-----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, A32px85DeA67+vUbVQ8rm+sQRaEG9kNEX+8u+HPdIL3LQv7Cc3L8jz1zwCzfY7RU u1ZqlvbF8Cbb6Uvkg+xNjw== 0000710507-98-000004.txt : 19980330 0000710507-98-000004.hdr.sgml : 19980330 ACCESSION NUMBER: 0000710507-98-000004 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST BANKS INC CENTRAL INDEX KEY: 0000710507 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 431175538 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 033-50576 FILM NUMBER: 98575081 BUSINESS ADDRESS: STREET 1: 135 N MERAMEC AVE CITY: ST LOUIS STATE: MO ZIP: 63105 BUSINESS PHONE: 3148544600 MAIL ADDRESS: STREET 1: 135 N MERAMEC AVE CITY: ST LOUIS STATE: MO ZIP: 63105 10-K405 1 FORM 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to ________ Commission File No. 0-20632 FIRST BANKS, INC. ----------------- (Exact Name of registrant as specified in its charter) MISSOURI 43-1175538 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 135 North Meramec, Clayton, MO 63105 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (314) 854-4600 -------------------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ------------------- None N/A Securities registered pursuant to Section 12(g) of the Act: 9.25% Cumulative Trust Preferred Securities (issued by First Preferred Capital Trust and guaranteed by its parent, First Banks, Inc.) (Title or class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ X ] None of the voting stock of the Company is held by non-affiliates. All of the voting stock of the Company is owned by various trusts which were created by and for the benefit of Mr. James F. Dierberg, the Company's Chairman of the Board of Directors, President and Chief Executive Officer, and members of his immediate family. At March 25, 1998 there were 23,661 shares of the registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the fiscal year ended December 31, 1997 (the "1997 Annual Report to Shareholders") are incorporated by reference into Parts I and II. PART I Information appearing in this report, in documents incorporated by reference herein and in documents subsequently filed with the Securities and Exchange Commission which are not statements of historical fact may include forward looking statements. Such forward-looking statements are subject to certain risks and uncertainties, not all of which can be predicted or anticipated. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include general market conditions as well as conditions affecting the banking industry generally and factors having a specific impact on the Company, including but not limited to fluctuations in interest rates and in the economy; the impact of laws and regulations applicable to the Company and changes therein; competitive conditions in the markets in which the Company conducts its operations; and the ability of the Company to respond to changes in technology. With regard to the Company's efforts to grow through acquisitions, factors that could affect the accuracy or completeness of such forward-looking statements include the potential for higher than acceptable operating costs arising from the geographic dispersion of the offices of First Banks, Inc.'s subsidiaries, as compared with competitors operating solely in contiguous markets; the competition of larger acquirers with greater resources than First Banks; fluctuations in the prices at which acquisition targets may be available for sale and in the market for First Banks' securities, and the potential for difficulty or unanticipated costs in realizing the benefits of particular acquisition transactions. Readers should therefore not place undue reliance on forward-looking statements. Item 1. Business General First Banks, Inc. ("First Banks" or the "Company"), incorporated in Missouri in 1978, is headquartered in St. Louis, Missouri and is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). At December 31, 1997, First Banks had $4.17 billion in total assets, $3.00 billion in total loans, net of unearned discount, $3.68 billion in total deposits and $231.5 million in total stockholders' equity. First Banks operates through its subsidiary financial institutions and bank holding companies (the "Subsidiary Banks") as follows: FirstBank, headquartered in St. Louis County, Missouri ("First Bank"). First Banks America, Inc., headquartered in St. Louis County, Missouri ("FBA"),and its wholly owned subsidiaries: BankTEXAS N. A., headquartered in Houston, Texas ("BankTEXAS"). First Bank of California, headquartered in Roseville, California ("FB California"). CCB Bancorp, Inc., headquartered in Irvine, California ("CCB"), and its wholly owned subsidiary: First Bank & Trust, headquartered in Irvine, California ("FB&T"). First Commercial Bancorp, Inc., headquartered in Sacramento, California ("FCB"), and its wholly owned subsidiary: First Commercial Bank, headquartered in Sacramento, California ("First Commercial"). All of the Subsidiary Banks are wholly owned by their respective parents except FBA and FCB, which were 65.85% and 61.48% owned, respectively, by First Banks at December 31, 1997. As discussed under "--Acquisitions" in the 1997 Annual Report to Shareholders, incorporated herein by reference, FB California is a newly-formed California state bank resulting from the merger of Sunrise Bank of California, which was acquired by FBA on November 1, 1996 and Surety Bank, Vallejo, California, which was acquired by FBA on December 1, 1997. In February 1998, FCB was acquired by FBA, and its subsidiary bank, First Commercial, was merged into FB California. Through the Subsidiary Banks, First Banks offers a broad range of commercial and personal banking services including certificate of deposit accounts, individual retirement and other time deposit accounts, checking and other demand deposit accounts, interest checking accounts, savings accounts and money market accounts. Loans include commercial, financial and agricultural, real estate construction and development, commercial and residential real estate, consumer and installment, student and Small Business Administration loans. Other financial services include mortgage banking, credit cards, discount brokerage, credit-related insurance, automatic teller machines, telephone account access, safe deposit boxes, trust and private banking services, and cash management services. First Banks centralizes overall corporate policies, procedures and administrative and operational support functions for the Subsidiary Banks. Primary responsibility for managing the Subsidiary Banks remains with their officers and directors.
The following table lists the Subsidiary Banks at December 31, 1997: Loans, net of Number of Total unearned Total Subsidiary Banks locations assets discount deposits ---------------- --------- ------ -------- -------- (dollars expressed in thousands) First Bank...................................... 98 $2,843,575 2,185,493 2,559,968 FBA: BankTEXAS................................... 6 267,152 176,341 231,175 FB California............................... 4 179,999 137,096 152,825 CCB: FB&T........................................ 17 672,410 385,251 598,560 FCB: First Commercial............................ 6 190,918 118,018 172,737
As described under "--Financial Condition and Average Balances" in the 1997 Annual Report to Shareholders, incorporated herein by reference, on February 3, 1997, First Preferred Capital Trust ("First Trust"), a Delaware statutory business trust, issued 3,450,000 shares of 9.25% cumulative trust preferred securities ("Preferred Securities") for $86.25 million. In addition, First Trust issued $2.7 million of common securities which are owned by First Banks. The Preferred Securities are publicly held and listed on the Nasdaq Stock Market's National Market System. The Preferred Securities have no voting rights except in certain limited circumstances. On December 1, 1997, First Banks redeemed all of the outstanding Class C, 9.00% increasing rate, redeemable, cumulative preferred stock ("Class C Preferred Stock") which had previously been publicly held and listed on the Nasdaq Stock Market's National Market System. As described in Note 17 to the consolidated financial statements of the 1997 Annual Report to Shareholders, incorporated herein by reference, FBA and FCB were merged. The merger of FBA and FCB will not have a significant impact on the financial condition or results of operations of First Banks. The Company, Mr. Dierberg and an affiliate of Mr. Dierberg own 18.55%, 0.20% and 4.44%, respectively, of the outstanding shares of common stock of Southside Bancshares Corporation ("Southside") located in St. Louis, Missouri. The shares of Southside are currently held for investment purposes. The voting stock of First Banks is owned by various trusts which were created by and are administered by and for the benefit of Mr. James F. Dierberg, First Banks' Chairman of the Board, President and Chief Executive Officer, and members of his immediate family. Accordingly, Mr. Dierberg controls the management and policies of First Banks and the election of its directors. The Preferred Securities are publicly held and listed on the Nasdaq Stock Market's National Market. The Preferred Securities have no voting rights except in certain limited circumstances. For a description of the business of First Banks during the past year, see "Management's Discussion and Analysis - General" in the 1997 Annual Report to Shareholders, incorporated herein by reference. Acquisitions Prior to 1994, First Banks' acquisitions had been concentrated within its primary market area of eastern Missouri and central and southern Illinois. The premiums required to successfully pursue acquisitions escalated sharply in 1993, reducing dramatically the economic viability of many potential acquisitions in that area. Recognizing this, First Banks began to expand the geographic area in which it approached acquisition candidates. While First Banks was successful in making acquisitions in Chicago and northern Illinois, it became apparent that acquisition pricing, in Chicago and other areas being considered, was comparable to that of First Banks' primary acquisition area. As a result, while First Banks continued to pursue acquisitions within these areas, it turned much of its attention in 1994 and 1995 to institutions which could be acquired at more attractive prices which were within major metropolitan areas outside of its immediate market area. This led to the acquisition of a financial institution which had offices in Dallas and Houston, Texas in 1994 and several acquisitions of financial institutions which had offices in Los Angeles, Orange County, Santa Barbara, San Francisco, San Jose and Sacramento, California in 1995, 1996 and 1997. During 1997, 1996 and 1995, First Banks completed nine acquisitions and two deposit purchases. These transactions provided total assets of $1.41 billion and 39 banking locations. For a description of the acquisitions completed during the three years ended December 31, 1997, see "Management's Discussion and Analysis - Acquisitions" and Note 2 to the consolidated financial statements of the 1997 Annual Report to Shareholders, incorporated herein by reference. Market Area As of December 31, 1997, the Subsidiary Banks' 131 banking facilities were located throughout eastern Missouri, Illinois, California and Texas. First Banks' primary market area is the St. Louis, Missouri metropolitan area. First Banks' second and third largest market areas are central and southern Illinois and southern and northern California, respectively. First Banks also has locations in the Houston, Dallas, Irving and McKinney, Texas metropolitan areas, rural eastern Missouri and the greater Chicago, Illinois metropolitan area.
The following table lists the market areas in which the Subsidiary Banks operate, total deposits and number of locations as of December 31, 1997: Total Deposits deposits as percent No. of Geographic area (in millions) of total locations --------------- ------------- -------- --------- St. Louis, Missouri Metropolitan Area (1)................. $ 801.9 21.8% 27 Rural Eastern Missouri (1)................................ 343.2 9.3 16 Central and Southern Illinois (1)......................... 1,030.5 27.9 38 Northern Illinois (1)..................................... 354.1 9.6 17 Texas (2)................................................. 231.2 6.3 6 Southern and Central California (3)....................... 566.6 15.4 15 Northern California (4)................................... 357.1 9.7 12 --------- ------ ----- Total Deposits....................................... $ 3,684.6 100.0% 131 ========= ===== =====
- ---------------------- (1) First Bank operates in the St. Louis metropolitan market area, in rural eastern Missouri, in central and southern Illinois and in northern Illinois, including Chicago. (2) BankTEXAS operates in the Houston, Dallas and McKinney metropolitan areas. (3) FB&T operates in the greater Los Angeles metropolitan area, including Orange County, California. Three of the branches are also located in Santa Barbara County, California. (4) FB&T and FB California operate in northern California, including the greater San Francisco, San Jose and Sacramento metropolitan market areas. Lending Activities Lending activities are conducted pursuant to a written loan policy which has been adopted by each of the Subsidiary Banks. Each loan officer has a defined lending authority and loans made by each such officer must be reviewed by a loan committee of the banking facility at which the loan officer is located, the Subsidiary Bank's Board of Directors or the Central Finance Committee of the Company, depending upon the amount of the loan request. Loan requests for amounts in excess of $4,000,000, and loan requests for amounts in excess of $1,000,000 where the aggregate indebtedness of the borrower exceeds $8,000,000, must also be approved by the Company's Chairman of the Board or Chief Financial Officer. Generally, loans are limited to borrowers residing or doing business in the immediate market area of the originating Subsidiary Bank. The Company's policy is for each Subsidiary Bank to meet the quality loan demand and credit needs of its local community before it considers the purchase of loan participations from an affiliate. The Company offers the following types of loans: commercial, financial, agricultural, real estate construction and development, commercial and residential real estate, consumer and installment loans. The loan portfolio composition for the five years ended December 31, 1997 is included under "Management's Discussion and Analysis - Loans and Allowance for Possible Loan Losses" in the 1997 Annual Report to Shareholders, incorporated herein by reference. Mortgage Banking Operations Through the First Bank Mortgage division ("First Bank Mortgage") of First Bank, the Company provides mortgage banking services. First Bank Mortgage originates, underwrites, closes and services a full line of residential mortgage loan products, both for the portfolios of First Bank and the Company's other Subsidiary Banks and for resale in the secondary mortgage market. In addition, First Bank Mortgage acquires loans originated by the other Subsidiary Banks or by unrelated entities, which it then underwrites and services. For a summary of the mortgage banking activities of First Banks, see "Management's Discussion and Analysis Mortgage Banking Activities" in the 1997 Annual Report to Shareholders, incorporated herein by reference. Investment Portfolio The Company has established a written investment policy which has been adopted by the Subsidiary Banks and is reviewed annually. The investment policy identifies investment criteria and states specific objectives in terms of risk, interest rate sensitivity, and liquidity. The investment policy directs management of the Subsidiary Banks to consider, among other criteria, the quality, term, and marketability of the securities acquired for their respective investment portfolios. The investment portfolio composition is presented in Note 3 to the consolidated financial statements of the 1997 Annual Report to Shareholders, incorporated herein by reference. Deposits The Company's deposits consist principally of core deposits from the local market areas of the Subsidiary Banks. The Subsidiary Banks do not accept brokered deposits, except for any such deposits which acquired institutions may have had prior to their acquisition by the Company. A table illustrating the distribution of the Company's deposit accounts and the weighted average nominal interest rates on each category of deposits for the three years ending December 31, 1997 is included under "Management's Discussion and Analysis - Deposits" in the 1997 Annual Report to Shareholders, incorporated herein by reference. Competition and Branch Banking The activities in which the Subsidiary Banks engage are highly competitive. Those activities and the geographic markets served involve primarily competition with other banks, some of which are affiliated with large bank holding companies. Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans and other credit and service charges, the quality of services rendered, the convenience of banking facilities and, in the case of loans to large commercial borrowers, relative lending limits. In addition to competing with other banks within their primary service areas, the Subsidiary Banks also compete with other financial intermediaries, such as thrifts, credit unions, industrial loan associations, securities firms, insurance companies, small loan companies, finance companies, mortgage companies, real estate investment trusts, certain governmental agencies, credit organizations and other enterprises. Additional competition for depositors' funds comes from United States Government securities, private issuers of debt obligations and suppliers of other investment alternatives for depositors. Many of the Company's non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally-insured banks and thrifts and state regulations governing state-chartered banks and thrifts. As a result, such non-bank competitors may have certain advantages over the Company in providing some services. The trend in Missouri, Illinois, California and Texas has been for multi-bank holding companies to acquire independent banks and thrifts in communities throughout these states. The Company believes it will continue to face competition in the acquisition of such banks and thrifts from bank holding companies based in those states and from bank holding companies based in other states under interstate banking laws. Many of the financial institutions with which the Company competes are larger than the Company and have substantially greater resources available for making acquisitions. Subject to regulatory approval, commercial banks situated in Missouri, Illinois, California and Texas are permitted to establish branches throughout their respective states, thereby creating the potential for additional competition in the services areas of the Subsidiary Banks. Supervision and Regulation General The Company and its Subsidiary Banks are extensively regulated under federal and state law. These laws and regulations are intended to protect depositors, not shareholders. To the extent the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable laws or regulations may have a material effect on the business and prospects of the Company. The operations of the Company may be affected by legislative changes and by the policies of various regulatory authorities. The Company is unable to predict the nature or the extent of the effects on its business and earnings that fiscal or monetary policies, economic controls or new federal or state legislation may have in the future. The Company is a registered bank holding company under the BHC Act, and, as such, is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System (the "FRB"). The Company is required to file annual reports with the FRB and to provide additional information as it may require. The Company's state-chartered Subsidiary Banks (First Bank, FB&T and FB California) are subject to supervision and regulation by the bank supervisory authorities in their respective states and also by their respective primary federal bank regulators. The primary such regulator for First Bank, as a member of the Federal Reserve System, is the FRB, while the primary federal bank regulator for FB&T and FB California, which are not members of the Federal Reserve System, is the Federal Deposit Insurance Corporation (the "FDIC"). BankTEXAS, a national banking association, is subject to the supervision and regulation of the Office of the Comptroller of the Currency (the "OCC"). Because the FDIC provides deposit insurance to the Company's depository subsidiary financial institutions, they are also subject to supervision and regulation by the FDIC, even where the FDIC is not their primary federal regulator. Recent and Pending Legislation. The enactment of the legislation described below has significantly affected the banking industry generally and will have an ongoing effect on the Company and its Subsidiary Banks in the future. Financial Institutions Reform, Recovery, and Enforcement Act of 1989. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") reorganized and reformed the regulatory structure applicable to financial institutions generally. Among other things, FIRREA: (i) enhanced the supervisory and enforcement powers for the federal bank regulatory agencies; (ii) required insured financial institutions to guaranty repayment of losses incurred by the FDIC in connection with the failure of an affiliated financial institution; (iii) required financial institutions to provide their primary federal regulator with notice, under certain circumstances, of changes in senior management; and (iv) broadened authority for bank holding companies to acquire savings institutions. Under FIRREA, federal bank regulators were granted expanded enforcement authority over "institution-affiliated parties" (i.e., officers, directors, controlling stockholders, as well as attorneys, appraisers or accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution). Federal banking regulators have greater flexibility to bring enforcement actions against insured institutions and institution-affiliated parties, including cease and desist orders, prohibition orders, civil money penalties, termination of insurance and the imposition of operating restrictions and capital plan requirements. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Since the enactment of FIRREA, the federal bank regulators have significantly increased the use of written agreements to correct compliance deficiencies with respect to applicable laws and regulations and to ensure safe and sound practices. Violations of such written agreements are grounds for initiation of cease-and-desist proceedings. FIRREA granted the FDIC back-up enforcement authority to recommend enforcement action to an appropriate federal banking agency and to bring such enforcement action against a financial institution or an institution-affiliated party if such federal banking agency fails to follow the FDIC's recommendation. In addition, FIRREA requires, except under certain circumstances, public disclosure of final enforcement actions by the federal banking agencies. FIRREA also established a cross guarantee provision pursuant to which the FDIC may recover from a depository institution losses the FDIC incurs in providing assistance to, or paying off the depositors of, any of such depository institution's affiliated insured banks or thrifts. The cross guarantee thus enables the FDIC to assess a holding company's healthy Bank Insurance Fund ("BIF") members and Savings Association Insurance Fund ("SAIF") members for the losses of any of such holding company's failed BIF and SAIF members. Cross guarantee liabilities are generally superior in priority to obligations of the depository institution to its stockholders due solely to their status as stockholders and obligations to other affiliates. Cross guarantee liabilities are generally subordinated, except with respect to affiliates, to deposit liabilities, secured obligations or any other general or senior liabilities, and any obligations subordinated to depositors or other general creditors. The Federal Deposit Insurance Corporation Improvement Act of 1991. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was adopted to recapitalize the BIF and impose certain supervisory and regulatory reforms on insured depository institutions. In general, FDICIA includes provisions, among others, to: (i) increase the FDIC's line of credit with the U.S. Treasury in order to provide the FDIC with additional funds to cover the losses of federally insured banks; (ii) reform the deposit insurance system, including the implementation of risk-based deposit insurance premiums; (iii) establish a format for closer monitoring of financial institutions to enable prompt corrective action by banking regulators when a financial institution begins to experience financial difficulty; (iv) establish five capital levels for financial institutions ("well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized") that impose more scrutiny and restrictions on less capitalized institutions; (v) require the banking regulators to set operational and managerial standards for all insured depository institutions and their holding companies, including limits on excessive compensation to executive officers, directors, employees and principal stockholders, and establish standards for loans secured by real estate; (vi) adopt certain accounting reforms and require annual on-site examinations of federally insured institutions, including the ability to require independent audits of banks and thrifts; (vii) revise risk-based capital standards to ensure they (a) take adequate account of interest-rate changes, concentration of credit risk and the risks of nontraditional activities, and (b) reflect the actual performance and expected risk of loss of multi-family mortgages; and (viii) restrict state-chartered banks from engaging in activities not permitted for national banks unless they are adequately capitalized and have FDIC approval. FDICIA also authorized the FDIC to make special assessments on insured depository institutions, in amounts determined by the FDIC to be necessary to give it adequate assessment income to repay amounts borrowed from the U.S. Treasury and other sources or for any other purpose the FDIC deems necessary. FDICIA also grants authority to the FDIC to establish semiannual assessment rates on BIF and SAIF member banks so as to maintain these funds at the designated reserve ratios. FDICIA, as noted above, authorizes and, under certain circumstances, requires the federal banking agencies to take certain actions against institutions that fail to meet certain capital-based requirements. Under FDICIA, the federal banking agencies are required to establish five levels of insured depository institutions based on leverage limit and risk-based capital requirements established for institutions subject to their jurisdiction, plus, in their discretion, individual additional capital requirements for such institutions. Under the final rules that have been adopted by each of the federal banking agencies, an institution is designated: (i) well-capitalized if the institution has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or greater, and the institution is not subject to an order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure; (ii) adequately capitalized if the institution has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater, and a leverage ratio of 4% or greater; (iii) undercapitalized if the institution has a total risk-based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is less than 4%, or a leverage ratio that is less than 4%; (iv) significantly undercapitalized if the institution has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3%, or a leverage ratio that is less than 3%; and (v) critically undercapitalized if the institution has a ratio of tangible equity to total assets that is equal to or less than 2%. Undercapitalized, significantly undercapitalized and critically undercapitalized institutions are required to submit capital restoration plans to the appropriate federal banking agency and are subject to certain operational restrictions. Moreover, companies controlling an undercapitalized institution are required to guarantee the subsidiary institution's compliance with the capital restoration plan subject to an aggregate limitation of the lesser of 5% of the institution's assets at the time it received notice it was undercapitalized or the amount of the capital deficiency when the institution first failed to meet the plan. Significantly or critically undercapitalized institutions and undercapitalized institutions that did not submit or comply with acceptable capital restoration plans are subject to restrictions on the compensation of senior executive officers and to additional regulatory sanctions that may include a forced offering of shares or merger, restrictions on affiliate transactions, restrictions on rates paid on deposits, asset growth and new activities, the dismissal of directors or senior executive officers and mandatory divestitures by the institution or its parent company. The banking agency must require the offering of shares or merger and restrict affiliate transactions and the rates paid on deposits unless it is determined they would not further capital improvement. FDICIA generally requires the appointment of a conservator or receiver within 90 days after an institution becomes critically undercapitalized. The federal banking agencies have adopted uniform procedures for the issuance of directives by the appropriate federal banking agency. Under these procedures, an institution will generally be provided advance notice when the appropriate federal banking agency proposes to impose one or more of the sanctions set forth above. These procedures provide an opportunity for the institution to respond to the proposed agency action or, where circumstances warrant immediate agency action, an opportunity for administrative review of the agency's action. As described in Note 18 to the consolidated financial statements of the 1997 Annual Report to Shareholders, incorporated herein by reference, each of the Company's subsidiary bank depository institutions have, as of December 31, 1997, capital in excess of the requirements for a "well-capitalized" institution. Pursuant to FDICIA, the FRB and the other federal banking agencies adopted real estate lending guidelines pursuant to which each insured depository institution is required to adopt and maintain written real estate lending policies in conformity with the prescribed guidelines. Under these guidelines, each institution is expected to set loan-to-value ratios not exceeding the supervisory limits set forth in the guidelines. A loan-to-value ratio is generally defined as the total loan amount divided by the appraised value of the property at the time the loan is originated. The guidelines require the institution's real estate policy include proper loan documentation, and that it establish prudent underwriting standards. These guidelines became effective on March 19, 1993. These rules have had no material adverse impact on the Company. FDICIA also contained the Truth in Savings Act, which requires clear and uniform disclosure of the rates of interest payable on deposit accounts by depository institutions and the fees assessable against deposit accounts, so that consumers can make a meaningful comparison between the competing claims of financial institutions with regard to deposit accounts and products. Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. In September 1994, Congress enacted the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act"). Beginning in September 1995, bank holding companies have the right to expand, by acquiring existing banks, into all states, even those which had theretofore restricted entry. The legislation also provides that, subject to future action by individual states, a holding company will have the right, commencing in 1997, to convert the banks which its owns in different states to branches of a single bank. A state is permitted to "opt out" of the law which will permit conversion of separate banks to branches, but is not permitted to "opt out" of the law allowing bank holding companies from other states to enter the state of those states in which the Subsidiary Banks are located. Texas has adopted legislation to "opt out" of the interstate branching provisions (which Texas law currently expires on September 2, 1999). The federal legislation also establishes limits on acquisitions by large banking organizations, providing that no acquisition may be undertaken if it would result in the organization having deposits exceeding either 10% of all bank deposits in the United States or 30% of the bank deposits in the state in which the acquisition would occur. Economic Growth and Regulatory Paperwork Reduction Act of 1996. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("EGRPRA") was signed into law on September 30, 1996. EGRPRA streamlined the non-banking activities application process for well-capitalized and well-managed bank holding companies. Under EGRPRA, qualified bank holding companies may commence a regulatory approved non-banking activity without prior notice to the FRB; written notice is required within 10 days after commencing the activity. Under EGRPRA, the prior notice period is reduced to 12 days in the event of any non-banking acquisition or share purchase, assuming the size of the acquisition does not exceed 10% of risk-weighted assets of the acquiring bank holding company and the consideration does not exceed 15% of Tier 1 capital. The FRB has recently announced comprehensive amendments to its regulations under the BHC Act that implement the foregoing provisions of EGRPRA and that also streamline the application / notice process for acquisitions of banks and bank holding companies and eliminate regulatory provisions the FRB considered unnecessary. EGRPRA also provided for the recapitalization of the SAIF in order to bring it into parity with the BIF of the FDIC. First Banks recorded an $8.2 million charge in 1996 for the one-time special deposit insurance assessment. Pending Legislation. Because of concerns relating to competitiveness and the safety and soundness of the banking industry, Congress is considering a number of wide-ranging proposals for altering the structure, regulation and competitive relationships of the nation's financial institutions. Among such bills are new proposals to merge the BIF and the SAIF insurance funds, to eliminate the federal thrift charter, to alter the statutory separation of commercial and investment banking and to further expand the powers of banks, bank holding companies and competitors of banks. It cannot be predicted whether or in what form any of these proposals will be adopted or the extent to which the business of First Banks may be affected thereby. Bank and Bank Holding Company Regulation BHC Act. Under the BHC Act, the activities of a bank holding company are limited to business so closely related to banking, managing or controlling banks as to be a proper incident thereto. The Company is also subject to capital requirements applied on a consolidated basis in a form substantially similar to those required of the Subsidiary Banks. The BHC Act also requires a bank holding company to obtain approval from the FRB before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company. The FRB will not approve any acquisition, merger or consolidation that would have a substantially anticompetitive result, unless the anticompetitive effects of the proposed transaction are clearly outweighed by a greater public interest in meeting the convenience and needs of the community to be served. The FRB also considers capital adequacy and other financial and managerial factors in reviewing acquisitions or mergers. The BHC Act also prohibits a bank holding company, with certain limited exceptions: (i) from acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company; or (ii) from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by FRB regulation or order, have been identified as activities closely related to the business of banking or of managing or controlling banks. In making this determination, the FRB considers whether the performance of such activities by a bank holding company can be expected to produce benefits to the public such as greater convenience, increased competition or gains in efficiency in resources, which can be expected to outweigh the risks of possible adverse effects such as decreased or unfair competition, conflicts of interest or unsound banking practices. FIRREA (described in more detail herein) made a significant addition to this list of permitted non-bank activities for bank holding companies by providing that bank holding companies may acquire thrift institutions upon approval by the FRB and the applicable regulatory authority for the thrift institutions. Insurance of Accounts. The FDIC provides insurance, through the BIF and the SAIF, to deposit accounts at the Subsidiary Banks to a maximum of $100,000 for each insured depositor. Certain of the Subsidiary Banks have deposits which were added through the merger of acquired thrifts. Consequently, First Bank, FB&T and FB California are members of both the BIF and the SAIF while BankTEXAS is a member of the BIF only. Through December 31, 1992, all FDIC-insured institutions, whether members of the BIF, the SAIF or both, paid the same premium (23 cents per $100 of domestic deposits) under a flat-rate system mandated by law. FDICIA required the FDIC to raise the reserves of the BIF and the SAIF, implement a risk related premium system and adopt a long term schedule for recapitalizing the BIF. Effective January 1, 1993, the FDIC amended its regulations regarding insurance premiums to provide that a bank or thrift would pay an insurance assessment within a range of 23 cents to 31 cents per $100 of domestic deposits, depending on its risk classification. Effective January 1, 1996, the FDIC implemented an amendment to the BIF risk-based assessment schedule which effectively eliminated deposit insurance assessments for most commercial banks and other depository institutions with deposits insured by the BIF only, while maintaining the assessment rate for SAIF-insured institutions in even the lowest risk-based premium category at 23 cents for each $100 of assessable deposits. Following enactment of EGRPRA, First Banks paid a one-time special deposit insurance assessment with respect to its SAIF-insured deposits, as part of the recapitalization of the SAIF, and the overall assessment rate for 1997 for institutions in the lowest risk-based premium category was revised to equal 1.29 cents and 6.44 cents for each $100 of assessable deposits of BIF and SAIF, respectively, in comparison to the prior assessment rate for such institutions, applicable only to SAIF deposits, of 23 cents for each $100 of assessable deposits. At this time, the deposit insurance assessment rate for institutions in the lowest risk-based premium category is zero. Amounts paid by institutions in the lowest risk-based premium category are used to service debt issued by the Financing Corporation, a federal agency established to finance the recapitalization of the former Federal Savings and Loan Insurance Corporation Regulations Governing Capital Adequacy. The federal bank regulatory agencies use capital adequacy guidelines in their examination and regulation of bank holding companies and banks. If the capital falls below the minimum levels established by these guidelines, the bank holding company or bank may be denied approval to acquire or establish additional banks or nonbank businesses or to open facilities. The FRB, the FDIC and the OCC adopted risk-based capital guidelines for banks and bank holding companies. The risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profile among banks and bank holding companies, to account for off-balance-sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance-sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items. The FRB has noted that bank holding companies contemplating significant expansion programs should not allow expansion to diminish their capital ratios and should maintain ratios well in excess of the minimums. Under these guidelines, all bank holding companies and federally regulated banks must maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must be Tier 1 capital. The FRB also has implemented a leverage ratio, which is Tier 1 capital to total assets, to be used as a supplement to the risk-based guidelines. The principal objective of the leverage ratio is to place a constraint on the maximum degree to which a bank holding company may leverage its equity capital base. The FRB requires a minimum leverage ratio of 3%. For all but the most highly-rated bank holding companies and for bank holding companies seeking to expand, however, the FRB expects that additional capital sufficient to increase the ratio by at least 100 to 200 basis points will be maintained. Management of the Company believes the risk-weighting of assets and the risk-based capital guidelines do not have a material adverse impact on the Company's operations or on the operations of its Subsidiary Banks. The requirement of deducting certain intangibles in computing capital ratios contained in the guidelines, however, could adversely affect the ability of the Company to make acquisitions in the future in transactions that would be accounted for using the purchase method of accounting. Although these requirements would not reduce the ability of the Company to make acquisitions using the pooling of interests method of accounting, the Company has not historically made, and has no present plans to make, acquisitions on this basis. Community Reinvestment Act. The Community Reinvestment Act of 1977 (the "CRA") requires, in connection with examinations of financial institutions within their jurisdiction, the federal banking regulators to evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those banks. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility. Regulations Governing Extensions of Credit. The Subsidiary Banks are subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to the bank holding company or its subsidiaries, or investments in their securities and on the use of their securities as collateral for loans to any borrowers. These regulations and restrictions limit the Company's ability to borrow funds from its Subsidiary Banks for its cash needs, including funds for acquisitions and for payment of dividends, interest and operating expenses. Transactions among the Subsidiary Banks (other than BankTEXAS and FB California) that do not involve the Company are generally exempt from the foregoing regulations and restrictions. Because the exemption is available only to those Subsidiary Banks that are at least 80% owned by the Company, it would not apply to such transactions involving BankTEXAS and FB California. Further, under the BHC Act and certain regulations of the FRB, subsidiary banks of a bank holding company are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. Bank holding companies and their nonbank subsidiaries that engage in electronic benefit transfer services are also subject to certain anti-tying restrictions. The Subsidiary Banks are also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal stockholders or any related interest of such persons. Extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral as, and following credit underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions with persons not covered above and who are not employees; and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. The Subsidiary Banks are also subject to certain lending limits and restrictions on overdrafts to such persons. Reserve Requirements. The FRB requires all depository institutions to maintain reserves against their transaction accounts and non-personal time deposits. Reserves of 3% must be maintained against total transaction accounts of $49.3 million or less (subject to adjustment by the FRB) and an initial reserve of $1,479,000 plus 10% (subject to adjustment by the FRB to a level between 8% and 14%) must be maintained against that portion of total transaction accounts in excess of such amount. The balances maintained to meet the reserve requirements imposed by the FRB may be used to satisfy liquidity requirements. Institutions are authorized to borrow from the Federal Reserve Bank "discount window," but FRB regulations require institutions to exhaust other reasonable alternative sources of funds, including Federal Home Loan Bank advances, before borrowing from the Federal Reserve Bank. Federal Home Loan Bank System. First Bank, FB&T, FB California and BankTEXAS are members of the Federal Home Loan Bank System (the "FHLB System"). The FHLB System consists of twelve regional Federal Home Loan Banks (each, a "FHLB"), each subject to supervision and regulation by the Federal Housing Finance Board, an independent agency created by FIRREA. The FHLBs provide a central credit facility primarily for member institutions. First Bank, as a member of the FHLB of Des Moines, BankTEXAS, as a member of the FHLB of Dallas, and FB&T and FB California, as members of the FHLB of San Francisco, are required to acquire and hold shares of capital stock in the FHLB in amounts at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20th of its advances (borrowings) from the FHLB, whichever is greater. Each of the Subsidiary Banks which is a member of the FHLB is in compliance with these regulations. Dividends. The Company's primary sources of funds are the dividends and management fees paid by its Subsidiary Banks. The ability of the Subsidiary Banks to pay dividends and management fees is limited by various state and federal laws, by the regulations promulgated by their respective primary regulators and by the principles of prudent bank management. In addition, the amount of dividends the Subsidiary Banks may pay to the Company is limited by the provisions of the Company's credit agreement with a group of unaffiliated lenders, which imposes certain minimum capital requirements. Under the most restrictive of these requirements, dividends from the Subsidiary Banks are limited to approximately $29.7 million as of December 31, 1997, unless prior permission of the regulatory authorities and, if necessary, the lead bank for the lenders is obtained. Monetary Policy and Economic Control. The commercial banking business in which the Company engages is affected not only by general economic conditions, but also by the monetary policies of the FRB. Changes in the discount rate on member bank borrowing, availability of borrowing at the "discount window," open market operations, the imposition of changes in reserve requirements against member bank deposits and assets of foreign branches, and the imposition of and changes in reserve requirements against certain borrowings by banks and their affiliates are some of the instruments of monetary policy available to the FRB. These monetary policies are used in varying combinations to influence overall growth and distributions of bank loans, investments and deposits, and such use may affect interest rates charged on loans or paid on deposits. The monetary policies of the FRB have had a significant effect on the operating results of commercial banks and are expected to do so in the future. The monetary policies of the FRB are influenced by various factors, including inflation, unemployment, short-term and long-term changes in the international trade balance and in the fiscal policies of the U.S. Government. Future monetary policies and the effect of such policies on the future business and earnings of the Company cannot be predicted. Employees As of December 31, 1997, the Company and its subsidiaries employed approximately 1,860 employees. None of the employees are subject to a collective bargaining agreement. The Company considers its relationships with its employees and those of the Subsidiary Banks and its other subsidiaries to be good. Executive Officers of the Registrant Information regarding executive officers is contained in Item 10 of Part III hereof (pursuant to General Instruction G) and is incorporated herein by this reference. Item 2. Properties The Company owns the office building which houses the principal place of business of the Company, which is located at 135 N. Meramec, Clayton, Missouri 63105. The property is in good condition and consists of approximately 41,763 square feet, of which approximately 11,742 is currently leased to others. Of the Subsidiary Banks' other 130 main offices and branch facilities, 85 are located in buildings owned by the Subsidiary Banks and 45 are located in leased facilities. Item 3. Legal Proceedings The Company and the Subsidiary Banks are, from time to time, parties to various legal actions arising in the normal course of business. Management believes there is no proceeding threatened or pending against the Company or any of the Subsidiary Banks which, if determined adversely, would have a material adverse effect on the business or financial position of the Company, any of the Subsidiary Banks or any other subsidiary. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters There is no established public trading market for the Company's common stock. All of the Company's common stock is owned by various trusts created by and for the benefit of Mr. James F. Dierberg, the Company's Chairman of the Board, President and Chief Executive Officer, and members of his immediate family. Item 6. Selected Financial Data The information required by this item is incorporated herein by reference to "Selected Consolidated and Other Financial Data" included in the 1997 Annual Report to Shareholders. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required by this item is incorporated herein by reference to "Management's Discussion and Analysis" included in the 1997 Annual Report to Shareholders. Item 7a. Quantitative And Qualitative Disclosures About Market Risk. The information required by this item is incorporated herein by reference to "Management's Discussion and Analysis-Interest Rate Risk Management" included in the 1997 annual Report to Shareholders. Item 8. Financial Statements and Supplementary Data The following consolidated financial statements, included in the 1997 Annual Report to Shareholders, and quarterly consolidated financial data, included in the 1997 Annual Report to Shareholders, are incorporated herein by reference. Consolidated Balance Sheets - December 31, 1997 and 1996 Consolidated Statements of Income - Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Changes in Stockholders' Equity - Years Ended December 31, 1997, 1996, and 1995 Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements Independent Auditors' Report Quarterly Condensed Financial Data (Unaudited) Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company, their ages, and positions with the Company and the Subsidiary Banks and the Company's other subsidiaries as of December 31, 1997, are set forth below. Name Age Position with the Company and its Subsidiaries ---- --- ----------------------------------------------- James F. Dierberg................... 60 Chairman of the Board of Directors, President and Chief Executive Officer of the Company and FBA; Director of CCB and Sundowner Corporation (a wholly owned subsidiary of FBA); and Trustee of First Preferred Capital Trust. Allen H. Blake...................... 55 Executive Vice President, Chief Financial Officer, Secretary and Director of the Company; Secretary and Director of First Bank; Vice President, Chief Financial Officer, Secretary and Director of FBA; Director of Sundowner Corporation; Vice President and Assistant Secretary of FB&T and FB California; and Trustee of First Preferred Capital Trust. Donald Gunn, Jr..................... 62 Director of the Company. George J. Markos.................... 49 Director of the Company. Thomas A. Bangert................... 54 Senior Vice President and Chief Operations Officer of the Company; and Executive Vice President and Director of First Bank. Laurence J. Brost................... 41 Senior Vice President and Controller of the Company; Vice President, Chief Accounting Officer of First Bank; and Trustee of First Preferred Capital Trust. John A. Schreiber................... 47 Executive Vice President and Chief Lending Officer of the Company; and Chairman of the Board of Directors, President and Chief Executive Officer of First Bank. Mark T. Turkcan .................... 42 Executive Vice President, Retail and Mortgage Banking of the Company; and Director of First Bank and FBA. Donald W. Williams.................. 50 Executive Vice President and Chief Credit Officer of the Company; Senior Vice President and Director of First Bank; Director of FBA and BankTEXAS; and Chairman of the Board of Directors and Chief Executive Officer of CCB, FB&T and FB California.
James F. Dierberg is the Chairman of the Board and Chief Executive Officer of the Company; positions he has held since 1988. He has also served as a Director of the Company since 1979. Mr. Dierberg was President of the Company from 1979 until February 1992; he was re-appointed President in April 1994 and continues to serve in that capacity. Mr. Dierberg was appointed Chairman of the Board, President and Chief Executive Officer of FBA in September 1994. Mr. Dierberg has served in various capacities with other bank holding companies and banks owned or controlled by him or members of his family since 1957. In addition, Mr. Dierberg serves as a trustee of First Preferred Capital Trust. Allen H. Blake has been an Executive Vice President of the Company since April 18, 1996. Mr. Blake joined the Company as Vice President and Chief Financial Officer in 1984, and in 1988 he was appointed as Secretary and a Director of the Company. In addition, Mr. Blake has served as Chief Financial Officer, Secretary and Director of FBA since September 1994 and as a trustee of First Preferred Capital Trust. Donald Gunn, Jr. was elected a Director of the Company in December 1992. Mr. Gunn is a practicing attorney and has been a shareholder in the law firm of Gunn & Gunn, P.C. during the past five years. George J. Markos was elected a Director of the Company in December 1992. Mr. Markos is a management consultant providing services primarily to banks, savings and loans and related businesses, including the Company and has performed such services during the past five years. Thomas A. Bangert is Senior Vice President and Chief Operations Officer of the Company, Executive Vice President and Director of First Bank, positions he assumed on January 1, 1990. Mr. Bangert is also a Director of First Land Trustee Corporation, a position he assumed during 1997. Laurence J. Brost has been Senior Vice President and Controller of the Company since October 21, 1997. Mr. Brost assumed the position of Vice President and Controller of the Company in 1990. Mr. Brost also serves as a trustee of First Preferred Capital Trust. John A. Schreiber is Executive Vice President and Chief Lending Officer of the Company and President and a Director of First Bank, positions he assumed in April 1996 and September 1992, respectively. In May 1994, he became Chairman of First Bank. He was previously Senior Vice President at Mercantile Bank of St. Louis, N.A., a position he had held since 1989, where he was responsible for commercial lending and operating services to St. Louis-based companies. Mark T. Turkcan is Executive Vice President, Retail and Mortgage Banking of the Company, positions he assumed in April 1996. Mr. Turkcan has been employed in various executive capacities since 1985. Mr. Turkcan is also a Director of First Bank and FBA, positions he has held since April 1994 and August 1994, respectively. Donald W. Williams is an Executive Vice President and Chief Credit Officer of the Company and a Senior Vice President and Director of First Bank, positions he assumed in March 1993. Mr. Williams also serves as a Director of FBA and BankTEXAS and Chairman of the Board of Directors and Chief Executive Officer of CCB, FB&T and FB California. He was previously Senior Vice President at Mercantile Bank of St. Louis, N.A., a position he had held since 1989, where he was responsible for credit approval. Section 16(a) Beneficial Ownership Reporting Compliance To the Company's knowledge, no director, executive officer or shareholder of the Company, subject, in their capacity as such, to the reporting obligations set forth in Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") has failed to file on a timely basis reports required by Section 16(a) of the Exchange Act during the year ended December 31, 1997 or prior years. Item 11. Executive Compensation The following table sets forth the compensation for the named executive officers for the last three years.
SUMMARY COMPENSATION TABLE All Other Name and Principal Positions Year Salary Bonus Compensation (1) ---------------------------- ---- ------ -------- ---------------- James F. Dierberg Chairman of the Board of 1997 $ 492,000 $ 0 $ 4,750 Directors, President and 1996 492,000 0 4,750 Chief Executive Officer 1995 492,000 0 4,500 Donald W. Williams 1997 $ 166,250 $ 40,000 $ 4,750 Executive Vice President 1996 155,000 30,000 4,750 1995 138,750 26,000 4,260 John A. Schreiber 1997 $ 166,250 $ 30,000 $ 4,750 Executive Vice President 1996 155,000 20,000 4,750 1995 138,750 25,000 4,260 Allen H. Blake 1997 $ 147,500 $ 30,000 $ 4,750 Executive Vice President and 1996 140,000 30,000 4,750 Chief Financial Officer 1995 128,750 30,000 4,260 Mark T. Turkcan 1997 $ 133,750 $ 15,000 $ 4,012 Executive Vice President 1996 130,000 10,000 4,088 1995 113,750 25,000 4,163 - ------------------- (1) All other compensation reported represents First Banks' matching contributions to the 401(k) Plan for the year indicated.
Employment Agreements Messrs. Schreiber and Williams are parties to employment agreements with the Company and First Bank. In most respects, the two contracts are identical. The term of each contract is one year, and each is automatically renewable for additional one-year periods. As part of the annual renewal process, the base salary payable under each employment agreement is reviewed and may be adjusted at the discretion of the Board of Directors of the Company. The base salary paid to each of Messrs. Schreiber and Williams pursuant to their respective employment agreements is set forth in the salary column of the Summary Compensation Table. Both employment contracts provide for a bonus of up to twenty percent (20%) of the employee's annual base salary, with the exact percentage to be determined by the Chairman of the Board of the Company if the employee meets the criteria set by the Company and First Bank at the beginning of each contract year. Each annual bonus is payable within ninety (90) days after the close of the year to which it relates. In addition, each employee is entitled to participate in the 401(k) Plan, the Company's health insurance plan and in such other additional benefit plans which the Company may adopt for its employees. Under the terms of the employment contracts, if either Mr. Schreiber or Mr. Williams terminated for a reason other than retirement, death, "disability" or for "cause," as those terms are defined in the employment agreements, or are terminated due to a change in control of the Company, each such individual will be entitled to receive two years base salary. Should either Mr. Schreiber or Mr. Williams voluntarily terminate employment with the Company and First Bank, he would be entitled to receive the balance of his base salary for that year or a minimum of six months salary, provided that neither would be permitted to accept a position with any bank or trust company for the duration of that year. Finally, in the event of the death of either Mr. Schreiber or Mr. Williams, their respective employment agreements provide that their widows would be entitled to receive compensation that would have been payable to the employee during the month of his death, and his monthly salary for the twelve month period following the date of his death. Compensation of Directors Only those directors who are not employees of the Company or any of its subsidiaries receive remuneration for their services as directors. Such non-employee directors (currently only Messrs. Donald Gunn and George Markos) receive a retainer of $1,000 per quarter and a fee of $500 per Board meeting attended. No directors are compensated for attendance at Audit Committee meetings, which is the only committee of the Board of Directors. In addition to Board meeting fees, during 1997, the Company paid Mr. Markos, directly and indirectly, consulting fees in the amount of $1,500 exclusive of reimbursement for his travel expenses. It is anticipated Mr. Markos will continue to provide consulting services to the Company during the current fiscal year. During 1997, the Company paid $33,160 in legal fees to a law firm of which Mr. Donald Gunn, one of the Company's directors, is a shareholder. It is anticipated Mr. Gunn's law firm will continue to provide legal services to the Company during the current fiscal year. Executive officers of the Company who are also directors of the Company do not receive remuneration other than salaries and bonuses for serving on the Board of Directors. Compensation Committee Interlock and Insider Participation in Compensation Decisions The Company does not have a compensation committee of the Board of Directors or another committee which performs the functions normally reserved to compensation committees. All decisions with respect to the compensation of executive officers of the Company are the responsibility of the Board of Directors. Messrs. Dierberg and Blake are the only executive officers of the Company who serve on the Board of Directors. The aforementioned individuals abstain from voting with respect to matters relating to their own compensation. Certain of the executive officers and directors of the Company serve as executive officers and directors of certain of the Subsidiary Banks. The Company believes these relationships are typical of bank holding companies in general and that they do not constitute "insider participation" as set forth in the executive compensation disclosure rules promulgated by the Securities and Exchange Commission. The salaries and bonuses paid to these individuals for their services to the Company and its Subsidiary Banks are established in their entirety by the Board of Directors of the Company. The Boards of Directors of the Subsidiary Banks do not participate in the deliberations of the Company's Board of Directors with respect to the compensation paid to these individuals. Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth the entire ownership of all classes of voting capital stock of the Company issued and outstanding.
Percent of Number of Total Title of Class Shares Percent Voting and Name of Owner Owned of Class Power ----------------- ----- -------- ----- Common Stock ($250 par value) James F. Dierberg II, Family Trust (1).......................... 7,714.677(2) 32.605% * Michael J. Dierberg, Family Trust (1)........................... 4,255.319(2) 17.985% * Ellen C. Dierberg, Trustees, Family Trust (1)................... 7,714.676(2) 32.605% * Michael J. Dierberg and Mary W. Dierberg, Trustees under living trust of Michael J. Dierberg (1)....... 3,459.358(2) 14.621% * First Trust (Mary W. Dierberg and First Bank Trustees).................................................... 516.830(3) 2.184% * Class A Convertible Adjustable Rate Preferred Stock ($20 par value) James F. Dierberg, trustee of the James F. Dierberg living trust (1)............................................. 641,082(4)(5) 100% 77.7% Class B Non-Convertible Adjustable Rate Preferred Stock ($1.50 par value) James F. Dierberg, trustee of the James F. Dierberg living trust (1)............................................. 160,505(5) 100% 19.4%
- ---------------------------------- * Represent less than 1.0%. (1) Each of the above-named trustees and beneficial owners are United States citizens, and the business address for each such individual is 135 N. Meramec, Clayton, Missouri 63105. Mr. James F. Dierberg, the Company's Chairman of the Board, President and Chief Executive Officer, and Mrs. Mary W. Dierberg, are husband and wife, and Messrs. James F. Dierberg II, Michael James Dierberg and Miss Ellen C. Dierberg are their children. (2) Due to the relationship between Mr. James F. Dierberg, his wife and their children, Mr. Dierberg is deemed to share voting and investment power over the Company's common stock. (3) Due to the relationship between Mr. James F. Dierberg, his wife and First Bank, Mr. Dierberg is deemed to share voting and investment power over these shares. (4) Convertible into common stock, based on the appraised value of the common stock at the date of conversion. Assuming an appraised value of the common stock equal to the book value, the number of shares of common stock into which the Class A Preferred Stock is convertible at December 31, 1997, is 1,645, which shares are not included in the above table. (5) Sole voting and investment power. Security Ownership of Management As set forth above, other than trusts established by and for the benefit of Mr. James F. Dierberg, the Company's Chairman of the Board, President and Chief Executive Officer, or for the benefit of members of Mr. Dierberg's immediate family, no other director or executive officer of the Company beneficially owns any of the issued and outstanding shares of the Company's (i) Common Stock, (ii) Class A Convertible Adjustable Rate Preferred Stock, or (iii) Class B Non-Convertible Adjustable Rate Preferred Stock - the only classes of voting stock of the Company outstanding. The following table sets forth, as of December 31, 1997, the shares of the Company's non-voting Preferred Securities owned by the Company's Directors, executive officers, including those named in the Summary Compensation Table, and all Directors and executive officers as a group. The Company has no knowledge of any person or entity who beneficially owns more than five percent (5.0%) of the Preferred Securities.
