust business of the Property Trustee or the Debenture Trustee, as the case may be, shall be principally administered, which office at the date hereof, in each such case, is located at Two International Place, 4th Floor, Boston, Massachusetts 02110, Attention: Corporate Trust Department. 3 9 "Debenture Event of Default" means an "Event of Default" as defined in Section 7.1 of the Indenture. "Debenture Redemption Date" means, with respect to any Debentures to be redeemed under the Indenture, the date fixed for redemption under the Indenture. "Debenture Tax Event" means a "Tax Event" as specified in Section 1.1 of the Indenture. "Debenture Trustee" means State Street Bank and Trust Company, a banking corporation organized under the laws of the Commonwealth of Massachusetts and any successor thereto, as trustee under the Indenture. "Debentures" means the $41,237,125 (or $47,442,700 if the Underwriters exercise their Option) aggregate principal amount of the Depositor's % ------ Subordinated Debentures due 2028, issued pursuant to the Indenture. "Definitive Preferred Securities Certificates" means the Preferred Securities Certificates issued in certificated, fully registered form as provided in Section 511. "Delaware Bank" has the meaning specified in the Preamble to this Trust Agreement. "Delaware Business Trust Act" means Chapter 38 of Title 12 of the Delaware Code, 12 Delaware Code Sections 3801 et seq., as it may be amended from time to time. "Delaware Trustee" means the commercial bank or trust company identified as the "Delaware Trustee" in the Preamble to this Trust Agreement, solely in its capacity as Delaware Trustee of the Trust formed and continued hereunder and not in its individual capacity, or its successor in interest in such capacity, or any successor trustee appointed as herein provided. "Depositor" has the meaning specified in the Preamble to this Trust Agreement. "Distribution Date" has the meaning specified in Section 401(a). "Distributions" means amounts payable in respect of the Trust Securities as provided in Section 401. "Early Termination Event" has the meaning specified in Section 902. "Event of Default" means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) the occurrence of a Debenture Event of Default; or (b) default by the Trust or the Property Trustee in the payment of any Distribution when it becomes due and payable, and continuation of such default for a period of 30 days; or (c) default by the Trust or the Property Trustee in the payment of any Redemption Price of any Trust Security when it becomes due and payable; or (d) default in the performance, or breach, in any material respect, of any covenant or warranty of the Trustees in this Trust Agreement (other than a covenant or warranty a default in the performance of which or the breach of which is dealt with in clause (b) or (c), above) and continuation of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the defaulting Trustee or Trustees by the Holders of at least 25% in aggregate liquidation preference of the Outstanding Preferred Securities a written notice specifying 4 10 such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (e) the occurrence of a Bankruptcy Event with respect to the Property Trustee and the failure by the Depositor to appoint a successor Property Trustee within 60 days thereof. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Expense Agreement" means the Agreement as to Expenses and Liabilities between the Depositor and the Trust, substantially in the form attached as Exhibit C, as amended from time to time. "Expiration Date" has the meaning specified in Section 901. "Extended Interest Payment Period" has the meaning specified in Section 4.1 of the Indenture. "Guarantee" means the Preferred Securities Guarantee Agreement executed and delivered by the Depositor and State Street Bank and Trust Company, as trustee, contemporaneously with the execution and delivery of this Trust Agreement, for the benefit of the Preferred Securityholders, as amended from time to time. "Indenture" means the Indenture, dated as of -----------------------, 1998, between the Depositor and the Debenture Trustee, as trustee, as amended or supplemented from time to time pertaining to the Debentures of the Depositor. "Investment Company Act," means the Investment Company Act of 1940, as amended, as in effect at the date of execution of this instrument. "Investment Company Event" means the receipt by the Trust of an Opinion of Counsel, rendered by a law firm having a recognized national tax and securities law practice, to the effect that, as a result of the occurrence of a change in law or regulation or a change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority (a "Change in 1940 Act Law"), the Trust is or shall be considered an "investment company" that is required to be registered under the Investment Company Act, which Change in 1940 Act Law becomes effective on or after the date of original issuance of the Preferred Securities under this Trust Agreement. "Lien" means any lien, pledge, charge, encumbrance, mortgage, deed of trust, adverse ownership interest, hypothecation, assignment, security interest or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever. "Like Amount" means (a) with respect to a redemption of Trust Securities, Trust Securities having a Liquidation Amount equal to the principal amount of Debentures to be contemporaneously redeemed in accordance with the Indenture and the proceeds of which shall be used to pay the Redemption Price of such Trust Securities; and (b) with respect to a distribution of Debentures to Holders of Trust Securities in connection with a termination or liquidation of the Trust, Debentures having a principal amount equal to the Liquidation Amount of the Trust Securities of the Holder to whom such Debentures are distributed. Each Debenture distributed pursuant to clause (b) above shall carry with it accumulated interest in an amount equal to the accumulated and unpaid interest then due on such Debentures. "Liquidation Amount" means the stated amount of $25 per Trust Security. "Liquidation Date" means the date on which Debentures are to be distributed to Holders of Trust Securities in connection with a termination and liquidation of the Trust pursuant to Section 904(a). 5 11 "Liquidation Distribution" has the meaning specified in Section 904(d). "Officers' Certificate" means a certificate signed by the President or a Vice President and by the Treasurer or an Assistant Treasurer or the Controller or an Assistant Controller or the Secretary or an Assistant Secretary, of the Depositor, and delivered to the appropriate Trustee. One of the officers signing an Officers' Certificate given pursuant to Section 816 shall be the principal executive, financial or accounting officer of the Depositor. Any Officers' Certificate delivered with respect to compliance with a condition or covenant provided for in this Trust Agreement shall include: (a) a statement that each officer signing the Officers' Certificate has read the covenant or condition and the definitions relating thereto; (b) a brief statement of the nature and scope of the examination or investigation undertaken by each officer in rendering the Officers' Certificate; (c) a statement that each such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such officer, such condition or covenant has been complied with. "Opinion of Counsel" means an opinion in writing of legal counsel, who may be counsel for the Trust, the Property Trustee, the Delaware Trustee or the Depositor, but not an employee of any thereof, and who shall be reasonably acceptable to the Property Trustee. "Original Trust Agreement" has the meaning specified in the Recitals to this Trust Agreement. "Outstanding", when used with respect to Preferred Securities, means, as of the date of determination, all Preferred Securities theretofore executed and delivered under this Trust Agreement, except: (a) Preferred Securities theretofore canceled by the Property Trustee or delivered to the Property Trustee for cancellation; (b) Preferred Securities for whose payment or redemption money in the necessary amount has been theretofore deposited with the Property Trustee or any Paying Agent for the Holders of such Preferred Securities; provided that, if such Preferred Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Trust Agreement; and (c) Preferred Securities which have been paid or in exchange for or in lieu of which other Preferred Securities have been executed and delivered pursuant to Sections 504, 505, and 511; provided, however, that in determining whether the Holders of the requisite Liquidation Amount of the Outstanding Preferred Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Preferred Securities owned by the Depositor, any Trustee or any Affiliate of the Depositor or any Trustee shall be disregarded and deemed not to be Outstanding, except that (a) in determining whether any Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Preferred Securities that such Trustee knows to be so owned shall be so disregarded; and (b) the foregoing shall not apply at any time when all of the outstanding Preferred Securities are owned by the Depositor, one or more of the Trustees and/or any such Affiliate. Preferred Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Administrative Trustees the pledgee's right so to act with respect to such Preferred Securities and the pledgee is not the Depositor or any other Obligor upon the Preferred Securities or a Person directly 6 12 or indirectly controlling or controlled by or under direct or indirect common control with the Depositor or any Affiliate of the Depositor. "Paying Agent" means any paying agent or co-paying agent appointed pursuant to Section 509 and shall initially be the Bank. "Payment Account" means a segregated non-interest-bearing corporate trust account maintained by the Property Trustee with the Bank in its trust department for the benefit of the Securityholders in which all amounts paid in respect of the Debentures shall be held and from which the Property Trustee shall make payments to the Securityholders in accordance with Sections 401 and 402. "Person" means any individual, corporation, partnership, joint venture, trust, limited liability company or corporation, unincorporated organization or government or any agency or political subdivision thereof. "Preferred Securities Certificate", means a certificate evidencing ownership of Preferred Securities, substantially in the form attached as Exhibit D. "Preferred Security" means an undivided beneficial interest in the assets of the Trust, having a Liquidation Amount of $25 and having the rights provided therefor in this Trust Agreement, including the right to receive Distributions and a Liquidation Distribution as provided herein. "Preferred Securityholder" means a Holder of a Preferred Security. "Property Trustee" means the commercial bank or trust company identified as the "Property Trustee," in the Preamble to this Trust Agreement solely in its capacity as Property Trustee of the Trust heretofore formed and continued hereunder and not in its individual capacity, or its successor in interest in such capacity, or any successor property trustee appointed as herein provided. "Redemption Date" means, with respect to any Trust Security to be redeemed, the date fixed for such redemption by or pursuant to this Trust Agreement; provided that each Debenture Redemption Date and the stated maturity of the Debentures shall be a Redemption Date for a Like Amount of Trust Securities. "Redemption Price" means, with respect to any Trust Security, the Liquidation Amount of such Trust Security, plus accumulated and unpaid Distributions to the Redemption Date, paid by the Depositor upon the concurrent redemption of a Like Amount of Debentures, allocated on a pro rata basis (based on Liquidation Amounts) among the Trust Securities. "Relevant Trustee" shall have the meaning specified in Section 810. "Securities Register" and "Securities Registrar" have the respective meanings specified in Section 504. "Securityholder" or "Holder" means a Person in whose name a Trust Security or Securities is registered in the Securities Register; any such Person is a beneficial owner within the meaning of the Delaware Business Trust Act. "Trust" means the Delaware business trust created and continued hereby and identified on the cover page to this Trust Agreement. "Trust Agreement" means this Amended and Restated Trust Agreement, as the same may be modified, amended or supplemented in accordance with the applicable provisions hereof, including all exhibits hereto, including, for all purposes of this Trust Agreement and any such modification, 7 13 amendment or supplement, the provisions of the Trust Indenture Act that are deemed to be a part of and govern this Trust Agreement and any such modification, amendment or supplement, respectively. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended, as in force at the date as of which this instrument was executed; provided, however, that in the event the Trust Indenture Act of 1939, as amended, is amended after such date, "Trust Indenture Act" means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended. "Trust Property" means (a) the Debentures; (b) the rights of the Property Trustee under the Guarantee; (c) any cash on deposit in, or owing to, the Payment Account; and (d) all proceeds and rights in respect of the foregoing and any other property and assets for the time being held or deemed to be held by the Property Trustee pursuant to this Trust Agreement. "Trust Security" means any one of the Common Securities or the Preferred Securities. "Trust Securities Certificate" means any one of the Common Securities Certificates or the Preferred Securities Certificates. "Trustees" means, collectively, the Property Trustee, the Delaware Trustee and the Administrative Trustees. "Underwriting Agreement" means the Underwriting Agreement, dated as of , 1998 among the Trust, the Depositor and the - ----------------- ------ Underwriters named therein. ARTICLE II ESTABLISHMENT OF THE TRUST SECTION 201. NAME. The Trust created and continued hereby shall be known as "First America Capital Trust," as such name may be modified from time to time by the Administrative Trustees following written notice to the Holders of Trust Securities and the other Trustees, in which name the Trustees may engage in the transactions contemplated hereby, make and execute contracts and other instruments on behalf of the Trust and sue and be sued. SECTION 202. OFFICE OF THE DELAWARE TRUSTEE; PRINCIPAL PLACE OF BUSINESS. The address of the Delaware Trustee in the State of Delaware is c/o Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attention: Corporate Trust Administration, or such other address in the State of Delaware as the Delaware Trustee may designate by written notice to the Securityholders and the Depositor. The principal executive office of the Trust is c/o First Banks America, Inc., 135 North Meramec Avenue, St. Louis, Missouri 63105. SECTION 203. INITIAL CONTRIBUTION OF TRUST PROPERTY; ORGANIZATIONAL EXPENSES. The Trustees acknowledge receipt in trust from the Depositor in connection with the Original Trust Agreement of the sum of $10, which constituted the initial Trust Property. The Depositor shall pay organizational expenses of the Trust as they arise or shall, upon request of any Trustee, promptly reimburse such Trustee for any such expenses paid by such Trustee. The Depositor shall make no claim upon the Trust Property for the payment of such expenses. 8 14 SECTION 204. ISSUANCE OF THE PREFERRED SECURITIES. On , 1998, the Depositor and an -------------------- ----- Administrative Trustee, on behalf of the Trust and pursuant to the Original Trust Agreement, executed and delivered the Underwriting Agreement. Contemporaneously with the execution and delivery of this Trust Agreement, an Administrative Trustee, on behalf of the Trust, shall execute in accordance with Section 502 and deliver in accordance with the Underwriting Agreement, Preferred Securities Certificates, registered in the name of the Persons entitled thereto, in an aggregate amount of 1,600,000 Preferred Securities having an aggregate Liquidation Amount of $40,000,000 against receipt of the aggregate purchase price of such Preferred Securities of $40,000,000, which amount such Administrative Trustee shall promptly deliver to the Property Trustee. If the Underwriters exercise their Option and there is an Option Closing Date (as such terms are defined in the Underwriting Agreement), then an Administrative Trustee, on behalf of the Trust, shall execute in accordance with Section 502, and deliver in accordance with the Underwriting Agreement, additional Preferred Securities Certificates, registered in the name of the Persons entitled thereto in an aggregate amount of up to 240,000 Preferred Securities having an aggregate Liquidation Amount of up to $6,000,000 against receipt of the aggregate purchase price of such Preferred Securities equal to the product of $25 multiplied by the number of Preferred Securities purchased pursuant to the Option, which amount such Administrative Trustee shall promptly deliver to the Property Trustee. SECTION 205. ISSUANCE OF THE COMMON SECURITIES; SUBSCRIPTION AND PURCHASE OF DEBENTURES. (a) Contemporaneously with the execution and delivery of this Trust Agreement, an Administrative Trustee, on behalf of the Trust, shall execute in accordance with Section 502 and deliver to the Depositor Common Securities Certificates registered in the name of the Depositor, in an aggregate amount of 49,485 Common Securities having an aggregate Liquidation Amount of $1,237,125 against payment by the Depositor of such amount. Contemporaneously therewith, an Administrative Trustee, on behalf of the Trust, shall subscribe to and purchase from the Depositor Debentures, registered in the name of the Property Trustee on behalf of the Trust and having an aggregate principal amount equal to $1,237,125 and, in satisfaction of the purchase price for such Debentures, the Property Trustee, on behalf of the Trust, shall deliver to the Depositor the sum of $1,237,125. (b) If the Underwriters exercise the Option and there is an Option Closing Date, then an Administrative Trustee, on behalf of the Trust, shall execute in accordance with Section 502, and deliver to the Depositor, Common Securities Certificates, registered in the name of the Depositor, in an aggregate amount of up to 8,223 Common Securities having an aggregate Liquidation Amount of up to $205,575 against payment by the Depositor of an amount equal to the product of $25 multiplied by the number of additional Common Securities purchased by the Depositor. Contemporaneously therewith, an Administrative Trustee, on behalf of the Trust, shall subscribe to and purchase from the Depositor, Debentures, registered in the name of the Property Trustee on behalf of the Trust and having an aggregate principal amount of up to $205,575, and, in satisfaction of the purchase price of such Debentures, the Property Trustee, on behalf of the Trust, shall deliver to the Depositor an amount equal to the sum of the amounts received from one of the Administrative Trustees pursuant to the first sentence of this Section 205(b) and the last sentence of Section 204. SECTION 206. DECLARATION OF TRUST. The exclusive purposes and functions of the Trust are (a) to issue and sell Trust Securities and use the proceeds from such sale to acquire the Debentures; and (b) to engage in those activities necessary, convenient or incidental thereto. The Depositor hereby appoints the Trustees as trustees of the Trust, to have all the rights, powers and duties to the extent set forth herein, and the Trustees hereby accept such appointment. The Property Trustee hereby declares that it shall hold the Trust Property in trust upon and subject to the conditions set forth herein for the benefit of the Securityholders. The Administrative Trustees shall have all rights, powers and duties set forth herein 9 15 and in accordance with applicable law with respect to accomplishing the purposes of the Trust. The Delaware Trustee shall not be entitled to exercise any powers, nor shall the Delaware Trustee have any of the duties and responsibilities, of the Property Trustee or the Administrative Trustees set forth herein. The Delaware Trustee shall be one of the Trustees of the Trust for the sole and limited purpose of fulfilling the requirements of Section 3807 of the Delaware Business Trust Act. SECTION 207. AUTHORIZATION TO ENTER INTO CERTAIN TRANSACTIONS. (a) The Trustees shall conduct the affairs of the Trust in accordance with the terms of this Trust Agreement. Subject to the limitations set forth in paragraph (b) of this Section 207 and Article VIII, and in accordance with the following provisions (i) and (ii), the Administrative Trustees shall have the authority to enter into all transactions and agreements determined by the Administrative Trustees to be appropriate in exercising the authority, express or implied, otherwise granted to the Administrative Trustees under this Trust Agreement, and to perform all acts in furtherance thereof, including without limitation, the following: (i) As among the Trustees, each Administrative Trustee, acting singly or jointly, shall have the power and authority to act on behalf of the Trust with respect to the following matters: (A) the issuance and sale of the Trust Securities; (B) to cause the Trust to enter into, and to execute, deliver and perform on behalf of the Trust, the Expense Agreement and such other agreements or documents as may be necessary or desirable in connection with the purposes and function of the Trust; (C) assisting in the registration of the Preferred Securities under the Securities Act of 1933, as amended, and under state securities or blue sky laws, and the qualification of this Trust Agreement as a trust indenture under the Trust Indenture Act; (D) assisting in the listing of the Preferred Securities upon the New York Stock Exchange or such securities exchange or exchanges as shall be determined by the Depositor and the registration of the Preferred Securities under the Exchange Act, and the preparation and filing of all periodic and other reports and other documents pursuant to the foregoing; (E) the sending of notices (other than notices of default) and other information regarding the Trust Securities and the Debentures to the Securityholders in accordance with this Trust Agreement; (F) the appointment of a Paying Agent, authenticating agent and Securities Registrar in accordance with this Trust Agreement; (G) to the extent provided in this Trust Agreement, the winding up of the affairs of and liquidation of the Trust and the preparation, execution and filing of the certificate of cancellation with the Secretary of State of the State of Delaware; (H) to take all action that may be necessary or appropriate for the preservation and the continuation of the Trust's valid existence, rights, franchises and privileges as a statutory business trust under the laws of the State of Delaware and of each other jurisdiction in which such existence is necessary to protect the limited liability of the Preferred Securityholders or to enable the Trust to effect the purposes for which the Trust was created; and (I) the taking of any action incidental to the foregoing as the Administrative Trustees may from time to time determine is necessary or advisable to give effect to the terms of this Trust Agreement for the benefit of the Securityholders (without consideration of the effect of any such action on any particular Securityholder). 10 16 (ii) As among the Trustees, the Property Trustee shall have the power, duty and authority to act on behalf of the Trust with respect to the following matters: (A) the establishment of the Payment Account; (B) the receipt of the Debentures; (C) the collection of interest, principal and any other payments made in respect of the Debentures in the Payment Account; (D) the distribution of amounts owed to the Securityholders in respect of the Trust Securities in accordance with the terms of this Trust Agreement; (E) the exercise of all of the rights, powers and privileges of a holder of the Debentures; (F) the sending of notices of default and other information regarding the Trust Securities and the Debentures to the Securityholders in accordance with this Trust Agreement; (G) the distribution of the Trust Property in accordance with the terms of this Trust Agreement; (H) to the extent provided in this Trust Agreement, the winding up of the affairs of and liquidation of the Trust; (I) after an Event of Default, the taking of any action incidental to the foregoing as the Property Trustee may from time to time determine is necessary or advisable to give effect to the terms of this Trust Agreement and protect and conserve the Trust Property for the benefit of the Securityholders (without consideration of the effect of any such action on any particular Securityholder); (J) registering transfers of the Trust Securities in accordance with this Trust Agreement; and (K) except as otherwise provided in this Section 207(a)(ii), the Property Trustee shall have none of the duties, liabilities, powers or the authority of the Administrative Trustees set forth in Section 207(a)(i). (b) So long as this Trust Agreement remains in effect, the Trust (or the Trustees acting on behalf of the Trust) shall not undertake any business, activities or transaction except as expressly provided herein or contemplated hereby. In particular, the Trustees shall not (i) acquire any investments or engage in any activities not authorized by this Trust Agreement; (ii) sell, assign, transfer, exchange, mortgage, pledge, set-off or otherwise dispose of any of the Trust Property or interests therein, including to Securityholders, except as expressly provided herein; (iii) take any action that would cause the Trust to fail or cease to qualify as a "grantor trust" for United States federal income tax purposes; (iv) incur any indebtedness for borrowed money or issue any other debt; or (v) take or consent to any action that would result in the placement of a Lien on any of the Trust Property. The Administrative Trustees shall defend all claims and demands of all Persons at any time claiming any Lien on any of the Trust Property adverse to the interest of the Trust or the Securityholders in their capacity as Securityholders. (c) In connection with the issue and sale of the Preferred Securities, the Depositor shall have the right and responsibility to assist the Trust with respect to, or effect on behalf of the Trust, the following (and any actions taken by the Depositor in furtherance of the following prior to the date of this Trust Agreement are hereby ratified and confirmed in all respects): 11 17 (i) the preparation and filing by the Trust with the Commission and the execution on behalf of the Trust of a registration statement on the appropriate form in relation to the Preferred Securities and the Debentures, including any amendments thereto; (ii) the determination of the states in which to take appropriate action to qualify or, register for sale all or part of the Preferred Securities and to do any and all such acts, other than actions which must be taken by or on behalf of the Trust, and advise the Trustees of actions they must take on behalf of the Trust, and prepare for execution and filing any documents to be executed and filed by the Trust or on behalf of the Trust, as the Depositor deems necessary or advisable in order to comply with the applicable laws of any such states; (iii) the preparation for filing by the Trust and execution on behalf of the Trust of an application to the New York Stock Exchange or another national stock exchange or other organization for listing upon notice of issuance of any Preferred Securities and to file or cause an Administrative Trustee to file thereafter with such exchange or organization such notifications and documents as may be necessary from time to time; (iv) the preparation for filing by the Trust with the Commission and the execution on behalf of the Trust of a registration statement on Form 8-A relating to the registration of the Preferred Securities under Section 12(b) or 12(g) of the Exchange Act, including any amendments thereto; (v) the negotiation of the terms of, and the execution and delivery of, the Underwriting Agreement providing for the sale of the Preferred Securities; and (vi) the taking of any other actions necessary or desirable to carry out any of the foregoing activities. (d) Notwithstanding anything herein to the contrary, the Administrative Trustees are authorized and directed to conduct the affairs of the Trust and to operate the Trust so that the Trust shall not be deemed to be an "investment company" required to be registered under the Investment Company Act, shall be classified as a "grantor trust" and not as an association taxable as a corporation for United States federal income tax purposes and so that the Debentures shall be treated as indebtedness of the Depositor for United States federal income tax purposes. In this connection, subject to Section 1002, the Depositor and the Administrative Trustees are authorized to take any action, not inconsistent with applicable law or this Trust Agreement, that each of the Depositor and the Administrative Trustees determines in their discretion to be necessary or desirable for such purposes. SECTION 208. ASSETS OF TRUST. The assets of the Trust shall consist of the Trust Property. SECTION 209. TITLE TO TRUST PROPERTY. Legal title to all Trust Property shall be vested at all times in the Property Trustee (in its capacity as such) and shall be held and administered by the Property Trustee for the benefit of the Securityholders in accordance with this Trust Agreement. 12 18 ARTICLE III PAYMENT ACCOUNT SECTION 301. PAYMENT ACCOUNT. (a) On or prior to the Closing Date, the Property Trustee shall establish the Payment Account. The Property Trustee and any agent of the Property Trustee shall have exclusive control and sole right of withdrawal with respect to the Payment Account for the purpose of making deposits and withdrawals from the Payment Account in accordance with this Trust Agreement. All monies and other property deposited or held from time to time in the Payment Account shall be held by the Property Trustee in the Payment Account for the exclusive benefit of the Securityholders and for distribution as herein provided, including (and subject to) any priority of payments provided for herein. (b) The Property Trustee shall deposit in the Payment Account, promptly upon receipt, all payments of principal of or interest on, and any other payments or proceeds with respect to, the Debentures. Amounts held in the Payment Account shall not be invested by the Property Trustee pending distribution thereof. 13 19 ARTICLE IV DISTRIBUTIONS; REDEMPTION SECTION 401. DISTRIBUTIONS. (a) Distributions on the Trust Securities shall be cumulative, and shall accumulate whether or not there are funds of the Trust available for the payment of Distributions. Distributions shall accumulate from , 1998, and, except during any Extended Interest - ------------------ ------ Payment Period with respect to the Debentures, shall be payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year, commencing on , 1998. If any date on which a -------------------- ----- Distribution is otherwise payable on the Trust Securities is not a Business Day, then the payment of such Distribution shall be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) with the same force and effect as if made on such date (each date on which distributions are payable in accordance with this Section 401(a), a "Distribution Date"). (b) The Trust Securities represent undivided beneficial interests in the Trust Property, and, as a practical matter, the Distributions on the Trust Securities shall be payable at a rate of % per annum of the ------ Liquidation Amount of the Trust Securities. The amount of Distributions payable for any full period shall be computed on the basis of a 360-day year of twelve 30-day months. The amount of Distributions for any partial period shall be computed on the basis of the number of days elapsed in a 360-day year of twelve 30 day months. During any Extended Interest Payment Period with respect to the Debentures, Distributions on the Preferred Securities shall be deferred for a period equal to the Extended Interest Payment Period. The amount of Distributions payable for any period shall include the Additional Amounts, if any. (c) Distributions on the Trust Securities shall be made by the Property Trustee solely from the Payment Account and shall be payable on each Distribution Date only to the extent that the Trust has funds then on hand and immediately available by 12:30 p.m. on each Distribution Date in the Payment Account for the payment of such Distributions. (d) Distributions on the Trust Securities with respect to a Distribution Date shall be payable to the Holders thereof as they appear on the Securities Register for the Trust Securities on the relevant record date, which shall be the 15th day of the month in which the Distribution is payable. SECTION 402. REDEMPTION. (a) On each Debenture Redemption Date and on the stated maturity of the Debentures, the Trust shall be required to redeem a Like Amount of Trust Securities at the Redemption Price. (b) Notice of redemption shall be given by the Property Trustee by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date to each Holder of Trust Securities to be redeemed, at such Holder's address appearing in the Securities Register. The Property Trustee shall have no responsibility for the accuracy of any CUSIP number contained in such notice. All notices of redemption shall state: 14 20 (i) the Redemption Date; (ii) the Redemption Price; (iii) the CUSIP number; (iv) if less than all the Outstanding Trust Securities are to be redeemed, the identification and the aggregate Liquidation Amount of the particular Trust Securities to be redeemed; and (v) that, on the Redemption Date, the Redemption Price shall become due and payable upon each such Trust Security to be redeemed and that Distributions thereon shall cease to accumulate on and after said date. (c) The Trust Securities redeemed on each Redemption Date shall be redeemed at the Redemption Price with the proceeds from the contemporaneous redemption of Debentures. Redemptions of the Trust Securities shall be made and the Redemption Price shall be payable on each Redemption Date only to the extent that the Trust has immediately available funds then on hand and available in the Payment Account for the payment of such Redemption Price. (d) If the Property Trustee gives a notice of redemption in respect of any Preferred Securities, then, by 12:00 noon, New York City time, on the Redemption Date, subject to Section 402(c), the Property Trustee shall deposit with the Paying Agent funds sufficient to pay the applicable Redemption Price and shall give the Paying Agent irrevocable instructions and authority to pay the Redemption Price to the Holders thereof upon surrender of their Preferred Securities Certificates. Notwithstanding the foregoing, Distributions payable on or prior to the Redemption Date for any Trust Securities called for redemption shall be payable to the Holders of such Trust Securities as they appear on the Register for the Trust Securities on the relevant record dates for the related Distribution Dates. If notice of redemption shall have been given and funds deposited as required, then upon the date of such deposit, all rights of Securityholders holding Trust Securities so called for redemption shall cease, except the right of such Securityholders to receive the Redemption Price and any Distribution payable on or prior to the Redemption Date, but without interest, and such Securities shall cease to be Outstanding. In the event that any date on which any Redemption Price is payable is not a Business Day, then payment of the Redemption Price payable on such date shall be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) with the same force and effect as if made on such date. In the event that payment of the Redemption Price in respect of any Trust Securities called for redemption is improperly withheld or refused and not paid either by the Trust or by the Depositor pursuant to the Guarantee, Distributions on such Trust Securities shall continue to accumulate, at the then applicable rate, from the Redemption Date originally established by the Trust for such Trust Securities to the date such Redemption Price is actually paid, in which case the actual payment date shall be the date fixed for redemption for purposes of calculating the Redemption Price. (e) Payment of the Redemption Price on the Trust Securities shall be made to the record holders thereof as they appear on the Securities Register for the Trust Securities on the relevant record date, which shall be the date 15 days prior to the relevant Redemption Date. (f) Subject to Section 403(a), if less than all the Outstanding Trust Securities are to be redeemed on a Redemption Date, then the aggregate Liquidation Amount of Trust Securities to be redeemed shall be allocated on a pro rata basis (based on Liquidation Amounts) among the Common Securities and the Preferred Securities. The particular Preferred Securities to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Property Trustee from the outstanding Preferred Securities not previously called for redemption, by such method (including, without limitation, by lot) as the Property Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions (equal to $25 or an integral multiple of $25 in excess thereof) of the Liquidation Amount of Preferred Securities of a denomination larger than $25. 15 21 The Property Trustee shall promptly notify the Securities Registrar in writing of the Preferred Securities selected for redemption and, in the case of any Preferred Securities selected for partial redemption, the Liquidation Amount thereof to be redeemed. For all purposes of this Trust Agreement, unless the context otherwise requires, all provisions relating to the redemption of Preferred Securities shall relate, in the case of any Preferred Securities redeemed or to be redeemed only in part, to the portion of the Liquidation Amount of Preferred Securities which has been or is to be redeemed. SECTION 403. SUBORDINATION OF COMMON SECURITIES. (a) Payment of Distributions (including Additional Amounts, if applicable) on, and the Redemption Price of, the Trust Securities, as applicable, shall be made, subject to Section 402(f), pro rata among the Common Securities and the Preferred Securities based on the Liquidation Amount of the Trust Securities; provided, however, that if on any Distribution Date or Redemption Date any Event of Default resulting from a Debenture Event of Default shall have occurred and be continuing, no payment of any Distribution (including Additional Amounts, if applicable) on, or Redemption Price of, any Common Security, and no other payment on account of the redemption, liquidation or other acquisition of Common Securities, shall be made unless payment in full in cash of all accumulated and unpaid Distributions (including Additional Amounts, if applicable) on all Outstanding Preferred Securities for all Distribution periods terminating on or prior thereto, or in the case of payment of the Redemption Price the full amount of such Redemption Price on all Outstanding Preferred Securities then called for redemption, shall have been made or provided for, and all funds immediately available to the Property Trustee shall first be applied to the payment in full in cash of all Distributions (including Additional Amounts, if applicable) on, or the Redemption Price of, Preferred Securities then due and payable. (b) In the case of the occurrence of any Event of Default resulting from a Debenture Event of Default, the Holder of Common Securities shall be deemed to have waived any right to act with respect to any such Event of Default under this Trust Agreement until the effect of all such Events of Default with respect to the Preferred Securities shall have been cured, waived or otherwise eliminated. Until any such Event of Default under this Trust Agreement with respect to the Preferred Securities shall have been so cured, waived or otherwise eliminated, the Property Trustee shall act solely on behalf of the Preferred Securityholders and not the Common Securityholder, and only the Preferred Securityholders shall have the right to direct the Property Trustee to act on their behalf. SECTION 404. PAYMENT PROCEDURES. Payments of Distributions (including Additional Amounts, if applicable) in respect of the Preferred Securities shall be made by check mailed to the address of the Person entitled thereto as such address shall appear on the Securities Register. Payments in respect of the Common Securities shall be made in such manner as shall be mutually agreed between the Property Trustee and the Common Securityholder. SECTION 405. TAX RETURNS AND REPORTS. The Administrative Trustees shall prepare (or cause to be prepared), at the Depositor's expense, and file all United States federal, state and local tax and information returns and reports required to be filed by or in respect of the Trust. In this regard, the Administrative Trustees shall (a) prepare and file (or cause to be prepared and filed) the appropriate Internal Revenue Service Form required to be filed in respect of the Trust in each taxable year of the Trust; and (b) prepare and furnish (or cause to be prepared and furnished) to each Securityholder the appropriate Internal Revenue Service form required to be furnished to such Securityholder or the information required to be provided on such form. The Administrative Trustees shall provide the Depositor with a copy of all such returns and reports promptly after such filing or furnishing. The Property Trustee shall comply with United States federal withholding and backup withholding tax laws and information reporting requirements with respect to any payments to Securityholders under the Trust Securities. 16 22 SECTION 406. PAYMENT OF TAXES, DUTIES, ETC. OF THE TRUST. Upon receipt under the Debentures of Additional Payments (as defined in Section 1.1 of the Indenture), the Property Trustee, at the direction of an Administrative Trustee or the Depositor, shall promptly pay any taxes, duties or governmental charges of whatsoever nature (other than withholding taxes) imposed on the Trust by the United States or any other taxing authority. SECTION 407. PAYMENTS UNDER INDENTURE. Any amount payable hereunder to any Preferred Securityholder shall be reduced by the amount of any corresponding payment such Holder has directly received under the Indenture pursuant to Section 512(b) or (c) hereof. ARTICLE V TRUST SECURITIES CERTIFICATES SECTION 501. INITIAL OWNERSHIP. Upon the creation of the Trust and the contribution by the Depositor pursuant to Section 203 and until the issuance of the Trust Securities, and at any time during which no Trust Securities are outstanding, the Depositor shall be the sole beneficial owner of the Trust. SECTION 502. THE TRUST SECURITIES CERTIFICATES. The Preferred Securities Certificates shall be issued in minimum denominations of $25 Liquidation Amount and integral multiples of $25 in excess thereof, and the Common Securities Certificates shall be issued in denominations of $25 Liquidation Amount and integral multiples thereof. The Trust Securities Certificates shall be executed on behalf of the Trust by manual or facsimile signature of at least one Administrative Trustee. Trust Securities Certificates bearing the manual or facsimile signatures of individuals who were, at the time when such signatures shall have been affixed, authorized to sign on behalf of the Trust, shall be validly issued and entitled to the benefits of this Trust Agreement, notwithstanding that such individuals or any of them shall have ceased to be so authorized prior to the delivery of such Trust Securities Certificates or did not hold such offices at the date of delivery of such Trust Securities Certificates. A transferee of a Trust Securities Certificate shall become a Securityholder, and shall be entitled to the rights and subject to the obligations of a Securityholder hereunder, upon due registration of such Trust Securities Certificate in such transferee's name pursuant to Sections 504, 511 and 513. SECTION 503. EXECUTION, AUTHENTICATION AND DELIVERY OF TRUST SECURITIES CERTIFICATES. (a) On the Closing Date and, if applicable, the Option Closing Date, the Administrative Trustees shall cause Trust Securities Certificates, in an aggregate Liquidation Amount as provided in Sections 204 and 205, to be executed on behalf of the Trust by at least one of the Administrative Trustees and delivered to or upon the written order of the Depositor, signed by its Chief Executive Officer, President, any Vice President, the Treasurer or any Assistant Treasurer without further corporate action by the Depositor, in authorized denominations. (b) A Preferred Securities Certificate shall not be valid until authenticated by the manual signature of an authorized signatory of the Property Trustee. The signature shall be conclusive evidence that the Preferred Securities Certificate has been authenticated under this Trust Agreement. Each Preferred Security Certificate shall be dated the date of its authentication. Upon the written order of the Trust signed by the Administrative Trustee, the Property Trustee shall authenticate and make available for delivery the Preferred Securities Certificates. 17 23 The Property Trustee may appoint an Authenticating Agent acceptable to the Trust to authenticate the Preferred Securities. An Authenticating Agent may authenticate the Preferred Securities whenever the Property Trustee may do so. Each reference in this Trust Agreement to authentication by the Property Trustee includes authentication by such agent. An Authenticating Agent has the same rights as the Property Trustee to deal with the Company or the Trust. SECTION 504. REGISTRATION OF TRANSFER AND EXCHANGE OF PREFERRED SECURITIES CERTIFICATES. (a) The Depositor shall keep or cause to be kept, at the office or agency maintained pursuant to Section 508, a register or registers for the purpose of registering Trust Securities Certificates and transfers and exchanges of Preferred Securities Certificates (herein referred to as the "Securities Register") in which the registrar designated by the Depositor (the "Securities Registrar"), subject to such reasonable regulations as it may prescribe, shall provide for the registration of Preferred Securities Certificates and Common Securities Certificates (subject to Section 510 in the case of the Common Securities Certificates) and registration of transfers and exchanges of Preferred Securities Certificates as herein provided. The Property Trustee shall be the initial Securities Registrar. (b) Upon surrender for registration of transfer of any Preferred Securities Certificate at the office or agency maintained pursuant to Section 508, the Administrative Trustees or any one of them shall execute and deliver, in the name of the designated transferee or transferees, one or more new Preferred Securities Certificates in authorized denominations of a like aggregate Liquidation Amount dated the date of execution by such Administrative Trustee or Trustees. The Securities Registrar shall not be required to register the transfer of any Preferred Securities that have been called for redemption. At the option of a Holder, Preferred Securities Certificates may be exchanged for other Preferred Securities Certificates in authorized denominations of the same class and of a like aggregate Liquidation Amount upon surrender of the Preferred Securities Certificates to be exchanged at the office or agency maintained pursuant to Section 508. (c) Every Preferred Securities Certificate presented or surrendered for registration of transfer or exchange shall be accompanied by a written instrument of transfer in form satisfactory to the Property Trustee and the Securities Registrar duly executed by the Holder or his attorney duly authorized in writing. Each Preferred Securities Certificate surrendered for registration of transfer or exchange shall be canceled and subsequently disposed of by the Property Trustee in accordance with its customary practice. The Trust shall not be required to (i) issue, register the transfer of, or exchange any Preferred Securities during a period beginning at the opening of business 15 calendar days before the date of mailing of a notice of redemption of any Preferred Securities called for redemption and ending at the close of business on the day of such mailing; or (ii) register the transfer of or exchange any Preferred Securities so selected for redemption, in whole or in part, except the unredeemed portion of any such Preferred Securities being redeemed in part. (d) No service charge shall be made for any registration of transfer or exchange of Preferred Securities Certificates, but the Securities Registrar may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer or exchange of Preferred Securities Certificates. SECTION 505. MUTILATED, DESTROYED, LOST OR STOLEN TRUST SECURITIES CERTIFICATES. If (a) any mutilated Trust Securities Certificate shall be surrendered to the Securities Registrar, or if the Securities Registrar shall receive evidence to its satisfaction of the destruction, loss or theft of any Trust Securities Certificate, and (b) there shall be delivered to the Securities Registrar and the Administrative Trustees such security or indemnity as may be required by them to save each of them harmless, then in the absence of notice that such Trust Securities Certificate shall have been acquired by a bona fide purchaser, the Administrative Trustees, or any one of them, on behalf of the Trust shall execute and make available for delivery, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Trust Securities Certificate, a new Trust Securities Certificate of like class, 18 24 tenor and denomination. In connection with the issuance of any new Trust Securities Certificate under this Section 505, the Administrative Trustees or the Securities Registrar may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Any duplicate Trust Securities Certificate issued pursuant to this Section 505 shall constitute conclusive evidence of an undivided beneficial interest in the assets of the Trust, as if originally issued, whether or not the lost, stolen or destroyed Trust Securities Certificate shall be found at any time. SECTION 506. PERSONS DEEMED SECURITYHOLDERS. The Trustees, the Paying Agent and the Securities Registrar shall treat the Person in whose name any Trust Securities Certificate shall be registered in the Securities Register as the owner of such Trust Securities Certificate for the purpose of receiving Distributions and for all other purposes whatsoever, and neither the Trustees nor the Securities Registrar shall be bound by any notice to the contrary. SECTION 507. ACCESS TO LIST OF SECURITYHOLDERS' NAMES AND ADDRESSES. At any time when the Property Trustee is not also acting as the Securities Registrar, the Administrative Trustees or the Depositor shall furnish or cause to be furnished to the Property Trustee (a) semi-annually on or before January 15 and July 15 in each year, a list, in such form as the Property Trustee may reasonably require, of the names and addresses of the Securityholders as of the most recent record date; and (b) promptly after receipt by any Administrative Trustee or the Depositor of a request therefor from the Property Trustee in order to enable the Property Trustee to discharge its obligations under this Trust Agreement, in each case to the extent such information is in the possession or control of the Administrative Trustees or the Depositor and is not identical to a previously supplied list or has not otherwise been received by the Property Trustee in its capacity as Securities Registrar. The rights of Securityholders to communicate with other Securityholders with respect to their rights under this Trust Agreement or under the Trust Securities and the corresponding rights of the Trustee shall be as provided in the Trust Indenture Act. Each Holder, by receiving and holding a Trust Securities Certificate, and each owner shall be deemed to have agreed not to hold the Depositor, the Property Trustee or the Administrative Trustees accountable by reason of the disclosure of its name and address, regardless of the source from which such information was derived. SECTION 508. MAINTENANCE OF OFFICE OR AGENCY. The Administrative Trustees shall maintain in The City of New York or other location designated by the Administrative Trustees, an office or offices or agency or agencies where Preferred Securities Certificates may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Trustees in respect of the Trust Securities Certificates may be served. The Administrative Trustees initially designate the Corporate Trust Office of the Property Trustee, Two International Place, 4th Floor, Boston, Massachusetts 02110, as the principal corporate trust office for such purposes. The Administrative Trustees shall give prompt written notice to the Depositor and to the Securityholders of any change in the location of the Securities Register or any such office or agency. SECTION 509. APPOINTMENT OF PAYING AGENT. The Property Trustee shall act as the Paying Agent. The Paying Agent shall make Distributions to Securityholders from the Payment Account and shall report the amounts of such Distributions to the Property Trustee and the Administrative Trustees. Any Paying Agent shall have the revocable power to withdraw funds from the Payment Account for the purpose of making the Distributions referred to above. The Administrative Trustees may revoke such power and remove the Paying Agent if such Trustees determine in their sole discretion that the Paying Agent shall have failed to perform its obligations under this Trust Agreement in any material respect. The Paying Agent shall initially be the Property Trustee, and any co-paying agent chosen by the Property 19 25 Trustee, and acceptable to the Administrative Trustees and the Depositor. Any Person acting as Paying Agent shall be permitted to resign as Paying Agent upon 30 days' written notice to the Administrative Trustees, the Property Trustee and the Depositor. In the event that the Property Trustee shall no longer be the Paying Agent or a successor Paying Agent shall resign or its authority to act be revoked, the Administrative Trustees shall appoint a successor (which shall be a bank or trust company) that is acceptable to the Property Trustee and the Depositor to act as Paying Agent. The Administrative Trustees shall cause such successor Paying Agent or any additional Paying Agent appointed by the Administrative Trustees to execute and deliver to the Trustees an instrument in which such successor Paying Agent or additional Paying Agent shall agree with the Trustees that as Paying Agent, such successor Paying Agent or additional Paying Agent shall hold all sums, if any, held by it for payment to the Securityholders in trust for the benefit of the Securityholders entitled thereto until such sums shall be paid to such Securityholders. The Paying Agent shall return all unclaimed funds to the Property Trustee and, upon removal of a Paying Agent, such Paying Agent shall also return all funds in its possession to the Property Trustee. The provisions of Sections 801, 803 and 806 shall apply to the Property Trustee also in its role as Paying Agent, for so long as the Property Trustee shall act as Paying Agent and, to the extent applicable, to any other paying agent appointed hereunder. Any reference in this Agreement to the Paying Agent shall include any co-paying agent unless the context requires otherwise. SECTION 510. OWNERSHIP OF COMMON SECURITIES BY DEPOSITOR. On the Closing Date, the Depositor shall acquire and retain beneficial and record ownership of the Common Securities. To the fullest extent permitted by law, any attempted transfer of the Common Securities (other than a transfer in connection with a merger or consolidation of the Depositor into another corporation pursuant to Section 12.1 of the Indenture) shall be void. The Administrative Trustees shall cause each Common Securities Certificate issued to the Depositor to contain a legend stating "THIS CERTIFICATE IS NOT TRANSFERABLE." SECTION 511. PREFERRED SECURITIES CERTIFICATES. (a) Each owner shall receive a Preferred Securities Certificate representing such owner's interest in such Preferred Securities. Upon the issuance of Definitive Preferred Securities Certificates, the Trustees shall recognize the record holders of the Definitive Preferred Securities Certificates as Securityholders. The Definitive Preferred Securities Certificates shall be printed, lithographed or engraved or may be produced in any other manner as is reasonably acceptable to the Administrative Trustees, as evidenced by the execution thereof by the Administrative Trustees or any one of them. (b) A single Common Securities Certificate representing the Common Securities shall be issued to the Depositor in the form of a definitive Common Securities Certificate. SECTION 512. RIGHTS OF SECURITYHOLDERS. (a) The legal title to the Trust Property is vested exclusively in the Property Trustee (in its capacity as such) in accordance with Section 209, and the Securityholders shall not have any right or title therein other than the undivided beneficial interest in the assets of the Trust conferred by their Trust Securities, and they shall have no right to call for any partition or division of property, profits or rights of the Trust except as described below. The Trust Securities shall be personal property giving only the rights specifically set forth therein and in this Trust Agreement. The Trust Securities shall have no preemptive or similar rights. When issued and delivered to Preferred Securityholders against payment of the purchase price therefor, the Preferred Securities shall be fully paid and nonassessable interests in the Trust. The Preferred Securityholders, in their capacities as such, shall be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware. (b) For so long as any Preferred Securities remain Outstanding, if, upon a Debenture Event of Default, the Debenture Trustee fails or the holders of not less than 25% in principal amount 20 26 of the outstanding Debentures fail to declare the principal of all of the Debentures to be immediately due and payable, the Holders of at least 25% in Liquidation Amount of the Preferred Securities then Outstanding shall have such right by a notice in writing to the Depositor and the Debenture Trustee; and upon any such declaration such principal amount of and the accrued interest on all of the Debentures shall become immediately due and payable, provided that the payment of principal and interest on such Debentures shall remain subordinated to the extent provided in the Indenture. (c) For so long as any Preferred Securities remain outstanding, upon a Debenture Event of Default arising from the failure to pay interest or principal on the Debentures, the Holders of any Preferred Securities then Outstanding shall, to the fullest extent permitted by law, have the right to directly institute proceedings for enforcement of payment to such Holders of principal of or interest on the Debentures having a principal amount equal to the Liquidation Amount of the Preferred Securities of such Holders. ARTICLE VI ACTS OF SECURITYHOLDERS; MEETINGS; VOTING SECTION 601. LIMITATIONS ON VOTING RIGHTS. (a) Except as provided in this Section 601, in Sections 512, 810 and 1002 and in the Indenture and as otherwise required by law, no Preferred Securityholder shall have any right to vote or in any manner otherwise control the administration, operation and management of the Trust or the obligations of the parties hereto, nor shall anything herein set forth, or contained in the terms of the Trust Securities Certificates, be construed so as to constitute the Securityholders from time to time as partners or members of an association. (b) So long as any Debentures are held by the Property Trustee, the Trustees shall not (i) direct the time, method and place of conducting any proceeding for any remedy available to the Debenture Trustee, or executing any trust or power conferred on the Debenture Trustee with respect to such Debentures; (ii) waive any past default which is waivable under Article VII of the Indenture; (iii) exercise any right to rescind or annul a declaration that the principal of all the Debentures shall be due and payable; or (iv) consent to any amendment, modification or termination of the Indenture or the Debentures, where such consent shall be required, without, in each case, obtaining the prior approval of the Holders of at least a majority in Liquidation Amount of all Outstanding Preferred Securities; provided, however, that where a consent under the Indenture would require the consent of each Holder of Outstanding Debentures affected thereby, no such consent shall be given by the Property Trustee without the prior written consent of each Preferred Securityholder. The Trustees shall not revoke any action previously authorized or approved by a vote of the Preferred Securityholders, except by a subsequent vote of the Preferred Securityholders. The Property Trustee shall notify each Preferred Securityholder of any notice of default received from the Debenture Trustee with respect to the Debentures. In addition to obtaining the foregoing approvals of the Preferred Securityholders, prior to taking any of the foregoing actions, the Trustees shall, at the expense of the Depositor, obtain an Opinion of Counsel experienced in such matters to the effect that the Trust shall continue to be classified as a grantor trust and not as an association taxable as a corporation for United States federal income tax purposes on account of such action. (c) If any proposed amendment to the Trust Agreement provides for, or the Trustees otherwise propose to effect, (i) any action that would adversely affect in any material respect the powers, preferences or special rights of the Preferred Securities, whether by way of amendment to the Trust Agreement or otherwise; or (ii) the dissolution, winding-up or termination of the Trust, other than pursuant to the terms of this Trust Agreement, then the Holders of Outstanding Preferred Securities as a class shall be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of the Holders of at least a majority in Liquidation Amount of the Outstanding Preferred Securities. No amendment to this Trust Agreement may be made if, as a result of such amendment, the Trust would cease to be classified as a 21 27 grantor trust or would be classified as an association taxable as a corporation for United States federal income tax purposes. SECTION 602. NOTICE OF MEETINGS. Notice of all meetings of the Preferred Securityholders, stating the time, place and purpose of the meeting, shall be given by the Property Trustee pursuant to Section 1008 to each Preferred Securityholder of record, at his registered address, at least 15 days and not more than 90 days before the meeting. At any such meeting, any business properly before the meeting may be so considered whether or not stated in the notice of the meeting. Any adjourned meeting may be held as adjourned without further notice. SECTION 603. MEETINGS OF PREFERRED SECURITYHOLDERS. (a) No annual meeting of Securityholders is required to be held. The Administrative Trustees, however, shall call a meeting of Securityholders to vote on any matter in respect of which Preferred Securityholders are entitled to vote upon the written request of the Preferred Securityholders of 25% of the Outstanding Preferred Securities (based upon their aggregate Liquidation Amount) and the Administrative Trustees or the Property Trustee may, at any time in their discretion, call a meeting of Preferred Securityholders to vote on any matters as to which the Preferred Securityholders are entitled to vote. (b) Preferred Securityholders of record of 50% of the Outstanding Preferred Securities (based upon their aggregate Liquidation Amount), present in person or by proxy, shall constitute a quorum at any meeting of Securityholders. (c) If a quorum is present at a meeting, an affirmative vote by the Preferred Securityholders of record present, in person or by proxy, holding more than a majority of the Preferred Securities (based upon their aggregate Liquidation Amount) held by the Preferred Securityholders of record present, either in person or by proxy, at such meeting shall constitute the action of the Securityholders, unless this Trust Agreement requires a greater number of affirmative votes. SECTION 604. VOTING RIGHTS. Securityholders shall be entitled to one vote for each $25 of Liquidation Amount represented by their Trust Securities in respect of any matter as to which such Securityholders are entitled to vote. SECTION 605. PROXIES, ETC. At any meeting of Securityholders, any Securityholder entitled to vote thereat may vote by proxy, provided that no proxy shall be voted at any meeting unless it shall have been placed on file with the Administrative Trustees, or with such other officer or agent of the Trust as the Administrative Trustees may direct, for verification prior to the time at which such vote shall be taken. When Trust Securities are held jointly by several persons, any one of them may vote at any meeting in person or by proxy in respect of such Trust Securities, but if more than one of them shall be present at such meeting in person or by proxy, and such joint owners or their proxies so present disagree as to any vote to be cast, such vote shall not be received in respect of such Trust Securities. A proxy purporting to be executed by or on behalf of a Securityholder shall be deemed valid unless challenged at or prior to its exercise, and, the burden of proving invalidity shall rest on the challenger. No proxy shall be valid more than three years after its date of execution. SECTION 606. SECURITYHOLDER ACTION BY WRITTEN CONSENT. Any action which may be taken by Securityholders at a meeting may be taken without a meeting if Securityholders holding more than a majority of all Outstanding Trust Securities (based upon their aggregate Liquidation Amount) entitled to vote in respect of such action (or such larger 22 28 proportion thereof as shall be required by any express provision of this Trust Agreement) shall consent to the action in writing (based upon their aggregate Liquidation Amount). SECTION 607. RECORD DATE FOR VOTING AND OTHER PURPOSES. For the purposes of determining the Securityholders who are entitled to notice of and to vote at any meeting or by written consent, or to participate in any Distribution on the Trust Securities in respect of which a record date is not otherwise provided for in this Trust Agreement, or for the purpose of any other action, the Administrative Trustees may from time to time fix a date, not more than 90 days prior to the date of any meeting of Securityholders or the payment of Distribution or other action, as the case may be, as a record date for the determination of the identity of the Securityholders of record for such purposes. SECTION 608. ACTS OF SECURITYHOLDERS. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Trust Agreement to be given, made or taken by Securityholders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Securityholders in person or by an agent duly appointed in writing; and, except as otherwise expressly provided herein, such action shall become effective when such instrument or instruments are delivered to an Administrative Trustee. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Securityholders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Trust Agreement and (subject to Section 801) conclusive in favor of the Trustees, if made in the manner provided in this Section 608. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which any Trustee receiving the same deems sufficient. (c) The ownership of Preferred Securities shall be proved by the Securities Register. (d) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Securityholder of any Trust Security shall bind every future Securityholder of the same Trust Security and the Securityholder of every Trust Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustees or the Trust in reliance thereon, whether or not notation of such action is made upon such Trust Security. (e) Without limiting the foregoing, a Securityholder entitled hereunder to take any action hereunder with regard to any particular Trust Security may do so with regard to all or any part of the Liquidation Amount of such Trust Security or by one or more duly appointed agents, each of which may do so pursuant to such appointment with regard to all or any part of such liquidation amount. (f) A Securityholder may institute a legal proceeding directly against the Depositor under the Guarantee to enforce its rights under the Guarantee without first instituting a legal proceeding against the Guarantee Trustee (as defined in the Guarantee), the Trust or any Person. 