Number of Preferred Securities Shares Beneficially Owned Beneficial Owners as of December 31, 1997(1) Percent of Class ----------------- ----------------------- ---------------- James F. Dierberg............................. -0- * Allen H. Blake................................ 1,280 * Donald Gunn, Jr............................... -0- * George Markos................................. -0- * Donald W. Williams............................ -0- * John A. Schreiber............................. -0- * Mark T. Turkcan............................... -0- * Directors and Executive Officers as a Group (9 persons)............. 1,280 *
- --------------------------- * Represents less than 1.0% (1) Beneficial ownership of shares, as determined in accordance with applicable rules of the Securities and Exchange Commission, includes shares as to which a person directly or indirectly has or shares voting power or investment power or both. Item 13. Certain Relationships and Related Transactions Directors and executive officers of the Company, and some of the corporations and firms in which one of the directors is a majority owner, have been customers of the Subsidiary Banks in the ordinary course of business, or have been indebted to the Subsidiary Banks for loans of $60,000 or more, and it is anticipated that some of these persons, corporations and firms will continue to be customers of and indebted to the Subsidiary Banks on a similar basis in the future. All loans extended to such persons, corporations and firms since the beginning of the last full fiscal year were made in the ordinary course of business, none involved more than normal risk of collectibility or presented other unfavorable features, and all were made on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable bank transactions with unaffiliated persons. At December 31, 1997, the Subsidiary Banks had no loans outstanding to such persons. Outside of normal customer relationships, no Directors or officers of the Company, no shareholders holding over five percent (5.0%) of the Company's voting securities and no corporations or firms with which such persons or entities are associated, maintain or have maintained since the beginning of the last full fiscal year, any significant business or personal relationship with the Company or its subsidiaries, other than such as arises by virtue of such position or ownership interest in the Company or its subsidiaries, except as set forth in Item 11, "Executive Compensation - Compensation of Directors," or as described in the following paragraphs. During 1997, 1996 and 1995, Tidal Insurance Limited (Tidal), a corporation owned indirectly by First Banks' Chairman and his children, received approximately $214,000, $326,000 and $192,000, respectively, in insurance premiums for accident, health and life insurance policies purchased by loan customers of First Banks. The insurance policies are issued by an unaffiliated company and then ceded to Tidal. First Banks believes the premiums paid by the loan customers of First Banks are comparable to those that such loan customers would have paid if the premiums were subsequently being ceded to an unaffiliated third-party insurer. In addition, for the years ended December 31, 1997, 1996 and 1995, First Securities America, Inc., doing business as First Banc Insurors, received approximately $206,000, $231,000 and $196,000, respectively, in commissions or insurance premiums for policies purchased by First Banks or customers of the Subsidiary Banks from the unaffiliated, third-party insurors to which First Banc Insurors placed such policies. First Banc Insurors received an additional $136,000 and $999,000 in annuity sales commissions for the years ended December 31, 1996 and 1995, respectively. In addition, First Brokerage L.P. received approximately $707,000 and $822,000 for the years ended December 31, 1997 and 1996, respectively, in commissions and lease payments in connection with annuities and securities and other insurance product sales services provided to certain customers of the Subsidiary Banks. Commissions received by First Banc Insurors and First Brokerage L.P. in connection with the purchase and/or sale of such annuities and securities were paid by an unaffiliated, third-party company. First Securities America, Inc. and First Brokerage L.P. are owned by a trust established and administered by and for the benefit of First Banks' Chairman and members of his immediate family. The insurance premiums on which the aforementioned commissions were earned were competitively bid and First Banks deems the commissions First Banc Insurors earned to be comparable to those which would have been earned by an unaffiliated third-party agent. First Services, L.P., a limited partnership indirectly owned by First Banks' Chairman and his children through its General Partners and Limited Partners, provides data processing services and operational support for First Banks and its subsidiaries. Fees paid under the agreement to First Services L.P. were $6.4 million, $3.2 million and $2.9 million for the years ended December 31, 1997, 1996 and 1995, respectively. During 1997, First Services, L.P. paid First Banks $1.1 million in rental fees for the use of data processing and other equipment owned by First Banks. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) The following documents are filed as part of this Report: 1. Financial Statements: The Financial Statements listed under Item 8 to this Report are set forth at pages 34 through 38, and the Notes to Consolidated Financial Statements are set forth at pages 39 through 58, of the 1997 Annual Report to Shareholders (See Exhibit 13 under Paragraph (a)3 of this Item 14). 2. Financial Statement Schedules: None 3. Exhibits: See the Exhibit Index at pages 23 through 24 of this Report. The following exhibits listed in the Exhibit Index are filed with this Report: Exhibit 10.8 Service Agreement by and between First Services, L.P. and First Bank dated April 1, 1997. Exhibit 10.9 Service Agreement by and between First Services, L.P. and First Bank & Trust dated April 1, 1997. Exhibit 10.10 Service Agreement by and between First Services L.P. and BankTEXAS dated April 1, 1997. Exhibit 10.11 Service Agreement by and between First Services L.P. and SunriseBank dated April 1, 1997. Exhibit 13.1 1997 Annual Report to Shareholders. The 1997 Annual Report to Shareholders is being filed as an Exhibit solely for the purpose of incorporating certain provisions thereof by reference. Portions of the Annual Report to Shareholders not specifically incorporated by reference are not deemed "filed" for the purposes of the Securities Exchange Act of 1934, as amended. Exhibit 21.1 Subsidiaries of the Registrant. (b) Reports on Form 8-K during the quarter ended December 31, 1997: None. (c) See the Exhibit Index attached hereto. Management Contracts and Compensatory Plans -- The following exhibits listed in the Exhibit Index are identified below in response to Item 14(a)-3 of Form 10-K: Exhibit 10.4 Employment Agreement by and among the Company, First Bank and John A. Schreiber, dated September 21, 1992. Exhibit 10.5 Employment Agreement by and among the Company, First Bank and Donald W. Williams, dated March 22, 1993. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST BANKS, INC. By: /s/ James F. Dierberg ------------------------- James F. Dierberg Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer) By: /s/ Allen H. Blake ---------------------- Allen H. Blake Executive Vice President, Chief Financial Officer, Secretary and Director (Principal Financial Officer) By: /s/ Laurence J. Brost ------------------------- Laurence J. Brost Senior Vice President and Controller (Principal Accounting Officer) Date: March 26, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the date indicated. Signature and Title Date ------------------- ---- /s/ James F. Dierberg March 26, 1998 - ------------------------- James F. Dierberg Chairman of the Board of Directors, President and Chief Executive Officer Signature and Title Date - ------------------- ---- /s/ Allen H. Blake March 26, 1998 - --------------------------- Allen H. Blake Executive Vice President, Chief Financial Officer, Secretary and Director /s/ Donald Gunn, Jr. March 26, 1998 - ------------------- Donald Gunn, Jr. Director /s/ George Markos March 26, 1998 - ------------------- George Markos Director EXHIBIT INDEX These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K. Exhibit Number Description 3.1 Restated Articles of Incorporation of the Company, as amended (incorporated herein by reference to Exhibit 3(i) to the Company's Annual Report on Form 10-K for the year ending December 31, 1993). 3.2 Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 to Amendment No.2 to the Company's Registration Statement on Form S-1 (File No. 33-50576) dated September 15, 1992). 4.1 Reference is made to Article III of the Company's Restated Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 filed herewith). 4.2 The Company agrees to furnish to the Securities and Exchange Commission upon request pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of instruments defining the rights of holders of long term debt of the Company and its subsidiaries. 4.3 Agreement As To Expenses and Liabilities (incorporated herein by reference to Exhibit 4(a) to the Company' Report on Form 10-Q for the quarter ended March 31, 1997). 4.4 Preferred Securities Guarantee Agreement (incorporated herein by reference to Exhibit (4(b) to the Company's Report on Form 10-Q for the quarter ended March 31, 1997). 4.5 Indenture (incorporated herein by reference to Exhibit 4(c) to the Company's Report on Form 10-Q for the quarter ended March 31, 1997). 4.6 Amended and Restated Trust Agreement (incorporated herein by reference to Exhibit 4(d) to the Company's Report on Form 10-Q for the quarter ended March 31, 1997). 10.1 Shareholders' Agreement by and among James F. Dierberg, II and Mary W. Dierberg, Trustees under Living Trust of James F. Dierberg II, dated July 24, 1989, Michael James Dierberg and Mary W. Dierberg, Trustees under the Living Trust of Michael James Dierberg, dated July 24, 1989; Ellen C. Dierberg and Mary W. Dierberg, Trustees under Living Trust of Ellen C. Dierberg dated July 17, 1992, and First Banks, Inc. (incorporated herein by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 (File No. 33-50576) dated August 6, 1992). 10.2 Comprehensive Banking System License and Service Agreement dated as of July 24, 1991, by and between the Company and FIserv CIR, Inc. (incorporated herein by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1 (File No. 33-50576) dated August 6, 1992). 10.4 Employment Agreement by and among the Company, First Bank and John A. Schreiber, dated September 21, 1992 (incorporated herein by reference to Exhibit 10(iii)(A) to the Company's Form 10-K for the year ended December 31, 1993). 10.5 Employment Agreement by and among the Company, First Bank and Donald W. Williams dated March 22, 1993 (incorporated herein by reference to Exhibit 10(iii)(A) to the Company's Form 10-K for the year ended December 31, 1993). 10.6 $90,000,000 Secured Credit Agreement, dated as of July 18, 1996 among the Company, The Boatmen's National Bank of St. Louis, Harris Trust and Savings Bank, Norwest Bank of Minnesota, National Association, American National Bank and Trust Company, The Frost National Bank and The Boatmen's National Bank of St. Louis, as Agent. 10.7 Stock Purchase and Operating Agreement by and between the Company and BancTEXAS, dated May 19, 1994 (incorporated herein by reference to Exhibit 2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994). 10.8 Service Agreement by and between First Services, L.P. and First Bank dated April 1, 1997. 10.9 Service Agreement by and between First Services, L.P. and First Bank & Trust dated April 1, 1997. 10.10 Service Agreement by and between First Services L. P. and BankTEXAS dated April 1, 1997. 10.11 Service Agreement by and between First Services L.P. and Sunrise Bank dated April 1, 1997. 13.1 The Company's 1997 Annual Report to Shareholders. 21.1 Subsidiaries of the Company. 27.1 Financial Data Schedule (EDGAR only). EXHIBIT 10.8 SERVICE AGREEMENT This Service Agreement is made and entered into as of the 1st day of April, 1997, by and between First Services, L.P., a Missouri Limited Partnership and First Bank (MO), a banking institution duly organized and existing by virtue of the laws of the State of Missouri. WHEREAS, FIRST BANK (MO) and FIRSTSERV, INC. entered into a Service Agreement dated May l, l992; and WHEREAS, said Service Agreement was assigned to First Services, L.P. on or about April 1, 1997; and WHEREAS, FIRST SERVICES, L.P. and FIRST BANK (MO) desire to amend and restate said Service Agreement in its entirety. NOW, THEREFORE, for and in consideration of the mutual promises and covenants contained herein, and the sum of Ten Dollars ($l0.00) in hand paid, each to the other, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: I. TERMINATION AND REVOCATION The Parties hereto hereby revoke, cancel and hold for naught the Service Agreement dated May l, l992, and hereby substitute in its place the Service Agreement herein contained. II. SERVICES (A) First Services, L.P. shall furnish First Bank (MO) data processing and item processing services selected by First Bank (MO) from the Product and Price Schedule as per Attachment 1, attached hereto and incorporated herein by reference thereto. Additional services may be selected upon prior written notice to First Services, L.P. at First Services, L.P.'s then current list price by executing an amended Summary Page. (B) First Services, L.P. will provide conversion and training services for the fees specified from the Product and Price Schedule (Attachment 1). Classroom training in the use and operation of the system for the number of First Bank (MO) personnel mutually agreed upon in the conversion planning process will be provided at a training facility mutually agreed upon. Conversion services are those activities designed to transfer the processing of First Bank's (MO) data from its present processing company to First Services, L.P. (C) First Services, L.P. will also provide Network Support Service consisting of communication line monitoring and diagnostic equipment and support personnel to discover, diagnose, repair or report line problems to the appropriate telephone company. The fee for this service is also listed from the Product and Price Schedule (Attachment 1). (D) First Services, L.P. shall upon request act as First Bank's (MO) designated representative to arrange for the purchase, and installation of data lines necessary to access the First Services, L.P. system. Where requested, additional dial-up lines and equipment to be utilized as a backup to the regular data lines may also be ordered. First Services, L.P. shall bill First Bank (MO) for the actual charges incurred for the data lines and for the maintenance of the modems and other interface devices. (E) Processing priorities will be determined by mutual agreement of the parties hereto. (F) In addition, First Services, L.P. acknowledges that First Bank (MO) acts as a correspondent bank to certain Affiliate Banks and that as part of its duties hereunder First Services, L.P. will be performing certain services for First Bank (MO) which are necessary because of its status as a correspondent bank. III. TERM The term of this Agreement shall be twelve (12) months commencing on April 1, 1997. Upon expiration, the Agreement will automatically renew for successive terms of twelve (12) months each unless either party shall have provided written notice to the other at least one-hundred eighty (180) days prior to the expiration of the then current term, of its intent not to renew. In the event of termination, First Services, L.P. shall provide reasonable time allowance to allow First Bank (MO) to convert to another system. IV. SOFTWARE/FIRMWARE Unmodified third party software or firmware ("Software") may be supplied as part of the Agreement. All such Software shall be provided subject to Software License Agreements. V. PRICE AND PAYMENT (A) Fees for First Services, L.P.'s services are set forth from the Product and Price Schedule (Attachment 1), including where applicable minimum monthly charges and payment schedules for onetime fees. (B) Standard Fees shall be invoiced no later than the fifteenth (15th) of each month for the then current month. Terms of payment shall be net cash. (C) The Base Service Charge listed from the Product and Price Schedule (Attachment 1) shall not change more than once a year and then only upon six (6) months' prior written notice. The fee schedule shall be reviewed annually to ensure fair market value in pricing. Comparisons will be made with peers and other providers of similar services. (D) This above limitation shall not apply to pass-thru expenses. A pass-thru expense is a charge for goods or services by First Services, L.P. on First Bank's (MO) behalf which are to be billed to First Bank (MO) without mark-up. (E) The fees listed from the Product and Price Schedule (Attachment 1) do not include and First Bank (MO) is responsible for furnishing transportation or transmission of information between First Services, L.P.'s data center, First Bank's (MO) site and any applicable clearing house, regulatory agency or Federal Reserve Bank. Where First Bank (MO) has elected to have First Services, L.P. provide Telecommunication Services, the price for the Services will be provided and billed as a pass-thru expense. (F) Network Support Service Fees and Local Network Fees are based upon services rendered from First Services, L.P.'s premises. Off-premise support will be provided upon First Bank's (MO) request on an as available basis at First Services, L.P. then current charges for time and materials, plus reasonable travel and living expenses. (G) First Services L.P.'s Price Schedule for First Bank (MO) shall allow for a discount from the Schedule of Fees (Attachment 1) in return for the use by First Services, L.P. of certain of First Bank's (MO) computer hardware, software and equipment. The monthly discount is determined by adding the monthly depreciation of the assets used and a reasonable cost of funds factor, said cost of funds factor may be changed from time to time with the written consent of the parties hereto. VI. CLIENT OBLIGATIONS (A) First Bank (MO) shall be solely responsible for the input, transmission or delivery of all information and data required by First Services, L.P. to perform the services except where First Bank (MO) has retained First Services, L.P. to handle such responsibilities on its behalf. The data shall be provided in a format and manner approved by First Services, L.P. First Bank (MO) will provide at its own expense or procure from First Services, L.P. all equipment, computer software, communication lines and interface devices required to access the First Services, L.P. System. If First Bank (MO) has elected to provide such items itself, First Services, L.P. shall provide First Bank (MO) with a list of compatible equipment and software. (B) First Bank (MO) shall designate appropriate First Bank (MO) personnel for training in the use of the First Services, L.P. System, shall allow First Services, L.P. access to First Bank's (MO) site during normal business hours for conversion and shall cooperate with First Services, L.P. personnel in the conversion and implementation of the services. (C) First Bank (MO) shall comply with any operating instructions on the use of the First Services, L.P. system provided by First Services, L.P., shall review all reports furnished by First Services, L.P. for accuracy and shall work with First Services, L.P. to reconcile any out of balance conditions. First Bank (MO) shall determine and be responsible for the authenticity and accuracy of all information and data submitted to First Services, L.P. (D) First Bank (MO) shall furnish, or if First Services, L.P. agrees to so furnish, reimburse First Services, L.P. for courier services applicable to the services requested. VII. GENERAL ADMINISTRATION First Services, L.P. is continually reviewing and modifying the First Services, L.P. system to improve service and to comply with federal government regulations applicable to the data utilized in providing services to First Bank (MO). First Services, L.P. reserves the right to make changes in the service, including, but not limited to operating procedures, security procedures, the type of equipment resident at and the location of First Services, L.P.'s data center. First Services, L.P. will provide First Bank (MO) at least sixty (60) days prior written notice of changes in procedures or reporting and at least six (6) months prior written notice of changes in service costs. VIII. CLIENT CONFIDENTIAL INFORMATION (A) First Services, L.P. shall treat all information and data relating to First Bank (MO) business provided to First Services, L.P. by First Bank (MO), or information relating to First Bank's (MO) customers, as confidential and shall safe-guard First Bank's (MO) information with the same degree of care used to protect First Services, L.P.'s confidential information. First Services, L.P. and First Bank (MO) agree that master and transaction data files are owned by and constitute property of First Bank (MO). First Bank (MO) data and records shall be subject to regulation and examination by State and Federal supervisory agencies to the same extent as if such information were on First Bank's (MO) premises. First Services, L.P.'s obligations under this Section VIII shall survive the termination or expiration of this Agreement. (B) First Services, L.P. shall maintain adequate backup procedures including storage of duplicate record files as necessary to reproduce First Bank's (MO) records and data. In the event of a service disruption due to reasons beyond First Services, L.P.'s control, First Services, L.P. shall use diligent efforts to mitigate the effects of such an occurrence. IX. FIRST SERVICES, L.P. CONFIDENTIAL INFORMATION (A) First Bank (MO) shall not use or disclose to any third persons any confidential information concerning First Services, L.P. First Services, L.P. confidential information is that which relates to First Services, L.P.'s software, research, development, trade secrets or business affairs including, but not limited to, the terms and conditions of this Agreement but does not include information in the public domain through no fault of First Bank (MO). First Bank (MO) obligations under this Section IX shall survive the termination or expiration of this Agreement. (B) First Services, L.P.'s system contains information and computer software which is proprietary and confidential information of First Services, L.P., its suppliers and licensees. First Bank (MO) agrees not to attempt to circumvent the devices employed by First Services, L.P. to prevent unauthorized access to the First Services, L.P.'s System. X. WARRANTIES First Services, L.P. will accurately process First Bank's (MO) work provided that First Bank (MO) supplies accurate data and follows the procedures described in First Services, L.P.'s User Manuals, notices and advises. First Services, L.P. personnel will exercise due care in the processing of First Bank's (MO) work. In the event of an error caused by First Services, L.P.'s personnel, programs or equipment, First Services, L.P. shall correct the data and/or reprocess the affected report at no additional cost to First Bank (MO). XI. LIMITATION OF LIABILITY IN NO EVENT SHALL FIRST SERVICES, L.P. BE LIABLE FOR LOSS OF GOODWILL, OR FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING FROM FIRST BANK'S (MO) USE OF FIRST SERVICES L.P.'S SERVICES, OR FIRST SERVICES, L.P.'S SUPPLY OF EQUIPMENT OR SOFTWARE, UNDER THIS AGREEMENT REGARDLESS OF WHETHER SUCH CLAIM ARISES IN TORT OR IN CONTRACT. FIRST SERVICES, L.P.'S AGGREGATE LIABILITY FOR ANY AND ALL CAUSES OF ACTION RELATING TO SERVICES PERFORMED HEREUNDER OR ANY DAMAGE OR LOSS INCURRED OR SUSTAINED BY FIRST BANK (MO) RELATING TO THIS AGREEMENT AND THE SERVICES PERFORMED HEREUNDER SHALL BE LIMITED TO THE AMOUNT OF TOTAL FEES PAID BY FIRST BANK (MO) TO FIRST SERVICES, L.P. IN THE THREE (3) MONTH PERIOD PRECEDING THE DATE THE CLAIM ACCRUED. FIRST SERVICES, L.P.'S AGGREGATE LIABILITY FOR A DEFAULT RELATING TO EQUIPMENT OR SOFTWARE SHALL BE LIMITED TO THE AMOUNT PAID FOR THE EQUIPMENT OR SOFTWARE. XII. PERFORMANCE STANDARDS (A) On-Line Availability - First Services, L.P.'s standard of performance shall be on-line availability of the system 98% of the time that it is scheduled to be so available over a three month period (the "Measurement Period") Actual on-line performance will be calculated monthly by comparing the number of hours which the system was scheduled to be operational on an on-line basis with the number of hours, or a portion thereof, it was actually operational on an on-line basis. Downtime may be caused by o perator error, hardware malfunction or failure, or environmental failures such as loss of power or air conditioning. Downtime caused by reasons beyond First Services, L.P.'s control should not be considered in the statistics. (B) Report Availability - First Services, L.P.'s standard of performance for report availability shall be that, over a three (3) month period, ninety-five percent (95%) of all Critical Daily Reports shall be available for remote printing on time without significant errors. A Critical Daily Report shall mean priority group reports which First Services, L.P. and First Bank (MO) have mutually agreed in writing are necessary to properly account for the previous day's activity and properly notify First Bank (MO) of overdraft, NSF or return items. A significant error is one which impairs First Bank's (MO) ability to properly account for the previous days activity and/or properly account for overdraft, NSF or return items. Actual performance will be calculated monthly by comparing the total number of First Bank (MO) reports scheduled to be available from First Services, L.P. to the number of reports which were available on time and withou error. (C) Exclusive Remedy - In the event that First Services, L.P.'s performance fails to meet the standards listed above and such failure is not the result of First Bank's (MO)error or omission, First Bank (MO) sole and exclusive remedy for such default shall be the right to terminate this Agreement in accordance with the provisions of this paragraph. In the event that First Services, L.P. fails to achieve any Performance Standards, alone or in combination, for the prescribed measurement period, First Bank (MO) shall notify First Services, L.P. ofits intent to terminate this agreement if First Services, L.P. fails to restore performance to the committed levels. First Services, L.P. shall advise First Bank (MO) promptly upon correction of the system deficiencies (in no event shall corrective action exceed sixty (60) days from the notice date) and shall begin an additional measurement period. Should First Services, L.P. fail to achieve the required Performance Standards during the remeasurement period, First Bank (MO) may terminate this Agreement and First Services, L.P. shall cooperate with First Bank (MO) to achieve an orderly transition to First Bank's (MO) replacement processing system. First Bank (MO) may also terminate this Agreement if First Services, L.P.'s performance for the same standard is below the relevant performance standard for more than two (2) measurement periods in any consecutive twelve (12) months or for more than five (5) measurement periods during the term of this agreement. During the period of transition, First Bank (MO) shall pay only such charges as are incurred for monthly fees until the date of deconversion. First Services, L.P. shall not charge First Bank (MO) for services relating t First Bank's (MO) deconversion. (D) Audit - First Bank (MO) shall have the right to perform reasonable audits, at its cost, upon giving written notice to First Services, L.P. of its intent to do so. First Services, L.P. shall provide, upon request, financial information to First Bank (MO). XIII. DISASTER RECOVERY (A) A Disaster shall mean any unplanned interruption of the operations of or inaccessibility to the First Services, L.P. data center which appears in First Services, L.P.'s reasonable judgement to require relocation of processing to an alternative site. First Services, L.P. shall notify First Bank (MO) as soon as possible after it deems a service outage to be a Disaster. First Services, L.P. shall move the processing of First Bank's (MO) standard on-line services to an alternative processing center as expeditiously as possible. First Bank (MO) shall maintain adequate records of all transactions during the period of service interruption and shall have personnel available to assist First Services L.P., Inc. in implementing the switch over to the alternative processing site. During a disaster, optional or on-request services shall be provided by First Services, L.P. only to the extent that there is adequate capacity at the alternate center and only after stabilizing the provision of base on-line services. (B) First Services, L.P. shall work with First Bank (MO) to establish a plan for alternative data communications in the event of a disaster. First Bank (MO) shall be responsible for furnishing any additional communications equipment and data lines required under the adopted plan. (C) First Services, L.P. shall test its Disaster Recovery Services Plan by conducting one annual test. First Bank (MO) agrees to participate in and assist First Services, L.P. with such testing. Test results will be made available to First Bank's (MO) regulators, internal and external auditors, and (upon request) to First Bank's (MO) insurance underwriters. (D) First Bank (MO) understands and agrees that the First Services, L.P. Disaster Recovery Plan is designed to minimize but not eliminate risks associated with a disaster affecting First Services, L.P.'s data center. First Services, L.P. does not warrant that service will be uninterrupted or error free in the event of a disaster. First Bank (MO) maintains responsibility for adopting a disaster recovery plan relating to disasters affecting First Bank's (MO) facilities and for securing business interruption insurance or other insurance as necessary to properly protect First Bank's (MO) revenues in the event of a disaster. XIV. DEFAULT (A) In the event that First Bank (MO) is thirty (30) days in arrears in making any payment required, or in the event of any other material default by either First Services, L.P. or First Bank (MO) in the performance of their obligations, the affected party shall have the right to give written notice to the other of the default and its intent to terminate this Agreement stating with reasonable particularity the nature of the claimed default. This Agreement shall terminate if the default has not been cured within a reasonable time with a minimum being thirty (30) days from the effective date of the notice. (B) Upon the expiration of this Agreement, or its termination, First Services, L.P. shall furnish to First Bank (MO) such copies of First Bank's (MO) data files as First Bank (MO) may request in machine readable format form along with such other information and assistance as or is reasonable and customary to enable First Bank (MO) to deconvert from the First Services, L.P. system. First Bank (MO) shall reimburse First Services, L.P. for the production of data records and other services at First Services, L.P.'s current fees for such services. XV. INSURANCE First Services, L.P. carries Comprehensive General Liability insurance with primary limits of two million dollars, Commercial Crime insurance covering Employee Dishonesty in the amount of fifteen million dollars, all-risk replacement cost coverage on all equipment used at First Services, L.P.'s data center and Workers Compensation coverage on First Services, L.P. employees wherever located in the United States. First Bank (MO) shall carry adequate insurance to cover liability for source documents while in transit and in case of data loss through errors and omissions. XVI. GENERAL (A) This Agreement is binding upon the parties and their respective successors and permitted assigns. Neither party may assign this Agreement in whole or in part without the consent of First Bank (MO) and/or First Services, L.P., provided, however, that First Services, L.P. may subcontract any or all of the services to be performed under this Agreement without the written consent of First Bank (MO). Any such subcontractors shall be required to comply with all of the applicable terms and conditions of this Agreement. (B) The parties agree that, in connection with the performance of their obligations hereunder, they will comply with all applicable Federal, State, and local laws including the laws and regulations regarding Equal Employment Opportunities. (C) First Services, L. P. agrees that the Office of Thrift Supervision, FDIC, or other authority will have the authority and responsibility provided to the other regulatory agencies pursuant to the Bank Service Corporation Act, 12 U.S.C. 1867 (C) relating to service performed by contract or otherwise. First Services, L.P., also agrees that its services shall be subject to oversight by the O.C.C., FDIC or state banking departments as may be applicable under laws and regulations pertaining to First Bank's (MO) charter and shall, if applicable, provide the O.T.S. DistrictDirector of the district in which the data processing center is located and other state and federal agencies with a copy of First Services, L.P.'s current audit and financial statements and a copy of any current third party review report when a review has been performed. (D) Neither party shall be liable for any errors, delays or non-performance due to events beyond its reasonable control including, but not limited to, acts of God, failure or delay of power or communications, changes in law or regulation or other acts of governmental authority, strike, weather conditions or transpor- tation. (E) All written notices required to be given under this Agreement shall be sent by Registered or Certified Mail, Return Receipt Requested, postage prepaid, or by confirmed facsimile to the persons and at the addresses listed below or to such other address or person as a party shall have designated in writing. First Services, L.P. First Bank (MO) #l First Missouri Center 11901 Olive Blvd. St. Louis, Missouri 63l4l Creve Coeur, Missouri 63l4l (F) The failure of either party to exercise in any respect any right provided for herein shall not be deemed a waiver of any rights. (G) Each party acknowledges that is has read this Agreement, understands it, and agrees that it is the complete and exclusive statement of the Agreement between the parties and supersedes and merges any prior or simultaneous proposals, understandings and all other agreements with respect to the subject matter. This Agreement may not be modified or altered except by a written instrument duly executed by both parties. (H) No waiver of any of the terms of this Agreement shall be effective unless in writing and signed by the duly authorized representative of the party charged therewith. No waiver of any provision hereof shall extend to or affect any obligation not expressly waived, impair any rights consequent on such obligation or imply a subsequent waiver of that or any other provision. (I) This Agreement shall be governed by, construed and interpreted in accordance with the laws of the State of Missouri. IN WITNESS WHEREOF, the parties have executed this Agreement the date first above written. First Bank (MO) First Services, L.P. 11901 Olive Boulevard One First Missouri Center Creve Coeur, Missouri 63141 St. Louis, Missouri 63141 BY: /s/ John A. Schreiber BY: /s/Thomas A. Bangert - ------------------------- ------------------------ John A. Schreiber Thomas A. Bangert President President Attachment 1 First Bank - 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 $0.100 Lockbox each $0.020 Branch Courier Route each, per month $17.00 Mail Services per month $200.00 DEPOSIT SERVICES Customer Accounts per account $0.30
Included in Above: Charge Backs CIF Management Returns Exception Item Processing Stops Signature Verification Wire Transfers Corporate Analysis ACH Incoming Cash Management Support ACH Origination FirstLink Official Checks Control Disbursement Money Orders Balance Reporting Savings Bonds Research Funds Transfer Adjustments B Notices 1099s "Due From" Reconciliation Kiting "Due To" Reconciliation Holds FRB Reconciliation's Dormant Accounts Application Balancing ATM Settlement Records Management Debit Card Settlement Savings Bonds OTHER SERVICES Collection System (Cyber Resources) Cash Management System (FirstLink) Recovery System (Cyber Resources) Commercial Analysis Asset/Liability (Bankware) Charge Back System Optical System (RVI) Teller Platform (ISC) MCIF (OKRA) ATM Support Loan Documentation (FTI/CFI) General Ledger Bank Audit Fixed Asset Interface Accounts Payable Interface Interactive Voice Remote Laser Printing Card Management System ACH Origination Wire Transfer (Fundtec) Organization Profitability (IPS) NOW Reclassification Loan Tracking (Baker Hill) Retrofit/New Releases Credit Scoring (Fair Issac)