23 29 SECTION 609. INSPECTION OF RECORDS. Upon reasonable notice to the Administrative Trustees and the Property Trustee, the records of the Trust shall be open to inspection and copying by Securityholders and their authorized representatives during normal business hours for any purpose reasonably related to such Securityholder's interest as a Securityholder. ARTICLE VII REPRESENTATIONS AND WARRANTIES SECTION 701. REPRESENTATIONS AND WARRANTIES OF THE BANK AND THE PROPERTY TRUSTEE. The Bank and the Property Trustee, each severally on behalf of and as to itself, as of the date hereof, and each Successor Property Trustee at the time of the Successor Property Trustee's acceptance of its appointment as Property Trustee hereunder (the term "Bank" being used to refer to such Successor Property Trustee in its separate corporate capacity) hereby represents and warrants (as applicable) for the benefit of the Depositor and the Securityholders that: (a) the Bank is a trust company duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts; (b) the Bank has full corporate power, authority and legal right to execute, deliver and perform its obligations under this Trust Agreement and has taken all necessary action to authorize the execution, delivery and performance by it of this Trust Agreement; (c) this Trust Agreement has been duly authorized, executed and delivered by the Property Trustee and constitutes the valid and legally binding agreement of the Property Trustee enforceable against it in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors, rights and to general equity principles; (d) the execution, delivery and performance by the Property Trustee of this Trust Agreement has been duly authorized by all necessary corporate or other action on the part of the Property Trustee and does not require any approval of stockholders of the Bank, and such execution, delivery and performance shall not (i) violate the Bank's charter or by-laws; (ii) violate any provision of, or constitute, with or without notice or lapse of time, a default under, or result in the creation or imposition of, any Lien on any properties included in the Trust Property pursuant to the provisions of, any indenture, mortgage, credit agreement, license or other agreement or instrument to which the Property Trustee or the Bank is a party or by which it is bound; or (iii) violate any law, governmental rule or regulation of the United States or the Commonwealth of Massachusetts, as the case may be, governing the banking or trust powers of the Bank or the Property Trustee (as appropriate in context) or any order, judgment or decree applicable to the Property Trustee or the Bank; (e) neither the authorization, execution or delivery by the Property Trustee of this Trust Agreement nor the consummation of any of the transactions by the Property Trustee contemplated herein or therein requires the consent or approval of, the giving of notice to, the registration with or the taking of any other action with respect to any governmental authority or agency under any existing federal law governing the banking or trust powers of the Bank or the Property Trustee, as the case may be, under the laws of the United States or the Commonwealth of Massachusetts; and (f) there are no proceedings pending or, to the best of the Property Trustee's knowledge, threatened against or affecting the Bank or the Property Trustee in any court or before any governmental authority, agency or arbitration board or tribunal which, individually or in the aggregate, would materially and adversely affect the Trust or would question the right, power and 24 30 authority of the Property Trustee to enter into or perform its obligations as one of the Trustees under this Trust Agreement. SECTION 702. REPRESENTATIONS AND WARRANTIES OF THE DELAWARE BANK AND THE DELAWARE TRUSTEE. The Delaware Bank and the Delaware Trustee, each severally on behalf of and as to itself, as of the date hereof, and each Successor Delaware Trustee at the time of the Successor Delaware Trustee's acceptance of appointment as Delaware Trustee hereunder (the term "Delaware Bank" being used to refer to such Successor Delaware Trustee in its separate corporate capacity), hereby represents and warrants (as applicable) for the benefit of the Depositor and the Securityholders that: (a) the Delaware Bank is a Delaware banking corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; (b) the Delaware Bank has full corporate power, authority and legal right to execute, deliver and perform its obligations under this Trust Agreement and has taken all necessary action to authorize the execution, delivery and performance by it of this Trust Agreement; (c) this Trust Agreement has been duly authorized, executed and delivered by the Delaware Trustee and constitutes the valid and legally binding agreement of the Delaware Trustee enforceable against it in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors, rights and to general equity principles; (d) the execution, delivery and performance by the Delaware Trustee of this Trust Agreement has been duly authorized by all necessary corporate or other action on the part of the Delaware Trustee and does not require any approval of stockholders of the Delaware Bank, and such execution, delivery and performance shall not (i) violate the Delaware Bank's charter or by-laws; (ii) violate any provision of, or constitute, with or without notice or lapse of time, a default under, or result in the creation or imposition of, any Lien on any properties included in the Trust Property pursuant to the provisions of, any indenture, mortgage, credit agreement, license or other agreement or instrument to which the Delaware Bank or the Delaware Trustee is a party or by which it is bound; or (iii) violate any law, governmental rule or regulation of the United States or the State of Delaware, as the case may be, governing the banking or trust powers of the Delaware Bank or the Delaware Trustee (as appropriate in context) or any order, judgment or decree applicable to the Delaware Bank or the Delaware Trustee; (e) neither the authorization, execution or delivery by the Delaware Trustee of this Trust Agreement nor the consummation of any of the transactions by the Delaware Trustee contemplated herein or therein requires the consent or approval of, the giving of notice to, the registration with or the taking of any other action with respect to any governmental authority or agency under any existing federal law governing the banking or trust powers of the Delaware Bank or the Delaware Trustee, as the case may be, under the laws of the United States or the State of Delaware; and (f) there are no proceedings pending or, to the best of the Delaware Trustee's knowledge, threatened against or affecting the Delaware Bank or the Delaware Trustee in any court or before any governmental authority, agency or arbitration board or tribunal which, individually or in the aggregate, would materially and adversely affect the Trust or would question the right, power and authority of the Delaware Trustee to enter into or perform its obligations as one of the Trustees under this Trust Agreement. SECTION 703. REPRESENTATIONS AND WARRANTIES OF THE DEPOSITOR. The Depositor hereby represents and warrants for the benefit of the Securityholders that: 25 31 (a) the Trust Securities Certificates issued on the Closing Date or the Option Closing Date, if applicable, on behalf of the Trust have been duly authorized and shall have been duly and validly executed, issued and delivered by the Administrative Trustees pursuant to the terms and provisions of, and in accordance with the requirements of, this Trust Agreement, and the Securityholders shall be, as of such date, entitled to the benefits of this Trust Agreement; and (b) there are no taxes, fees or other governmental charges payable by the Trust (or the Trustees on behalf of the Trust) under the laws of the State of Delaware or any political subdivision thereof in connection with the execution, delivery and performance by the Bank, the Property Trustee or the Delaware Trustee, as the case may be, of this Trust Agreement. ARTICLE VIII TRUSTEES SECTION 801. CERTAIN DUTIES AND RESPONSIBILITIES. (a) The duties and responsibilities of the Trustees shall be as provided by this Trust Agreement and, in the case of the Property Trustee, by the Trust Indenture Act. Notwithstanding the foregoing, no provision of this Trust Agreement shall require the Trustees to expend or risk their own funds or otherwise incur any financial liability in the performance of any of their duties hereunder, or in the exercise of any of their rights or powers, if they shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. No Administrative Trustee nor the Delaware Trustee shall be liable for its act or omissions hereunder except as a result of its own gross negligence or willful misconduct. The Property Trustee's liability shall be determined under the Trust Indenture Act. Whether or not therein expressly so provided, every provision of this Trust Agreement relating to the conduct or affecting the liability of or affording protection to the Trustees shall be subject to the provisions of this Section 801. To the extent that, at law or in equity, the Delaware Trustee or an Administrative Trustee has duties (including fiduciary duties) and liabilities relating thereto to the Trust or to the Securityholders, the Delaware Trustee or such Administrative Trustee shall not be liable to the Trust or to any Securityholder for such Trustee's good faith reliance on the provisions of this Trust Agreement. The provisions of this Trust Agreement, to the extent that they restrict the duties and liabilities of the Delaware Trustee or the Administrative Trustees otherwise existing at law or in equity, are agreed by the Depositor and the Securityholders to replace such other duties and liabilities of the Delaware Trustee and the Administrative Trustees, as the case may be. (b) All payments made by the Property Trustee or a Paying Agent in respect of the Trust Securities shall be made only from the revenue and proceeds from the Trust Property and only to the extent that there shall be sufficient revenue or proceeds from the Trust Property to enable the Property Trustee or a Paying Agent to make payments in accordance with the terms hereof. With respect to the relationship of each Securityholder and the Trustee, each Securityholder, by its acceptance of a Trust Security, agrees that it shall look solely to the revenue and proceeds from the Trust Property to the extent legally available for distribution to it as herein provided and that the Trustees are not personally liable to it for any amount distributable in respect of any Trust Security or for any other liability in respect of any Trust Security. This Section 801(b) does not limit the liability of the Trustees expressly set forth elsewhere in this Trust Agreement or, in the case of the Property Trustee, in the Trust Indenture Act. (c) No provision of this Trust Agreement shall be construed to relieve the Property Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) the Property Trustee shall not be liable for any error of judgment made in good faith by an authorized officer of the Property Trustee, unless it shall be proved that the Property Trustee was negligent in ascertaining the pertinent facts; 26 32 (ii) the Property Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a majority in Liquidation Amount of the Trust Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Property Trustee, or exercising any trust or power conferred upon the Property Trustee under this Trust Agreement; (iii) the Property Trustee's sole duty with respect to the custody, safe keeping and physical preservation of the Debentures and the Payment Account shall be to deal with such Property in a similar manner as the Property Trustee deals with similar property for its own account, subject to the protections and limitations on liability afforded to the Property Trustee under this Trust Agreement and the Trust Indenture Act; (iv) the Property Trustee shall not be liable for any interest on any money received by it except as it may otherwise agree with the Depositor and money held by the Property Trustee need not be segregated from other funds held by it except in relation to the Payment Account maintained by the Property Trustee pursuant to Section 301 and except to the extent otherwise required by law; and (v) the Property Trustee shall not be responsible for monitoring the compliance by the Administrative Trustees or the Depositor with their respective duties under this Trust Agreement, nor shall the Property Trustee be liable for the negligence, default or misconduct of the Administrative Trustees or the Depositor. SECTION 802. CERTAIN NOTICES. (a) Within 5 Business Days after the occurrence of any Event of Default actually known to the Property Trustee, the Property Trustee shall transmit, in the manner and to the extent provided in Section 1008, notice of such Event of Default to the Securityholders, the Administrative Trustees and the Depositor, unless such Event of Default shall have been cured or waived. For purposes of this Section 802 the term "Event of Default" means any event that is, or after notice or lapse of time or both would become, an Event of Default. (b) The Administrative Trustees shall transmit to the Securityholders, in the manner and to the extent provided in Section 1008, notice of the Depositor's election to begin or further extend an Extended Interest Payment Period on the Debentures (unless such election shall have been revoked) within the time specified for transmitting such notice to the holders of the Debentures pursuant to the Indenture as originally executed. SECTION 803. CERTAIN RIGHTS OF PROPERTY TRUSTEE. Subject to the provisions of Section 801: (a) the Property Trustee may rely and shall be protected in acting or refraining from acting in good faith upon any resolution, Opinion of Counsel, certificate, written representation of a Holder or transferee, certificate of auditors or any other certificate, statement, instrument, opinion, report, notice, request, consent, order, appraisal, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) if (i) in performing its duties under this Trust Agreement the Property Trustee is required to decide between alternative courses of action; or (ii) in construing any of the provisions of this Trust Agreement the Property Trustee finds the same ambiguous or inconsistent with other provisions contained herein; or (iii) the Property Trustee is unsure of the application of any provision of this Trust Agreement, then, except as to any matter as to which the Preferred Securityholders are entitled to vote under the terms of this Trust Agreement, the Property Trustee shall deliver a notice to 27 33 the Depositor requesting written instructions of the Depositor as to the course of action to be taken, and the Property Trustee shall take such action, or refrain from taking such action, as the Property Trustee shall be instructed in writing to take, or to refrain from taking, by the Depositor; provided, however, that if the Property Trustee does not receive such instructions of the Depositor within 10 Business Days after it has delivered such notice, or such reasonably shorter period of time set forth in such notice (which to the extent practicable shall not be less than 2 Business Days), it may, but shall be under no duty to, take or refrain from taking such action not inconsistent with this Trust Agreement as it shall deem advisable and in the best interests of the Securityholders, in which event the Property Trustee shall have no liability except for its own bad faith, negligence or willful misconduct; (c) any direction or act of the Depositor or the Administrative Trustees contemplated by this Trust Agreement shall be sufficiently evidenced by an Officers' Certificate; (d) whenever in the administration of this Trust Agreement, the Property Trustee shall deem it desirable that a matter be established before undertaking, suffering or omitting any action hereunder, the Property Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and conclusively rely upon an Officer's Certificate which, upon receipt of such request, shall be promptly delivered by the Depositor or the Administrative Trustees; (e) the Property Trustee shall have no duty to see to any recording, filing or registration of any instrument (including any financing or continuation statement or, except as provided in Section 405, any filing under tax or securities laws) or any rerecording, refiling or reregistration thereof; (f) the Property Trustee may consult with counsel of its choice (which counsel may be counsel to the Depositor or any of its Affiliates), and the advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon and, in accordance with such advice, such counsel may be counsel to the Depositor or any of its Affiliates, and may include any of its employees; the Property Trustee shall have the right at any time to seek instructions concerning the administration of this Trust Agreement from any court of competent jurisdiction; (g) the Property Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Trust Agreement at the request or direction of any of the Securityholders pursuant to this Trust Agreement, unless such Securityholders shall have offered to the Property Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (h) the Property Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, note or other evidence of indebtedness or other paper or document, unless requested in writing to do so by one or more Securityholders, but the Property Trustee may make such further inquiry or investigation into such facts or matters as it may see fit; (i) the Property Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through its agents or attorneys, provided that the Property Trustee shall be responsible for its own negligence or recklessness with respect to selection of any agent or attorney appointed by it hereunder; (j) whenever in the administration of this Trust Agreement the Property Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder, the Property Trustee (i) may request instructions from the Holders of the Trust Securities which instructions may only be given by the Holders of the same proportion in Liquidation Amount of the Trust Securities as would be entitled to direct the Property Trustee under 28 34 the terms of the Trust Securities in respect of such remedy, right or action; (ii) may refrain from enforcing such remedy or right or taking such other action until such instructions are received; and (iii) shall be protected in acting in accordance with such instructions; and (k) except as otherwise expressly provided by this Trust Agreement, the Property Trustee shall not be under any obligation to take any action that is discretionary under the provisions of this Trust Agreement. No provision of this Trust Agreement shall be deemed to impose any duty or obligation on the Property Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it, in any jurisdiction in which it shall be illegal, or in which the Property Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts, or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Property Trustee shall be construed to be a duty. SECTION 804. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF SECURITIES. The Recitals contained herein and in the Trust Securities Certificates shall be taken as the statements of the Trust, and the Trustees do not assume any responsibility for their correctness. The Trustees shall not be accountable for the use or application by the Depositor of the proceeds of the Debentures. SECTION 805. MAY HOLD SECURITIES. Any Trustee or any other agent of any Trustee or the Trust, in its individual or any other capacity, may become the owner or pledgee of Trust Securities and, subject to Sections 808 and 813 and except as provided in the definition of the term "Outstanding" in Article I, may otherwise deal with the Trust with the same rights it would have if it were not a Trustee or such other agent. 29 35 SECTION 806. COMPENSATION; INDEMNITY; FEES. The Depositor agrees: (a) to pay to the Trustees from time to time reasonable compensation for all services rendered by them hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (b) except as otherwise expressly provided herein, to reimburse the Trustees upon request for all reasonable expenses, disbursements and advances incurred or made by the Trustees in accordance with any provision of this Trust Agreement (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to such Trustee's negligence, bad faith or willful misconduct (or, in the case of the Administrative Trustees or the Delaware Trustee, any such expense, disbursement or advance as may be attributable to its, his or her gross negligence, bad faith or willful misconduct); and (c) to indemnify each of the Trustees or any predecessor Trustee for, and to hold the Trustees harmless against, any loss, damage, claims, liability, penalty or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this Trust Agreement, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder, except any such expense, disbursement or advance as may be attributable to such Trustee's negligence, bad faith or willful misconduct (or, in the case of the Administrative Trustees or the Delaware Trustee, any such expense, disbursement or advance as may be attributable to its, his or her gross negligence, bad faith or willful misconduct). No Trustee may claim any Lien or charge on Trust Property as a result of any amount due pursuant to this Section 806. SECTION 807. CORPORATE PROPERTY TRUSTEE REQUIRED; ELIGIBILITY OF TRUSTEES. (a) There shall at all times be a Property Trustee hereunder with respect to the Trust Securities. The Property Trustee shall be a Person that is eligible pursuant to the Trust Indenture Act to act as such and has a combined capital and surplus of at least $50,000,000. If any such Person publishes reports of condition at least annually, pursuant to law or to the requirements of its supervising or examining authority, then for the purposes of this Section 807, the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Property Trustee with respect to the Trust Securities shall cease to be eligible in accordance with the provisions of this Section 807, it shall resign immediately in the manner and with the effect hereinafter specified in this Article VIII. (b) There shall at all times be one or more Administrative Trustees hereunder with respect to the Trust Securities. Each Administrative Trustee shall be either a natural person who is at least 21 years of age or a legal entity that shall act through one or more persons authorized to bind that entity. (c) There shall at all times be a Delaware Trustee with respect to the Trust Securities. The Delaware Trustee shall either be (i) a natural person who is at least 21 years of age and a resident of the State of Delaware; or (ii) a legal entity with its principal place of business in the State of Delaware and that otherwise meets the requirements of applicable Delaware law that shall act through one or more persons authorized to bind such entity. 30 36 SECTION 808. CONFLICTING INTERESTS. If the Property Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Property Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Trust Agreement. SECTION 809. CO-TRUSTEES AND SEPARATE TRUSTEE. (a) Unless an Event of Default shall have occurred and be continuing, at any time or times, for the purpose of meeting the legal requirements of the Trust Indenture Act or of any jurisdiction in which any part of the Trust Property may at the time be located, the Depositor shall have power to appoint, and upon the written request of the Property Trustee, the Depositor shall for such purpose join with the Property Trustee in the execution, delivery and performance of all instruments and agreements necessary or proper to appoint, one or more Persons approved by the Property Trustee either to act as co-trustee, jointly with the Property Trustee, of all or any part of such Trust Property, or to the extent required by law to act as separate trustee of any such property, in either case with such powers as may be provided in the instrument of appointment, and to vest in such Person or Persons in the capacity aforesaid, any property, title, right or power deemed necessary or desirable, subject to the other provisions of this Section 809. If the Depositor does not join in such appointment within 15 days after the receipt by it of a request so to do, or in case a Debenture Event of Default has occurred and is continuing, the Property Trustee alone shall have power to make such appointment. Any co-trustee or separate trustee appointed pursuant to this Section 809 shall either be (i) a natural person who is at least 21 years of age and a resident of the United States; or (ii) a legal entity with its principal place of business in the United States that shall act through one or more persons authorized to bind such entity. (b) Should any written instrument from the Depositor be required by any co-trustee or separate trustee so appointed for more fully confirming to such co-trustee or separate trustee such property, title, right, or power, any and all such instruments shall, on request, be executed, acknowledged, and delivered by the Depositor. (c) Every co-trustee or separate trustee shall, to the extent permitted by law, but to such extent only, be appointed subject to the following terms, namely: (i) The Trust Securities shall be executed and delivered and all rights, powers, duties and obligations hereunder in respect of the custody of securities, cash and other personal property held by, or required to be deposited or pledged with, the Trustees specified hereunder, shall be exercised, solely by such Trustees and not by such co-trustee or separate trustee. (ii) The rights, powers, duties and obligations hereby conferred or imposed upon the Property Trustee in respect of any property covered by such appointment shall be conferred or imposed upon and exercised or performed by the Property Trustee or by the Property Trustee and such co-trustee or separate trustee jointly, as shall be provided in the instrument appointing such co-trustee or separate trustee, except to the extent that under any law of any jurisdiction in which any particular act is to be performed, the Property Trustee shall be incompetent or unqualified to perform such act, in which event such rights, powers, duties and obligations shall be exercised and performed by such co-trustee or separate trustee. (iii) The Property Trustee at any time, by an instrument in writing executed by it, with the written concurrence of the Depositor, may accept the resignation of or remove any co-trustee or separate trustee appointed under this Section 809, and, in case a Debenture Event of Default has occurred and is continuing, the Property Trustee shall have the power to accept the resignation of, or remove, any such co-trustee or separate trustee without the concurrence of the Depositor. Upon the written request of the Property Trustee, the Depositor shall join with the Property Trustee in the execution, delivery and performance of all instruments and agreements necessary or proper to 31 37 effectuate such resignation or removal. A successor to any co-trustee or separate trustee so resigned or removed may be appointed in the manner provided in this Section 809. (iv) No co-trustee or separate trustee hereunder shall be personally liable by reason of any act or omission of the Property Trustee or any other trustee hereunder. (v) The Property Trustee shall not be liable by reason of any act of a co-trustee or separate trustee. (vi) Any Act of Holders delivered to the Property Trustee shall be deemed to have been delivered to each such co-trustee and separate trustee. SECTION 810. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR. (a) No resignation or removal of any Trustee (the "Relevant Trustee") and no appointment of a successor Trustee pursuant to this Article VIII shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 811. (b) Subject to the immediately preceding paragraph, the Relevant Trustee may resign at any time with respect to the Trust Securities by giving written notice thereof to the Securityholders. If the instrument of acceptance by the successor Trustee required by Section 811 shall not have been delivered to the Relevant Trustee within 30 days after the giving of such notice of resignation, the Relevant Trustee may petition, at the expense of the Depositor, any court of competent jurisdiction for the appointment of a successor Relevant Trustee with respect to the Trust Securities. (c) Unless a Debenture Event of Default shall have occurred and be continuing, any Trustee may be removed at any time by Act of the Common Securityholder. If a Debenture Event of Default shall have occurred and be continuing, the Property Trustee or the Delaware Trustee, or both of them, may be removed at such time by Act of the Holders of a majority in Liquidation Amount of the Preferred Securities, delivered to the Relevant Trustee (in its individual capacity and on behalf of the Trust). An Administrative Trustee may be removed by the Common Securityholder at any time. (d) If any Trustee shall resign, be removed or become incapable of acting as Trustee, or if a vacancy shall occur in the office of any Trustee for any cause, at a time when no Debenture Event of Default shall have occurred and be continuing, the Common Securityholder, by Act of the Common Securityholder delivered to the retiring Trustee, shall promptly appoint a successor Trustee or Trustees with respect to the Trust Securities and the Trust, and the successor Trustee shall comply with the applicable requirements of Section 811. If the Property Trustee or the Delaware Trustee shall resign, be removed or become incapable of continuing to act as the Property Trustee or the Delaware Trustee, as the case may be, at a time when a Debenture Event of Default shall have occurred and is continuing, the Preferred Securityholders, by Act of the Securityholders of a majority in Liquidation Amount of the Preferred Securities then Outstanding delivered to the retiring Relevant Trustee, shall promptly appoint a successor Relevant Trustee or Trustees with respect to the Trust Securities and the Trust, and such successor Trustee shall comply with the applicable requirements of Section 811. If an Administrative Trustee shall resign, be removed or become incapable of acting as Administrative Trustee, at a time when a Debenture Event of Default shall have occurred and be continuing, the Common Securityholder, by Act of the Common Securityholder delivered to an Administrative Trustee, shall promptly appoint a successor Administrative Trustee or Administrative Trustees with respect to the Trust Securities and the Trust, and such successor Administrative Trustee or Administrative Trustees shall comply with the applicable requirements of Section 811. If no successor Relevant Trustee with respect to the Trust Securities shall have been so appointed by the Common Securityholder or the Preferred Securityholders and accepted appointment in the manner required by Section 811, any Securityholder who has been a Securityholder of Trust Securities on behalf of himself and all others similarly situated may petition a court of competent jurisdiction for the appointment Trustee with respect to the Trust Securities. 32 38 (e) The Property Trustee shall give notice of each resignation and each removal of a Trustee and each appointment of a successor Trustee to all Securityholders in the manner provided in Section 1008 and shall give notice to the Depositor. Each notice shall include the name of the successor Relevant Trustee and the address of its Corporate Trust Office if it is the Property Trustee. (f) Notwithstanding the foregoing or any other provision of this Trust Agreement, in the event any Administrative Trustee or a Delaware Trustee who is a natural person dies or becomes, in the opinion of the Depositor, incompetent or incapacitated, the vacancy created by such death, incompetence or incapacity may be filled by (a) the unanimous act of remaining Administrative Trustees if there are at least two of them; or (b) otherwise by the Depositor (with the successor in each case being a Person who satisfies the eligibility requirement for Administrative Trustees set forth in Section 807). SECTION 811. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR. (a) In case of the appointment hereunder of a successor Relevant Trustee with respect to the Trust Securities and the Trust, the retiring Relevant Trustee and each successor Relevant Trustee with respect to the Trust Securities shall execute and deliver an instrument hereto wherein each successor Relevant Trustee shall accept such appointment and which shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each successor Relevant Trustee all the rights, powers, trusts and duties of the retiring Relevant Trustee with respect to the Trust Securities and the Trust and upon the execution and delivery of such instrument the resignation or removal of the retiring Relevant Trustee shall become effective to the extent provided therein and each such successor Relevant Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Relevant Trustee with respect to the Trust Securities and the Trust; but, on request of the Trust or any successor Relevant Trustee such retiring Relevant Trustee shall duly assign, transfer and deliver to such successor Relevant Trustee all Trust Property, all proceeds thereof and money held by such retiring Relevant Trustee hereunder with respect to the Trust Securities and the Trust. (b) Upon request of any such successor Relevant Trustee, the Trust shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Relevant Trustee all such rights, powers and trusts referred to in the immediately preceding paragraph, as the case may be. (c) No successor Relevant Trustee shall accept its appointment unless at the time of such acceptance such successor Relevant Trustee shall be qualified and eligible under this Article VIII. SECTION 812. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS. Any Person into which the Property Trustee, the Delaware Trustee or any Administrative Trustee may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which such Relevant Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of such Relevant Trustee, shall be the successor of such Relevant Trustee hereunder, provided such Person shall be otherwise qualified and eligible under this Article VIII, without the execution or filing of any paper or any further act on the part of any of the parties hereto. SECTION 813. PREFERENTIAL COLLECTION OF CLAIMS AGAINST DEPOSITOR OR TRUST. If and when the Property Trustee or the Delaware Trustee shall be or become a creditor of the Depositor or the Trust (or any other obligor upon the Debentures or the Trust Securities), the Property Trustee or the Delaware Trustee, as the case may be, shall be subject to and shall take all actions necessary in order to comply with the provisions of the Trust Indenture Act regarding the collection of claims against the Depositor or Trust (or any such other obligor). 33 39 SECTION 814. REPORTS BY PROPERTY TRUSTEE. (a) Not later than July 15 of each year commencing with July 15, 1999, the Property Trustee shall transmit to all Securityholders in accordance with Section 1008, and to the Depositor, a brief report dated as of such May 15 with respect to: (i) its eligibility under Section 807 or, in lieu thereof, if to the best of its knowledge it has continued to be eligible under said Section, a written statement to such effect; and (ii) any change in the property and funds in its possession as Property Trustee since the date of its last report and any action taken by the Property Trustee in the performance of its duties hereunder which it has not previously reported and which in its opinion materially affects the Trust Securities. (b) In addition the Property Trustee shall transmit to Securityholders such reports concerning the Property Trustee and its actions under this Trust Agreement as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. (c) A copy of each such report shall, at the time of such transmission to Holders, be filed by the Property Trustee with each national securities exchange or other organization upon which the Trust Securities are listed, and also with the Commission and the Depositor. SECTION 815. REPORTS TO THE PROPERTY TRUSTEE. The Depositor and the Administrative Trustees on behalf of the Trust shall provide to the Property Trustee such documents, reports and information as required by Section 314 of the Trust Indenture Act (if any) and the compliance certificate required by Section 314(a) of the Trust Indenture Act in the form, in the manner and at the times required by Section 314 of the Trust Indenture Act. SECTION 816. EVIDENCE OF COMPLIANCE WITH CONDITIONS PRECEDENT. Each of the Depositor and the Administrative Trustees on behalf of the Trust shall provide to the Property Trustee such evidence of compliance with any conditions precedent, if any, provided for in this Trust Agreement that relate to any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c)(1) of the Trust Indenture Act shall be given in the form of an Officers' Certificate. SECTION 817. NUMBER OF TRUSTEES. (a) The number of Trustees shall be five, provided that the Common Securityholder by written instrument may increase or decrease the number of Administrative Trustees. The Property Trustee and the Delaware Trustee may be the same Person. (b) If a Trustee ceases to hold office for any reason and the number of Administrative Trustees is not reduced pursuant to Section 817(a), or if the number of Trustees is increased pursuant to Section 817(a), a vacancy shall occur. The vacancy shall be filled with a Trustee appointed in accordance with Section 810. (c) The death, resignation, retirement, removal, bankruptcy, incompetence or incapacity to perform the duties of a Trustee shall not operate to annul the Trust. Whenever a vacancy in the number of Administrative Trustees shall occur, until such vacancy is filled by the appointment of an Administrative Trustee in accordance with Section 810, the Administrative Trustees in office, regardless of their number (and notwithstanding any other provision of this Agreement), shall have all the powers granted to the Administrative Trustees and shall discharge all the duties imposed upon the Administrative Trustees by this Trust Agreement. 34 40 SECTION 818. DELEGATION OF POWER. (a) Any Administrative Trustee may, by power of attorney consistent with applicable law, delegate to any other natural person over the age of 21 his or her power for the purpose of executing any documents contemplated in Section 207(a); and (b) The Administrative Trustees shall have power to delegate from time to time to such of their number or to the Depositor the doing of such things and the execution of such instruments either in the name of the Trust or the names of the Administrative Trustees or otherwise as the Administrative Trustees may deem expedient, to the extent such delegation is not prohibited by applicable law or contrary to the provisions of the Trust, as set forth herein. SECTION 819. VOTING. Except as otherwise provided in this Trust Agreement, the consent or approval of the Administrative Trustees shall require consent or approval by not less than a majority of the Administrative Trustees, unless there are only two, in which case both must consent. ARTICLE IX TERMINATION, LIQUIDATION AND MERGER SECTION 901. TERMINATION UPON EXPIRATION DATE. Unless earlier dissolved, the Trust shall automatically dissolve on , 2053 (the "Expiration Date"), subject to - ------------------- ----- distribution of the Trust Property in accordance with Section 904. SECTION 902. EARLY TERMINATION. The first to occur of any of the following events is an "Early Termination Event:" (a) the occurrence of a Bankruptcy Event in respect of, or the dissolution or liquidation of, the Depositor; (b) delivery of written direction to the Property Trustee by the Depositor at any time (which direction is wholly optional and within the discretion of the Depositor) to dissolve the Trust and distribute the Debentures to Securityholders in exchange for the Preferred Securities in accordance with Section 904; (c) the redemption of all of the Preferred Securities in connection with the redemption of all of the Debentures; and (d) an order for dissolution of the Trust shall have been entered by a court of competent jurisdiction. SECTION 903. TERMINATION. The respective obligations and responsibilities of the Trustees and the Trust created and continued hereby shall terminate upon the latest to occur of the following: (a) the distribution by the Property Trustee to Securityholders upon the liquidation of the Trust pursuant to Section 904, or upon the redemption of all of the Trust Securities pursuant to Section 402, of all amounts required to be distributed hereunder upon the final payment of the Trust Securities; (b) the payment of any expenses owed by the Trust; (c) the discharge of all administrative duties of the Administrative Trustees, including the performance of any tax reporting obligations with respect to the Trust or the 35 41 Securityholders; and (d) the filing of a Certificate of Cancellation by the Administrative Trustee under the Delaware Business Trust Act. SECTION 904. LIQUIDATION. (a) If an Early Termination Event specified in clause (a), (b), or (d) of Section 902 occurs or upon the Expiration Date, the Trust shall be liquidated by the Trustees as expeditiously as the Trustees determine to be practicable by distributing, after satisfaction of liabilities to creditors of the Trust as provided by applicable law, to each Securityholder a Like Amount of Debentures, subject to Section 904(d). Notice of liquidation shall be given by the Property Trustee by first-class mail, postage prepaid, mailed not later than 30 nor more than 60 days prior to the Liquidation Date to each Holder of Trust Securities at such Holder's address appearing in the Securities Register. All notices of liquidation shall: (i) state the Liquidation Date; (ii) state that from and after the Liquidation Date, the Trust Securities shall no longer be deemed to be Outstanding and any Trust Securities Certificates not surrendered for exchange shall be deemed to represent a Like Amount of Debentures; and (iii) provide such information with respect to the mechanics by which Holders may exchange Trust Securities Certificates for Debentures, or, if Section 904(d) applies, receive a Liquidation Distribution, as the Administrative Trustees or the Property Trustee shall deem appropriate. (b) Except where Section 902(c) or 904(d) applies, in order to effect the liquidation of the Trust and distribution of the Debentures to Securityholders, the Property Trustee shall establish a record date for such distribution (which shall be not more than 45 days prior to the Liquidation Date) and, either itself acting as exchange agent or through the appointment of a separate exchange agent, shall establish such procedures as it shall deem appropriate to effect the distribution of Debentures in exchange for the Outstanding Trust Securities Certificates. (c) Except where Section 902(c) or 904(d) applies, after the Liquidation Date, (i) the Trust Securities shall no longer be deemed to be outstanding; (ii) certificates representing a Like Amount of Debentures shall be issued to holders of Trust Securities Certificates upon surrender of such certificates to the Administrative Trustees or their agent for exchange; (iii) the Depositor shall use its reasonable efforts to have the Debentures listed on the New York Stock Exchange or such securities exchange or other organization as the Preferred Securities are then listed or traded; (iv) any Trust Securities Certificates not so surrendered for exchange shall be deemed to represent a Like Amount of Debentures, accruing interest at the rate provided for in the Debentures from the last Distribution Date on which a Distribution was made on such Trust Securities Certificates until such certificates are so surrendered (and until such certificates are so surrendered, no payments of interest or principal shall be made to holders of Trust Securities Certificates with respect to such Debentures); and (v) all rights of Securityholders holding Trust Securities shall cease, except the right of such Securityholders to receive Debentures upon surrender of Trust Securities Certificates. (d) In the event that, notwithstanding the other provisions of this Section 904, whether because of an order for dissolution entered by a court of competent jurisdiction or otherwise, distribution of the Debentures in the manner provided herein is determined by the Property Trustee not to be practical, the Trust Property shall be liquidated, and the Trust shall be dissolved, wound-up or terminated, by the Property Trustee in such manner as the Property Trustee determines. In such event, on the date of the dissolution, winding-up or other termination of the Trust, Securityholders shall be entitled to receive out of the assets of the Trust available for distribution to Securityholders, after satisfaction of liabilities to creditors of the Trust as provided by applicable law, an amount equal to the Liquidation Amount per Trust Security plus accumulated and unpaid Distributions thereon to the date of payment (such amount being the "Liquidation Distribution"). If, upon any such dissolution, winding-up or termination, the Liquidation Distribution can be paid only in part because the Trust has insufficient assets available to pay in full the aggregate Liquidation Distribution, then, 36 42 subject to the next succeeding sentence, the amounts payable by the Trust on the Trust Securities shall be paid on a pro rata basis (based upon Liquidation Amounts). The Common Securityholder shall be entitled to receive Liquidation Distributions upon any such dissolution, winding-up or termination pro rata (determined as aforesaid) with Holders of Preferred Securities, except that, if a Debenture Event of Default has occurred and is continuing, the Preferred Securities shall have a priority over the Common Securities. SECTION 905. MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST. The Trust may not merge with or into, consolidate, amalgamate, or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to any corporation or other Person, except pursuant to this Section 905. At the request of the Depositor, with the consent of the Administrative Trustees and without the consent of the Preferred Securityholders, the Property Trustee or the Delaware Trustee, the Trust may merge with or into, consolidate, amalgamate, be replaced by or convey, transfer or lease its properties and assets substantially as an entirety to a trust organized as such under the laws of any state; provided, that (i) such successor entity either (a) expressly assumes all of the obligations of the Trust with respect to the Preferred Securities, or (b) substitutes for the Preferred Securities other securities having substantially the same terms as the Preferred Securities (the "Successor Securities") so long as the Successor Securities rank the same as the Preferred Securities rank in priority with respect to distributions and payments upon liquidation, redemption and otherwise; (ii) the Depositor expressly appoints a trustee of such successor entity possessing substantially the same powers and duties as the Property Trustee as the holder of the Debentures; (iii) the Successor Securities are listed or traded, or any Successor Securities shall be listed or traded upon notification of issuance, on any national securities exchange or other organization on which the Preferred Securities are then listed, if any; (iv) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the Preferred Securityholders (including any Successor Securities) in any material respect; (v) prior to such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, the Depositor has received an Opinion of Counsel to the effect that (a) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the Preferred Securityholders (including any Successor Securities) in any material respect, and (b) following such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, neither the Trust nor such successor entity shall be required to register as an "investment company" under the Investment Company Act; and (vi) the Depositor owns all of the Common Securities of such successor entity and guarantees the obligations of such successor entity under the Successor Securities at least to the extent provided by the Guarantee, the Debentures, the Indenture, this Trust Agreement and the Expense Agreement. Notwithstanding the foregoing, the Trust shall not, except with the consent of holders of 100% in Liquidation Amount of the Preferred Securities, consolidate, amalgamate, merge with or into, or be replaced by or convey, transfer or lease its properties and assets substantially as an entirety to any other Person or permit any other Person to consolidate, amalgamate, merge with or into, or replace it if such consolidation, amalgamation, merger or replacement would cause the Trust or the successor entity to be classified as other than a grantor trust for United States federal income tax purposes. ARTICLE X MISCELLANEOUS PROVISIONS SECTION 1001. LIMITATION OF RIGHTS OF SECURITYHOLDERS. The death or incapacity of any Person having an interest, beneficial or otherwise, in Trust Securities shall not operate to terminate this Trust Agreement, nor entitle the legal representatives or heirs of such Person or any Securityholder for such Person, to claim an accounting, take any action or bring any proceeding in any court for a partition or winding-up of the arrangements contemplated hereby, nor otherwise affect the rights, obligations and liabilities of the parties hereto or any of them. 37 43 SECTION 1002. AMENDMENT. (a) This Trust Agreement may be amended from time to time by the Trustees and the Depositor, without the consent of any Securityholders, (i) as provided in Section 811 with respect to acceptance of appointment by a successor Trustee; (ii) to cure any ambiguity, correct or supplement any provision herein or therein which may be inconsistent with any other provision herein or therein, or to make any other provisions with respect to matters or questions arising under this Trust Agreement, that shall not be inconsistent with the other provisions of this Trust Agreement; (iii) to modify, eliminate or add to any provisions of this Trust Agreement to such extent as shall be necessary to ensure that the Trust shall be classified for United States federal income tax purposes as a grantor trust at all times that any Trust Securities are outstanding or to ensure that the Trust shall not be required to register as an "investment company" under the Investment Company Act; or (iv) to reduce or increase the Liquidation Amount per Trust Security and simultaneously to increase or decrease correspondingly the number of Trust Securities issued and outstanding solely for the purpose of maintaining the eligibility of the Preferred Securities for quotation or listing on any national securities exchange or other organization on which the Preferred Securities are then quoted or listed (including, if applicable, the New York Stock Exchange); provided, however, that in the case of clause (ii), such action shall not adversely affect in any material respect the interests of any Securityholder; and provided further, that in the case of clause (iv), the aggregate Liquidation Amount of the Trust Securities outstanding upon completion of any such reduction must be the same as the aggregate Liquidation Amount of the Trust Securities outstanding immediately prior to such reduction or increase. Any amendments of this Trust Agreement shall become effective when notice thereof is given to the Securityholders or, in the case of any amendment pursuant to clause (iv), as of the date specified in the notice. (b) Except as provided in Section 601(c) or Section 1002(c) hereof, any provision of this Trust Agreement may be amended by the Trustees and the Depositor (i) with the consent of the Securityholders representing not less than a majority (based upon Liquidation Amounts) of the Trust Securities then Outstanding; and (ii) upon receipt by the Trustees of an Opinion of Counsel to the effect that such amendment or the exercise of any power granted to the Trustees in accordance with such amendment shall not affect the Trust's status as a grantor trust for United States federal income tax purposes or the Trust's exemption from status of an "investment company" under the Investment Company Act. (c) In addition to and notwithstanding any other provision in this Trust Agreement, without the consent of each affected Securityholder (such consent being obtained in accordance with Section 603 or 606 hereof), this Trust Agreement may not be amended to (i) change the amount or timing of any Distribution on the Trust Securities or otherwise adversely affect the amount of any Distribution required to be made in respect of the Trust Securities as of a specified date; or (ii) restrict the right of a Securityholder to institute suit for the enforcement of any such payment on or after such date; notwithstanding any other provision herein, without the unanimous consent of the Securityholders (such consent being obtained in accordance with Section 603 or 606 hereof), this paragraph (c) of this Section 1002 may not be amended. (d) Notwithstanding any other provisions of this Trust Agreement, no Trustee shall enter into or consent to any amendment to this Trust Agreement which would cause the Trust to fail or cease to qualify for the exemption from status of an "investment company" under the Investment Company Act or to fail or cease to be classified as a grantor trust for United States federal income tax purposes. (e) Notwithstanding anything in this Trust Agreement to the contrary, without the consent of the Depositor, this Trust Agreement may not be amended in a manner which imposes any additional obligation on the Depositor. (f) In the event that any amendment to this Trust Agreement is made, the Administrative Trustees shall promptly provide to the Depositor a copy of such amendment. 38 44 (g) Neither the Property Trustee nor the Delaware Trustee shall be required to enter into any amendment to this Trust Agreement which affects its own rights, duties or immunities under this Trust Agreement. The Property Trustee shall be entitled to receive an Opinion of Counsel and an Officers' Certificate stating that any amendment to this Trust Agreement is in compliance with this Trust Agreement. SECTION 1003. SEPARABILITY. In case any provision in this Trust Agreement or in the Trust Securities Certificates shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 1004. GOVERNING LAW. THIS TRUST AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF EACH OF THE SECURITYHOLDERS, THE TRUST AND THE TRUSTEES WITH RESPECT TO THIS TRUST AGREEMENT AND THE TRUST SECURITIES SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE (WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES). SECTION 1005. PAYMENTS DUE ON NON-BUSINESS DAY. If the date fixed for any payment on any Trust Security shall be a day that is not a Business Day, then such payment need not be made on such date but may be made on the next succeeding day which is a Business Day, with the same force and effect as though made on the date fixed for such payment, and no distribution shall accumulate thereon for the period after such date. SECTION 1006. SUCCESSORS. This Trust Agreement shall be binding upon and shall inure to the benefit of any successor to the Depositor, the Trust or the Relevant Trustee(s), including any successor by operation of law. Except in connection with a consolidation, merger or sale involving the Depositor that is permitted under Article XII of the Indenture and pursuant to which the assignee agrees in writing to perform the Depositor's obligations hereunder, the Depositor shall not assign its obligations hereunder. SECTION 1007. HEADINGS. The Article and Section headings are for convenience only and shall not affect the construction of this Trust Agreement. SECTION 1008. REPORTS, NOTICES AND DEMANDS. Any report, notice, demand or other communication which by any provision of this Trust Agreement is required or permitted to be given or served to or upon any Securityholder or the Depositor may be given or served in writing by deposit thereof, first-class postage prepaid, in the United States mail, hand delivery or facsimile transmission, in each case, addressed, (a) in the case of a Preferred Securityholder, to such Preferred Securityholder as such Securityholder's name and address may appear on the Securities Register; and (b) in the case of the Common Securityholder or the Depositor, to First Banks America, Inc., 11901 Olive Boulevard, St. Louis, Missouri 63141, Attention: Chief Financial Officer, facsimile no.: (314) 567-3490. Any notice to Preferred Securityholders shall also be given to such owners as have, within two years preceding the giving of such notice, filed their names and addresses with the Property Trustee for that purpose. Such notice, demand or other communication to or upon a Securityholder shall be deemed to have been sufficiently given or made, for all purposes, upon hand delivery, mailing or transmission. Any notice, demand or other communication which by any provision of this Trust Agreement is required or permitted to be given or served to or upon the Trust, the Property Trustee or the Administrative Trustees shall be given in writing addressed (until another address is published by the 39 45 Trust) as follows: (a) with respect to the Property Trustee to State Street Bank and Trust Company, Two International Place, 4th Floor, Boston, Massachusetts 02110, Attention: Corporate Trust Department; (b) with respect to the Delaware Trustee, to Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attention: Corporate Trust Administration; and (c) with respect to the Administrative Trustees, to them at the address above for notices to the Depositor, marked "Attention: Administrative Trustees of First America Capital Trust." Such notice, demand or other communication to or upon the Trust or the Property Trustee shall be deemed to have been sufficiently given or made only upon actual receipt of the writing by the Trust or the Property Trustee. SECTION 1009. AGREEMENT NOT TO PETITION. Each of the Trustees and the Depositor agree for the benefit of the Securityholders that, until at least one year and 1 day after the Trust has been terminated in accordance with Article IX, they shall not file, or join in the filing of, a petition against the Trust under any bankruptcy, insolvency, reorganization or other similar law (including, without limitation, the United States Bankruptcy Code of 1978, as amended) (collectively, "Bankruptcy Laws") or otherwise join in the commencement of any proceeding against the Trust under any Bankruptcy Law. In the event the Depositor takes action in violation of this Section 1009, the Property Trustee agrees, for the benefit of Securityholders, that at the expense of the Depositor (which expense shall be paid prior to the filing), it shall file an answer with the bankruptcy court or otherwise properly contest the filing of such petition by the Depositor against the Trust or the commencement of such action and raise the defense that the Depositor has agreed in writing not to take such action and should be stopped and precluded therefrom. The provisions of this Section 1009 shall survive the termination of this Trust Agreement. SECTION 1010. TRUST INDENTURE ACT; CONFLICT WITH TRUST INDENTURE ACT. (a) This Trust Agreement is subject to the provisions of the Trust Indenture Act that are required to be part of this Trust Agreement and shall, to the extent applicable, be governed by such provisions. (b) The Property Trustee shall be the only Trustee which is a trustee for the purposes of the Trust Indenture Act. (c) If any provision hereof limits, qualifies or conflicts with another provision hereof which is required to be included in this Trust Agreement by any of the provisions of the Trust Indenture Act, such required provision shall control. If any provision of this Trust Agreement modifies or excludes any provision of the Trust Indenture Act which may be so modified or excluded, the latter provision shall be deemed to apply to this Trust Agreement as so modified or to be excluded, as the case may be. (d) The application of the Trust Indenture Act to this Trust Agreement shall not affect the nature of the Securities as equity securities representing undivided beneficial interests in the assets of the Trust. SECTION 1011. ACCEPTANCE OF TERMS OF TRUST AGREEMENT, GUARANTEE AND INDENTURE. THE RECEIPT AND ACCEPTANCE OF A TRUST SECURITY OR ANY INTEREST THEREIN BY OR ON BEHALF OF A SECURITYHOLDER OR ANY BENEFICIAL OWNER, WITHOUT ANY SIGNATURE OR FURTHER MANIFESTATION OF ASSENT, SHALL CONSTITUTE THE UNCONDITIONAL ACCEPTANCE BY THE SECURITYHOLDER AND ALL OTHERS HAVING A BENEFICIAL INTEREST IN SUCH TRUST SECURITY OF ALL THE TERMS AND PROVISIONS OF THIS TRUST AGREEMENT AND AGREEMENT TO THE SUBORDINATION PROVISIONS AND OTHER TERMS OF THE GUARANTEE AND THE INDENTURE, AND SHALL CONSTITUTE THE AGREEMENT OF THE TRUST, SUCH SECURITYHOLDER AND SUCH OTHERS THAT THE TERMS AND PROVISIONS OF THIS TRUST AGREEMENT SHALL BE BINDING, OPERATIVE AND EFFECTIVE AS BETWEEN THE TRUST AND SUCH SECURITYHOLDER AND SUCH OTHERS. [Signatures on Next Page] 40 46 FIRST BANKS AMERICA, INC. By: ------------------------------------ Its: ----------------------------------- STATE STREET BANK AND TRUST COMPANY, as Property Trustee By: ------------------------------------ Its: ----------------------------------- WILMINGTON TRUST COMPANY, as Delaware Trustee By: ------------------------------------ Its: ----------------------------------- ------------------------------------------- James F. Dierberg, as Administrative Trustee ------------------------------------------- Allen H. Blake, as Administrative Trustee ------------------------------------------- Laurence J. Brost, as Administrative Trustee 41 47 EXHIBIT A CERTIFICATE OF TRUST OF FIRST AMERICA CAPITAL TRUST THIS CERTIFICATE OF TRUST of FIRST AMERICA CAPITAL TRUST (the "Trust"), dated as of June , 1998, is being duly executed and filed by ---- WILMINGTON TRUST COMPANY, a Delaware banking corporation, JAMES F. DIERBERG, ALLEN H. BLAKE and LAURENCE J. BROST, each an individual, as trustees, to form a business trust under the Delaware Business Trust Act (12 Delaware Code Section 3801 et seq.). 1. NAME. The name of the business trust formed hereby is FIRST AMERICA CAPITAL TRUST. 2. DELAWARE TRUSTEE. The name and business address of the trustee of the Trust in the State of Delaware is Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890- 0001, Attention: Corporate Trust Administration. 3. EFFECTIVE DATE. This Certificate of Trust shall be effective on June , 1998. ---- IN WITNESS WHEREOF, the undersigned have executed this Certificate of Trust as of the date first above written, in accordance with Section 3811(a) of the Delaware Business Trust Act. WILMINGTON TRUST COMPANY, as trustee By: --------------------------------------- Its: -------------------------------------- ------------------------------------------- JAMES F. DIERBERG as Trustee ------------------------------------------- ALLEN H. BLAKE as Trustee ------------------------------------------- LAURENCE J. BROST as Trustee 1 48 EXHIBIT B THIS CERTIFICATE IS NOT TRANSFERABLE CERTIFICATE NUMBER 1 NUMBER OF COMMON SECURITIES: --------- CERTIFICATE EVIDENCING COMMON SECURITIES OF FIRST AMERICA CAPITAL TRUST COMMON SECURITIES (LIQUIDATION AMOUNT $25 PER COMMON SECURITY) FIRST AMERICA CAPITAL TRUST, a statutory business trust created under the laws of the State of Delaware (the "Trust"), hereby certifies that FIRST BANKS AMERICA, INC. (the "Holder") is the registered owner of - ---------------------- (-----------) common securities of the Trust representing undivided beneficial interests in the assets of the Trust and designated the % Common Securities (liquidation amount $25 per Common ----- Security) (the "Common Securities"). In accordance with Section 510 of the Trust Agreement (as defined below), the Common Securities are not transferable, and any attempted transfer hereof shall be void. The designations, rights, privileges, restrictions, preferences, and other terms and provisions of the Common Securities are set forth in, and this certificate and the Common Securities represented hereby are issued and shall in all respects be subject to the terms and provisions of, the Amended and Restated Trust Agreement of the Trust dated as of , ----------------- ---- 1998, as the same may be amended from time to time (the "Trust Agreement"), including the designation of the terms of the Common Securities as set forth therein. The Trust shall furnish a copy of the Trust Agreement to the Holder without charge upon written request to the Trust at its principal place of business or registered office. Upon receipt of this certificate, the Holder is bound by the Trust Agreement and is entitled to the benefits thereunder. IN WITNESS WHEREOF, one of the Administrative Trustees of the Trust has executed this certificate this day of , 1998. ----- ---------------- FIRST AMERICA CAPITAL TRUST By: --------------------------------------- Its: --------------------------------------- 1 49 EXHIBIT C AGREEMENT AS TO EXPENSES AND LIABILITIES AGREEMENT AS TO EXPENSES AND LIABILITIES (this "Agreement") dated as of , 1998, between FIRST BANKS AMERICA, INC., a ------------ Delaware corporation ("FBA"), and FIRST AMERICA CAPITAL TRUST, a Delaware business trust (the "Trust"). RECITALS WHEREAS, the Trust intends to issue its common securities (the "Common Securities") to, and receive Debentures from, FBA and to issue and sell First America Capital Trust % Cumulative Trust Preferred Securities (the ------ "Preferred Securities") with such powers, preferences and special rights and restrictions as are set forth in the Amended and Restated Trust Agreement of the Trust dated as of , 1998, as the same may be amended -------------------- from time to time (the "Trust Agreement"); and WHEREAS, FBA shall directly or indirectly own all of the Common Securities of the Trust and shall issue the Debentures; NOW, THEREFORE, in consideration of the purchase by each holder of the Preferred Securities, which purchase FBA hereby agrees shall benefit FBA and which purchase FBA acknowledges shall be made in reliance upon the execution and delivery of this Agreement, FBA, including in its capacity as holder of the Common Securities, and the Trust hereby agree as follows: ARTICLE I SECTION 1.1. GUARANTEE BY FBA. Subject to the terms and conditions hereof, FBA, including in its capacity as holder of the Common Securities, hereby irrevocably and unconditionally guarantees to each person or entity to whom the Trust is now or hereafter becomes indebted or liable (the "Beneficiaries") the full payment when and as due, of any and all Obligations (as hereinafter defined) to such Beneficiaries. As used herein, "Obligations" means any costs, expenses or liabilities of the Trust other than obligations of the Trust to pay to holders of any Preferred Securities or other similar interests in the Trust the amounts due such holders pursuant to the terms of the Preferred Securities or such other similar interests, as the case may be. This Agreement is intended to be for the benefit of, and to be enforceable by, all such Beneficiaries, whether or not such Beneficiaries have received notice hereof. SECTION 1.2. TERM OF AGREEMENT. This Agreement shall terminate and be of no further force and effect upon the later of (a) the date on which full payment has been made of all amounts payable to all holders of all the Preferred Securities (whether upon redemption, liquidation, exchange or otherwise); and (b) the date on which there are no Beneficiaries remaining; provided, however, that this Agreement shall continue to be effective or shall be reinstated, as the case may be, if at any time any holder of Preferred Securities or any Beneficiary must restore payment of any sums paid under the Preferred Securities, under any obligation, under the Preferred Securities Guarantee Agreement dated the date hereof by FBA and State Street Bank and Trust Company, as guarantee trustee, or under this Agreement for any reason whatsoever. This Agreement is continuing, irrevocable, unconditional and absolute. SECTION 1.3. WAIVER OF NOTICE. FBA hereby waives notice of acceptance of this Agreement and of any obligation to which it applies or may apply, and FBA hereby waives presentment, demand for payment, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. 1 50 SECTION 1.4. NO IMPAIRMENT. The obligations, covenants, agreements and duties of FBA under this Agreement shall in no way be affected or impaired by reason of the happening from time to time of any of the following: (a) the extension of time for the payment by the Trust of all or any portion of the obligations or for the performance of any other obligation under, arising out of, or in connection with, the obligations; (b) any failure, omission, delay or lack of diligence on the part of the Beneficiaries to enforce, assert or exercise any right, privilege, power or remedy conferred on the Beneficiaries with respect to the obligations or any action on the part of the Trust granting indulgence or extension of any kind; or (c) the voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement composition or readjustment of debt of, or other similar proceedings affecting, the Trust or any of the assets of the Trust. There shall be no obligation of the Beneficiaries to give notice to, or obtain the consent of, FBA with respect to the happening of any of the foregoing. SECTION 1.5. ENFORCEMENT. A Beneficiary may enforce this Agreement directly against FBA, and FBA waives any right or remedy to require that any action be brought against the Trust or any other person or entity before proceeding against FBA. ARTICLE II SECTION 2.1. BINDING EFFECT. All guarantees and agreements contained in this Agreement shall bind the successors, assigns, receivers, trustees and representatives of FBA and shall inure to the benefit of the Beneficiaries. SECTION 2.2. AMENDMENT. So long as there remains any Beneficiary or any Preferred Securities of any series are outstanding, this Agreement shall not be modified or amended in any manner adverse to such Beneficiary or to the holders of the Preferred Securities. SECTION 2.3. NOTICES. Any notice, request or other communication required or permitted to be given hereunder shall be given in writing by delivering the same by facsimile transmission (confirmed by mail), telex, or by registered or certified mail, addressed as follows (and if so given, shall be deemed given when mailed or upon receipt of an answerback, if sent by telex): First America Capital Trust c/o First Banks America, Inc. 11901 Olive Boulevard St. Louis, MO 63141 Facsimile No.: (314) 567-3490 Attention: Chief Financial Officer 2 51 First Banks America, Inc. 11901 Olive Boulevard St. Louis, MO 63141 Facsimile No.: (314) 567-3490 Attention: Chief Financial Officer SECTION 2.4. This agreement shall be governed by and construed and interpreted in accordance with the laws of the State of ------------------- (without regard to conflict of laws principles). THIS AGREEMENT is executed as of the day and year first above written. FIRST BANKS AMERICA, INC. By: --------------------------------------- Its: --------------------------------------- FIRST AMERICA CAPITAL TRUST By: --------------------------------------- Its: --------------------------------------- 3 52 EXHIBIT D CERTIFICATE NUMBER NUMBER OF PREFERRED SECURITIES -------- P- CERTIFICATE EVIDENCING PREFERRED SECURITIES OF FIRST AMERICA CAPITAL TRUST ----% CUMULATIVE TRUST PREFERRED SECURITIES (LIQUIDATION AMOUNT $25 PER PREFERRED SECURITY) CUSIP NO. --------------- FIRST AMERICA CAPITAL TRUST, a statutory business trust created under the laws of the State of Delaware (the "Trust"), hereby certifies that - ---------------- (the "Holder") is the registered owner of ----- preferred securities of the Trust representing undivided beneficial interests in the assets of the Trust and designated the ------% Cumulative Trust Preferred Securities (liquidation amount $25 per Preferred Security) (the "Preferred Securities"). The Preferred Securities are transferable on the books and records of the Trust, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer as provided in Section 504 of the Trust Agreement (as defined herein). The designations, rights, privileges, restrictions, preferences, and other terms and provisions of the Preferred Securities are set forth in, and this certificate and the Preferred Securities represented hereby are issued and shall in all respects be subject to the terms and provisions of, the Amended and Restated Trust Agreement of the Trust dated as of ----------------------- - -----, 1998, as the same may be amended from time to time (the "Trust Agreement"), including the designation of the terms of Preferred Securities as set forth therein. The Holder is entitled to the benefits of the Preferred Securities Guarantee Agreement entered into by First Banks America, Inc., a Delaware corporation, and State Street Bank and Trust Company, as guarantee trustee, dated as of ----------------------------, 1998 (the "Guarantee"), to the extent provided therein. The Trust shall furnish a copy of the Trust Agreement and the Guarantee to the Holder without charge upon written request to the Trust at its principal place of business or registered office. Upon receipt of this certificate, the Holder is bound by the Trust Agreement and is entitled to the benefits thereunder. Unless the Certificate of Authentication has been manually executed by the Authentication Agent, this certificate is not valid or effective. IN WITNESS WHEREOF, the Administrative Trustees of the Trust have executed this certificate as of the date hereof. 1 53 Dated: FIRST AMERICA CAPITAL TRUST CERTIFICATE OF AUTHENTICATION This is one of the -----% By Cumulative Trust Preferred Securities ----------------------------------- referred to in the within-mentioned Trustee Amended and Restated Trust Agreement. By ----------------------------------- STATE STREET BANK & TRUST COMPANY, Trustee as Authentication Agent and Registrars By ----------------------------------- Trustee By ---------------------------------- Authorized Signature 2 54 [FORM ON REVERSE OF CERTIFICATE] The Trust will furnish without charge to any registered owner of Preferred Securities who so requests, a copy of the Trust Agreement and the Guarantee. Any such request should be in writing and addressed to First America Capital Trust, c/o Secretary, First Banks America, Inc., 135 North Meramec Avenue, St. Louis, Missouri 63105 or to the Registrar named on the face of this Certificate. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT - ...Custodian.... TEN ENT - as tenants by the entireties (Cust) (Minor) JT TEN - as joint tenants with right under Uniform Gifts to Minors of survivorship and not as Act...................... tenants in common (State) TOD - transfer on death direction UNIF TRF MIN ACT - ..Custodian...... in event of owner's death, (until age)....... to person named on face and (Cust) subject to TOD rules referenced ......under Uniform Transfers (Minor) to Minors Act............... (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, ------------- hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - -------------------------------------- - -------------------------------------- - ------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ---------------------------------------------------------- Preferred Securities represented by the within Certificate, and do hereby irrevocably constitute and appoint - ---------------------------------------------------------------------- Attorney to transfer the said Preferred Securities on the books of the within named Trust with full power of substitution in the premises. Dated,-------------------------- ------------------------------------------------------- NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERNATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. SIGNATURE(S) GUARANTEED: - ------------------------------------------------------ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED MEDALLION SIGNATURE GUARANTEE PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. 3 EX-4.7 7 FORM OF PREFERRED SECURITIES GUARANTEE AGREEMENT 1 ================================================================================ PREFERRED SECURITIES GUARANTEE AGREEMENT BY AND BETWEEN FIRST BANKS AMERICA, INC. AND STATE STREET BANK AND TRUST COMPANY JUNE --, 1998 ================================================================================ 2 TABLE OF CONTENTS
Page ARTICLE I. 1 DEFINITIONS AND INTERPRETATION 1 Section 1.1. Definitions and Interpretation. 1 ARTICLE II. 4 TRUST INDENTURE ACT 4 Section 2.1. Trust Indenture Act; Application. 4 Section 2.2. The List of Holders of the Securities. 5 Section 2.3. Reports by the Preferred Guarantee Trustee. 5 Section 2.4. Periodic Reports to the Preferred Guarantee Trustee. 5 Section 2.5. Evidence of Compliance with Conditions Precedent. 5 Section 2.6. Events of Default; Waiver. 5 Section 2.7. Event of Default; Notice. 6 Section 2.8. Conflicting Interests. 6 ARTICLE III. 6 POWERS, DUTIES AND RIGHTS 6 OF THE PREFERRED GUARANTEE TRUSTEE 6 Section 3.1. Powers and Duties of the Preferred Guarantee Trustee. 6 Section 3.2. Certain Rights of the Preferred Guarantee Trustee. 8 Section 3.3. Not Responsible for Recitals or Issuance of Guarantee. 9 ARTICLE IV. 10 THE PREFERRED GUARANTEE TRUSTEE 10 Section 4.1. The Preferred Guarantee Trustee; Eligibility. 10 Section 4.2. Appointment, Removal and Resignation of the Preferred Guarantee Trustee. 10 ARTICLE V. 12 GUARANTEE 12 Section 5.1. Guarantee. 12 Section 5.2. Waiver of Notice and Demand. 12 Section 5.3. Obligations not Affected. 12 Section 5.4. Rights of the Holders. 13 Section 5.5. Guarantee of Payment. 13 Section 5.6. Subrogation. 13 Section 5.7. Independent Obligations. 13 i 3 ARTICLE VI. 14 LIMITATION OF TRANSACTIONS; SUBORDINATION 14 Section 6.1. Limitation on Transactions. 14 Section 6.2 Ranking. 14 ARTICLE VII. 14 TERMINATION 14 Section 7.1. Termination. 14 ARTICLE VIII. 15 INDEMNIFICATION 15 Section 8.1. Exculpation. 15 Section 8.2. Indemnification. 15 ARTICLE IX. 15 MISCELLANEOUS 15 Section 9.1. Successors and Assigns. 15 Section 9.2. Amendments. 15 Section 9.3. Notices. 16 Section 9.4. Benefit. 16 Section 9.5. Governing Law. 16
ii 4 CROSS-REFERENCE TABLE
Section of Section of Trust Indenture Act Guarantee of 1939, as amended Agreement - ------------------- ---------- 310(a) 4.1(a) 310(b) 4.1(c), 2.8 310(c) Not Applicable 311(a) 2.2(b) 311(b) 2.2(b) 311(c) Not Applicable 312(a) 2.2(a) 312(b) 2.2(b) 313 2.3 314(a) 2.4 314(b) Not Applicable 314(c) 2.5 314(d) Not Applicable 314(e) 1.1, 2.5,3.2 314(f) 2.1, 3.2 315(a) 3.1(d) 315(b) 2.7 315(c) 3.1 315(d) 3.1(d) 316(a) 1.1, 2.6, 5.4 316(b) 5.3 317(a) 3.1 317(b) Not Applicable 318(a) 2.1(a) 318(b) 2.1 318(c) 2.1(b) Note: This Cross-Reference Table does not constitute part of this Agreement and shall not affect the interpretation of any of its terms or provisions.