EXHIBIT 10.9 SERVICE AGREEMENT This Service Agreement is made and entered into as of the 1st day of April, 1997, by and between First Services, L.P., a Missouri Limited Partnership and First Bank & Trust, a banking institution duly organized and existing by virtue of the laws of the State of California. WHEREAS, FIRST BANK & TRUST and FIRSTSERV, INC. entered into a Service Agreement dated December 8, 1995, as amended; and WHEREAS, said Service Agreement was assigned to First Services, L.P. on or about April 1, 1997; and WHEREAS, FIRST SERVICES, L.P. and FIRST BANK & TRUST desire to amend and restate said Service Agreement in its entirety. NOW, THEREFORE, for and in consideration of the mutual promises and covenants contained herein, and the sum of Ten Dollars ($l0.00) in hand paid, each to the other, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: I. TERMINATION AND REVOCATION The Parties hereto hereby revoke, cancel and hold for naught the Service Agreement dated December 8, 1995, as amended, and hereby substitute in its place the Service Agreement herein contained. II. SERVICES (A) First Services, L.P. shall furnish First Bank & Trust data processing and item processing services selected by First Bank & Trust from the Product and Price Schedule as per Attachment 1, attached hereto and incorporated herein by reference thereto. Additional services may be selected upon prior written notice to First Services, L.P. at First Services, L.P.'s then current list price by executing an amended Summary Page. (B) First Services, L.P. will provide conversion and training services for the fees specified from the Product and Price Schedule (Attachment 1). Classroom training in the use and operation of the system for the number of First Bank & Trust personnel mutually agreed upon in the conversion planning process will be provided at a training facility mutually agreed upon. Conversion services are those activities designed to transfer the processing of First Bank & Trust's data from its present processing company to First Services, L.P. (C) First Services, L.P. will also provide Network Support Service consisting of communication line monitoring and diagnostic equipment and support personnel to discover, diagnose, repair or report line problems to the appropriate telephone company. The fee for this service is also listed from the Product and Price Schedule (Attachment 1). (D) First Services, L.P. shall upon request act as First Bank & Trust's designated representative to arrange for the purchase, and installation of data lines necessary to access the First Services, L.P. system. Where requested, additional dial-up lines and equipment to be utilized as a backup to the regular data lines may also be ordered. First Services, L.P. shall bill First Bank & Trust for the actual charges incurred for the data lines and for the maintenance of the modems and other interface devices. (E) Processing priorities will be determined by mutual agreement of the parties hereto. III. TERM The term of this Agreement shall be twelve (12) months commencing on April 1, 1997. Upon expiration, the Agreement will automatically renew for successive terms of twelve (12) months each unless either party shall have provided written notice to the other at least one-hundred eighty (180) days prior to the expiration of the then current term, of its intent not to renew. In the event of termination, First Services, L.P. shall provide reasonable time allowance to allow First Bank & Trust to convert to another system. IV. SOFTWARE/FIRMWARE Unmodified third party software or firmware ("Software") may be supplied as part of the Agreement. All such Software shall be provided subject to Software License Agreements. V. PRICE AND PAYMENT (A) Fees for First Services, L.P.'s services are set forth from the Product and Price Schedule (Attachment 1), including where applicable minimum monthly charges and payment schedules for onetime fees. (B) Standard Fees shall be invoiced no later than the fifteenth (15th) of each month for the then current month. Terms of payment shall be net cash. (C) The Base Service Charge listed from the Product and Price Schedule (Attachment 1) shall not change more than once a year and then only upon six (6) months' prior written notice. The fee schedule shall be reviewed annually to ensure fair market value in pricing. Comparisons will be made with peers and other providers of similar services. (D) This above limitation shall not apply to pass-thru expenses. A pass-thru expense is a charge for goods or services by First Services, L.P. on First Bank & Trust's behalf which are to be billed to First Bank & Trust without mark-up. (E) The fees listed from the Product and Price Schedule (Attachment 1) do not include and First Bank & Trust is responsible for furnishing transportation or transmission of information between First Services, L.P.'s data center, First Bank & Trust's site and any applicable clearing house, regulatory agency or Federal Reserve Bank. Where First Bank & Trust has elected to have First Services, L.P. provide Telecommunication Services, the price for the Services will be provided and billed as a pass-thru expense. (F) Network Support Service Fees and Local Network Fees are based upon services rendered from First Services, L.P.'s premises. Off-premise support will be provided upon First Bank & Trust's request on an as available basis at First Services, L.P. then current charges for time and materials, plus reasonable travel and living expenses. VI. CLIENT OBLIGATIONS (A) First Bank & Trust shall be solely responsible for the input, transmission or delivery of all information and data required by First Services, L.P. to perform the services except where First Bank & Trust has retained First Services, L.P. to handle such responsibilities on its behalf. The data shall be provided in a format and manner approved by First Services, L.P. First Bank & Trust will provide at its own expense or procure from First Services, L.P. all equipment, computer software, communication lines and interface devices required to access the First Services, L.P. System. If First Bank & Trust has elected to provide such items itself, First Services, L.P. shall provide First Bank & Trust with a list of compatible equipment and software. (B) First Bank & Trust shall designate appropriate First Bank & Trust personnel for training in the use of the First Services, L.P. System, shall allow First Services, L.P. access to First Bank & Trust's site during normal business hours for conversion and shall cooperate with First Services, L.P. personnel in the conversion and implementation of the services. (C) First Bank & Trust shall comply with any operating instructions on the use of the First Services, L.P. system provided by First Services, L.P., shall review all reports furnished by First Services, L.P. for accuracy and shall work with First Services, L.P. to reconcile any out of balance conditions. First Bank & Trust shall determine and be responsible for the authenticity and accuracy of all information and data submitted to First Services, L.P. (D) First Bank & Trust shall furnish, or if First Services, L.P. agrees to so furnish, reimburse First Services, L.P. for courier services applicable to the services requested. VII. GENERAL ADMINISTRATION First Services, L.P. is continually reviewing and modifying the First Services, L.P. system to improve service and to comply with federal government regulations applicable to the data utilized in providing services to First Bank & Trust. First Services, L.P. reserves the right to make changes in the service, including, but not limited to operating procedures, security procedures, the type of equipment resident at and the location of First Services, L.P.'s data center. First Services, L.P. will provide First Bank & Trust at least sixty (60) days prior written notice of changes in procedures or reporting and at least six (6) months prior written notice of changes in service costs. VIII. CLIENT CONFIDENTIAL INFORMATION (A) First Services, L.P. shall treat all informatio and data relating to First Bank & Trust business provided to First Services, L.P. by First Bank & Trust, or information relating to First Bank & Trust's customers, as confidential and shall safeguard First Bank & Trust's information with the same degree of care used to protect First Services, L.P.'s confidential information. First Services, L.P. and First Bank & Trust agree that master and transaction data files are owned by and constitute property of First Bank & Trust. First Bank & Trust's data and records shall be subject to regulation and examination by State and Federal supervisory agencies to the same extent as if such information were on First Bank & Trust's premises. First Services, L.P.'s obligations under this Section VIII shall survive the termination or expiration of this Agreement. (B) First Services, L.P. shall maintain adequate backup procedures including storage of duplicate record files as necessary to reproduce First Bank & Trust's records and data. In the event of a service disruption due to reasons beyond First Services, L.P.'s control, First Services, L.P. shall use diligent efforts to mitigate the effects of such an occurrence. IX. FIRST SERVICES, L.P. CONFIDENTIAL INFORMATION (A) First Bank & Trust shall not use or disclose to any third persons any confidential information concerning First Services, L.P. First Services, L.P. confidential information is that which relates to First Services, L.P.'s software, research, development, trade secrets or business affairs including, but not limited to, the terms and conditions of this Agreement but does not include information in the public domain through no fault of First Bank & Trust. First Bank & Trust's obligations under this Section IX shall survive the termination or expiration of this Agreement. (B) First Services, L.P.'s system contains information and computer software which is proprietary and confidential information of First Services, L.P., its suppliers and licensees. First Bank & Trust agrees not to attempt to circumvent the devices employed by First Services, L.P. to prevent unauthorized access to the First Services, L.P.'s System. X. WARRANTIES First Services, L.P. will accurately process First Bank & Trust's work provided that First Bank & Trust supplies accurate data and follows the procedures described in First Services, L.P.'s User Manuals, notices and advises. First Services, L.P. personnel will exercise due care in the processing of First Bank & Trust's work. In the event of an error caused by First Services, L.P.'s personnel, programs or equipment, First Services, L.P. shall correct the data and/or reprocess the affected report at no additional cost to First Bank & Trust. XI. LIMITATION OF LIABILITY IN NO EVENT SHALL FIRST SERVICES, L.P. BE LIABLE FOR LOSS OF GOODWILL, OR FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING FROM FIRST BANK & TRUST'S USE OF FIRST SERVICES L.P.'S SERVICES, OR FIRST SERVICES, L.P.'S SUPPLY OF EQUIPMENT OR SOFTWARE, UNDER THIS AGREEMENT REGARDLESS OF WHETHER SUCH CLAIM ARISES IN TORT OR IN CONTRACT. FIRST SERVICES, L.P.'S AGGREGATE LIABILITY FOR ANY AND ALL CAUSES OF ACTION RELATING TO SERVICES PERFORMED HEREUNDER OR ANY DAMAGE OR LOSS INCURRED OR SUSTAINED BY FIRST BANK & TRUST RELATING TO THIS AGREEMENT AND THE SERVICES PERFORMED HEREUNDER SHALL BE LIMITED TO THE AMOUNT OF TOTAL FEES PAID BY FIRST BANK & TRUST TO FIRST SERVICES, L.P. IN THE THREE (3) MONTH PERIOD PRECEDING THE DATE THE CLAIM ACCRUED. FIRST SERVICES, L.P.'S AGGREGATE LIABILITY FOR A DEFAULT RELATING TO EQUIPMENT OR SOFTWARE SHALL BE LIMITED TO THE AMOUNT PAID FOR THE EQUIPMENT OR SOFTWARE. XII. PERFORMANCE STANDARDS (A) On-Line Availability - First Services, L.P.'s standard of performance shall be on-line availability of the system 98% of the time that it is scheduled to be so available over a three month period (the "Measurement Period"). Actual on-line performance will be calculated monthly by comparing the number of hours which the system was scheduled to be operational on an on-line basis with the number of hours, or a portion thereof, it was actually operational on an on-line basis. Downtime may be caused by operator error, hardware malfunction or failure, or environmental failures such as loss of power or air conditioning. Downtime caused by reasons beyond First Services, L.P.'s control should not be considered in the statistics. (B) Report Availability - First Services, L.P.'s standard of performance for report availability shall be that, over a three (3) month period, ninety-five percent (95%) of all Critical Daily Reports shall be available for remote printing on time without significant errors. A Critical Daily Report shall mean priority group reports which First Services, L.P. and First Bank & Trust have mutually agreed in writing are necessary to properly account for the previous day's activity and properly notify First Bank & Trust of overdraft, NSF or return items. A significant error is one which impairs First Bank & Trust's ability to properly account for the previous days activity and/or properly account for overdraft, NSF or return items. Actual performance will be calculated monthly by comparing the total number of First Bank & Trust reports scheduled to be available from First Services, L.P. to the number of reports which were available on time and without error. (C) Exclusive Remedy - In the event that First Services, L.P.'s performance fails to meet the standards listed above and such failure is not the result of First Bank & Trust's error or omission, First Bank & Trust's sole and exclusive remedy for such default shall be the right to terminate this Agreement in accordance with the provisions of this paragraph. In the event that First Services, L.P. fails to achieve any Performance Standards, alone or in combination, for the prescribed measurement period, First Bank & Trust shall notify First Services, L.P. of its intent to terminate this agreement if First Services, L.P. fails to restore performance to the committed levels. First Services, L.P. shall advise First Bank & Trust promptly upon correction of the system deficiencies (in no event shall corrective action exceed sixty (60) days from the notice date) and shall begin an additional measurement period. Should First Services, L.P. fail to achieve the required Performance Standards during the remeasurement period, First Bank & Trust may terminate this Agreement and First Services, L.P. shall cooperate with First Bank & Trust to achieve an orderly transition to First Bank & Trust's replacement processing system. First Bank & Trust may also terminate this Agreement if First Services, L.P.'s performance for the same standard is below the relevant performance standard for more than two (2) measurement periods in any consecutive twelve (12) months or for more than five (5) measurement periods during the term of this agreement. During the period of transition, First Bank & Trust shall pay only such charges as are incurred for monthly fees until the date of deconversion. First Services, L.P. shall not charge First Bank & Trust for services relating to First Bank & Trust's deconversion. (D) Audit - First Bank & Trust shall have the right to perform reasonable audits, at its cost, upon giving written notice to First Services, L.P. of its intent to do so. First Services, L.P. shall provide, upon request, financial information to First Bank & Trust. XIII. DISASTER RECOVERY (A) A Disaster shall mean any unplanned interruption of the operations of or inaccessibility to the First Services, L.P. data center which appears in First Services, L.P.s reasonable judgement to require relocation of processing to an alternative site. First Services, L.P. shall notify First Bank & Trust as soon as possible after it deems a service outage to be a Disaster. First Services, L.P. shall move the processing of First Bank & Trust's standard on-line services to an alternative processing center as expeditiously as possible. First Bank & Trust shall maintain adequate records of all transactions during the period of service interruption and shall have personnel available to assist First Services L.P., Inc.in implementing the switch over to the alternative processing site. During a disaster, optional or on-request services shall be provided by First Services, L.P. only to the extent that there is adequate capacity at the alternate center and only after stabilizing the provision of base on-line services. (B) First Services, L.P. shall work with First Bank & Trust to establish a plan for alternative data communications in the event of a disaster. First Bank & Trust shall be responsible for furnishing any additional communications equipment and data lines required under the adopted plan. (C) First Services, L.P. shall test its Disaster Recovery Services Plan by conducting one annual test. First Bank & Trust agrees to participate in and assist First Services, L.P. with such testing. Test results will be made available to First Bank & Trust's regulators, internal and external auditors, and (upon request) to First Bank & Trust's insurance underwriters. (D) First Bank & Trust understands and agrees that the First Services, L.P. Disaster Recovery Plan is designed to minimize but not eliminate risks associated with a disaster affecting First Services, L.P.'s data center. First Services, L.P. does not warrant that service will be uninterrupted or error free in the event of a disaster. First Bank & Trust maintains responsibility for adopting a disaster recovery plan relating to disasters affecting First Bank & Trust's facilities and for securing business interruption insurance or other insurance as necessary to properly protect First Bank & Trust's revenues in the event of a disaster. XIV. DEFAULT (A) In the event that First Bank & Trust is thirty (30) days in arrears in making any payment required, or in the event of any other material default by either First Services, L.P. or First Bank & Trust in the performance of their obligations, the affected party shall have the right to give written notice to the other of the default and its intent to terminate this Agreement stating with reasonable particularity the nature of the claimed default. This Agreement shall terminate if the default has not been cured within a reasonable time with a minimum being thirty (30) days from the effective date of the notice. (B) Upon the expiration of this Agreement, or its termination, First Services, L.P. shall furnish to First Bank & Trust such copies of First Bank & Trust's data files as First Bank & Trust may request in machine readable format form along with such other information and assistance as or is reasonable and customary to enable First Bank & Trust to deconvert from the First Services, L.P. system. First Bank & Trust shall reimburse First Services, L.P. for the production of data records and other services at First Services, L.P.'s current fees for such services. XV. INSURANCE First Services, L.P. carries Comprehensive General Liability insurance with primary limits of two million dollars, Commercial Crime insurance covering Employee Dishonesty in the amount of fifteen million dollars, all-risk replacement cost coverage on all equipment used at First Services, L.P.'s data center and Workers Compensation coverage on First Services, L.P. employees wherever located in the United States. First Bank & Trust shall carry adequate insurance to cover liability for source documents while in transit and in case of data loss through errors and omissions. XVI. GENERAL (A) This Agreement is binding upon the parties and their respective successors and permitted assigns. Neither party may assign this Agreement in whole or in part without the consent of First Bank & Trust and/or First Services, L.P., provided, however, that First Services, L.P. may subcontract any or all of the services to be performed under this Agreement without the written consent of First Bank & Trust. Any such subcontractors shall be required to comply with all of the applicable terms and conditions of this Agreement. (B) The parties agree that, in connection with the performance of their obligations hereunder, they will comply with all applicable Federal, State, and local laws including the laws and regulations regarding Equal Employment Opportunities. (C) First Services, L.P. agrees that the Office of Thrift Supervision, FDIC, or other authority will have the authority and responsibility provided to the other regulatory agencies pursuant to the Bank Service Corporation Act, 12 U.S.C. 1867 (C) relating to service performed by contract or otherwise. First Services, L.P., also agrees that its services shall be subject to oversight by the O.C.C., FDIC or state banking departments as may be applicable under laws and regulations pertaining to First Bank & Trusts's charter and shall, if applicable, provide the O.T.S. District Director of the district in which the data processing center is located and other state and federal agencies with a copy of First Services, L.P.'s current audit and financial statements and a copy of any current third party review report when a review has been performed. (D) Neither party shall be liable for any errors, delays or non-performance due to events beyond its reasonable control including, but not limited to, acts of God, failure or delay of power or communications, changes in law or regulation or other acts of governmental authority, strike, weather conditions or transpor- tation. (E) All written notices required to be given under this Agreement shall be sent by Registered or Certified Mail, Return Receipt Requested, postage prepaid, or by confirmed facsimile to the persons and at the addresses listed below or to such other address or person as a party shall have designated in writing. First Services, L.P. First Bank & Trust #l First Missouri Center 2400 Michelson Drive St. Louis, Missouri 63l4l Irvine, California 92714 (F) The failure of either party to exercise in any respect any right provided for herein shall not be deemed a waiver of any rights. (G) Each party acknowledges that is has read this Agreement, understands it, and agrees that it is the complete and exclusive statement of the Agreement between the parties and supersedes and merges any prior or simultaneous proposals, understandings and all other agreements with respect to the subject matter. This Agreement may not be modified or altered except by a written instrument duly executed by both parties. (H) No waiver of any of the terms of this Agreement shall be effective unless in writing and signed by the duly authorized representative of the party charged therewith. No waiver of any provision hereof shall extend to or affect any obligation not expressly waived, impair any rights consequent on such obligation or imply a subsequent waiver of that or any other provision. (I) This Agreement shall be governed by, construed and interpreted in accordance with the laws of the State of Missouri. IN WITNESS WHEREOF, the parties have executed this Agreement the date first above written. First Bank & Trust First Services, L.P. 2400 Michelson Drive One First Missouri Center Irvine, California 92714 St. Louis, Missouri 63141 BY:/s/ Fred D. Jensen BY:/s/ Thomas A. Bangert - --------------------- ------------------------ Fred D. Jensen Thomas A. Bangert President President
Attachment 1 First Bank & Trust- 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 $0.100 Lockbox each $0.020 Branch Courier Route each, per month $17.00 Mail Services per month $200.00 DEPOSIT SERVICES Customer Accounts per account $5,000.00
Included in Above: Charge Backs CIF Management Returns Exception Item Processing Stops Signature Verification Wire Transfers Corporate Analysis ACH Incoming Cash Management Support ACH Origination FirstLink Official Checks Control Disbursement Money Orders Balance Reporting Savings Bonds Research Funds Transfer Adjustments B Notices 1099s "Due From" Reconciliation Kiting "Due To" Reconciliation Holds FRB Reconciliation's Dormant Accounts Application Balancing ATM Settlement Records Management Debit Card Settlement Savings Bonds OTHER SERVICES Collection System (Cyber Resources) Cash Management System (FirstLink) Recovery System (Cyber Resources) Commercial Analysis Asset/Liability (Bankware) Charge Back System Optical System (RVI) Teller Platform (ISC) MCIF (OKRA) ATM Support Loan Documentation (FTI/CFI) General Ledger Bank Audit Fixed Asset Interface Accounts Payable Interface Interactive Voice Remote Laser Printing Card Management System ACH Origination Wire Transfer (Fundtec) Organization Profitability (IPS) NOW Reclassification Loan Tracking (Baker Hill) Retrofit/New Releases Credit Scoring (Fair Issac)
EXHIBIT 10.10 SERVICE AGREEMENT This Service Agreement is made and entered into as of the 1st day of April, 1997, by and between First Services, L.P., a Missouri Limited Partnership and BankTEXAS N.A., a banking institution duly organized and existing by virtue of the laws of the United State. WHEREAS, BankTEXAS and FIRSTSERV, INC. entered into a Service Agreement dated December 8, 1995, as amended; and WHEREAS, said Service Agreement was assigned to First Services, L.P. on or about April 1, 1997; and WHEREAS, FIRST SERVICES, L.P. and BankTEXAS desire to amend and restate said Service Agreement in its entirety. NOW, THEREFORE, for and in consideration of the mutual promises and covenants contained herein, and the sum of Ten Dollars ($l0.00) in hand paid, each to the other, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: I. TERMINATION AND REVOCATION The Parties hereto hereby revoke, cancel and hold for naught the Service Agreement dated December 8, 1995, as amended, and hereby substitute in its place the Service Agreement herein contained. II. SERVICES (A) First Services, L.P. shall furnish BankTEXAS data processing and item processing services selected by BankTEXAS from the Product and Price Schedule as per Attachment 1, attached hereto and incorporated herein by reference thereto. Additional services may be selected upon prior written notice to First Services, L.P. at First Services, L.P.'s then current list price by executing an amended Summary Page. (B) First Services, L.P. will provide conversion and training services for the fees specified from the Product and Price Schedule (Attachment 1). Classroom training in the use and operation of the system for the number of BankTEXAS personnel mutually agreed upon in the conversion planning process will be provided at a training facility mutually agreed upon. Conversion services are those activities designed to transfer the processing of BankTEXAS's data from its present processing company to First Services, L.P. (C) First Services, L.P. will also provide Network Support Service consisting of communication line monitoring and diagnostic equipment and support personnel to discover, diagnose, repair or report line problems to the appropriate telephone company. The fee for this service is also listed from the Product and Price Schedule (Attachment 1). (D) First Services, L.P. shall upon request act as BankTEXAS's designated representative to arrange for the purchase, and installation of data lines necessary to access the First Services, L.P. system. Where requested, additional dial-up lines and equipment to be utilized as a backup to the regular data lines may also be ordered. First Services, L.P. shall bill BankTEXAS for the actual charges incurred for the data lines and for the maintenance of the modems and other interface devices. (E) Processing priorities will be determined by mutual agreement of the parties hereto. III. TERM The term of this Agreement shall be twelve (12) months commencing on April 1, 1997. Upon expiration, the Agreement will automatically renew for successive terms of twelve (12) months each unless either party shall have provided written notice to the other at least one-hundred eighty (180) days prior to the expiration of the then current term, of its intent not to renew. In the event of termination, First Services, L.P. shall provide reasonable time allowance to allow BankTEXAS to convert to another system. IV. SOFTWARE/FIRMWARE Unmodified third party software or firmware ("Software") may be supplied as part of the Agreement. All such Software shall be provided subject to Software License Agreements. V. PRICE AND PAYMENT (A) Fees for First Services, L.P.'s services are set forth from the Product and Price Schedule (Attachment 1), including where applicable minimum monthly charges and payment schedules for onetime fees. (B) Standard Fees shall be invoiced no later than the fifteenth (15th) of each month for the then current month. Terms of payment shall be net cash. (C) The Base Service Charge listed from the Product and Price Schedule (Attachment 1) shall not change more than once a year and then only upon six (6) months' prior written notice. The fee schedule shall be reviewed annually to ensure fair market value in pricing. Comparisons will be made with peers and other providers of similar services. (D) This above limitation shall not apply to pass-thru expenses. A pass-thru expense is a charge for goods or services by First Services, L.P. on BankTEXAS's behalf which are to be billed to BankTEXAS without mark-up. (E) The fees listed from the Product and Price Schedule (Attachment 1) do not include and BankTEXAS is responsible for furnishing transportation or transmission of information between First Services, L.P.'s data center, BankTEXAS's site and any applicable clearing house, regulatory agency or Federal Reserve Bank. Where BankTEXAS has elected to have First Services, L.P. provide Telecommunication Services, the price for the Services will be provided and billed as a pass-thru expense. (F) Network Support Service Fees and Local Network Fees are based upon services rendered from First Services, L.P.'s premises. Off-premise support will be provided upon BankTEXAS's request on an as available basis at First Services, L.P. then current charges for time and materials, plus reasonable travel and living expenses. VI. CLIENT OBLIGATIONS (A) BankTEXAS shall be solely responsible for the input, transmission or delivery of all information and data required by First Services, L.P. to perform the services except where BankTEXAS has retained First Services, L.P. to handle such responsibilities on its behalf. The data shall be provided in a format and manner approved by First Services, L.P. BankTEXAS will provide at its own expense or procure from First Services, L.P. all equipment, computer software, communication lines and interface devices required to access the First Services, L.P. System. If BankTEXAS has elected to provide such items itself, First Services, L.P. shall provide BankTEXAS with a list of compatible equipment and software. (B) BankTEXAS shall designate appropriate BankTEXAS personnel for training in the use of the First Services, L.P. System, shall allow First Services, L.P. access to BankTEXAS's site during normal business hours for conversion and shall cooperate with First Services, L.P. personnel in the conversion and implementation of the services. (C) BankTEXAS shall comply with any operating instructions on the use of the First Services, L.P. system provided by First Services, L.P., shall review all reports furnished by First Services, L.P. for accuracy and shall work with First Services, L.P. to reconcile any out of balance conditions. BankTEXAS shall determine and be responsible for the authenticity and accuracy of all information and data submitted to First Services, L.P. (D) BankTEXAS shall furnish, or if First Services, L.P. agrees to so furnish, reimburse First Services, L.P. for courier services applicable to the services requested. VII. GENERAL ADMINISTRATION First Services, L.P. is continually reviewing and modifying the First Services, L.P. system to improve service and to comply with federal government regulations applicable to the data utilized in providing services to BankTEXAS. First Services, L.P. reserves the right to make changes in the service, including, but not limited to operating procedures, security procedures, the type of equipment resident at and the location of First Services, L.P.'s data center. First Services, L.P. will provide BankTEXAS at least sixty (60) days prior written notice of changes in procedures or reporting and at least six (6) months prior written notice of changes in service costs. VIII. CLIENT CONFIDENTIAL INFORMATION (A) First Services, L.P. shall treat all information and data relating to BankTEXAS business provided to First Services, L.P. by BankTEXAS, or information relating to BankTEXAS's customers, as confidential and shall safeguard BankTEXAS's information with the same degree of care used to protect First Services, L.P.'s confidential information. First Services, L.P. and BankTEXAS agree that master and transaction data files are owned by and constitute property of BankTEXAS. BankTEXAS's data and records shall be subject to regulation and examination by State and Federal supervisory agencies to the same extent as if such information were on BankTEXAS's premises. First Services, L.P.'s obligations under this Section VIII shall survive the termination or expiration of this Agreement. (B) First Services, L.P. shall maintain adequate backup procedures including storage of duplicate record files as necessary to reproduce BankTEXAS's records and data. In the event of a service disruption due to reasons beyond First Services, L.P.'s control, First Services, L.P. shall use diligent efforts to mitigate the effects of such an occurrence. IX. FIRST SERVICES, L.P. CONFIDENTIAL INFORMATION (A) BankTEXAS shall not use or disclose to any third persons any confidential information concerning First Services, L.P. First Services, L.P. confidential information is that which relates to First Services, L.P.'s software, research, development, trade secrets or business affairs including, but not limited to, the terms and conditions of this Agreement but does not include information in the public domain through no fault of BankTEXAS. BankTEXAS's obligations under this Section IX shall survive the termination or expiration of this Agreement. (B) First Services, L.P.'s system contains information and computer software which is proprietary and confidential information of First Services, L.P., its suppliers and licensees. BankTEXAS agrees not to attempt to circumvent the devices employed by First Services, L.P. to prevent unauthorized access to the First Services, L.P.'s System. X. WARRANTIES First Services, L.P. will accurately process BankTEXAS's work provided that BankTEXAS supplies accurate data and follows the procedures described in First Services, L.P.'s User Manuals, notices and advises. First Services, L.P. personnel will exercise due care in the processing of BankTEXAS's work. In the event of an error caused by First Services, L.P.'s personnel, programs or equipment, First Services, L.P. shall correct the data and/or reprocess the affected report at no additional cost to BankTEXAS. XI. LIMITATION OF LIABILITY IN NO EVENT SHALL FIRST SERVICES, L.P. BE LIABLE FOR LOSS OF GOODWILL, OR FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING FROM BANKTEXAS'S USE OF FIRST SERVICES L.P.'S SERVICES, OR FIRST SERVICES, L.P.'S SUPPLY OF EQUIPMENT OR SOFTWARE, UNDER THIS AGREEMENT REGARDLESS OF WHETHER SUCH CLAIM ARISES IN TORT OR IN CONTRACT. FIRST SERVICES, L.P.'S AGGREGATE LIABILITY FOR ANY AND ALL CAUSES OF ACTION RELATING TO SERVICES PERFORMED HEREUNDER OR ANY DAMAGE OR LOSS INCURRED OR SUSTAINED BY BANKTEXAS RELATING TO THIS AGREEMENT AND THE SERVICES PERFORMED HEREUNDER SHALL BE LIMITED TO THE AMOUNT OF TOTAL FEES PAID BY BANKTEXAS TO FIRST SERVICES, L.P. IN THE THREE (3) MONTH PERIOD PRECEDING THE DATE THE CLAIM ACCRUED. FIRST SERVICES, L.P.'S AGGREGATE LIABILITY FOR A DEFAULT RELATING TO EQUIPMENT OR SOFTWARE SHALL BE LIMITED TO THE AMOUNT PAID FOR THE EQUIPMENT OR SOFTWARE. XII. PERFORMANCE STANDARDS (A) On-Line Availability - First Services, L.P.'s standard of performance shall be on-line availability of the system 98% of the time that it is scheduled to be so available over a three month period (the "Measurement Period"). Actual on-line performance will be calculated monthly by comparing the number of hours which the system was scheduled to be operational on an on-line basis with the number of hours, or a portion thereof, it was actually operational on an on-line basis. Downtime may be caused by operator error, hardware malfunction or failure, or environmental failures such as loss of power or air conditioning. Downtime caused by reasons beyond First Services, L.P.'s control should not be considered in the statistics. (B) Report Availability - First Services, L.P.'s standard of performance for report availability shall be that, over a three (3) month period, ninety-five percent (95%) of all Critical Daily Reports shall be available for remote printing on time without significant errors. A Critical Daily Report shall mean priority group reports which First Services, L.P. and BankTEXAS have mutually agreed in writing are necessary to properly account for the previous day's activity and properly notify BankTEXAS of overdraft, NSF or return items. A significant error is one which impairs BankTEXAS's ability to properly account for the previous days activity and/or properly account for overdraft, NSF or return items. Actual performance will be calculated monthly by comparing the total number of BankTEXAS reports scheduled to be available from First Services, L.P. to the number of reports which were available on time and without error. (C) Exclusive Remedy - In the event that First Services, L.P.'s performance fails to meet the standards listed above and such failure is not the result of BankTEXAS's error or omission, BankTEXAS's sole and exclusive remedy for such default shall be the right to terminate this Agreement in accordance with the provisions of this paragraph. In the event that First Services, L.P. fails to achieve any Performance Standards, alone or in combination, for the prescribed measurement period, BankTEXAS shall notify First Services, L.P. of its intent to terminate this agreement if First Services, L.P. fails to restore performance to the committed levels. First Services, L.P. shall advise BankTEXAS promptly upon correction of the system deficiencies (in no event shall corrective action exceed sixty (60) days from the notice date) and shall begin an additional measurement period. Should First Services, L.P. fail to achieve the required Performance Standards during the remeasurement period, BankTEXAS may terminate this Agreement and First Services, L.P. shall cooperate with BankTEXAS to achieve an orderly transition to BankTEXAS's replacement processing system. BankTEXAS may also terminate this Agreement if First Services, L.P.'s performance for the same standard is below the relevant performance standard for more than two (2) measurement periods in any consecutive twelve (12) months or for more than five (5) measurement periods during the term of this agreement. During the period of transition, BankTEXAS shall pay only such charges as are incurred for monthly fees until the date of deconversion. First Services, L.P. shall not charge BankTEXAS for services relating to BankTEXAS's deconversion. (D) Audit - BankTEXAS shall have the right to perform reasonable audits, at its cost, upon giving written notice to First Services, L.P. of its intent to do so. First Services, L.P. shall provide, upon request, financial information to BankTEXAS. XIII. DISASTER RECOVERY (A) A Disaster shall mean any unplanned interruption of the operations of or inaccessibility to the First Services, L.P. data center which appears in First Services, L.P.'s reasonable judgement to require relocation of processing to an alternative site. First Services, L.P. shall notify BankTEXAS as soon as possible after it deems a service outage to be a Disaster. First Services, L.P. shall move the processing of BankTEXAS's standard on-line services to an alternative processing center as expeditiously as possible. BankTEXAS shall maintain adequate records of all transactions during the period of service interruption and shall have personnel available to assist First Services L.P., Inc. in implementing the switch over to the alternative processing site. During a disaster, optional or on-request services shall be provided by First Services, L.P. only to the extent that there is adequate capacity at the alternate center and only after stabilizing the provision of base on-line services. (B) First Services, L.P. shall work with BankTEXAS to establish a plan for alternative data communications in the event of a disaster. BankTEXAS shall be responsible for furnishing any additional communications equipment and data lines required under the adopted plan. (C) First Services, L.P. shall test its Disaster Recovery Services Plan by conducting one annual test. BankTEXAS agrees to participate in and assist First Services, L.P. with such testing. Test results will be made available to BankTEXAS's regulators, internal and external auditors, and (upon request) to BankTEXAS's insurance underwriters. (D) BankTEXAS understands and agrees that the First Services, L.P. Disaster Recovery Plan is designed to minimize but not eliminate risks associated with a disaster affecting First Services, L.P.'s data center. First Services, L.P. does not warrant that service will be uninterrupted or error free in the event of a disaster. BankTEXAS maintains responsibility for adopting a disaster recovery plan relating to disasters affecting BankTEXAS's facilities and for securing business interruption insurance or other insurance as necessary to properly protect BankTEXAS's revenues in the event of a disaster. XIV. DEFAULT (A) In the event that BankTEXAS is thirty (30) days in arrears in making any payment required, or in the event of any other material default by either First Services, L.P. or BankTEXAS in the performance of their obligations, the affected party shall have the right to give written notice to the other of the default and its intent to terminate this Agreement stating with reasonable particularity the nature of the claimed default. This Agreement shall terminate if the default has not been cured within a reasonable time with a minimum being thirty (30) days from the effective date of the notice. (B) Upon the expiration of this Agreement, or its termination, First Services, L.P. shall furnish to BankTEXAS such copies of BankTEXAS's data files as BankTEXAS may request in machine readable format form along with such other information and assistance as or is reasonable and customary to enable BankTEXAS to deconvert from the First Services, L.P. system. BankTEXAS shall reimburse First Services, L.P. for the production of data records and other services at First Services, L.P.'s current fees for such services. XV. INSURANCE First Services, L.P. carries Comprehensive General Liability insurance with primary limits of two million dollars, Commercial Crime insurance covering Employee Dishonesty in the amount of fifteen million dollars, all-risk replacement cost coverage on all equipment used at First Services, L.P.'s data center and Workers Compensation coverage on First Services, L.P. employees wherever located in the United States. BankTEXAS shall carry adequate insurance to cover liability for source documents while in transit and in case of data loss through errors and omissions. XVI. GENERAL (A) This Agreement is binding upon the parties and their respective successors and permitted assigns. Neither party may assign this Agreement in whole or in part without the consent of BankTEXAS and/or First Services, L.P., provided, however, that First Services, L.P. may subcontract any or all of the services to be performed under this Agreement without the written consent of BankTEXAS. Any such subcontractors shall be required to comply with all of the applicable terms and conditions of this Agreement. (B) The parties agree that, in connection with the performance of their obligations hereunder, they will comply with all applicable Federal, State, and local laws including the laws and regulations regarding Equal Employment Opportunities. (C) First Services, L.P. agrees that the Office of Thrift Supervision, FDIC, or other authority will have the authority and responsibility provided to the other regulatory agencies pursuant to the Bank Service Corporation Act, 12 U.S.C. 1867 (C) relating to service performed by contract or otherwise. First Services, L.P., also agrees that its services shall be subject to oversight by the O.C.C., FDIC or state banking departments as may be applicable under laws and regulations pertaining to BankTEXASs's charter and shall, if applicable, provide the O.T.S. DistrictDirector of the district in which the data processing center is located and other state and federal agencies with a copy of First Services, L.P.'s current audit and financial statements and a copy of any current third party review report when a review has been performed. (D) Neither party shall be liable for any errors, delays or non-performance due to events beyond its reasonable control including, but not limited to, acts of God, failure or delay of power or communications, changes in law or regulation or other acts of governmental authority, strike, weather conditions or transpor- tation. (E) All written notices required to be given under this Agreement shall be sent by Registered or Certified Mail, Return Receipt Requested, postage prepaid, or by confirmed facsimile to the persons and at the addresses listed below or to such other address or person as a party shall have designated in writing. First Services, L.P. BankTEXAS #l First Missouri Center 8820 Westheimer St. Louis, Missouri 63l4l Houston, Texas 77063 (F) The failure of either party to exercise in any respect any right provided for herein shall not be deemed a waiver of any rights. (G) Each party acknowledges that is has read this Agreement, understands it, and agrees that it is the complete and exclusive statement of the Agreement between the parties and supersedes and merges any prior or simultaneous proposals, understandings and all other agreements with respect to the subject matter. This Agreement may not be modified or altered except by a written instrument duly executed by both parties. (H) No waiver of any of the terms of this Agreement shall be effective unless in writing and signed by the duly authorized representative of the party charged therewith. No waiver of any provision hereof shall extend to or affect any obligation not expressly waived, impair any rights consequent on such obligation or imply a subsequent waiver of that or any other provision. (I) This Agreement shall be governed by, construed and interpreted in accordance with the laws of the State of Missouri. IN WITNESS WHEREOF, the parties have executed this Agreement the date first above written. BankTEXAS First Services, L.P. 8820 Westheimer One First Missouri Center Houston, Texas 77063 St. Louis, Missouri 63141 BY:/s/ David W. Weaver BY:/s/ Thomas A. Bangert David Weaver Thomas A. Bangert President President 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 DEPOSIT SERVICES Customer Accounts per account $0.30
Included in Above:
Charge Backs CIF Management Returns Exception Item Processing Stops Signature Verification Wire Transfers Corporate Analysis ACH Incoming Cash Management Support ACH Origination FirstLink Official Checks Control Disbursement Money Orders Balance Reporting Savings Bonds Research Funds Transfer Adjustments B Notices 1099s "Due From" Reconciliation Kiting "Due To" Reconciliation Holds FRB Reconciliation's Dormant Accounts Application Balancing ATM Settlement Records Management Debit Card Settlement Savings Bonds OTHER SERVICES Collection System (Cyber Resources) Cash Management System (FirstLink) Recovery System (Cyber Resources) Commercial Analysis Asset/Liability (Bankware) Charge Back System Optical System (RVI) Teller Platform (ISC) MCIF (OKRA) ATM Support Loan Documentation (FTI/CFI) General Ledger Bank Audit Fixed Asset Interface Accounts Payable Interface Interactive Voice Remote Laser Printing Card Management System ACH Origination Wire Transfer (Fundtec) Organization Profitability (IPS) NOW Reclassification Loan Tracking (Baker Hill) Retrofit/New Releases Credit Scoring (Fair Issac)
EXHIBIT 10.11 SERVICE AGREEMENT This Service Agreement is made and entered into as of the 1st day of April, 1997, by and between First Services, L.P., a Missouri Limited Partnership and Sunrise Bank, a banking institution duly organized and existing by virtue of the laws of the State of California. WHEREAS, SUNRISE BANK and FIRSTSERV, Inc. entered into a Service Agreement dated November 21, 1996; WHEREAS, said Service Agreement was assigned to First Services, L.P. on or about April 1, 1997; and WHEREAS, FIRST SERVICES, L.P. and SUNRISE BANK desire to amend and restate said Service Agreement in its entirety. NOW, THEREFORE, for and in consideration of the mutual promises and covenants contained herein, and the sum of Ten Dollars ($l0.00) in hand paid, each to the other, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: I. TERMINATION AND REVOCATION The Parties hereto hereby revoke, cancel and hold for naught the Service Agreement dated November 21, 1996, and hereby substitute in its place the Service Agreement herein contained. II. SERVICES (A) First Services, L.P. shall furnish Sunrise Bank data processing and item processing services selected by Sunrise Bank from the Product and Price Schedule as per Attachment 1, attached hereto and incorporated herein by reference thereto. Additional services may be selected upon prior written notice to First Services, L.P. at First Services, L.P.'s then current list price by executing an amended Summary Page. (B) First Services, L.P. will provide conversion and training services for the fees specified from the Product and Price Schedule (Attachment 1). Classroom training in the use and operation of the system for the number of Sunrise Bank personnel mutually agreed upon in the conversion planning process will be provided at a training facility mutually agreed upon. Conversion services are those activities designed to transfer the processing of Sunrise Bank's data from its present processing company to First Services, L.P. (C) First Services, L.P. will also provide Network Support Service consisting of communication line monitoring and diagnostic equipment and support personnel to discover, diagnose, repair or report line problems to the appropriate telephone company. The fee for this service is also listed from the Product and Price Schedule (Attachment 1). (D) First Services, L.P. shall upon request act as Sunrise Bank's designated representative to arrange for the purchase, and installation of data lines necessary to access the First Services, L.P. system. Where requested, additional dial-up lines and equipment to be utilized as a backup to the regular data lines may also be ordered. First Services, L.P. shall bill Sunrise Bank for the actual charges incurred for the data lines and for the maintenance of the modems and other interface devices. (E) Processing priorities will be determined by mutual agreement of the parties hereto. III. TERM The term of this Agreement shall be twelve (12) months commencing on April 1, 1997. Upon expiration, the Agreement will automatically renew for successive terms of twelve (12) months each unless either party shall have provided written notice to the other at least one-hundred eighty (180) days prior to the expiration of the then current term, of its intent not to renew. In the event of termination, First Services, L.P. shall provide reasonable time allowance to allow Sunrise Bank to convert to another system. IV. SOFTWARE/FIRMWARE Unmodified third party software or firmware ("Software") may be supplied as part of the Agreement. All such Software shall be provided subject to Software License Agreements. V. PRICE AND PAYMENT (A) Fees for First Services, L.P.'s services are set forth from the Product and Price Schedule (Attachment 1), including where applicable minimum monthly charges and payment schedules for onetime fees. (B) Standard Fees shall be invoiced no later than the fifteenth (15th) of each month for the then current month. Terms of payment shall be net cash. (C) The Base Service Charge listed from the Product and Price Schedule (Attachment 1) shall not change more than once a year and then only upon six (6) months' prior written notice. The fee schedule shall be reviewed annually to ensure fair market value in pricing. Comparisons will be made with peers and other providers of similar services. (D) This above limitation shall not apply to pass-thru expenses. A pass-thru expense is a charge for goods or services by First Services, L.P. on Sunrise Bank's behalf which are to be billed to Sunrise Bank without mark-up. (E) The fees listed from the Product and Price Schedule (Attachment 1) do not include and Sunrise Bank is responsible for furnishing transportation or transmission of information between First Services, L.P.'s data center, Sunrise Bank's site and any applicable clearing house, regulatory agency or Federal Reserve Bank. Where Sunrise Bank has elected to have First Services, L.P. provide Telecommunication Services, the price for the Services will be provided and billed as a pass-thru expense. (F) Network Support Service Fees and Local Network Fees are based upon services rendered from First Services, L.P.'s premises. Off-premise support will be provided upon Sunrise Bank's request on an as available basis at First Services, L.P. then current charges for time and materials, plus reasonable travel and living expenses. VI. CLIENT OBLIGATIONS (A) Sunrise Bank shall be solely responsible for the input, transmission or delivery of all information and data required by First Services, L.P. to perform the services except where Sunrise Bank has retained First Services, L.P. to handle such responsibilities on its behalf. The data shall be provided in a format and manner approved by First Services, L.P. Sunrise Bank will provide at its own expense or procure from First Services, L.P. all equipment, computer software, communication lines and interface devices required to access the First Services, L.P. System. If Sunrise Bank has elected to provide such items itself, First Services, L.P. shall provide Sunrise Bank with a list of compatible equipment and software. (B) Sunrise Bank shall designate appropriate Sunrise Bank personnel for training in the use of the First Services, L.P. System, shall allow First Services, L.P. access to Sunrise Bank's site during normal business hours for conversion and shall cooperate with First Services, L.P. personnel in the conversion and implementation of the services. (C) Sunrise Bank shall comply with any operating instructions on the use of the First Services, L.P. system provided by First Services, L.P., shall review all reports furnished by First Services, L.P. for accuracy and shall work with First Services, L.P. to reconcile any out of balance conditions. Sunrise Bank shall determine and be responsible for the authenticity and accuracy of all information and data submitted to First Services, L.P. (D) Sunrise Bank shall furnish, or if First Services, L.P. agrees to so furnish, reimburse First Services, L.P. for courier services applicable to the services requested. VII. GENERAL ADMINISTRATION First Services, L.P. is continually reviewing and modifying the First Services, L.P. system to improve service and to comply with federal government regulations applicable to the data utilized in providing services to Sunrise Bank. First Services, L.P. reserves the right to make changes in the service, including, but not limited to operating procedures, security procedures, the type of equipment resident at and the location of First Services, L.P.'s data center. First Services, L.P. will provide Sunrise Bank at least sixty (60) days prior written notice of changes in procedures or reporting and at least six (6) months prior written notice of changes in service costs. VIII. CLIENT CONFIDENTIAL INFORMATION (A) First Services, L.P. shall treat all information and data relating to Sunrise Bank business provided to First Services, L.P. by Sunrise Bank, or information relating to Sunrise Bank's customers, as confidential and shall safeguard Sunrise Bank's information with the same degree of care used to protect First Services, L.P.'s confidential information. First Services, L.P. and Sunrise Bank agree that master and tra \nsaction data files are owned by and constitute property of Sunrise Bank. Sunrise Bank data and records shall be subject to regulation and examination by State and Federal supervisory agencies to the same extent as if such information were on Sunrise Bank's premises. First Services, L.P.'s obligations under this Section VIII shall survive the termination or expiration of this Agreement. (B) First Services, L.P. shall maintain adequate backup procedures including storage of duplicate record files as necessary to reproduce Sunrise Bank's records and data. In the event of a service disruption due to reasons beyond First Services, L.P.'s control, First Services, L.P. shall use diligent efforts to mitigate the effects of such an occurrence. IX. FIRST SERVICES, L.P. CONFIDENTIAL INFORMATION (A) Sunrise Bank shall not use or disclose to any third persons any confidential information concerning First Services, L.P. First Services, L.P. confidential information is that which relates to First Services, L.P.'s software, research, development, trade secrets or business affairs including, but not limited to, the terms and conditions of this Agreement but does not include information in the public domain through no fault of Sunrise Bank. Sunrise Bank obligations under this Section IX shall survive the termination or expiration of this Agreement. (B) First Services, L.P.'s system contains information and computer software which is proprietary and confidential information of First Services, L.P., its suppliers and licensees. Sunrise Bank agrees not to attempt to circumvent the devices employed by First Services, L.P. to prevent unauthorized access to the First Services, L.P.'s System. X. WARRANTIES First Services, L.P. will accurately process Sunrise Bank's work provided that Sunrise Bank supplies accurate data and follows the procedures described in First Services, L.P.'s User Manuals, notices and advises. First Services, L.P. personnel will exercise due care in the processing of Sunrise Bank's work. In the event of an error caused by First Services, L.P.'s personnel, programs or equipment, First Services, L.P. shall correct the data and/or reprocess the affected report at no additional cost to Sunrise Bank. XI. LIMITATION OF LIABILITY IN NO EVENT SHALL FIRST SERVICES, L.P. BE LIABLE FOR LOSS OF GOODWILL, OR FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING FROM SUNRISE BANK'S USE OF FIRST SERVICES L.P.'S SERVICES, OR FIRST SERVICES, L.P.'S SUPPLY OF EQUIPMENT OR SOFTWARE, UNDER THIS AGREEMENT REGARDLESS OF WHETHER SUCH CLAIM ARISES IN TORT OR IN CONTRACT. FIRST SERVICES, L.P.'S AGGREGATE LIABILITY FOR ANY AND ALL CAUSES OF ACTION RELATING TO SERVICES PERFORMED HEREUNDER OR ANY DAMAGE OR LOSS INCURRED OR SUSTAINED BY SUNRISE BANK RELATING TO THIS AGREEMENT AND THE SERVICES PERFORMED HEREUNDER SHALL BE LIMITED TO THE AMOUNT OF TOTAL FEES PAID BY SUNRISE BANK TO FIRST SERVICES, L.P. IN THE THREE (3) MONTH PERIOD PRECEDING THE DATE THE CLAIM ACCRUED. FIRST SERVICES, L.P.'S AGGREGATE LIABILITY FOR A DEFAULT RELATING TO EQUIPMENT OR SOFTWARE SHALL BE LIMITED TO THE AMOUNT PAID FOR THE EQUIPMENT OR SOFTWARE. XII. PERFORMANCE STANDARDS (A) On-Line Availability - First Services, L.P.'s standard of performance shall be on-line availability of the system 98% of the time that it is scheduled to be so available over a three month period (the "Measurement Period"). Actual on-line performance will be calculated monthly by comparing the number of hours which the system was scheduled to be operational on an on-line basis with the number of hours, or a portion thereof, it was actually operational on an on-line basis. Downtime may be caused by operator error, hardware malfunction or failure, or environmental failures such as loss of power or air conditioning. Downtime caused by reasons beyond First Services, L.P.'s control should not be considered in the statistics. (B) Report Availability - First Services, L.P.'s standard of performance for report availability shall be that, over a three (3) month period, ninety-five percent (95%) of all Critical Daily Reports shall be available for remote printing on time without significant errors. A Critical Daily Report shall mean priority group reports which First Services, L.P. and Sunrise Bank have mutually agreed in writing are necessary to properly account for the previous day's activity and properly notify Sunrise Bank of overdraft, NSF or return items. A significant error is one which impairs Sunrise Bank's ability to properly account for the previous days activity and/or properly account for overdraft, NSF or return items. Actual performance will be calculated monthly by comparing the total number of Sunrise Bank reports scheduled to be available from First Services, L.P. to the number of reports which were available on time and without error. (C) Exclusive Remedy - In the event tha First Services, L.P.' performance fails to meet the standards listed above and such failure is not the result of Sunrise Bank's error or omission, Sunrise Bank's sole and exclusive remedy for such default shall be the right to terminate this Agreement in accordance with the provisions of this paragraph. In the event that First Services, L.P. fails to achieve any Performance Standards, alone or in combination, for the prescribed measurement period, Sunrise Bank shall notify First Services, L.P. of its intent to terminate this agreement if First Services, L.P. fails to restore performance to the committed levels. First Services, L.P. shall advise Sunrise Bank promptly upon correction of the system deficiencies (in no event shall corrective action exceed sixty (60) days from the notice date) and shall begin an additional measurement period. Should First Services, L.P. fail to achieve the required Performance Standards during the remeasurement period, Sunrise Bank may terminate this Agreement and First Services, L.P. shall cooperate with Sunrise Bank to achieve an orderly transition to Sunrise Bank's replacement processing system. Sunrise Bank may also terminate this Agreement if First Services, L.P.'s performance for the same standard is below the relevant performance standard for more than two (2) measurement periods in any consecutive twelve (12) months or for more than five (5) measurement periods during the term of this agreement. During the period of transition, Sunrise Bank shall pay only such charges as are incurred for monthly fees until the date of deconversion. First Services, L.P. shall not charge Sunrise Bank for services relating to Sunrise Bank's deconversion. (D) Audit - Sunrise Bank shall have the right to perform reasonable audits, at its cost, upon giving written notice to First Services, L.P. of its intent to do so. First Services, L.P. shall provide, upon request, financial information to Sunrise Bank. XIII. DISASTER RECOVERY (A) A Disaster shall mean any unplanned interruption of the operations of or inaccessibility to the First Services, L.P. data center which appear in First Services, L.P.'s reasonable judgement to require relocation of processing to an alternative site. First Services, L.P. shall notify Sunrise Bank as soon as possible after it deems a service outage to be a Disaster. First Services, L.P. shall move the processing of Sunrise Bank's standard on-line services to an alternative processing center as expeditiously as possible. Sunrise Bank shall maintain adequate records of all transactions during the period of service interruption and shall have personnel available to assist First Services L.P., Inc. in implementing the switch over to the alternative processing site. During a disaster, optional or on-request services shall be provided by First Services, L.P. only to the extent that there is adequate capacity at the alternate center and only after stabilizing the provision of base on-line services. (B) First Services, L.P. shall work with Sunrise Bank to establish a plan for alternative data communications in the event of a disaster. Sunrise Bank shall be responsible for furnishing any additional communications equipment and data lines required under the adopted plan. (C) First Services L.P., shall test its Disaster Recovery Services Plan by conducting one annual test. Sunrise Bank agrees to participate in and assist First Services, L.P. with such testing. Test results will be made available to Sunrise Bank's regulators, internal and external auditors, and (upon request) to Sunrise Bank's insurance underwriters. (D) Sunrise Bank understands and agrees that the First Services, L.P. Disaster Recovery Plan is designed to minimize but not eliminate risks associated with a disaster affecting First Services, L.P.'s data center. First Services, L.P. does not warrant that service will be uninterrupted or error free in the event of a disaster. Sunrise Bank maintains responsibility for adopting a disaster recovery plan relating to disasters affecting Sunrise Bank's facilities and for securing business interruption insurance or other insurance as necessary to properly protect Sunrise Bank's revenues in the event of a disaster. XIV. DEFAULT (A) In the event that Sunrise Bank is thirty (30) days in arrears in making any payment required, or in the event of any other material default by either First Services, L.P. or Sunrise Bank in the performance of their obligations, the affected party shall have the right to give written notice to the other of the default and its intent to terminate this Agreement stating with reasonable particularity the nature of the claimed default. This Agreement shall terminate if the default has not been cured within a reasonable time with a minimum being thirty (30) days from the effective date of the notice. (B) Upon the expiration of this Agreement, or its termination, First Services, L.P. shall furnish to Sunrise Bank such copies of Sunrise Bank's data files as Sunrise Bank may request in machine readable format form along with such other information and assistance as or is reasonable and customary to enable Sunrise Bank to deconvert from the First Services, L.P. system. Sunrise Bank shall reimburse First Services, L.P. for the production of data records and other services at First Services, L.P.'s current fees for such services. XV. INSURANCE First Services, L.P. carries Comprehensive General Liability insurance with primary limits of two million dollars, Commercial Crime insurance covering Employee Dishonesty in the amount of fifteen million dollars, all-risk replacement cost coverage on all equipment used at First Services, L.P.'s data center and Workers Compensation coverage on First Services, L.P. employees wherever located in the United States. Sunrise Bank shall carry adequate insurance to cover liability for source documents while in transit and in case of data loss through errors and omissions. XVI. GENERAL (A) This Agreement is binding upon the parties and their respective successors and permitted assigns. Neither party may assign this Agreement in whole or in part without the consent of Sunrise Bank and/or First Services, L.P., provided, however, that First Services, L.P. may subcontract any or all of the services to be performed under this Agreement without the written consent of Sunrise Bank. Any such subcontractors shall be required to comply with all of the applicable terms and conditions of this Agreement. (B) The parties agree that, in connection with the performance of their obligations hereunder, they will comply with all applicable Federal, State, and local laws including the laws and regulations regarding Equal Employment Opportunities. (C) First Services, L.P. agrees that the Office of Thrift Supervision, FDIC, or other authority will have the authority and responsibility provided to the other regulatory agencies pursuant to the Bank Service Corporation Act, 12 U.S.C. 1867 (C) relating to service performed by contract or otherwise. First Services, L.P., also agrees that its services shall be subject to oversight by the O.C.C., FDIC or state banking departments as may be applicable under laws and regulations pertaining to Sunrise Bank's charter and shall, if applicable, provide the O.T.S. DistrictDirector of the district in which the data processing center is located and other state and federal agencies with a copy of First Services, L.P.'s current audit and financial statements and a copy of any current third party review report when a review has been performed. (D) Neither party shall be liable for any errors, delays or non-performance due to events beyond its reasonable control including, but not limited to, acts of God, failure or delay of power or communications, changes in law or regulation or other acts of governmental authority, strike, weather conditions or transpor- tation. (E) All written notices required to be given under this Agreement shall be sent by Registered or Certified Mail, Return Receipt Requested, postage prepaid, or by confirmed facsimile to the persons and at the addresses listed below or to such other address or person as a party shall have designated in writing. First Services, L.P. Sunrise Bank #l First Missouri Center Five Sierragate Plaza St. Louis, Missouri 63l4l Roseveille, California 95678 (F) The failure of either party to exercise in any respect any right provided for herein shall not be deemed a waiver of any rights. (G) Each party acknowledges that is has read this Agreement, understands it, and agrees that it is the complete and exclusive statement of the Agreement between the parties and supersedes and merges any prior or simultaneous proposals, understandings and all other agreements with respect to the subject matter. This Agreement may not be modified or altered except by a written instrument duly executed by both parties. (H) No waiver of any of the terms of this Agreement shall be effective unless in writing and signed by the duly authorized representative of the party charged therewith. No waiver of any provision hereof shall extend to or affect any obligation not expressly waived, impair any rights consequent on such obligation or imply a subsequent waiver of that or any other provision. (I) This Agreement shall be governed by, construed and interpreted in accordance with the laws of the State of Missouri. IN WITNESS WHEREOF, the parties have executed this Agreement the date first above written. Sunrise Bank First Services, L.P. Five Sierragate Plaza One First Missouri Center Roseville, California 95678 St. Louis, Missouri 63141 BY:/s/ Donald W. Williams BY:/s/ Thomas A. Bangert - ------------------------- ------------------------ Donald W. Williams Thomas A. Bangert Chairman President 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 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)
EXHIBIT 13.1 FIRST BANKS, INC. 1997 ANNUAL REPORT FIRST BANKS, INC. TABLE OF CONTENTS Page LETTER TO SHAREHOLDERS................................................... 1 SELECTED CONSOLIDATED AND OTHER FINANCIAL DATA........................... 2 MANAGEMENT'S DISCUSSION AND ANALYSIS..................................... 3 QUARTERLY CONDENSED FINANCIAL DATA - UNAUDITED........................... 30 INDEPENDENT AUDITORS' REPORT............................................. 31 FINANCIAL STATEMENTS: CONSOLIDATED BALANCE SHEETS.............................................. 32 CONSOLIDATED STATEMENTS OF INCOME........................................ 34 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY............... 35 CONSOLIDATED STATEMENTS OF CASH FLOWS.................................... 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................... 37 DIRECTORS AND EXECUTIVE OFFICERS......................................... 56 INVESTOR INFORMATION..................................................... 57 To our Valued Shareholders, Customers and Friends: We are pleased to report our accomplishments and continued progress toward furthering First Banks' long term objective as a premier provider of financial services. To that end, First Banks will remain focused on generating progressive and profitable growth through the continued development of our existing franchise, augmented by the acquisition of other financial institutions. Indicative of our recent growth is the continuing improvement in our operating results. For 1997, net income increased to $33.0 million, compared to $20.2 million for 1996. The results of operations for 1996 were adversely affected by a one-time Savings Association Insurance Fund special assessment of $8.2 million or $5.3 million on an after-tax basis. Since 1992, First Banks has completed 15 acquisitions of banks and thrifts. The completion of these acquisitions, coupled with increased business development activities, fueled asset growth from $2.0 billion at December 31, 1992 to $4.2 billion at December 31, 1997 and provided access into several major markets. The long term opportunities provided by the entry into these markets, including Chicago, Dallas, Houston and southern, central and northern California, represent an unprecedented opportunity for First Banks and a catalyst for future growth. Recognizing and acting upon opportunities has been present at First Banks for years. Going back to 1982, when total assets were $325 million, First Banks embarked on a plan to expand into central and southern Illinois and further develop its presence in eastern Missouri. Reflective of our success in this endeavor is the position of First Banks' lead bank, First Bank, with assets now totaling $2.8 billion. The profitability of First Bank during this time-frame was the primary source for First Banks' stockholders' equity increasing from $26.5 million at December 31, 1982 to $231.5 million by the end of 1997. With necessary capital, technology and operational support, First Banks is again embarking on the plan to expand and develop our current franchise. Accepting the challenge, First Banks has been aggressively quantifying the needs of the local businesses and consumers and adapting to the changing requirements of our existing customers. Furthering the plan is the effort and success of each local market's management team. Each team, equipped with superior products and services, is expanding their market presence by attracting and retaining customers through the development and addition of experienced banking officers and support staff. Surrounding these efforts are the resources of First Banks and our unconditional guarantee never to sell-out and desert our customers. As we reflect back over the past century, we are reminded of the many challenges and successes at First Banks. While those challenges are now history and new challenges are now present, First Banks' mind-set and sound business practices will approach each new challenge with optimism that a future success lies within such challenges. In closing, I would like to take this opportunity to welcome our new shareholders, joining us through the issuance of the Preferred Securities, and to extend our sincerest appreciation for the dedication of our employees, the loyalty of our customers and the continued support of our shareholders. Sincerely, James F. Dierberg Chairman, President and Chief Executive Officer The following table presents selected consolidated financial information for First Banks, Inc. and subsidiaries (First Banks) for each of the years in the five-year period ended December 31, 1997. The comparability of the selected data presented is affected by the acquisitions of eleven banks and four thrifts during the five-year period. These acquisitions were accounted for as purchases and, accordingly, the selected data includes the financial position and results of operations of each acquired entity only for the periods subsequent to its date of acquisition.
Year ended December 31, ----------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (dollars expressed in thousands, except per share data) Income Statement Data: Interest income................................... $ 295,101 266,021 261,621 162,435 140,012 Interest expense.................................. 148,831 141,670 144,945 70,670 58,058 ---------- ------- ------- ------- -------- Net interest income............................... 146,270 124,351 116,676 91,765 81,954 Provision for possible loan losses................ 11,300 11,494 10,361 1,858 4,456 ---------- ------- ------- ------- -------- Net interest income after provision for possible loan losses......................... 134,970 112,857 106,315 89,907 77,498 Noninterest income................................ 25,697 20,721 19,407 13,634 9,953 Noninterest expense............................... 110,287 105,741 91,566 67,734 53,431 ---------- ------- ------- ------- -------- Income before provision for income taxes, minority interest in (income) loss of subsidiaries and cumulative effect of change in accounting principle............... 50,380 27,837 34,156 35,807 34,020 Provision for income taxes........................ 16,083 6,960 11,038 12,012 11,592 ---------- ------- ------- ------- -------- Income before minority interest in (income) loss of subsidiaries and cumulative effect of change in accounting principle.............. 34,297 20,877 23,118 23,795 22,428 Minority interest in (income) loss of subsidiaries (1,270) (659) 1,353 237 -- ----------- ------- ------- ------- -------- Income before cumulative effect of change in accounting principle......................... 33,027 20,218 24,471 24,032 22,428 Cumulative effect of change in accounting principle....................................... -- -- -- -- 766 ----------- ------- ------- ------- -------- Net income........................................ $ 33,027 20,218 24,471 24,032 23,194 =========== ======= ======= ======= ======== Dividends: Preferred stock................................... $ 5,067 5,728 5,736 5,735 5,766 Common stock...................................... -- -- -- -- -- Ratio of total dividends declared to net income... 15.34% 28.33% 23.44% 23.86% 24.86% Per Share Data: Earnings per common share: Basic........................................... $ 1,181.69 612.46 791.82 773.31 741.69 Diluted......................................... 1,134.28 596.83 759.09 735.28 696.30 Weighted average shares of common stock outstanding..................................... 23,661 23,661 23,661 23,661 23,498 Balance Sheet Data (at year-end): Investment securities............................. $ 795,530 552,801 508,323 587,878 531,148 Loans, net of unearned discount................... 3,002,200 2,767,969 2,744,219 2,073,570 1,362,018 Total assets...................................... 4,165,014 3,689,154 3,622,962 2,879,570 2,031,909 Total deposits.................................... 3,684,595 3,238,567 3,183,691 2,333,144 1,779,389 Notes payable..................................... 55,144 76,330 88,135 46,203 -- Common stockholders' equity....................... 218,474 184,439 166,542 149,249 133,781 Total stockholders' equity........................ 231,537 251,389 234,605 217,312 201,844 Earnings Ratios: Return on average total assets.................... 0.87% 0.57% 0.70% 1.00% 1.16% Return on average total stockholders' equity...... 12.91 8.43 10.79 11.48 12.27 Asset Quality Ratios: Allowance for possible loan losses to loans....... 1.68 1.69 1.92 1.37 1.69 Nonperforming loans to loans (1).................. 0.80 1.09 1.44 0.78 0.90 Allowance for possible loan losses to nonperforming loans (1)......................... 209.88 154.55 133.70 175.37 188.50 Nonperforming assets to loans and foreclosed assets (2)....................................... 1.04 1.47 1.71 1.10 1.08 Net loan charge-offs to average loans............. 0.27 0.72 0.41 0.09 0.33 Capital Ratios: Average total stockholders' equity to average total assets............................ 6.70 6.79 6.49 8.70 9.46 Total risk-based capital ratio.................... 10.26 9.23 9.34 12.68 16.90 Leverage ratio.................................... 6.80 5.99 5.32 7.54 9.30 - ---------------- (1) Nonperforming loans consist of nonaccrual loans and loans with restructured terms. (2) Nonperforming assets consist of nonperforming loans and foreclosed assets.
The discussion set forth in the Letter to Shareholders and Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain forward looking statements with respect to the financial condition, results of operations and business of First Banks. These forward-looking statements are subject to certain risks and uncertainties, not all of which can be predicted or anticipated. Factors that may cause actual results to differ materially from those contemplated by the forward looking statements herein include general market conditions as well as conditions specifically affecting the banking industry generally and factors having a specific impact on First Banks, including but not limited to fluctuations in interest rates and in the economy; the impact of laws and regulations applicable to First Banks and changes therein; competitive conditions in the markets in which First Banks conducts its operations; and the ability of First Banks to respond to changes in technology. With regard to First Banks' efforts to grow through acquisitions, factors that could affect the accuracy or completeness of forward-looking statements contained herein include the potential for higher than acceptable operating costs arising from the geographic dispersion of the offices of First Banks, as compared with competitors operating solely in contiguous markets; the competition of larger acquirers with greater resources than First Banks; fluctuations in the prices at which acquisition targets may be available for sale and in the market for First Banks' securities; and the potential for difficulty or unanticipated costs in realizing the benefits of particular acquisition transactions. Readers of this Annual Report should therefore not place undue reliance on forward-looking statements. Company Profile First Banks is a registered bank holding company incorporated in Missouri and headquartered in St. Louis County, Missouri. At December 31, 1997, First Banks had $4.17 billion in total assets, $3.00 billion in total loans, net of unearned discount, $3.68 billion in total deposits and $231.5 million in total stockholders' equity. First Banks operates through its subsidiary financial institutions and bank holding companies (Subsidiary Banks) as follows: First Bank, headquartered in St. Louis County, Missouri (First Bank). First Banks America, Inc., headquartered in St. Louis County, Missouri (FBA), and its wholly owned subsidiaries: BankTEXAS N. A., headquartered in Houston, Texas (BankTEXAS). First Bank of California, headquartered in Roseville, California (FB California). CCB Bancorp, Inc., headquartered in Irvine, California (CCB), and its wholly owned subsidiary: First Bank & Trust, headquartered in Irvine, California (FB&T). First Commercial Bancorp, Inc., headquartered in Sacramento, California (FCB), and its wholly owned subsidiary: First Commercial Bank, headquartered in Sacramento, California (First Commercial). All of the Subsidiary Banks are wholly owned by their respective parents except FBA and FCB, which were 65.85% and 61.48% owned, respectively, by First Banks at December 31, 1997. As discussed under "--Acquisitions," FB California is a newly-formed California state bank resulting from the merger of Sunrise Bank of California, which was acquired by FBA on November 1, 1996 and Surety Bank, Vallejo, California, which was acquired by FBA on December 1, 1997. In February 1998, FCB was acquired by FBA, and its subsidiary bank, First Commercial, was merged into FB California. Through the Subsidiary Banks, First Banks offers a broad range of commercial and personal banking services including certificate of deposit accounts, individual retirement and other time deposit accounts, checking and other demand deposit accounts, interest checking accounts, savings accounts and money market accounts. Loans include commercial, financial and agricultural, real estate construction and development, commercial and residential real estate, consumer and installment, student and Small Business Administration loans. Other financial services include mortgage banking, credit cards, discount brokerage, credit-related insurance, automatic teller machines, telephone account access, safe deposit boxes, trust and private banking services, and cash management services. First Banks centralizes overall corporate policies, procedures and administrative and operational support functions for the Subsidiary Banks. Primary responsibility for managing the Subsidiary Banks remains with their officers and directors. > The following table lists the Subsidiary Banks at December 31, 1997:
Loans, net of Number of Total unearned Total Subsidiary Banks locations assets discount deposits ---------------- --------- ------ -------- -------- (dollars expressed in thousands) First Bank...................................... 98 $2,843,575 2,185,493 2,559,968 FBA: BankTEXAS................................... 6 267,152 176,341 231,175 FB California............................... 4 179,999 137,096 152,825 CCB: FB&T........................................ 17 672,410 385,251 598,560 FCB: First Commercial............................ 6 190,918 118,018 172,737
As described under "--Financial Condition and Average Balances," on February 3, 1997, First Preferred Capital Trust (First Trust), a Delaware statutory business trust, issued 3,450,000 shares of 9.25% cumulative trust preferred securities (Preferred Securities) for $86.25 million. In addition, First Trust issued $2.7 million of common securities which are owned by First Banks. The Preferred Securities are publicly held and listed on the Nasdaq Stock Market's National Market System. The Preferred Securities have no voting rights except in certain limited circumstances. On December 1, 1997, First Banks redeemed all of the outstanding Class C, 9.00% increasing rate, redeemable, cumulative preferred stock (Class C Preferred Stock) which had previously been publicly held and listed on the Nasdaq Stock Market's National Market System. The voting stock of First Banks is owned by various trusts which were created by and are administered by and for the benefit of Mr. James F. Dierberg, First Banks' Chairman of the Board, President and Chief Executive Officer, and members of his immediate family. Accordingly, Mr. Dierberg controls the management and policies of First Banks and the election of its directors. General In the development of its banking franchise, First Banks has traditionally placed primary emphasis upon acquiring other financial institutions as a means of achieving its growth objectives. Acquisitions may serve to enhance its presence in a given market, to expand the extent of its market area or to enter new or noncontiguous markets. However, because First Banks has historically used cash in its acquisitions, the characteristics of the acquisition arena at any given point in time may place it at a competitive disadvantage relative to other acquirers able to offer stock transactions. This is the result of the market attractiveness of other financial institutions' stock, the advantages of tax-free exchanges to the selling shareholders, and the financial reporting flexibility inherent in structuring stock transactions. Consequently, First Banks' acquisition activities are somewhat sporadic, in which multiple transactions are consummated in a particular period, followed by substantially less active acquisition periods. Furthermore, the intangible assets recorded in conjunction with such acquisitions create an immediate reduction in regulatory capital. This reduction, as required by regulatory policy, provides further financial disincentives to paying large premiums in cash acquisitions. Recognizing these facts, First Banks has followed certain patterns in its acquisitions. First, it tends to acquire several smaller institutions, sometimes over an extended period of time, rather than a single larger one. This is attributable to the constraints imposed by the amount of funds required for a larger transaction, as well as the opportunity to minimize the aggregate premium required through smaller individual transactions. Secondly, First Banks may acquire institutions which have more significant problems which could reduce their attractiveness to other potential acquirers, and therefore reduce the amount of acquisition premiums required. Finally, First Banks realizes that various acquisition markets may become so competitive at times, that cash transactions are not economically viable, thereby requiring it to pursue its acquisition strategy in other geographic areas, or pursue internal growth more aggressively. These patterns have been evident in First Banks' growth during the four years ended December 31, 1997. During 1995, First Banks completed seven acquisitions which increased total assets from $2.88 billion on December 31, 1994 to $3.62 billion on December 31, 1995. These acquisitions provided First Banks with access into several new major market areas and, accordingly, an attractive opportunity for future growth and profitability. However, in 1996 and 1997, as acquisition pricing in these areas escalated dramatically, First Banks' acquisition activities were substantially reduced. In 1996, First Banks completed one acquisition. In 1997, First Banks acquired one bank, as well as assuming the liabilities and purchasing certain assets of three branch offices of a savings bank. Anticipating that increasing acquisition pricing would eventually make growth solely by acquisition economically unfeasible, and recognizing that rapid consolidation within the banking industry would create new business development opportunities, beginning in 1993 First Banks began a continuing program for substantial enhancement of its capabilities to achieve and manage internal growth. This program required significant increases in the resources dedicated to commercial and retail business development, financial service product line and delivery systems, branch development and training, and administrative and operational support. These efforts were manifested during this period in various changes with the organization. Many of the acquired loan portfolios exhibited compositions which were skewed toward certain loan types which reflected the abilities and experiences of their management. This was particularly evident in acquisitions of savings banks, which had portfolios heavily concentrated in single family and/or multi-family residential real estate lending, and in BankTEXAS, which had a portfolio consisting primarily of indirect automobile loans. In order to achieve a more diversified portfolio, to address asset quality issues in the portfolios and to achieve a higher level interest yield on the loan portfolio, a substantial portion of the loans which were acquired during this time were reduced through payments, refinancing with other financial institutions, charge-offs, and, in two instances, sales. As a result, the portfolio of one-to-four family residential real estate loans, after reaching a maximum of $1.20 billion at December 31, 1995, was reduced to $1.06 billion at December 31, 1996 and $915.2 million at December 31, 1997. Similarly, the portfolio of consumer and installment loans, net of unearned discount, the majority of which is indirect automobile loans, decreased from $422.5 million at December 31, 1994 to $413.6 million, $333.3 million and $279.3 million at December 31, 1995, 1996 and 1997, respectively. While First Banks' acquisitions in 1994 and 1995 introduced it to new major market areas which offer significant long-term opportunities, these acquisitions presented several immediate challenges. Many of the acquired institutions, particularly those in California, exhibited some degree of distress prior to their purchase by First Banks, generally including asset quality problems. While these problems had been identified and considered in the acquisition pricing, this led to an increase in non-performing assets to $47.1 million at December 31, 1995 from $22.9 million at December 31, 1994. As First Banks worked to correct these asset quality problems, total nonperforming assets were reduced to $40.9 million at December 31, 1996 and $31.4 million at December 31, 1997. As these segments of the loan portfolio decreased, they were replaced with more diversified, better quality and higher yielding loans which were internally generated by the business development function which had been established. With the acquisitions, the business development function was expanded into the new market areas in which First Banks was then operating. Consequently, in spite of relatively large reductions in acquired portfolios, the aggregate loan portfolio, net of unearned discount, increased from $2.07 billion at December 31, 1994 to $2.74 billion, $2.77 billion and $3.00 billion at December 31, 1995, 1996 and 1997, respectively. While this restructuring of the loan portfolio was occurring, First Banks was also changing the composition of its deposits. Several of the institutions which First Banks has acquired since 1990 were savings banks. Traditionally, savings banks have placed greater reliance on time deposits as a source of funding than their commercial banking counterparts. Although time deposits are generally a stable source of funds, they are typically the highest cost deposits available, the depositors tend to be relatively sensitive to interest rates in the market, and frequently the customers have no other banking relationship with the financial institution. These characteristics suggest that many of these customers move their deposits between financial institutions fairly readily, and have limited loyalty to any particular institution. Consequently, First Banks' deposit development programs have been directed toward increased transaction accounts, such as demand and savings accounts, rather than time deposits, and have emphasized attracting more than one account relationship with customers by cross selling them through packaging various account types and offering incentives to deposit customers on other deposit or non-deposit services. As a result, the net growth in deposits has been focused in transaction, rather than time accounts. At December 31, 1995 and 1996, total time deposits were $1.80 billion and $1.81 billion, or 56.4% and 55.9% of total deposits, respectively. Although the deposits included in acquisitions in 1997 were predominately time deposits, by December 31, 1997, total time deposits had increased to $1.90 billion, but decreased to 51.7% of total deposits. The simultaneous growth by acquisition of financial institutions and the building of the infrastructure necessary to achieve significant internal growth has had an adverse effect on the operating results of First Banks. The effects of this were reflected in a lower net interest margin, increased provisions for possible loan losses and higher noninterest expenses. As discussed previously, savings banks generally focus on residential mortgage loans and residential mortgage-backed securities to generate interest income. These assets tend to yield lower interest rates than other types of loans. At the same time, their reliance on time deposits, accompanied by a relatively small amount of noninterest-bearing demand accounts, tends to result in a deposit cost which is higher than commercial banks. This results in generally lower net interest margins than those experienced by comparable commercial banks. The acquisition of several savings banks by First Banks has resulted in a reduction of its net interest margin which has not been fully mitigated. Furthermore, the efforts to change the overall deposit composition frequently involves the payment of premium interest rates or other incentive costs for a period of time to influence the account selection by customers. Consequently, while net interest income increased from $116.7 million for the year ended December 31, 1995 to $124.4 million and $146.3 million for the years ended December 31, 1996 and 1997, respectively, the net interest margin reflected relatively modest improvement from 3.60% in 1995 to 3.79% and 4.09% for 1996 and 1997, respectively. Recognizing the acquisition program involved the assumption of additional credit risk, First Banks controlled this exposure by pursuing a strategy of maintaining higher than average asset quality in its Missouri and Illinois operations through strict adherence to its lending policies and practices, and consistently building the allowance for possible loan losses through substantial provisions. First Banks provided $11.30 million, $11.49 million and $10.36 million for possible loan losses for the years ended December 31, 1997, 1996 and 1995, respectively. At the same time, First Banks expanded its credit administration and loan review functions to more closely monitor the overall risk inherent in the loan portfolio. Finally, most of the changes described above contributed to an overall increase in noninterest expenses. The addition of a significant number of new banking locations through acquisition added new expenses for staffing, bank premises and equipment and other purposes necessary to operate those locations. In addition, the time and resources needed to manage a significantly larger portfolio of problem assets required greater dedication of personnel and third party assistance than had previously been necessary. Furthermore, the augmentation of the existing organization to provide the ability to achieve significant internal growth and to operate and manage a larger organization entailed substantial additional expenses, particularly in personnel and equipment. These increases in noninterest expenses were only partially offset by the economies available as acquired entities were merged into First Banks' other operations and systems. Consequently, total noninterest expenses increased from $67.73 million for the year ended December 31, 1994 to $91.57 million, $105.74 million and $110.29 million for the years ended December 31, 1995, 1996 and 1997, respectively. Included in noninterest expenses for 1996 was the nonrecurring assessment to recapitalize the Savings Association Insurance Fund (SAIF) of the Federal Deposit Insurance Corporation (FDIC) of $8.2 million. Acquisitions Prior to 1994, First Banks' acquisitions had been limited to its primary market area of eastern Missouri and central and southern Illinois. However, the premiums required to successfully pursue acquisitions in this area began escalating sharply, dramatically reducing the economic viability of many potential acquisitions in that area. Recognizing this, First Banks began to expand the geographic area in which it approached acquisition candidates. As a result, while First Banks continued to pursue acquisitions within this area, it then turned much of its attention to institutions which could be acquired at more attractive prices which were within major metropolitan areas outside its immediate market area. This had led to the acquisition of a financial institution which had offices in Dallas and Houston, Texas in 1994 and several acquisitions of financial institutions which had offices in Los Angeles, Orange County, Santa Barbara, San Francisco, San Jose and Sacramento, California in 1995, 1996 and 1997.