iii 5 PREFERRED SECURITIES GUARANTEE AGREEMENT THIS PREFERRED SECURITIES GUARANTEE AGREEMENT (this "Preferred Securities Guarantee"), dated as of June --, 1998, is executed and delivered by FIRST BANKS AMERICA, INC., a Delaware corporation (the "Guarantor"), and STATE STREET BANK AND TRUST COMPANY, a trust company organized and existing under the laws of the Commonwealth of Massachusetts, as trustee (the "Preferred Guarantee Trustee"), for the benefit of the Holders (as defined herein) from time to time of the Preferred Securities (as defined herein) of FIRST AMERICA CAPITAL TRUST, a Delaware statutory business trust (the "Trust"). RECITALS WHEREAS, pursuant to an Amended and Restated Trust Agreement (the "Trust Agreement"), dated as of June --, 1998, among the trustees of the Trust named therein, the Guarantor, as depositor, and the holders from time to time of undivided beneficial interests in the assets of the Trust, the Trust is issuing on the date hereof up to 1,840,000 preferred securities, having an aggregate liquidation amount of $46,000,000, designated the ---% Cumulative Trust Preferred Securities (the "Preferred Securities"); WHEREAS, as incentive for the Holders to purchase the Preferred Securities, the Guarantor desires irrevocably and unconditionally to agree, to the extent set forth in this Preferred Securities Guarantee, to pay to the Holders of the Preferred Securities the Guarantee Payments (as defined herein) and to make certain other payments on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the purchase by each Holder of Preferred Securities, which purchase the Guarantor hereby agrees shall benefit the Guarantor, the Guarantor executes and delivers this Preferred Securities Guarantee for the benefit of the Holders. ARTICLE I. DEFINITIONS AND INTERPRETATION SECTION 1.1. DEFINITIONS AND INTERPRETATION. In this Preferred Securities Guarantee, unless the context otherwise requires: (a) capitalized terms used in this Preferred Securities Guarantee but not defined in the preamble above have the respective meanings assigned to them in this Section 1.1; (b) terms defined in the Trust Agreement as at the date of execution of this Preferred Securities Guarantee have the same meaning when used in this Preferred Securities Guarantee; (c) a term defined anywhere in this Preferred Securities Guarantee has the same meaning throughout; 6 (d) all references to "the Preferred Securities Guarantee" or "this Preferred Securities Guarantee" are to this Preferred Securities Guarantee as modified, supplemented or amended from time to time; (e) all references in this Preferred Securities Guarantee to Articles and Sections are to Articles and Sections of this Preferred Securities Guarantee, unless otherwise specified; (f) a term defined in the Trust Indenture Act has the same meaning when used in this Preferred Securities Guarantee, unless otherwise defined in this Preferred Securities Guarantee or unless the context otherwise requires; and (g) a reference to the singular includes the plural and vice versa. "Affiliate" has the same meaning as given to that term in Rule 405 of the Securities Act of 1933, as amended, or any successor rule thereunder. "Business Day" means any day other than a Saturday or a Sunday or a day on which federal or state banking institutions in the Borough of Manhattan, the City of New York are authorized or required by law, executive order or regulation to close or a day on which the Corporate Trust Office of the Preferred Guarantee Trustee is closed for business. "Corporate Trust Office" means the office of the Preferred Guarantee Trustee at which the corporate trust business of the Preferred Guarantee Trustee shall, at any particular time, be principally administered, which office at the date of execution of this Preferred Securities Guarantee is located at Two International Place, 4th Floor, Boston, Massachusetts 02110, Attention: Corporate Trust Department. "Covered Person" means any Holder or beneficial owner of Preferred Securities. "Debentures" means the ----% Subordinated Debentures due June 30, 2028, of the Debenture Issuer held by the Property Trustee of the Trust. "Debenture Issuer" means the Guarantor. "Event of Default" means a default by the Guarantor on any of its payment or other obligations under this Preferred Securities Guarantee. "Guarantor" means First Banks America, Inc., a Delaware corporation. "Guarantee Payments" means the following payments or distributions, without duplication, with respect to the Preferred Securities, to the extent not paid or made by the Trust: (i) any accrued and unpaid Distributions that are required to be paid on such Preferred Securities, to the extent the Trust shall have funds available therefor, (ii) the redemption price, including all accrued and unpaid Distributions to the date of redemption (the "Redemption Price"), to the extent the Trust has funds available therefor, with respect to any Preferred Securities called for 2 7 redemption by the Trust, and (iii) upon a voluntary or involuntary dissolution, winding-up or termination of the Trust (other than in connection with the distribution of the Debentures to the Holders in exchange for the Preferred Securities as provided in the Trust Agreement), the lesser of (A) the aggregate of the Liquidation Amount and all accrued and unpaid Distributions on the Preferred Securities to the date of payment, to the extent the Trust shall have funds available therefor (the "Liquidation Distribution"), and (B) the amount of assets of the Trust remaining available for distribution to Holders in liquidation of the Trust. "Holder" means a Person in whose name a Preferred Security is or Preferred Securities are registered in the Securities Register; provided, however, that, in determining whether the holders of the requisite percentage of the Preferred Securities have given any request, notice, consent or waiver hereunder, "Holder" shall not include the Guarantor or any Affiliate of the Guarantor. "Indemnified Person" means the Preferred Guarantee Trustee, any Affiliate of the Preferred Guarantee Trustee, or any officers, directors, shareholders, members, partners, employees, representatives, nominees, custodians or agents of the Preferred Guarantee Trustee. "Indenture" means the Indenture dated as of June --, 1998, among the Debenture Issuer and State Street Bank and Trust Company, as trustee, and any indenture supplemental thereto pursuant to which the Debentures are to be issued to the Property Trustee of the Trust. "Liquidation Distribution" has the meaning provided therefor in the definition of Guarantee Payments. "List of Holders" has the meaning set forth in Section 2.2 of this Preferred Securities Guarantee. "Majority in Liquidation Amount of the Preferred Securities" means the holders of more than 50% of the Liquidation Amount (including the stated amount that would be paid on redemption, liquidation or otherwise, plus accrued and unpaid Distributions to the date upon which the voting percentages are determined) of all of the Preferred Securities. "Officers' Certificate" means, with respect to any Person, a certificate signed by two authorized officers of such Person. Any Officers' Certificate delivered with respect to compliance with a condition or covenant provided for in this Preferred Securities Guarantee shall include: (a) a statement that each officer signing the Officers' Certificate has read the covenant or condition and the definition relating thereto; (b) a brief statement of the nature and scope of the examination or investigation undertaken by each officer in rendering the Officers' Certificate; 3 8 (c) a statement that each such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such officer, such condition or covenant has been complied with. "Person" means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature. "Preferred Guarantee Trustee" means State Street Bank and Trust Company, until a Successor Preferred Guarantee Trustee has been appointed and has accepted such appointment pursuant to the terms of this Preferred Securities Guarantee and thereafter means each such Successor Preferred Guarantee Trustee. "Redemption Price" has the meaning provided therefor in the definition of Guarantee Payments. "Responsible Officer" means, with respect to the Preferred Guarantee Trustee, any officer within the Corporate Trust Office of the Preferred Guarantee Trustee, including any vice-president, any assistant vice-president, any assistant secretary, the treasurer, any assistant treasurer or other officer of the Corporate Trust Office of the Preferred Guarantee Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject. "Successor Preferred Guarantee Trustee" means a successor Preferred Guarantee Trustee possessing the qualifications to act as Preferred Guarantee Trustee under Section 4.1. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended, as in force at the date of which this instrument was executed; provided, however, that in the event the Trust Indenture Act of 1939, as amended, is amended after such date, "Trust Indenture Act" means, to the extent required by any such amendment, the Trust Indenture Act of 1939, as so amended. ARTICLE II. TRUST INDENTURE ACT SECTION 2.1. TRUST INDENTURE ACT; APPLICATION. (a) This Preferred Securities Guarantee is subject to the provisions of the Trust Indenture Act that are required to be part of this Preferred Securities Guarantee and shall, to the extent applicable, be governed by such provisions. 4 9 (b) If and to the extent that any provision of this Preferred Securities Guarantee limits, qualifies or conflicts with the duties imposed by Section 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control. SECTION 2.2. THE LIST OF HOLDERS OF THE SECURITIES. (a) In the event the Preferred Guarantee Trustee is not also the Securities Registrar, the Guarantor shall provide the Preferred Guarantee Trustee with a list, in such form as the Preferred Guarantee Trustee may reasonably require, of the names and addresses of the Holders of the Preferred Securities (the "List of Holders") as of such date, (i) within 1 Business Day after January 1 and June 30 of each year, and (ii) at any other time within 30 days of receipt by the Guarantor of a written request for a List of Holders as of a date no more than 15 days before such List of Holders is given to the Preferred Guarantee Trustee; provided, that the Guarantor shall not be obligated to provide such List of Holders at any time the List of Holders does not differ from the most recent List of Holders given to the Preferred Guarantee Trustee by the Guarantor. The Preferred Guarantee Trustee may destroy any List of Holders previously given to it on receipt of a new List of Holders. (b) The Preferred Guarantee Trustee shall comply with its obligations under Sections 311(a), 311(b) and Section 312(b) of the Trust Indenture Act. SECTION 2.3. REPORTS BY THE PREFERRED GUARANTEE TRUSTEE. On or before July 15 of each year, the Preferred Guarantee Trustee shall provide to the Holders of the Preferred Securities such reports as are required by Section 313 of the Trust Indenture Act, if any, in the form and in the manner provided by Section 313 of the Trust Indenture Act. The Preferred Guarantee Trustee shall also comply with the requirements of Section 313(d) of the Trust Indenture Act. SECTION 2.4. PERIODIC REPORTS TO THE PREFERRED GUARANTEE TRUSTEE. The Guarantor shall provide to the Preferred Guarantee Trustee such documents, reports and information as required by Section 314 (if any) and the compliance certificate required by Section 314 of the Trust Indenture Act in the form, in the manner and at the times required by Section 314 of the Trust Indenture Act. SECTION 2.5. EVIDENCE OF COMPLIANCE WITH CONDITIONS PRECEDENT. The Guarantor shall provide to the Preferred Guarantee Trustee such evidence of compliance with any conditions precedent, if any, provided for in this Preferred Securities Guarantee that relate to any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c)(1) may be given in the form of an Officers' Certificate. SECTION 2.6. EVENTS OF DEFAULT; WAIVER. The Holders of a Majority in Liquidation Amount of the Preferred Securities may, by vote, on behalf of the Holders of all of the Preferred Securities, waive any past Event of Default and its consequences. Upon such waiver, any such 5 10 Event of Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Preferred Securities Guarantee, but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. SECTION 2.7. EVENT OF DEFAULT; NOTICE. (a) The Preferred Guarantee Trustee shall, within 90 days after the occurrence of an Event of Default, transmit by mail, first class postage prepaid, to the Holders of the Preferred Securities, notices of all Events of Default actually known to a Responsible Officer of the Preferred Guarantee Trustee, unless such defaults have been cured before the giving of such notice; provided, that the Preferred Guarantee Trustee shall be protected in withholding such notice if and so long as a Responsible Officer of the Preferred Guarantee Trustee in good faith determines that the withholding of such notice is in the interests of the Holders of the Preferred Securities. (b) The Preferred Guarantee Trustee shall not be deemed to have knowledge of any Event of Default unless the Preferred Guarantee Trustee shall have received written notice, or of which a Responsible Officer of the Preferred Guarantee Trustee charged with the administration of the Trust Agreement shall have obtained actual knowledge of such Event of Default. SECTION 2.8. CONFLICTING INTERESTS. The Trust Agreement shall be deemed to be specifically described in this Preferred Securities Guarantee for the purposes of clause (i) of the first proviso contained in Section 310(b) of the Trust Indenture Act. ARTICLE III. POWERS, DUTIES AND RIGHTS OF THE PREFERRED GUARANTEE TRUSTEE SECTION 3.1. POWERS AND DUTIES OF THE PREFERRED GUARANTEE TRUSTEE. (a) This Preferred Securities Guarantee shall be held by the Preferred Guarantee Trustee for the benefit of the Holders of the Preferred Securities, and the Preferred Guarantee Trustee shall not transfer this Preferred Securities Guarantee to any Person except a Holder of Preferred Securities exercising his or her rights pursuant to Section 5.4(b) or to a Successor Preferred Guarantee Trustee on acceptance by such Successor Preferred Guarantee Trustee of its appointment to act as Successor Preferred Guarantee Trustee. The right, title and interest of the Preferred Guarantee Trustee shall automatically vest in any Successor Preferred Guarantee Trustee, and such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered pursuant to the appointment of such Successor Preferred Guarantee Trustee. 6 11 (b) If an Event of Default actually known to a Responsible Officer of the Preferred Guarantee Trustee has occurred and is continuing, the Preferred Guarantee Trustee shall enforce this Preferred Securities Guarantee for the benefit of the Holders of the Preferred Securities. (c) The Preferred Guarantee Trustee, before the occurrence of any Event of Default and after the curing of all Events of Default that may have occurred, shall undertake to perform only such duties as are specifically set forth in this Preferred Securities Guarantee, and no implied covenants shall be read into this Preferred Securities Guarantee against the Preferred Guarantee Trustee. In case an Event of Default has occurred (that has not been cured or waived pursuant to Section 2.6) and is actually known to a Responsible Officer of the Preferred Guarantee Trustee, the Preferred Guarantee Trustee shall exercise such of the rights and powers vested in it by this Preferred Securities Guarantee, and use the same degree of care and skill in its exercise thereof, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (d) No provision of this Preferred Securities Guarantee shall be construed to relieve the Preferred Guarantee Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) prior to the occurrence of any Event of Default and after the curing or waiving of all such Events of Default that may have occurred: (A) the duties and obligations of the Preferred Guarantee Trustee shall be determined solely by the express provisions of this Preferred Securities Guarantee, and the Preferred Guarantee Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Preferred Securities Guarantee, and no implied covenants or obligations shall be read into this Preferred Securities Guarantee against the Preferred Guarantee Trustee; and (B) in the absence of bad faith on the part of the Preferred Guarantee Trustee, the Preferred Guarantee Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Preferred Guarantee Trustee and conforming to the requirements of this Preferred Securities Guarantee; but in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Preferred Guarantee Trustee, the Preferred Guarantee Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Preferred Securities Guarantee; (ii) the Preferred Guarantee Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Preferred Guarantee Trustee, 7 12 unless it shall be proved that the Preferred Guarantee Trustee was negligent in ascertaining the pertinent facts upon which such judgment was made; (iii) the Preferred Guarantee Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a Majority in Liquidation Amount of the Preferred Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Preferred Guarantee Trustee, or exercising any trust or power conferred upon the Preferred Guarantee Trustee under this Preferred Securities Guarantee; and (iv) no provision of this Preferred Securities Guarantee shall require the Preferred Guarantee Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if the Preferred Guarantee Trustee shall have reasonable grounds for believing that the repayment of such funds or liability is not reasonably assured to it under the terms of this Preferred Securities Guarantee or indemnity, reasonably satisfactory to the Preferred Guarantee Trustee, against such risk or liability is not reasonably assured to it. SECTION 3.2. CERTAIN RIGHTS OF THE PREFERRED GUARANTEE TRUSTEE. (a) Subject to the provisions of Section 3.1: (i) the Preferred Guarantee Trustee may conclusively rely, and shall be fully protected in acting or refraining from acting upon, any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed, sent or presented by the proper party or parties; (ii) any direction or act of the Guarantor contemplated by this Preferred Securities Guarantee shall be sufficiently evidenced by an Officers' Certificate; (iii) whenever, in the administration of this Preferred Securities Guarantee, the Preferred Guarantee Trustee shall deem it desirable that a matter be proved or established before taking, suffering or omitting any action hereunder, the Preferred Guarantee Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and conclusively rely upon an Officers' Certificate which, upon receipt of such request, shall be promptly delivered by the Guarantor; (iv) the Preferred Guarantee Trustee shall have no duty to see to any recording, filing or registration of any instrument (or any rerecording, refiling or registration thereof); (v) the Preferred Guarantee Trustee may consult with counsel, and the written advice or opinion of such counsel with respect to legal matters shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it 8 13 hereunder in good faith and in accordance with such advice or opinion. Such counsel may be counsel to the Guarantor or any of its Affiliates and may include any of its employees. The Preferred Guarantee Trustee shall have the right at any time to seek instructions concerning the administration of this Preferred Securities Guarantee from any court of competent jurisdiction; (vi) the Preferred Guarantee Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Preferred Securities Guarantee at the request or direction of any Holder, unless such Holder shall have provided to the Preferred Guarantee Trustee such security and indemnity, reasonably satisfactory to the Preferred Guarantee Trustee, against the costs, expenses (including attorneys' fees and expenses and the expenses of the Preferred Guarantee Trustee's agents, nominees or custodians) and liabilities that might be incurred by it in complying with such request or direction, including such reasonable advances as may be requested by the Preferred Guarantee Trustee; provided that, nothing contained in this Section 3.2(a)(vi) shall be taken to relieve the Preferred Guarantee Trustee, upon the occurrence of an Event of Default, of its obligation to exercise the rights and powers vested in it by this Preferred Securities Guarantee; (vii) the Preferred Guarantee Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Preferred Guarantee Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit; (viii) the Preferred Guarantee Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, nominees, custodians or attorneys, and the Preferred Guarantee Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; (ix) no third party shall be required to inquire as to the authority of the Preferred Guarantee Trustee to so act or as to its compliance with any of the terms and provisions of this Preferred Securities Guarantee, both of which shall be conclusively evidenced by the Preferred Guarantee Trustee's or its agent's taking such action; (x) whenever in the administration of this Preferred Securities Guarantee the Preferred Guarantee Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder, the Preferred Guarantee Trustee (A) may request instructions from the Holders of a Majority in Liquidation Amount of the Preferred Securities, (B) may refrain from enforcing such remedy or right or taking such other action until such instructions are received, and (C) shall be protected in conclusively relying on or acting in accordance with such instructions. 9 14 (b) No provision of this Preferred Securities Guarantee shall be deemed to impose any duty or obligation on the Preferred Guarantee Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it in any jurisdiction in which it shall be illegal, or in which the Preferred Guarantee Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Preferred Guarantee Trustee shall be construed to be a duty. SECTION 3.3. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF GUARANTEE. The Recitals contained in this Guarantee shall be taken as the statements of the Guarantor, and the Preferred Guarantee Trustee does not assume any responsibility for their correctness. The Preferred Guarantee Trustee makes no representation as to the validity or sufficiency of this Preferred Securities Guarantee. ARTICLE IV. THE PREFERRED GUARANTEE TRUSTEE SECTION 4.1. THE PREFERRED GUARANTEE TRUSTEE; ELIGIBILITY. (a) There shall at all times be a Preferred Guarantee Trustee which shall: (i) not be an Affiliate of the Guarantor; and (ii) be a corporation organized and doing business under the laws of the United States or any state or territory thereof or of the District of Columbia, or a corporation or Person permitted by the Securities and Exchange Commission to act as an institutional trustee under the Trust Indenture Act, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $50,000,000, and subject to supervision or examination by federal, state, territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the supervising or examining authority referred to above, then, for the purposes of this Section 4.1(a)(ii), the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. (b) If at any time the Preferred Guarantee Trustee shall cease to be eligible to so act under Section 4.1(a), the Preferred Guarantee Trustee shall immediately resign in the manner and with the effect set out in Section 4.2(c). (c) If the Preferred Guarantee Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Preferred Guarantee Trustee and the Guarantor shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act. 10 15 SECTION 4.2. APPOINTMENT, REMOVAL AND RESIGNATION OF THE PREFERRED GUARANTEE TRUSTEE. (a) Subject to Section 4.2(b), the Preferred Guarantee Trustee may be appointed or removed without cause at any time by the Guarantor. (b) The Preferred Guarantee Trustee shall not be removed in accordance with Section 4.2(a) until a Successor Preferred Guarantee Trustee has been appointed and has accepted such appointment by written instrument executed by such Successor Preferred Guarantee Trustee and delivered to the Guarantor. (c) The Preferred Guarantee Trustee appointed to office shall hold office until a Successor Preferred Guarantee Trustee shall have been appointed or until its removal or resignation. The Preferred Guarantee Trustee may resign from office (without need for prior or subsequent accounting) by an instrument in writing executed by the Preferred Guarantee Trustee and delivered to the Guarantor, which resignation shall not take effect until a Successor Preferred Guarantee Trustee has been appointed and has accepted such appointment by instrument in writing executed by such Successor Preferred Guarantee Trustee and delivered to the Guarantor and the resigning Preferred Guarantee Trustee. (d) If no Successor Preferred Guarantee Trustee shall have been appointed and accepted appointment as provided in this Section 4.2 within 60 days after delivery to the Guarantor of an instrument of resignation, the resigning Preferred Guarantee Trustee may petition any court of competent jurisdiction for appointment of a Successor Preferred Guarantee Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Successor Preferred Guarantee Trustee. (e) No Preferred Guarantee Trustee shall be liable for the acts or omissions to act of any Successor Preferred Guarantee Trustee. (f) Upon termination of this Preferred Securities Guarantee or removal or resignation of the Preferred Guarantee Trustee pursuant to this Section 4.2, the Guarantor shall pay to the Preferred Guarantee Trustee all fees and expenses accrued to the date of such termination, removal or resignation. ARTICLE V. GUARANTEE SECTION 5.1. GUARANTEE. The Guarantor irrevocably and unconditionally agrees to pay in full to the Holders the Guarantee Payments (without duplication of amounts theretofore paid by the Trust), as and when due, regardless of any defense, right of set-off or counterclaim that the Trust may have or assert. The Guarantor's obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by the Guarantor to the Holders or by causing the Trust to pay such amounts to the Holders. 11 16 SECTION 5.2. WAIVER OF NOTICE AND DEMAND. The Guarantor hereby waives notice of acceptance of this Preferred Securities Guarantee and of any liability to which it applies or may apply, presentment, demand for payment, any right to require a proceeding first against the Trust or any other Person before proceeding against the Guarantor, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. SECTION 5.3. OBLIGATIONS NOT AFFECTED. The obligations, covenants, agreements and duties of the Guarantor under this Preferred Securities Guarantee shall in no way be affected or impaired by reason of the happening from time to time of any of the following: (a) the release or waiver, by operation of law or otherwise, of the performance or observance by the Trust of any express or implied agreement, covenant, term or condition relating to the Preferred Securities to be performed or observed by the Trust; (b) the extension of time for the payment by the Trust of all or any portion of the Distributions, Redemption Price, Liquidation Distribution or any other sums payable under the terms of the Preferred Securities or the extension of time for the performance of any other obligation under, arising out of, or in connection with, the Preferred Securities (other than an extension of time for payment of Distributions, Redemption Price, Liquidation Distribution or other sum payable that results from the extension of any interest payment period on the Debentures or any extension of the maturity date of the Debentures permitted by the Indenture); (c) any failure, omission, delay or lack of diligence on the part of the Holders to enforce, assert or exercise any right, privilege, power or remedy conferred on the Holders pursuant to the terms of the Preferred Securities, or any action on the part of the Trust granting indulgence or extension of any kind; (d) the voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Trust or any of the assets of the Trust; (e) any invalidity of, or defect or deficiency in, the Preferred Securities; (f) any failure or omission to receive any regulatory approval or consent required in connection with the Preferred Securities (or the common equity securities issued by the Trust), including the failure to receive any approval of the Board of Governors of the Federal Reserve System required for the redemption of the Preferred Securities; (g) the settlement or compromise of any obligation guaranteed hereby or hereby incurred; or 12 17 (h) any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a guarantor, it being the intent of this Section 5.3 that the obligations of the Guarantor hereunder shall be absolute and unconditional under any and all circumstances. There shall be no obligation of the Holders to give notice to, or obtain consent of, the Guarantor with respect to the happening of any of the foregoing. SECTION 5.4. RIGHTS OF THE HOLDERS. (a) The Holders of a Majority in Liquidation Amount of the Preferred Securities have the right to direct the time, method and place of conducting of any proceeding for any remedy available to the Preferred Guarantee Trustee in respect of this Preferred Securities Guarantee or exercising any trust or power conferred upon the Preferred Guarantee Trustee under this Preferred Securities Guarantee. (b) Any Holder of Preferred Securities may institute a legal proceeding directly against the Guarantor to enforce its rights under this Preferred Securities Guarantee, without first instituting a legal proceeding against the Trust, the Preferred Guarantee Trustee or any other Person. 13 18 SECTION 5.5. GUARANTEE OF PAYMENT. This Preferred Securities Guarantee creates a guarantee of payment and not of collection. SECTION 5.6. SUBROGATION. The Guarantor shall be subrogated to all (if any) rights of the Holders of the Preferred Securities against the Trust in respect of any amounts paid to such Holders by the Guarantor under this Preferred Securities Guarantee; provided, however, that the Guarantor shall not (except to the extent required by mandatory provisions of law) be entitled to enforce or exercise any right that it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of payment under this Preferred Securities Guarantee, if, at the time of any such payment, any amounts are due and unpaid under this Preferred Securities Guarantee. If any amount shall be paid to the Guarantor in violation of the preceding sentence, the Guarantor agrees to hold such amount in trust for the Holders and to pay over such amount to the Holders. SECTION 5.7. INDEPENDENT OBLIGATIONS. The Guarantor acknowledges that its obligations hereunder are independent of the obligations of the Trust with respect to the Preferred Securities, and that the Guarantor shall be liable as principal and as debtor hereunder to make Guarantee Payments pursuant to the terms of this Preferred Securities Guarantee notwithstanding the occurrence of any event referred to in subsections (a) through (h), inclusive, of Section 5.3 hereof. ARTICLE VI. LIMITATION OF TRANSACTIONS; SUBORDINATION SECTION 6.1. LIMITATION ON TRANSACTIONS. So long as any of the Preferred Securities remain outstanding, if any of the circumstances described in Section 5.6 of the Indenture shall have occurred, then (a) the Guarantor shall not declare or pay any dividend on, make any distributions with respect to, or redeem, purchase, acquire or make a liquidation payment with respect to, any of its capital stock (other than (i) dividends or distributions in common stock of the Guarantor or any declaration of a non-cash dividend in connection with the implementation of a shareholder rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, and (ii) purchases of common stock of the Guarantor related to the rights under any of the Guarantor's benefit plans for its directors, officers or employees of), (b) the Guarantor shall not make any payment of principal or interest on or repay, repurchase or redeem any debt securities issued by the Guarantor which rank pari passu with or junior to the Debentures other than payments under this Preferred Securities Guarantee and (c) the Guarantor shall not redeem, purchase or acquire less than all of the Outstanding Debentures or any of the Preferred Securities. SECTION 6.2 RANKING. This Preferred Securities Guarantee will constitute an unsecured obligation of the Guarantor and will rank (a) subordinate and junior in right of payment to all Senior Debt, Subordinated Debt and Additional Senior Obligations (as defined in the Indenture) of the Guarantor, (b) pari passu with the most senior preferred securities or preference stock now or hereafter issued by the Guarantor and with any guarantee now or hereafter entered into by the Guarantor in respect of any preferred securities or preference stock of any Affiliate of the Guarantor, and (c) senior to the Guarantor's common stock. 14 19 ARTICLE VII. TERMINATION SECTION 7.1. TERMINATION. This Preferred Securities Guarantee shall terminate upon (a) full payment of the Redemption Price of all the Preferred Securities, (b) full payment of the amounts payable in accordance with the Trust Agreement upon liquidation of the Trust, or (c) distribution of the Debentures to the Holders of the Preferred Securities. Notwithstanding the foregoing, this Preferred Securities Guarantee shall continue to be effective or shall be reinstated, as the case may be, if at any time any Holder of Preferred Securities must restore payment of any sums paid under the Preferred Securities or under this Preferred Securities Guarantee. ARTICLE VIII. INDEMNIFICATION SECTION 8.1. EXCULPATION. (a) No Indemnified Person shall be liable, responsible or accountable in damages or otherwise to the Guarantor or any Covered Person for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Indemnified Person in good faith in accordance with this Preferred Securities Guarantee and in a manner that such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by this Preferred Securities Guarantee or by law, except that an Indemnified Person shall be liable for any such loss, damage or claim incurred by reason of such Indemnified Person's negligence or willful misconduct with respect to such acts or omissions. (b) An Indemnified Person shall be fully protected in relying in good faith upon the records of the Guarantor and upon such information, opinions, reports or statements presented to the Guarantor by any Person as to matters the Indemnified Person reasonably believes are within such other Person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Guarantor, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets from which Distributions to the Holders of the Preferred Securities might properly be paid. SECTION 8.2. INDEMNIFICATION. The Guarantor agrees to indemnify each Indemnified Person for, and to hold each Indemnified Person harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses (including reasonable legal fees and expenses) of defending itself against, or investigating, any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligation to indemnify as set forth in this Section 8.2 shall survive the termination of this Preferred Securities Guarantee. 15 20 ARTICLE IX. MISCELLANEOUS SECTION 9.1. SUCCESSORS AND ASSIGNS. All guarantees and agreements contained in this Preferred Securities Guarantee shall bind the successors, assigns, receivers, trustees and representatives of the Guarantor and shall inure to the benefit of the Holders of the Preferred Securities then outstanding. SECTION 9.2. AMENDMENTS. Except with respect to any changes that do not adversely affect the rights of the Holders (in which case no consent of the Holders will be required), this Preferred Securities Guarantee may only be amended with the prior approval of the Holders of at least a Majority in Liquidation Amount of the Preferred Securities. The provisions of Article VI of the Trust Agreement with respect to meetings of the Holders of the Preferred Securities apply to the giving of such approval. SECTION 9.3. NOTICES. All notices provided for in this Preferred Securities Guarantee shall be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied or mailed by registered or certified mail, as follows: (a) If given to the Preferred Guarantee Trustee, at the Preferred Guarantee Trustee's mailing address set forth below (or such other address as the Preferred Guarantee Trustee may give notice of to the Holders of the Preferred Securities): State Street Bank and Trust Company Two International Place, 4th Floor Boston, Massachusetts 02110 Attention: Corporate Trust Department (b) If given to the Guarantor, at the Guarantor's mailing address set forth below (or such other address as the Guarantor may give notice of to the Holders of the Preferred Securities): First Banks America, Inc. 135 North Meramec St. Louis, Missouri 63105 Attention: Chief Financial Officer (c) If given to any Holder of Preferred Securities, at the address set forth on the books and records of the Trust. 16 21 All such notices shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. SECTION 9.4. BENEFIT. This Preferred Securities Guarantee is solely for the benefit of the Holders of the Preferred Securities and, subject to Section 3.1(a), is not separately transferable from the Preferred Securities. SECTION 9.5. GOVERNING LAW. THIS PREFERRED SECURITIES GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE. 17 22 This Preferred Securities Guarantee is executed as of the day and year first above written. FIRST BANKS AMERICA, INC., as Guarantor By: ----------------------------------------- Name: Title: STATE STREET BANK AND TRUST COMPANY, as Preferred Guarantee Trustee By: ----------------------------------------- Name: Title: 18 EX-5.1 8 OPINION RE LEGALITY 1 EXHIBIT 5.1 [Letterhead of Jackson Walker L.L.P.] July 1, 1998 First Banks America, Inc. 135 North Meramec Ave. St. Louis, Missouri 63105 Attention: Board of Directors First America Capital Trust c/o First Banks America, Inc. 135 North Meramec Ave. St. Louis, Missouri 63105 Attention: Administrative Trustees Gentlemen: We have acted as counsel to First Banks America, Inc., a Delaware corporation (the "Company"), and First America Capital Trust, a Delaware statutory business trust ("First Capital"), in connection with the preparation of a Registration Statement on Form S-2 (the "Registration Statement") to be filed by the Company and First Capital with the Securities and Exchange Commission (the "SEC") for the purpose of registering under the Securities Act of 1933, as amended, preferred securities (the "Preferred Securities") of First Capital, subordinated debentures (the "Subordinated Debentures") of the Company and the guarantee of the Company with respect to the Preferred Securities (the "Guarantee"). In connection with this opinion, we have examined originals or copies, certified or otherwise identified to our satisfaction, of (i) the certificate of trust (the "Certificate of Trust") filed by First Capital with the Secretary of State of the State of Delaware on June 18, 1998; (ii) the Trust Agreement, dated as of June 18, 1998, with respect to First Capital; (iii) the form of the Amended and Restated Trust Agreement with respect to First Capital; (iv) the form of the Preferred Securities of First Capital; (v) the form of the Guarantee between the Company and State Street Bank and Trust Company, as trustee; (vi) the form of the Subordinated Debentures; and (vii) the form of the indenture (the "Indenture"), between the Company and State Street Bank and Trust Company, as trustee, in each case in the form incorporated by reference in the Registration Statement. We have also examined originals or copies, certified, or otherwise identified to our satisfaction, of such other documents, certificates, and records as we have deemed necessary or appropriate as a basis for the opinions set forth herein. 2 In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as copies and the authenticity of the originals of such copies. In examining documents executed by parties other than the Company or First Capital, we have assumed that such parties had the power, corporate or otherwise, to enter into and perform all obligations thereunder and have also assumed the due authorization by all requisite action, corporate or otherwise, and execution and delivery by such parties of such documents and that, except as set forth in paragraphs (1) and (2) below, such documents constitute valid and binding obligations of such parties. In addition, we have assumed that the Amended and Restated Trust Agreement of First Capital, the Preferred Securities of First Capital, the Guarantee, the Subordinated Debentures and the Indenture, when executed, will be executed in substantially the form reviewed by us. As to any facts material to the opinions expressed herein which were not independently established or verified, we have relied upon oral or written statements and representations of officers, trustees, and other representatives of the Company, First Capital, and others. We are members of the bar of the state of Texas, and we express no opinion as to the laws of any other jurisdiction other than the Delaware General Corporation Law. Based upon and subject to the foregoing and to other qualifications and limitations set forth herein, we are of the opinion that: 1. After the Indenture has been duly executed and delivered, the Subordinated Debentures, when duly executed, delivered, authenticated and issued in accordance with the Indenture and delivered and paid for as contemplated by the Registration Statement, will be valid and binding obligations of the Company, entitled to the benefits of the Indenture and enforceable against the Company in accordance with their terms, except to the extent that enforcement thereof may be limited by (i) bankruptcy, insolvency, reorganization, moratorium, or other similar laws now or hereafter in effect relating to creditors' rights generally, and (ii) general principles of equity regardless of whether enforceability is considered in a proceeding at law or in equity. 2. The Guarantee, when duly executed and delivered by the parties hereto, will be a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except to the extent that enforcement thereof may be limited by (i) bankruptcy, insolvency, reorganization, moratorium, or other similar laws now or hereafter in effect relating to creditors' rights generally, and (ii) general principles of equity regardless of whether enforceability is considered in a proceeding at law or in equity. We hereby consent to the reference to us under the caption "Validity of Securities" in the Prospectus forming a part of the Registration Statement and to the inclusion of this legal opinion as an Exhibit to the Registration Statement. Very truly yours, JACKSON WALKER, L.L.P. /s/ Jackson Walker L.L.P. EX-5.2 9 OPINION RE LEGALITY 1 [letterhead of Richards, Layton & Finger] July 1, 1998 First America Capital Trust c/o First Banks America, Inc. 135 North Meramec Clayton, Missouri 63105 Re: First America Capital Trust --------------------------- Ladies and Gentlemen: We have acted as special Delaware counsel for First America Capital Trust, a Delaware business trust (the "Trust"), in connection with the matters set forth herein. At your request, this opinion is being furnished to you. For purposes of giving the opinions hereinafter set forth, our examination of documents has been limited to the examination of originals or copies of the following: A. The Certificate of Trust of the Trust (the "Certificate"), as filed in the office of the Secretary of State of the State of Delaware (the "Secretary of State") on June 18, 1998; B. The Trust Agreement of the Trust, dated as of June 18, 1998, between First Banks America, Inc., a Delaware corporation (the "Company"), and the trustees of the Trust named therein; C. The Registration Statement (the "Registration Statement") on Form S-2, including a prospectus (the "Prospectus") relating to the ---% Cumulative Trust Preferred Securities of the Trust representing preferred undivided beneficial interests in the Trust (each, a "Preferred Security" and collectively, the "Preferred Securities"), as filed by the Company and the Trust as set forth therein with the Securities and Exchange Commission on July 1, 1998; D. A form of Amended and Restated Trust Agreement of the Trust, to be entered into among the Company, the trustees of the Trust named therein, and the holders, from time to time, of undivided beneficial interests in the Trust (the "Trust Agreement"), attached as an exhibit to the Registration Statement; and E. A Certificate of Good Standing for the Trust, dated June 29, 1998, obtained from the Secretary of State. Initially capitalized terms used herein and not otherwise defined are used as defined in the Trust Agreement. 2 First America Capital Trust June ---, 1998 Page 2 For purposes of this opinion, we have not reviewed any documents other than the documents listed above, and we have assumed that there exists no provision in any document that we have not reviewed that bears upon or is inconsistent with the opinions stated herein. We have conducted no independent factual investigation of our own but rather have relied solely upon the foregoing documents, the statements and information set forth therein and the additional matters recited or assumed herein, all of which we have assumed to be true, complete and accurate in all material respects. With respect to all documents examined by us, we have assumed (i) the authenticity of all documents submitted to us as authentic originals, (ii) the conformity with the originals of all documents submitted to us as copies or forms, and (iii) the genuineness of all signatures. For purposes of this opinion, we have assumed (i) that the Trust Agreement constitutes the entire agreement among the parties thereto with respect to the subject matter thereof, including with respect to the creation, operation and termination of the Trust, and that the Trust Agreement and the Certificate are in full force and effect and have not been amended, (ii) except to the extent provided in paragraph 1 below, the due creation or due organization or due formation, as the case may be, and valid existence in good standing of each party to the documents examined by us under the laws of the jurisdiction governing its creation, organization or formation, (iii) the legal capacity of natural persons who are parties to the documents examined by us, (iv) that each of the parties to the documents examined by us has the power and authority to execute and deliver, and to perform its obligations under, such documents, (v) the due authorization, execution and delivery by all parties thereto of all documents examined by us, (vi) the receipt by each Person to whom a Preferred Security is to be issued by the Trust (collectively, the "Preferred Security Holders") of a Preferred Security Certificate for such Preferred Security and the payment for the Preferred Security acquired by it, in accordance with the Trust Agreement and the Prospectus, and (vii) that the Preferred Securities are issued and sold to the Preferred Security Holders in accordance with the Trust Agreement and the Prospectus. We have not participated in the preparation of the Registration Statement and assume no responsibility for its contents. This opinion is limited to the laws of the State of Delaware (excluding the securities laws of the State of Delaware), and we have not considered and express no opinion on the laws of any other jurisdiction, including federal laws and rules and regulations relating thereto. Our opinions are rendered only with respect to Delaware laws and rules, regulations and orders thereunder which are currently in effect. Based upon the foregoing, and upon our examination of such questions of law and statutes of the State of Delaware as we have considered necessary or appropriate, and subject to the assumptions, qualifications, limitations and exceptions set forth herein, we are of the opinion that: F. The Trust has been duly created and is validly existing in good standing as a business trust under the Delaware Business Trust Act, 12 Del. C. Sec. 3801, et seq. - ------ ------ G. The Preferred Securities will represent valid and, subject to the qualifications set forth in paragraph 3 below, fully paid and nonassessable undivided beneficial interests in the assets of the Trust. H. The Preferred Security Holders, as beneficial owners of the Trust, will be entitled to the same limitation of personal liability extended to stockholders of private corporations 3 First America Capital Trust June ---, 1998 Page 3 for profit organized under the General Corporation Law of the State of Delaware. We note that the Preferred Security Holders may be obligated to make payments as set forth in the Trust Agreement. We consent to the filing of this opinion with the Securities and Exchange Commission as an exhibit to the Registration Statement. In addition, we hereby consent to the use of our name under the heading "Validity of Securities" in the Prospectus. In giving the foregoing consents, we do not thereby admit that we come within the category of Persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission thereunder. Except as stated above, without our prior written consent, this opinion may not be furnished or quoted to, or relied upon by, any other Person for any purpose. Very truly yours, EAM EX-8.1 10 OPINION RE TAX MATTERS 1 Exhibit 8.1 ----------- July 1, 1998 First Banks America, Inc. 135 North Meramec St. Louis, Missouri 63105 First America Capital Trust 135 North Meramec St. Louis, Missouri 63105 Re: First America Capital Trust ___% Cumulative Trust Preferred Securities Ladies and Gentlemen: We have acted as federal income tax counsel for First Banks America, Inc., a Delaware corporation (the "Company"), and First America Capital Trust, a statutory business trust created under the laws of Delaware (the "Trust"), in connection with the proposed issuance of: (i) __% Cumulative Trust Preferred Securities (the "Preferred Securities") of the Trust pursuant to the terms of the Amended and Restated Trust Agreement between the Company and State Street Bank and Trust Company, as Property Trustee (the "Trust Agreement"), to be offered in an underwritten public offering; (ii) Subordinated Debentures (the "Subordinated Debentures") of the Company pursuant to the terms of an indenture from the Company to State Street Bank and Trust Company, as Trustee (the "Indenture"), to be sold by the Company to the Trust; and (iii) the Preferred Securities Guarantee Agreement of the Company with respect to the Preferred Securities (the "Guarantee") between the Company and State Street Bank and Trust Company, as Guarantee Trustee. The Preferred Securities and the Subordinated Debentures are to be issued as contemplated by the registration statement on Form S-2 dated July 1, 1998 (the "Registration Statement") to be filed by the Company and the Trust to register the issuances of the Preferred Securities, the Subordinated Debentures and the Guarantee under the Securities Act of 1933, as amended (the "Act"). In connection therewith, we have participated in the preparation of the discussion set forth under the caption "Certain Federal Income Tax Consequences" (the "Tax Discussion") in the Registration Statement. Except as otherwise indicated, the terms utilized herein have the meaning ascribed to them in the Registration Statement. In rendering this opinion we have examined originals or copies, certified or otherwise identified to our satisfaction, of documents, corporate records and other instruments as we have deemed necessary or appropriate for purposes of this opinion including: (i) the Registration Statement; (ii) the Form of Indenture attached as an exhibit to the Registration Statement; (iii) the Form of the Subordinated Debentures attached as an exhibit to the Registration Statement; (iv) the Form of original Trust Agreement, attached as an exhibit to the Registration Statement; (v) the form of Amended and Restated Trust Agreement, attached as an exhibit to the Registration Statement; (vi) the Form of Guarantee attached as an exhibit to the Registration Statement; and (vii) the Form of Preferred Security Certificate attached as an exhibit to the Registration Statement (collectively the "Documents"). Our opinion is premised and conditioned on the accuracy of the facts contained in the Documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies, the authenticity of the originals of such latter documents, the genuineness of all signatures and the correctness of all representations made therein and on the assumption that 2 the transactions contemplated therein will be consummated in the manner described therein. In particular, and without limiting the scope of the preceding sentence, we have assumed for purposes of our opinion that the trustees will conduct the affairs of the Trust in accordance with the Trust Agreement. We have further assumed that there are no agreements or understandings contemplated therein other than those contained in the Documents. In rendering this opinion, we have also relied, without independent investigation or verification, upon the initial and continuing accuracy of the following certifications on behalf of the Company or the Trust, the initial and continuing accuracy of which constitute an integral basis for the opinions expressed herein: A. The Company and the Trust intend to create a debtor-creditor relationship between the Company, as debtor, and the Trust as creditor, upon the issuance of the Subordinated Debentures to the Trust by the Company, and the Company will: (i) record and at all times continue to reflect the Subordinated Debentures as indebtedness on its separate books and records for financial accounting purposes; and (ii) treat the Subordinated Debentures as indebtedness for all United States tax purposes. B. The sole assets of the Trust will be the Subordinated Debentures. C. The Company has no present intent to exercise its right to defer payments of interest by extending the interest payment period on the Subordinated Debentures. D. The Company believes that the likelihood that it would exercise its right to defer payments of interest by extending the interest payment period on the Subordinated Debentures at any time during which the Subordinated Debentures are outstanding is remote because of the restrictions that would be imposed on the Company's ability to pay dividends on its outstanding equity and its ability to make payments on its outstanding debt securities that rank pari passu or junior to the Subordinated Debentures in the event it elected to defer payments of interest on the Subordinated Debentures. E. The Company expects that it will be able to cause its wholly- owned subsidiaries to pay dividends to the Company in amounts and at times sufficient to enable the Company to make timely payments of interest and principal on the Subordinated Debentures. Subject to the assumptions, qualifications, and conditions set forth herein and assuming: (i) the final Documents will be substantially identical to the forms attached as exhibits to the Registration Statement; and (ii) full compliance with all the terms of the final Documents, we are of the opinion that under current law: The statements contained in the Tax Discussion, to the extent that they constitute matters of law or legal conclusions, as qualified therein, constitute, in all material respects, a fair and accurate summary, in general terms, of the United States federal income tax matters specifically addressed therein. This opinion is based on the Internal Revenue Code of 1986, as amended, U.S. Treasury regulations promulgated thereunder, and administrative and judicial interpretations thereof, all as in existence and in effect on the date hereof and all of which are subject to change, possibly on a retroactive basis. Any such changes could have a material impact upon the conclusions reached herein. The opinion expressed herein is not binding on the Internal 3 Revenue Service ("IRS") or the courts. The authorities on which this opinion is based are subject to various interpretations and there is no clear legal precedent dealing with the federal income tax characterization of securities similar to the Subordinated Debentures and the Preferred Securities. Additionally, the IRS has issued a Notice (Notice 94-47, 1994-1 C.B. 357) indicating that it intends to closely scrutinize securities similar to those contemplated to be issued in the transactions here in question. Accordingly, there can be no assurance that the IRS will not challenge the opinions expressed herein or that a court would not sustain such a challenge. We specifically note that we are rendering no opinion as to the state, local or foreign tax consequences associated with the Trust, the Subordinated Debentures or the Preferred Securities nor do we render any opinion as to any United States federal income tax consequences related thereto except as expressly addressed herein. Additionally, we undertake no obligation to update this opinion in the event there is either a change in the legal authorities, in the facts (including the taking of any action by any party to any of the transactions described in the Documents relating to such transactions) or in the Documents on which this opinion is based, or any inaccuracy in any of the representations or warranties upon which we have relied in rendering this opinion. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement, and to the use of our name under the headings "Certain Federal Income Tax Consequences" and "Legal Matters" in the Registration Statement. Sincerely, JACKSON WALKER, L.L.P. EX-10.(G) 11 FUNDS MANAGEMENT POLICY 1 [LOGO] BankTEXAS FUNDS MANAGEMENT POLICY In connection with its normal requirements to manage liquidity, BankTEXAS, N.A., ("THE BANK"), will enter into a variety of transactions with FIRST BANK (MISSOURI) (the "CENTRAL BANK") in which both parties will act as principal. All of the transactions referenced herein represent unsecured extensions of credit between the parties, and may include loans of portfolio securities, sales of Federal Funds, placements of deposits and purchases of certificates of deposit. 1. Loans of securities will be subject to the terms and conditions in a "Securities Borrowing Agreement", executed by THE BANK and the CENTRAL BANK. The parties will lend their own portfolio securities only and will not lend any securities pledged to or held for the accounts of any of its customers. The parties will maintain separate records to indicate which of their portfolio securities are loaned at any time and may request a report from the contraparty verifying the individual securities held in the collateral pool. 2. The Board of Directors of each party shall establish limits of no greater than 10% of the respective party's capital accounts for the transactions referenced by this policy. The limit shall be reviewed and approved by the Board of Directors on an annual basis, in conjunction with a review of the regularly available financial information on the contraparty. The Directors shall also consider the party's liquidity, asset-liability mix and profitability prior to establishing or renewing the limit. Board approval of this limit shall be noted in the official minutes of the board. Each party will notify the contraparty annually of any changes in limit. 3. The Board may change this policy at any of its regularly scheduled meeting, provided that written notification is forwarded to the Chief Executive Officer of the contraparty. $2,750,000 12-01-97 /s/ Monica Rinehart ---------- -------- ---------------------------------- LIMIT DATE Asst.- SECRETARY OF THE BOARD-BANK $20,000,000 /s/ Josephine Gahn ----------- -------- ----------------------------------------- LIMIT DATE ASST. SECRETARY OF THE BOARD-CENTRAL BANK EX-10.(T) 12 BROKERAGE SERVICE/LEASE AGREEMENT 1 BROKERAGE SERVICE/LEASE AGREEMENT --------------------------------- This Brokerage Service/Lease Agreement is made and entered into this 1st day of June, 1998, by and between BankTEXAS N.A. a financial institution (FI) and First Brokerage America L.L.C (FBAL) a Registered broker/dealer member of the NASD and SIPC. Reference to The Providers may include reference to an insurance agency that operates separately yet simultaneously with FBAL. WITNESSETH: WHEREAS, FBAL has developed a program to provide customers of affiliate banks access to nondeposit investment products, the terms and conditions are set forth herein: and WHEREAS, FBAL is a registered broker/dealer in the business of providing investment products and services at various banking locations of banks of First Bank's Inc.; and WHEREAS, the parties desire to establish a nondeposit investment product and services program that complies with all applicable laws and regulations, all in accordance with the terms of this agreement. NOW THEREFORE, in consideration of the mutual convenants and agreements made herein, and other good and valuable consideration, FBAL and FI hereby agree as follows: SECTION 1. LEASE AND SERVICE PROGRAM DESCRIPTION AND PRODUCTS ------------------------------------------------------------- (a) The FI will lease space (the exact nature, size, and location to be agreed upon by parties) to FBAL at the offices listed on schedule A attached hereto and made part of this agreement. The lease and service shall include use of office space, desks and other office equipment and furniture, copiers and fax machines, compliance training and support, computer maintenance, software and hardware support, tracking services, customer lists as provided by applicable law, sales training, E & O insurance and all other services necessary to offer nondeposit investment products and insurance at the financial institution locations. The products offered will be through the respective entity (broker/dealer or insurance agency) as required by law. FBAL will have the right to sublease space to other providers subject to the approval of FI. (b) Customers of FI will be offered certain nondeposit investment products through Providers at the branch office. FBAL will make available and execute securities transactions on an agency or riskless principal basis upon the order and for the account of customers as defined in and required by the NASD Rules of Fair Practice, through Registered Representatives (as defined in Section 2(e)) for the following 2 products: equity securities, debt securities, open-end/closed end mutual funds, variable insurance products and variable annuities. Insurance Agency will provide insurance products such as fixed annuities, term insurance, long term care and other products defined as insurance products by the Insurance code of the specific state where offered. As required, Insurance Agency will oversee insurance requirement and supervision of variable insurance products that are defined as securities. These include variable life and variable annuities. (c) All products offered through the program are subject to the prior approval of FI and The Providers. (d) Any change in the agreement deemed necessary by changes in rules, regulations and statutes shall be implemented promptly. (e) From time to time Providers will have the right to bill the other for special services as agreed to and for actual costs of travel and training as it relates to personnel costs. SECTION 2: BRANCH OFFICE DESIGNATION ------------------------------------ a) The program will operate at all mutually agreeable offices of FI. Branches offices for purposes of securities regulations will be established if the branch holds itself out as a place where securities business is transacted and it meets the most conservative definition of a branch office as defined by NASD Regulation. Branch office operations must be operated in areas clearly identified and segregated from the areas where depository functions are located when possible. b) FI and Providers will mutual agree to a marketing plan and budget. It will be mutually determined who will bear the cost of such marketing plans. c) Securities related activities shall be conducted only through properly registered and/or licensed representatives. These individuals may also be dual employees of financial institution and FBAL and may be independent contractors of the insurance agency. Designated principals of FBAL or management and compliance staff of Providers will exclusively supervise the sales activities under NASD rules and will train, supervise, control and assume responsibility for all the activities contemplated herein. Registered Representatives shall provide all securities services as directed by the FBAL Supervisory Procedures Manual. No one who has been barred from membership in any self Regulatory Organization shall be allowed to associate with the program. d) FBAL and FI agree that all payments due under this agreement will be paid directly to the FI, who will then distribute their proportional share to sales force provided that all business was transacted properly and the individual was properly licensed to conduct the line of business. FI will be responsible for payment of all non-securities and insurance related wages as well, including any withholding or other taxes required by law. 3 e) FI and Providers agree and acknowledge that no unregistered or non- licensed employees will engage in any securities or insurance activities, nor will they receive any compensation based on transactions or sales. Unregistered employees shall be prohibited from recommending any security or insurance product, and handling any question that might require any familiarity with the securities or insurance industry. The same employees may not handle or maintain customer securities or funds other than providing clerical or ministerial assistance. FI and Providers will monitor the activities of its employees to ensure their compliance with the limitations as set forth in this agreement. FI understands that joint employees must exercise extreme caution when acting in a dual capacity as bank employee and nondeposit product provider. f) All marketing relating to the offering of nondeposit investment products shall comply with all applicable rules and regulations. FI agrees and understands that it may not advertise or communicate with the public in any media or through any medium without prior written approval of the Providers. SECTION 3: CUSTOMER ACCOUNTS ---------------------------- a) Each account opened by a Registered Representative will be approved in writing by a designated principal of FBAL. The branch will promptly forward all appropriate information regarding each new account to Provider's Service Center, presently at 11901 Olive Blvd., Creve Coeur, MO. 63141. b) At the time the customer account is opened, the Registered Representative shall disclose orally and in writing to each customer that the nondeposit investment products are: (a) NOT FDIC insured; (b) are neither obligations of FI or Providers nor deposits of FI or Providers; (c) are not guaranteed by agency or FI or their parent companies; (d) involves investment risk including the possible loss of principal. Written acknowledgement will be obtained of such. c) All general securities transactions shall be effected on a fully disclosed basis through clearing brokers designated by FBAL. No customer funds or securities shall be held by the branch office or Registered Representative. d) FI agrees to provide FBAL reasonable access to the names and addresses of its customers, and those of its parent or affiliates to the extent permissible under applicable law or regulation. Any information obtained will be used only in conjunction with the marketing of FBAL services and shall remain confidential and shall not be disclosed to third parties without prior written permission of the other party or as may be required by the Regulations. Any books and records relating to the sale of securities and insurance securities shall remain the property of FBAL which shall ensure that those books and records comply with all the statutory and regulatory requirements of the SEC and SROs. 4 SECTION 4. MUTUAL CONVENANT OF FBALLC AND FI -------------------------------------------- FBAL and FI convenant to each other that it is the joint responsibility of FBAL and FI to assure that the Registered Representatives shall make the Required Disclosures (i) orally to each customer during any sales presentation (including telemarketing contacts), (ii) orally whenever investment advice regarding any non-deposit investment product is provided, (iii) orally and in writing prior to or at the time an investment account is opened; and (iv) at other such times as may be required by the Regulations. SECTION 5. COMPLIANCE --------------------- (a) FBAL and FI agree that they will actively promote, and all FBAL employees and Registered Representatives shall abide by all applicable Regulations, and the FBAL Supervisory Procedures and policies, as each may change from time to time. (b) All branch office operations shall be conducted under the joint supervision of FBAL and FI in accordance with all applicable Regulations. (c) FBAL shall be responsible for compliance with SEC, NASD, state securities rules and regulations, and other rules or regulations of other governmental or self-regulating body as may be applicable to securities brokerages, operations, or transactions. SECTION 6. CONFIDENTIALITY AND ACCESS TO RECORDS ------------------------------------------------ (a) FBAL agrees that all customer account information obtained by FBAL from FI is confidential and proprietary in nature and that said information shall not be divulged by FBAL to any third party except for the normal transaction of business. (b) All information, materials, and any other documents or data associated with the Program are confidential and proprietary in nature and shall not be used by or disclosed to any person or entity by any of the parties hereto or their employees except as necessary in operation of the program or as required by applicable Regulations. (c) Each party to this agreement shall permit officers or authorized designees of the other parties, any governmental agency, exchange, or association having regulatory jurisdiction over the affairs of that party, or independent accountants retained for the purpose of conducting an audit of the financial affairs of the requesting party, full and complete access to inspect records and books, and monitor activities at any Branch Office or other location of information during normal business hours. 5 SECTION 7 - ENTIRE AGREEMENT AND ATTACHMENTS -------------------------------------------- This document including all its attachments, constitute the entire agreement between said parties with respect to the offering of such products and services contemplated herein. Any changes to this agreement shall be in writing and agreed to by each party. The terms of this agreement are continuous unless one party gives notice of its intention to terminate the contract giving sixty days advance notice. We agree to the terms and conditions discussed herein this 1st day of June, 1998. For Financial Institution: Joseph Milcoun /s/ Joseph Milcoun, Jr. 6-1-98 - ---------------------------------- Vice President Date For First Brokerage America L.L.C.: /s/ C. Bryan Stilwell 6-1-98 - ---------------------------------- Principal Date 6 EXHIBIT "A" FEE SCHEDULE All service fees and rental connected with this Agreement are due and payable on or about the 15th of each month following an initial 30 day set up period. Such service fees are conditioned upon the volume of invested dollars collected in the offices of the institution and, therefore, will vary from month to month. Payments are based upon a percentage of commissions generated and are outlined in Table "1" below. TABLE "1" PERCENT OF GROSS COMMISSIONS PAYABLE FOR LEASE AND SERVICES FI will receive a percentage of gross revenues generated on products sold through this agreement. Any chargeback or errors will reduce this amount accordingly. ADDENDUM Travel costs and other fees generated solely for the benefit of FI will be reimbursed by FI to FBAL. This shall include airfare, hotels and meals, but shall not include printing of materials and other costs that are the obligation of FBAL to provide so that business can be conducted. EX-12.1 13 RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12.1 FIRST BANKS AMERICA, INC. RATIO OF EARNINGS TO FIXED CHARGES
AT MARCH 31, AT DECEMBER 31, --------------- ------------------------------------------------ 1998 1997 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ---- ---- Net income before tax and minority interest... $ 1,890 931 6,972 1,292 (7,013) (10,366) 219 Add back: Interest: With deposits............................. 5,899 4,508 19,155 15,533 13,134 11,072 9,750 Without deposits.......................... 537 545 2,439 1,597 2,299 3,952 2,073 Rent expense.................................. 266 254 1,043 826 997 589 397 Earnings base: With deposits............................. 8,055 5,693 27,170 17,651 7,118 1,295 10,366 Without deposits.......................... 2,693 1,730 10,454 3,715 (3,717) (5,825) 2,689 Fixed charges: Including interest on deposits............ 6,165 4,762 20,198 16,359 14,131 11,661 10,147 Excluding interest on deposits............ 803 799 3,482 2,423 3,296 4,541 2,470 Ratio: Including interest on deposits............ 1.31x 1.20x 1.35x 1.08x 0.50x 0.11x 1.02x Excluding interest on deposits............ 3.35 2.17 3.00 1.53 (1.13) (1.28) 1.09