During the three years ended December 31, 1997, First Banks completed nine acquisitions and two deposit purchases. These transactions, as more fully described in Note 2 to the accompanying consolidated financial statements, are summarized as follows: Loans, net of Number of Total unearned Investment banking Entity Date assets discount securities Deposits locations ------ ---- ------ -------- ---------- -------- --------- (dollars expressed in thousands) 1995 QCB Bancorp Long Beach, California (2).... November 30, 1995 $ 56,200 35,100 10,700 50,200 3 La Cumbre Savings Bank F.S.B. Santa Barbara, California (2). September 1, 1995 144,000 131,000 1,000 124,000 3 First Commercial Bancorp, Inc. Sacramento, California........ August 23, 1995 169,000 84,600 30,700 163,600 7 Irvine City Financial Irvine, California (2)........ May 31, 1995 83,300 68,700 7,500 61,600 2 HNB Financial Group Huntington Beach, California (2)................ April 28, 1995 88,000 62,800 10,500 76,300 3 CCB Bancorp, Inc. Santa Ana, California......... March 15, 1995 193,400 114,500 31,100 156,400 3 River Valley Holdings, Inc. Chicago, Illinois (1)......... January 4, 1995 412,000 225,000 125,000 286,000 10 ----------- -------- -------- ------- -- $ 1,145,900 721,700 216,500 918,100 31 =========== ======== ======== ======= == 1996 Sunrise Bancorp, Inc. Roseville, California ........ November 1, 1996 $ 110,800 61,100 18,100 92,000 3 =========== ======== ======== ======= ===
1997 Surety Bank Vallejo, California (4)....... December 1, 1997 $ 72,800 54,400 11,800 67,500 2 Highland Federal Bank, F.S.B., Woodland Hills, California branch office (3).. September 30, 1997 42,400 100 -- 42,400 1 Highland Federal Bank, F.S.B., Long Beach, California branch offices (3). March 31, 1997 40,400 100 -- 40,400 2 ----------- -------- -------- ------- --- $ 155,600 54,600 11,800 150,300 5 =========== ======== ======== ======= ===
- ------------------ (1) River Valley Holdings, Inc. nd its thrift subsidiary were merged into First Bank. (2) QCB Bancorp, La Cumbre Savings Bank, F.S.B., Irvine City Financial and HNB Financial Group and their respective banking and thrift subsidiaries were merged into CCB and its banking subsidiary, FB&T. (3) The Woodland Hills branch office and the Long Beach branch offices of Highland Federal Savings Bank, F.S.B. were acquired by FB&T through a purchase of certain assets and assumption of deposit liabilities of the branch offices. Total assets consist primarily of cash received upon assumption of deposit liabilities. (4) Sunrise Bancorp, Inc. and its banking subsidiary, and Surety Bank were merged into FBA and its indirect banking subsidiary, FB California. Except for the acquisition of Surety Bank, these acquisitions were funded by First Banks from available cash reserves, proceeds from the sales and maturities of available-for-sale investment securities, borrowing under a promissory note to a former shareholder, borrowing under First Banks' credit agreement with a group of unaffiliated banks (Credit Agreement) and the proceeds of the Preferred Securities issued in February 1997. The 49% cash portion of the acquisition of Surety Bank was funded from available cash. The remaining 51% was acquired through an exchange of shares of common stock of FBA. See Note 2 to the consolidated financial statements. On December 1, 1997, Sunrise Bank of California and Surety Bank were merged into FB California, a newly-formed California state bank. In February 1998, FCB was acquired by FBA in an exchange of FBA common stock for FCB common stock. In connection with this transaction, FCB was merged into a wholly owned subsidiary of FBA, and First Commercial was merged into FB California. In addition, on February 2, 1998, FBA acquired Pacific Bay Bank, which was then merged into FB California. As of December 31, 1997, Pacific Bay Bank had $37.5 million in total assets, $29.3 million in total loans, net of unearned discount, $1.9 million in total interest-bearing deposits with other financial institutions and $33.9 million in total deposits. Pacific Bay Bank operates through one banking location in San Pablo, California and one loan production office in Lafayette, California. Financial Condition and Average Balances First Banks' average total assets were $3.82 billion for the year ended December 31, 1997, compared to $3.53 billion and $3.50 billion for the years ended December 31, 1996 and 1995, respectively. Total assets at December 31, 1997 were $4.17 billion, an increase of $480 million, or 13.0%, over total assets of $3.69 billion at December 31, 1996. The increase in total assets was primarily attributable to $72.8 million of assets provided in the acquisition of Surety Bank, growth in total loans of $180 million, excluding those acquired in the acquisition of Surety Bank of $54.4 million, and an increase in investment securities of $230.9 million, excluding those attributable to Surety Bank. The increase in total assets was partially offset by a decrease in Federal Funds sold of $50.6 million to $23.5 million from $74.1 million at December 31, 1997 and 1996, respectively. Loans, net of unearned discount, increased by $234 million to $3.00 billion at December 31, 1997 from $2.77 billion at December 31, 1996. The acquisition of Surety Bank provided $54.4 million of loans, $31.7 million of which were one-to-four family residential real estate loans. In addition to these loans, $378.9 million of net loan growth was provided by corporate banking business development, consisting of an increase of $159.7 million of commercial, financial and agricultural loans, $120.5 million of real estate construction and land development loans and $98.7 million of commercial real estate loans. These increases were partially offset by continuing reductions in residential real estate loans of $144.7 million and in consumer and installment loans, net of unearned discount, which consists primarily of indirect automobile loans, of $54.3 million. These changes are the result of the focus which First Banks has placed on its business development efforts and the portfolio reorientation which began in 1995. This reorientation provided that substantially all of the conforming residential mortgage loan production of First Banks would be sold in the secondary mortgage market, and that the origination of indirect automobile loans would be substantially reduced. Tables summarizing the composition of the loan portfolio are presented under "--Lending and Credit Management." The increase in assets was funded by an increase in total deposits of $440 million to $3.68 billion at December 31, 1997 from $3.24 billion at December 31, 1996, an increase of 13.8%. This increase included the deposits of Surety Bank of $67.5 million, and the deposits of three branches of Highland Federal Bank, F.S.B. of $82.8 million which were acquired during the year. Excluding the acquired deposits, total deposits increased by $295.7 million for the year. This is the result of First Banks' retail marketing efforts, the commercial business development program and the opening of two new branch offices during the year. A summary of the composition of deposits is presented under "--Deposits." In January 1997, First Banks formed First Trust, a Delaware statutory business trust, for the purpose of conducting a public offering of cumulative trust securities. First Banks owns all of the common securities of First Trust. On February 3, 1997, First Trust issued and sold, pursuant to an effective registration statement filed with the Securities and Exchange Commission, 3,450,000 shares of 9.25% Preferred Securities for $86.25 million. The Preferred Securities, which are publicly held, are listed on the Nasdaq Stock Market's National Market System and have no voting rights except in certain limited circumstances. After payment of offering expenses, the proceeds of the offering were used to reduce borrowings under the Credit Agreement, for purchases of shares of Class C Preferred Stock, and for various short-term investments. On December 1, 1997, First Banks redeemed all of its remaining outstanding Class C Preferred Stock for $47.1 million. The effect of the redemption was a reduction of First Banks' total stockholders' equity, and consequently regulatory capital, by the amount of the redemption. However, the structure of the Preferred Securities satisfies the regulatory requirements to be included in First Banks' capital base in a manner identical to the Class C Preferred Stock. For the year ended December 31, 1996, total average assets were $3.53 billion compared to $3.50 billion for the year ended December 31, 1995. Total assets at December 31, 1996 were $3.69 billion, an increase of $70 million from total assets of $3.62 billion at December 31, 1995. The increase was primarily attributable to the acquisition of Sunrise Bancorp, Inc., which provided $110.8 million in total assets. This increase was partially offset by a settlement in January 1996 of the sale of $41.3 million of investment securities which were reflected as a receivable at December 31, 1995. Loans, net of unearned discount, increased to $2.77 billion at December 31, 1996 from $2.74 billion at December 31, 1995. Included in this growth was $61.1 million of loans provided by the acquisition of Sunrise Bancorp, Inc. and a net increase of $209.3 million in loans through First Banks' commercial business development efforts. However, this was substantially offset by decreases in residential real estate and consumer and installment loans, net of unearned discount, which consist primarily of indirect automobile loans, of $164.4 and $82.2 million, respectively. Deposits increased to $3.24 billion at December 31, 1996 from $3.18 billion at December 31, 1995. The acquisition of Sunrise Bancorp, Inc. provided $92 million of deposits, which was partially offset by a decrease of $32 million in time deposits of $100,000 or more to $169 million at December 31, 1996 from $201 million at December 31, 1995. The following table sets forth, on a tax-equivalent basis, certain information relating to First Banks' average balance sheet, and reflects the average yield earned on interest-earning assets, the average cost of interest-bearing liabilities and the resulting net interest income for the periods indicated.
For the years ended December 31, --------------------------------------------------------- 1997 1996 1995 ------------------------ ---------------------- --------------- Interest Interest Interest Average income/ Yield/ Average income/ Yield/ Average income/ Yield/ ASSETS balance expense rate balance expense rate balance expense rate (dollars expressed in thousands) Interest-earning assets: Loans: (1) (2) Taxable............................ $2,837,190 252,089 8.89% $2,714,387 236,527 8.71% $2,585,763 220,931 8.54% Tax-exempt (3)..................... 8,967 1,042 11.62 11,910 1,311 11.01 13,173 1,543 11.71 Investment securities: Taxable (4)........................ 598,660 35,248 5.89 469,832 22,650 4.82 585,868 34,379 5.87 Tax-exempt (3) (4)................. 19,056 1,552 8.15 22,648 1,889 8.34 26,751 2,138 7.99 Federal funds sold.................... 125,825 5,322 4.23 63,802 3,352 5.25 52,208 2,905 5.56 Other................................. 12,138 757 6.24 25,634 1,410 5.50 14,602 1,013 6.94 ---------- ------- ---------- ------- ---------- ------- Total interest-earning assets.... 3,601,836 296,010 8.22 3,308,213 267,139 8.08 3,278,365 262,909 8.02 ------- ------- ------- Nonearning assets......................... 215,890 224,175 219,445 ---------- ---------- ----------- Total assets..................... $3,817,726 $3,532,388 $ 3,497,810 ========== ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Interest bearing deposits: Interest-bearing demand deposits... $ 332,712 5,648 1.70% $ 304,247 4,845 1.59% $ 279,681 5,760 2.06% Savings deposits................... 761,052 27,383 3.60 683,009 21,769 3.19 663,870 22,737 3.42 Time deposits of $100 or more (4).. 183,223 11,008 6.01 164,453 9,665 5.88 166,232 9,931 5.97 Other time deposits (4)............ 1,681,014 100,954 6.01 1,592,657 95,813 6.02 1,443,026 83,595 5.79 ---------- ------- ---------- ------- --------- ------- Total interest-bearing deposits.. 2,958,001 144,993 4.90 2,744,366 132,092 4.81 2,552,809 122,023 4.78 Federal funds purchased, repurchase agreements and Federal Home Loan Bank advances (4).................... 75,016 2,463 3.28 64,021 3,964 6.19 256,333 16,850 6.57 Notes payable and other............... 17,883 1,375 7.69 76,892 5,614 7.30 83,068 6,072 7.31 ---------- ------ ---------- ------- --------- ------- Total interest-bearing liabilities..................... 3,050,900 148,831 4.88 2,885,279 141,670 4.91 2,892,210 144,945 5.01 ------- ------- ------- Noninterest-bearing liabilities: Demand deposits....................... 394,580 368,786 345,397 Other liabilities..................... 116,359 38,413 33,345 ---------- ---------- --------- Total liabilities................ 3,561,839 3,292,478 3,270,952 Stockholders' equity...................... 255,887 239,910 226,858 ---------- ---------- --------- Total liabilities and stockholders' equity........... $3,817,726 $3,532,388 $3,497,810 ========== ========== ========== Net interest income....................... 147,179 125,469 117,964 ======= ======= ======= Interest rate spread...................... 3.34 3.17 3.01 Net interest margin....................... 4.09% 3.79% 3.60% ==== ==== ==== - ----------------- (1) For purposes of these computations, nonaccrual loans are included in the average loan amounts. (2) Interest income on loans includes loan fees. (3) Information is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustments were approximately $909,000, $1.1 million and $1.3 million for the years ended December 31, 1997, 1996 and 1995, respectively. (4) Includes the effects of interest rate exchange agreements.
The following table indicates, on a tax-equivalent basis, the changes in interest income and interest expense which are attributable to changes in average volume and changes in average rates, in comparison with the preceding year. The change in interest due to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the dollar amounts of the change in each.
Increase (decrease) attributable to change in: ---------------------------------------------- December 31, 1997 compared December 31, 1996 compared to December 31, 1996 to December 31, 1995 ---------------------------- ---------------------------- Net Net Volume Rate Change Volume Rate Change ------ ---- ------ ------ ---- ------ (dollars expressed in thousands) Interest earned on: Loans: (1) (2) Taxable........................... $ 10,682 4,880 15,562 11,139 4,457 15,596 Tax-exempt (3).................... (347) 78 (269) (143) (89) (232) Investment securities: Taxable (4)....................... 6,962 5,636 12,598 (6,163) (5,566) (11,729) Tax-exempt (3) (4)................ (295) (42) (337) (349) 100 (249) Federal funds sold................... 2,462 (492) 1,970 597 (150) 447 Other................................ (877) 224 (653) 547 (150) 397 -------- ------ ------ ----- ------ ------ Total interest income......... $ 18,587 10,284 28,871 5,628 (1,398) 4,230 -------- ------ ------ ----- ------ ------ Interest paid on: Interest-bearing demand deposits..... $ 462 341 803 573 (1,488) (915) Savings deposits..................... 2,642 2,972 5,614 678 (1,646) (968) Time deposits of $100 or more........ 1,125 218 1,343 (110) (156) (266) Other time deposits (4).............. 5,300 (159) 5,141 8,834 3,384 12,218 Federal funds purchased, repur- chase agreements and Federal Home Loan Bank advances (4)....... 864 (2,365) (1,501) (11,964) (922) (12,886) Notes payable and other.............. (4,556) 317 (4,239) (450) (8) (458) -------- ------ ------ ----- ------ ------ Total interest expense........ $ 5,837 1,324 7,161 (2,439) (836) (3,275) -------- ------ ------ ------ ------ ------- Net interest income........... $ 12,750 8,960 21,710 8,067 (562) 7,505 ======== ====== ====== ===== ====== ====== - --------------- (1) For purposes of these computations, nonaccrual loans are included in the average loan amounts. (2) Interest income on loans includes loan fees. (3) Information is presented on a tax-equivalent basis assuming a tax rate of 35%. (4) Includes the effect of interest rate exchange agreements.
Net Interest Income First Banks' primary source of earnings is its net interest income, which is the difference between the interest earned on its earning assets and the interest paid on its interest-bearing liabilities. Net interest income (expressed on a tax-equivalent basis) increased to $147.2 million for the year ended December 31, 1997, from $125.5 million and $118.0 million for the years ended December 31, 1996 and 1995, respectively. Although both net interest income and net interest margin, which is net interest income (expressed on a tax-equivalent basis) expressed as a percentage of interest-earning assets, have increased significantly during these periods, the net interest margin has continued to remain below average for commercial banks. For the year ended December 31, 1997, net interest margin was 4.09%, compared to 3.79% and 3.60% for the years ended December 31, 1996 and 1995, respectively. During periods of rapid growth through cash acquisitions, the net interest margin frequently decreases because the reduction of interest income on internally generated funds used in acquisitions and the interest expense on debt incurred in the transactions offsets a portion of the net interest income of the entities acquired. As a result, during this period interest-earning assets increased more rapidly than net interest income, contributing to the lower net interest margin in 1995. As discussed below, there were other additional factors involved.
Since 1990, First Banks has acquired ten thrifts in various transactions. As previously discussed, both the regulatory requirements and the historic customer bases of thrifts tend to result in balance sheets which are predominately comprised of residential mortgage loans, frequently supplemented by mortgage-backed securities, for interest earning assets, and certificates of deposit as a primary source of funds. Because of the competitive, homogeneous nature of residential mortgage loans and certificates of deposit, the interest rate spreads between them tend to be more narrow than other types of loans and funding sources. First Banks' average yield on residential real estate loans and average cost of certificates of deposit, compared to those of other segments of its loan portfolio and interest-bearing deposits, respectively, were as follows: Interest Average Percent of income/ Yield/ balances total expense rate -------- ----- ------- ---- (dollars expressed in thousands) Year ended December 31, 1997: Residential mortgage loans........................... $ 1,025,442 36.03% $ 83,248 8.12% Other loans.......................................... 1,820,715 63.97 169,883 9.33 ----------- ------- --------- Total loans...................................... $ 2,846,157 100.00% $ 253,131 8.89 =========== ====== ========= ==== Certificates of deposit.............................. $ 1,864,237 63.02% $ 111,962 6.01% Other interest-bearing deposits...................... 1,093,764 36.98 33,031 3.02 ----------- ------- --------- Total interest-bearing deposits.................... $ 2,958,001 100.00% $ 144,993 4.90 =========== ====== ========= ==== Year ended December 31, 1996: Residential mortgage loans........................... $ 1,154,231 42.34% $ 93,282 8.08% Other loans.......................................... 1,572,066 57.66 144,556 9.20 ----------- ------- --------- Total loans........................................ $ 2,726,297 100.00% $ 237,838 8.72 =========== ======= ========= ==== Certificates of deposit.............................. $ 1,757,110 64.03% $ 105,478 6.00% Other interest-bearing deposits...................... 987,256 35.97 26,614 2.70 ----------- ------- --------- Total interest-bearing deposits.................... $ 2,744,366 100.00% $ 132,092 4.81 =========== ====== ========= ====
In addition to the narrow interest rate spread between the yield on residential mortgage loans and the rates paid on certificates of deposit, residential mortgage loans introduce various prepayment alternatives for borrowers which, when combined with inexpensive refinancing opportunities, accelerate principal repayments in periods of declining interest rates, thereby exacerbating their inherent interest rate risk. In order to enhance its net interest income through increased yields on its loan portfolio and to reduce the interest rate risk associated with residential mortgage loans, First Banks initiated a plan to reduce its reliance on residential mortgage loans within its portfolio. This change in the portfolio composition required the concurrent internal generation of other types of loans, particularly commercial and financial, real estate construction and development, and commercial real estate loans, a process which had previously been initiated. Consequently, this process focused on continuing to build this business development function, as well as the control and servicing staff necessary to support it. As the growth of other loans developed, First Banks expanded its sale of conforming residential mortgage loans in the secondary market to include essentially all new loan production. This process was expedited by the sale of a portfolio of residential mortgage loans of $147 million in 1995. See "--Mortgage Banking Activities" and "--Loans and Allowance for Possible Loan Losses." At the same time, in order to limit its interest rate risk, First Banks expanded its risk management capabilities to improve its risk measurement techniques and reporting, and increase its risk control alternatives. This included initiating a program of substantial use of derivative financial instruments to reduce interest rate exposure. First Banks uses a combination of swaps, caps and floors to reduce its exposure, primarily arising from residential mortgage loans and mortgage-backed securities. Although these financial instruments are effective in reducing interest rate risk, the expense associated with them has had a significant effect on net interest income.
Cost of interest rate --------------------- Swap, cap Reduction Effect on Futures and and floor of net net interest options on futures agreements interest income margin (1) ------------------ ---------- --------------- ---------- (dollars expressed in thousands) (expressed in Year ended December 31: basis points) 1997.......................... $ -- 6,574 6,574 (0.18) 1996.......................... 3,875 7,623 11,498 (0.35) 1995.......................... 2,210 6,911 9,121 (0.28) - --------------- (1) Effect on net interest margin is expressed as reduction of net interest income divided by average earning assets.
Interest Rate Risk Management In financial institutions, the maintenance of a satisfactory level of net interest income is a primary factor in achieving acceptable income levels. However, the maturity and repricing characteristics of the institution's loan and investment portfolios, relative to those within its deposit structure, may differ significantly. This is influenced by the characteristics of the loan and deposit markets within which First Banks operates, as well as its objectives for business development within those markets at any point in time. In addition, the ability of borrowers to repay loans and depositors to withdraw funds prior to stated maturity dates introduces divergent option characteristics which operate primarily as interest rates change. These factors cause various elements of the institution's balance sheet to react in different manners and at different times relative to changes in interest rates, thereby leading to increases or decreases in net interest income over time. Depending upon the nature and velocity of interest rate movements and their effect on the specific components of the institution's balance sheet, the effects on net interest income can be substantial. Consequently, a fundamental requirement in managing a financial institution is establishing effective control of the exposure of the institution to changes in interest rates. First Banks manages its interest rate risk by: (1) maintaining an Asset Liability Committee (ALCO) responsible to First Banks' Board of Directors to review the overall interest rate risk management activity and approve actions taken to reduce risk; (2) maintaining an effective simulation model to determine First Banks' exposure to changes in interest rates; (3) coordinating the lending, investing and deposit-generating functions to control the assumption of interest rate risk; and (4) employing various off-balance-sheet financial instruments to offset inherent interest rate risk when it becomes excessive. The objective of these procedures is to limit the adverse impact which changes in interest rates may have on net interest income. The ALCO has overall responsibility for the effective management of interest rate risk and the approval of policy guidelines. The ALCO includes the Chairman and Chief Executive Officer, the senior executives of investments, credit, retail banking, commercial banking and finance, and certain other officers. The ALCO is supported by the Asset Liability Management Group which monitors interest rate risk, prepares analyses for review by the ALCO and implements actions which are either specifically directed by the ALCO or established by policy guidelines. The objective and primary focus of interest sensitivity management is to optimize earnings results, while managing, within internal policy constraints, interest rate risk. First Banks' policy on rate sensitivity is to manage exposure to potential risks associated with changing interest rates by maintaining a balance sheet posture in which annual net interest income is not significantly impacted by reasonably possible near term changes in interest rates. To measure the effect of interest rate changes, First Banks recalculates its net income over two one-year horizons on a pro forma basis. The analysis assumes various scenarios for increases and decreases in interest rates including both instantaneous and gradual, parallel and non-parallel shifts in the yield curve, in varying amounts. For purposes of arriving at reasonably possible near term changes in interest rates, First Banks includes a forecast based on actual changes in interest rates which have occurred over a two-year period, simulating both a declining and rising interest rate scenario. Consistent with the table presented below, which indicates First Banks is "asset-sensitive," First Banks' simulation model indicates a loss of projected net income should interest rates decline. While a decline in interest rates of less than 10% has a diminutive effect on the earnings of First Banks, a significant decline in interest rates, resembling the actual decline which occurred over a two-year period commencing in March 1991, indicates a loss of net income equivalent to approximately 4% of net interest income for the year ended December 31, 1997. As discussed previously, First Banks has expanded its use of off-balance-sheet derivative financial instruments to assist in the management of the interest rate sensitivity inherent in its balance sheet, particularly that arising from its portfolio of residential mortgage loans and mortgage-backed securities relative to its deposit structure.
These off-balance-sheet derivative financial instruments effectively modify the repricing, maturity and option characteristics of its assets and liabilities. See Notes 1 and 11 to the consolidated financial statements. Derivative financial instruments held by First Banks for purposes of managing interest rate risk are as follows: December 31, ------------ 1997 1996 ---- ---- Notional Credit Notional Credit amount exposure amount exposure -------- -------- ------ -------- (dollars expressed in thousands) Interest rate swap agreements......................... $ -- -- 70,000 -- Interest rate floor agreements........................ 70,000 26 105,000 141 Interest rate cap agreements.......................... 10,000 222 10,000 335 Forward commitments to sell mortgage-backed securities 60,000 -- 35,000 308
The notional amounts of derivative financial instruments do not represent amounts exchanged by the parties and, therefore, are not a measure of First Banks' credit exposure through its use of derivative financial instruments. The amounts exchanged are determined by reference to the notional amounts and the other terms of the derivatives. First Banks uses interest rate swap agreements to extend the repricing characteristics of certain interest-bearing liabilities to correspond more closely with its assets, with the objective of stabilizing net interest income over time. However, the utilization of swaps has decreased with the change in the composition of its balance sheet, resulting in the termination or expiration of all remaining swap agreements prior to December 31, 1997. At December 31, 1996 and 1995, there were interest rate swap agreements with notional amounts of $70 million and $145 million outstanding, respectively. The interest expense related to these agreements was $6.4 million, $7.4 million and $6.6 million for the years ended December 31, 1997, 1996 and 1995, respectively. In connection with the sale of a pool of $147 million of residential mortgage loans and repayment of the related short-term borrowings, in May 1995, First Banks terminated a $100 million interest rate swap agreement resulting in a loss of $3.3 million. This loss on termination was reflected in the consolidated statement of income for the year ended December 31, 1995. In addition, the reduction in the residential mortgage loan portfolio has been accompanied by periods of increased principal prepayments due to declines in interest rates. These prepayments disproportionately shortened the expected life of the loan portfolio relative to the effective maturity created with the interest rate swap agreements. Consequently, during July 1995, November 1996 and July 1997, First Banks shortened the effective maturity of its interest-bearing liabilities through the termination of $225 million, $75 million and $35 million, respectively, of interest rate swap agreements resulting in losses of $13.5 million, $5.3 million and $1.4 million, respectively. These losses were deferred and are being amortized over the remaining lives of the swap agreements. If all or any portion of the underlying liabilities are repaid, the related deferred losses are charged to operations. First Banks also uses interest rate cap and floor agreements to limit the interest expense associated with certain of its interest-bearing liabilities and the interest expense of certain interest rate swap agreements, respectively. At December 31, 1997 and 1996, the unamortized costs of these agreements were $290,000 and 433,000, respectively, and were included in other assets. As discussed under "--Mortgage Banking Activities," derivative financial instruments issued by First Banks consist of commitments to originate fixed-rate loans. Commitments to originate fixed-rate loans consist primarily of residential real estate loans. These loan commitments, net of estimated underwriting fallout, and loans held for sale are hedged with forward contracts to sell mortgage-backed securities. In addition to the simulation model employed by First Banks, an interest rate sensitivity position summary is prepared and reviewed in conjunction with the results of the simulation model. The following table presents the projected maturities and periods to repricing of First Banks' rate-sensitive assets and liabilities as of December 31, 1997, adjusted to include prepayment assumptions:
Over three Over six Three through through Over one months six twelve through Over five or less months months five years years Total ------- ------ ------ ---------- ----- ----- (dollars expressed in thousands) Interest-earning assets: Loans (1).................................. $ 1,550,244 284,049 441,074 395,288 331,545 3,002,200 Investment securities...................... 191,300 37,794 56,840 374,683 134,913 795,530 Federal funds sold......................... 23,515 -- -- -- -- 23,515 Interest-bearing deposits with other financial institutions................... 2,840 -- -- -- -- 2,840 ----------- -------- --------- -------- -------- ---------- Total interest-earning assets.......... $ 1,767,899 321,843 497,914 769,971 466,458 3,824,085 =========== ======== ========= ======== ======== ========== Interest-bearing liabilities: Interest-bearing demand accounts........... $ 128,790 80,058 52,212 38,289 48,731 348,080 Savings accounts........................... 96,873 79,912 68,496 97,036 228,320 570,637 Money market demand accounts............... 376,392 -- -- -- -- 376,392 Time deposits.............................. 466,143 415,455 536,528 222,233 263,905 1,904,264 Other borrowed funds....................... 108,073 632 -- 592 -- 109,297 ----------- -------- --------- -------- -------- ---------- Total interest-bearing liabilities..... $ 1,176,271 576,057 657,236 358,150 540,956 3,308,670 =========== ======= ======= ======== ======= ========= Interest sensitivity gap: Periodic................................... $ 591,628 (254,214) (159,322) 411,821 (74,498) 515,415 Cumulative................................. 591,628 337,414 178,092 589,913 515,415 =========== ======== ========= ======== ======= Ratio of interest-sensitive assets to interest-sensitive liabilities: Periodic................................. 1.50 .56 .76 2.15 .86 1.16 ==== Cumulative............................... 1.50 1.19 1.07 1.21 1.16 ==== ==== ==== ==== ==== - ------------------ (1) Loans presented net of unearned discount.