EX-13.1 14 FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K (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, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-8937 First Banks America, Inc. (Exact name of registrant as specified in its charter) Delaware 75-1604965 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 135 North Meramec Clayton, Missouri 63105 (Address of principal executive offices) (Zip Code) (314) 854-4600 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12 (b) of the Act: Name of each exchange on Title of class which registered -------------- ---------------- Common Stock, $.15 Par Value Per Share New York Stock Exchange Securities registered pursuant to Section 12 (g) of the Act: None 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 amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by nonaffiliates of the registrant, based on the closing price of the Common Stock on the New York Stock Exchange on March 18, 1998 was $34,535,397. For purposes of this computation, officers, directors and 5% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed an admission that such directors, officers or 5% beneficial owners are, in fact, affiliates of the registrant. As of March 18, 1998, 2,758,661 shares of the registrant's Common Stock, $0.15 par value and 2,500,000 shares of the registrant's Class B Common Stock, $0.15 par value, were outstanding. Documents incorporated by reference: Portions of the Annual Report to Stockholders for the year ended December 31, 1997 are incorporated by reference into Parts I, II and IV of this report. 2 PART I The following portions of the 1997 Annual Report to Stockholders (the "1997 Annual Report") of First Banks America, Inc. ("FBA" or the "Company") are incorporated by reference in this report: Page(s) in 1997 Section Annual Report Management's Discussion and Analysis of Financial Condition and Results of Operations 3-22 Selected Consolidated and Other Financial Data 2 Consolidated Financial Statements 24-46 Supplementary Financial Data 23 Range of Price of Common Stock 48 Except for the parts of the 1997 Annual Report to Stockholders 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. Such forward-looking statements are subject to certain risks and uncertainties, not all of which can be predicted or anticipated. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include general market conditions as well as conditions affecting the banking industry generally and factors having a specific impact on the Company, including but not limited to fluctuations in interest rates and in the economy; the impact of laws and regulations applicable to the Company and changes therein; competitive conditions in the markets in which the Company conducts its operations; and the ability of the Company to respond to changes in technology. With regard to the Company's efforts to grow through acquisitions, factors that could affect the accuracy or completeness of such forward-looking statements include the potential for higher than acceptable operating costs arising from the geographic dispersion of the offices of FBA's subsidiaries, as compared with competitors operating solely in contiguous markets; the competition of larger acquirers with greater resources than FBA; fluctuations in the prices at which acquisition targets may be available for sale and in the market for FBA's 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 FBA is a bank holding company which was organized as a Delaware corporation in 1978 and was previously known as BancTEXAS Group Inc. The Company's executive office is located at 135 North Meramec, Clayton, Missouri. The principal function of the Company is to assist management of its two banking subsidiaries, BankTEXAS N.A. ("BankTEXAS") and First Bank of California ("FB California"). BankTEXAS and FB California are collectively referred to herein as the "Subsidiary Banks." At December 31, 1997, FBA had approximately $451.3 million in total assets, $313.4 million in total loans, net of unearned discount, $383.9 million in total deposits and $39.9 million in total stockholders' equity. 3 In 1994 FBA sold 2,500,000 shares of Class B common stock (the "Class B Stock") for $30 million cash in a private placement to First Banks, Inc., a multi-bank holding company headquartered in Clayton, Missouri ("First Banks"). As a result, First Banks became the owner of approximately 65% of the then-outstanding voting stock of FBA, which includes the Class B Stock and the class of common stock owned by all other stockholders (referred to herein as the "Common Stock"). The Class B Stock has the same voting rights per share as the Common Stock, and the two classes of stock are generally equivalent except the Class B Stock is not registered with the Securities and Exchange Commission, not listed on any exchange and, with limited exceptions, it is not transferable, other than to an affiliate of First Banks. In the event FBA were to commence the payment of dividends to its stockholders, the Class B Stock would receive dividends only to the extent that dividends on the Common Stock exceed $.45 per share annually. The terms of the Class B Stock allow First Banks to purchase additional shares of Class B Stock if a sufficient number of additional shares of Common Stock are issued to cause First Banks' voting power to fall below 55%, at prices to be determined based on a formula related to the book value per share of common stock. The Class B Stock is convertible into shares of Common Stock at any time after August 31, 1999 at the option of First Banks. On February 2, 1998, FBA completed its acquisition of First Commercial Bancorp, Inc. ("FCB"), Sacramento, California, as described further in the Management's Discussion and Analysis section of the 1997 Annual Report and in Note 2 to the Consolidated Financial Statements, both of which are incorporated herein by reference. In connection with the acquisition of FCB, FBA issued approximately 1,555,700 shares of Common Stock, of which 1,266,176 shares were issued to First Banks. FBA also issued to First Banks a convertible debenture in the principal amount of $6.5 million (the "Debenture") in exchange for outstanding debentures of FCB; principal and interest on the Debenture are convertible at the option of First Banks into shares of Common Stock. As of March 18, 1998, the total Common Stock and Class B Stock owned by First Banks, including the shares of Common Stock that would be issued to First Banks upon conversion of the Debenture, constituted approximately 74.8% of the outstanding voting stock of FBA. First Banks exercises control over the management and policies of FBA and the election of its officers and directors. The Company implemented a one-for-fifteen stock split in 1995, whereby each fifteen shares of Common Stock and Class B Stock were converted into one share of Common Stock and Class B Stock, respectively, and the par value of each share of stock of each class was changed from $.01 to $.15. References in this report to either class of such stock refer to the same after giving effect to the reverse stock split, and the numbers of shares referred to in periods prior to the effective date of the reverse stock split are restated in this Report to give effect to the reverse stock split. Descriptions of the business operations of FBA and the Subsidiary Banks and the Company's policies with respect to potential acquisitions are set forth in the Management's Discussion and Analysis section of the 1997 Annual Report which is incorporated herein by reference. FBA, BankTEXAS and FB California purchase certain services and supplies, including data processing services, internal auditing, loan review, income tax preparation and assistance, accounting, asset/liability and investment services, loan servicing and other management and administrative services, through its majority stockholder, First Banks. Additional information regarding the nature of the arrangements with First Banks appears in Note 13 to the Consolidated Financial Statements incorporated herein by reference. Competition and Branch Banking The activities in which the Subsidiary Banks are engaged are highly competitive. Those activities and the geographic markets served primarily involve competition with other banks and thrift institutions, some of which are affiliated with large regional or national holding companies. Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans and other credit and service charges, the quality of services rendered, the convenience of banking facilities and, in the case of loans to large commercial borrowers, relative lending limits. 4 In addition to competing with other banks and thrift institutions within their primary service areas, the Subsidiary Banks also compete with other financial intermediaries, such as credit unions, industrial loan associations, securities firms, insurance companies, small loan companies, finance companies, mortgage companies, real estate investment trusts, certain governmental agencies, credit organizations and other enterprises. Additional competition for depositors' funds comes from United States Government securities, private issuers of debt obligations and suppliers of other investment alternatives for depositors. Many of 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 state regulations governing state-chartered banks. As a result, such non-bank competitors may have certain advantages over the Company in providing some services. The trend in the Subsidiary Banks' markets has been for holding companies to acquire independent banks and thrifts. The Company believes it will continue to face competition in the acquisition of banks and thrifts from larger holding companies. Many of the financial institutions with which the Company competes are larger than the Company and have substantially greater resources available for making acquisitions. Subject to regulatory approval, both commercial banks and thrift institutions situated in Texas and California are permitted to establish branches throughout each of those states, thereby creating the potential for additional competition in the Subsidiary Banks' service areas. Supervision and Regulation General The Company and the Subsidiary Banks are extensively regulated under federal and state law. These laws and regulations are intended to protect depositors, not stockholders. To the extent the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Changes in applicable laws or regulations may have a material effect on the business and prospects of the Company. The operations of the Company may be affected by legislative changes and by the policies of various regulatory authorities. The Company is unable to predict the nature or the extent of the effects on its business and earnings that fiscal or monetary policies, economic controls or new federal or state legislation may have in the future. FBA is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHC Act") and, as such, is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System (the "FRB"). FBA is required to file annual reports with the FRB and to provide the FRB such additional information as it may require. BankTEXAS and FB California are subject to supervision and regulation by the Office of the Comptroller of the Currency (the "OCC") and the State Banking Department of the State of California, respectively. The Subsidiary Banks are also regulated by the Federal Deposit Insurance Corporation ("FDIC"), which provides deposit insurance to the Subsidiary Banks. 5 Recent and Pending Legislation The enactment of the legislation described below has significantly affected the banking industry generally and will have an ongoing effect on the Company and the Subsidiary Banks in the future. Financial Institutions Reform, Recovery, and Enforcement Act of 1989. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") reorganized and reformed the regulatory structure applicable to financial institutions generally. Among other things, FIRREA enhanced the supervisory and enforcement powers for the federal bank regulatory agencies; required insured financial institutions to guaranty repayment of losses incurred by the FDIC in connection with the failure of an affiliated financial institution; required financial institutions to provide their primary federal regulator with notice, under certain circumstances, of changes in senior management and broadened authority for bank holding companies to acquire savings institutions. Under FIRREA, federal bank regulators were granted expanded enforcement authority over "institution-affiliated parties" (i.e., officers, directors, controlling stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution). Federal banking regulators have power to bring enforcement actions against insured institutions and institution-affiliated parties, including cease and desist orders, prohibition orders, civil money penalties, termination of insurance and the imposition of operating restrictions and capital plan requirements. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Since the enactment of FIRREA, the federal bank regulators have significantly increased the use of written agreements to correct compliance deficiencies with respect to applicable laws and regulations and to ensure safe and sound practices. Violations of such written agreements are grounds for initiation of cease-and-desist proceedings. FIRREA granted the FDIC back-up enforcement authority to recommend enforcement action to an appropriate federal banking agency and to bring such enforcement action against a financial institution or an institution-affiliated party if such federal banking agency fails to follow the FDIC's recommendation. In addition, FIRREA generally requires public disclosure of final enforcement actions by the federal banking agencies. FIRREA also established a cross-guarantee provision ("Cross-Guarantee") pursuant to which the FDIC may recover from a depository institution losses the FDIC incurs in providing assistance to, or paying off the depositors of, any of such depository institution's affiliated insured banks or thrifts. The Cross-Guarantee thus enables the FDIC to assess a holding company's healthy Bank Insurance Fund (the "BIF") members and Savings Association Insurance Fund (the "SAIF") members for the losses of any of such holding company's failed BIF and SAIF members. Cross-Guarantee liabilities are generally superior in priority to obligations of the depository institution to its stockholders due solely to their status as stockholders and obligations to other affiliates. Cross-Guarantee liabilities are generally subordinated to deposit liabilities, secured obligations or any other general or senior liabilities, and any obligations subordinated to depositors or other general creditors. The Federal Deposit Insurance Corporation Improvement Act of 1991. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was adopted to recapitalize the BIF and impose certain supervisory and regulatory reforms on insured depository institutions. FDICIA includes provisions, among others, to: (i) increase the FDIC's line of credit with the U. S. Treasury in order to provide the FDIC with additional funds to cover the losses of federally insured banks; (ii) reform the deposit insurance system, including the implementation of risk-based deposit insurance premiums; (iii) establish a format for closer monitoring of financial institutions to enable prompt corrective action by banking regulators when a financial institution begins to experience financial difficulty; (iv) establish five capital levels for financial institutions ("well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized") that would impose more scrutiny and restrictions on less capitalized institutions; (v) require the banking regulators to set operational and managerial standards for all insured depository institutions and holding 6 companies, including limits on excessive compensation to executive officers, directors, employees and principal stockholders, and establish standards for loans secured by real estate; (vi) adopt certain accounting reforms and require annual on-site examinations of federally insured institutions, including the ability to require independent audits of banks and thrifts; (vii) revise risk-based capital standards to ensure they (a) take adequate account of interest-rate changes, concentration of credit risk and the risks of nontraditional activities, and (b) reflect the actual performance and expected risk of loss of multi-family mortgages; and (viii) restrict state-chartered banks from engaging in activities not permitted for national banks unless they are adequately capitalized and have FDIC approval. Further, FDICIA permits the FDIC to make special assessments on insured depository institutions, in amounts determined by the FDIC to be necessary to give it adequate assessment income to repay amounts borrowed from the U.S. Treasury and other sources or for any other purpose the FDIC deems necessary. FDICIA also grants authority to the FDIC to establish semiannual assessment rates on BIF and SAIF member banks so as to maintain these funds at the designated reserve ratios. As noted above, FDICIA authorizes and, under certain circumstances, requires the federal banking agencies to take certain actions against institutions that fail to meet certain capital-based requirements. Under FDICIA, the federal banking agencies are required to establish five levels of insured depository institutions based on leverage limit and risk-based capital requirements established for institutions subject to their jurisdiction, plus, in their discretion, individual additional capital requirements for such institutions. Under the final rules that have been adopted by each of the federal banking agencies, an institution will be designated: (i) well capitalized if the institution has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater and a leverage ratio of 5% or greater, and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure; (ii) adequately capitalized if the institution has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater and a leverage ratio of 4% or greater; (iii) undercapitalized if the institution has a total risk-based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is less than 4% or a leverage ratio that is less than 4%; (iv) significantly undercapitalized if the institution has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a leverage ratio that is less than 3%; and (v) critically undercapitalized if the institution has a ratio of tangible equity to total assets that is equal to or less than 2%. Undercapitalized, significantly undercapitalized and critically undercapitalized institutions are required to submit capital restoration plans to the appropriate federal banking agency and are subject to certain operational restrictions. Moreover, companies controlling an undercapitalized institution are required to guarantee the subsidiary institution's compliance with the capital restoration plan subject to an aggregate limitation of the lesser of 5% of the institution's assets at the time it received notice that it was undercapitalized or the amount of the capital deficiency when the institution first failed to meet the plan. 7 Significantly or critically undercapitalized institutions and undercapitalized institutions that fail to submit or comply with acceptable capital restoration plans will be subject to regulatory sanctions. A forced sale of shares or merger, restriction on affiliate transactions and restrictions on rates paid on deposits are required to be imposed by the banking agency unless it is determined 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 16 to the Consolidated Financial Statements, incorporated herein by reference, each of the Subsidiary Banks was "well capitalized" as of December 31, 1997. Pursuant to FDICIA, the federal banking agencies adopted real estate lending guidelines pursuant to which each insured depository institution is required to adopt and maintain written real estate lending policies in conformity with the prescribed guidelines. Under these guidelines, each institution is expected to set loan-to-value ratios not exceeding the supervisory limits set forth in the guidelines. A loan-to-value ratio is generally defined as the total loan amount divided by the appraised value of the property at the time the loan is originated. The guidelines require the institution's real estate policy also require 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 and interest payable on deposit accounts by depository institutions and the fees assessable against deposit accounts, so that consumers can make a meaningful comparison between the competing claims of financial institutions with regard to deposit accounts and products. Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. In 1994 Congress enacted the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act"). Beginning in 1995, bank holding companies have had 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 would have the right commencing in 1997, to convert the banks which it owns in different states to branches of a single bank. A state is permitted to "opt-out" of the law which will permit conversion of separate banks to branches, but is not permitted to "opt-out" of the law allowing bank holding companies from other states to enter the state. The State of Texas adopted ""opt-out"" legislation in 1995 which has the effect of delaying, or possibly preventing permanently, the conversion of banks in Texas to branches of banks headquartered in other states. 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. 8 Economic Growth and Regulatory Paperwork Reduction Act of 1996. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("EGRPRA") streamlined the non-banking activities application process for well-capitalized and well-managed bank holding companies. Under EGRPRA, qualified bank holding companies may commence a regulatory approved non-banking acquisition or share purchase, assuming the size of the acquisition does not exceed 10% of risk-weighted assets of the acquiring bank holding company and the consideration does not exceed 15% of Tier 1 capital. The foregoing prior notice requirement also applies to commencing non-banking activity de novo which has been previously approved by order of the FRB, but has not yet been implemented by regulations. EGRPRA also provides for the recapitalization of the SAIF in order to bring it into parity with the BIF of the FDIC. Pending Legislation. Because of concerns relating to competitiveness and the safety and soundness of the banking industry, Congress is considering a number of wide-ranging proposals for altering the structure, regulation and competitive relationships of the nation's financial institutions. Among such bills are 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 the Company 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 anticompetitive result, unless the anticompetitive effects of the proposed transaction are clearly outweighed by a greater public interest in meeting the convenience and needs of the community to be served. The FRB also considers capital adequacy and other financial and managerial factors in reviewing acquisitions or mergers. The BHC Act also prohibits a bank holding company, with certain limited exceptions: (i) from acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company; or (ii) from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by FRB regulation or order, have been identified as activities closely related to the business of banking or of managing or controlling banks. In making this determination, the FRB considers whether the performance of such activities by a bank holding company can be expected to produce benefits to the public such as greater convenience, increased competition or gains in efficiency in resources, which can be expected to outweigh the risks of possible adverse effects such as decreased or unfair competition, conflicts of interest or unsound banking practices. FIRREA, which is described in more detail above, made a significant addition to this list of permitted non-bank activities for bank holding companies by providing that bank holding companies may acquire thrift institutions upon approval by the FRB and the applicable regulatory authority for the thrift institutions. 9 Insurance of Accounts. The FDIC provides insurance to deposit accounts at the Subsidiary Banks to a maximum of $100,000 for each insured depositor. Through December 31, 1992, all FDIC-insured institutions, whether members of the BIF or the SAIF, paid the same premium (23 cents per $100 of domestic deposits) under a flat-rate system mandated by law. FDICIA required the FDIC to raise the reserves of the BIF and the SAIF, implement a risk-related premium system and adopt a long-term schedule for recapitalizing the BIF. Effective in 1993, the FDIC amended its regulations regarding insurance premiums to provide that a bank or thrift would pay an insurance assessment within a range of 23 cents to 31 cents per $100 of domestic deposits, depending on its risk classification. The FDIC adopted an amendment to the BIF risk-based assessment schedule, effective January 1, 1996, which effectively eliminated deposit insurance assessments for most commercial banks and other depository institutions with deposits insured by the BIF, 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 the enactment of EGRPRA and as part of the recapitalization of the SAIF, the overall assessment rate for 1997 was revised to equal 1.29 cents and 6.44 cents per $100 of assessable deposits of BIF and SAIF members, respectively. The deposits of BankTEXAS consist solely of BIF deposits, and the deposits of FB California include both BIF and SAIF deposits. Regulations Governing Capital Adequacy. The federal bank regulatory agencies use capital adequacy guidelines in their examination and regulation of bank holding companies and banks. If the capital falls below the minimum levels established by these guidelines, the bank holding company or bank may be denied approval to acquire or establish additional banks or nonbank businesses or to open facilities. The FRB, the FDIC and the OCC adopted risk-based capital guidelines for banks and bank holding companies, and the OTS has adopted similar guidelines for thrifts. The risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profiles among financial institutions and holding companies, to account for off-balance-sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance-sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items. The 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 theses 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 the Subsidiary Banks. The requirement of deducting certain intangibles in computing capital ratios contained in the guidelines, however, could adversely affect the ability of the Company to make acquisitions in the future in transactions that would be accounted for using the purchase method of accounting. Community Reinvestment Act . The Community Reinvestment Act of 1977 (the "CRA") requires that, in connection with examinations of financial institutions within their jurisdiction, the federal banking regulators must evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those banks. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility. 10 Regulations Governing Extensions of Credit. The Subsidiary Banks are subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to FBA or its subsidiaries and affiliates, or investments in their securities and on the use of their securities as collateral for loans to any borrowers. These regulations and restrictions may limit the Company's ability to obtain funds from the Subsidiary Banks for its cash needs, including funds for acquisitions and for payment of dividends, interest and operating expenses. Further, under the BHC Act and certain regulations of the FRB, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. For example, the Subsidiary Banks may generally not require a customer to obtain other services from the Subsidiary Banks or any other affiliated bank or the Company and may not require the customer to promise not to obtain other services from a competitor, as a condition to an extension of credit to the customer. The Subsidiary Banks are also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal stockholders or any related interest of such persons. Extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral as, and following credit underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions with persons not covered and who are not employees; and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. The Subsidiary Banks are also subject to certain lending limits and restrictions on overdrafts to such persons. 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 advances from Federal Home Loan Banks ("FHLBs"), before borrowing from the Federal Reserve Bank. Federal Home Loan Bank System. The Subsidiary Banks are members of the Federal Home Loan Bank System ("FHLB System"), which consists of twelve regional FHLBs, each subject to supervision and regulation by the Federal Housing Finance Board, an independent agency created by FIRREA. The FHLBs provide a central credit facility primarily for member institutions. The Subsidiary Banks are required to acquire and hold shares of capital stock in an FHLB in an amount at least equal to 1% of the aggregate principal amount of their respective unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20th of advances (borrowings) from the FHLB, whichever is greater. The Subsidiary Banks were in compliance with these regulations at December 31, 1997, with investments of $4.7 million in stock of the FHLB of Dallas held by BankTEXAS and $473,000 in stock of the FHLB of San Francisco held by FB California. 11 Restrictions on Thrift Acquisitions. FBA is prohibited from acquiring, without prior approval of the Director of the OTS, (i) control of any savings institution or savings and loan holding company or substantially all the assets thereof; or (ii) more than 5% of the voting shares of a savings institution or holding company which is not a subsidiary. Furthermore, such an acquisition would require FBA itself to become registered as a savings and loan holding company subject to all applicable regulations of the OTS. Dividends. The Company's primary source of funds in the future is the dividends, if any, paid by the Subsidiary Banks. The ability of the Subsidiary Banks to pay dividends is limited by federal laws, by the regulations promulgated by the bank regulatory agencies and by principles of prudent bank management. In addition, the amount of dividends the Subsidiary Banks may pay to the Company is limited by the provisions of First Banks' credit agreement with a group of unaffiliated lenders, which imposes certain minimum capital requirements. Additional information concerning limitations on the ability of the Subsidiary Banks to pay dividends appears in Note 12 to the Consolidated Financial Statements and is incorporated herein by reference. Monetary Policy and Economic Control The commercial banking business is affected not only by general economic conditions, but also by the monetary policies of the 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 this 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 or the Subsidiary Banks cannot be predicted. Employment As of March 18, 1998, the Company employed 225 persons, none of whom were covered by a collective bargaining agreement. The Company considers its employee relations to be good. 12 Item 2. Properties FBA's executive office is located at the executive office owned by First Banks at 135 N. Meramec, Clayton, Missouri. The headquarters of the Subsidiary Banks are (i) in the case of BankTEXAS, in a building owned by BankTEXAS located at 8828 Westheimer, Houston, Texas; and (ii) in the case of FB California, in a leased building located at 865 Howe Avenue, Sacramento, California. In addition to those offices, as of March 18, 1998, the Subsidiary Banks do business at 15 branch offices in Texas and California, of which five are owned and 10 are leased. FBA considers the properties at which it does business to be in good condition, suitable for the business conducted at each location. To the extent that its properties or those acquired in connection with the acquisition of other entities provide space in excess of that effectively utilized in the operations of the Subsidiary Banks, FBA seeks to lease or sub-lease any excess space to third parties. Additional information regarding the premises and equipment utilized by the Subsidiary Banks appears in Note 5 to the Consolidated Financial Statements incorporated herein by reference. Item 3. Legal Proceedings There are various claims and pending actions against FBA and the Subsidiary Banks in the ordinary course of business. It is the opinion of management of FBA, in consultation with legal counsel, the ultimate liability, if any, resulting from such claims and pending actions will have no material adverse effect on the financial position or results of operations of FBA. Item 4. Submission of Matters to a Vote of Security Holders An Annual Meeting of Stockholders was held on January 23, 1998. The six directors of the Company were reelected, with the vote totals indicated in the following table: Name of Director For Withheld ---------------- --- -------- Allen H. Blake 3,407,001 26,619 Charles A. Crocco, Jr. 3,407,072 26,548 James F. Dierberg 3,407,067 26,553 Edward T. Story, Jr. 3,407,067 26,553 Mark T. Turkcan 3,407,067 26,613 Donald W. Williams 3,407,067 26,553
The following matters, all of which were related to the acquisition of FCB (which is described in detail in the 1997 Annual Report in Management's Discussion and Analysis of Financial Condition and Results of Operations and in Note 2 to the Consolidated Financial Statements, both of which are incorporated herein by reference) were approved at the Annual Meeting with the votes indicated: For Against Abstain Broker Non-votes --- ------- ------- ---------------- Agreement and Plan of Merger with FCB 2,922,963 14,431 4,615 491,711 Issuance of Common Stock to First Banks 2,903,910 31,557 6,442 491,711 Issuance of convertible debenture to First Banks 2,892,140 41,909 7,861 491,711
13 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters Market Information FBA has two classes of common stock. The Common Stock is listed on the New York Stock Exchange ("NYSE") under the symbol "FBA." All of the Class B Stock was issued to First Banks in 1994 in a private placement, and is not listed or traded. See "Item 1, Business -- General." Continued listing of the Common Stock on the NYSE is subject to various requirements, including the financial eligibility and distribution requirements of the NYSE. Information regarding the number of stockholders and the market prices for Common Stock since January 1, 1996 is set forth under the caption "Investor Information" of the 1997 Annual Report and is incorporated herein by reference. Dividends The Company has not paid any dividends on its Common Stock in recent years. The ability of a bank holding company such as FBA to pay dividends is limited by regulatory requirements and by the receipt of dividend payments from the Subsidiary Banks, which are also subject to regulatory requirements; see Note 12 to the Consolidated Financial Statements, incorporated herein by reference. Item 6. Selected Financial Data The information required by this item is incorporated herein by reference from page 2 of the 1997 Annual Report under the caption "Selected Consolidated and Other Financial Data." 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 from pages 3 through 23 of the 1997 Annual Report under the caption "Management's Discussion and Analysis." Item 7a. Quantitative and Qualitative Disclosure About Market Risk The information required by this item is incorporated herein by reference from the 1997 Annual Report under the caption "Management's Discussion and Analysis - Interest Rate Risk Management." Item 8. Financial Statements and Supplementary Data The consolidated financial statements of FBA are incorporated herein by reference from pages 25 through 47 of the 1997 Annual Report under the captions "Consolidated Balance Sheets," "Consolidated Statements of Operations," "Consolidated Statements of Changes in Stockholders' Equity," "Consolidated Statements of Cash Flows," "Notes to Consolidated Financial Statements" and "Independent Auditors' Report." Supplementary Financial Information regarding FBA is incorporated herein by reference from page 24 of the 1997 Annual Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 14 PART III Item 10. Directors and Executive Officers of the Registrant Board of Directors As of March 18, 1998, the Board of Directors consisted of seven members, who are identified in the following table. Each of the directors was elected or appointed to serve a one-year term and until his successor has been duly qualified for office.
Director Principal Occupation During Last Five Years and Name Age since Directorships of Public Companies ---------------------------------------------------------------------------------------------------------------- Allen H. Blake 55 1994 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; Executive Vice President of First Banks since 1996; Senior Vice President of First Banks from 1992 until 1996; Secretary and Director of First Banks since 1988; joined First Banks as Vice President and Chief Financial Officer in 1984. Charles A. Crocco, Jr.(1) 59 1988 Partner in the law firm of Crocco & De Maio, P.C., New YorkCity since 1970; Director of The Hallwood Group Incorporated (merchant banking). James F. Dierberg 60 1994 Chairman of the Board of Directors, Chief Executive Officer and President of FBA since 1995; Chairman of the Board and Chief Executive Officer of First Banks since 1988; Director of First Banks since 1979; President of First Banks, 1979-1992 and 1994- present. Albert M. Lavezzo (2) 61 1998 President and Chief Operating Officer of Favaro, Lavezzo, Gill, Caretti & Heppell, Vallejo, California, a professional legal corporation. Edward T. Story, Jr. (1) 54 1987 President, Chief Executive Officer and Director of SOCO International, plc, a corporation listed on the London Stock Exchange, engaged in international oil and gas operations, since 1991; from 1990 until 1991, Chairman of Thaiatex Petroleum Company; from 1981 to 1990, Vice Chairman And Chief Financial Officer of Conquest Exploration Company; Director of Cairn Energy plc, Hallwood Realty Corporation, Snyder Oil Corporation And Seaunion Holdings, Ltd. Mark T. Turkcan 42 1994 Executive Vice President (Retail and Mortgage Banking), First Banks, since 1996; Senior Vice President (Retail and Mortgage Banking), First Banks, since 1994 and Vice President from 1990 until 1994; joined First Banks when Clayton Savings and Loan Association, St. Louis, Missouri (now First Bank), for whom Mr. Turkcan was employed in various capacities since 1985, was acquired by FirstBanks in 1990. 15 Donald W. Williams 50 1995 Executive Vice President of First Banks since 1996; Senior Vice President of First Banks from 1993 until 1996; Director of FCB from 1995 until its merger into FBA in February 1998; Chief Credit Officer of First Banks and executive officer of various subsidiaries of First Banks since 1993; previously served as Senior Vice President in charge of commercial credit approval, commercial loan operations, international operations and the credit department of Mercantile Bank of St. Louis, N.A. from 1989 ,until 1993. Mr. Williams currently serves as Executive Vice President and Chief Credit Officer of First Banks and Chairman and Chief Executive Officer of the California subsidiaries thereof.
- - ------------- (1) Member of the Audit Committee. (2) Mr. Lavezzo was the Chairman of the Board of Directors of Surety Bank, Vallejo, California ("Surety") prior to its acquisition by FBA in December 1997. The agreement by which Surety was acquired provided that FBA would cause a person designated by Surety's Board of Directors to be appointed to FBA's Board of Directors, and Mr. Lavezzo was so designated. Executive Officers The executive officers of the Company as of March 18, 1998 were is follows: Name Age FBA Office(s) held - ------------------------------------------------------------------------------- James F. Dierberg 60 Chairman of the Board, President and Chief Executive Officer. Allen H. Blake 55 Vice President, Chief Financial Officer and Secretary. David F. Weaver 50 Executive Vice President of FBA since 1995; Chairman of the Board, Chief Executive Officer and President of BankTEXAS since 1994; President of BankTEXAS Houston N.A. (predecessor of BankTEXAS) from 1988 to 1994. The executive officers were each elected by the Board of Directors to the office indicated. There is no family relationship between any of the nominees for director, directors or executive officers of the Company or its subsidiaries. Item 11. Executive Compensation The following table sets forth certain information regarding compensation earned during the year ended December 31, 1997, and specified information with respect to the two preceding years, by Mr. Weaver, who is the only executive officer of FBA whose annual compensation in 1997 from FBA or the Subsidiary Banks exceeded $100,000. Neither Mr. Dierberg nor Mr. Blake receives any compensation directly from either the Company or the Subsidiary Banks. The Company and the Subsidiary Banks have entered into various contracts with First Banks, of which Messrs. Dierberg and Blake are directors and executive officers, pursuant to which services are provided to the Company and the Subsidiary Banks (see "Compensation Committee Interlocks and Insider Participation" for additional information regarding contracts with First Banks). 16
SUMMARY COMPENSATION TABLE FOR YEAR ENDED DECEMBER 31, 1997 Name and Principal Position Year Salary (1) Bonus All Other Compensation (2) - - --------------------------------------------------------------------------------------------------------------- David F. Weaver, Executive Vice 1997 $ 103,750 $22,000 $3,144 President; Chairman of the Board, 1996 86,875 20,625 2,172 President and Chief Executive Officer 1995 107,500 0 3,225 of BankTEXAS N.A.
- - --------------------- (1) The total of all other annual compensation for each of the named officers is less than the amount required to be reported which is the lesser of (a) $50,000 or (b) ten percent (10%) of the total of the annual salary and bonus paid to that person. (2) All items reported are FBA's matching contributions to the 401(k) Plan for the year indicated. FBA has omitted from this report tables which would disclose information regarding stock options granted during 1997, stock options exercised during 1997 and long term incentive plan awards. No options were granted to or exercised by executive officers in 1997, and FBA does not have a long term incentive plan. Director Compensation Directors who are not officers of FBA or affiliated with First Banks ("Unaffiliated Directors," consisting in 1997 of Messrs. Crocco and Story) were paid fees for their service as directors in 1997, consisting of an annual retainer of $7,500, a fee for each meeting of the Board of Directors attended of $3,000 and a fee of $500 for each committee meeting attended. Effective January 1, 1998, Unaffiliated Directors of FBA are to be paid a fee of $2,000 for each meeting of the Board of Directors attended and a fee of $500 for each committee meeting attended. Unaffiliated Directors also participate in the 1993 Directors' Stock Bonus Plan (the "Stock Bonus Plan"), which provides for an annual grant of 500 shares of Common Stock to each such director. Future grants would apply equally to current directors and to any individual who becomes a director of FBA in the future. The maximum number of shares that may be issued will not exceed 16,667 shares, and the plan will expire on July 1, 2001. Directors' compensation expense of $13,000 was incurred in 1997 in connection with the Stock Bonus Plan. None of the four directors of FBA who are also executive officers of First Banks (Messrs. Dierberg, Blake, Turkcan and Williams) receive any compensation from FBA or the Subsidiary Banks for service as a director, nor do they participate in the Stock Bonus Plan or any other compensation plan of FBA or the Subsidiary Banks. First Banks, of which Messrs. Dierberg, Blake, Turkcan and Williams are executive officers and Messrs. Dierberg and Blake are directors, provides various services to FBA and the Subsidiary Banks for which it is compensated (see "Compensation Committee Interlocks and Insider Participation"). Compensation Committee Interlocks and Insider Participation Messrs. Dierberg and Blake, who are executive officers of FBA but do not receive any compensation for their services as such, are also members of the Board of Directors and executive officers of First Banks. Mr. Blake was also a director and executive officer of FCB prior to its merger into FBA in February 1998. First Banks 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 FBA served during 1997 as a member of the Compensation Committee, or any other committee performing comparable functions, or as a director, of another entity any of whose executive officers or directors served on FBA's Compensation Committee. First Banks provides management services to FBA and the Subsidiary Banks. Management services are provided under a management fee agreement whereby FBA compensates First Banks on an hourly basis for its use of personnel for various functions including internal audit, loan review, income tax preparation and assistance, accounting, asset/liability and investment services, loan servicing and other management and administrative services. Fees paid under this agreement were $931,000 and $687,000 for the years ended December 31, 1997 and 1996, respectively. The fees paid for management services are at least as favorable as could have been obtained from an unaffiliated third party. 17 Because of the affiliation with First Banks and the geographic proximity of certain of their offices, FBA shares the cost of certain personnel and services used by FBA and First Banks. This includes the salaries and benefits of certain loan and administrative personnel. The allocation of the shared costs are charged and/or credited under the terms of cost sharing agreements entered into during 1997. Because this involves distributing essentially fixed costs over a larger asset base, it allows each bank to receive the benefit of personnel and services at a reduced cost. Fees paid under these agreements were $383,000 for the year ended December 31, 1997. Effective April 1, 1997, First Services L.P., a limited partnership indirectly owned by FBA's Chairman and his children through its general partners and limited partners, began providing data processing and various related services to FBA under the term of data processing agreements. Previously, these services were provided by a subsidiary of First Banks. Fees paid under these agreements were $643,000 and $311,000 for the years ended December 31, 1997 and 1996, respectively. The fees paid for data processing services are at least as favorable as could have been obtained from an unaffiliated third party. The Subsidiary Banks participate in loans with other bank affiliates of First Banks; as of December 31, 1997, $41.9 million of purchased loan participations and $42.7 million of sold loan participations were outstanding. Loans are purchased and sold at prevailing interest rates and terms at the time of such transactions and in accordance with the credit standards and policies of the purchasing entity. FBA borrows funds from First Banks pursuant to a promissory note agreement. As of March 18, 1998, the balance advanced under the note was $13.1 million. See Note 13 to the Consolidated Financial Statements, incorporated herein by reference. Employee Benefit Plans FBA maintains various employee benefit plans. Directors are not eligible to participate in such plans except the 1990 Stock Option Plan and the 1993 Directors' Stock Bonus Plan unless they are also employees of FBA or one of its subsidiaries. Although Messrs. Blake and Dierberg are executive officers, they are not participants in any employee benefit plans of FBA. The Employees Retirement Plan (the "Pension Plan") is a noncontributory, defined benefit plan for all eligible officers and employees of FBA and its subsidiaries. During 1994, the Company discontinued the accumulation of benefits under the Pension Plan. While the Pension Plan continues in existence and provides benefits which had then accumulated, no additional benefits have accrued to participants since 1994, and no new participants will become eligible for benefits thereafter. Benefits under the Pension Plan are based upon annual base salaries and years of service as of 1994 and are payable only upon retirement or disability and, in some instances, at death. A participant who fulfilled the eligibility and tenure requirements prior to the discontinuation of accumulation of benefits will receive, upon reaching the normal retirement age of 65, monthly benefits based upon average monthly compensation during the five consecutive calendar years out of his or her last ten calendar years prior to 1994 that provided the highest average compensation. As of December 31, 1997, Mr. Weaver would be eligible to receive annual benefits of approximately $11,000 upon retirement at age 65. 18 Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth, as of March 18, 1998, certain information with respect to the beneficial ownership of Common Stock and Class B Stock by each person known to the Company to be the beneficial owner of more than five percent of the outstanding shares of either class of stock, by each director and executive officer and by all executive officers and directors as a group:
Title of Name of Beneficial Number of Shares and Nature of Percent of - - ------------------------------------------------------------------------------------------------------------- Class Owner Beneficial Ownership Class Class B Stock First Banks, Inc. 2,500,000 (1)(2)(3) 100.0 135 N. Meramec Clayton, Missouri 63105 Class B Stock James F. Dierberg 2,500,000 (1)(2)(3) 100.0 Common Stock First Banks, Inc. 1,939,685 (1)(2)(3)(4) 56.5 Common Stock James F. Dierberg 1,939,685 (1)(2)(3)(4) 56.5 Common Stock Allen H. Blake 1,902 (5) * Common Stock Charles A. Crocco, Jr. 9,272 (6) * Common Stock Albert M. Lavezzo 20,164 (5) * Common Stock Edward T. Story, Jr. 9,182 (6) * Common Stock Mark T. Turkcan 200 (5) * Common Stock David F. Weaver 8,000 (5) * Common Stock Donald W. Williams 1,033 (5) * All executive officers 1,989,438 shares 58.0% of Common and directors as a Common Stock (4) Stock group (8 persons) 2,500,000 shares 100% of Class Class B Stock B Stock
* Less than one percent (1) The shares shown as beneficially owned by First Banks and James F. Dierberg comprise 100% of the outstanding s hares and percentages reflected are Common Stock. Each share of Common Stock and Class B Stock is entitled to one vote on matters subject to stockholder vote. Under Rule 13d-3(d), shares not outstanding which are subject to options, warrants, rights, or conversion privileges exercisable within 60 days are deemed outstanding for the purpose of calculating the number and percentage owned by such person, but not deemed outstanding for the purpose of calculating the percentage owned by each other person listed. All of the shares of Class B Stock and Common Stock owned by First Banks are pledged to secure a loan to First Banks from a group of unaffiliated lenders. The related credit agreement contains customary provisions which could ultimately result in transfer of such shares if First Banks were to default in the repayment of the loan and such default were not cured, or other arrangements satisfactory of the lenders were not made, by First Banks. (2) The controlling stockholders of First Banks are (i) the James F. Dierberg, II, Family Trust, dated December 30, 1992; (ii) Mary W. Dierberg and Michael James Dierberg, trustees under the living trust of Michael James Dierberg, dated July 24, 1989; (iii) the Ellen C. Dierberg Family Trust, dated December 30, 1992; (iv) James F. Dierberg, trustee of the James F. Dierberg living trust, dated October 8, 1985; (v) the Michael J. Dierberg Family Trust, dated December 30, 1992; and (vi) First Trust (Mary W. Dierberg and First Bank, Trustees) established U/I James F. Dierberg, dated December 12, 1992. Mr. James F. Dierberg and Mrs. Mary W. Dierberg are husband and wife, and Messrs. James F. Dierberg, II, Michael James Dierberg and Miss Ellen C. Dierberg are their adult children. 19 (3) Due to the relationships among James F. Dierberg, Mary W. Dierberg, First Bank and the three children of James F. and Mary W. Dierberg, Mr. Dierberg is deemed to share voting and investment power over all of the outstanding voting stock of First Banks which in turn exercises voting and investment power over the shares of Common Stock and Class B Stock attributed to it in the table. (4) Includes 673,509 shares of Common Stock which First Banks has the right to acquire upon conversion of $6.5 million principal amount plus $1.9 million accrued interest on a convertible debenture issued to First Banks in connection with the acquisition by FBA of FCB. Such shares are deemed outstanding for the purpose of calculating the percentage ownership of First Banks, Mr. Dierberg and executive officers and directors as a group, but are not otherwise taken into account in calculating the percentages shown in the table. (5) All of the shares attributed in the table to Messrs. Blake, Turkcan, Weaver and Williams are owned by them directly; Mr. Lavezzo owns 8,710 shares directly and 11,454 shares indirectly through a profit-sharing/pension plan. (6) The shares attributed to Messrs. Crocco and Story include shares subject to vested, currently exercisable stock options granted under the Company's 1990 Stock Option Plan. Mr. Crocco has an option covering 6,666 shares; he owns directly 2,606 shares. Mr. Story has an option covering 6,666 shares; he owns directly 2,516 shares. Item 13. Certain Relationships and Related Transactions The Subsidiary Banks have had in the past, and may have in the future, loan transactions in the ordinary course of business with directors of FBA or their affiliates. These loan transactions have been and will be on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unaffiliated persons and did not and will not involve more than the normal risk of collectibility or present other unfavorable features. The Subsidiary Banks do not extend credit to officers of FBA or of the Subsidiary Banks, except extensions of credit secured by mortgages on personal residences, loans to purchase automobiles and personal credit card accounts. Certain of the directors and officers of FBA and their respective affiliates have deposit accounts with the Subsidiary Banks. It is the policy of the Subsidiary Banks not to permit any officers or directors of the Subsidiary Banks or their affiliates to overdraw their respective deposit accounts unless that person has been previously approved for overdraft protection under a plan whereby a credit limit has been established in accordance with the standard credit criteria of the Subsidiary Banks. 20 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) 1. Financial Statements and Supplementary Data: The financial statements and supplemental data filed as part of this Report are listed under Item 8. 2. Financial Statement Schedules: These schedules are omitted for the reason they are not required or are not applicable. 3. Exhibits: The exhibits are listed in the index of exhibits required by Item 601 of Regulation S-K at Item (c) below and are incorporated herein by reference. (b) Reports on Form 8-K FBA filed a Current Report on Form 8-K on December 17, 1997. Items 2 and 7 reported the acquisition of Surety Bank through a merger with FB California. Included in Item 7 of the Report are the following financial information and pro forma financial information relating to Surety Bank: 1. Consolidated Balance Sheet as of September 30, 1997 and December 31, 1996 (Unaudited). 2. Consolidated Statements of Operations for the three and nine months ended September 30, 1997 and 1996 (Unaudited). 3. Consolidated Statements of Changes in Stockholders' Equity for the year ended December 31, 1996 and the nine months ended September 30, 1997 (Unaudited). 4. Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 1997 and 1996 (Unaudited). 5. Audited Consolidated Financial Statements as of and for the years ended December 31, 1996 and 1995. 6. Pro Forma Combined Condensed Balance Sheet as of December 31,1996 (Unaudited). 7. Pro Forma Consolidated Condensed Statements of Operations for the nine months ended September 30, 1997 and 1996 and for the year ended December 31, 1996 (Unaudited). 8. Notes to Pro Forma Combined Condensed Financial Statements (Unaudited). (c) The index of required exhibits is included beginning on page 20 of this Report. 21 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 America, Inc. By: /s/ James F. Dierberg ------------------------- James F. Dierberg Chairman of the Board, President and Chief Executive Officer March 26, 1998 By: /s/ Allen H. Blake ---------------------- Allen H. Blake Chief Financial Officer and Principal Accounting Officer March 26, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signatures Title Date ---------- ----- ---- /s/ James F. Dierberg Director March 26, 1998 --------------------- James F. Dierberg /s/ Allen H. Blake Director March 26, 1998 ------------------ Allen H. Blake /s/ Charles A. Crocco. Jr. Director March 26, 1998 -------------------------- Charles A. Crocco, Jr. /s/ Albert M. Lavezzo Director March 26, 1998 --------------------- Albert M. Lavezzo /s/ Edward T. Story, Jr. Director March 26, 1998 ------------------------ Edward T. Story, Jr. /s/ Mark T. Turkcan Director March 26, 1998 ------------------- Mark T. Turkcan /s/ Donald W. Williams Director March 26, 1998 ---------------------- Donald W. Williams 22 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - -------------------------------------------------------------------------------- 3(a) Restated Certificate of Incorporation of the Company effective August 31, 1995 (filed as Exhibit 3(a) to Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 and incorporated herein by reference). 3(b) Amended and Restated Bylaws of the Company (as amended April 21, 1995) (filed as Exhibit 3(b) to Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 and incorporated herein by reference). 4(a) Specimen Stock Certificate for Common Stock (filed as Exhibit 1.01 to the Company's Amendment No. 1 to Form 8-A on Form 8, dated September 4, 1987, and incorporated herein by reference). 10(a)* BancTEXAS Group Inc. 1990 Stock Option Plan (as amended July 22, 1993) (filed as Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, and incorporated herein by reference). 10(b)* 1993 Directors' Stock Bonus Plan (filed as Exhibit 10(k) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 and incorporated herein by reference). 10(c) Stock Purchase and Operating Agreement by and between First Banks, Inc., a Missouri Corporation and the Company, dated May 19, 1994 (filed as Exhibit 10(d) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 and incorporated herein by reference). 10(d)* Management Agreement by and between First Banks, Inc. and BankTEXAS N.A., dated November 17, 1994 (filed as Exhibit 10(h) to the Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10(e)* Data Processing Agreement by and between First Serv, Inc. (a subsidiary of First Banks, Inc.) and BankTEXAS N.A., dated December 1, 1994 (filed as Exhibit 10(i) to the Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10(f)* Financial Management Policy by and between First Banks, Inc. and the Company, dated September 15, 1994 (filed as Exhibit 10(j)) to the Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10(g)* Federal Funds Agency Agreement by and between First Banks, Inc. and the Company, dated September 15, 1994 (filed as Exhibit 10(k) to the Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 23 10(h)* Funds Management Policy by and between First Banks, Inc. and BankTEXAS, N.A., dated September 15, 1994 (filed as Exhibit 10(l) to the Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10(i)* Management Services Agreement by and between First Banks, Inc. and Sunrise Bank of California dated December 16, 1996 (filed as Exhibit 10(j)) to the Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 10(j)* Service Agreement by and between First Serv, Inc. and Sunrise Bank of California (relating to data processing services) dated November 21, 1996 (filed as Exhibit 10(k) to the Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 10(K)* Federal Funds Agency Agreement by and between First Banks, Inc. and Sunrise Bank of California dated November 19, 1996 (filed as Exhibit 10(l) to the Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 10(1)* Funds Management Policy by and between First Banks, Inc. and Sunrise Bank of California dated November 19, 1996 (filed as Exhibit 10(m) to the Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 10(m) Agreement and Plan of Reorganization dated July 28, 1997, by and between FBA and Sure Bank (filed as Exhibit 2 to the Current Report on Form 8-K dated August 7, 1997 and incorporated herein by reference). 10(n) Agreement and Plan of Merger by and between FBA and Pacific Bay Bank dated September 22, 1997 (filed as Exhibit 2(b) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference). 10(o) Agreement and Plan of Merger by and between FBA and FCB dated October 3, 1997 (filed as Exhibit 2(c) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference). 10(p) Promissory note payable to First Banks, Inc. dated November 4, 1997 (filed as Exhibit 10(o) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference). 1O(q)* Cost sharing agreement by and among First Bank & Trust, Sunrise Bank of California, Sundowner Corporation and First Banks America, Inc. 10(r)* Service Agreement by and between First Services, L.P. and BankTEXAS N. A., dated April 1, 1997. 10(s)* Service Agreement by and between First Services, L.P. and First Bank of California, dated April 1, 1997. 13 1997 Annual Report to Stockholders filed herewith. Portions not specifically incorporated by reference in this Report are not deemed "filed" for the purposes of the Securities Exchange Act of 1934. 21 Subsidiaries of the Company - filed herewith. 23(a) Consent of Peat Marwick LLP-- filed herewith. 27 Financial Data Schedule. ------------------- * Exhibits designated by an asterisk in this Index to Exhibits relate to management contracts and/or compensatory plans or arrangements. 24 EXHIBIT 10(Q) COST SHARING AGREEMENT BY AND AMONG FIRST BANK & TRUST SUNRISE BANK SUNDOWNER CORPORATION AND FIRST BANKS AMERICA This Cost Sharing Agreement (the "Agreement") is made this 21st day of January 1997, by and between First Bank & Trust, Irvine, California, a California banking corporation ("First Bank") and Sunrise Bank, Roseville, California, a California banking corporation ("Sunrise"), (each "Bank" and collectively the "Banks") and Sundowner Corp, Inc., a Nevada corporation ("Sundowner Corp.") and First Banks America, Inc. a Delaware corporation ("First Banks America"). WHEREAS First Bank is currently operating as a commercial and retail bank in the State of California, with offices in Walnut Creek and San Jose, California, as well as Orange County and Los Angeles County, California, and desires to share with Sunrise Bank and Sundowner Corp and First Banks America the costs, benefits and services of certain personnel and WHEREAS Sunrise Bank is currently operating as a commercial and retail bank in the State of California, with offices in Roseville, Citrus Heights and San Francisco, California, and desires to share with First Bank the costs, benefits and services of certain personnel, and purchase certain other services from First Bank, WHEREAS Sundowner Corp. is a registered Bank Holding Company, and First Banks America is a registered Bank Holding Company, and desire to share with First Bank the costs, benefits and services of certain personnel and purchase certain other services from First Bank, WHEREAS First Bank is a wholly-owned subsidiary of First Banks, Inc., a Missouri corporation and a multi-bank and thrift holding company ("FB, Inc.") and WHEREAS FB, Inc. has acquired majority control of Sunrise Bank, THEREFORE, in consideration of the premises and the mutual terms and provisions set forth in the Agreement, First Bank, Sunrise Bank, Sundowner Corp. and First Banks America hereby agree as follows: Services to be performed: First Bank shall undertake to perform certain services for the benefit of Sunrise Bank, Sundowner Corp. and First Banks America, including, but not limited to those enumerated below, as and when requested by Sunrise Bank or Sundowner Corp. or First Banks America, as the case may be, and approved by First Bank, these services will generally be provided by employees of First Bank, but may include services provided by external sources such as independent contractors or consultants retained by First Bank on behalf of itself and Sunrise Bank and Sundowner Corp. and First Banks America, as the case may be. First Bank will prepare a monthly statement to Sunrise Bank and Sundowner Corp. and First Banks America, respectively, indicating the nature of the services performed, the entity performing such services and the fees charged for such services. Sunrise Bank, Sundowner Corp. and First Banks America shall undertake to perform certain services for the benefit of First Bank, including, but not limited to those enumerated below, as and when requested by First Bank and approved by Sunrise Bank, Sundowner Corp. and First Banks America. These services will generally be provided by employees of Sunrise Bank, Sundowner Corp. and First Banks America, but may include services provided by external sources such as independent contractors or consultants retained by Sunrise Bank, Sundowner Corp. and First Banks America on behalf of itself and First Bank. Sunrise Bank, Sundowner Corp. and First Banks America will prepare a monthly statement to First Bank indicating the nature of the services performed, the entity performing such services and the fees charged for such services. 25 Notwithstanding anything else contained in this Agreement to the contrary, any such services provided by First Bank to either Sunrise Bank, Sundowner Corp or First Banks America, or by Sunrise Bank, Sundowner Corp or First Banks America to First Bank pursuant to this Agreement shall be provided on terms and conditions including audit standards, that are substantially the same, or at least as favorable to First Bank, Sunrise Bank, Sundowner Corp. or First Banks America as the case may be, as then prevailing at the time for comparable transactions with or not involving other non-affiliated companies, or in the absence of comparable transactions, on terms and under circumstances, including audit standards, that in good faith would be offered to, or would apply to, non-affiliated companies. Services performed by employees of First Bank will be billed to Sunrise Bank or Sundowner Corp. or First Banks America, as the case may be, and services performed by employees of Sunrise Bank, Sundowner Corp. or First Banks America will be billed to First Bank, on the most appropriate basis for the type of service provided. For loan officers engaged in the development of new business and marketing, charges will be based on the aggregate loan volume assigned to each officer for each Bank. Generally, services provided by other employees will be charged on the basis of hours required to perform the services using hourly rates established for each employee. Hours billed for exempt employees will be charged based on a maximum of eight hours per day, forty hours per week. Hours billed for non-exempt employees will be charged based on actual hours worked, including any overtime hours for which such employee may have been paid. The base rates will be established by dividing each such employee's annualized wages, excluding any overtime compensation by 1,864 hours per year. This amount will be increased by 20% to compensate for the cost of fringe benefits, payroll taxes and the cost of premises, equipment, supplies and other expenses incurred by each Bank on behalf of the employee. Rates for overtime hours of non-exempt employees will be calculated at 150% or 200% of the employee's base rate as may be appropriate for the hours charged. Services provided by external sources will be charged at cost. The allocation of costs between the Banks will generally be on the basis of hours expended for each Bank, unless another basis is determined mutually by the Banks to be more appropriate for the particular service and charge. Included in the services to be provided will be the following: 1. Lending: a. Loan and business development b. Loan administration and support c. Loan collection and workout d. Other lending activities 2. Human Resources: a. Human resources administration b. Records and compliance c. Employee recruiting and training d. Payroll administration and benefits e. Other branch administration 26 3. Branch administration: a. Branch operations b. Customer service and training c. Data capture and item processing d. Other branch administration activities Travel expenses incurred in connection with the performance of services will be charged to each Bank based on the expense reports received from the employees. Travel time, or other non-productive time, will not be charged to the Banks. Billing of fees: Each Bank shall prepare and submit to the other Bank a monthly bill for services rendered in sufficient detail to provide that Bank a basis for evaluating the cost/benefit of items charged. It shall be the responsibility of the Bank preparing the statement to maintain time reports, worksheets and summaries supporting the amounts billed. Such documentation will be furnished to the other Bank, and/or its examiners or auditors upon request. Amounts billed will be payable to the billing Bank by either a direct payment or offsetting it against a reciprocal bill submitted to that Bank after approval of payment thereof by the Bank being billed. If either Bank disputes the amounts billed, such Bank will provide to the billing Bank a written explanation of its disagreement and a solution for resolving the dispute. If the Banks are unable to reach an agreement with respect to the disputed items, the disagreement will be resolved by a decision between the Presidents of the Banks. Payments will be due by the last day of the month following the month in which the services were performed. Cost sharing statements will be provided to the other Bank at least five working days prior to payment. General: Each Bank shall make available to the other Bank all records, facilities and personnel reasonably necessary to enable it to perform the services required, which records and other materials shall be returned to that Bank when the services are completed. The Bank performing the services shall furnish the necessary forms and instructions to the other Bank's personnel. Each Bank shall give the same care to the other Bank's work as it gives to its own work. However, neither Bank shall warrant the work free of error, and each Bank shall be liable only for its own gross negligence or willful misconduct. The services performed under this Agreement by each Bank will be subject to the regulations and examination of the federal or state agencies having supervisory jurisdiction over the Bank to the same extent as if such services were being performed solely by the Bank on its own premises. The provisions of this Agreement are subject to the approval, modification, regulation or ruling of any governmental agency having jurisdiction over each Bank, Sunrise Bank, First Banks or its affiliates. This Agreement shall be binding upon the parties and their successors or assigns, and may only be amended or modified by a writing executed by the parties hereto. Each Bank will hold in confidence, during the term and following the termination of this Agreement, all information relating to the other Bank's assets, liabilities, business or affairs, or those of any of its customers, which such Bank may receive in the course of rendering the services hereunder and shall return all confidential information obtained during the performance of the Agreement to the other bank upon termination of the Agreement. Each Bank will make the same effort to safeguard such information as it does to protect its own proprietary data. The term of the Agreement is for one year, but it shall be automatically renewable for additional periods of one year each unless any party hereto shall give thirty (30) days' written notice of termination prior to the end of any term to the other parties hereto. 27 IN WITNESS WHEREOF, the parties hereto have, by their duly authorized officers executed this Agreement this 21st day of January, 1997. FIRST BANK & TRUST By /s/ Terrance M. McCarthy - - --------------------------- Its Senior Vice President - - ------------------------- SUNRISE BANK By /s/ Donald W. Williams - - ------------------------- Its President - - ------------- SUNDOWNER CORPORATION By /s/ Allen H. Blake - - --------------------- Its Vice President - - ------------------ FIRST BANKS AMERICA By /s/ Allen H. Blake - - --------------------- Its Vice President - - ------------------ 28 EXHIBIT 10(r) SERVICE AGREEMENT This Service Agreement is made and entered into as of the 1st day of April, 1997, by and between First Services, L.P., a Missouri Limited Partnership and BankTEXAS N.A., a banking institution duly organized and existing by virtue of the laws of the United State. WHEREAS, BankTEXAS and FIRSTSERV, INC. entered into a Service Agreement dated December 8, 1995, as amended; and WHEREAS, said Service Agreement was assigned to First Services, L.P. on or about April 1, 1997; and WHEREAS, FIRST SERVICES, L.P. and BankTEXAS desire to amend and restate said Service Agreement in its entirety. NOW, THEREFORE, for and in consideration of the mutual promises and covenants contained herein, and the sum of Ten Dollars ($l0.00) in hand paid, each to the other, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: I. TERMINATION AND REVOCATION The Parties hereto hereby revoke, cancel and hold for naught the Service Agreement dated December 8, 1995, as amended, and hereby substitute in its place the Service Agreement herein contained. II. SERVICES (A) First Services, L.P. shall furnish BankTEXAS data processing and item processing services selected by BankTEXAS from the Product and Price Schedule as per Attachment 1, attached hereto and incorporated herein by reference thereto. Additional services may be selected upon prior written notice to First Services, L.P. at First Services, L.P.'s then current list price by executing an amended Summary Page. (B) First Services, L.P. will provide conversion and training services for the fees specified from the Product and Price Schedule (Attachment 1). Classroom training in the use and operation of the system for the number of BankTEXAS personnel mutually agreed upon in the conversion planning process will be provided at a training facility mutually agreed upon. Conversion services are those activities designed to transfer the processing of BankTEXAS's data from its present processing company to First Services, L.P. (C) First Services, L.P. will also provide Network Support Service consisting of communication line monitoring and diagnostic equipment and support personnel to discover, diagnose, repair or report line problems to the appropriate telephone company. The fee for this service is also listed from the Product and Price Schedule 29 (Attachment 1). (D) First Services, L.P. shall upon request act as BankTEXAS's designated representative to arrange for the purchase, and installation of data lines necessary to access the First Services, L.P. system. Where requested, additional dial-up lines and equipment to be utilized as a backup to the regular data lines may also be ordered. First Services, L.P. shall bill BankTEXAS for the actual charges incurred for the data lines and for the maintenance of the modems and other interface devices. (E) Processing priorities will be determined by mutual agreement of the parties hereto. III. TERM The term of this Agreement shall be twelve (12) months commencing on April 1, 1997. Upon expiration, the Agreement will automatically renew for successive terms of twelve (12) months each unless either party shall have provided written notice to the other at least one-hundred eighty (180) days prior to the expiration of the then current term, of its intent not to renew. In the event of termination, First Services, L.P. shall provide reasonable time allowance to allow BankTEXAS to convert to another system. IV. SOFTWARE/FIRMWARE Unmodified third party software or firmware ("Software") may be supplied as part of the Agreement. All such Software shall be provided subject to Software License Agreements. V. PRICE AND PAYMENT (A) Fees for First Services, L.P.'s services are set forth from the Product and Price Schedule (Attachment 1), including where applicable minimum monthly charges and payment schedules for onetime fees. (B) Standard Fees shall be invoiced no later than the fifteenth (15th) of each month for the then current month. Terms of payment shall be net cash. (C) The Base Service Charge listed from the Product and Price Schedule (Attachment 1) shall not change more than once a year and then only upon six (6) months' prior written notice. The fee schedule shall be reviewed annually to ensure fair market value in pricing. Comparisons will be made with peers and other providers of similar services. (D) This above limitation shall not apply to pass-thru expenses. A pass-thru expense is a charge for goods or services by First Services, L.P. on BankTEXAS's behalf which are to be billed to BankTEXAS without mark-up. (E) The fees listed from the Product and Price Schedule (Attachment 1) do not include and BankTEXAS is responsible for furnishing transportation or transmission of information between First Services, L.P.'s data center, BankTEXAS's site and any applicable clearing house, regulatory agency or Federal Reserve Bank. Where BankTEXAS has elected to have First Services, L.P. provide Telecommunication Services, the price for the Services will be provided and billed as a pass-thru expense. (F) Network Support Service Fees and Local Network Fees are based upon services rendered from First Services, L.P.'s premises. Off-premise support will be provided upon BankTEXAS's request on an as available basis at First Services, L.P. then current charges for time and materials, plus reasonable travel and living expenses. 30 VI. CLIENT OBLIGATIONS (A) BankTEXAS shall be solely responsible for the input, transmission or delivery of all information and data required by First Services, L.P. to perform the services except where BankTEXAS has retained First Services, L.P. to handle such responsibilities on its behalf. The data shall be provided in a format and manner approved by First Services, L.P. BankTEXAS will provide at its own expense or procure from First Services, L.P. all equipment, computer software, communication lines and interface devices required to access the First Services, L.P. System. If BankTEXAS has elected to provide such items itself, First Services, L.P. shall provide BankTEXAS with a list of compatible equipment and software. (B) BankTEXAS shall designate appropriate BankTEXAS personnel for training in the use of the First Services, L.P. System, shall allow First Services, L.P. access to BankTEXAS's site during normal business hours for conversion and shall cooperate with First Services, L.P. personnel in the conversion and implementation of the services. (C) BankTEXAS shall comply with any operating instructions on the use of the First Services, L.P. system provided by First Services, L.P., shall review all reports furnished by First Services, L.P. for accuracy and shall work with First Services, L.P. to reconcile any out of balance conditions. BankTEXAS shall determine and be responsible for the authenticity and accuracy of all information and data submitted to First Services, L.P. (D) BankTEXAS shall furnish, or if First Services, L.P. agrees to so furnish, reimburse First Services, L.P. for courier services applicable to the services requested. 31 VII. GENERAL ADMINISTRATION First Services, L.P. is continually reviewing and modifying the First Services, L.P. system to improve service and to comply with federal government regulations applicable to the data utilized in providing services to BankTEXAS. First Services, L.P. reserves the right to make changes in the service, including, but not limited to operating procedures, security procedures, the type of equipment resident at and the location of First Services, L.P.'s data center. First Services, L.P. will provide BankTEXAS at least sixty (60) days prior written notice of changes in procedures or reporting and at least six (6) months prior written notice of changes in service costs. VIII. CLIENT CONFIDENTIAL INFORMATION (A) First Services, L.P. shall treat all information and data relating to BankTEXAS business provided to First Services, L.P. by BankTEXAS, or information relating to BankTEXAS's customers, as confidential and shall safeguard BankTEXAS's information with the same degree of care used to protect First Services, L.P.'s confidential information. First Services, L.P. and BankTEXAS agree that master and transaction data files are owned by and constitute property of BankTEXAS. BankTEXAS's data and records shall be subject to regulation and examination by State and Federal supervisory agencies to the same extent as if such information were on BankTEXAS's premises. First Services, L.P.'s obligations under this Section VIII shall survive the termination or expiration of this Agreement. (B) First Services, L.P. shall maintain adequate backup procedures including storage of duplicate record files as necessary to reproduce BankTEXAS's records and data. In the event of a service disruption due to reasons beyond First Services, L.P.'s control, First Services, L.P. shall use diligent efforts to mitigate the effects of such an occurrence. IX. FIRST SERVICES, L.P. CONFIDENTIAL INFORMATION (A) BankTEXAS shall not use or disclose to any third persons any confidential information concerning First Services, L.P. First Services, L.P. confidential information is that which relates to First Services, L.P.'s software, research, development, trade secrets or business affairs including, but not limited to, the terms and conditions of this Agreement but does not include information in the public domain through no fault of BankTEXAS. BankTEXAS's obligations under this Section IX shall survive the termination or expiration of this Agreement. (B) First Services, L.P.'s system contains information and computer software which is proprietary and confidential information of First Services, L.P., its suppliers and licensees. BankTEXAS agrees not to attempt to circumvent the devices employed by First Services, L.P. to prevent unauthorized access to the First Services, L.P.'s System. 32 X. WARRANTIES First Services, L.P. will accurately process BankTEXAS's work provided that BankTEXAS supplies accurate data and follows the procedures described in First Services, L.P.'s User Manuals, notices and advises. First Services, L.P. personnel will exercise due care in the processing of BankTEXAS's work. In the event of an error caused by First Services, L.P.'s personnel, programs or equipment, First Services, L.P. shall correct the data and/or reprocess the affected report at no additional cost to BankTEXAS. XI. LIMITATION OF LIABILITY IN NO EVENT SHALL FIRST SERVICES, L.P. BE LIABLE FOR LOSS OF GOODWILL, OR FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING FROM BANKTEXAS'S USE OF FIRST SERVICES L.P.'S SERVICES, OR FIRST SERVICES, L.P.'S SUPPLY OF EQUIPMENT OR SOFTWARE, UNDER THIS AGREEMENT REGARDLESS OF WHETHER SUCH CLAIM ARISES IN TORT OR IN CONTRACT. FIRST SERVICES, L.P.'S AGGREGATE LIABILITY FOR ANY AND ALL CAUSES OF ACTION RELATING TO SERVICES PERFORMED HEREUNDER OR ANY DAMAGE OR LOSS INCURRED OR SUSTAINED BY BANKTEXAS RELATING TO THIS AGREEMENT AND THE SERVICES PERFORMED HEREUNDER SHALL BE LIMITED TO THE AMOUNT OF TOTAL FEES PAID BY BANKTEXAS TO FIRST SERVICES, L.P. IN THE THREE (3) MONTH PERIOD PRECEDING THE DATE THE CLAIM ACCRUED. FIRST SERVICES, L.P.'S AGGREGATE LIABILITY FOR A DEFAULT RELATING TO EQUIPMENT OR SOFTWARE SHALL BE LIMITED TO THE AMOUNT PAID FOR THE EQUIPMENT OR SOFTWARE. XII. PERFORMANCE STANDARDS (A) On-Line Availability - First Services, L.P.'s standard of performance shall be on-line availability of the system 98% of the time that it is scheduled to be so available over a three month period (the "Measurement Period"). Actual on-line performance will be calculated monthly by comparing the number of hours which the system was scheduled to be operational on an on-line basis with the number of hours, or a portion thereof, it was actually operational on an on-line basis. Downtime may be caused by operator error, hardware malfunction or failure, or environmental failures such as loss of power or air conditioning. Downtime caused by reasons beyond First Services, L.P.'s control should not be considered in the statistics. (B) Report Availability - First Services, L.P.'s standard of performance for report availability shall be that, over a three (3) month period, ninety-five percent (95%) of all Critical Daily Reports shall be available for remote printing on time without significant errors. A Critical Daily Report shall mean priority group reports which First Services, L.P. and BankTEXAS have mutually agreed in writing are necessary to properly account for the previous day's activity and properly notify BankTEXAS of overdraft, NSF or return items. A significant error is one which impairs BankTEXAS's ability to properly account for the previous days activity and/or properly account for overdraft, NSF or return items. Actual performance will be calculated monthly by comparing the total number of BankTEXAS reports scheduled to be available from First Services, L.P. to the number of reports which were available on time and without error. 33 (C) Exclusive Remedy - In the event that First Services, L.P.'s performance fails to meet the standards listed above and such failure is not the result of BankTEXAS's error or omission, BankTEXAS's sole and exclusive remedy for such default shall be the right to terminate this Agreement in accordance with the provisions of this paragraph. In the event that First Services, L.P. fails to achieve any Performance Standards, alone or in combination, for the prescribed measurement period, BankTEXAS shall notify First Services, L.P. of its intent to terminate this agreement if First Services, L.P. fails to restore performance to the committed levels. First Services, L.P. shall advise BankTEXAS promptly upon correction of the system deficiencies (in no event shall corrective action exceed sixty (60) days from the notice date) and shall begin an additional measurement period. Should First Services, L.P. fail to achieve the required Performance Standards during the remeasurement period, BankTEXAS may terminate this Agreement and First Services, L.P. shall cooperate with BankTEXAS to achieve an orderly transition to BankTEXAS's replacement processing system. BankTEXAS may also terminate this Agreement if First Services, L.P.'s performance for the same standard is below the relevant performance standard for more than two (2) measurement periods in any consecutive twelve (12) months or for more than five (5) measurement periods during the term of this agreement. During the period of transition, BankTEXAS shall pay only such charges as are incurred for monthly fees until the date of deconversion. First Services, L.P. shall not charge BankTEXAS for services relating to BankTEXAS's deconversion. (D) Audit - BankTEXAS shall have the right to perform reasonable audits, at its cost, upon giving written notice to First Services, L.P. of its intent to do so. First Services, L.P. shall provide, upon request, financial information to BankTEXAS. XIII. DISASTER RECOVERY (A) A Disaster shall mean any unplanned interruption of the operations of or inaccessibility to the First Services, L.P. data center which appears in First Services, L.P.'s reasonable judgement to require relocation of processing to an alternative site. First Services, L.P. shall notify BankTEXAS as soon as possible after it deems a service outage to be a Disaster. First Services, L.P. shall move the processing of BankTEXAS's standard on-line services to an alternative processing center as expeditiously as possible. BankTEXAS shall maintain adequate records of all transactions during the period of service interruption and shall have personnel available to assist First Services L.P., Inc. in implementing the switch over to the alternative processing site. During a disaster, optional or on-request services shall be provided by First Services, L.P. only to the extent that there is adequate capacity at the alternate center and only after stabilizing the provision of base on-line services. (B) First Services, L.P. shall work with BankTEXAS to establish a plan for alternative data communications in the event of a disaster. BankTEXAS shall be responsible for furnishing any additional communications equipment and data lines required under the adopted plan. (C) First Services, L.P. shall test its Disaster Recovery Services Plan by conducting one annual test. BankTEXAS agrees to participate in and assist First Services, L.P. with such testing. Test results will be made available to BankTEXAS's regulators, internal and external auditors, and (upon request) to BankTEXAS's insurance underwriters. (D) BankTEXAS understands and agrees that the First Services, L.P. Disaster Recovery Plan is designed to minimize but not eliminate risks associated with a disaster affecting First Services, L.P.'s data center. First Services, L.P. does not warrant that service will be uninterrupted or error free in the event of a disaster. BankTEXAS maintains responsibility for adopting a disaster recovery plan relating to disasters affecting BankTEXAS's facilities and for securing business interruption insurance or other insurance as necessary to properly protect BankTEXAS's revenues in the event of a disaster. 34 XIV. DEFAULT (A) In the event that BankTEXAS is thirty (30) days in arrears in making any payment required, or in the event of any other material default by either First Services, L.P. or BankTEXAS in the performance of their obligations, the affected party shall have the right to give written notice to the other of the default and its intent to terminate this Agreement stating with reasonable particularity the nature of the claimed default. This Agreement shall terminate if the default has not been cured within a reasonable time with a minimum being thirty (30) days from the effective date of the notice. (B) Upon the expiration of this Agreement, or its termination, First Services, L.P. shall furnish to BankTEXAS such copies of BankTEXAS's data files as BankTEXAS may request in machine readable format form along with such other information and assistance as or is reasonable and customary to enable BankTEXAS to deconvert from the First Services, L.P. system. BankTEXAS shall reimburse First Services, L.P. for the production of data records and other services at First Services, L.P.'s current fees for such services. XV. INSURANCE First Services, L.P. carries Comprehensive General Liability insurance with primary limits of two million dollars, Commercial Crime insurance covering Employee Dishonesty in the amount of fifteen million dollars, all-risk replacement cost coverage on all equipment used at First Services, L.P.'s data center and Workers Compensation coverage on First Services, L.P. employees wherever located in the United States. BankTEXAS shall carry adequate insurance to cover liability for source documents while in transit and in case of data loss through errors and omissions. XVI. GENERAL (A) This Agreement is binding upon the parties and their respective successors and permitted assigns. Neither party may assign this Agreement in whole or in part without the consent of BankTEXAS and/or First Services, L.P., provided, however, that First Services, L.P. may subcontract any or all of the services to be performed under this Agreement without the written consent of BankTEXAS. Any such subcontractors shall be required to comply with all of the applicable terms and conditions of this Agreement. (B) The parties agree that, in connection with the performance of their obligations hereunder, they will comply with all applicable Federal, State, and local laws including the laws and regulations regarding Equal Employment Opportunities. (C) First Services, L.P. agrees that the Office of Thrift Supervision, FDIC, or other authority will have the authority and responsibility provided to the other regulatory agencies pursuant to the Bank Service Corporation Act, 12 U.S.C. 1867 (C) relating to service performed by contract or otherwise. First Services, L.P., also agrees that its services shall be subject to oversight by the O.C.C., FDIC or state banking departments as may be applicable under laws and regulations pertaining to BankTEXASs's charter and shall, if applicable, provide the O.T.S. DistrictDirector of the district in which the data processing center is located and other state and federal agencies with a copy of First Services, L.P.'s current audit and financial statements and a copy of any current third party review report when a review has been performed. 35 (D) Neither party shall be liable for any errors, delays or non-performance due to events beyond its reasonable control including, but not limited to, acts of God, failure or delay of power or communications, changes in law or regulation or other acts of governmental authority, strike, weather conditions or transpor- tation. (E) All written notices required to be given under this Agreement shall be sent by Registered or Certified Mail, Return Receipt Requested, postage prepaid, or by confirmed facsimile to the persons and at the addresses listed below or to such other address or person as a party shall have designated in writing. First Services, L.P. BankTEXAS #l First Missouri Center 8820 Westheimer St. Louis, Missouri 63l4l Houston, Texas 77063 (F) The failure of either party to exercise in any respect any right provided for herein shall not be deemed a waiver of any rights. (G) Each party acknowledges that is has read this Agreement, understands it, and agrees that it is the complete and exclusive statement of the Agreement between the parties and supersedes and merges any prior or simultaneous proposals, understandings and all other agreements with respect to the subject matter. This Agreement may not be modified or altered except by a written instrument duly executed by both parties. (H) No waiver of any of the terms of this Agreement shall be effective unless in writing and signed by the duly authorized representative of the party charged therewith. No waiver of any provision hereof shall extend to or affect any obligation not expressly waived, impair any rights consequent on such obligation or imply a subsequent waiver of that or any other provision. (I) This Agreement shall be governed by, construed and interpreted in accordance with the laws of the State of Missouri. IN WITNESS WHEREOF, the parties have executed this Agreement the date first above written. BankTEXAS First Services, L.P. 8820 Westheimer One First Missouri Center Houston, Texas 77063 St. Louis, Missouri 63141 BY:/s/ David W. Weaver BY:/s/ Thomas A. Bangert ---------------------- ------------------------ David Weaver Thomas A. Bangert President President 36
Attachment 1 BankTEXAS - Product And Price Schedule Effective 4/1/97 DATA PROCESSING Accounts DDA per account $0.50 Savings per account $0.50 Time per account $0.50 Loans per account $0.50 Transactions each $0.01 Terminal Management each $5.00 Branch Data Connection each $500.00 ATM Management each $200.00 Telephone Switch Mgmt each $750.00 Other Services per application $100.00 ITEM PROCESSING Proof each $0.020 POD And EFT each $0.009 Inclearing and Transmission each $0.009 DDA per account $0.250 Savings per account $0.050 Time per account $0.020 Loan $0.100
37
DEPOSIT SERVICES Customer Accounts per account $0.30 Included in Above: Charge Backs CIF Management Returns Exception Item Processing Stops Signature Verification Wire Transfers Corporate Analysis ACH Incoming Cash Management Support ACH Origination FirstLink Official Checks Control Disbursement Money Orders Balance Reporting Savings Bonds Research Funds Transfer Adjustments B Notices 1099s "Due From" Reconciliation Kiting "Due To" Reconciliation Holds FRB Reconciliation's Dormant Accounts Application Balancing ATM Settlement Records Management Debit Card Settlement Savings Bonds OTHER SERVICES Collection System (Cyber Resources) Cash Management System (FirstLink) Recovery System (Cyber Resources) Commercial Analysis Asset/Liability (Bankware) Charge Back System Optical System (RVI) Teller Platform (ISC) MCIF (OKRA) ATM Support Loan Documentation (FTI/CFI) General Ledger Bank Audit Fixed Asset Interface Accounts Payable Interface Interactive Voice Remote Laser Printing Card Management System ACH Origination Wire Transfer (Fundtec) Organization Profitability (IPS) NOW Reclassification Loan Tracking (Baker Hill) Retrofit/New Releases Credit Scoring (Fair Issac)
38 EXHIBIT 10(s) SERVICE AGREEMENT This Service Agreement is made and entered into as of the 1st day of April, 1997, by and between First Services, L.P., a Missouri Limited Partnership and Sunrise Bank, a banking institution duly organized and existing by virtue of the laws of the State of California. WHEREAS, SUNRISE BANK and FIRSTSERV, Inc. entered into a Service Agreement dated November 21, 1996; WHEREAS, said Service Agreement was assigned to First Services, L.P. on or about April 1, 1997; and WHEREAS, FIRST SERVICES, L.P. and SUNRISE BANK desire to amend and restate said Service Agreement in its entirety. NOW, THEREFORE, for and in consideration of the mutual promises and covenants contained herein, and the sum of Ten Dollars ($l0.00) in hand paid, each to the other, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: I. TERMINATION AND REVOCATION The Parties hereto hereby revoke, cancel and hold for naught the Service Agreement dated November 21, 1996, and hereby substitute in its place the Service Agreement herein contained. II. SERVICES (A) First Services, L.P. shall furnish Sunrise Bank data processing and item processing services selected by Sunrise Bank from the Product and Price Schedule as per Attachment 1, attached hereto and incorporated herein by reference thereto. Additional services may be selected upon prior written notice to First Services, L.P. at First Services, L.P.'s then current list price by executing an amended Summary Page. (B) First Services, L.P. will provide conversion and training services for the fees specified from the Product and Price Schedule (Attachment 1). Classroom training in the use and operation of the system for the number of Sunrise Bank personnel mutually agreed upon in the conversion planning process will be provided at a training facility mutually agreed upon. Conversion services are those activities designed to transfer the processing of Sunrise Bank's data from its present processing company to First Services, L.P. (C) First Services, L.P. will also provide Network Support Service consisting of communication line monitoring and diagnostic equipment and support personnel to discover, diagnose, repair or report line problems to the appropriate telephone company. The fee for this service is also listed from the Product and Price Schedule (Attachment 1). 39 (D) First Services, L.P. shall upon request act as Sunrise Bank's designated representative to arrange for the purchase, and installation of data lines necessary to access the First Services, L.P. system. Where requested, additional dial-up lines and equipment to be utilized as a backup to the regular data lines may also be ordered. First Services, L.P. shall bill Sunrise Bank for the actual charges incurred for the data lines and for the maintenance of the modems and other interface devices. (E) Processing priorities will be determined by mutual agreement of the parties hereto. III. TERM The term of this Agreement shall be twelve (12) months commencing on April 1, 1997. Upon expiration, the Agreement will automatically renew for successive terms of twelve (12) months each unless either party shall have provided written notice to the other at least one-hundred eighty (180) days prior to the expiration of the then current term, of its intent not to renew. In the event of termination, First Services, L.P. shall provide reasonable time allowance to allow Sunrise Bank to convert to another system. IV. SOFTWARE/FIRMWARE Unmodified third party software or firmware ("Software") may be supplied as part of the Agreement. All such Software shall be provided subject to Software License Agreements. V. PRICE AND PAYMENT (A) Fees for First Services, L.P.'s services are set forth from the Product and Price Schedule (Attachment 1), including where applicable minimum monthly charges and payment schedules for onetime fees. (B) Standard Fees shall be invoiced no later than the fifteenth (15th) of each month for the then current month. Terms of payment shall be net cash. 40 (C) The Base Service Charge listed from the Product and Price Schedule (Attachment 1) shall not change more than once a year and then only upon six (6) months' prior written notice. The fee schedule shall be reviewed annually to ensure fair market value in pricing. Comparisons will be made with peers and other providers of similar services. (D) This above limitation shall not apply to pass-thru expenses. A pass-thru expense is a charge for goods or services by First Services, L.P. on Sunrise Bank's behalf which are to be billed to Sunrise Bank without mark-up. (E) The fees listed from the Product and Price Schedule (Attachment 1) do not include and Sunrise Bank is responsible for furnishing transportation or transmission of information between First Services, L.P.'s data center, Sunrise Bank's site and any applicable clearing house, regulatory agency or Federal Reserve Bank. Where Sunrise Bank has elected to have First Services, L.P. provide Telecommunication Services, the price for the Services will be provided and billed as a pass-thru expense. (F) Network Support Service Fees and Local Network Fees are based upon services rendered from First Services, L.P.'s premises. Off-premise support will be provided upon Sunrise Bank's request on an as available basis at First Services, L.P. then current charges for time and materials, plus reasonable travel and living expenses. 41 VI. CLIENT OBLIGATIONS (A) Sunrise Bank shall be solely responsible for the input, transmission or delivery of all information and data required by First Services, L.P. to perform the services except where Sunrise Bank has retained First Services, L.P. to handle such responsibilities on its behalf. The data shall be provided in a format and manner approved by First Services, L.P. Sunrise Bank will provide at its own expense or procure from First Services, L.P. all equipment, computer software, communication lines and interface devices required to access the First Services, L.P. System. If Sunrise Bank has elected to provide such items itself, First Services, L.P. shall provide Sunrise Bank with a list of compatible equipment and software. (B) Sunrise Bank shall designate appropriate Sunrise Bank personnel for training in the use of the First Services, L.P. System, shall allow First Services, L.P. access to Sunrise Bank's site during normal business hours for conversion and shall cooperate with First Services, L.P. personnel in the conversion and implementation of the services. (C) Sunrise Bank shall comply with any operating instructions on the use of the First Services, L.P. system provided by First Services, L.P., shall review all reports furnished by First Services, L.P. for accuracy and shall work with First Services, L.P. to reconcile any out of balance conditions. Sunrise Bank shall determine and be responsible for the authenticity and accuracy of all information and data submitted to First Services, L.P. (D) Sunrise Bank shall furnish, or if First Services, L.P. agrees to so furnish, reimburse First Services, L.P. for courier services applicable to the services requested. VII. GENERAL ADMINISTRATION First Services, L.P. is continually reviewing and modifying the First Services, L.P. system to improve service and to comply with federal government regulations applicable to the data utilized in providing services to Sunrise Bank. First Services, L.P. reserves the right to make changes in the service, including, but not limited to operating procedures, security procedures, the type of equipment resident at and the location of First Services, L.P.'s data center. First Services, L.P. will provide Sunrise Bank at least sixty (60) days prior written notice of changes in procedures or reporting and at least six (6) months prior written notice of changes in service costs. VIII. CLIENT CONFIDENTIAL INFORMATION (A) First Services, L.P. shall treat all information and data relating to Sunrise Bank business provided to First Services, L.P. by Sunrise Bank, or information relating to Sunrise Bank's customers, as confidential and shall safeguard Sunrise Bank's information with the same degree of care used to protect First Services, L.P.'s confidential information. First Services, L.P. and Sunrise Bank agree that master and transaction data files are owned by and constitute property of Sunrise Bank. Sunrise Bank data and records shall be subject to regulation and examination by State and Federal supervisory agencies to the same extent as if such information were on Sunrise Bank's premises. First Services, L.P.'s obligations under this Section VIII shall survive the termination or expiration of this Agreement. (B) First Services, L.P. shall maintain adequate backup procedures including storage of duplicate record files as necessary to reproduce Sunrise Bank's records and data. In the event of a service disruption due to reasons beyond First Services, L.P.'s control, First Services, L.P. shall use diligent efforts to mitigate the effects of such an occurrence. IX. FIRST SERVICES, L.P. CONFIDENTIAL INFORMATION (A) Sunrise Bank shall not use or disclose to any third persons any confidential information concerning First Services, L.P. First Services, L.P. confidential information is that which relates to First Services, L.P.'s software, research, development, trade secrets or business affairs including, but not limited to, the terms and conditions of this Agreement but does not include information in the public domain through no fault of Sunrise Bank. Sunrise Bank obligations under this Section IX shall survive the termination or expiration of this Agreement. (B) First Services, L.P.'s system contains information and computer software which is proprietary and confidential information of First Services, L.P., its suppliers and licensees. Sunrise Bank agrees not to attempt to circumvent the devices employed by First Services, L.P. to prevent unauthorized access to the First Services, L.P.'s System. X. WARRANTIES First Services, L.P. will accurately process Sunrise Bank's work provided that Sunrise Bank supplies accurate data and follows the procedures described in First Services, L.P.'s User Manuals, notices and L.P.'S AGGREGATE LIABILITY FOR A DEFAULT RELATING TO EQUIPMENT OR SOFTWARE SHALL BE LIMITED TO THE AMOUNT PAID FOR THE EQUIPMENT OR SOFTWARE. advises. First Services, L.P. personnel will exercise due care in the processing of Sunrise Bank's work. In the event of an error caused by First Services, L.P.'s personnel, programs or equipment, First Services, L.P. shall correct the data and/or reprocess the affected report at no additional cost to Sunrise Bank. XI. LIMITATION OF LIABILITY IN NO EVENT SHALL FIRST SERVICES, L.P. BE LIABLE FOR LOSS OF GOODWILL, OR FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING FROM SUNRISE BANK'S USE OF FIRST SERVICES L.P.'S SERVICES, OR FIRST SERVICES, L.P.'S SUPPLY OF EQUIPMENT OR SOFTWARE, UNDER THIS AGREEMENT REGARDLESS OF WHETHER SUCH CLAIM ARISES IN TORT OR IN CONTRACT. FIRST SERVICES, L.P.'S AGGREGATE LIABILITY FOR ANY AND ALL CAUSES OF ACTION RELATING TO SERVICES PERFORMED HEREUNDER OR ANY DAMAGE OR LOSS INCURRED OR SUSTAINED BY SUNRISE BANK RELATING TO THIS AGREEMENT AND THE SERVICES PERFORMED HEREUNDER SHALL BE LIMITED TO THE AMOUNT OF TOTAL FEES PAID BY SUNRISE BANK TO FIRST SERVICES, L.P. IN THE THREE (3) MONTH PERIOD PRECEDING THE DATE THE CLAIM ACCRUED. FIRST SERVICES, 42 XII. PERFORMANCE STANDARDS (A) On-Line Availability - First Services, L.P.'s standard of performance shall be on-line availability of the system 98% of the time that it is scheduled to be so available over a three month period (the "Measurement Period"). Actual on-line performance will be calculated monthly by comparing the number of hours which the system was scheduled to be operational on an on-line basis with the number of hours, or a portion thereof, it was actually operational on an on-line basis. Downtime may be caused by operator error, hardware malfunction or failure, or environmental failures such as loss of power or air conditioning. Downtime caused by reasons beyond First Services, L.P.'s control should not be considered in the statistics. (B) Report Availability - First Services, L.P.'s standard of performance for report availability shall be that, over a three (3) month period, ninety-five percent (95%) of all Critical Daily Reports shall be available for remote printing on time without significant errors. A Critical Daily Report shall mean priority group reports which First Services, L.P. and Sunrise Bank have mutually agreed in writing are necessary to properly account for the previous day's activity and properly notify Sunrise Bank of overdraft, NSF or return items. A significant error is one which impairs Sunrise Bank's ability to properly account for the previous days activity and/or properly account for overdraft, NSF or return items. Actual performance will be calculated monthly by comparing the total number of Sunrise Bank reports scheduled to be available from First Services, L.P. to the number of reports which were available on time and without error. 43 (C) Exclusive Remedy - In the event that First Services, L.P.'s performance fails to meet the standards listed above and such failure is not the result of Sunrise Bank's error or omission, Sunrise Bank's sole and exclusive remedy for such default shall be the right to terminate this Agreement in accordance with the provisions of this paragraph. In the event that First Services, L.P. fails to achieve any Performance Standards, alone or in combination, for the prescribed measurement period, Sunrise Bank shall notify First Services, L.P. of its intent to terminate this agreement if First Services, L.P. fails to restore performance to the committed levels. First Services, L.P. shall advise Sunrise Bank promptly upon correction of the system deficiencies (in no event shall corrective action exceed sixty (60) days from the notice date) and shall begin an additional measurement period. Should First Services, L.P. fail to achieve the required Performance Standards during the remeasurement period, Sunrise Bank may terminate this Agreement and First Services, L.P. shall cooperate with Sunrise Bank to achieve an orderly transition to Sunrise Bank's replacement processing system. Sunrise Bank may also terminate this Agreement if First Services, L.P.'s performance for the same standard is below the relevant performance standard for more than two (2) measurement periods in any consecutive twelve (12) months or for more than five (5) measurement periods during the term of this agreement. During the period of transition, Sunrise Bank shall pay only such charges as are incurred for monthly fees until the date of deconversion. First Services, L.P. shall not charge Sunrise Bank for services relating to Sunrise Bank's deconversion. (D) Audit - Sunrise Bank shall have the right to perform reasonable audits, at its cost, upon giving written notice to First Services, L.P. of its intent to do so. First Services, L.P. shall provide, upon request, financial information to Sunrise Bank. XIII. DISASTER RECOVERY (A) A Disaster shall mean any unplanned interruption of the operations of or inaccessibility to the First Services, L.P. data center which appears in First Services, L.P.'s reasonable judgement to require relocation of processing to an alternative site. First Services, L.P. shall notify Sunrise Bank as soon as possible after it deems a service outage to be a Disaster. First Services, L.P. shall move the processing of Sunrise Bank's standard on-line services to an alternative processing center as expeditiously as possible. Sunrise Bank shall maintain adequate records of all transactions during the period of service interruption and shall have personnel available to assist First Services L.P., Inc. in implementing the switch over to the alternative processing site. During a disaster, optional or on-request services shall be provided by First Services, L.P. only to the extent that there is adequate capacity at the alternate center and only after stabilizing the provision of base on-line services. (B) First Services, L.P. shall work with Sunrise Bank to establish a plan for alternative data communications in the event of a disaster. Sunrise Bank shall be responsible for furnishing any additional communications equipment and data lines required under the adopted plan. (C) First Services L.P., shall test its Disaster Recovery Services Plan by conducting one annual test. Sunrise Bank agrees to participate in and assist First Services, L.P. with such testing. Test results will be made available to Sunrise Bank's regulators, internal and external auditors, and (upon request) to Sunrise Bank's insurance underwriters. 44 (D) Sunrise Bank understands and agrees that the First Services, L.P. Disaster Recovery Plan is designed to minimize but not eliminate risks associated with a disaster affecting First Services, L.P.'s data center. First Services, L.P. does not warrant that service will be uninterrupted or error free in the event of a disaster. Sunrise Bank maintains responsibility for adopting a disaster recovery plan relating to disasters affecting Sunrise Bank's facilities and for securing business interruption insurance or other insurance as necessary to properly protect Sunrise Bank's revenues in the event of a disaster. XIV. DEFAULT (A) In the event that Sunrise Bank is thirty (30) days in arrears in making any payment required, or in the event of any other material default by either First Services, L.P. or Sunrise Bank in the performance of their obligations, the affected party shall have the right to give written notice to the other of the default and its intent to terminate this Agreement stating with reasonable particularity the nature of the claimed default. This Agreement shall terminate if the default has not been cured within a reasonable time with a minimum being thirty (30) days from the effective date of the notice. (B) Upon the expiration of this Agreement, or its termination, First Services, L.P. shall furnish to Sunrise Bank such copies of Sunrise Bank's data files as Sunrise Bank may request in machine readable format form along with such other information and assistance as or is reasonable and customary to enable Sunrise Bank to deconvert from the First Services, L.P. system. Sunrise Bank shall reimburse First Services, L.P. for the production of data records and other services at First Services, L.P.'s current fees for such services. XV. INSURANCE First Services, L.P. carries Comprehensive General Liability insurance with primary limits of two million dollars, Commercial Crime insurance covering Employee Dishonesty in the amount of fifteen million dollars, all-risk replacement cost coverage on all equipment used at First Services, L.P.'s data center and Workers Compensation coverage on First Services, L.P. employees wherever located in the United States. Sunrise Bank shall carry adequate insurance to cover liability for source documents while in transit and in case of data loss through errors and omissions. 45 XVI. GENERAL (A) This Agreement is binding upon the parties and their respective successors and permitted assigns. Neither party may assign this Agreement in whole or in part without the consent of Sunrise Bank and/or First Services, L.P., provided, however, that First Services, L.P. may subcontract any or all of the services to be performed under this Agreement without the written consent of Sunrise Bank. Any such subcontractors shall be required to comply with all of the applicable terms and conditions of this Agreement. (B) The parties agree that, in connection with the performance of their obligations hereunder, they will comply with all applicable Federal, State, and local laws including the laws and regulations regarding Equal Employment Opportunities. (C) First Services, L.P. agrees that the Office of Thrift Supervision, FDIC, or other authority will have the authority and responsibility provided to the other regulatory agencies pursuant to the Bank Service Corporation Act, 12 U.S.C. 1867 (C) relating to service performed by contract or otherwise. First Services, L.P., also agrees that its services shall be subject to oversight by the O.C.C., FDIC or state banking departments as may be applicable under laws and regulations pertaining to Sunrise Bank's charter and shall, if applicable, provide the O.T.S. DistrictDirector of the district in which the data processing center is located and other state and federal agencies with a copy of First Services, L.P.'s current audit and financial statements and a copy of any current third party review report when a review has been performed. 46 (D) Neither party shall be liable for any errors, delays or non-performance due to events beyond its reasonable control including, but not limited to, acts of God, failure or delay of power or communications, changes in law or regulation or other acts of governmental authority, strike, weather conditions or transpor- tation. (E) All written notices required to be given under this Agreement shall be sent by Registered or Certified Mail, Return Receipt Requested, postage prepaid, or by confirmed facsimile to the persons and at the addresses listed below or to such other address or person as a party shall have designated in writing. First Services, L.P. Sunrise Bank #l First Missouri Center Five Sierragate Plaza St. Louis, Missouri 63l4l Roseveille, California 95678 (F) The failure of either party to exercise in any respect any right provided for herein shall not be deemed a waiver of any rights. (G) Each party acknowledges that is has read this Agreement, understands it, and agrees that it is the complete and exclusive statement of the Agreement between the parties and supersedes and merges any prior or simultaneous proposals, understandings and all other agreements with respect to the subject matter. This Agreement may not be modified or altered except by a written instrument duly executed by both parties. (H) No waiver of any of the terms of this Agreement shall be effective unless in writing and signed by the duly authorized representative of the party charged therewith. No waiver of any provision hereof shall extend to or affect any obligation not expressly waived, impair any rights consequent on such obligation or imply a subsequent waiver of that or any other provision. (I) This Agreement shall be governed by, construed and interpreted in accordance with the laws of the State of Missouri. 47 IN WITNESS WHEREOF, the parties have executed this Agreement the date first above written. Sunrise Bank First Services, L.P. Five Sierragate Plaza One First Missouri Center Roseville, California 95678 St. Louis, Missouri 63141 BY:/s/ Donald W. Williams BY:/s/ Thomas A. Bangert - - ------------------------- ------------------------ Donald W. Williams Thomas A. Bangert Chairman President 48 Attachment 1 Sunrise Bank - Product And Price Schedule Effective 4/1/97
DATA PROCESSING Accounts DDA 10,000 $0.50 Savings 10,000 $0.50 Time 10,000 $0.50 Loans 10,000 $0.50 Transactions 250,000 $0.01 Terminal Management 25 $5.00 Branch Data Connection Included ATM Management Included Telephone Switch Mgmt Included Other Services Included ITEM PROCESSING Proof 200,000 $0.020 POD And EFT 200,000 $0.009 Inclearing and Transmission 50,000 $0.009 Statements: DDA $0.250 Savings $0.050 Time $0.100 Loan $0.100 Lockbox $0.020 Branch Courier Route $17.00 Mail Services $200.00
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DEPOSIT SERVICES Customer Accounts 40,000 $0.30 Included in Above: Charge Backs CIF Management Returns Exception Item Processing Stops Signature Verification Wire Transfers Corporate Analysis ACH Incoming Cash Management Support ACH Origination FirstLink Official Checks Control Disbursement Money Orders Balance Reporting Savings Bonds Research Funds Transfer Adjustments B Notices 1099s "Due From" Reconciliation Kiting "Due To" Reconciliation Holds FRB Reconciliation's Dormant Accounts Application Balancing ATM Settlement Records Management Debit Card Settlement Savings Bonds OTHER SERVICES Collection System (Cyber Resources) Cash Management System (FirstLink) Recovery System (Cyber Resources) Commercial Analysis Asset/Liability (Bankware) Charge Back System Optical System (RVI) Teller Platform (ISC) MCIF (OKRA) ATM Support Loan Documentation (FTI/CFI) General Ledger Bank Audit Fixed Asset Interface Accounts Payable Interface Interactive Voice Remote Laser Printing Card Management System ACH Origination Wire Transfer (Fundtec) Organization Profitability (IPS) NOW Reclassification Loan Tracking (Baker Hill) Retrofit/New Releases Credit Scoring (Fair Issac)
50 EXHIBIT 13 FIRST BANKS AMERICA, INC. 1997 ANNUAL REPORT 51 FIRST BANKS AMERICA, 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........................... 24 FINANCIAL STATEMENTS: CONSOLIDATED BALANCE SHEETS.............................................. 25 CONSOLIDATED STATEMENTS OF OPERATIONS.................................... 27 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY............... 28 CONSOLIDATED STATEMENTS OF CASH FLOWS.................................... 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................... 30 INDEPENDENT AUDITORS' REPORT............................................. 47 DIRECTORS AND SENIOR MANAGEMENT.......................................... 48 INVESTOR INFORMATION..................................................... 49 52 To Our Shareholders, Customers and Friends: We are pleased to report our accomplishments and continued progress toward achieving First Banks America's long term objective of becoming a premier provider of financial services. Most notable is our progress in improving earnings, which increased by 103% to $3.18 million for 1997, from $1.57 million for 1996. Earnings per share, on a diluted basis, increased by 118% to $0.87 from $0.40 for the years ended December 31, 1997 and 1996, respectively. In my letter to you last year, I stated the development of our banking franchise may place us in new or noncontigious market areas and serve as a basis to augment our internal growth. Consistent with this strategy, First Banks America completed its acquisition of Surety Bank, Vallejo, California on December 1, 1997 providing total assets of $72.8 million. In addition, on February 2, 1998, First Banks America completed its acquisitions of First Commercial Bancorp, Inc., and its wholly owned subsidiary, First Commercial Bank, Sacramento, California, and Pacific Bay Bank, San Pablo, California, providing combined assets in excess of $225 million. Together with Sunrise Bank of California, which was acquired in late 1996, First Banks America has established a solid presence in the Sacramento - San Francisco corridor with total assets of $415 million and 11 full service banking locations. Recognizing the growth potential of this region, First Banks America will aggressively support the expansion of its commercial and retail business development staff. Underlying the improvement in earnings is the performance of BankTEXAS, a wholly owned subsidiary. The earnings momentum reflects management's success in repositioning the loan portfolio from predominantly indirect automobile loans to a diversified loan portfolio, now including commercial and financial, real estate construction and commercial and residential real estate loans. This lending strategy, which focuses on serving and meeting the needs of local businesses and consumers, has facilitated the development of our commercial and retail deposit base, which remains the most stable and cost-effective source of funds. First Banks America's strategic objectives are few and clearly stated. Simply said, we will strive for progressive and profitable growth through the continued development of our existing franchise, augmented by the acquisition of other financial institutions. With First Banks America's consolidated assets approaching $700 million, an increase in diluted earnings per share of 118% and a presence in several major market areas, it is not surprising the market value of our stock has improved dramatically, reaching $23.19 at year end, up 129%, over a year ago. In closing, I would like to take this opportunity to welcome our new shareholders, joining us through the acquisitions of Surety Bank and First Commercial, and to extend our sincerest appreciation for the dedication of our employees, the loyalty of our customers and the continued support of our existing shareholders. Sincerely, James F. Dierberg Chairman of the Board, President and Chief Executive Officer 53 FIRST BANKS AMERICA, INC. Selected Consolidated and Other Financial Data The following table presents selected consolidated financial information for First Banks America, Inc. and subsidiaries (FBA or the Company) for each of the years in the five-year period ended December 31, 1997. The comparability of the selected data presented is affected by the acquisitions of Surety Bank and Sunrise Bank of California on December 1, 1997 and November 1, 1996, respectively. These acquisitions were accounted for as purchases and, accordingly, the selected data includes the financial position and results of operations of each acquired entity only for the periods subsequent to its date of acquisition.
Year ended December 31, ------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (dollars expressed in thousands, except per share data) Income statement data: Interest income.................................. $ 28,883 21,446 22,427 22,649 21,966 Interest expense................................. 12,834 9,993 11,218 11,072 9,750 -------- -------- ------ ------ -------- Net interest income.............................. 16,049 11,453 11,209 11,577 12,216 Provision for possible loan losses............... 2,000 1,250 5,826 1,258 490 -------- -------- ------ ------ -------- Net interest income after provision for possible loan losses........................... 14,049 10,203 5,383 10,319 11,726 Noninterest income............................... 2,564 1,848 (126) (4,511) 3,068 Noninterest expense.............................. 11,676 9,480 11,160 16,174 14,575 -------- -------- ------ ------ -------- Income (loss) before provision (benefit) for income taxes................................... 4,937 2,571 (5,903) (10,366) 219 Provision (benefit) for income tax expense....... 1,758 1,002 (2,083) (9,461) -- -------- -------- ------ ------ -------- Net income (loss)................................ $ 3,179 1,569 (3,820) (905) 219 ======== ======== ====== ====== ======== Dividends: Common stock..................................... $ -- -- -- -- -- Ratio of total dividends declared to net income.. --% --% --% --% --% Per share data: Earnings (loss) per share: Basic.......................................... $ 0.88 0.42 (0.99) (0.41) 0.17 Diluted........................................ 0.87 0.40 (0.99) (0.41) 0.14 Weighted average common stock outstanding (in thousands).................................. 3,607 3,763 3,870 2,181 1,290 Balance sheet data (at year end): Investment securities............................ $ 83,791 86,910 39,337 61,400 160,158 Loans, net of unearned discount.................. 313,437 241,874 192,573 203,314 167,732 Total assets..................................... 451,256 375,182 296,583 331,790 368,608 Total deposits................................... 383,942 319,806 249,263 241,570 242,897 Note payable .................................... 14,500 14,000 1,054 1,054 1,054 Stockholders' equity............................. 39,864 33,498 35,258 39,714 14,952 Earnings ratios: Return on average total assets................... 0.84% 0.52% (1.20)% (0.25)% 0.07% Return on average stockholders' equity........... 9.17 4.48 (10.10) (3.66) 1.49 Asset quality ratios: Allowance for possible loan losses to loans...... 2.14 2.54 2.71 1.36 1.57 Nonperforming loans to loans (1)................. 0.77 0.87 0.29 0.14 0.37 Allowance for possible loan losses to nonperforming loans (1)........................ 278.52 293.41 952.28 940.61 423.95 Nonperforming assets to loans and foreclosed assets (2)..................................... 0.89 1.19 0.81 0.90 2.22 Net loan charge-offs to average loans............ 0.59 1.44 1.63 0.62 0.52 Capital ratios: Average stockholders' equity to average total assets.................................... 9.19 11.62 11.88 6.80 4.40 Total risk-based capital ratio................... 7.89 7.64 11.69 17.50 8.47 Leverage ratio................................... 6.11 5.31 8.38 11.97 4.27 - - ---------------------- (1) Nonperforming loans consist of nonaccrual loans and loans with restructured terms. (2) Nonperforming assets consist of nonperforming loans and foreclosed assets.
54 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 the Company. These forward looking statements are subject to certain risks and uncertainties, not all of which can be predicted or anticipated. Factors that may cause actual results to differ materially from those contemplated by the forward looking statements herein include general market conditions as well as conditions specifically affecting the banking industry generally and factors having a specific impact on the Company, including but not limited to fluctuations in interest rates and in the economy; the impact of laws and regulations applicable to the Company and changes therein; competitive conditions in the markets in which the Company conducts its operations; and the ability of the Company to respond to changes in technology. With regard to the Company's efforts to grow through acquisitions, factors that could affect the accuracy or completeness of forward-looking statements contained herein include the potential for higher than acceptable operating costs arising from the geographic dispersion of the offices of FBA, as compared with competitors operating solely in contiguous markets; the competition of larger acquirers with greater resources than FBA; fluctuations in the prices at which acquisition targets may be available for sale and in the market for the Company's securities; and the potential for difficulty or unanticipated costs in realizing the benefits of particular acquisition transactions. Readers of this Annual Report should therefore not place undue reliance on forward-looking statements. Company Profile FBA is a registered bank holding company incorporated in Delaware and headquartered in St. Louis County, Missouri. At December 31, 1997, FBA had $451.3 million in total assets, $313.4 million in total loans, net of unearned discount, $383.9 million in total deposits and $39.9 million in total stockholders' equity. FBA operates through two wholly owned bank subsidiaries, BankTEXAS N.A., headquartered in Houston, Texas (BankTEXAS), and First Bank of California (FB California), headquartered in Roseville, California (Subsidiary Banks). As discussed under "--Acquisitions," FB California represents a newly-formed California state bank resulting from the merger of Sunrise Bank of California, Roseville, California (Sunrise Bank), which was acquired by FBA in 1996, and Surety Bank, Vallejo, California, which was acquired by FBA on December 1, 1997. Through the Subsidiary Banks' six banking locations in Houston, Dallas, Irving and McKinney, Texas, and four banking locations in Roseville, Rancho Cordova, Vallejo and Fairfield, California, FBA offers 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 industrial, 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. FBA centralizes overall corporate policies, procedural and administrative functions, and operational support functions for the Subsidiary Banks. Primary responsibility for managing the Subsidiary Banks remains with its officers and directors. The following table lists the Subsidiary Banks at December 31, 1997:
Loans, net of Number of Total unearned Total Locations assets discount deposits --------- ------ -------- -------- (dollars expressed in thousands) BankTEXAS.................. 6 $ 267,152 176,341 231,175 FB California.............. 4 179,999 137,096 152,825
As discussed under "--Acquisitions," at December 31, 1997, FBA had two pending acquisitions which were consummated in February 1998: First Commercial Bancorp, Inc. (FCB), and its wholly owned subsidiary, First Commercial Bank (First Commercial), Sacramento, California, and Pacific Bay Bank, San Pablo, California. Both First Commercial and Pacific Bay Bank were merged into FB California in February 1998. 55 FBA is majority owned by First Banks, Inc., St. Louis, Missouri (First Banks). As discussed under "--Capital," First Banks owns 100% of the Class B common stock, which represented 65.9% of the outstanding voting stock of FBA at December 31, 1997, and accordingly, has effective control over the management and policies of FBA and the election of its directors. General FBA believes for a financial institution to prosper in the current environment of rapid restructuring and consolidation in the banking industry, and intense competition both within the industry and from non-banking entities, FBA must achieve a size sufficient to enable it to take advantage of many of the efficiencies available to its much larger competitors. Failure to achieve this growth would place FBA at a competitive disadvantage relative to those larger competitors with respect to its costs of operation which, over time, will be an increasingly difficult obstacle to overcome. FBA also believes that internal growth alone will not be sufficient to advance FBA to the size which is necessary within an acceptable time frame. Therefore, FBA views a combination of internal growth and acquisitions as the means which will be necessary to achieve its growth objectives. Although FBA originally viewed Texas, particularly the Dallas and Houston areas, as its primary acquisition area, during 1995 and 1996, prices for acquisitions escalated sharply in those areas. Acquisitions at the prices required to successfully consummate these transactions would have caused substantial diminution in the economic benefits which FBA envisioned would be available in its acquisition program. This resulted in FBA evaluating California for acquisition candidates, where acquisition pricing was considerably more favorable. This led to FBA's identification and acquisition of Sunrise Bank in November 1996 and Surety Bank in December 1997, as well as the acquisitions of FCB and Pacific Bay Bank completed in February 1998. While this acquisition strategy was in process, FBA was also building the infra-structure necessary to accomplish its objectives for internal growth. This included significantly expanding the commercial and financial, commercial real estate and real estate construction business development staff, enhancing the retail service delivery organization and systems, improving overall asset quality and changing the composition of the loan portfolio. Prior to 1995, FBA's lending strategy had been focused on consumer lending, particularly indirect automobile lending. As of December 31, 1994, consumer loans, net of unearned discount, constituted 78.5% of FBA's loan portfolio, while commercial and financial, commercial real estate and real estate construction loans constituted 17.2% of the portfolio. However, in 1995, FBA began experiencing substantial asset quality problems within the indirect automobile loan portfolio, resulting in provisions for loan losses of $5.83 million in 1995 and $1.25 million in 1996. Furthermore, indirect automobile lending is an extremely competitive market in which the interest yields available to lenders are substantially less than other types of lending and not sufficient to compensate lenders for losses of that magnitude. Consequently, with the expansion of its business development staff, FBA began building its portfolio of commercial and real estate development loans, while allowing its portfolio of indirect automobile loans to decrease. By December 31, 1997, consumer loans, net of unearned discount, had decreased to 21.8% of the loan portfolio, while commercial and financial, commercial real estate and real estate construction loans had increased to 65.6% of the portfolio. Although significant expenses were incurred by FBA in the amalgamation of newly acquired entities into its corporate culture and systems, and in the expansion of its organizational capabilities, the earnings of the acquired entities and the improved net interest income resulting from the transition in the composition of the loan portfolio have contributed to improving net income during 1997. For the year ended December 31, 1997, net income was $3.18 million, compared with $1.57 million in 1996 and a net loss of $3.82 million in 1995. Acquisitions In enhancing its banking franchise, FBA places emphasis upon acquiring other financial institutions as a means of accelerating its growth to significantly expand its presence in a given market, to increase the extent of its market area or to enter new or noncontiguous market areas. After an 56 acquisition is consummated, FBA will enhance the franchise of the acquired entity by supplementing the marketing and business development efforts to broaden the customer bases, strengthening particular segments of the business or filling voids in the overall market coverage. In addition, the acquisition program enables FBA to further leverage the operational support services available to it through First Banks, and to provide the products and services typically available only through such a larger organization. In meeting its growth objectives under the acquisition program, FBA will utilize cash, borrowings and the issuance of additional common stock. On November 1, 1996, FBA completed its acquisition of Sunrise Bancorp, a California corporation (Sunrise), and its wholly owned subsidiary, Sunrise Bank, a California state chartered bank headquartered in Roseville, California, for $17.5 million in cash. At the time of the transaction, Sunrise had $110.8 million in total assets, $17.7 million in investment securities, $61.1 million in total loans, net of unearned discount, and $91.1 million in deposits. Sunrise conducts its business through two banking locations in Roseville and Rancho Cordova, California. Sunrise was merged into a subsidiary of FBA. On December 1, 1997, Sunrise Bank was merged into FB California. On December 1, 1997, FBA completed its acquisition of Surety Bank, a California state chartered bank headquartered in Vallejo, California, for $3.8 million in cash and 264,622 shares of FBA common stock. At the time of the transaction, Surety Bank had $72.8 million in total assets, $11.8 million in investment securities, $54.4 million in total loans, net of unearned discount, and $67.5 million in deposits. Surety Bank conducts its banking business through two banking locations in Vallejo and Fairfield, California. Surety Bank was merged into FB California. At December 31, 1997, FBA had two pending acquisitions which were consummated in February 1998, FCB and its wholly owned subsidiary, First Commercial, headquartered in Sacramento, California, and Pacific Bay Bank, headquartered in San Pablo, California. FCB operates through First Commercial, which has six banking locations located in Sacramento, Roseville (2), Concord, Campbell and San Francisco, California. At December 31, 1997, FCB had $191.6 million in total assets, $64.4 million in investment securities, $118.0 million in total loans, net of unearned discount, and $172.6 million in deposits. Pacific Bay Bank has one banking location in San Pablo, California and one loan production office in Lafayette, California. At December 31, 1997, Pacific Bay Bank had $37.5 million in total assets, $1.9 million in total interest-bearing deposits with other financial institutions, $29.3 million in total loans, net of unearned discount, and $33.9 million in deposits. Both First Commercial and Pacific Bay Bank were merged into FB California in February 1998. FCB was majority owned by First Banks. First Banks' ownership interest in FBA would have been 70.4% of the outstanding voting stock of FBA at December 31, 1997 had the acquisition of FCB been completed on that date. Financial Condition and Average Balances FBA's average total assets were $377.3 million, $301.5 million and $318.1 million for the years ended December 31, 1997, 1996 and 1995, respectively. For 1997, total average assets increased by $75.8 million primarily due to the acquisitions of Surety Bank and Sunrise Bank on December 1, 1997 and November 1, 1996, respectively, and internal loan growth resulting from the expansion of the business development staff. For 1996, total average assets decreased by $16.6 million reflecting the continuation of the reduction in average loans and investment securities which began in 1995, partially offset by the assets provided by the acquisition of Sunrise Bank. Loans, net of unearned discount, averaged $247.0 million, $185.2 million and $205.3 million for the years ended December 31, 1997, 1996 and 1995, respectively. During 1995, average loans increased by $22.4 million, reflecting FBA's prior emphasis on indirect automobile lending. As more fully discussed under "--Net Interest Income," during the second quarter of 1995, FBA elected to reduce the level of originations of indirect automobile loans. Accordingly, indirect automobile loans, which initially increased from $147.7 million at December 31, 1994 to $159.5 million at June 30, 1995, has subsequently decreased to $61.4 million, $86.6 million and $130.3 million at December 31, 1997, 1996 57 and 1995, respectively. At the same time, FBA expanded its corporate banking activities resulting in the increase of the commercial and financial, commercial real estate and real estate construction loan portfolios to $205.7 million and $134.7 million at December 31, 1997 and 1996, respectively, including the loans provided by the acquisition of Surety Bank and Sunrise Bank, from $49.2 million at December 31, 1995. Investment securities, which had increased to an average of $141.7 million for the year ended December 31, 1994, averaged $82.5 million, $59.9 million and $74.7 million for the years ended December 31, 1997, 1996 and 1995, respectively. The increase during 1994 resulted from an investment strategy which FBA implemented during 1992 whereby funds were borrowed, principally through repurchase agreements and advances from the Federal Home Loan Bank (FHLB), which were in turn used to purchase investment securities. This strategy resulted in a corresponding increase in average short-term borrowings for these same periods. As more fully discussed under "--Net Interest Income," this strategy resulted in a declining net interest income and net interest margin. Recognizing the need to improve the net interest income and net interest margin, during 1994 FBA commenced the process of restructuring its investment portfolio. The restructuring process consisted initially of hedging the existing investment security portfolio in an attempt to reduce the overall interest rate risk to a more acceptable level. At the same time, FBA began disposing of securities which had greater interest rate risk and reducing the level of short-term borrowings. Remaining funds generated in this process were invested in shorter-term securities which generally have less interest rate risk. The restructuring of the investment security portfolio was completed during 1995 and resulted in a reduction in the average balance of investment securities of $67.0 million for the year ended December 31, 1995. For 1996, the average balance of investment securities decreased by $14.8 million, reflecting the remaining impact of the restructuring which was completed during 1995. The average balance of investment securities increased for the year ended December 31, 1997 by $22.6 million. The increase is attributable to the securities provided by the acquisitions of Surety Bank and Sunrise Bank. Deposits are the primary funding source for FBA and are acquired from a broad base of local markets, including both individual and corporate customers. For 1997, average deposits were $316.5 million, an increase of $61.9 million, from $254.6 million for 1996. Average deposits increased $9.3 million during 1996, to $254.6 million from $245.3 million for the years ended December 31, 1996 and 1995, respectively. These increases are primarily attributable to the acquisitions of Surety Bank and Sunrise Bank. The average balance of promissory notes payable and short-term borrowings decreased to $19.4 million and $7.2 million for the years ended December 31, 1997 and 1996, respectively, from $31.5 million for 1995. The decrease in the average balance during 1996 is attributable to a strategic decision to reduce FBA's dependence on short-term borrowings as a funding source for its investment security portfolio. The increase in the average balance for 1997 is attributable to borrowings under FBA's promissory note payable to facilitate its funding of acquisitions. Stockholders' equity averaged $34.7 million, $35.0 million and $37.8 million for the years ended December 31, 1997, 1996 and 1995, respectively. The decreases are primarily attributable to the repurchases of common stock for treasury, repurchases of an outstanding warrant and an option to purchase common stock and a net loss of $3.8 million for the year ended December 31, 1995, partially offset by net income of $3.2 million and $1.6 million for the years ended December 31, 1997 and 1996, respectively. In addition, effective December 31, 1994, stockholders' equity includes the impact of implementing an accounting adjustment referred to as a "quasi-reorganization" as approved by the Board of Directors of FBA. In accordance with the accounting provisions applicable to a quasi-reorganization, the assets and liabilities of FBA were adjusted to their fair value and the accumulated deficit was eliminated. Fair value adjustments included a reduction in the carrying value of bank premises and equipment of $4.4 million and the elimination of the net fair value adjustment for securities available for sale of $1.1 million. As a result of implementing the quasi-reorganization, stockholders' equity was reduced by $3.1 million. The implementation of the quasi-reorganization did not have a significant impact on the results of operations of FBA. 58 The following table sets forth certain information relating to FBA's average balance sheets, and reflects the average yield earned on interest-bearing assets, the average cost of interest-bearing liabilities and the resulting net interest income for the periods indicated.
Years ended December 31, --------------------------------------------------------------------------------------- 1997 1996 1995 ------------------------- ------------------------- --------------------------- Interest Interest Interest Average income/ Average Average income/ Average Average income/ Average balance expense rate balance expense rate balance expense rate ------- ------- ---- ------- ------- ---- ------- ------- ---- (dollars expressed in thousands) Earning assets: Time deposits with banks....... $ 1,019 58 5.69% $ 19,813 1,062 5.36% $ 4,693 319 6.80% Investment securities (2)(3)... 82,546 5,073 6.15 59,917 3,519 5.87 74,687 4,47 5.99 Federal funds sold and securities purchased under agreements to resell........................ 10,922 593 5.43 7,023 371 5.28 2,961 173 5.84 Loans (1) (2) ................. 247,005 3,159 9.38 185,154 6,494 8.91 205,288 17,462 8.51 -------- ------ -------- ------ ------- ------ Total earning assets 341,492 28,883 8.46 271,907 21,446 7.89 287,629 22,427 7.80 ------ ------ ------ Nonearning assets................. 35,792 29,579 30,508 -------- -------- -------- Total assets................. $377,284 $301,486 $318,137 ======== ======== ======== Interest-bearing liabilities: Interest-bearing demand and savings deposits............. $121,125 3,524 2.91 $ 81,857 2,341 2.86% $ 79,633 2,481 3.12% Time deposits of $100 or more.. 29,614 1,631 5.51 25,294 1,409 5.57 23,305 1,300 5.58 Other time deposits............ 112,892 6,159 5.46 100,803 5,551 5.51 98,067 5,148 5.25 -------- ------ -------- ------ -------- ------ Total interest-bearing deposits............... 263,631 11,314 4.29 207,954 9,301 4.47 201,005 8,929 4.44 Notes payable and short-term borrowings (3).............. 19,400 1,520 7.84 7,195 692 9.62 31,491 2,289 7.27 -------- ----- ------- ------ ------- ----- Total interest-bearing liabilities............ 283,031 12,834 4.53 215,149 9,993 4.64 232,496 11,218 4.83 ------ ---- ------ Non-interest-bearing liabilities: Demand deposits............... 52,893 46,684 44,251 Other liabilities............. 6,674 4,611 3,584 -------- -------- -------- Total liabilities........... 342,598 266,444 280,331 Stockholders' equity.......... 34,686 35,042 37,806 -------- -------- -------- Total liabilities and stockholders' equity... $377,284 $301,486 $318,137 ======== ======== ======== Net interest income......... 16,049 11,453 11,209 ======= ====== ====== Interest rate spread........ 3.93% 3.25% 2.97% Net interest margin......... 4.70 4.21 3.90 ==== ==== ==== - - --------------- (1) Nonaccrual loans are included in the average loan amounts. (2) FBA has no tax-exempt income. (3) Includes the effect of an interest rate exchange agreement.
59 The following table indicates the changes in interest income and interest expense which are attributable to changes in average volume and changes in average rates, in comparison with the same period in the preceding year. The change in interest due to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the dollar amounts of the change in each.
December 31, 1997 compared December 31, 1996 compared to December 31, 1996 to December 31, 1995 ------------------------------ ------------------------- Net Net Volume Rate Change Volume Rate Change ------ ---- ------ ------ ---- ------ (dollars expressed in thousands) Earning assets: Time deposits with banks............... $(1,073) 69 (1,004) 795 (52) 743 Investment securities (1) (2).......... 1,380 174 1,554 (866) (88) (954) Federal funds sold and securities purchased under agreements to resell................. 211 11 222 213 (15) 198 Loans (2).............................. 5,756 909 6,665 (1,859) 891 (968) ------- ------ ------ ----- ----- ---- Total interest income............ 6,274 1,163 7,437 (1,717) 736 (981) ------- ------ ------ ----- ----- ---- Interest-bearing liabilities: Interest-bearing demand and savings deposits................. 1,142 41 1,183 71 (211) (140) Time deposits of $100 or more ......... 238 (16) 222 111 (2) 109 Other time deposits.................... 657 (49) 608 145 258 403 Notes payable and short- term borrowings (1).................. 929 (101) 828 (3,462) 1,865 (1,597) ------- ------- ------ ------ ----- ------ Total interest expense........... 2,966 (125) 2,841 (3,135) 1,910 (1,225) ------- ------- ------ ------ ----- ------ Net interest income.............. $ 3,308 1,288 4,596 1,418 (1,174) 244 ======= ====== ====== ====== ====== ====== - - ------------------------ (1) Includes the effect of an interest rate exchange agreement. (2) FBA has no tax-exempt income.
Net Interest Income The primary source of FBA's income is net interest income, which is the difference between the interest earned on assets and the interest paid on liabilities. Net interest income was $16.0 million, or 4.70% of average earning assets, for the year ended December 31, 1997, compared with $11.5 million, or 4.21% of average earning assets, and $11.2 million, or 3.90% of average earning assets, for the years ended December 31, 1996 and 1995, respectively. FBA's loan portfolio, which represents its primary interest-earning asset and source of net interest income, previously consisted primarily of fixed rate indirect automobile loans. As interest rates began to increase during 1994, the yield on this fixed rate portfolio remained relatively constant. Furthermore, intense competition for automobile loans, particularly from nonbank entities, caused market rates to increase more slowly than interest rates in general. Consequently, both the amounts and rates at which new loans were originated were less than anticipated. The combination of these factors and the continued repayments of the older loans, caused the yield on the loan portfolio to increase by only 20 basis points to 8.51% for the year ended December 31, 1995, compared with 8.31% for the year ended December 31, 1994. At the same time, FBA's cost of interest-bearing deposits, the principal source of funding for the loan portfolio, increased by 80 basis points to 4.44% for the year ended December 31, 1995, from 3.64% for the year December 31, 1994. During this same time frame, FBA was following an investment strategy whereby funds were borrowed, principally short-term borrowings, which were invested in mortgage-backed securities. While initially generating an incremental spread, as rates increased in 1994, this contribution to net interest margin was substantially reduced. 60 The following is a comparison of the yield earned on the investment portfolio and the cost of short-term borrowings for the years ended December 31, 1995 and 1994: 1995 1994 ---- ---- Average yield on investment securities................ 5.99% 4.91% Average cost of borrowings............................ 7.27 4.35 ---- ---- Interest spread....................................... (1.28)% 0.56% ==== ==== Concerned with its interest rate risk profile and the overall impact of further increases in interest rates, FBA began the process of restructuring its investment securities portfolio and repositioning its loan portfolio in the latter part of 1994. The restructuring process included sales of investment securities of $48.9 million and $113.9 million, resulting in net losses of $3.0 million and $7.1 million for the years ended December 31, 1995 and 1994, respectively. To reposition the loan portfolio, FBA significantly expanded its ability to originate commercial and financial, commercial real estate and real estate construction and development loans while maintaining a presence in the indirect automobile lending business. The current composition of the loan portfolio and the changes over the past five years are presented under, "--Loans and Allowance for Possible Loan Losses." The culmination of FBA's efforts in repositioning its loan portfolio and the restructuring of the investment securities portfolio has resulted in an improvement of the net interest margin to 4.70% of average interest-earning assets for 1997, from 4.21% and 3.90% for 1996 and 1995, respectively. Specifically, this improvement is attributable to the increase in the average yield on the loan portfolio to 9.38% for 1997, from 8.91% for 1996. In addition, the cost of interest-bearing liabilities decreased to 4.53% for 1997, from 4.64% for 1996. This decrease in the cost of interest-bearing liabilities is primarily attributable to the reduction in short-term borrowings, which has represented a higher cost source of funds. Comparison of Results of Operations for 1997 and 1996 Net Income. Net income for the year ended December 31, 1997 improved to $3.18 million from $1.57 million for the same period in 1996, an increase of 103%. This improvement is primarily attributable to net interest income. As previously discussed, net interest income increased by $4.60 million, or by 40.2%, to $16.05 million, or 4.70% of average earning assets, for 1997, from $11.45 million, or 4.21% of average earning assets, for 1996. Provision for Possible Loan Losses. The provision for possible loan losses was $2.00 million and $1.25 million for the years ended December 31, 1997 and 1996, respectively. Net loan charge-offs were $1.46 million and $2.67 million for the years ended December 31, 1997 and 1996, respectively. The allowance for possible loan losses was $6.72 million, or 2.14% of total loans, net of unearned discount, at December 31, 1997, compared to $6.15 million, or 2.54% of total loans, at December 31, 1996. Loans which were either 90 days or more past due and still accruing interest or on nonaccrual status totaled $3.57 million and $2.68 million at December 31, 1997 and 1996, respectively, representing 1.14% and 1.11% of total loans, net of unearned discount, at those dates. Loans which were between 30 and 89 days past due were $6.67 million, or 2.13% of total loans, net of unearned discount, at December 31, 1997, compared to $6.47 million, or 2.68% of total loans, net of unearned discount, at December 31, 1996. Although asset quality has improved, FBA has continued to provide for possible loan losses in recognition of the overall growth in the loan portfolio as well as its changing composition. As the portfolio changes from one with significant preponderance in indirect automobile loans, to one having substantial portions of commercial and financial, real estate construction and development and commercial real estate loans, the credit risk profile also changes. Typically, a larger group of lower balance homogeneous loans, such as the indirect automobile loan portfolio, exhibits certain past due and loan loss experience trends which provides FBA a basis for establishing an adequate level of allowance for possible loan losses. While these same trends are included in FBA's evaluation of its commercial lending activities, the overall credit risk of this type of portfolio is heightened as the possibility of a significant 61 unforeseen loss occurring over time is greater. See "--Loans and Allowance for Possible Loan Losses," for a further discussion of FBA's policies and practices of monitoring and maintaining the allowance for possible loan losses. Noninterest Income and Expense. The following table summarizes noninterest income and noninterest expense for the years ended December 31, 1997 and 1996.
Increase (decrease) 1997 1996 Amount Percent ---- ---- ------ ------- (dollars expressed in thousands) Noninterest income: Service charges on deposit accounts and customer service fees........................ $ 1,632 1,507 125 8.29% Loan sales and servicing income.................... 22 53 (31) (58.49) Other income ...................................... 834 103 731 709.71 ------- ------- ----- 2,488 1,663 825 49.61 Gain on sales of securities, net................... 76 185 (109) (58.92) ------- ------- ----- Total noninterest income....................... $ 2,564 1,848 716 38.74 ======= ======= ===== ======= Noninterest expense: Salaries and employee benefits .................... $ 4,219 3,072 1,147 37.34% Occupancy, net of rental income ................... 1,440 951 489 51.42 Furniture and equipment ........................... 805 613 192 31.32 Federal Deposit Insurance Corporation premiums..... 102 160 (58) (36.25) Postage, printing and supplies..................... 346 267 79 29.59 Legal, examination and professional fees........... 2,005 1,276 729 57.13 Data processing ................................... 715 334 381 114.07 Communications..................................... 521 421 100 23.75 (Gain) loss on sale of foreclosed property, net of expenses.................................. (303) 146 (449) (307.53) Other.............................................. 1,826 2,240 (414) (18.48) ------- ------- ----- Total noninterest expense...................... $11,676 9,480 2,196 23.16 ======= ======= ===== =======
Noninterest Income. Noninterest income was $2.56 million for the year ended December 31, 1997, in comparison to $1.85 million for 1996, representing an increase of $716,000, or 38.7%. Service charges on deposit accounts and customer service fees increased by $125,000 to $1.63 million from $1.51 million for the years ended December 31, 1997 and 1996, respectively. The increase is primarily attributable to the acquisition of Sunrise Bank. Loan servicing fees decreased to $22,000 from $53,000 for the years ended December 31, 1997 and 1996, respectively. The decrease is due to a reduction in the amount of indirect automobile loans serviced for others as FBA is no longer selling indirect automobile loans on a servicing retained basis. Other income increased by $731,000 to $834,000 from $103,000 for the years ended December 31, 1997 and 1996, respectively. The increase is primarily attributable to legal settlements received applicable to pending litigation of the former Sunrise Bank and a net gain of $47,000 realized upon disposition of repossessed and other assets, compared to a net loss of $178,000 for the years ended December 31, 1997 and 1996, respectively. Offsetting the increase in noninterest income for the year ended December 31, 1997 was a gain of $76,000 recognized upon the sale of an investment security for the year ended December 31, 1997, in comparison to a gain of $185,000 for 1996. 62 Noninterest Expense. Noninterest expense increased by $2.20 million to $11.68 million from $9.48 million for the years ended December 31, 1997 and 1996, respectively. The increase is primarily attributable to the acquisition of Sunrise Bank and Surety Bank and FBA's expansion of its corporate lending staff. In particular, salaries and employee benefits increased by $1.15 million to $4.22 million from $3.07 million for the years ended December 31, 1997 and 1996, respectively. In addition, occupancy expense, net of rental income, and data processing expenses increased by $489,000 and $381,000 for the year ended December 31, 1997, respectively, in comparison to 1996. Legal, examination and professional fees increased to $2.01 million from $1.28 million for the years ended December 31, 1997 and 1996, respectively. The increase is primarily attributable to the costs associated with expanding FBA's organizational capabilities to achieve both internal and external growth as well as its overall growth in 1997. In the year ended December 31, 1997, FBA realized a gain on sale of foreclosed property, net of expenses, of $303,000, compared to losses and expenses on sale of foreclosed property of $146,000 for the same period in 1996. The improvement for 1997 is attributable to a gain realized upon sale of a foreclosed property and an overall decrease in the costs of maintaining a reduced level of foreclosed properties. Offsetting the increase in noninterest expense is a decrease in other expense of $414,000 to $1.83 million from $2.24 million for the years ended December 31, 1997 and 1996, respectively. The decrease is primarily attributable to the noncredit provision for possible losses within the indirect automobile dealer lending program of $842,000 recorded in 1996, partially offset by an increase in fees paid to First Banks of $513,000 during 1997. See Note 13 to the consolidated financial statements. Income Taxes. The accompanying consolidated statement of operations reflects a deferred income tax charge of $1.76 million for the year ended December 31, 1997, compared to $1.00 million in 1996. At December 31, 1997 and 1996, the accompanying consolidated balance sheets include a deferred tax asset, net of deferred tax liabilities, of $12.8 million and $14.6 million, respectively. The deferred tax asset valuation allowance was $3.4 million at December 31, 1997 and 1996. Comparison of Results of Operations for 1996 and 1995 Net Income. Net income for the year ended December 31, 1996 was $1.57 million in comparison to a net loss of $3.82 for the same period in 1995. As more fully discussed below, the operating results for 1995 reflect an after-tax loss of $2.10 million incurred in connection with the restructuring of FBA's investment portfolio and a sharply higher provision for possible loan losses in comparison to 1996. As previously discussed, net interest income was $11.45 million, or 4.21% of average earning assets, for 1996, compared to $11.21 million, or 3.90% of average earning assets, for 1995. Provision for Possible Loan Losses. The provision for possible loan losses was $1.25 million and $5.83 million for the years ended December 31, 1996 and 1995, respectively. Net loan charge-offs were $2.67 million and $3.35 million for the years ended December 31, 1996 and 1995, respectively. The allowance for possible loan losses was $6.15 million, or 2.54% of total loans, net of unearned discount, at December 31, 1996, compared to $5.23 million, or 2.71% of total loans, at December 31, 1995. Loans which were either 90 days or more past due and still accruing interest or on nonaccrual status totaled $2.68 million and $1.07 million at December 31, 1996 and 1995, respectively, representing 1.11% and .55% of total loans at those dates. Loans which were between 30 and 89 days past due were $6.47 million, or 2.67% of total loans, net of unearned discount, at December 31, 1996 compared to $6.65 million, or 3.45% of total loans, net of unearned discount, at December 31, 1995. The provision for possible loan losses for 1995 was higher than normal in recognition of increasing loan charge-offs and delinquencies which were experienced during 1995 within the portfolio of indirect automobile loans. 63 Noninterest Income and Expense. The following table summarizes noninterest income and noninterest expense for the years ended December 31, 1996 and 1995.
Increase (decrease) 1996 1995 Amount Percent ---- ---- ------ ------- (dollars expressed in thousands) Noninterest income (loss): Service charges on deposit accounts and customer service fees.............................. $ 1,507 1,458 49 3.4% Loan sales and servicing income.......................... 53 159 (106) (66.7) Other income............................................. 103 1,253 (1,150) (91.8) ------- ------- -------- 1,663 2,870 (1,207) (42.1) ===== Gain (loss) on sales of securities, net.................. 185 (2,996) 3,181 ------- ------- ------- Total noninterest income (loss)...................... $ 1,848 (126) 1,974 ======= ======= ======= Noninterest expense: Salaries and employee benefits .......................... $ 3,072 4,029 (957) (23.8)% Occupancy, net of rental income ......................... 951 1,274 (323) (25.4) Furniture and equipment ................................. 613 663 (50) (7.5) Federal Deposit Insurance Corporation premiums........... 160 313 (153) (48.9) Postage, printing and supplies........................... 267 303 (36) (11.9) Legal, examination and professional fees................. 1,276 1,354 (78) (5.8) Data processing ......................................... 334 664 (330) (49.7) Communications........................................... 421 553 (132) (23.9) Losses and expenses on foreclosed property, net.......... 146 176 (30) (17.0) Other ................................................... 2,240 1,831 409 22.3 ------- ------- ------- Total noninterest expense............................ $ 9,480 11,160 (1,680) (15.1) ======= ======= ======= =====
Noninterest Income. Noninterest income was $1.85 million for the year ended December 31, 1996 in comparison to a loss of $126,000 for 1995. As more fully discussed under "-- Net Interest Income and Interest Rate Risk Management," the loss in noninterest income for 1995 is attributable to the $3.00 million loss realized upon sales of investment securities. Service charges on deposit accounts increased by $50,000 to $1.51 million from $1.46 million for the years ended December 31, 1996 and 1995, respectively. The increase is primarily attributable to the acquisition of Sunrise Bank which generated $38,000 of service charges on deposit accounts for the period subsequent to the acquisition. Loan servicing fees decreased to $53,000 from $159,000 for the years ended December 31, 1996 and 1995, respectively. The decrease is due to a reduction in the amount of indirect automobile loans serviced for others. Other income decreased by $1.15 million to $103,000 from $1.25 million for the years ended December 31, 1996 and 1995, respectively. Other income for the year ended December 31, 1995 includes a nonrecurring benefit of $179,000 from the termination of the Directors' Retirement Plan and an $802,000 nonrecurring benefit from the termination of a self-insurance trust. During 1990, FBA established a trust in lieu of purchasing officer and director liability insurance. Since coverage is now available and in place through First Banks, the trust was terminated and the funds were returned to FBA. Noninterest Expense. Noninterest expense decreased by $1.68 million to $9.48 million from $11.16 million for the years ended December 31, 1996 and 1995, respectively. The decrease, as more fully discussed below, is primarily attributable to cost reductions achieved through the reengineering of FBA's operations and the centralization of various functions with First Banks' systems during 1995. The decrease in salaries and employee benefits of $960,000 to $3.07 million from $4.03 million for the years ended December 31, 1996 and 1995, respectively, relates primarily to reductions in staff during 1995. FBA's staff was reduced to 67 full-time employees at December 31, 1995, from 142 and 162 full-time employees at December 31, 1994 and 1993, respectively. 64 Occupancy expense, net of rental income, decreased by $323,000 to $951,000 from $1.27 million for the years ended December 31, 1996 and 1995, respectively. The decrease is attributable to certain leased premises which were vacated during 1995. This space previously housed various support functions, indirect dealer lending and executive management. These departments were consolidated into support functions of First Banks or relocated to other existing banking facilities of FBA. Data processing expenses decreased by $330,000 to $334,000 from $664,000 for the years ended December 31, 1996 and 1995, respectively. The decrease is attributable to the conversion to First Banks' data processing system in 1995 which is less expensive than the former data processing service provider. Offsetting the decrease in noninterest expense is an increase in other expense of $409,000 to $2.24 million from $1.83 million for the years ended December 31, 1996 and 1995, respectively. The increase is primarily attributable to the noncredit provision for possible losses within the indirect automobile dealer lending program of $842,000 in 1996. Also included in other expense are fees paid to First Banks for the various services rendered. These fees totaled $997,000 and $796,000 for the years ended December 31, 1996 and 1995, respectively. Income Taxes. The accompanying consolidated statement of operations reflects a deferred income tax charge of $1.00 million for the year ended December 31, 1996. This compares to a $2.08 million deferred income tax benefit for the same period in 1995. At December 31, 1996 and 1995, the accompanying consolidated balance sheets include a deferred tax asset, net of deferred tax liabilities, of $14.6 million and $13.2 million, respectively. The deferred tax asset valuation allowance was $3.4 million and $2.7 million at December 31, 1996 and 1995, respectively. Investment Securities FBA classifies the securities within its investment portfolio as held to maturity or available for sale. FBA does not engage in the trading of investment securities. As more fully described in Notes 1 and 3 of the consolidated financial statements, the investment security portfolio consists solely of securities designated as available-for-sale at December 31, 1997 and 1996. During 1997, investment securities decreased to $83.8 million from $86.9 million at December 31, 1997 and 1996, respectively. Funds generated from the decrease were utilized to support internal loan growth. Offsetting the decrease was $11.8 million of investment securities provided by the acquisition of Surety Bank. Loans and Allowance for Possible Loan Losses Interest earned on the loan portfolio is the primary source of income for FBA. Loans, net of unearned discount, represented 69.5% of total assets as of December 31, 1997, compared to 64.5% as of December 31, 1996. At December 31, 1997, total loans, net of unearned discount, were $313.4 million, an increase of $71.5 million from $241.9 million at December 31, 1996. For 1996, total loans, net of unearned discount, increased by $49.3 million. As previously discussed under "--Acquisitions and Financial Condition and Average Balances," the increases are attributable to the loans provided by the acquisitions of Surety Bank and Sunrise Bank and to expanding the commercial and financial, commercial real estate and real estate construction and development loan portfolios, partially offset by the decrease in indirect automobile loans. 65 The following table summarizes the changes in the loan portfolio for the two year period ended December 31, 1997:
Increase (decrease) for the years ended December 31, ------------ 1997 1996 ---- ---- (dollars expressed in thousands) Loans provided by acquisition: Surety Bank.............................................. $54,400 -- Sunrise Bank............................................. -- 61,100 Internal loan volumes: Commercial lending....................................... 47,100 34,900 Indirect automobile loans................................ (25,500) (43,400) Other........................................................ (4,400) (3,300) ------- ------ Total increase (decrease) in loans................... $71,600 49,300 ======= ====== Increase (decrease) in potential problem loans (1)........... $ (800) 2,100 ======= ====== - - --------------------- (1) Potential problem loans include indirect automobile loans 60 days or more past due, loans on nonaccrual status and other loans identified by management as having potential credit problems.
FBA's lending strategy stresses quality, growth and diversification by collateral, geography and industry. A common credit underwriting structure is in place throughout FBA. The commercial lenders focus principally on small to middle-market companies. Retail lenders focus principally on residential loans, including home equity loans, automobile financing and other consumer financing needs arising out of FBA's branch banking network. Commercial and financial loans include loans that are made primarily based on the borrowers' general credit strength and ability to generate repayment cash flows from income sources even though such loans and bonds may also be secured by real estate or other assets. Real estate construction and development loans, primarily relating to residential properties and smaller commercial properties, represent interim financing secured by real estate under construction. Real estate mortgage loans consist primarily of loans secured by single-family owner-occupied properties and various types of commercial properties on which the income from the property is the intended source of repayment. Consumer and installment loans are loans to individuals and consist primarily of loans secured by automobiles. Loans held for sale are generally fixed and adjustable rate residential loans pending sale in the secondary mortgage market in the form of a mortgage-backed security, or to various private third-party investors. 66 The following table shows the composition of the loan portfolio by major category and the percent of each category to the total portfolio as of the dates presented:
December 31, --------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 --------------- --------------- ----------------- --------------- ---------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- (dollars expressed in thousands) Commercial and financial... $ 69,091 22.5% $48,025 19.9% $15,055 7.8% $ 14,556 7.4% $ 7,653 5.2% Real estate construction and development......... 66,601 21.6 44,238 18.3 26,048 13.5 13,793 7.0 9,072 6.2 Real estate mortgage....... 103,718 33.7 54,761 22.6 12,572 6.5 14,796 7.6 12,862 8.8 Consumer and installment, net of unearned discount. 68,319 22.2 94,850 39.2 138,898 72.2 152,916 78.0 117,116 79.8 ------ ---- ------ ---- ------- ---- ------- ---- ------- ---- Total loans, excluding loans held for sale........ 307,729 100.0% 241,874 100.0% 192,573 100.0% 196,061 100.0% 146,703 100.0% ===== ===== ===== ===== ===== Loans held for sale........ 5,708 -- -- 7,253 21,029 -------- -------- -------- -------- -------- Total loans.......... $313,437 $241,874 $192,573 $203,314 $167,732 ======== ======== ======== ======== ========
Loans at December 31, 1997 mature as follows: Over one year through five years Over five years ------------------ --------------- One year Fixed Floating Fixed Floating or less rate rate rate rate Total ------- ---- ---- ---- ---- ----- (dollars expressed in thousands) Commercial and financial ................ $ 57,612 7,851 1,584 -- 2,044 69,091 Real estate construction and development...................... 65,623 118 419 94 347 66,601 Real estate mortgage..................... 65,563 12,925 9,566 5,185 10,479 103,718 Consumer and installment, net of unearned discount.................... 7,961 52,450 150 7,758 -- 68,319 Loans held for sale...................... 5,708 -- -- -- -- 5,708 --------- ------ ------ ------- ------- --------- Total loans................... $ 202,467 73,344 11,719 13,037 12,870 313,437 ========= ====== ====== ======= ======= =========
67 The following table is a summary of loan loss experience for the five years ended December 31, 1997:
December 31, ------------ 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (dollars expressed in thousands) Balance at beginning of year............... $ 6,147 5,228 2,756 2,637 3,044 Acquired allowances for possible loan losses.............................. 30 2,338 ------ ------ ------ ------- ------- 6,177 7,566 2,756 2,637 3,044 ------- ------- ------- ------ ------ Loans charged off: Commercial and financial............... (390) (243) -- (7) (268) Real estate construction and development...................... (15) -- (2) -- -- Real estate mortgage................... (76) (106) (57) (375) (8) Consumer and installment............... (2,263) (3,712) (4,010) (1,876) (1,622) ------- ------- ------- ------- ------- Total loans charged-off........... (2,744) (4,061) (4,069) (2,258) (1,898)) ------- ------- ------- ------- ------- Recoveries of loans previously charged off: Commercial and financial............... 123 345 129 184 164 Real estate construction and development.......................... -- -- 1 -- -- Real estate mortgage................... 105 34 35 258 154 Consumer and installment............... 1,054 1,013 550 677 683 ------- ------- ------- ------ ------ Total recoveries of loans previously charged off................... 1,282 1,392 715 1,119 1,001 ------- ------- ------- ------ ------ Net loans charged-off............. (1,462) (2,669) (3,354) (1,139) (897) ------- ------- ------- ------ ------ Provision for possible loan losses......... 2,000 1,250 5,826 1,258 490 ------- ------- ------- ------ ------ Balance at end of year..................... $ 6,715 6,147 5,228 2,756 2,637 ======= ======= ======= ====== ====== Loans outstanding: Average................................ $247,005 185,154 205,288 182,922 171,889 End of period.......................... 313,437 241,874 192,573 203,314 167,732 Ratio of allowance for possible loan losses to loans outstanding: Average........................... 2.72% 3.32% 2.55% 1.51% 1.53% End of period..................... 2.14 2.54 2.71 1.36 1.57 Ratio of net charge-offs to average loans outstanding.................... 0.59 1.44 1.63 0.62 0.52 ======== ====== ======== ====== ====== Allocation of allowance for possible loan losses at end of period:.......... Commercial and financial............. $ 1,531 1,453 409 197 229 Real estate construction ............ and development.................... 1,018 920 707 187 237 Real estate mortgage................. 2,774 1,833 344 201 720 Consumer and installment............. 1,392 1,941 3,768 2,171 1,451 ------- ------- ------ ------ ------ Total ............................ $ 6,715 6,147 5,228 2,756 2,637 ======= ======= ====== ====== ====== Percent of categories to loans, net of unearned discount: Commercial and financial............. 22.0% 19.9% 7.8% 7.1% 4.6% Real estate construction and development........................ 21.3 18.3 13.5 6.8 5.4 Real estate mortgage................. 33.1 22.6 6.5 7.3 7.7 Consumer and installment............. 21.8 39.2 72.2 75.2 69.8 Loans held for sale.................. 1.8 -- -- 3.6 12.5 ------- ------ ------- ------ ------ Total............................. 100.0% 100.0% 100.0% 100.0% 100.0% ======= ====== ======= ====== ======
68 Nonperforming assets include nonaccrual loans and foreclosed property. The following table presents the categories of nonperforming assets and certain ratios for the past five years:
December 31, ------------ 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (dollars expressed in thousands) Nonperforming loans......................... $ 2,411 2,095 549 293 622 Foreclosed property, net.................... 381 785 1,013 1,553 3,171 ---------- -------- -------- -------- -------- Total nonperforming assets............ $ 2,792 2,880 1,562 1,846 3,793 ========== ======== ======== ======== ======== Loans, net of unearned discount............. $ 313,437 241,874 192,573 203,314 167,732 ========== ======== ======= ======== ======== Loans past due: Over 30 days to 90 days................. $ 6,664 6,471 6,649 1,368 1,571 Over 90 days and still accruing......... 1,158 583 517 183 803 ---------- -------- -------- -------- -------- Total past-due loans................. $ 7,822 7,054 7,166 1,551 2,374 ========== ======== ======== ======== ======== Allowance for possible loan losses to loans................................ 2.14% 2.54% 2.71% 1.36% 1.57% Nonperforming loans to loans................ 0.77 0.87 0.29 0.14 0.37 Allowance for possible loan losses to nonperforming loans.................. 278.52 293.41 952.28 940.61 423.95 Nonperforming assets to loans and foreclosed property................. 0.89 1.19 0.81 0.90 2.22 ========== ======== ========= ====== ========
As of December 31, 1997 and 1996, $4.5 million and $9.8 million, respectively, of loans not included in the table above were identified by management as having potential credit problems which raised doubts as to the ability of the borrowers to comply with the present loan repayment terms. FBA's credit management policy and procedures focus on identifying, measuring and controlling credit exposure. These procedures employ a lender-initiated system of rating credits, which is ratified in the loan approval process and subsequently tested in internal loan reviews, external audits and regulatory bank examinations. Basically, the system requires rating all loans at the time they are made, except for homogeneous categories of loans, such as residential real estate mortgage loans and indirect automobile loans. These homogeneous loans are assigned an initial rating based on FBA's experience with each type of loan. Adjustments to these ratings are based on payment experience subsequent to their origination. Adversely rated credits, including loans requiring close monitoring which would not normally be considered criticized credits by regulators, are included on a monthly loan watch list. Loans may be added to the watch list for reasons which are temporary and correctable, such as the absence of current financial statements of the borrower, or a deficiency in loan documentation. Other loans are added whenever any adverse circumstance is detected which might affect the borrower's ability to meet the terms of the loan. This could be initiated by the delinquency of a scheduled loan payment, a deterioration in the borrower's financial condition identified in a review of periodic financial statements, a decrease in the value of the collateral securing the loan, or a change in the economic environment within which the borrower operates. Loans on the watch list require detailed loan status reports prepared by the responsible officer every four months, which are then discussed in formal meetings with the loan review and credit administration staffs. Downgrades of loan risk ratings may be initiated by the responsible loan officer at any time. However, upgrades of risk ratings may only be made with the concurrence of the loan review and credit administration staffs generally at the time of the formal watch list review meetings. Each month, credit administration provides FBA's management with detailed lists of loans on the watch list and summaries of the entire loan portfolio of each Subsidiary Bank by risk rating. These are coupled with analyses of changes in the risk profiles of the portfolios, changes in past due and nonperforming loans and changes in watch list and classified loans over time. In this manner, the overall increases or decreases in the levels of risk in the portfolios are 69 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 losses. In its analysis, management considers the change in the portfolio, including growth and composition, and the economic conditions of the regions in which FBA operates. Based on this quantitative and qualitative analysis, the allowance for possible loan losses is adjusted. Such adjustments are reflected in the consolidated statements of operations. FBA does not engage in lending in foreign countries or based on activities in foreign countries. Additionally, FBA does not have any concentrations of loans exceeding 10% of total loans which are not otherwise disclosed in the loan portfolio composition table and Note 5 to the accompanying consolidated financial statements. FBA does not have any 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 FBA. FBA's deposits consist principally of core deposits from its local market areas. FBA does not accept brokered deposits. The following table sets forth the distribution of FBA's average deposit accounts at the dates indicated and the weighted average interest rates by category of deposit:
Years ended December 31, ---------------------------------------------------------------------- 1997 1996 1995 -------------- ----------------- ----------------- Balance Rate Balance Rate Balance Rate (dollars expressed in thousands) Non-interest-bearing demand........... $ 52,893 --% $46,684 --% $ 44,251 --% Interest-bearing demand .............. 50,743 2.31 25,244 1.93 22,718 2.00 Savings............................... 70,382 3.34 56,613 3.27 56,915 3.56 Time deposits of $100 or more......... 29,614 5.46 25,294 5.57 23,305 5.58 Other time............................ 112,892 4.29 100,803 5.51 98,067 5.25 --------- ==== --------- ==== --------- ==== Total average deposits.......... $ 316,524 $ 254,638 $ 245,256 ========= ========= =========
Capital On August 31, 1994, FBA issued and sold for $30 million in a private placement 2,500,000 shares of Class B common stock to First Banks. The Class B common stock is generally equivalent to FBA's common stock, except that it is not registered or transferable by First Banks, other than to an affiliated entity, and has dividend rights which are junior to those of FBA's common stock. First Banks owned 65.9% of the total outstanding voting stock of FBA at December 31, 1997. On October 1, 1996, FBA purchased an outstanding warrant to acquire 131,336 shares of FBA common stock at $0.75 per share from the FDIC for an aggregate amount of $1.28 million. The purchase of the warrant was applied as a reduction of capital surplus. FBA issued 264,622 shares of common stock in connection with its acquisition of Surety Bank, resulting in an increase to stockholders' equity of $4.8 million. The increase represents the fair value of the net assets exchanged for FBA common stock, as determined by the market value of FBA common stock at the date of exchange. On February 2, 1998, FBA completed its acquisition of FCB. As described under "--Acquisitions" and in Note 2 of the accompanying consolidated financial statements, in connection with the acquisition, FBA issued approximately 1,555,728 shares of common stock, of which 1,266,176 were issued to First Banks. 70 The Board of Directors has authorized the purchase of up to 555,488 shares of common stock for treasury. Aggregate shares purchased totaled 386,458 and 280,430, at an aggregate cost of $4.35 million and $2.84 million as of December 31, 1997 and 1996, respectively. Interest Rate Risk Management For financial institutions, the maintenance of a satisfactory level of net interest income is a primary factor in achieving acceptable income levels. However, the maturity and repricing characteristics of the institution's loan and investment portfolios, relative to those within its deposit structure, may differ significantly. This is influenced by the characteristics of the loan and deposit markets within which FBA 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. FBA manages its interest rate risk by: (1) maintaining an Asset Liability Committee (ALCO) responsible to FBA's Board of Directors to review the overall interest rate risk management activity and approve actions taken to reduce risk; (2) maintaining an effective simulation model to determine FBA's exposure to changes in interest rates; (3) coordinating the lending, investing and deposit-generating functions to control the assumption of interest rate risk; and (4) employing various off-balance-sheet financial instruments to offset inherent interest rate risk when it becomes excessive. The objective of these procedures is to limit the adverse impact which changes in interest rates may have on net interest income. The ALCO has overall responsibility for the effective management of interest rate risk and the approval of policy guidelines. The ALCO includes the Chairman and Chief Executive Officer, the senior executives of investments, credit, retail banking, commercial banking and finance, and certain other officers. The ALCO is supported by the Asset Liability Management Group which monitors interest rate risk, prepares analyses for review by the ALCO and implements actions which are either specifically directed by the ALCO or established by policy guidelines. The objective and primary focus of interest sensitivity management is to optimize earnings results, while managing, within internal policy constraints, interest rate risk. FBA's policy on rate sensitivity is to manage exposure to potential risks associated with changing interest rates by maintaining a balance sheet posture in which annual net interest income is not significantly impacted by reasonably possible near-term changes in interest rates. To measure the effect of interest rate changes, FBA recalculates its net income over two one-year horizons on a pro forma basis. The analysis assumes various scenarios for increases and decreases in interest rates including both instantaneous and gradual, parallel and non-parallel shifts in the yield curve, in varying amounts. For purposes of arriving at reasonably possible near-term changes in interest rates, FBA includes a forecast based on actual changes in interest rates which have occurred over a two year period, simulating both a declining and rising interest rate scenario. Consistent with the table presented below, which indicates FBA is "asset-sensitive," FBA's simulation model indicates a loss of projected net income should interest rates decline. While a decline in interest rates of less than 10% has a diminutive effect on the earnings of FBA, a significant decline in interest rates, resembling the actual decline which occurred over a two-year period commencing in March 1991, indicates a loss of net income equivalent to approximately 7% of net interest income for the year ended December 31, 1997. FBA utilizes off-balance-sheet derivative financial instruments to assist in the management of interest rate sensitivity and to modify the repricing, maturity and option characteristics of on-balance-sheet assets and liabilities. Derivative financial instruments held by FBA at December 31, 1997 and 1996 consist of an interest rate cap agreement with a notional amount of $10 million and credit exposure of $222,000 and $335,000, respectively. The notional amount 71 of the interest rate cap agreement does not represent amounts exchanged by the parties and, therefore, is not a measure of FBA's credit exposure through its use of derivative financial instruments. The amounts actually exchanged are determined by reference to the notional amounts and the other terms of the agreement. FBA's interest rate cap agreement limits the interest expense associated with certain of its interest-bearing liabilities. In exchange for an initial fee, the interest rate cap agreement entitles FBA to receive interest payments when a specified index rate exceeds a predetermined rate. The agreement outstanding at December 31, 1997 and 1996 effectively limits the interest rate to 5.0% on $10 million of interest-bearing liabilities from October 15, 1997 to May 15, 2000. Previously, FBA sold interest rate futures contracts and purchased options on interest rate futures contracts to hedge the interest rate risk of its available-for-sale securities portfolio. Interest rate futures contracts are commitments to either purchase or sell designated financial instruments at a future date for a specified price and may be settled in cash or through delivery of such financial instruments. Options on interest rate futures contracts confer the right to purchase or sell financial futures contracts at a specified price and are settled in cash. There were no outstanding interest rate futures contracts or options on interest rate futures contracts at December 31, 1995 and no activity for the years ended December 31, 1997 and 1996. During 1995, as interest rates declined, FBA incurred losses on the interest rate futures contracts of $5.95 million, of which $806,000 was amortized to income as a yield adjustment to the investment security portfolio and $5.14 million was included in the cost basis in determining the gain or loss upon the sale of the securities. The losses incurred on the interest rate futures contracts were partially offset by gains in the available-for-sale securities portfolio. The overall net loss in net market value of these positions was attributable to an increase in the projected prepayments of principal underlying the available-for-sale securities portfolio. These increased prepayment projections disproportionately shortened the expected lives of the available-for-sale securities portfolio in comparison to the effective maturity created with the hedge position. As a result, beginning in the second quarter of 1995, FBA began to reduce its hedge position to coincide with the current expected life of the available-for-sale securities portfolio by decreasing the number of outstanding interest rate futures contracts. FBA continued to reduce its hedge position during the third and fourth quarters of 1995 as a result of the further declines in interest rates. In addition, on November 3, 1995, upon sales of $48.9 million of securities, which marked the completion of the restructuring of the available-for-sale securities portfolio, the remaining outstanding interest rate futures contracts were closed. 72 In addition to the simulation model employed by FBA, a more traditional interest rate sensitivity position is prepared and reviewed in conjunction with the results of the simulation model. The following table presents the projected maturities and periods to repricing of FBA's rate sensitive assets and liabilities as of December 31, 1997, adjusted to account for anticipated prepayments:
Over three Over six Three through through Over one Over months six twelve through five or less months months five years years Total ------- ------ ------ ---------- ----- ----- (dollars expressed in thousands) Interest-earning assets: Loans (1)..................................... $ 211,151 16,939 28,830 54,453 2,064 313,437 Investment securities......................... 22,883 1,605 3,451 51,791 4,061 83,791 Federal funds sold............................ 2,215 -- -- -- -- 2,215 Interest-bearing deposits with other financial institutions................ 690 -- -- -- -- 690 --------- ------- ------- ------- ------- -------- Total interest-earning assets............... 236,939 18,544 32,281 106,244 6,125 400,133 --------- ------- ------- ------- ------- -------- Interest-bearing liabilities: Interest-bearing demand accounts.............. 21,095 13,112 8,552 6,271 7,981 57,011 Money market demand accounts.................. 51,345 -- -- -- -- 51,345 Savings accounts.............................. 6,703 5,520 4,731 6,703 15,771 39,428 Time deposits................................. 40,294 34,349 41,261 53,858 -- 169,762 Notes payable and other borrowed funds........ 16,723 584 -- -- -- 17,307 --------- ------- ------- ------- ------- -------- Total interest-bearing liabilities.......... 136,160 53,565 54,544 66,832 23,752 334,853 --------- ------- ------- ------- ------- -------- Interest-sensitivity gap: Periodic...................................... $ 100,779 (35,021) (22,263) 39,412 (17,627) 65,280 ======== Cumulative.................................... 100,779 65,758 43,495 82,907 65,280 ========= ======== ======= ======= ======= Ratio of interest-sensitive assets to interest-sensitive liabilities: Periodic.................................... 1.74 .35 .59 1.59 .26 1.19 ======= Cumulative.................................. 1.74 1.35 1.18 1.27 1.19 ======== ====== ====== ====== ====== - - ---------------------- (1) Loans presented net of unearned discount
Management made certain assumptions in preparing the table above. These assumptions included: Loans will repay at historic repayment speeds; mortgage-backed securities, included in investment securities, will repay at projected repayment speeds; interest-bearing demand accounts and savings accounts are interest-sensitive at a rate of 37% and 17%, respectively, of the remaining balance for each period presented; and fixed maturity deposits will not be withdrawn prior to maturity. At December 31, 1997 and 1996, FBA's asset-sensitive position on a cumulative basis through the twelve-month time horizon increased by $29.8 million, or 6.60% of total assets, to $43.5 million, or 9.64% of total assets, from $13.7 million, or 3.65% of total assets, respectively. The increase is attributable to the composition and growth of the loan portfolio. The interest-sensitivity position is one of several measurements of the impact of interest rate changes on net interest income. Its usefulness in assessing the effect of potential changes in net interest income varies with the constant change in the composition of FBA's assets and liabilities. For this reason, FBA places greater emphasis on a simulation model for monitoring its interest rate risk exposure. 73 Liquidity The liquidity of FBA and the Subsidiary Banks is the ability to maintain a cash flow which is adequate to fund operations and meet obligations and other commitments on a timely basis. The Subsidiary Banks receive funds for liquidity from customer deposits, loan payments, maturities of loans and investments, sales of investments and earnings. In addition, the Subsidiary Banks may avail themselves of more volatile sources of funds through the issuance of certificates of deposit in denominations of $100,000 or more, federal funds borrowed, securities sold under agreements to repurchase and borrowings from the FHLB. The aggregate funds acquired from these more volatile sources were $41.2 million and $33.8 million at December 31, 1997 and 1996, respectively. The following table presents the maturity structure of volatile funds, which consists of certificates of deposit of $100,000 or more and other short-term borrowings, at December 31, 1997: December 31, 1997 ----------------- (dollars expressed in thousands) 3 months or less................. $ 15,404 Over 3 through 6 months.......... 8,338 Over 6 through 12 months ........ 8,447 Over 12 months................... 8,995 -------- Total................... $ 41,184 ======== In addition to these more volatile sources of funds, FBA borrowed $14.5 million and $14.0 million at December 31, 1997 and 1996, respectively, from First Banks under a $20.0 million promissory note payable (Note Payable) to facilitate the funding of its acquisitions. The borrowings under the Note Payable bear interest at an annual rate of one-quarter percent less than the "Prime Rate" as reported in the Wall Street Journal. The principal and accrued interest under the Note Payable are due and payable on October 31, 2001. Management believes the available liquidity and operating results of the Subsidiary Banks will be sufficient to provide funds for growth and to meet FBA's operating and debt service requirements both on a short-term and long-term basis, including the Note Payable with First Banks. Year 2000 Compatibility FBA has significant dependence on various computer equipment and software for its daily operations. Most software systems were originally designed to operate using date fields which contain two digits to correspond to the last two digits of the Year. With the approaching change to the Year 2000, this limitation in these systems could cause the computers to misinterpret years beginning with "20" as instead being years beginning with "19". If not corrected, this could cause miscalculation of data for financial purposes, and operating failure of equipment which is date dependent. While the most obvious location of this problem is the mainframe computer system, there are many other potential ramifications. These can be categorized as: (1) the ancillary software systems which are used for various other purposes throughout FBA on secondary mainframe computers, personal computers or intelligent terminals; (2) other types of equipment which are not related to or connected to computer equipment, such as vault time locks, elevators, security equipment and heating/air conditioning systems, which are used in bank branches for various purposes; and (3) the effects which the transition to the Year 2000 may have on external suppliers and servicers, as well as the loan and deposit customers of FBA. Recognizing this, FBA has established an operating committee, which includes representatives of First Banks, to identify all of the various Year 2000 problems which may arise and work with the various departments within FBA to address these issues. Since most of the software used by FBA is purchased from outside vendors, FBA has been working with these vendors to ensure the issues are being corrected. In a few instances, there are particular systems or equipment which the vendors do not intend to convert to Year 2000 compatibility. However, generally these are items which are at the end of their economic lives and scheduled for replacement. Consequently, FBA believes its cost of Year 2000 compliance will not be material to its financial position or results of operation. These costs are expensed as incurred. 74 FBA and its Subsidiary Banks are subject to risks associated with the Year 2000 software problem, a term which refers to uncertainties about the ability of various software systems to interpret dates correctly after the beginning of the Year 2000. FBA's process of evaluating potential effects of Year 2000 issues on customers of the Subsidiary Banks is in its early stages, and it is therefore impossible to quantify the potential adverse effects of incompatible software systems on loan customers of FBA's Subsidiary Banks. The failure of a commercial bank customer to prepare adequately for Year 2000 compatibility could have a significant adverse effect on such customer operations and profitability, in turn inhibiting its ability to repay loans in accordance with their terms. Until sufficient information is accumulated from customers of the Subsidiary Banks to enable FBA to assess the degree to which customers' operations are susceptible to potential problems, FBA will be unable to quantify the potential for losses from loans to commercial customers. Effect of New Accounting Standards During 1997, the Financial Accounting Standards Board (FASB) issued Statement on Financial Accounting Standards (SFAS) No. 130 - Reporting Comprehensive Income. The statement establishes standards for reporting and displaying income and its components (revenues, gains, and losses) in a full set of general purpose financial statements. The statement requires all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Although the statement is effective for fiscal years beginning after December 15, 1997, FBA does not believe the SFAS will have a material impact to the Company's financial statements. In addition, the FASB issued SFAS No. 131 - Disclosures about Segments of an Enterprise and Related Information. The statement establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires those enterprises report selected information about operating segments in interim financial reports issued to shareholders. Additionally, the statement establishes standards for related disclosures about products and services, geographic areas, and major customers superseding SFAS No. 14 - Financial Reporting for Segments of a Business Enterprise. FBA is currently evaluating information required in the statement and believes expanded disclosure information will be required to be included in FBA's financial statements beginning in 1998. Effects of Inflation Financial institutions are less affected by inflation than other types of companies. Financial institutions make relatively few significant asset acquisitions which are directly affected by changing prices. Instead, the assets and liabilities are primarily monetary in nature. Consequently, interest rates are more significant to the performance of financial institutions than the effect of general inflation levels. While a relationship exists between the inflation rate and interest rates, FBA believes this is generally manageable through its asset/liability management program. 75
FIRST BANKS AMERICA, INC. QUARTERLY CONDENSED FINANCIAL DATA (Unaudited) 1997 ---- 4th 3rd 2nd 1st Quarter Quarter Quarter Quarter ------- ------- ------- ------- (dollars in thousands, except per share data) Interest income......................................... $7,802 7,495 6,949 6,637 Interest expense......................................... 3,418 3,210 3,109 3,097 ------ ------ ----- ----- Net interest income......................... 4,384 4,285 3,840 3,540 Provision for possible loan losses....................... 250 465 735 550 ------ ------ ----- ----- Net interest income after provision for possible loan losses.................. 4,134 3,820 3,105 2,990 ------ ------ ----- ----- Noninterest income: Gains on sales of securities.......................... 76 -- -- -- Other................................................. 510 500 823 655 ------ ------ ----- ------ Total noninterest income.................... 586 500 823 655 ------ ------ ----- ----- Noninterest expense...................................... 3,155 2,821 2,669 3,031 ------ ------ ----- ----- Income before income tax expense............ 1,565 1,499 1,259 614 Income tax expense....................................... 492 566 463 237 ------ ------ ----- ----- Net income.................................. $1,073 933 796 377 ====== ====== ===== ====== Earnings per common share: Basic................................................. $ 0.30 0.26 0.22 0.10 Diluted............................................... 0.29 0.26 0.22 0.10 ====== ====== ====== ====== 1996 ---- 4th 3rd 2nd 1st Quarter Quarter Quarter Quarter ------- ------- ------- ------- (dollars in thousands, except per share data) Interest income......................................... $6,157 5,299 4,982 5,008 Interest expense......................................... 2,834 2,233 2,452 2,474 ------ ----- ----- ------ Net interest income......................... 3,323 3,066 2,530 2,534 Provision for possible loan losses....................... 650 250 250 100 ------ ----- ----- ------ Net interest income after provision for possible loan losses.................. 2,673 2,816 2,280 2,434 ------ ----- ----- ------ Noninterest income: Gains on sales of securities.......................... 110 -- -- 75 Other................................................. 435 429 436 363 ------ ----- ----- ------ Total noninterest income.................... 545 429 436 438 ------ ----- ----- ------ Noninterest expense...................................... 2,858 2,535 1,994 2,093 ------ ----- ----- ------ Income before income tax expense............ 360 710 722 779 Income tax expense....................................... 147 253 284 318 ------ ----- ----- ------ Net income.................................. $ 213 457 438 461 ====== ===== ===== ====== Earnings per common share: Basic................................................. $ 0.06 0.12 0.12 0.12 Diluted............................................... 0.06 0.12 0.11 0.12 ====== ===== ===== ======
76 FIRST BANKS AMERICA, INC. CONSOLIDATED BALANCE SHEETS (dollars expressed in thousands, except per share data)
December 31, ------------ 1997 1997 1996 ---- ---- ---- pro forma (unaudited) Assets ------ Cash and cash equivalents: Cash and due from banks................................................ $ 34,399 23,537 12,343 Interest-bearing deposits with other financial institutions with maturities of three months or less................ 2,607 690 146 Federal funds sold..................................................... 4,915 2,215 9,475 --------- --------- --------- Total cash and cash equivalents................................... 41,921 26,442 21,964 --------- --------- --------- Investment securities available for sale, at fair value.................... 148,181 83,791 86,910 Loans: Commercial and financial............................................... 113,807 69,091 48,025 Real estate construction and development............................... 94,587 66,601 44,238 Real estate mortgage................................................... 171,842 103,718 54,761 Consumer and installment............................................... 77,390 69,923 96,096 Loans held for sale.................................................... 5,708 5,708 -- --------- --------- -------- Total loans....................................................... 463,334 315,041 243,120 Unearned discount...................................................... (2,588) (1,604) (1,246) Allowance for possible loan losses..................................... (12,313) (6,715) (6,147) --------- --------- --------- Net loans......................................................... 448,433 306,722 235,727 --------- --------- --------- Bank premises and equipment, net of accumulated depreciation............................................... 10,852 8,679 6,369 Intangibles associated with the purchase of subsidiaries................... 12,000 6,424 3,127 Accrued interest receivable................................................ 5,029 2,963 2,348 Foreclosed property, net................................................... 842 381 785 Deferred tax assets........................................................ 14,498 13,812 15,519 Other assets............................................................... 3,851 2,042 2,433 --------- --------- --------- Total assets...................................................... $ 685,607 451,256 375,182 ========= ========= ========= The accompanying notes are an integral part of the consolidated financial statements.
77 FIRST BANKS AMERICA, INC. CONSOLIDATED BALANCE SHEETS, CONTINUED (dollars expressed in thousands, except per share data)
December 31, ------------ 1997 1997 1996 ---- ---- ---- pro forma (unaudited) Liabilities ----------- Deposits: Demand: Non-interest-bearing ................................................ $ 101,039 66,396 56,161 Interest-bearing..................................................... 74,965 57,011 53,310 Savings................................................................ 158,080 90,773 66,523 Time deposits: Time deposits of $100 or more........................................ 56,373 38,377 31,679 Other time deposits.................................................. 199,945 131,385 112,133 ---------- --------- --------- Total deposits.................................................... 590,402 383,942 319,806 Short-term borrowings...................................................... 3,687 2,807 2,092 Promissory note payable.................................................... 9,100 14,500 14,000 Accrued interest payable................................................... 4,242 2,246 904 Deferred tax liabilities................................................... 1,273 983 909 Payable to former shareholders of Surety Bank.............................. 3,829 3,829 -- Accrued expenses and other liabilities..................................... 5,167 3,085 3,973 12% convertible debentures................................................. 6,500 -- -- ---------- ---------- ---------- Total liabilities................................................. 624,200 411,392 341,684 ---------- --------- --------- Stockholders' Equity -------------------- Common stock: Common stock, $0.15 par value; 6,666,666 shares authorized at December 31, 1997 and 1996; 3,238,417 pro forma shares, 1,682,689 shares and 1,412,900 shares issued at December 31, 1997 and 1996, respectively................... 486 252 212 Class B common stock, $.15 par value; 4,000,000 shares authorized; 2,500,000 shares issued and outstanding at December 31, 1997 and 1996............................ 375 375 375 Capital surplus............................................................ 63,636 42,497 38,036 Retained earnings (deficit), since elimination of accumulated deficit of $259,117 effective December 31, 1994........................ 928 928 (2,251) Common treasury stock, at cost; 386,458 shares and 280,430 shares at December 31, 1997 and 1996, respectively..................... (4,350) (4,350) (2,838) Net fair value adjustment for securities available for sale................ 332 162 (36) ---------- --------- --------- Total stockholders' equity........................................ 61,407 39,864 33,498 ---------- --------- --------- Total liabilities and stockholders' equity........................ $ 685,607 451,256 375,182 ========== ========= =========
78
FIRST BANKS AMERICA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (dollars expressed in thousands, except per share data) Years ended December 31, ------------------------ 1997 1997 1996 1995 ---- ---- ---- ---- pro forma (unaudited) Interest income: Interest and fees on loans........................................ $ 29,451 23,159 16,494 17,462 Investment securities............................................. 6,793 5,073 3,519 4,473 Federal funds sold and other...................................... 1,021 651 1,433 492 -------- ------- ------- ------- Total interest income........................................ 37,265 28,883 21,446 22,427 -------- ------- ------- ------- Interest expense: Deposits: Interest-bearing demand......................................... 1,312 1,174 487 455 Savings......................................................... 3,209 2,350 1,854 2,026 Time deposits of $100 or more................................... 1,946 1,631 1,409 1,300 Other time deposits............................................. 8,168 6,159 5,551 5,148 Promissory note payable and other borrowings...................... 2,085 1,520 692 2,289 -------- ------- ------- ------- Total interest expense....................................... 16,720 12,834 9,993 11,218 -------- ------- ------- ------- Net interest income.......................................... 20,545 16,049 11,453 11,209 Provision for possible loan losses.................................... 2,000 2,000 1,250 5,826 -------- ------- ------- ------- Net interest income after provision for possible loan losses................................... 18,545 14,049 10,203 5,383 -------- ------- ------- ------- Noninterest income (loss): Service charges on deposit accounts............................... 2,005 1,632 1,507 1,458 Loan sales and servicing income................................... 33 22 53 159 Other income...................................................... 894 834 103 1,253 Gain (loss) on sales of securities, net........................... 76 76 185 (2,996) -------- ------- ------- ------- Total noninterest income (loss).............................. 3,008 2,564 1,848 (126) -------- ------- ------- ------- Noninterest expense: Salaries and employee benefits.................................... 5,453 4,219 3,072 4,029 Occupancy, net of rental income................................... 1,886 1,440 951 1,274 Furniture and equipment........................................... 1,016 805 613 663 Federal Deposit Insurance Corporation premiums.................... 112 102 160 313 Postage, printing and supplies.................................... 438 346 267 303 Legal, examination and professional fees.......................... 2,765 2,005 1,276 1,354 Data processing................................................... 942 715 334 664 Communications.................................................... 614 521 421 553 (Gain) loss on sale of foreclosed property, net of expenses....... (332) (303) 146 176 Other............................................................. 2,399 1,826 2,240 1,831 -------- ------- ------- ------- Total noninterest expense.................................... 15,293 11,676 9,480 11,160 -------- ------- ------- ------- Income (loss) before provision for income tax expense (benefit)............................ 6,260 4,937 2,571 (5,903) Provision for income tax expense (benefit)............................ 2,611 1,758 1,002 (2,083) -------- ------- ------- ------- Net income (loss)............................................ $ 3,649 3,179 1,569 (3,820) ======== ======= ======= ======= Earnings (loss) per common share: Basic............................................................. $ 0.90 0.88 0.42 (0.99) Diluted........................................................... 0.89 0.87 0.40 (0.99) ======== ======= ======= ======= Weighted average common stock outstanding (in thousands).............. 4,069 3,607 3,763 3,870 ======== ======= ======= ======= The accompanying notes are an integral part of the consolidated financial statements.
79
FIRST BANKS AMERICA, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Three years ended December 31, 1997 (dollars expressed in thousands, except per share data) Net fair value adjustment Total Class B Retained Common for securities stock- Common common Capital earnings treasury available holders' stock stock surplus (deficit) stock for sale equity ----- ----- ------- --------- ----- -------- ------ Consolidated balances, January 1, 1995.................$ 206 375 39,133 -- -- -- 39,714 Year ended December 31, 1995: Consolidated net loss........... -- -- -- (3,820) -- -- (3,820) Exercise of stock options....... 4 -- 111 -- -- -- 115 Compensation paid in stock...... -- -- 27 -- -- -- 27 Repurchases of common stock..... -- -- -- -- (828) -- (828) Net fair value adjustment for securities available for sale. -- -- -- -- -- 50 50 ---- ---- ------ ----- ----- ---- ------ Consolidated balances, December 31, 1995............... 210 375 39,271 (3,820) (828) 50 35,258 Year ended December 31, 1996: Consolidated net income......... -- -- -- 1,569 -- -- 1,569 Exercise of stock options....... 2 -- 36 -- -- -- 38 Compensation paid in stock...... -- -- 10 -- -- -- 10 Repurchase of outstanding warrants...................... -- -- (1,281) -- -- -- (1,281) Repurchases of common stock..... -- -- -- -- (2,010) -- (2,010) Net fair value adjustment for securities available for sale. -- -- -- -- -- (86) (86) ---- ---- ----- ----- ----- ---- ------ Consolidated balances, December 31, 1996............... 212 375 38,036 (2,251) (2,838) (36) 33,498 Year ended December 31, 1997: Consolidated net income......... -- -- -- 3,179 -- -- 3,179 Issuance of common stock for purchase accounting acquisition................... 40 -- 4,723 -- -- -- 4,763 Exercise of stock options....... -- -- 15 -- -- -- 15 Redemption of stock options.... -- -- (290) -- -- -- (290) Compensation paid in stock...... -- -- 13 -- -- -- 13 Repurchases of common stock..... -- -- -- -- (1,512) -- (1,512) Net fair value adjustment for securities available for sale. -- -- -- -- -- 198 198 ---- ---- ----- ----- ------ ---- ------ Consolidated balances, December 31, 1997............... $252 375 42,497 928 (4,350) 162 39,864 ==== ==== ====== ===== ====== ==== ====== The accompanying notes are an integral part of the consolidated financial statements.
80
FIRST BANKS AMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars expressed in thousands) Years ended December 31, ------------------------ 1997 1996 1995 ---- ---- ---- Cash flows from operating activities: Net income (loss)...................................................... 3,179 1,569 (3,820) Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation, amortization and accretion, net...................... 694 (172) 337 Provision for possible loan losses................................. 2,000 1,250 5,826 Provision (benefit) for income taxes............................... 1,758 1,002 (2,083) Payments of income taxes........................................... (213) -- -- (Gain) loss on sales of securities, net............................ (76) (185) 2,996 (Increase) decrease in accrued interest receivable................. (615) (1,084) 481 Interest accrued on liabilities.................................... 12,834 9,993 11,218 Payments of interest on liabilities................................ (11,492) (9,984) (11,142) Other operating activities, net.................................... (66) (1,836) (860) -------- ------- -------- Net cash provided by operating activities.................... 8,003 553 2,953 -------- ------- -------- Cash flows from investing activities: Cash paid for acquired entities, net of cash and cash equivalents received................................................. 3,072 10,715 -- Sales of investment securities......................................... 11,073 20,564 70,995 Maturities of investment securities.................................... 54,805 161,223 54,380 Purchases of investment securities..................................... (50,126) (205,661) (104,753) Net (increase) decrease in loans....................................... (20,031) 7,481 6,469 Recoveries of loans previously charged-off............................. 1,281 1,392 715 Purchases of bank premises and equipment............................... (487) (191) (489) Proceeds from sales of other real estate............................... 1,020 508 743 Other investing activities............................................. (258) -- (6,414) -------- -------- -------- Net cash provided by (used in) investing activities.......... 349 (3,969) 21,646 -------- ------- -------- Cash flows from financing activities: Other increases (decreases) in deposits: Demand and savings deposits.......................................... 1,664 (7,444) (454) Time deposits........................................................ (4,978) (13,159) 8,147 Decrease in federal funds purchased and other short-term borrowings................................................ -- (352) (5,257) Decrease in Federal Home Loan Bank advances............................ (1,122) (3,957) (13,749) Increase (decrease) in securities sold under agreements to repurchase.. 1,836 (324) (18,722) Increase in promissory note payable.................................... 500 12,946 -- Repurchase of common stock for treasury and warrant.................... (1,512) (3,290) (828) Repurchase of stock option............................................. (290) -- -- Proceeds from exercise of stock options................................ 28 38 115 -------- ------- -------- Net cash used in financing activities........................ (3,874) (15,542) (30,748) --------- ------- -------- Net increase (decrease) in cash and cash equivalents......... 4,478 (18,958) (6,149) Cash and cash equivalents, beginning of year............................... 21,964 40,922 47,071 -------- ------- -------- Cash and cash equivalents, end of year..................................... $ 26,442 21,964 40,922 ======== ======= ======== Noncash investing and financing activities: Loans transferred to foreclosed real estate............................ $ 176 286 203 Issuance of common stock in purchase accounting acquisition............ 4,763 -- -- Loans transferred from loans held for sale............................. -- -- 7,253 Receivable from sale of investment securities.......................... $ -- -- 4,915 ========= ======= ======== The accompanying notes are an integral part of the consolidated financial statements.
81 (1) Summary of Significant Accounting Policies The accompanying consolidated financial statements of First Banks America, Inc. and subsidiaries (FBA or the Company), have been prepared in accordance with generally accepted accounting principles and conform to practices prevalent among financial institutions. The following is a summary of the more significant policies followed by FBA: Basis of Presentation. The consolidated financial statements of FBA have been prepared in accordance with generally accepted accounting principles and conform to predominant practices within the banking industry. Management of FBA has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare the consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Certain 1996 and 1995 amounts have been reclassified to conform with the 1997 presentation. As more fully discussed in Note 2, the unaudited pro forma balance sheet as of December 31, 1997 and unaudited pro forma statement of operations for the year ended December 31, 1997 have been prepared to reflect the effects on the historical results of FBA of the acquisitions of First Commercial Bancorp, Inc. (FCB) and its wholly owned subsidiary, First Commercial Bank (First Commercial), and Pacific Bay Bank. The unaudited pro forma balance sheet and unaudited pro forma statement of operations have been prepared as if the acquisitions occurred on December 31, 1997. In addition, the historical results of First Banks, Inc.'s interest in FCB is presented as if FBA had acquired First Banks, Inc.'s interest in FCB on August 25, 1995. The pro forma financial information is not necessarily indicative of the results that will occur in the future. The Board of Directors of FBA elected to implement an accounting adjustment referred to as a "quasi-reorganization," effective December 31, 1994. In accordance with accounting provisions applicable to a quasi-reorganization, the assets and liabilities of FBA were adjusted to their fair value and the accumulated deficit was eliminated as of December 31, 1994. Principles of Consolidation. The consolidated financial statements include the accounts of the parent company and its subsidiaries, all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated. FBA operates through two banking subsidiaries, BankTEXAS N.A., headquartered in Houston, Texas (BankTEXAS) and First Bank of California, headquartered in Roseville, California (FB California), collectively referred to as Subsidiary Banks. Cash and Cash Equivalents. Cash, due from banks, federal funds sold, and interest-bearing deposits with original maturities of three months or less are considered to be cash and cash equivalents for purposes of the consolidated statements of cash flows. The Subsidiary Banks are required to maintain certain daily reserve balances in accordance with regulatory requirements. These reserve balances were $3.6 million and $2.6 million at December 31, 1997 and 1996, respectively. Investment Securities. The classification of investment securities as available for sale or held to maturity is determined at the date of purchase. FBA does not engage in the trading of investment securities. Investment securities classified as available for sale are those debt and equity securities for which FBA has no immediate plan to sell, but which may be sold in the future if circumstances warrant. Available-for-sale securities are stated at current fair value. Realized gains and losses are included in noninterest income upon commitment to sell, based on the amortized cost of the individual security sold. Unrealized gains and losses are recorded, net of related income tax effects, in a separate component of stockholders' equity. All previous fair value adjustments included in stockholders' equity are reversed upon sale. 82 Investment securities designated as held to maturity are those debt securities which FBA has the positive intent and ability to hold until maturity. Held-to-maturity securities are stated at amortized cost, in which the amortization of premiums and accretion of discounts are recognized over the contractual maturities or estimated lives of the individual securities, adjusted for anticipated prepayments, using the level yield method. At December 31, 1997 and 1996, all investment securities were classified as available for sale. Loans. Loans held for portfolio are carried at cost, adjusted for amortization of premiums and accretion of discounts using a method which approximates the level yield method. Interest and fees on loans are recognized as income using the interest method. Loans held for portfolio are stated at cost as FBA has the ability and it is management's intention to hold them to maturity. The accrual of interest on loans is discontinued when it appears that interest or principal may not be paid in a timely manner in the normal course of business. Generally, payments received on nonaccrual and impaired loans are recorded as principal reductions. Interest income is recognized after all principal has been repaid or an improvement in the condition of the loan has occurred which would warrant resumption of interest accruals. A loan is considered impaired when it is probable a creditor will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan agreement. When measuring impairment, the expected future cash flows of an impaired loan are discounted at the loan's effective interest rate. Alternatively, impairment is measured by reference to an observable market price, if one exists, or the fair value of the collateral for a collateral-dependent loan. Regardless of the historical measurement method used, FBA measures impairment based on the fair value of the collateral when the creditor determines foreclosure is probable. Additionally, impairment of a restructured loan is measured by discounting the total expected future cash flows at the loan's effective rate of interest as stated in the original loan agreement. FBA continues to use its existing nonaccrual methods for recognizing interest income on impaired loans. Loans Held for Sale. Mortgage loans held for sale are carried at the lower of cost or market value which is determined on an individual loan basis. Gains or losses on the sale of loans held for sale are determined on a specific identification method. Allowance for Possible Loan Losses. The allowance for possible loan losses is maintained at a level considered adequate to provide for potential losses. The provision for possible loan losses is based on a periodic analysis of the loans by management, considering, among other factors, current economic conditions, loan portfolio composition, past loan loss experience, independent appraisals, loan collateral and payment experience. In addition to the allowance for estimated losses on impaired loans, an overall unallocated allowance is established to provide for unidentified credit losses which are inherent in the portfolio. As adjustments become necessary, they are reflected in the results of operations in the periods in which they become known. Bank Premises and Equipment. Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed primarily using the straight-line method over the estimated useful lives of the related assets. Amortization of leasehold improvements is calculated using the straight-line method over the shorter of the useful life of the improvement or term of the lease. Bank premises and improvements are depreciated over 15 to 29 years and equipment over two to ten years. Intangibles Associated With the Purchase of Subsidiaries. The excess of cost over net assets acquired of purchased subsidiaries are amortized using the straight-line method over the estimated periods to be benefited, which has been estimated at 15 years. Foreclosed Property. Foreclosed property, consisting of real estate acquired through foreclosure or deed in lieu of foreclosure, is stated at the lower of fair value less applicable selling costs or cost at the time the property is acquired. The excess of cost over fair value of the property at the date of acquisition is charged to the allowance for possible loan losses. 83 Income Taxes. FBA and its subsidiaries join in filing consolidated federal income tax returns. Each subsidiary pays its allocation of federal income taxes to FBA, or receives payment from FBA to the extent that tax benefits are realized. Separate state franchise tax returns are filed in Texas, Delaware and Nevada for the appropriate entities. FBA and its subsidiaries join in filing Illinois and California unitary income tax returns with First Banks. Financial Instruments. A financial instrument is defined as cash, evidence of an ownership interest in an entity, or a contract that conveys or imposes on an entity the contractual right or obligation to either receive or deliver cash or another financial instrument. Financial Instruments With Off-Balance-Sheet Risk. FBA uses financial instruments to reduce the interest rate risk arising from its financial assets and liabilities. These instruments involve, in varying degrees, elements of interest rate risk and credit risk in excess of the amount recognized in the consolidated balance sheets. "Interest rate risk" is defined as the possibility that interest rates may move unfavorably from the perspective of FBA. The risk that a counterparty to an agreement entered into by FBA may default is defined as "credit risk." These financial instruments include one interest rate cap agreement. FBA is party to commitments to extend credit and commercial and standby letters of credit in the normal course of business to meet the financing needs of its customers. These commitments involve, in varying degrees, elements of interest rate risk and credit risk in excess of the amount recognized in the consolidated balance sheets. Interest Rate Futures Contracts. Prior to 1996, interest rate futures contracts were utilized to manage the interest rate risk of the available-for-sale securities portfolio. Gains and losses on interest rate futures contracts, which qualified as hedges, were deferred. Amortization of the net deferred gains or losses was applied to the interest income of the available-for-sale securities portfolio using the straight-line method. The net deferred gains and losses were applied to the carrying value of the available-for-sale securities portfolio as part of the mark to market valuation. When the hedged assets were sold, the related gain or loss on the interest rate futures contract was immediately recognized in the consolidated statements of operations. Interest Rate Cap Agreements. Interest rate cap agreements are accounted for on an accrual basis with the net interest differential being recognized as an adjustment to interest expense of the related liability. Premiums and fees paid upon the purchase of interest rate cap agreements are amortized to interest expense over the life of the agreements using the interest method. In the event of early termination of an interest rate cap agreement, the net proceeds received or paid are deferred and amortized over the shorter of the remaining contract life or the maturity of the related liability. If, however, the amount of the underlying hedged liability is repaid, then the gain or loss on the agreement is recognized immediately in the consolidated statements of operations. The unamortized premiums and fees paid are included in other assets in the accompanying consolidated balance sheets. Earnings (Loss) Per Common Share. FBA adopted the provisions of SFAS 128, Earnings Per Share (SFAS 128), on a retroactive basis effective December 31, 1997. Accordingly, earnings (loss) per common share (EPS) data has been restated to conform with the provisions of SFAS 128. SFAS 128 provides for the calculation of a "Basic" and "Diluted" EPS. Basic EPS is computed by dividing the income (loss) available to common stockholders (the numerator) by the weighted average number of common shares outstanding (the denominator) during the year. The computation of dilutive EPS is similar except the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential shares had been issued. In addition, in computing the dilutive effect of convertible securities, the numerator is adjusted to add back (a) any convertible preferred dividends and (b) the after-tax amount of interest recognized in the period associated with any convertible debt. The implementation of SFAS 128 did not have a material impact on the calculation of EPS. 84 (2) Acquisitions On November 1, 1996, FBA completed its acquisition of Sunrise Bancorp, a California corporation (Sunrise), and its wholly owned subsidiary, Sunrise Bank, in exchange for $17.5 million in cash. At the time of the transaction, Sunrise had $110.8 million in total assets, $45.5 million in cash and cash equivalents and investment securities, $61.1 million in total loans, net of unearned discount, and $91.1 million in total deposits. The acquisition was funded from available cash and borrowings of $14.0 million under a promissory note payable (Note Payable) with First Banks, Inc., St. Louis, Missouri (First Banks). First Banks owns a majority of the outstanding voting stock of FBA, representing 65.9% and 68.8% at December 31, 1997 and 1996, respectively. On December 1, 1997, FBA completed its acquisition of Surety Bank in exchange for 264,622 shares of FBA common stock and cash of $3.8 million. The cash portion of this transaction, which was paid to the former shareholders of Surety Bank in January 1998, was funded by an advance under the Note Payable. At the time of the transaction, Surety had $72.8 million in total assets, $14.9 million in cash and cash equivalents and investment securities, $54.4 million in total loans, net of unearned discount, and $67.5 million in total deposits. Sunrise was merged into a wholly owned subsidiary of FBA. Sunrise Bank and Surety Bank were merged into FB California, a newly-formed commercial bank charter of FBA. The acquisitions of Sunrise and Surety Bank were accounted for under the purchase method of accounting and, accordingly, the consolidated financial statements include the financial position and results of operations for the period subsequent to the acquisition dates, and the assets acquired and liabilities assumed were recorded at fair value at the acquisition date. The excess of the cost over the fair value of the net assets acquired was $3.2 million and $3.3 million for Sunrise and Surety Bank, respectively, and is being amortized over 15 years. On February 2, 1998, FBA and FCB were merged. Under the terms of the Agreement and Plan of Merger (Agreement), FCB was merged into FBA, and FCB's wholly owned subsidiary, First Commercial Bank, was merged into FB California, an indirect subsidiary bank of FBA. The FCB shareholders received .8888 shares of FBA common stock for each share of FCB common stock that they held. In total, FCB shareholders received approximately 751,728 shares of FBA common stock. The transaction also provided for First Banks to receive 804,000 shares of FBA common stock in exchange for $10.0 million of the Note Payable. In addition, FCB's convertible debentures of $6.5 million, which are owned by First Banks, were exchanged for comparable debentures in FBA. FCB had six banking offices located in Sacramento, Roseville (2), San Francisco, Concord and Campbell, California. At December 31, 1997, FCB had total assets of $191.6 million and net income of $764,000 for the year then ended. First Banks owned a majority interest in both FBA and FCB. Consistent with the accounting treatment for companies under common control, the merger was accounted for by FBA as follows: First Banks' interest in FCB was accounted for by FBA at First Banks' historical cost. First Banks' historical cost basis in FCB was determined under the purchase method of accounting, effective upon First Banks' acquisition of First Commercial on August 23, 1995. Accordingly, the consolidated financial statements of First Banks will include the financial position and results of operations for the periods subsequent to the acquisition date, and the assets acquired and liabilities assumed were recorded at fair value at the acquisition date. Effective with the merger, because the two entities were under the common control of First Banks, the consolidated financial statements of FBA will be restated in 1998 to reflect First Banks' interest in the financial condition and results of operations of FCB for the periods subsequent to August 23, 1995. 85 The amount attributable to the interests of the minority shareholders in the fair value of the net assets of FCB was accounted for by FBA under the purchase method of accounting. Accordingly, such amount was reflected by FBA at fair value, as determined by the market value of FBA common stock exchanged for the minority interest pursuant to the Agreement. The following information presents unaudited pro forma condensed results of operations of FBA, combined with the acquisition of Surety Bank, as if FBA had completed the transaction on January 1, 1996. In addition, the historical results of First Banks' interest in FCB is presented as if FBA had acquired First Banks' interest in FCB on August 25, 1995:
December 31, ------------ 1997 1996 1995 ---- ---- ---- (dollars expressed in thousands, except per share data) Net interest income........................... $ 23,811 19,015 13,274 Provision for possible loan losses........... 2,255 2,469 6,376 Net income (loss)............................ 3,589 352 (4,736) ======== ======= ======= Weighted average shares of common stock outstanding (in thousands)......... 5,138 5,294 4,332 ======== ======= ======= Earnings (loss) per common share: Basic.................................... $ 0.70 0.07 (1.09) Diluted.................................. 0.69 0.06 (1.09) ======== ======= =======
The unaudited pro forma condensed results of operations reflect the application of the purchase method of accounting for Surety Bank and certain other assumptions. Purchase accounting adjustments have been applied to investment securities, bank premises and equipment, deferred tax assets and liabilities and excess cost required to reflect the assets acquired and liabilities assumed at fair value. The resulting premiums and discounts are amortized or accreted to income consistent with the accounting policies of FBA. The results of operations of Sunrise are not included in the pro forma combined condensed statements of operations for the year ended December 31, 1996 as the historical results of operations for the period are not representative of normal operating results subsequent to its acquisition by FBA. On February 2, 1998, FBA completed its acquisition of Pacific Bay Bank in exchange for cash of $4.2 million. This transaction was funded by an advance under the Note Payable. At the time of the transaction, Pacific Bay Bank had $38.3 million in total assets; $7.4 million in cash and cash equivalents; $29.7 million in total loans, net of unearned discount; and, $35.2 million in total deposits. 86 (3) Investments in Debt and Equity Securities The amortized cost, contractual maturity, unrealized gains and losses and fair value of investment securities available for sale at December 31, 1997 and 1996 were as follows:
Maturity Total After amor- Gross 1 Year 1-5 5-10 10 tized unrealized Weighted ------- Fair average or less years years years cost Gains Losses value yield ------- ----- ----- ----- ---- ----- ------ ----- ------ (dollars expressed in thousands) December 31, 1997: Carrying value: U.S. Treasury.................. $ 11,000 27,070 -- -- 38,070 240 (1) 38,309 6.00% U.S. government agencies and corporations: Mortgage-backed......... -- 13,449 47 6,755 20,251 38 (20) 20,269 6.06 Other................... 6,483 12,701 -- -- 19,184 6 (15) 19,175 6.14 Federal Home Loan Bank and Federal Reserve Bank stock (no stated maturity)........ 6,038 -- -- -- 6,038 -- -- 6,038 5.87 -------- ------ --- ----- ------- --- ---- ------- ---- Total.............. $ 23,521 53,220 47 6,755 83,543 284 (36) 83,791 6.03 ======== ====== === ===== ======= === ==== ======= ==== Market value: Debt securities................ $ 17,490 53,423 47 6,793 Equity securities.............. 6,038 -- -- -- -------- ------- --- ----- Total.............. $ 23,528 53,423 47 6,793 ======== ====== === ===== Weighted average yield............ 5.84% 5.98% 6.56% 7.23% ==== ==== ==== ==== December 31, 1996: Carrying value: U.S. Treasury.................. $ 20,016 6,072 -- -- 26,088 81 -- 26,169 5.38% U.S. government agencies and corporations: Mortgage-backed......... -- 23,668 -- 8,857 32,525 29 (153) 32,401 6.05 Other................... 18,087 4,969 -- -- 23,056 14 (26) 23,044 5.31 Federal Home Loan Bank an Federal Reserve Bank stock (no stated maturity)........ 5,296 -- -- -- 5,296 -- -- 5,296 5.87 -------- ------ --- ---- ------- --- ---- ------- ---- Total.............. $ 43,399 34,709 -- 8,857 86,965 124 (179) 86,910 5.64 ======== ====== === ===== ======= === ==== ======= ==== Market value: Debt securities................ $ 38,122 34,632 -- 8,860 Equity securities.............. 5,296 -- -- -- -------- ------ ---- ----- Total.............. $ 43,418 34,632 -- 8,860 ======== ====== ==== ===== Weighted average yield............ 5.34% 5.63% --% 7.17% ========= ====== ==== =====
Proceeds from sales of securities were $11.1 million, $20.6 million and $76.0 million for the years ended December 31, 1997, 1996 and 1995, respectively. Gross gains of $76,000, $185,000 and $2.2 million were realized on those sales for the years ended December 31, 1997, 1996 and 1995, respectively. No losses were realized on those sales for the years ended December 31, 1997, 1996 and 1995. For 1995, the net gains on sales of securities were offset by the recognition of $5.1 million of hedging losses. The Subsidiary Banks maintain investments in the Federal Home Loan Bank (FHLB) and the Federal Reserve Bank (FRB). These investments are recorded at cost, which represents redemption value. The investment in FHLB stock is maintained at a minimum amount equal to the greater of 1% of the aggregate outstanding balance of loans secured by residential real estate, or 5% of advances from the FHLB. The investment in the FRB stock is maintained at a minimum of 6% of the Subsidiary Banks' capital stock and capital surplus. Investment securities with a carrying value of approximately $13.9 million and $8.4 million at December 31, 1997 and 1996, respectively, were pledged in connection with deposits of public and trust funds, securities sold under agreements to repurchase and for other purposes as required by law. 87 (4) Loans and Allowance for Possible Loan Losses
Changes in the allowance for possible loan losses for the years ended December 31 were as follows: 1997 1996 1995 ---- ---- ---- (dollars expressed in thousands) Balance, January 1............................................ $ 6,147 5,228 2,756 Acquired allowance for possible loan losses................... 30 2,338 -- ------- ------- ------- 6,177 7,566 2,756 ------- ------- ------- Loans charged-off............................................. (2,744) (4,061) (4,069) Recoveries of loans previously charged-off.................... 1,282 1,392 715 ------- ------- ------- Net loans charged-off............................. (1,462) (2,669) (3,354) -------- ------- ------- Provision charged to operations............................... 2,000 1,250 5,826 ------- ------- ------- Balance, December 31.......................................... $ 6,715 6,147 5,228 ======= ======= =======
At December 31, 1997 and 1996, FBA had $2.4 million and $2.1 million, respectively, of loans on nonaccrual status. Interest on nonaccrual loans which would have been recorded under the original terms of the loans was $298,000, $161,000 and $93,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Of these amounts, $259,000, $72,000 and $70,000 was actually recorded as interest income on such loans in 1997, 1996 and 1995, respectively. At December 31, 1997 and 1996, FBA had $2.9 million and $3.7 million of impaired loans, which is represented by loans on nonaccrual status and consumer installment loans 60 days or more past due. The impaired loans had no specific reserves at December 31, 1997 and 1996. The average recorded investment in impaired loans was $2.9 million and $2.2 million for the years ended December 31, 1997 and 1996, respectively. FBA's primary market areas are Houston, Dallas, Irving and McKinney, Texas and Roseville, Citrus Heights, Vallejo and Fairfield, California. At December 31, 1997, approximately 58% of the total loan portfolio and 56% of the commercial, financial and agricultural loan portfolio were to borrowers within this region. In general, FBA is a secured lender. At December 31, 1997, approximately 97.6% of the loan portfolio was secured. Collateral is required in accordance with the normal credit evaluation process based upon the creditworthiness of the customer and the credit risk associated with the particular transaction. (5) Bank Premises and Equipment
Bank premises and equipment were comprised of the following at December 31: 1997 1996 ---- ---- (dollars expressed in thousands) Land................................................... $ 3,224 2,424 Buildings and improvements............................. 4,995 3,234 Furniture, fixtures and equipment...................... 4,039 2,619 Construction in progress............................... 86 41 -------- ------ Total......................................... 12,344 8,318 Less accumulated depreciation ......................... 3,665 1,949 -------- ------ Bank premises and equipment, net.............. $ 8,679 6,369 ======== ======
Depreciation expense for the years ended December 31, 1997, 1996 and 1995 totaled $640,000, $553,000 and $544,000, respectively. 88 FBA leases land, office properties and some items of equipment under operating leases. Certain of the leases contain renewal options and escalation clauses. Total rent expense was $667,000, $350,000 and $537,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Future minimum lease payments under noncancellable operating leases extend through 2019 as follows: (dollars expressed in thousands) Year ending December 31: 1998............................................... $ 1,013 1999............................................... 531 2000............................................... 222 2001............................................... 195 2002............................................... 184 Thereafter......................................... 2,495 ------- Total minimum lease payments............. $ 4,640 ======= FBA leases to unrelated parties a portion of its owned banking facilities. Total rental income was $740,000, $419,000 and $284,000 for the years ended December 31, 1997, 1996 and 1995, respectively. (6) Promissory Note Payable FBA borrowed $14.5 million and $14.0 million at December 31, 1997 and 1996, respectively, from First Banks under a $20.0 million Note Payable. The borrowings under the Note Payable bear interest at an annual rate of one-quarter percent less than the "Prime Rate" as reported in the Wall Street Journal. The principal and accrued interest under the Note Payable are due and payable on October 31, 2001. The interest expense under the Note Payable was $1.18 million and $194,000 for the years ended December 31, 1997 and 1996, respectively. The accrued and unpaid interest under the Note Payable was $1.37 million and $194,000 at December 31, 1997 and 1996, respectively. There were no balances outstanding during 1995. (7) Earnings Per Common Share
The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for the periods indicated: Income Shares Per share (numerator) (denominator) amount ----------- ------------- ------ (dollars expressed in thousands, except per share data) Year ended December 31, 1997: Basic EPS - income available to common stockholders.... $ 3,179 3,607 $ 0.88 ======= Effect of dilutive securities-stock options............ -- 27 ------- ------ Diluted EPS - income available to common stockholders.. $ 3,179 3,634 $ 0.87 ======= ====== ======= Year ended December 31, 1996: Basic EPS - income available to common stockholders.... $ 1,569 3,763 $ 0.42 ======= Effect of dilutive securities: Stock options....................................... -- 61 Warrants............................................ -- 91 ------- ------ Diluted EPS - income available to common stockholders.. $ 1,569 3,915 $ 0.40 ======= ====== =======
As a result of the net loss incurred in 1995, the effects of stock options and warrants were anti-dilutive for the year then ended. (8) Income Taxes Total income tax expense of $1.8 million, $1.0 million, and a tax benefit of $2.1 million for the years ended December 31, 1997, 1996 and 1995, respectively, were attributable to income from continuing operations. 89
Income tax expense (benefit) for the years ended December 31 consists of: 1997 1996 1995 ---- ---- ---- (dollars expressed in thousands) Current income tax expense: Federal..................................................... $ -- -- -- State....................................................... -- -- -- ------- ------ ------ ....................................................... -- -- -- ------- ------ ------ Deferred income tax expense (benefit): Federal..................................................... 1,703 1,005 (2,083) State....................................................... 55 (3) -- ------- ------ ------ ....................................................... 1,758 1,002 (2,083) ------- ------ ----- Total..................................................... $ 1,758 1,002 (2,083) ======= ====== ======
The effective rates of federal income taxes for the years ended December 31 differ from statutory rates of taxation as follows: 1997 1996 1995 ------------------- -------------------- ---------------- Amount Percent Amount Percent Amount Percent (dollars expressed in thousands) Income (loss) before provision for income tax expense (benefit). $ 4,937 $2,571 $ (5,903) ======= ====== ======== Tax expense (benefit) at federal income tax rate.................. $ 1,728 35.0% 900 35.0% $ (2,066) (35.0)% Effects of differences in tax reporting................. 30 0.6 102 4.0 (17) (.3) ------- ----- ------ ---- ------- ---- Income tax expense (benefit) at effective rate.............. $ 1,758 35.6% $1,002 39.0% $ (2,083) (35.3)% ======= ===== ====== ===== ======== =====
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows: December 31, ------------ 1997 1996 ---- ---- (dollars expressed in thousands) Deferred tax assets: Allowance for possible loan losses......................... $ 2,202 1,754 Foreclosed property........................................ 633 1,856 Alternative minimum tax credit............................. 288 279 Postretirement medical plan................................ 247 353 Quasi-reorganization adjustment of bank premises........... 1,377 1,427 Other...................................................... 426 728 Net operating loss carryforwards........................... 12,086 12,512 --------- ------ Gross deferred tax assets............................ 17,259 18,909 Valuation allowance........................................ (3,447) (3,390) --------- ------- Net deferred tax assets.............................. 13,812 15,519 --------- ------- Deferred tax liabilities: FHLB stock dividends....................................... 409 230 Bank premises and equipment................................ 533 466 Other ..................................................... 41 213 --------- ------- Gross deferred tax liabilities....................... 983 909 --------- ------- Net deferred tax assets.............................. $ 12,829 14,610 ========= =======
90
Changes to the deferred tax asset valuation allowance for the years ended December 31 were as follows: 1997 1996 1995 ---- ---- ---- (dollars expressed in thousands) Balance, January 1......................................... $3,390 2,731 2,731 Current year deferred provision, change in deferred tax valuation allowance........................ -- -- -- Purchase acquisitions...................................... 57 659 -- ------ ----- ------ Balance, December 31....................................... $3,447 3,390 2,731 ====== ===== ======
Subsequently recognized tax benefits relating to $2.7 million of the valuation allowance for deferred tax assets will be credited directly to capital surplus under the terms of the quasi-reorganization, implemented on December 31, 1994, and the provisions of SFAS 109. The remaining $747,000 will be credited to intangibles associated with the purchase of subsidiaries. At December 31, 1997, FBA has separate limitation year (SRLY) net operating loss carryforwards (NOLs) of $22.5 million and alternative minimum tax credits of $288,000. Their utilization is subject to annual limitations. Additionally, FBA has non-SRLY NOLs of $11.8 million. The NOLs for FBA at December 31, 1997 expire as follows: (dollars expressed in thousands) Year ending December 31: 1998...................................... $ 4,140 1999...................................... 2,641 2000...................................... 103 2001 through 2010......................... 27,417 ------- Total......................... $34,301 ======= For California income tax purposes, FBA has NOLs of approximately $3.0 million. These NOLs expire as follows: (dollars expressed in thousands) Year ending December 31: 1998........................................ 1,089 1999........................................ 1,089 2000........................................ 635 2001........................................ 139 ------ Total........................................ $2,952 ====== The net deferred tax assets were evaluated to determine whether it is more likely than not the deferred tax assets will be recognized in the future. It has been determined the net deferred tax assets of FBA should not be fully valued until FBA can provide an earnings history sufficient to support the respective net deferred tax asset. A valuation reserve was determined by taking all positive and negative criteria into consideration. It was determined the valuation allowance established should be $3.4 million. (9) Employee Benefit Plans 401(k) Plan. FBA has a savings and incentive plan covering substantially all employees. Under the plan, employer matching contributions are determined annually by FBA's Board of Directors. Employee contributions are limited to 15% of an employee's compensation not to exceed $9,500 for 1997. Total employer contributions under the plan were $43,000, $23,000 and $41,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The plan assets are held and managed under a trust agreement with the trust department of an affiliated bank. 91 Pension Plan. FBA has a noncontributory defined benefit pension plan covering substantially all officers and employees. The accumulation of benefits under the plan were discontinued during 1994. During 1997, 1996 and 1995, no contributions were made to the pension plan and FBA did not incur any expenditures associated with the pension plan. FBA is in the process of terminating this plan and does not expect to incur a significant gain or loss. Postretirement Benefits Other Than Pensions. Prior to August 31, 1994, FBA made certain health care and life insurance benefits available for substantially all of its retired employees, a portion of the cost of which was paid by FBA. The estimated cost of such postretirement benefits was accrued as an expense during the period of an employee's active service to FBA. During 1994, FBA reevaluated the cost of this plan and changed it to provide contributions for coverage only to those individuals receiving benefits on August 31, 1994. In conjunction with the plan restructuring, FBA fully recognized the estimated cost of the future benefits payable under the plan. Employees retiring after that date are allowed to purchase coverage, but must pay the entire cost associated with such coverage. (10) Directors' Stock Bonus Plan The 1993 Directors' Stock Bonus Plan provides for annual grants of FBA common stock to the nonemployee directors of FBA. Directors' compensation of $13,000, $10,000 and $27,000 was recorded relating to this plan for the years ended December 31, 1997, 1996 and 1995, respectively. These amounts represented the market values of the 1,000 shares granted for the years ended December 31, 1997, 1996 and 1995, respectively. The plan is self-operative, and the timing, amounts, recipients and terms of individual grants are determined automatically. On July 1 of each year, each nonemployee director automatically receives a grant of 500 shares of common stock. The maximum number of plan shares that may be issued shall not exceed 16,667 shares and 9,667 shares remain to be issued at December 31, 1997. The plan will expire on July 1, 2001. (11) Commitments and Contingencies FBA is a party to commitments to extend credit and commercial and standby letters of credit in the normal course of business to meet the financing needs of its customers. These instruments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The interest rate risk associated with these credit commitments relates primarily to the commitments to originate fixed-rate loans. The credit risk amounts are equal to the contractual amounts, assuming the amounts are fully advanced and the collateral or other security is of no value. FBA uses the same credit policies in granting commitments and conditional obligations as it does for on-balance-sheet items. Commitments to extend credit at December 31 are as follows: 1997 1996 ---- ---- (dollars expressed in thousands) Credit card commitments....................... $ 1,978 3,140 Other loan commitments........................ 138,844 92,454 Standby letters of credit..................... 1,923 177 ======= ====== Credit card and other loan commitments are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant, equipment, income-producing commercial properties and single family residential properties. Collateral is generally required except for consumer credit card commitments. 92 Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The letters of credit are primarily issued to support private borrowing arrangements and commercial transactions. Most letters of credit extend for less than one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Upon issuance of the commitments, FBA holds marketable securities, certificates of deposit, inventory or other assets as collateral supporting those commitments for which collateral is deemed necessary. (12) Stockholders' Equity Stock Options. On April 19, 1990, the Board of Directors of FBA adopted the 1990 Stock Option Plan (1990 Plan). The 1990 Plan currently provides that no more than 200,000 shares of common stock will be available for stock options. One-fourth of each stock option becomes exercisable at the date of the grant and at each anniversary date of the grant. The options expire ten years from the date of the grant. There were no options granted under this plan during the three years ended December 31, 1997. At December 31, 1997, there were 36,833 shares available for future stock options and 13,334 shares of common stock reserved for the exercise of outstanding options. Transactions relating to the 1990 Plan for the years ended December 31 are as follows:
1997 1996 1995 ------------------ ------------------- ------------------ Average Average Average option option option Amount price Amount price Amount price ------ ----- ------ ----- ------ ----- Outstanding options, January 1....... 57,500 $ 3.75 67,500 $ 3.75 98,133 $ 3.75 Options exercised and redeemed....... (44,166) 3.75 (10,000) 3.75 (30,633) 3.75 --------- ------ ------- Outstanding options, December 31..... 13,334 3.75 57,500 3.75 67,500 3.75 ========= ======= ====== ======= ====== ======= Options exercisable, December 31..... 13,334 57,500 67,500 ========= ====== ======
Warrants. In connection with a previous restructuring of FBA, a warrant to purchase common stock was granted to the Federal Deposit Insurance Corporation (FDIC). On October 1, 1996, FBA purchased the outstanding warrant to acquire 131,336 shares of FBA common stock at $0.75 per share from the FDIC for an aggregate amount of $1.28 million. The purchase of the warrant was applied as a reduction of capital surplus. Distribution of Earnings of the Subsidiary Banks. The Subsidiary Banks are restricted by various state and federal regulations as to the amount of dividends which are available for payment of dividends to FBA. Under the most restrictive of these requirements, the future payment of dividends from the Subsidiary Banks is limited to approximately $1.0 million at December 31, 1997, unless prior permission of the regulatory authorities is obtained. (13) Transactions With Related Parties FBA purchases certain services and supplies from or through First Banks. FBA's financial position and operating results could significantly differ from those that would be obtained if FBA's relationship with First Banks did not exist. First Banks provides management services to FBA and its Subsidiary Banks. Management services are provided under a management fee agreement whereby FBA compensates First Banks on an hourly basis for its use of personnel for various functions including internal audit, loan review, income tax preparation and assistance, accounting, asset/liability and investment services, loan servicing and other management and administrative services. Fees paid under this agreement were $931,000, $687,000 and $422,000 for the years ended December 31, 1997, 1996 and 1995 respectively. The fees paid for management services are at least as favorable as could have been obtained from an unaffiliated third party. 93 Because of the affiliation with First Banks and the geographic proximity of certain of their offices, FBA shares the cost of certain personnel and services used by FBA and First Banks. This includes the salaries and benefits of certain loan and administrative personnel. The allocation of the shared costs are charged and/or credited under the terms of cost sharing agreements entered into during 1997. Because this involves distributing essentially fixed costs over a larger asset base, it allows each bank to receive the benefit of personnel and services at a reduced cost. Fees paid under these agreements were $383,000 for the year ended December 31, 1997. Effective April 1, 1997, First Services L.P., a limited partnership indirectly owned by First Banks' Chairman and his children through its general partners and limited partners, began providing data processing and various related services to FBA under the terms of data processing agreements. Previously, these services were provided by a subsidiary of First Banks. Fees paid under these agreements were $643,000, $311,000 and $374,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The fees paid for data processing services are at least as favorable as could have been obtained from an unaffiliated third party. FBA's Subsidiary Banks had $41.9 million and $21.4 million in whole loans and loan participations outstanding at December 31, 1997 and 1996, respectively, that were purchased from banks affiliated with First Banks. In addition, FBA's Subsidiary Banks had sold $42.7 million and $26.7 million in whole loans and loan participations to affiliates of First Banks at December 31, 1997 and 1996, respectively. These loans and loan participations were acquired and sold at interest rates and terms prevailing at the dates of their purchase or sale and under standards and policies followed by FBA's Subsidiary Banks. FBA has borrowed $14.5 million and $14.0 million at December 31, 1997 and 1996, respectively, from First Banks under a $20 million Note Payable, dated November 4, 1997. This Note Payable replaces a $15 million note payable under similar terms to First Banks. The borrowings under the Note Payable bear interest at an annual rate of one-quarter percent less than the "Prime Rate" as reported in the Wall Street Journal. The interest expense was $1.18 million and $194,000 for the years ended December 31, 1997 and 1996, respectively. The principal and accrued interest under the Note Payable are due and payable on October 31, 2001. The accrued and unpaid interest under the Note Payable was $1.37 million and $194,000 at December 31, 1997 and 1996, respectively. Outside of normal customer relationships, no directors, executive officers or stockholders holding over 5% of FBA's voting stock, and no corporations or firms with which such persons or entities are associated, currently maintain or have maintained, any significant business or personal relationships with FBA or its subsidiaries, other than that which arises by virtue of such position or ownership interest in FBA, except as described above. (14) Interest Rate Risk Management and Derivative Financial Instruments With Off-Balance-Sheet Risk Derivative financial instruments held by FBA at December 31, 1997 and 1996 consist of an interest rate cap agreement with a notional amount of $10.0 million and credit exposure of $222,000 and $335,000, respectively. FBA's interest rate cap agreement limits the interest expense associated with certain of its interest-bearing liabilities. In exchange for an initial fee, the interest rate cap agreement entitles FBA to receive interest payments when a specified index rate exceeds a predetermined rate. The agreement outstanding at December 31, 1997 and 1996 effectively limits the interest rate to 5.0% on $10 million of interest-bearing liabilities from October 15, 1997 to May 15, 2000. At December 31, 1997 and 1996, the unamortized costs were $242,000 and $353,000, respectively, and were included in other assets. The amount receivable under the agreement was $8,000 at December 31, 1997. There were no amounts receivable under the agreement at December 31, 1996. Previously, FBA sold interest rate futures contracts and purchased options on interest rate futures contracts to hedge the interest rate risk of its available-for-sale securities portfolio. There were no outstanding positions of interest rate futures for the years ended December 31, 1997 and 1996. For the year ended December 31, 1995, FBA incurred a net loss on interest rate futures contracts of $5.95 million, of which $806,000 was amortized to income as a yield adjustment to the investment security portfolio and $5.14 million was included in the cost basis in determining the gain or loss upon the sale of the securities. There were no gains or losses from interest rate futures contracts for the years ended December 31, 1997 and 1996. 94 (15) Fair Value of Financial Instruments Fair values of financial instruments are management's estimate of the values at which the instruments could be exchanged in a transaction between willing parties. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including deferred tax assets and bank premises and equipment. Further, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in any of the estimates.
The estimated fair value of FBA's financial instruments at December 31 were as follows: December 31, 1997 December 31, 1996 -------------------- -------------------- Carrying Estimated Carrying Estimated amount fair value amount fair value ------ ---------- ------ ---------- (dollars expressed in thousands) Assets: Cash and cash equivalents............... $ 26,442 26,442 21,964 21,964 Investment securities................... 83,791 83,791 86,910 86,910 Net loans............................... 306,722 307,911 235,727 238,266 Accrued interest receivable............. 2,963 2,963 2,348 2,348 Liabilities: Demand and savings deposits............. 214,180 214,180 175,994 175,994 Time deposits........................... 169,762 170,437 143,812 144,179 Accrued interest payable................ 2,246 2,246 710 710 Borrowings.............................. 17,307 17,307 16,092 16,092 Off-balance-sheet: Interest rate cap agreement............. 242 222 353 335 Unfunded loan commitments............... --- --- --- ---
The following methods and assumptions were used in estimating the fair value of financial instruments: Financial Assets: Cash and cash equivalents and accrued interest receivable: The carrying values reported in the consolidated balance sheets approximate fair value. Investment securities: Fair value for securities available for sale were the amounts reported in the consolidated balance sheets. If quoted market prices were not available, fair values were based upon quoted market prices of comparable instruments. Net loans: The fair value for most loans was estimated utilizing discounted cash flow calculations that applied interest rates currently being offered for similar loans to borrowers with similar risk profiles. The carrying values for loans are net of the allowance for possible loan losses and unearned discount. Financial Liabilities: Deposits: The fair value disclosed for deposits generally payable on demand (i.e., non-interest-bearing and interest-bearing demand, savings and money market accounts) were considered equal to their respective carrying amounts as reported in the consolidated balance sheets. The fair value disclosed for demand deposits does not include the benefit that results from the low-cost funding provided by deposit liabilities compared to the cost of borrowing funds in the market. The fair value for certificates of deposit was estimated utilizing a discounted cash flow calculation that applied interest rates currently being offered on similar certificates to a schedule of aggregated monthly maturities of time deposits. 95 Borrowings and accrued interest payable: The carrying values reported in the consolidated balance sheets approximate fair value. Off-Balance-Sheet: Interest rate cap agreement: The fair value of the interest rate cap agreement is estimated by comparison to market rates quoted on new agreements with similar creditworthiness. Unfunded loan commitments: The majority of the commitments to extend credit and commercial and standby letters of credit contain variable interest rates and credit deterioration clauses and, therefore, the carrying value of these credit commitments approximates fair value. (16) Regulatory Capital The Subsidiary Banks are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Subsidiary Banks' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Subsidiary Banks must meet specific capital guidelines that involve quantitative measures of the Subsidiary Banks' assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Subsidiary Banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors. Quantitative measures established by regulations to ensure capital adequacy require the Subsidiary Banks to maintain certain minimum capital ratios. The Subsidiary Banks are required to maintain a minimum risk-based capital to risk-weighted assets ratio of 8.0%, with at least 4.0% being "Tier 1" capital (as defined in the regulations). In addition, a minimum leverage ratio (Tier 1 capital to total assets) of 3.0% plus an additional cushion of 100 to 200 basis points is expected. In order to be considered well capitalized under Prompt Corrective Action provisions, a bank is required to maintain a risk weighted asset ratio of at least 10%, a Tier 1 to risk weighted assets ratio of at least 6%, and a leverage ratio of at least 5%. As of December 31, 1996, the date of the most recent notification from FBA's primary regulator, BankTEXAS was categorized as well capitalized under the regulatory framework for Prompt Corrective Action. Management believes, as of December 31, 1997, each of the Subsidiary Banks was well capitalized as defined by the FDIC Improvement Act.
At December 31, 1997 and 1996, FBA's and the Subsidiary Banks' capital ratios were as follows: Risk-Based Capital Ratios ------------------------- Total Tier 1 Leverage Ratio ----------------- ---------------- --------------- 1997 1996 1997 1996 1997 1996 ---- ---- ---- ---- ---- ---- FBA........................ 7.89% 7.64% 6.63% 6.38% 6.11% 5.31% BankTEXAS.................. 12.26 10.29 11.00 9.04 8.90 7.53 FB California.............. 13.03 -- 11.77 -- 13.80 -- Sunrise Bank (1)........... -- 17.67 -- 16.39 -- 10.88 - - ---------------- (1) Sunrise Bank was merged into FB California on December 1, 1997.
(17) Contingent Liabilities In the ordinary course of business, there are various legal proceedings pending against FBA and/or the Subsidiary Banks. Management, in consultation with legal counsel, is of the opinion the ultimate resolution of these proceedings will have no material effect on the financial condition or results of operations of FBA or the Subsidiary Banks. 96
(18) Parent Company Only Financial Information Condensed Balance Sheets December 31, ------------ 1997 1996 ---- ---- (dollars expressed in thousands) Assets: Cash.................................................................... $ 922 439 Investment in subsidiary................................................ 55,182 43,958 Deferred tax assets..................................................... 3,307 3,297 Other assets............................................................ 157 143 ---------- ------- Total assets.......................................................... $ 59,568 47,837 ========== ======= Liabilities and stockholders' equity: Promissory note payable................................................. $ 14,500 14,000 Accrued and other liabilities........................................... 5,204 339 ---------- ------- Total liabilities..................................................... 19,704 14,339 Stockholders' equity...................................................... 39,864 33,498 ---------- ------ Total liabilities and stockholders' equity............................ $ 59,568 47,837 ========== ======
Condensed Statements of Operations Years ended December 31, 1997 1996 1995 (dollars expressed in thousands) Income (loss): Dividends from subsidiary...................................... $ 1,425 -- -- Other.......................................................... 16 211 315 ------- ------ Total income................................................ 1,441 211 315 ------- ------ ------- Expense: Interest....................................................... 1,176 246 140 Other.......................................................... 496 338 32 ------- ------ ------- Total expense............................................... 1,672 584 172 ------- ------ ------- Income (loss) before income tax (benefit) expense........... (231) (373) 143 Income tax (benefit) expense..................................... (688) (126) 68 ------- ------ ------- Income (loss) before equity in undistributed income (loss) of subsidiary............................... 457 (247) 75 Equity in undistributed income (loss) of subsidiary.............. 2,722 1,816 (3,895) ------- ------ ----- Net income (loss)........................................... $ 3,179 1,569 (3,820) ======= ===== =====
97
Condensed Statements of Cash Flows Years ended December 31, ------------------------ 1997 1996 1995 ---- ---- ---- (dollars expressed in thousands) Operating activities: Net income (loss)............................................. $ 3,179 1,569 (3,820) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Credit for deferred income taxes........................... 688 126 -- Equity in undistributed (income) loss of subsidiary........ (2,722) (1,816) 3,895 Dividends from subsidiary.................................. 1,425 -- -- Other, net................................................. (1,090) (1,987) (552) ----------- -------- ------- Net cash provided by (used in) operating activities.. 1,480 (2,108) (477) ---------- -------- ------- Investing activities: Purchase of investment securities............................. -- (12,618) (21,191) Proceeds from maturity of investment securities............... -- 7,152 8,345 Proceeds from sales of investment securities.................. -- 4,496 25,752 Capital contributions to subsidiary........................... -- (17,052) (3,750) ---------- ------- ------- Net cash provided by (used in) investing activities.. -- (18,022) 9,156 ---------- ------- ------- Financing activities: Increase in promissory note payable........................... 500 14,000 -- Exercise of stock options..................................... 15 38 115 Repurchase of common stock for treasury....................... (1,512) (2,010) (828) ---------- --------- ------- Net cash provided by (used in) financing activities.. (997) 12,028 (713) ----------- ------- ------- Net increase (decrease) in cash and cash equivalents. 483 (8,102) 7,966 Cash and cash equivalents at beginning of year.................. 439 8,541 575 ---------- --------- ------- Cash and cash equivalents at end of year........................ $ 922 439 8,541 ========== ========= ======= Noncash investing and financing activities: Issuance of common stock in purchase accounting acquisition... $ 4,763 -- -- Cash paid for interest........................................ -- 475 110 =========== ========= =======
(19) Subsequent Events As described in Note 2 to the consolidated financial statements and presented in the pro forma information on the consolidated balance sheets and consolidated statements of operations, FBA completed the acquisitions of FCB and Pacific Bay Bank on February 2, 1998 in exchange for 751,728 shares of FBA common stock and cash of $4.2 million, respectively. The total assets of FCB and Pacific Bay Bank were $192.5 million and $38.3 million, respectively, at the date of the transaction. The accounting treatment for the acquisition of FCB is summarized in Note 2 to the consolidated financial statements. The acquisition of Pacific Bay Bank was accounted for under the purchase method of accounting and was funded through an advance under the Note Payable. The excess of the cost over the fair value of the net assets acquired was $4.08 million and $1.43 million for FCB and Pacific Bay Bank, respectively, and is being amortized over 15 years. The accompanying pro forma consolidated balance sheet and pro forma consolidated statement of operations reflect the acquisitions of FCB and Pacific Bay Bank as if they had been completed on December 31, 1997. 98 [LETTERHEAD OF KPMG Peat Marwick LLP] The Board of Directors and Stockholders First Banks America, Inc.: We have audited the accompanying consolidated balance sheets of First Banks America, Inc. and subsidiaries (the Company) as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the three year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Banks America, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/KPMG Peat Marwick LLP ------------------------ St. Louis, Missouri March 6, 1998 99 Directors of First Banks America, Inc. James F. Dierberg Chairman of the Board, President and Chief Executive Officer of First Banks America, Inc., St. Louis, Missouri; Chairman of the Board, President and Chief Executive Officer, First Banks, Inc., St. Louis, Missouri. Allen H. Blake Vice President, Chief Financial Officer and Secretary, First Banks America, Inc., St. Louis, Missouri; Executive Vice President, Chief Financial Officer and Secretary, First Banks, Inc., St. Louis, Missouri. Charles A. Crocco, Jr. Partner in the law firm of Crocco & De Maio, P. C., New York, New York. Albert M. Lavezzo Partner in the law firm of Favaro, Lavezzo, Gill, Caretti & Neppell, Vallejo, California. Edward T. Story, Jr. President and Chief Executive Officer of SOCO International, Inc., Comfort, Texas. Mark T. Turkcan Executive Vice President, Retail Banking, First Banks, Inc., St. Louis, Missouri. Donald W. Williams Executive Vice President, Chief Credit Officer, First Banks, Inc., St. Louis, Missouri. Executive Officers of First Banks America, Inc. James F. Dierberg Chairman of the Board, President and Chief Executive Officer Allen H. Blake Vice President, Chief Financial Officer and Secretary David F. Weaver Executive Vice President Directors and Senior Officers of BankTEXAS N.A. David F. Weaver Chairman of the Board, President and Chief Executive Officer Donald W. Williams Director Alan M. Meyer Director Joseph Milcoun, Jr. Director, Vice President, Retail Banking Arved E. White Director, Senior Vice President and Chief Lending Officer Monica J. Rinehart Assistant Secretary, Vice President and Controller Directors and Senior Officers of First Bank of California Donald W. Williams Chairman of the Board, President and Chief Executive Officer Jerry Brannigan Director James E. Culleton Director, President, Chief Operating Officer and Secretary Fred L. Harris Director Albert M. Lavezzo Director Terrance M. McCarthy Director, Senior Vice President and Chief Credit Officer Arleen R. Scavone Director, Vice President, Retail Banking Fred K. Sibley Director Kathryn L. Perrine Vice President and Chief Financial Officer Joseph H. Plant Senior Vice President, Commercial Lending Ralph J. Sabin Senior Vice President, Commercial Lending Gary M. Sanders Senior Vice President, Commercial Lending 100 INVESTOR INFORMATION FBA's Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, is available without charge to any stockholder upon request. Requests should be directed to Allen H. Blake, First Banks America, Inc., 11901 Olive Boulevard, St. Louis, Missouri 63141. The common stock of FBA is traded on the New York Stock Exchange with the ticker symbol "FBA" and is frequently reported in newspapers of general circulation with the symbol "FBKSAM" and in the Wall Street Journal with the symbol "FBA." As of March 6, 1998, there were approximately 1,725 record holders of common stock. Common stock price range: 1997 1996 ------------------ ---------------- High Low High Low First quarter $12.75 10.13 12.75 9.63 Second quarter 13.38 12.38 10.50 9.25 Third quarter 18.00 12.81 10.38 9.38 Fourth quarter 24.06 17.13 10.38 9.75
For information concerning the Company please contact: David F. Weaver Allen H. Blake Transfer Agent Executive Vice President Vice President, Chief Financial ChaseMellon Shareholders P. O. Box 630369 Officer and Secretary Services L.L.C. Houston, Texas 77263-0369 11901 Olive Boulevard 85 Challenger Road Telephone: 713/954-2400 St. Louis, Missouri 63141 Overpeck Centre Telephone: 314/995-8700 Ridgefield Park, NJ 07660 Telephone: 888/213-0965 www.chasemellon.com
101 EXHIBIT 21 First Banks America, Inc. Significant Subsidiaries The following is a list of all subsidiaries of the Company and the jurisdiction of incorporation or organization. BankTEXAS National Association and First Bank of California are wholly-owned by Sundowner Corporation, and Sundowner Corporation is wholly owned by First Banks America, Inc. Jurisdiction of Incorporation Name of Subsidiary or Organization ------------------ ------------------------------ Sundowner Corporation Nevada BankTEXAS National Association United States First Bank of California California 102 EXHIBIT 23(a) Independent Auditors' Consent The Board of Directors First Banks America, Inc. We consent to incorporation by reference in the registration statement (No. 33-42607) on Form S-8 of First Banks America, Inc. and subsidiaries of our report dated March 6, 1998, relating to the consolidated balance sheets of First Banks America, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, which report appears in the December 31, 1997 annual report on Form 10-K of First Banks America, Inc. /s/KPMG Peat Marwick LLP ------------------------ St. Louis, Missouri March 26, 1998 103 [ARTICLE] 9 [CIK] 0000310979 [NAME] First Banks America, Inc. [MULTIPLIER] 1,000 [PERIOD-TYPE] 12-mos [FISCAL-YEAR-END] Dec-31-1997 [PERIOD-START] Jan-01-1997 [PERIOD-END] Dec-31-1997 [CASH] 23,537 [INT-BEARING-DEPOSITS] 690 [FED-FUNDS-SOLD] 2,215 [TRADING-ASSETS] 0 [INVESTMENTS-HELD-FOR-SALE] 83,791 [INVESTMENTS-CARRYING] 0 [INVESTMENTS-MARKET] 0 [LOANS] 313,437 [ALLOWANCE] 6,715 [TOTAL-ASSETS] 451,256 [DEPOSITS] 383,942 [SHORT-TERM] 2,807 [LIABILITIES-OTHER] 10,143 [LONG-TERM] 14,500 [PREFERRED-MANDATORY] 0 [PREFERRED] 0 [COMMON] 627 [OTHER-SE] 39,237 [TOTAL-LIABILITIES-AND-EQUITY] 451,256 [INTEREST-LOAN] 23,159 [INTEREST-INVEST] 5,073 [INTEREST-OTHER] 651 [INTEREST-TOTAL] 28,883 [INTEREST-DEPOSIT] 11,314 [INTEREST-EXPENSE] 12,834 [INTEREST-INCOME-NET] 16,049 [LOAN-LOSSES] 2,000 [SECURITIES-GAINS] 76 [EXPENSE-OTHER] 11,676 [INCOME-PRETAX] 4,937 [INCOME-PRE-EXTRAORDINARY] 4,937 [EXTRAORDINARY] 0 [CHANGES] 0 [NET-INCOME] 3,179 [EPS-PRIMARY] .88 [EPS-DILUTED] .87 [YIELD-ACTUAL] 8.46 [LOANS-NON] 2,411 [LOANS-PAST] 1,158 [LOANS-TROUBLED] 0 [LOANS-PROBLEM] 4,500 [ALLOWANCE-OPEN] 6,147 [CHARGE-OFFS] (2,744) [RECOVERIES] 1,282 [ALLOWANCE-CLOSE] 6,715 [ALLOWANCE-DOMESTIC] 6,715 [ALLOWANCE-FOREIGN] 0 [ALLOWANCE-UNALLOCATED] 0
EX-13.2 15 QUARTERLY REPORT OF FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-8937 FIRST BANKS AMERICA, INC. ------------------------- (Exact name of registrant as specified in its charter) DELAWARE 75-1604965 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.) 135 North Meramec, Clayton, Missouri 63105 ------------------------------------------ (address of principal executive offices) (Zip Code) (314) 854-4600 -------------- (Registrant's telephone number, including area code) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class April 30, 1998 ----- -------------- Common Stock, $.15 par value 3,232,217 Class B Common Stock, $.15 par value 2,500,000 2 First Banks America, Inc. INDEX Page PART I FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997......................................... -1- Consolidated Statements of Income for the three months ended March 31, 1998 and 1997.......................... -3- Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 1998 and 1997 and the nine months ended December 31, 1997....................... -4- Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1997................................. -5- Notes to Consolidated Financial Statements...................... -6- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................... -10- PART II OTHER INFORMATION Item 6. Exhibits and Report on Form 8-K......................... -16- SIGNATURES................................................................ -17- 3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements FIRST BANKS AMERICA, INC. Consolidated Balance Sheets (unaudited) (dollars expressed in thousands, except per share data)
March 31, December 31, 1998 1997 ---- ---- ASSETS ------ Cash and cash equivalents: Cash and due from banks....................................... $ 32,651 32,257 Interest-bearing deposits with other financial institutions- with maturities of three months or less..................... 2,271 690 Federal funds sold............................................ 42,250 2,215 ----------- -------- Total cash and cash equivalents........................... 77,172 35,162 ----------- -------- Investment securities - available for sale, at fair value........ 141,131 148,181 Loans: Real estate construction and development...................... 96,035 93,454 Commercial and financial...................................... 113,312 109,763 Real estate mortgage.......................................... 166,160 149,951 Consumer and installment...................................... 71,017 75,023 Loans held for sale........................................... -- 5,708 ----------- -------- Total loans............................................... 446,524 433,899 Unearned discount............................................. (2,425) (2,444) Allowance for possible loan losses............................ (12,063) (11,407) ----------- -------- Net loans................................................. 432,036 420,048 ----------- -------- Bank premises and equipment, net of accumulated depreciation.................................... 11,382 10,697 Intangibles associated with the purchase of subsidiaries................................................ 8,794 7,189 Accrued interest receivable...................................... 4,062 4,819 Foreclosed property, net......................................... 725 601 Deferred income taxes............................................ 13,739 14,141 Other assets..................................................... 3,368 2,826 ----------- -------- Total assets.............................................. $ 692,409 643,664 =========== ========
4 FIRST BANKS AMERICA, INC. Consolidated Balance Sheets (unaudited) (dollars expressed in thousands, except per share data) (continued)
March 31, December 31, 1998 1997 ---- ---- LIABILITIES ----------- Deposits: Demand: Non-interest-bearing............................................ $ 101,270 97,393 Interest-bearing................................................ 73,433 73,199 Savings.......................................................... 158,625 147,623 Time: Time deposits of $100 or more................................... 57,725 52,472 Other time deposits............................................. 209,504 185,840 ----------- --------- Total deposits................................................ 600,557 556,527 Short-term borrowings................................................ 3,453 3,687 Promissory note payable.............................................. 13,450 14,900 Accrued interest payable............................................. 4,803 4,185 Deferred tax liability............................................... 1,049 1,092 Payable to former shareholders of Surety Bank........................ -- 3,829 Accrued and other liabilities........................................ 5,756 5,058 12% convertible debentures........................................... 6,500 6,500 Minority interest in subsidiary...................................... -- 2,795 ----------- --------- Total liabilities............................................. 635,568 598,573 ----------- --------- STOCKHOLDERS' EQUITY -------------------- Common Stock: Common stock, $.15 par value; 6,666,666 shares authorized; 3,238,417 and 2,144,865 shares issued and outstanding at March 31, 1998 and December 31, 1997, respectively.............. 486 322 Class B common stock, $.15 par value; 4,000,000 shares authorized; 2,500,000 shares issued and outstanding at March 31, 1998 and December 31, 1997......................... 375 375 Capital surplus...................................................... 59,858 47,014 Retained earnings since elimination of accumulated deficit of $259,117, effective December 31, 1994......................... 2,498 1,398 Common treasury stock, at cost; 496,056 shares and 386,458 shares at March 31, 1998 and December 31, 1997, respectively..................................................... (6,814) (4,350) Accumulated other comprehensive income............................... 438 332 ----------- --------- Total stockholders' equity.................................... 56,841 45,091 ----------- --------- Total liabilities and stockholders' equity.................... $ 692,409 643,664 =========== =========
See accompanying notes to consolidated financial statements. 5 FIRST BANKS AMERICA, INC. Consolidated Statements of Income (unaudited) (dollars expressed in thousands, except per share data)
Three months ended March 31, ------------------ 1998 1997 ---- ---- Interest income: Interest and fees on loans................................................ $ 10,568 7,453 Investment securities..................................................... 2,033 1,781 Federal funds sold and other.............................................. 395 377 --------- ---------- Total interest income................................................. 12,996 9,611 --------- ---------- Interest expense: Deposits: Interest-bearing demand................................................. 349 354 Savings................................................................. 1,454 766 Time deposits of $100 or more........................................... 775 529 Other time deposits..................................................... 2,784 2,314 Promissory note payable and other borrowings.............................. 537 545 --------- ---------- Total interest expense................................................ 5,899 4,508 --------- ---------- Net interest income................................................... 7,097 5,103 Provision for possible loan losses........................................... 300 550 --------- ---------- Net interest income after provision for possible loan losses.......... 6,797 4,553 --------- ---------- Noninterest income: Service charges on deposit accounts and customer service fees............. 739 575 Gain on sales of securities, net.......................................... 92 -- Other income.............................................................. 319 296 --------- ---------- Total noninterest income.............................................. 1,150 871 --------- ---------- Noninterest expense: Salaries and employee benefits............................................ 2,135 1,550 Occupancy, net of rental income........................................... 491 571 Furniture and equipment................................................... 347 267 Federal Deposit Insurance Corporation premiums............................ 43 38 Postage, printing and supplies............................................ 167 148 Data processing fees...................................................... 475 327 Legal, examination and professional fees.................................. 890 750 Communications............................................................ 200 164 (Gain) loss on sale of foreclosed property, net of expenses............... 157 (9) Other..................................................................... 1,152 658 --------- ---------- Total noninterest expense............................................. 6,057 4,464 --------- ---------- Income before provision for income taxes and minority interest in income of subsidiary............................................ 1,890 960 Provision for income taxes................................................... 790 361 --------- ---------- Income before minority interest in income of subsidiary............... 1,100 599 Minority interest in income of subsidiary.................................... -- 86 --------- ---------- Net income............................................................ $ 1,100 513 ========= ========== Earnings per common share: Basic................................................................. $ 0.22 0.13 Diluted............................................................... 0.22 0.12 ========= ========== Weighted average shares of common stock outstanding.......................... 4,911 4,082 ========= ==========
See accompanying notes to consolidated financial statements. 6 FIRST BANKS AMERICA, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity (unaudited) Three months ended March31, 1998 and nine months ended December 31, 1997 (dollars expressed in thousands, except per share data)
Accu- mulated other Total Class B Compre- Retained Common compre- stock- Common common- Capital hensive earnings treasury hensive holders' stock stock surplus income (deficit) stock income equity ----- ----- ------- --------------- ----- ------ ------ Consolidated balances, January 1, 1997........... $ 282 375 42,553 -- (2,251) (2,838) (36) 38,085 Three months ended March 31, 1997: Comprehensive income: Net income.................................. -- -- -- $ 513 513 -- -- 513 Other comprehensive income, net of tax (1) - Unrealized losses on securities, net of reclassification adjustment (2)......... -- -- -- (399) -- -- (339) (339) ------ Comprehensive income........................ -- -- -- $ 174 ====== Exercise of stock options..................... -- -- 4 -- -- -- 4 Repurchases of common stock................... -- -- -- -- (331) -- (331) ------- ---- ------- ----- ----- ---- ------- Consolidated balances, March 31, 1997............ 282 375 42,557 (1,738) (3,169) (375) 37,932 Nine months ended December 31, 1997: Comprehensive income: Net income.................................. -- -- -- $3,136 3,136 -- -- 3,136 Other comprehensive income, net of tax (1) Unrealized gains on securities net of reclassification adjustment (2).. -- -- -- 707 -- -- 707 707 ------ Comprehensive income........................ $3,843 ====== Issuance of common stock for purchase accounting acquisition...................... 40 -- 4,723 -- -- -- 4,763 Exercise of stock options..................... -- -- 11 -- -- -- 11 Redemption of stock option.................... -- -- (290) -- -- -- (290) Compensation paid in common stock............. -- -- 13 -- -- -- 13 Repurchases of common stock................... -- -- -- -- (1,181) -- (1,181) ------- ---- ------- ----- ------ ---- ------- Consolidated balances, December 31, 1997......... 322 375 47,014 1,398 (4,350) 332 45,091 Three months ended march 31, 1998: Comprehensive income: Net income.................................. -- -- -- $1,100 1,100 -- -- 1,100 Other comprehensive income, net of (1) - Unrealized gains on securities, net of of reclassification adjustment (2)...... -- -- -- 106 -- -- 106 106 ----- Comprehensive income........................ -- -- -- $1,206 ====== Issuance of common stock for acquisition of entity under common control.............. 43 -- 2,965 -- -- -- 3,008 Conversion of promissory note payable......... 121 -- 9,879 -- -- -- 10,000 Repurchases of common stock................... -- -- -- -- 2,464) -- (2,464) ------- ---- ------- ----- ----- ---- ------- Consolidated balances, March 31, 1998............ $ 486 375 59,858 2,498 (6,814) 438 56,841 ======= ==== ======= ===== ====== ==== =======
Three months Nine months ended March 31, ended 1998 1997 December 31, 1997 ---- ---- ----------------- Disclosure of reclassification amount: Unrealized gains arising during the period.......................... $198 (339) 783 Less: reclassification adjustment for gains included in net income.. 92 -- 76 ---- ---- ----- Unrealized gains on securities...................................... $106 (339) 707 ==== ==== =====
- - --------- (1) Components of other comprehensive income are shown net of tax. (2) Represents the net display with gross amounts and reclassification adjustment included on the face of the statement. See accompanying notes to consolidated financial statements. 7 FIRST BANKS AMERICA, INC. Consolidated Statements of Cash Flows (unaudited) (dollars expressed in thousands)
Three months ended March 31, 1998 1997 ---- ---- Cash flows from operating activities: Net income................................................................ $ 1,100 513 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion, net........................... 467 60 Provision for possible loan losses...................................... 300 550 Decrease in accrued interest receivable................................. 967 197 Interest accrued on liabilities......................................... 5,899 4,508 Payments of interest on liabilities..................................... (5,345) (4,010) Provision for income taxes.............................................. 790 361 Payments of income taxes................................................ (196) -- Gain on sales of securities, net........................................ 92 -- Other operating activities, net......................................... 366 (471) --------- -------- Net cash provided by operating activities............................. 4,440 1,708 --------- -------- Cash flows from investing activities: Cash received from acquired entities, net of cash paid.................... 3,241 -- Maturities of investment securities....................................... 32,850 41,365 Purchases of investment securities........................................ (25,399) (56,208) Net decrease in loans..................................................... 15,739 8,318 Recoveries of loans previously charged off................................ 530 560 Purchases of bank premises and equipment.................................. (807) (89) Other investing activities, net........................................... 219 37 --------- -------- Net cash provided by (used in) investing activities................... 26,373 (6,017) --------- -------- Cash flows from financing activities: Increase (decrease) in deposits........................................... 8,869 (3,487) Increase in borrowed funds................................................ 4,792 4,520 Repurchases of common stock for treasury.................................. (2,464) (331) Other financing activities, net .......................................... -- 4 --------- -------- Net cash provided by financing activities............................. 11,197 706 --------- -------- Net increase (decrease) in cash and cash equivalents.................. 42,010 (3,603) Cash and cash equivalents, beginning of period............................... 35,162 42,874 --------- -------- Cash and cash equivalents, end of period..................................... $ 77,172 39,271 ========= ======== Non-cash investing and financing activities: Issuance of common stock for purchase accounting acquisition.............. $ 3,008 -- Conversion of promissory note payable to common stock..................... 10,000 -- ========= ========
See accompanying notes to consolidated financial statements. 8 FIRST BANKS AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Basis of Presentation The accompanying consolidated financial statements of First Banks America, Inc. (FBA or the Company) are unaudited and should be read in conjunction with the consolidated financial statements contained in the 1997 annual report on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation of the results of operations for the interim periods presented herein, have been included. Operating results for the three month period ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. In connection with FBA's acquisition of First Commercial Bancorp, Inc. (FCB) and its wholly owned subsidiary, First Commercial Bank (First Commercial) as of February 2, 1998, FBA's financial information for the periods prior to the acquisition has been restated to include the 61.48% ownership interest of First Banks, Inc. (First Banks), FBA's majority owner, in FCB consistent with the accounting treatment applicable to entities under common control. First Banks owned 71.84% of FBA as of March 31, 1998. The remaining interest in FCB acquired by FBA, or 38.52%, is reflected in the consolidated financial statements as minority interest for the periods prior to the acquisition. The consolidated financial statements include the accounts of FBA and its subsidiaries, all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated. In addition to the aforementioned restatement of 1997 financial information, certain reclassifications of 1997 amounts have been made to conform with the 1998 presentation. FBA operates through two banking subsidiaries, BankTEXAS N.A., headquartered in Houston, Texas (BankTEXAS) and First Bank of California, headquartered in Roseville, California (FB California), collectively referred to as the Subsidiary Banks. (2) Transactions with Related Party FBA purchases certain services and supplies from or through its majority shareholder, First Banks. FBA's financial position and operating results could significantly differ from those that would be obtained if FBA's relationship with First Banks did not exist. First Banks provides management services to FBA and the Subsidiary Banks. Management services are provided under a management fee agreement whereby FBA compensates First Banks on an hourly basis for its use of personnel for various functions including internal auditing, loan review, income tax preparation and assistance, accounting, asset/liability and investment services, loan servicing and other management and administrative services. Fees paid under this agreement were $440,000 and $317,000 for the three months ended March 31, 1998 and 1997, respectively. Fees payable to First Banks generally increase as FBA expands through acquisitions and internal growth, reflecting the higher levels of service needed to operate the Subsidiary Banks. Because of its affiliation through First Banks and the geographic proximity of certain of their banking offices, FB California and First Bank & Trust (FB&T), a wholly owned subsidiary of First Banks, share the cost of certain personnel and services used by the banks. This includes the salaries and benefits of certain loan and administrative personnel. The allocation of the shared costs are charged and/or credited among the banks under the terms of a cost sharing agreement. Expenses associated with loan origination personnel are allocated based on the relative loan volume between the banks. Costs of most other personnel are allocated on an hourly basis. Because this involves distributing essentially fixed costs over a larger asset base, it allows each bank to receive the benefit of personnel and services at a reduced cost. Fees paid under the cost sharing agreement were $256,000 and $174,000 for the three month periods ended March 31, 1998 and 1997, respectively. 9 Effective April 1, 1997, First Services L.P., a limited partnership indirectly owned by First Banks' Chairman and his children through its General Partners and Limited Partners, began providing data processing and various related services to FBA under the terms of data processing agreements. Prior to April 1, 1997, a subsidiary of First Banks provided data processing and various related services to FBA. Fees paid under these agreements were $429,000 and $283,000 for the three months ended March 31, 1998 and 1997, respectively. The fees paid for management services and data processing are significantly lower than FBA was previously paying its nonaffiliated vendors. Fees payable to First Services L.P. generally increase as FBA expands through acquisitions and internal growth, reflecting the higher levels of service needed to operate the Subsidiary Banks. The Subsidiary Banks had $62.8 million and $66.9 million in whole loans and loan participations outstanding at March 31, 1998 and December 31, 1997, respectively, that were purchased from banks affiliated with First Banks. In addition, the Subsidiary Banks had sold $74.0 million and $54.7 million in whole loans and loan participations to affiliates of First Banks at March 31, 1998 and December 31, 1997, respectively. These loans and loan participations were acquired and sold at interest rates and terms prevailing at the dates of their purchase or sale and under standards and policies followed by the Subsidiary Banks. FBA has borrowed $13.5 million and $14.9 million from First Banks at March 31, 1998 and December 31, 1997, respectively, under a $20.0 million promissory note payable. The borrowings under the note bear interest at an annual rate of one-quarter percent less than the "Prime Rate" as reported in the Wall Street Journal. The interest expense was $272,000 and $276,000 for the three months ended March 31, 1998 and 1997, respectively. The principal and accrued interest under the note are due and payable on October 31, 2001. The accrued and unpaid interest under the note was $1.64 million and $1.37 million at March 31, 1998 and December 31, 1997, respectively. As more fully discussed in Note 4, on February 2, 1998, FBA exchanged 804,000 shares of its common stock for $10.0 million outstanding under the promissory note payable. In connection with FBA's acquisition of FCB, FBA issued convertible debentures to First Banks of $6.5 million. These debentures replaced similar FCB debentures previously owned by First Banks. The related interest expense for these debentures was $210,000 and $213,000 for the three months ended March 31, 1998 and 1997, respectively. FBA is not required to pay interest on the debentures prior to maturity. At maturity in 2001, principal and accrued interest are payable in FBA common stock (at a conversion rate of $12.50 per share), unless FBA elects to pay cash and First Banks does not exercise its right to convert principal and interest into FBA common stock. (3) Regulatory Capital FBA and the Subsidiary Banks are subject to various regulatory capital requirements administered by 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 FBA and the Subsidiary Banks' assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Subsidiary Banks' capital amounts and regulatory classification are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors which may affect possible regulatory actions. Quantitative measures established by regulations to ensure capital adequacy require the Subsidiary Banks to maintain certain minimum capital ratios. The Subsidiary Banks are required to maintain a minimum risk-based capital to risk-weighted assets ratio of 8.00%, with at least 4.00% being "Tier 1" capital. Tier 1 capital is composed of total stockholders' equity excluding the net fair value adjustment for securities available for sale and excess net deferred tax assets, as defined by regulation. In addition, a minimum leverage ratio (Tier 1 capital to total assets) of 3.00% plus an additional cushion of 100 to 200 basis points is expected. In order to be well capitalized under Prompt Corrective Action provisions, the Subsidiary Banks are required to maintain a risk weighted assets 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 the Subsidiary Banks' primary regulators, the Subsidiary Banks were categorized as well capitalized 10 under the regulatory framework for Prompt Corrective Action. Management believes, as of March 31, 1998, the Subsidiary Banks are well capitalized as defined by the Federal Deposit Insurance Corporation Improvement Act of 1991. At March 31, 1998 and December 31, 1997, FBA's and the Subsidiary Banks' capital ratios were as follows:
Risk-based capital ratios ------------------------- Total Tier 1 Leverage Ratio ----- ------ -------------- 1998 1997 1998 1997 1998 1997 ---- ---- ---- ---- ---- ---- FBA 9.08% 6.88% 7.82% 6.63% 6.77% 4.79% BankTEXAS 12.99 12.26 11.73 11.00 9.24 8.90 FB California 13.18 12.19 11.91 10.93 11.12 10.40
(4) Acquisitions On February 2, 1998, FBA completed its acquisition of FCB and its wholly owned subsidiary, First Commercial. In the transaction, the FCB shareholders received .8888 shares of FBA common stock for each share of FCB common stock. Cash was paid in lieu of issuing fractional shares. In total, FCB shareholders received approximately 752,000 shares of FBA common stock in the transaction, including 462,176 shares received by First Banks in exchange for its 61.48% ownership of FCB. The transaction also provided for First Banks to receive 804,000 shares of FBA common stock in exchange for $10.0 million of FBA's promissory note payable to First Banks, and for the exchange of FCB convertible debentures of $6.5 million, which were owned by First Banks, for comparable debentures of FBA. The Agreement was negotiated and approved by special committees of the Boards of Directors of FCB and FBA. These special committees were comprised solely of independent directors of the two respective Boards of Directors. First Commercial has six banking offices located in Sacramento, Roseville (2), San Francisco, Concord and Campbell, California. At February 2, 1998, FCB had total assets of $192.5 million, investment securities of $64.4 million, loans, net of unearned discount of $118.9 million and deposits of $173.1 million. The transaction was accounted for as a business combination of entities under common control. Accordingly, FBA assumed First Banks' 61.48% interest in FCB at its historical cost basis. The remaining 38.52%, or minority interest, owned by unaffiliated parties was recorded at fair value. The excess of the cost over the fair value of the minority interest's share in the fair value of the net assets acquired was $1.6 million and is being amortized over 15 years. First Commercial was merged into FB California. On February 2, 1998, FBA also 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. The transaction was accounted for using the purchase method of accounting. The excess of the cost over the fair value of the net assets acquired was $1.5 million and is being amortized over 15 years. This transaction was funded from an advance under the promissory note payable to First Banks. Pacific Bay operated a banking office in San Pablo, California and a loan production office in Lafayette, California. At February 2, 1998, Pacific Bay had total assets of $38.3 million, investment securities of $232,000, loans, net of unearned discount, of $29.7 million and deposits of $35.2 million. Pacific Bay was merged into FB California. 11 The following information presents unaudited pro forma condensed results of operations of FBA for the three months ended March 31, 1997, combined with the acquisition of Surety Bank, as if FBA had completed the transaction on January 1, 1997. In addition, the historical results of First Banks' interest in FCB is presented as if FBA had acquired First Banks' interest in FCB on January 1, 1997: March 31, 1997 (dollars expressed in thousands, except per share data) Net interest income............................... $ 5,952 Provision for possible loan losses................ 585 Net income (loss)................................. 695 ======= Weighted average shares of common stock Outstanding (in thousands)................... 5,440 ======= Earnings (loss) per common share: Basic........................................ $ 0.13 Diluted...................................... 0.13 ======= Unaudited pro forma condensed results of operations are not included for the three months ended March 31, 1998, as the proforma results did not significantly differ from actual results. The unaudited pro forma condensed results of operations reflect the application of the purchase method of accounting for Surety Bank and certain other assumptions. Purchase accounting adjustments have been applied to investment securities, bank premises and equipment, deferred tax assets and liabilities and excess cost required to reflect the assets acquired and liabilities assumed at fair value. The resulting premiums and discounts are amortized or accreted to income consistent with the accounting policies of FBA. 12 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations The discussion herein contains certain forward looking statements regarding the financial condition, results of operations and business of the Company. These forward looking statements are subject to risks and uncertainties, not all of which can be predicted or anticipated. Factors that may cause actual results to differ materially from those contemplated by such forward looking statements include general market conditions, conditions affecting the banking industry generally and factors having a specific impact on the Company, including but not limited to fluctuations in interest rates and in the economy; the impact of laws and regulations applicable to the Company and changes therein; competitive conditions in the markets in which the Company and the Subsidiary Banks conduct their operations; and the ability of the Company to respond to changes in technology. Additional factors potentially affecting the Company's results were identified in the Annual Report on Form 10-K filed with the Securities and Exchange Commission. Readers should not place undue reliance on any forward-looking statements herein. General FBA is a registered bank holding company, incorporated in Delaware and headquartered in Clayton, Missouri. At March 31, 1998, FBA had approximately $692.4 million in total assets; $444.1 million in total loans, net of unearned discount; $600.6 million in total deposits; and $56.8 million in total stockholders' equity. FBA operates through its Subsidiary Banks. As previously discussed in Notes 1 and 4 to the consolidated financial statements, FBA's financial information presented in this Report on Form 10-Q has been restated to reflect its acquisition of FCB. Through the Subsidiary Banks' six locations in Texas and eleven locations in the San Francisco - Sacramento corridor of northern California, FBA 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 and industrial, real estate construction and development, commercial and residential real estate and consumer loans. Other financial services include credit-related insurance, automatic teller machines and safe deposit boxes. The following table lists the Subsidiary Banks at March 31, 1998: Loans, net of Number of Total unearned Total locations assets discount deposits (dollars expressed in thousands) FB California 11 $415,806 270,713 365,405 BankTEXAS 6 271,902 173,386 235,215 Financial Condition FBA's total assets were $692.4 million and $643.7 million at March 31, 1998 and December 31, 1997, respectively, after the restatement for the acquisition of FCB, as previously discussed in Notes 1 and 4 to the consolidated financial statements. The increase in adjusted total assets from December 31, 1997 is primarily attributable to FBA's acquisition of Pacific Bay, which provided total assets of $38.3 million. 13 During the three months ended March 31, 1998, FBA purchased $2.5 million of its common stock for treasury. FBA utilized available cash and a $1.5 million advance under its promissory note payable to First Banks to fund its repurchase of common stock. As announced by FBA on April 29, 1998, the Board of Directors authorized the purchase of an additional 5% of its common stock for treasury. Results of Operations Net Income Net income was $1.1 million, or $0.22 per share on a diluted basis, for the three months ended March 31, 1998, compared to $513,000, or $0.12 per share on a diluted basis, for the same period in 1997. The improved operating results of FBA reflect the improved performance of both BankTEXAS and FB California. BankTEXAS' net income increased to $753,000 from $629,000 for the three month periods ended March 31, 1998 and 1997, respectively. FB California recorded net income of $739,000 for the three month period ended March 31, 1998, in comparison to $395,000 for the same period in 1997. The results for the first quarter of 1998 include a net charge of $225,000, or $0.05 per share on a diluted basis, in settlement of certain litigation. Excluding this charge, earnings per share on a diluted basis for the first quarter of 1998 would have been $0.27. Net Interest Income Net interest income was $7.10 million, or 4.77% of average interest-earning assets, for the three months ended March 31, 1998, compared to $5.10 million, or 4.30% of average interest-earning assets, for the same period in 1997. The improved net interest income is primarily attributable to the net interest-earning assets provided by the acquisitions of Surety Bank and Pacific Bay and the improving yield on BankTEXAS' repositioned loan portfolio and the effect of the exchange of $10.0 million of the promissory note payable for common stock. 14 The following table sets forth certain information relating to FBA's average balance sheets, 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 three month periods ended March 31:
1998 1997 ------------------------- -------------------------- Interest Interest Average income/ Yield/ Average income/ Yield/ balance expense rate balance expense rate ------- ------- ---- ------- ------- ---- (dollars expressed in thousands) Assets Interest-earning assets: Loans.................................... $ 438,421 10,568 9.78% $ 326,474 7,453 9.26% Investment securities.................... 136,501 2,033 6.04 125,544 1,781 5.75 Federal funds sold and other............. _28,062 395 5.71 29,360 377 5.21 --------- ------ ---------- ------ Total interest-earning assets...... 602,984 12,996 8.74 481,378 9,611 8.10 ------ ------ Nonearning assets........................... 62,166 42,194 --------- ---------- Total assets....................... $ 665,150 $ 523,572 ========= ========== Liabilities and Stockholders' Equity Interest-bearing liabilities: Interest-bearing demand deposits......... $ 73,291 349 1.93% $ 68,211 354 2.10% Savings deposits......................... 151,237 1,454 3.90 98,052 766 3.17 Time deposits of $100 or more............ 51,594 775 6.09 39,465 529 5.44 Other time deposits...................... 205,975 2,784 5.48 171,480 2,314 5.47 --------- ----- --------- ------ Total interest-bearing deposits.... 482,097 5,362 4.51 377,208 3,963 4.26 Notes payable and other ................. 24,602 537 8.85 24,393 545 9.06 --------- ----- --------- ------ Total interest-bearing liabilities. 506,699 5,899 4.72 401,601 4,508 4.55 ----- ------ Noninterest-bearing liabilities: Demand deposits.......................... 91,230 72,129 Other liabilities........................ 12,360 9,795 --------- --------- Total liabilities.................. 610,289 483,525 Stockholders' equity........................ 54,861 40,047 --------- --------- Total liabilities and stockholders' equity............. $ 665,150 $ 523,572 ========= ========== Net interest income......................... 7,097 5,103 ===== ===== Net interest margin......................... 4.77% 4.30% ==== ====
Provision for Possible Loan Losses The provision for possible loan losses was $300,000 and $550,000 for the three month periods ended March 31, 1998 and 1997, respectively. The decrease in the provision for possible loan losses for the first quarter of 1998, compared to the same period in 1997, is primarily attributable to improved asset quality of FBA's existing loan portfolio, as determined by management's review and evaluation of the credit quality of the loans in the portfolio and its assessment of the adequacy of the allowance for possible loan losses. Net loan charge-offs were $529,000 for the three month period ended March 31, 1998, compared to $422,000 for the same period in 1997. The increase in net loan charge-offs is primarily attributable to the loans obtained through the acquisition of Pacific Bay. The acquired allowance for possible loan losses totaled $885,000 at the acquisition date. See "-- Lending and Credit Management" for a summary of nonperforming loans and a summary of loan loss experience. 15 Noninterest Income Noninterest income was $1.2 million for the three month period ended March 31, 1998 compared to $871,000 for the same period in 1997. Noninterest income consists primarily of service charges on deposit accounts and customer service fees. Service charges on deposit accounts and customer service fees increased to $739,000 for the three month period ended March 31, 1998, in comparison to $575,000 for the same period in 1997. This increase is primarily attributable to the acquisitions of Surety Bank and Pacific Bay Bank. Noninterest Expense Noninterest expense was $6.1 million for the three month period ended March 31, 1998, compared to $4.5 million for the same period in 1997. The increase is attributable to the noninterest expense of Surety Bank and Pacific Bay. Additionally, other expenses for the three months ended March 31, 1998 includes a $350,000 charge in settlement of certain litigation. Occupancy, net of rental income, declined to $491,000 for the three months ended March 31, 1998 from $571,000 for the same period in 1997. This is the result of increased sub-leasing of excess space within FBA's banking premises, relocation of certain California branches and the related reductions in expenses attributable to centralization of recently acquired entities' functions into FBA's systems. Lending and Credit Management Interest earned on the loan portfolio is the primary source of income of FBA. Total loans, net of unearned discount, represented 64.1% and 67.0% of total assets as of March 31, 1998 and December 31, 1997, respectively. Total loans, net of unearned discount, were $444.1 million and $431.5 million at March 31, 1998 and December 31, 1997, respectively. The increase in loans, as summarized on the consolidated balance sheet, is attributable to the acquisition of Pacific Bay and to the expansion of the corporate lending function of FBA. The expansion has generated growth in the commercial and commercial real estate mortgage loan portfolios. Offsetting the growth in corporate lending is the continuing decrease in the consumer indirect automobile loan portfolio. 16 FBA's nonperforming loans consist of loans on a nonaccrual status and loans on which the original terms have been restructured. The following is a summary of nonperforming assets and past due loans at the dates indicated:
March 31, December 31, 1998 1997 ---- ---- (dollars expressed in thousands) Nonperforming assets: Nonperforming loans............................................... $ 6,003 2,846 Other real estate................................................. 725 601 ----------- ---------- Total nonperforming assets..................................... $ 6,728 3,447 =========== ========== Loans past due and still accruing: Over 30 days to 90 days........................................... $ 12,428 7,866 Over 90 days...................................................... 672 1,158 ----------- ---------- Total past due loans........................................... $ 13,100 9,024 =========== ========== Loans, net of unearned discount..................................... $ 444,099 431,455 =========== ========== Asset quality ratios: Allowance for possible loan losses to loans....................... 2.72% 2.64% Nonperforming loans to loans ..................................... 1.35 0.66 Allowance for possible loan losses to nonperforming loans ........................................... 200.95 400.81 Nonperforming assets to loans and other real estate............... 1.51 0.80 =========== =========
Nonperforming loans, consisting of loans on nonaccrual status and restructured loans, were $6.0 million at March 31, 1998 in comparison to $2.8 million and $2.4 million at December 31, 1997 and March 31, 1997, respectively. The increase is primarily attributable to the loans obtained through the acquisition of Pacific Bay. The acquired allowance for possible loan losses totaled $885,000 at the acquisition date. Impaired loans, consisting of loans on a nonaccrual status and indirect consumer and installment loans 60 days or more past due, were $6.3 million and $3.4 million at March 31, 1998 and December 31, 1997, respectively. The allowance for possible loan losses is monitored on a monthly basis. Each month, credit administration provides FBA's management with detailed lists of loans on the watch list and summaries of the entire loan portfolio of each Subsidiary Bank by risk rating. These are coupled with analyses of changes in the risk profiles of the portfolios, changes in past due and nonperforming loans and changes in watch list and classified loans over time. In this manner, the overall increases or decreases in the levels of risk in the portfolios are monitored continually. Factors are applied to the loan portfolios for each category of loan risk to determine acceptable levels of allowance for possible loan losses. These factors are derived primarily from the actual loss experience of the Subsidiary Banks and from published national surveys of norms in the industry. The calculated allowances required for the portfolios are then compared to the actual allowance balances to determine the provisions necessary to maintain the allowances at appropriate levels. In addition, management exercises judgment in its analysis of determining the overall level of the allowance for possible losses. In its analysis, management considers the change in the portfolio, including growth and composition, and the economic conditions of the regions in which FBA operates. Based on this quantitative and qualitative analysis, the allowance for possible loan losses is adjusted. Such adjustments are reflected in the consolidated statements of operations. 17 The following is a summary of the loan loss experience:
Three months ended March 31, --------------------- 1998 1997 ---- ---- (dollars expressed in thousands) Allowance for possible loan losses, beginning of period.................... $ 11,407 10,744 --------- Acquired allowances for possible loan losses............................ 885 -- --------- -------- 12,292 10,744 --------- -------- Loans charged-off....................................................... (1,059) (982) Recoveries of loans previously charged-off.............................. 530 560 --------- -------- Net loan charge-offs.................................................... (529) (422) --------- -------- Provision for possible loan losses...................................... 300 550 --------- -------- Allowance for possible loan losses, end of period.......................... $ 12,063 10,872 ========= ========
Liquidity The liquidity of FBA and the Subsidiary Banks is the ability to maintain a cash flow which is adequate to fund operations, service debt obligations and meet other commitments on a timely basis. The primary sources of funds for liquidity are derived from customer deposits, loan payments, maturities, sales of investments and operations. In addition, FBA and the Subsidiary Banks may avail themselves of more volatile sources of funds through issuance of certificates of deposit in denominations of $100,000 or more, federal funds borrowed, securities sold under agreements to repurchase and borrowings from the Federal Home Loan Bank. The aggregate funds acquired from those sources were $61.2 million and $56.2 million at March 31, 1998 and December 31, 1997, respectively. At March 31, 1998, FBA's more volatile sources of funds mature as follows: (dollars expressed in thousands) Three months or less............................... $ 21,562 Over three months through six months............... 13,606 Over six months through twelve months.............. 13,315 Over twelve months................................. 12,695 --------- Total........................................ $ 61,178 ========= Management believes the available liquidity and earnings of the Subsidiary Banks will be sufficient to provide funds for FBA's operating and debt service requirements both on a short-term and long-term basis. Effect of New Accounting Standards FBA adopted the provisions of Statement on Financial Accounting Standards (SFAS) No. 130 - Reporting Comprehensive Income (SFAS 130) retroactively on January 1, 1998. SFAS 130 established standards for reporting and displaying income and its components (revenues, gains and losses) in a full set of general purpose financial statements. The statement requires all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Comparative financial statements provided for earlier periods have been restated to reflect the application of SFAS 130. The implementation of SFAS 130 did not have a material impact on FBA's consolidated financial statements. During 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 131 - Disclosures about Segments of an Enterprise and Related Information (SFAS 131). SFAS 131 establishes standards for the way public business enterprises report information about operating segments in annual 18 financial statements and requires those enterprises report selected information about operating segments in interim financial reports issued to shareholders. Additionally, SFAS 131 establishes standards for related disclosures about products and services, geographic areas, and major customers superseding SFAS No. 14 - Financial Reporting for Segments of a Business Enterprise. FBA is currently evaluating information required by SFAS 131 and believes expanded disclosure information will be required to be included in FBA's consolidated financial statements for fiscal years beginning after December 15, 1997. PART II - OTHER INFORMATION Item 6 - Exhibits and Report on Form 8-K (a) The exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K. Exhibit Number Description 10(t) Debenture by and between First Banks America, Inc. and First Banks, Inc., dated February 2, 1998 11 Calculations of Earnings Per Share 27 Article 9 - Financial Data Schedule (EDGAR only) (b) A current report on Form 8-K was filed by FBA on February 13, 1998. Item 2 of the Report describes the acquisition of First Commercial Bancorp, Inc. by First Banks America, Inc. on February 2, 1998. In addition, Item 7 of the Report presents financial statements of the acquired entity and pro forma financial information of the combined group. 19 SIGNATURES Pursuant to the requirements 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 AMERICA, INC. Registrant Date: May 8, 1998 By:/s/ James F. Dierberg --------------------- James F. Dierberg Chairman, President and Chief Executive Officer Date: May 8, 1998 By:/s/ Allen H. Blake ------------------ Allen H. Blake Vice President, Chief Financial Officer and Secretary (Principal Financial Officer) 20 Exhibit 10(t) FIRST BANKS AMERICA, INC. a Delaware corporation DEBENTURE This is the Sole Debenture of an Issuance of Debentures Totaling $6,500,000.00 By First Banks America, Inc. on this Date Amount of Debenture: $6,500,000.00 February 2, 1998 Due: October 31, 2000 1. Promise to Pay. FIRST BANKS AMERICA, INC., a Delaware corporation (the "Company"), for value received, promises to pay to FIRST BANKS, INC., a Missouri corporation, or its successors and assigns (the "Holder"), the sum of Six Million Five Hundred Thousand Dollars ($6,500,000.00), together with interest on the principal amount hereof (not compounded) at the rate of interest of twelve percent (12%) annually. Unless otherwise provided herein, payments on this Debenture shall be in dollars of the United States of America and payments shall be made to the address of the Holder specified in Section 13 below. 2. Assumption of Accrued Interest. This Debenture is intended to replace certain indebtedness of First Commercial Bancorp, Inc., a Delaware corporation that was merged with and into the Company, to the Holder under that certain convertible debenture in the principal amount of $1.5 million, dated October 31, 1995, and that certain convertible debenture in the principal amount of $5.0 million, dated December 28, 1995 (collectively the "FCB Debentures"). The Company hereby agrees to repay the accrued and unpaid interest under the FCB Debentures as if such interest had accrued under this Debenture in accordance with the terms of this Debenture. 3. Payments. The Company shall make payments on this Debenture when, in the sole and absolute discretion of the Board of Directors of the Company, the Company has sufficient funds to make such a payment of interest or principal on this Debenture and can make such a payment in accordance with law and all applicable regulatory requirements; provided, however, if and to the extent the Company has not previously paid interest or principal on this Debenture, then (i) prior to October 31, 2000 ("Maturity"), the Holder of this Debenture shall have the right to convert unpaid interest or principal at the times and in the manner described in Section 5, and upon such conversion, that portion of interest or principal so converted shall be deemed paid in full and (ii) upon Maturity, the Debenture shall be payable and convert to common stock, $0.15 par value per share (the "Company Common"), pursuant to the provisions of Section 5(b). Notwithstanding anything to the contrary herein, Company shall give Holder ten (10) days prior written notice of Company's intention to make any payment to Holder on the Debenture. 21 4. No Security. The obligations of Company hereunder shall not be secured by any assets of the Company. 5. Conversion Rights. (a) Right to Convert. At the sole option and discretion of the Holder of this Debenture, unpaid principal and accrued but unpaid interest may be converted into shares of Company Common at the Conversion Price set forth in Subsection (c) below. A Holder desiring to convert shall follow the conversion procedure set forth in Subsection (d). On the date that the conversion is effective as provided in Subsection (d) below, all or any portion of the unpaid principal and interest which has then accrued but remains unpaid, and which Holder elects to convert, shall be converted into shares of Company Common. (b) Automatic Conversion. Notwithstanding the provisions of Section 5(a) above and absent an Event of Default, at Maturity, all unpaid principal and accrued but unpaid interest shall be automatically converted into Company Common at the Conversion Price set forth in Subsection (c) below. Once the automatic conversion has occurred, no further interest shall accrue, and the Holder shall be deemed to be paid in full. (c) Conversion Price. The price per share of Company Common at which the convertible portion of the interest or principal of this Debenture may be converted (the "Conversion Price") shall be equal to $14.06 per share. (d) Conversion Procedure. If Holder desires to convert all or any portion of the unpaid principal or accrued but unpaid interest of this Debenture, then Holder shall deliver a written notice to the Company stating that the Holder desires to convert and specifying the amount of unpaid principal and accrued by unpaid interest that Holder wishes to convert. Promptly after receipt of such written notice, the Company shall deliver to the Holder of this Debenture any and all documents which the Company shall require in order to permit the conversion, including, without limitation, any and all documents necessary to comply with applicable securities law exemptions or to satisfy any and all requirements of applicable law and regulations, including any requirements of any regulatory bodies having jurisdiction over the Company. Promptly after receipt from Holder by the Company of such documents as the Company may require to permit conversion, the Company shall send written notice to the Holder and the Holder shall execute the written notice that the portion of this Debenture that the Holder requested be converted has in fact been converted into common stock of the Company at the Conversion Price and specifying the number of shares of Company Common to which the Holder will be entitled as a result of such conversion. The conversion shall be deemed to have taken effect as of the date of such written notice from the Holder to the Company, and, promptly thereafter, the Company shall cause to be delivered to the Holder from the Company or its transfer agent, a certificate representing such shares of Company Common, which shares shall bear a legend substantially in the form of that set forth in Section 8 of this Debenture (with such changes as are necessary to reflect that the legend condition affects the shares represented by that certificate in lieu of the language pertaining to this Debenture). With respect to an automatic conversion of the Debenture on and as of October 31, 2000, such conversion shall occur automatically as set forth herein, except that no notice shall be required. 6. Adjustment for Dividends, Subdivisions, Combinations or Reclassifications. In case the Company shall: (a) pay a dividend or make a distribution in shares of its capital stock (whether shares of Company Common Stock or of capital stock of any other class); (b) subdivide the outstanding shares of Company Common Stock into a greater number of shares; (c) combine the outstanding shares of Company Common Stock into a smaller number of shares; or (d) reclassify shares of Company Common Stock such that additional shares of capital stock of the Company are issued to holders of Company Common Stock; then, and in each such case, the per share Conversion Price in effect immediately prior to such action shall be adjusted so that the Holder of this Debenture thereafter upon the Conversion hereof shall be entitled to receive the number of shares of capital stock of the Company which such Holder would have owned immediately following such action had this Debenture been converted immediately prior thereto. An adjustment made pursuant to this Section 6 shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination, or reclassification. If, as a result of an adjustment made pursuant to this Section 6, the Holder of this Debenture shall become entitled to receive shares of two or more classes of capital stock of the Company, the Board of Directors of the Company (whose determination shall be conclusive) shall determine the allocation of the adjusted Conversion Price between or among shares of such classes of capital stock. All calculations under this Section 6 shall be made to the nearest one-hundredth of a cent or to the nearest one-hundredth of a share, as the case may be, but in no event shall the Company be obligated to issue fractional shares upon the conversion of this Debenture. 22 7. Reservation. The Company shall, at all times, reserve and keep available, out of its authorized but unissued shares of Company Common, solely for the purpose of effecting the conversion of this Debenture, the full number of shares of Company Common deliverable upon the conversion of all Debentures from time to time outstanding. The Company shall from time to time in accordance with Delaware law, increase the authorized number of shares of Company Common if at any time the authorized number of such shares remaining unissued shall not be sufficient to permit the conversion of all of the Debentures at the time outstanding. 8. Restricted Nature of Debenture. The Holder of this Debenture understands that the Company may require, upon the conversion of this Debenture into Company Common, that the Holder make certain representations to the Company to comply with applicable securities law exemptions. The Holder understands that this Debenture and Company Common into which this Debenture is convertible are "restricted securities" under the Securities Act of 1933 and this Debenture and the Company Common into which this Debenture is convertible is and will be subject to the following legend condition: THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE DEBENTURE HAS BEEN ACQUIRED BY THE HOLDER FOR INVESTMENT AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF: (1) AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER THAT ACT; (2) AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED; OR (3) A "NO ACTION LETTER" FROM THE SECURITIES AND EXCHANGE COMMISSION TO THE EFFECT THAT THE STAFF OF THE COMMISSION WILL NOT RECOMMEND THAT ANY ACTION BE TAKEN UNDER THE ACT AGAINST THE COMPANY IF SUCH PROPOSED SALE IS CONSUMMATED WITHOUT REGISTRATION UNDER THE ACT. The issuance of the Company Common may be delayed in order for the Company to obtain any and all necessary regulatory approvals and to comply with federal and securities laws. 9. Default. Each of the following shall constitute an event of default ("Events of Default") under this Debenture: (a) Default or breach by the Company in the due observance or performance of any of the terms, covenants or agreements set forth in this Debenture if such default is not remedied by such the Company or waived by Holder within 30 days following the Company's receipt of notice thereof. (b) The Company (i) fails to pay, or admits in writing such Borrower's inability to pay, such Borrower's debts as they become due, or otherwise becomes insolvent (however evidenced); (ii) makes an assignment for the benefit of creditors; (iii) files a petition in bankruptcy, is adjudicated insolvent or bankrupt, petitions or applies to any tribunal for any receiver or any trustee of the Company or any substantial part of the Company's property; (iv) commences any proceeding relating to the Company under any reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; (v) if there is commenced against the Company any such proceeding which remains undismissed for a period of thirty (30) days, or the Company by any act indicates its consent to, approval of, or acquiescence in any such proceeding or the appointment of any receiver of or any trustee for such Borrower or of any substantial part of the Company's property, or suffers any such receivership or trusteeship to continue undischarged for a period of 30 days or the Company takes any partnership or corporate action to authorize any of the foregoing; or (vi) is placed in receivership by any federal or state agency with regulatory authority over the Company. 23 (c) The Company files a certificate of dissolution under applicable state law or is liquidated or dissolved or suspends or terminates the operation of its business, or has commenced against it any action or proceeding for its liquidation or dissolution or the winding up of its business, or takes any corporate action in furtherance thereof. 10. Rights and Remedies in the Event of Default. Upon any Event of Default, and at any time thereafter, Holder may, at its option, do any one or more of the following: (a) Declare this Debenture to be immediately due and payable in cash; or (b) exercise any other rights or remedies available to holder under this Debenture or otherwise available to Holder at law or in equity. 11. Modification. The terms of this Debenture may be amended or modified by the Company with the written consent of the Holder. If the Holder transfers or assigns all or a portion of this Debenture to a permitted assignee or transferee, then the Holders, by vote of Holders holding a majority of the principal amount of this Debenture, may authorize any amendment, modification, or waiver of compliance by the Company of the provisions or defaults under this Debenture. Any such consent or waiver by the Holder (or majority in interest of subsequent Holders) of the Debenture shall be conclusive and binding upon the Holder (and all other Holders) and upon all future holders of this Debenture. 12. Governing Law and Attorneys' Fees. This Debenture and the rights and obligations of the parties hereunder are to be governed by and construed and interpreted in accordance with the laws of the State of Missouri applicable to contracts made and to be performed wholly within Missouri, without regard to choice or conflict of laws rules. If either party incurs legal expenses in any action arising out of this Debenture, then the prevailing party in such action shall be entitled to recover from the nonprevailing party all reasonably attorneys' fees, expert witness fees, and other costs, in addition to any other relief to which such party may be entitled. This Debenture and the agreements referred to herein constitute the entire agreement among the parties pertaining the subject matter hereof and fully supersede any and all prior agreements between the parties hereto respecting the subject matter hereof. 13. Notices. Any notice required to be given to the Holder of this Debenture shall be deemed given if it is set forth in writing addressed to the Holder at the Holder's address appearing on the books of the Company. Notices to the Company shall be in writing and sent to the President, or any Executive Vice President of the Company in care of the then present principal place of business of the Company. Such notices shall be deemed effectively delivered: (a) three business days after deposit in the United States mail, postage prepaid; (b) when actually received if delivered by personal delivery; or (c) as of two business days after delivery to Federal Express or some other third-party who will guarantee delivery by overnight courier addressed to the address of such party as provided in this Section. 24 14. Usury Law Provision. All payments due hereunder are hereby expressly limited so that in no contingency or event whatsoever shall the amount paid or agreed to be paid to the Holder of this Debenture for the use, forbearance, or detention of the money exceed the highest lawful rate permissible. If, from any circumstance, whatsoever, fulfillment of any of the provisions of this Debenture, or any other agreement referred to herein, as of the time performance of such provision shall be due, shall involve a payment that exceeds the lawful amount permissible under law which a court of competent jurisdiction may deem applicable, then the obligations to be fulfilled shall be reduced to the limit of such validity, and if from any circumstance the Holder of this Debenture shall ever receive as interest an amount which would exceed the highest lawful rate, such amount which would be excessive interest shall be applied to the reduction of unpaid principal balance due hereunder, and not to the payment of interest, or, if such excessive interest exceeds the unpaid principal balance due hereunder, the excess shall be refunded to the undersigned. 15. Non-Transferable. Except with the consent of the Company (which consent shall not be unreasonably withheld) or to an entity controlled by or under common control with Holder, this Debenture is not transferable by the Holder hereof. FIRST BANKS AMERICA, INC. By /s/James F. Dierberg -------------------- James F. Dierberg Chairman of the Board, President, and Chief Executive Officer 25 Exhibit 11 The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for the periods indicated:
Income Shares Per share (numerator) (denominator) amount ---------- ------------- ------ (dollars expressed in thousands, except per share data) Quarter ended March 31, 1998: Basic EPS - income available to common stockholders.... $ 1,100 4,911 $ 0.22 ======= Effect of dilutive securities-stock options............ -- 13 ------- ------ Diluted EPS - income available to common stockholders.. $ 1,100 4,924 $ 0.22 ======= ====== ======= Quarter ended March 31, 1997: Basic EPS - income available to common stockholders.... $ 513 4,082 $ 0.13 ======= Effect of dilutive securities-stock options............ -- 57 ------- ------ Diluted EPS - income available to common stockholders.. $ 513 4,139 $ 0.12 ======= ====== =======
The 12% convertible debentures were anti-dilutive for the periods presented above and therefore, have not been included in the EPS calculations. 26 [ARTICLE] 9 [CIK] 0000310979 [NAME] First Banks America, Inc. [MULTIPLIER] 1,000 [PERIOD-TYPE] 3-mos [FISCAL-YEAR-END] Dec-31-1998 [PERIOD-START] Jan-01-1998 [PERIOD-END] Mar-31-1998 [CASH] 32,651 [INT-BEARING-DEPOSITS] 2,271 [FED-FUNDS-SOLD] 42,250 [TRADING-ASSETS] 0 [INVESTMENTS-HELD-FOR-SALE] 141,131 [INVESTMENTS-CARRYING] 0 [INVESTMENTS-MARKET] 0 [LOANS] 444,099 [ALLOWANCE] 12,063 [TOTAL-ASSETS] 692,409 [DEPOSITS] 600,557 [SHORT-TERM] 3,453 [LIABILITIES-OTHER] 11,608 [LONG-TERM] 19,950 [PREFERRED-MANDATORY] 0 [PREFERRED] 0 [COMMON] 861 [OTHER-SE] 55,980 [TOTAL-LIABILITIES-AND-EQUITY] 692,409 [INTEREST-LOAN] 10,568 [INTEREST-INVEST] 2,033 [INTEREST-OTHER] 395 [INTEREST-TOTAL] 12,996 [INTEREST-DEPOSIT] 5,362 [INTEREST-EXPENSE] 5,899 [INTEREST-INCOME-NET] 7,097 [LOAN-LOSSES] 300 [SECURITIES-GAINS] 92 [EXPENSE-OTHER] 6,057 [INCOME-PRETAX] 1,890 [INCOME-PRE-EXTRAORDINARY] 1,890 [EXTRAORDINARY] 0 [CHANGES] 0 [NET-INCOME] 1,100 [EPS-PRIMARY] .22 [EPS-DILUTED] .22 [YIELD-ACTUAL] 8.74 [LOANS-NON] 6,003 [LOANS-PAST] 672 [LOANS-TROUBLED] 0 [LOANS-PROBLEM] 5,317 [ALLOWANCE-OPEN] 11,407 [CHARGE-OFFS] (1,059) [RECOVERIES] 530 [ALLOWANCE-CLOSE] 12,063 [ALLOWANCE-DOMESTIC] 12,063 [ALLOWANCE-FOREIGN] 0 [ALLOWANCE-UNALLOCATED] 2,915
EX-23.1 16 CONSENT OF EXPERT 1 INDEPENDENT AUDITORS' CONSENT The Board of Directors First Banks America, Inc.: We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG Peat Marwick LLP St. Louis,Missouri July 1, 1998 2 INDEPENDENT AUDITORS' CONSENT The Board of Directors First Commercial Bancorp, Inc.: We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG Peat Marwick LLP St. Louis,Missouri July 1, 1998 EX-23.4 17 CONSENT OF EXPERT 1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-2 of our report dated June 19, 1998, on our audits of the consolidated financial statements of Redwood Bancorp and Subsidiaries. We also consent to the reference to our firm under the captions "Experts". /s/ Coopers & Lybrand, L.L.P. San Francisco, California June 30, 1998 EX-25.1 18 FORM T-1 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM T-1 --------- STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE Check if an Application to Determine Eligibility of a Trustee Pursuant to Section 305(b)(2) -- STATE STREET BANK AND TRUST COMPANY (Exact name of trustee as specified in its charter) Massachusetts 04-1867445 (Jurisdiction of incorporation or (I.R.S. Employer organization if not a U.S. national bank) Identification No.) 225 Franklin Street, Boston, Massachusetts 02110 (Address of principal executive offices) (Zip Code) Maureen Scannell Bateman, Esq. Executive Vice President and General Counsel 225 Franklin Street, Boston, Massachusetts 02110 (617) 654-3253 (Name, address and telephone number of agent for service) --------------------- FIRST BANKS AMERICA, INC. (Exact name of obligor as specified in its charter) Delaware xx-xxxxxxx (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 135 North Meramec, Clayton, Missouri 63105 (314) 854-4600 (Address of principal executive offices) (Zip Code) -------------------- % SUBORDINATED DEBENTURES (Title of indenture securities) 2 GENERAL ITEM 1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE: (A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISORY AUTHORITY TO WHICH IT IS SUBJECT. Department of Banking and Insurance of The Commonwealth of Massachusetts, 100 Cambridge Street, Boston, Massachusetts. Board of Governors of the Federal Reserve System, Washington, D.C., Federal Deposit Insurance Corporation, Washington, D.C. (B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS. Trustee is authorized to exercise corporate trust powers. ITEM 2. AFFILIATIONS WITH OBLIGOR. IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. The obligor is not an affiliate of the trustee or of its parent, State Street Boston Corporation. (See note on page 2.) ITEM 3. THROUGH ITEM 15. NOT APPLICABLE. ITEM 16. LIST OF EXHIBITS. LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF ELIGIBILITY. 1. A COPY OF THE ARTICLES OF ASSOCIATION OF THE TRUSTEE AS NOW IN EFFECT. A copy of the Articles of Association of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 1 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 2. A COPY OF THE CERTIFICATE OF AUTHORITY OF THE TRUSTEE TO COMMENCE BUSINESS, IF NOT CONTAINED IN THE ARTICLES OF ASSOCIATION. A copy of a Statement from the Commissioner of Banks of Massachusetts that no certificate of authority for the trustee to commence business was necessary or issued is on file with the Securities and Exchange Commission as Exhibit 2 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 3. A COPY OF THE AUTHORIZATION OF THE TRUSTEE TO EXERCISE CORPORATE TRUST POWERS, IF SUCH AUTHORIZATION IS NOT CONTAINED IN THE DOCUMENTS SPECIFIED IN PARAGRAPH (1) OR (2), ABOVE. A copy of the authorization of the trustee to exercise corporate trust powers is on file with the Securities and Exchange Commission as Exhibit 3 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 4. A COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE, OR INSTRUMENTS CORRESPONDING THERETO. A copy of the by-laws of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 4 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Eastern Edison Company (File No. 33-37823) and is incorporated herein by reference thereto. 1 3 5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4. IF THE OBLIGOR IS IN DEFAULT. Not applicable. 6. THE CONSENTS OF UNITED STATES INSTITUTIONAL TRUSTEES REQUIRED BY SECTION 321(b) OF THE ACT. The consent of the trustee required by Section 321(b) of the Act is annexed hereto as Exhibit 6 and made a part hereof. 7. A COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED PURSUANT TO LAW OR THE REQUIREMENTS OF ITS SUPERVISING OR EXAMINING AUTHORITY. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority is annexed hereto as Exhibit 7 and made a part hereof. NOTES In answering any item of this Statement of Eligibility which relates to matters peculiarly within the knowledge of the obligor or any underwriter for the obligor, the trustee has relied upon information furnished to it by the obligor and the underwriters, and the trustee disclaims responsibility for the accuracy or completeness of such information. The answer furnished to Item 2. of this statement will be amended, if necessary, to reflect any facts which differ from those stated and which would have been required to be stated if known at the date hereof. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the trustee, State Street Bank and Trust Company, a corporation organized and existing under the laws of The Commonwealth of Massachusetts, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Boston and The Commonwealth of Massachusetts, on the 2nd day of June, 1998. STATE STREET BANK AND TRUST COMPANY By: /S/ PAUL D. ALLEN ----------------------------------------- PAUL D. ALLEN VICE PRESIDENT 2 4 EXHIBIT 6 CONSENT OF THE TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939, as amended, in connection with the proposed issuance by FIRST BANKS AMERICA, INC. of its % SUBORDINATED DEBENTURES, we hereby consent that reports of examination by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. STATE STREET BANK AND TRUST COMPANY By: /S/ PAUL D. ALLEN ------------------------------------- PAUL D. ALLEN VICE PRESIDENT DATED: JUNE 2, 1998 3 5 EXHIBIT 7 Consolidated Report of Condition of State Street Bank and Trust Company, Massachusetts and foreign and domestic subsidiaries, a state banking institution organized and operating under the banking laws of this commonwealth and a member of the Federal Reserve System, at the close of business December 31, 1997, ----------------- published in accordance with a call made by the Federal Reserve Bank of this District pursuant to the provisions of the Federal Reserve Act and in accordance with a call made by the Commissioner of Banks under General Laws, Chapter 172, Section 22(a).
Thousands of ASSETS Dollars Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coin 2,220,829 Interest-bearing balances 10,076,045 Securities 10,373,821 Federal funds sold and securities purchased under agreements to resell in domestic offices of the bank and its Edge subsidiary 5,124,310 Loans and lease financing receivables: Loans and leases, net of unearned income 6,270,348 Allowance for loan and lease losses 82,820 Allocated transfer risk reserve 0 Loans and leases, net of unearned income and allowances 6,187,528 Assets held in trading accounts 1,241,555 Premises and fixed assets 410,029 Other real estate owned 100 Investments in unconsolidated subsidiaries 38,831 Customers' liability to this bank on acceptances outstanding 44,962 Intangible assets 224,049 Other assets 1,507,650 ----------- Total assets 37,449,709 ============== LIABILITIES Deposits: In domestic offices 10,115,205 Noninterest-bearing 7,739,136 Interest-bearing 2,376,069 In foreign offices and Edge subsidiary 14,791,134 Noninterest-bearing 71,889 Interest-bearing 14,719,245 Federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge subsidiary 7,603,920 Demand notes issued to the U.S. Treasury and Trading Liabilities 194,059 Trading liabilities 1,036,905 Other borrowed money 459,252 Subordinated notes and debentures 0 Bank's liability on acceptances executed and outstanding 44,962 Other liabilities 972,782 Total liabilities 35,218,219 ----------- EQUITY CAPITAL Perpetual preferred stock and related surplus 0 Common stock 29,931 Surplus 444,620 Undivided profits and capital reserves/Net unrealized holding gains (losses) 1,763,076 Cumulative foreign currency translation adjustments (6,137) Total equity capital 2,231,490 ----------- Total liabilities and equity capital 37,449,709 -----------
4 6 I, Rex S. Schuette, Senior Vice President and Comptroller of the above named bank do hereby declare that this Report of Condition has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true to the best of my knowledge and belief. Rex S. Schuette We, the undersigned directors, attest to the correctness of this Report of Condition and declare that it has been examined by us and to the best of our knowledge and belief has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true and correct. David A. Spina Marshall N. Carter Truman S. Casner 5 EX-25.2 19 FORM T-1 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM T-1 ---------- STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE Check if an Application to Determine Eligibility of a Trustee Pursuant to Section 305(b)(2) -- STATE STREET BANK AND TRUST COMPANY (Exact name of trustee as specified in its charter) Massachusetts 04-1867445 (Jurisdiction of incorporation or (I.R.S. Employer organization if not a U.S. national bank) Identification No.) 225 Franklin Street, Boston, Massachusetts 02110 (Address of principal executive offices) (Zip Code) Maureen Scannell Bateman, Esq. Executive Vice President and General Counsel 225 Franklin Street, Boston, Massachusetts 02110 (617) 654-3253 (Name, address and telephone number of agent for service) --------------------- FIRST AMERICA CAPITAL TRUST (Exact name of obligor as specified in its charter) Delaware xx-xxxxxxx (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 135 North Meramec, Clayton, Missouri 63105 (314) 854-4600 (Address of principal executive offices) (Zip Code) -------------------- PREFERRED SECURITIES (Title of indenture securities) 2 GENERAL ITEM 1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE: (A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISORY AUTHORITY TO WHICH IT IS SUBJECT. Department of Banking and Insurance of The Commonwealth of Massachusetts, 100 Cambridge Street, Boston, Massachusetts. Board of Governors of the Federal Reserve System, Washington, D.C., Federal Deposit Insurance Corporation, Washington, D.C. (B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS. Trustee is authorized to exercise corporate trust powers. ITEM 2. AFFILIATIONS WITH OBLIGOR. IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. The obligor is not an affiliate of the trustee or of its parent, State Street Boston Corporation. (See note on page 2.) ITEM 3. THROUGH ITEM 15. NOT APPLICABLE. ITEM 16. LIST OF EXHIBITS. LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF ELIGIBILITY. 1. A COPY OF THE ARTICLES OF ASSOCIATION OF THE TRUSTEE AS NOW IN EFFECT. A copy of the Articles of Association of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 1 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 2. A COPY OF THE CERTIFICATE OF AUTHORITY OF THE TRUSTEE TO COMMENCE BUSINESS, IF NOT CONTAINED IN THE ARTICLES OF ASSOCIATION. A copy of a Statement from the Commissioner of Banks of Massachusetts that no certificate of authority for the trustee to commence business was necessary or issued is on file with the Securities and Exchange Commission as Exhibit 2 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 3. A COPY OF THE AUTHORIZATION OF THE TRUSTEE TO EXERCISE CORPORATE TRUST POWERS, IF SUCH AUTHORIZATION IS NOT CONTAINED IN THE DOCUMENTS SPECIFIED IN PARAGRAPH (1) OR (2), ABOVE. A copy of the authorization of the trustee to exercise corporate trust powers is on file with the Securities and Exchange Commission as Exhibit 3 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 4. A COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE, OR INSTRUMENTS CORRESPONDING THERETO. A copy of the by-laws of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 4 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Eastern Edison Company (File No. 33-37823) and is incorporated herein by reference thereto. 1 3 5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4. IF THE OBLIGOR IS IN DEFAULT. Not applicable. 6. THE CONSENTS OF UNITED STATES INSTITUTIONAL TRUSTEES REQUIRED BY SECTION 321(b) OF THE ACT. The consent of the trustee required by Section 321(b) of the Act is annexed hereto as Exhibit 6 and made a part hereof. 7. A COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED PURSUANT TO LAW OR THE REQUIREMENTS OF ITS SUPERVISING OR EXAMINING AUTHORITY. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority is annexed hereto as Exhibit 7 and made a part hereof. NOTES In answering any item of this Statement of Eligibility which relates to matters peculiarly within the knowledge of the obligor or any underwriter for the obligor, the trustee has relied upon information furnished to it by the obligor and the underwriters, and the trustee disclaims responsibility for the accuracy or completeness of such information. The answer furnished to Item 2. of this statement will be amended, if necessary, to reflect any facts which differ from those stated and which would have been required to be stated if known at the date hereof. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the trustee, State Street Bank and Trust Company, a corporation organized and existing under the laws of The Commonwealth of Massachusetts, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Boston and The Commonwealth of Massachusetts, on the 2nd day of June, 1998. STATE STREET BANK AND TRUST COMPANY By: /S/ PAUL D. ALLEN -------------------------------------- PAUL D. ALLEN VICE PRESIDENT 2 4 EXHIBIT 6 CONSENT OF THE TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939, as amended, in connection with the proposed issuance by FIRST BANKS AMERICA CAPITAL TRUST of its PREFERRED SECURITIES, we hereby consent that reports of examination by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. STATE STREET BANK AND TRUST COMPANY By: /S/ PAUL D. ALLEN --------------------------------- PAUL D. ALLEN VICE PRESIDENT DATED: JUNE 2, 1998 3 5 EXHIBIT 7 Consolidated Report of Condition of State Street Bank and Trust Company, Massachusetts and foreign and domestic subsidiaries, a state banking institution organized and operating under the banking laws of this commonwealth and a member of the Federal Reserve System, at the close of business December 31, 1997, published in accordance with a call made by the ----------------- Federal Reserve Bank of this District pursuant to the provisions of the Federal Reserve Act and in accordance with a call made by the Commissioner of Banks under General Laws, Chapter 172, Section 22(a).
Thousands of ASSETS Dollars Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coin 2,220,829 Interest-bearing balances 10,076,045 Securities 10,373,821 Federal funds sold and securities purchased under agreements to resell in domestic offices of the bank and its Edge subsidiary 5,124,310 Loans and lease financing receivables: Loans and leases, net of unearned income 6,270,348 Allowance for loan and lease losses 82,820 Allocated transfer risk reserve 0 Loans and leases, net of unearned income and allowances 6,187,528 Assets held in trading accounts 1,241,555 Premises and fixed assets 410,029 Other real estate owned 100 Investments in unconsolidated subsidiaries 38,831 Customers' liability to this bank on acceptances outstanding 44,962 Intangible assets 224,049 Other assets 1,507,650 ------------ Total assets 37,449,709 =============== LIABILITIES Deposits: In domestic offices 10,115,205 Noninterest-bearing 7,739,136 Interest-bearing 2,376,069 In foreign offices and Edge subsidiary 14,791,134 Noninterest-bearing 71,889 Interest-bearing 14,719,245 Federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge subsidiary 7,603,920 Demand notes issued to the U.S. Treasury and Trading Liabilities 194,059 Trading liabilities 1,036,905 Other borrowed money 459,252 Subordinated notes and debentures 0 Bank's liability on acceptances executed and outstanding 44,962 Other liabilities 972,782 Total liabilities 35,218,219 ------------ EQUITY CAPITAL Perpetual preferred stock and related surplus 0 Common stock 29,931 Surplus 444,620 Undivided profits and capital reserves/Net unrealized holding gains (losses) 1,763,076 Cumulative foreign currency translation adjustments (6,137) Total equity capital 2,231,490 ------------ Total liabilities and equity capital 37,449,709 ------------
4 6 I, Rex S. Schuette, Senior Vice President and Comptroller of the above named bank do hereby declare that this Report of Condition has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true to the best of my knowledge and belief. Rex S. Schuette We, the undersigned directors, attest to the correctness of this Report of Condition and declare that it has been examined by us and to the best of our knowledge and belief has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true and correct. David A. Spina Marshall N. Carter Truman S. Casner 5 EX-25.3 20 FORM T-1 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM T-1 --------- STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE Check if an Application to Determine Eligibility of a Trustee Pursuant to Section 305(b)(2) -- STATE STREET BANK AND TRUST COMPANY (Exact name of trustee as specified in its charter) Massachusetts 04-1867445 (Jurisdiction of incorporation or (I.R.S. Employer organization if not a U.S. national bank) Identification No.) 225 Franklin Street, Boston, Massachusetts 02110 (Address of principal executive offices) (Zip Code) Maureen Scannell Bateman, Esq. Executive Vice President and General Counsel 225 Franklin Street, Boston, Massachusetts 02110 (617) 654-3253 (Name, address and telephone number of agent for service) --------------------- FIRST BANKS AMERICA, INC. (Exact name of obligor as specified in its charter) Delaware 75-1604965 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 135 North Meramec, Clayton, Missouri 63105 (314) 854-4600 (Address of principal executive offices) (Zip Code) -------------------- GUARANTEE (Title of indenture securities) 2 GENERAL ITEM 1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE: (A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISORY AUTHORITY TO WHICH IT IS SUBJECT. Department of Banking and Insurance of The Commonwealth of Massachusetts, 100 Cambridge Street, Boston, Massachusetts. Board of Governors of the Federal Reserve System, Washington, D.C., Federal Deposit Insurance Corporation, Washington, D.C. (B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS. Trustee is authorized to exercise corporate trust powers. ITEM 2. AFFILIATIONS WITH OBLIGOR. IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. The obligor is not an affiliate of the trustee or of its parent, State Street Boston Corporation. (See note on page 2.) ITEM 3. THROUGH ITEM 15. NOT APPLICABLE. ITEM 16. LIST OF EXHIBITS. LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF ELIGIBILITY. 1. A COPY OF THE ARTICLES OF ASSOCIATION OF THE TRUSTEE AS NOW IN EFFECT. A copy of the Articles of Association of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 1 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 2. A COPY OF THE CERTIFICATE OF AUTHORITY OF THE TRUSTEE TO COMMENCE BUSINESS, IF NOT CONTAINED IN THE ARTICLES OF ASSOCIATION. A copy of a Statement from the Commissioner of Banks of Massachusetts that no certificate of authority for the trustee to commence business was necessary or issued is on file with the Securities and Exchange Commission as Exhibit 2 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 3. A COPY OF THE AUTHORIZATION OF THE TRUSTEE TO EXERCISE CORPORATE TRUST POWERS, IF SUCH AUTHORIZATION NOT CONTAINED IN THE DOCUMENTS SPECIFIED IN PARAGRAPH (1) OR (2), ABOVE. A copy of the authorization of the trustee to exercise corporate trust powers is on file with the Securities and Exchange Commission as Exhibit 3 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 4. A COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE, OR INSTRUMENTS CORRESPONDING THERETO. A copy of the by-laws of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 4 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Eastern Edison Company (File No. 33-37823) and is incorporated herein by reference thereto. 1 3 5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4. IF THE OBLIGOR IS IN DEFAULT. Not applicable. 6. THE CONSENTS OF UNITED STATES INSTITUTIONAL TRUSTEES REQUIRED BY SECTION 321(b) OF THE ACT. The consent of the trustee required by Section 321(b) of the Act is annexed hereto as Exhibit 6 and made a part hereof. 7. A COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED PURSUANT TO LAW OR THE REQUIREMENTS OF ITS SUPERVISING OR EXAMINING AUTHORITY. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority is annexed hereto as Exhibit 7 and made a part hereof. NOTES In answering any item of this Statement of Eligibility which relates to matters peculiarly within the knowledge of the obligor or any underwriter for the obligor, the trustee has relied upon information furnished to it by the obligor and the underwriters, and the trustee disclaims responsibility for the accuracy or completeness of such information. The answer furnished to Item 2. of this statement will be amended, if necessary, to reflect any facts which differ from those stated and which would have been required to be stated if known at the date hereof. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the trustee, State Street Bank and Trust Company, a corporation organized and existing under the laws of The Commonwealth of Massachusetts, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Boston and The Commonwealth of Massachusetts, on the 2nd day of June, 1998. STATE STREET BANK AND TRUST COMPANY By: /S/ PAUL D. ALLEN ------------------------------------------- PAUL D. ALLEN VICE PRESIDENT 2 4 EXHIBIT 6 CONSENT OF THE TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939, as amended, in connection with the proposed issuance by FIRST BANKS AMERICA, INC. of its GUARANTEE, we hereby consent that reports of examination by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. STATE STREET BANK AND TRUST COMPANY By: /S/ PAUL D. ALLEN --------------------------------------------- PAUL D. ALLEN VICE PRESIDENT DATED: JUNE 2, 1998 3 5 EXHIBIT 7 Consolidated Report of Condition of State Street Bank and Trust Company, Massachusetts and foreign and domestic subsidiaries, a state banking institution organized and operating under the banking laws of this commonwealth and a member of the Federal Reserve System, at the close of business December 31, 1997, published in accordance with a call made by the ----------------- Federal Reserve Bank of this District pursuant to the provisions of the Federal Reserve Act and in accordance with a call made by the Commissioner of Banks under General Laws, Chapter 172, Section 22(a).
Thousands of ASSETS Dollars Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coin 2,220,829 Interest-bearing balances 10,076,045 Securities 10,373,821 Federal funds sold and securities purchased under agreements to resell in domestic offices of the bank and its Edge subsidiary 5,124,310 Loans and lease financing receivables: Loans and leases, net of unearned income 6,270,348 Allowance for loan and lease losses 82,820 Allocated transfer risk reserve 0 Loans and leases, net of unearned income and allowances 6,187,528 Assets held in trading accounts 1, 241,555 Premises and fixed assets 410,029 Other real estate owned 100 Investments in unconsolidated subsidiaries 38,831 Customers' liability to this bank on acceptances outstanding 44,962 Intangible assets 224,049 Other assets 1,507,650 ------------ Total assets 37,449,709 =============== LIABILITIES Deposits: In domestic offices 10,115,205 Noninterest-bearing 7,739,136 Interest-bearing 2,376,069 In foreign offices and Edge subsidiary 14,791,134 Noninterest-bearing 71,889 Interest-bearing 14,719,245 Federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge subsidiary 7,603,920 Demand notes issued to the U.S. Treasury and Trading Liabilities 194,059 Trading liabilities 1,036,905 Other borrowed money 459,252 Subordinated notes and debentures 0 Bank's liability on acceptances executed and outstanding 44,962 Other liabilities 972,782 Total liabilities 35,218,219 ------------ EQUITY CAPITAL Perpetual preferred stock and related surplus 0 Common stock 29,931 Surplus 444,620 Undivided profits and capital reserves/Net unrealized holding gains (losses) 1,763,076 Cumulative foreign currency translation adjustments (6,137) Total equity capital 2,231,490 ------------ Total liabilities and equity capital 37,449,709 ------------
4 6 I, Rex S. Schuette, Senior Vice President and Comptroller of the above named bank do hereby declare that this Report of Condition has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true to the best of my knowledge and belief. Rex S. Schuette We, the undersigned directors, attest to the correctness of this Report of Condition and declare that it has been examined by us and to the best of our knowledge and belief has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true and correct. David A. Spina Marshall N. Carter Truman S. Casner 5 -----END PRIVACY-ENHANCED MESSAGE-----