Management makes certain assumptions in preparing the table above. These include the assumption that: (1) loans will repay at historic repayment speeds; (2) interest-bearing demand and savings accounts are interest sensitive at a rate of 37% and 17%, respectively, of the remaining balance for each period presented: and (3) fixed maturity deposits will not be withdrawn prior to maturity. At December 31, 1997 and 1996, First Banks was asset sensitive on a cumulative basis through the twelve-month time horizon by $178.1 million, or 4.28% of total assets, and liability sensitive by $115.9 million, or 3.14% of total assets, respectively. The increase in the asset-sensitive position for 1997 primarily relates to the change in the composition of the loan portfolio and the issuance of the Preferred Securities in February 1997, which provided a long-term source of fixed-rate funding. The interest sensitivity position is one of several measurements of the impact of interest rate changes on net interest income. Its usefulness in assessing the effect of potential changes in net interest income varies with the constant change in the composition of First Banks' assets and liabilities and changes in interest rates. For this reason, First Banks places greater emphasis on a simulation model for monitoring its interest rate exposure. Mortgage Banking Activities The mortgage banking activities of First Banks consist of the origination, purchase and servicing of residential mortgage loans. Generally, First Banks sells its production of residential mortgage loans in the secondary loan markets. Servicing rights are retained with respect to conforming fixed-rate loans. Other loans are sold on a servicing released basis. For the three years ended December 31, 1997, 1996 and 1995, First Banks originated and purchased loans for resale totaling $174 million, $136 million and $67 million and sold loans totaling $148 million, $113 million and $207 million, respectively. The origination and purchase of residential mortgage loans and the related sale of the loans provides First Banks with additional sources of income including the interest income earned while the loan is held awaiting sale and ongoing loan servicing fees from the loans sold with servicing rights retained. Mortgage loans serviced for investors aggregated $784 million, $847 million and $857 million at December 31, 1997, 1996 and 1995, respectively. In 1995, First Banks experienced a substantial increase in its mortgage servicing portfolio as a result of the addition of loan servicing from acquired companies and the expansion of its loan origination function into certain of the markets of the acquired entities. In view of this increase and the favorable sales prices available in the market relative to the prospective profitability of the mortgage servicing rights, in July 1995, First Banks elected to sell $427 million of mortgage servicing rights, resulting in a gain of $3.8 million. The interest income on loans held for sale was $3.2 million for the years ended December 31, 1997, 1996 and 1995, respectively. The amount of interest income realized on loans held for sale is a function of the average balance of loans held for sale, the period for which the loans are held and the prevailing interest rates when the loans are made. The average balance of loans held for sale was $35.4 million, $36.3 million and $36.8 million for the years ended December 31, 1997, 1996 and 1995, respectively. On an annualized basis, the yield on the portfolio of loans held for sale was 7.07%, 6.99% and 7.17% for the years ended December 31, 1997, 1996 and 1995, respectively. This compares with First Banks' cost of funds as a percentage of average interest-bearing liabilities, of 4.88%, 4.91% and 5.01% for the years ended December 31, 1997, 1996 and 1995, respectively. Mortgage loan servicing fees are reported net of mortgage-backed security guarantee fee expense, interest shortfall and amortization of mortgage servicing rights. Loan servicing fees, net were $1.6 million, $1.8 million and $2.9 million for the years ended December 31, 1997, 1996 and 1995, respectively. The decrease in loan servicing fees of $200,000 for 1997 is primarily attributable to the sale of adjustable rate residential loan production on a servicing released basis and a lower volume of fixed-rate residential loan production which is generally sold with servicing retained. For 1996, the decrease is primarily attributable to the sale of mortgage servicing rights. Ancillary to the origination and purchase of loans held for sale in the secondary market are the realized and unrealized gains, net of losses, incurred during the period prior to sale. These net gains or losses include: (1) the adjustments of the carrying values of loans held for sale to current market values; (2) the adjustments for any gains or losses on loan commitments for which the interest rate has been established, net of anticipated underwriting "fallout"; and (3) the related cost of hedging the loans held for sale and loan commitments during the period First Banks is exposed to interest rate risk. The gain on mortgage loans originated for resale, including loans sold and held for sale, was $716,000 and $40,000 for the years ended December 31, 1997 and 1996, respectively. For the year ended December 31, 1995, First Banks incurred a loss on mortgage loans sold and held for sale of $608,000. As described under "--Interest Rate Risk Management," First Banks' interest rate risk management policy provides certain hedging parameters to reduce the interest rate exposure arising from changes in loan prices from the time of commitment until the sale of the security or loan. To reduce this exposure, First Banks uses forward commitments to sell fixed-rate mortgage-backed securities at a specified date in the future. At December 31, 1997, 1996 and 1995, First Banks had $67.4 million, $36.7 million and $42.4 million, respectively, of loans held for sale and related commitments, net of committed loan sales and estimated underwriting fallout, of which $60.0 million, $35.0 million and $42.0 million, respectively, were hedged through the use of such forward commitments. Comparison of Results of Operations for 1997 and 1996 Net Income. Net income for the year ended December 31, 1997 was $33.0 million, compared to $20.2 million for 1996. Excluding the effect of the one-time Savings Association Insurance Fund (SAIF) assessment of $8.2 million ($5.3 million after the related income tax effect), net income for the year ended December 31, 1996 would have been $25.5 million. The return on average assets for 1997 was 0.87%, compared with 0.57% for 1996 (0.72% excluding the effect of the SAIF assessment). The improvement in operating results for 1997 reflects several influences which had various effects on income for the year, including: (1) the continuation of the amalgamation of the entities acquired in recent years into First Banks' systems; (2) the overall improvement in asset quality, particularly within the acquired entities in Texas and California; and (3) the expansion of First Banks' internal business development capacity. During 1994 and 1995, First Banks completed twelve acquisitions which had an aggregate of $1.96 billion in total assets and 43 banking locations. This acquisition activity decreased substantially in 1996 and 1997, during which time management focused on continuing to meld these entities into its operations, systems and culture, and achieve the efficiencies and opportunities envisioned when the entities were acquired. As discussed under "--General," most of the acquired institutions exhibited elements of financial distress prior to their acquisitions which contributed to marginal earnings performance. Generally, these were the result of asset quality problems and/or high overhead expenses. Following acquisition, the most immediate tasks required were the improvement of asset quality and the elimination of unnecessary expenses. Although many improvements were instituted shortly after acquisition, many of the problems which existed were indigenous, requiring a much longer time period to resolve. This involved not only many problem assets, which had no apparent short-term solution, but also other elements of expense. This included addressing such areas as: (1) maintenance, repairs and, in some cases, refurbishing of bank premises necessitated by the deferral of such projects by the acquired entities; (2) long-term leases which provided space in excess of that necessary for banking activities and/or rates in excess of current market rates; (3) relocation of branch offices which were not adequate, conducive or convenient for retail banking operations; and (4) management of lawsuits which had existed with respect to acquired entities to minimize the overall cost of negotiation, settlement or litigation. However, the process which was required after acquisition was not only one of reducing expenses and improving asset quality, but the combining of different entities together to form a single cohesive organization with common objectives and focus. This involved a significant post-acquisition investment of resources by First Banks to reorganize staff, recruit personnel where needed, and establish the direction and focus necessary for the combined banks to take advantage of the opportunities available to them. While this contributed to the increases in noninterest expenses during the three years ended December 31, 1997, it also resulted in the creation of new banking entities which were unlike any of the merged entities individually. These banks were able to convey a consistent image and quality of service, provide a complete array of financial products to their customers and compete effectively in their marketplaces, even in the presence of other financial institutions with much greater resources.
While some of these activities did not contribute to reductions of noninterest expenses, they contributed to the commercial and retail business development efforts of the banks, and ultimately to their overall profitability. As a result of this, the contribution to consolidated net income by the Texas and California banks escalated sharply in 1997, as indicated below: California Texas Other ------------- -------------- ---------------- 1997 1996 (1) 1997 1996 (1) 1997 1996 (1) -------------- ----------------- ------------------ (dollars expressed in thousands) Year ended December 31: Equity in income of subsidiaries.............. $ 7,488 5,259 1,675 806 31,686 24,542 Average investment in subsidiaries............ 76,330 54,114 25,178 23,202 220,134 212,850 Return on average investment............. 9.81% 9.72% 6.65% 3.47% 14.39% 11.53% - --------- (1) Excludes the effect of the one-time FDIC special assessment, net of related tax benefits.
As this process was occurring in the acquired banks, First Banks continued the expansion of its business development function throughout the organization. As discussed under "--Financial Condition and Average Balances," this included not only the addition of commercial business development and retail banking personnel, but also increases in the support and administrative staffs necessary to deliver, control and manage the added volume of business. Although this contributed to the increase in noninterest expenses, it also was the impetus for the internal growth of First Banks in 1996 and 1997, as its growth through acquisitions decreased. For the year ended December 31, 1997, the corporate banking business development function provided a net loan increase, excluding loans added through acquisitions, of $378.9 million. This increase was partially offset by decreases of $199.0 of residential real estate and consumer loans reflecting the ongoing reorientation of the consolidated loan portfolio. In February 1997, First Banks, through First Trust, sold $86.25 million of Trust Securities, as described under "--Financial Condition and Average Balances." Initially, the proceeds of this offering were applied to the reduction of First Banks' borrowing under its Credit Agreement and to open market purchases and retirements of its Class C Preferred Stock. On December 1, 1997, First Banks redeemed all of the remaining Class C Preferred Stock. Because the Preferred Securities represent debt under Internal Revenue Regulations, but are considered capital for purposes of bank regulatory requirements, payments to security holders are reflected in the accompanying consolidated financial statements as a component of noninterest expense. Consequently, for the year ended December 31, 1997, the expense associated with the Preferred Securities contributed to a reduction in interest expense, due to the repayment of borrowed funds, and to an increase in noninterest expense. Furthermore, to the extent the Class C Preferred Stock was redeemed prior to the payment of dividends, it reduced the aggregate dividends for the year, which are reflected in the consolidated statements of income as a reduction from net income in arriving at net income available to common stockholders.
Provision for Possible Loan Losses. The provision for possible loan losses was $11.3 million for the year ended December 31, 1997, compared to $11.5 million for 1996. Net loan charge-offs were $7.6 million for the year ended December 31, 1997, compared to $19.7 million for 1996. Although asset quality has continued to improve, particularly with respect to its Texas and California banks, First Banks has continued to provide for possible loan losses relatively aggressively in recognition of the overall growth in the loan portfolio as well as its changing composition. As the portfolio changes from one with a significant preponderance in residential real estate loans, to one having substantial portions of commercial, financial and agricultural loans, real estate construction and development loans and commercial real estate loans, the credit risk profile of the portfolio increases. Typically, residential real estate lending has resulted in relatively minor credit losses. However, commercial lending carries with it greater credit risk which, although managed through appropriate loan policies and procedures, underwriting and credit administration, must be recognized through adequate allowances for possible loan losses. The following is a summary of loan loss experience and nonperforming assets by geographic area for the years ended December 31, 1997 and 1996: California Texas Other Total -------------- ------------- ---------------- --------------- 1997 1996 1997 1996 1997 1996 1997 1996 ---- ---- ---- ---- ---- ---- ---- ---- (dollars expressed in thousands) Total loans...................... $ 640,366 467,233 176,341 180,068 2,185,493 2,120,668 3,002,200 2,767,969 Total assets..................... 1,042,979 732,532 271,686 270,309 2,850,349 2,686,313 4,165,014 3,689,154 Provision for possible loan losses.................... 2,500 5,879 1,500 1,000 7,300 4,615 11,300 11,494 Net loan charge-offs............. 1,510 11,765 1,091 2,677 5,001 5,274 7,602 19,716 Net loan charge-offs as a percentage of average loans.............. 0.30% 2.42% 0.63% 1.53% 0.23% 0.25% 0.27% 0.72% Nonperforming loans.............. $ 5,548 14,726 211 164 18,307 15,379 24,066 30,269 Nonperforming assets............. 7,717 18,402 296 835 23,377 21,639 31,390 40,876
Noninterest Income and Expense. A summary of noninterest income and noninterest expense for the years ended December 31, 1997 and 1996 appears below: December 31, Increase (decrease) ------------ ------------------- 1997 1996 Amount % ---- ---- ------ ------ (dollars expressed in thousands) Noninterest income: Service charges on deposit accounts and customer service fees.... $ 12,491 12,521 (30) (.24)% Credit card fees................................................. 2,914 2,475 439 17.74 Loan servicing fees, net......................................... 1,628 1,837 (209) (11.38) (Gain) loss on mortgage loans sold and held for sale............. 716 40 676 1,690.00 Trust and brokerage fees......................................... 893 782 111 14.19 Net gain (loss) on sales of securities........................... 2,456 (311) 2,767 889.71 Other............................................................ 4,599 3,377 1,222 36.19 -------- -------- ------ Total noninterest income................................. $ 25,697 20,721 4,976 24.01 ======== ======== ====== ====== Noninterest expense: Salaries and employee benefits................................... $ 43,011 39,995 3,016 7.54% Occupancy, net of rental income.................................. 10,617 9,758 859 8.80 Furniture and equipment.......................................... 7,618 7,218 400 5.54 Federal Deposit Insurance Corporation premiums................... 804 11,715 (10,911) (93.14) Postage, printing and supplies................................... 4,187 4,687 (500) (10.67) Data processing fees............................................. 8,450 4,477 3,973 88.74 Legal, examination and professional fees......................... 4,587 4,901 (314) (6.41) Credit card expenses............................................. 3,343 2,913 430 14.76 Communications................................................... 2,611 2,635 (24) (.91) Advertising...................................................... 4,054 2,224 1,830 82.28 (Gain) loss on foreclosed real estate, net of expenses........... (331) 1,927 (2,258) (117.18) Guaranteed preferred debenture expense........................... 7,322 -- 7,322 -- Other............................................................ 14,014 13,291 723 5.44 -------- -------- ------ Total noninterest expense................................. $110,287 105,741 4,546 4.30 ======== ======== ====== ======
Noninterest income was $25.7 million for the year ended December 31, 1997, compared to $20.7 million for 1996. The increase is primarily attributable to net gains on sales of securities, an increase in the net gain on mortgage loans sold and held for sale, and various increases in other income. Overall, there were no significant changes in other components of noninterest income for the year. Although the acquisitions of Sunrise Bank in November 1996, three branches of Highland Federal Bank, F.S.B. in March and September 1997 and Surety Bank in December 1997 added new customer accounts on which service charges could be assessed, overall customer service charges declined from $12.52 million for the year ended December 31, 1996 to $12.49 million in 1997. This reflects three factors. First, following an acquisition and subsequent conversion to First Banks' account structure and data processing system, a period of moratorium on assessing of service charges is provided to allow customers to become acclimated to the changes which have occurred and become familiar with First Banks. During this period, which may be as long as six months from the date of acquisition, service charges do not increase, and may actually decrease. Secondly, part of the retail business development efforts during 1997 involved the marketing of "packaged accounts." These accounts offer the customer several different banking services in an effort to achieve a stronger relationship with that customer, attract the customer to noninterest bearing and lower cost account relationships, and promote higher balance accounts. However, these accounts also provide the banking services for a fixed fee, which reduces as the aggregate customer balances increase, in lieu of various other charges for specific services. In general, these relationships result in a net reduction of service charge income but an increase in deposit balances. The extent to which this occurs is dependent upon the amount of migration of existing customer relationships relative to the new customer relationships which are established. Finally, commercial accounts are frequently assessed service charges on demand accounts based on an analysis which takes into account an earnings credit for the balances which the customers maintain in their accounts relative to the service charges which would otherwise be assessed for the services provided. As interest rates have generally declined during 1997, the alternative opportunities for customers to invest their funds at yields in excess of the earnings credits have also declined. Consequently, these commercial customers have tended to maintain higher average balances in their accounts during 1997, offsetting a larger amount of service charges which would otherwise have been assessed. In 1997, First Banks realized a gain on the sale of three mortgage-backed residual securities which it had acquired through the acquisition of a thrift in 1995. Because of the unique structure of these residuals, at the date of acquisition it appeared unlikely that First Banks would receive payment of all of the remaining principal and interest. Consequently, the aggregate principal of these securities had been written down to $250,000, which was the approximate market value at that time, and recorded as securities available-for-sale. However, as residential mortgage rates declined in 1997, the value of the underlying pool of mortgages increased, increasing the value of these securities significantly. Recognizing this, First Banks sold these securities, realizing a gain of $2.24 million. Net gains on mortgage loans sold and held for sale increased to $716,000 for the year ended December 31, 1997 from $40,000 for 1996. As discussed under "--Mortgage Banking Activities," the increase is attributable to an increase in the sales of adjustable-rate residential loan production, which are sold on a servicing released basis, and First Banks' overall pricing practices. Other noninterest income increased to $4.6 million for the year ended December 31, 1997 from $3.4 million for 1996. The increase is primarily attributable to rental fees paid by First Services, L.P. for the use of data processing and other equipment owned by First Banks. See Note 16 to the consolidated financial statements. Noninterest expense increased to $110.3 million for the year ended December 31, 1997 from $105.7 million for 1996. The most significant changes in noninterest expense were the reduction of Federal Deposit Insurance Corporation (FDIC) premiums from $11.7 million for the year ended December 31, 1996 to $804,000 for 1997, and the expense associated with the Preferred Securities. In 1996, the FDIC levied a special deposit insurance assessment to be used to recapitalize the SAIF of the FDIC and to bring it into parity with the Bank Insurance Fund (BIF). As a result, First Banks paid a one-time charge to the FDIC of $8.2 million. However, in recognition of this recapitalization, SAIF premium rates were lower in 1997, resulting in a further reduction of the 1997 expense. Furthermore, the improving condition of the acquired banks allowed them to benefit from better rate classifications and consequently lower FDIC premiums. In connection with the issuance of the Preferred Securities in February 1997, First Banks incurred $7.32 million of expense for the year ended December 31, 1997. As discussed above, the proceeds from this issue were applied to the repayment of borrowed funds and the purchase and redemption of Class C Preferred Stock, resulting in a reduction of both interest expense and dividends during the year. Data processing expenses for the year ended December 31, 1997 increased to $8.45 million from $4.48 million for 1996. Prior to April 1, 1997, data processing, item processing and operational support services were provided to all of the Subsidiary Banks through FirstServ, Inc. (First Serv), a wholly owned subsidiary of First Banks. FirstServ in turn contracted with First Services, L.P. under a facilities management agreement for these services. However, FirstServ provided the equipment, premises, supplies, postage, telephone lines and other non-personnel expenses associated with these services. First Services, L.P. is owned indirectly by First Banks' voting shareholders. Effective April 1, 1997, FirstServ discontinued operations, transferring all of the functions and expenses which it had previously provided to the Subsidiary Banks to First Services, L.P. As a result, items which had previously been reflected in the consolidated financial statements in various expense categories were paid directly by First Services, L.P., and then charged to the Subsidiary Banks as data processing expenses. This change in organizational structure had the effect of reducing various expenses for 1997 by the amounts assumed by First Services, L.P., and increasing data processing expenses, when compared with like expenses in 1996.
The noninterest expenses of FirstServ for the year ended December 31, 1996 and the three months ended March 31, 1997 which were then assumed by First Services, L.P. were as follows: Three months ended Year ended March 31, 1997 December 31, 1996 -------------- ----------------- (dollars expressed in thousands) Occupancy, net of rental income.......................... $ 41 162 Furniture and equipment.................................. 375 889 Postage, printing and supplies........................... 169 459 Communications........................................... 147 569 Other expenses........................................... 151 593 ------- ------ Total $ 883 2,672 ======= ======
In connection with its increasing emphasis on internal growth as an alternative to acquisitions, First Banks' advertising expenses increased to $4.05 million for the year ended December 31, 1997 from $2.22 million for 1996. This reflected both advertising for specific promotions intended to increase deposits, and general image advertising intended to convey First Banks' stability of ownership to its midwest markets where bank consolidations have caused significant customer confusion and displacement. The sale of foreclosed real estate for the year ended December 31, 1997 resulted in a gain, net of expenses of $331,000, compared to a loss of $1.93 million for 1996. The loss for 1996 includes a provision for loss of $747,000 due to a contingent liability with respect to a parcel of foreclosed real estate in an acquired bank. The contingent liability became more probable due to the default on an agreement by a developer through whom the Company was attempting to dispose of the property. The gain for 1997 results partially from the reduction in the amount of other real estate from $10.6 million at December 31, 1996 to $7.3 million at December 31, 1997. In addition, it is indicative of the effort of First Banks to realistically value its other real estate at the time it is foreclosed or at the time banks are acquired. In addition, noninterest expense for 1997 reflects the expenses associated with Sunrise Bank, which was acquired in November 1996, three branch offices of Highland Federal Bank, F.S.B. which were acquired in March and September 1997, and Surety Bank, which was acquired in December 1997. Comparison of Results of Operations for 1996 and 1995 Net Income. Net income for the year ended December 31, 1996 excluding the effect of the one-time SAIF assessment of $8.2 million ($5.3 million on an after tax-basis), would have been $25.5 million, compared to $24.5 million for 1995. This represents a return on average assets of 0.72% and 0.70% for the years ended December 31, 1996 and 1995, respectively. Including the effect of the assessment, net income for 1996 was $20.2 million, representing a return on average assets of 0.57%. The decline in operating results in 1996 and 1995 reflect several influences which had significant adverse effects on earnings including the impact of 13 acquisitions completed during the three years ended December 31, 1996. As previously discussed under "-- General" and "-- Acquisitions," most of the acquired institutions exhibited significant financial distress prior to their acquisition, generally related to asset quality problems and/or high operating expenses. Consequently, in the periods since their respective dates of acquisition, management of First Banks has worked with management of the institutions to completely reorient their positions within their market places, restructure their balance sheets and revise their systems and procedures. This has required a significant dedication of resources by First Banks, both in terms of expenses and personnel. Substantial expenses have been incurred in reorganizing, retraining and reducing staff, converting data processing systems, instituting and controlling new policies and procedures, and merging corporate cultures, not only with that of First Banks, but also between acquired institutions. This process was complicated by the existence of what is collectively a substantial portfolio of problem assets. While the provisions for possible loan losses in California and Texas have been substantial, this represents only a portion of the cost of carrying the problem assets. In addition to that expense is the loss of income on nonperforming assets, the management, legal and other costs associated with managing and collecting problem loans, and the expenses incurred in foreclosing, operating, holding and disposing of real estate and other collateral acquired from problem borrowers.
Although these factors were anticipated prior to the acquisitions and are considered acceptable as costs of building the long-term franchise value of First Banks, they had a substantial effect on First Banks' profitability for the years ended December 31, 1996 and 1995. A comparison of the relative profitability of First Banks' investment in bank and thrift subsidiaries by area is as follows: California Texas Other ---------- ----- ----- 1996(1) 1995 1996 1995 1996(1) 1995 ------- ---- ---- ---- ------- ---- (dollars expressed in thousands) Year ended December 31: Equity in income of subsidiaries........... $ 5,259 3,598 806 (2,766) 24,542 29,647 Average investment in subsidiaries......... 54,114 43,539 23,202 27,250 212,850 230,776 Return on average investment, annualized... 9.72% 8.26% 3.47% (10.15)% 11.53% 12.85% - ----------------------- (1) Excludes the effect of the one-time FDIC special assessment, net of related tax benefit.
As previously discussed, during 1994, First Banks expanded its hedging activities through the use of derivative financial instruments as a means to reduce its interest rate risk exposure. The hedges were generally established between September 1994, after a significant increase in interest rates had already occurred, and March 1995, when interest rates began to decrease. While being conceptually appropriate in reducing interest rate risk, because of its timing, this hedging process did not have an opportunity to contribute to protecting First Banks from the adverse effects of increasing interest rates, but limited substantially its opportunity to benefit from decreasing interest rates. The expense of such derivative financial instruments was $11.5 million and $9.1 million for the years ended December 31, 1996 and 1995, respectively. The results of operations for the year ended December 31, 1996 were also adversely affected by an $8.2 million charge for the one-time special deposit insurance assessment passed by Congress and signed by President Clinton on September 30, 1996. This special assessment was used to recapitalize the SAIF of the FDIC in order to bring it into parity with the BIF of the FDIC. As previously discussed, net interest income (expressed on a tax-equivalent basis) for the year ended December 31, 1996 was $125.5 million, or 3.79% of average interest-earning assets, compared to $118.0 million, or 3.60% of average interest-earning assets, for 1995. Provision for Possible Loan Losses. The provision for possible loan losses was $11.5 million and $10.4 million for the years ended December 31, 1996 and 1995, respectively, while net loan charge-offs were $19.7 million and $10.8 million for the same periods. Several of First Banks' acquisitions in 1995 and 1994 included significant portfolios of problem assets. This is particularly evident in California and Texas, where the economies had been weak in recent years. Of First Banks' total nonperforming loans of $30.3 million at December 31, 1996, $14.9 million, or 49.1%, were held by the California and Texas banks. As this would suggest, a substantial portion of First Banks' net loan charge-offs and provisions for possible loan losses related to loans in the California or Texas banks.
The following is a summary of loan loss experience and nonperforming assets by geographic area for the years ended December 31, 1996 and 1995: California Texas Other Total -------------- ------------ ------------- ----------------- 1996 1995 1996 1995 1996 1995 1996 1995 ---- ---- ---- ---- ---- ---- ---- ---- (dollars expressed in thousands) Total loans.......................$ 467,233 460,907 180,068 192,573 2,120,668 2,090,739 2,767,969 2,744,219 Total assets...................... 732,532 626,782 270,309 296,712 2,686,313 2,699,468 3,689,154 3,622,962 Provisions for possible loan losses..................... 5,879 1,301 1,000 5,826 4,615 3,234 11,494 10,361 Net loan charge-offs.............. 11,765 5,980 2,677 3,355 5,274 1,426 19,716 10,761 Net loan charge-offs as a percentage of average loans... 2.42% 1.95% 1.53% 1.63% 0.25% 0.07% 0.72% 0.41% Nonperforming loans............... $ 14,726 18,952 164 549 15,379 19,890 30,269 39,391 Nonperforming assets.............. 18,402 21,852 835 1,561 21,639 23,731 40,876 47,144
The provision for possible loan losses for the year ended December 31, 1996 reflects an additional provision attributable to a single commercial loan of First Bank of approximately $3.7 million which was fully charged-off. The loan was identified in 1995 as having potential problems creating uncertainty as to its collectibility. During 1996, the borrower failed to meet certain previously agreed-upon financial measures and principal reductions. As a result, it became apparent the loan could not be collected in the normal course of business and was charged-off. The provision for possible loan losses for the year ended December 31, 1995 includes a special provision of $3.7 million. This special provision related to FBA's portfolio of automobile loans which had experienced increased levels of loan charge-offs and loans past due 30 days or more within that portfolio during 1995. Tables summarizing nonperforming assets, past-due loans and charge-off experience are presented under "--Loans and Allowance for Possible Loan Losses." Noninterest Income and Expense. The following table summarizes noninterest income and noninterest expense for the years ended December 31, 1996 and 1995, respectively:
December 31, Increase (decrease) ------------ ------------------- 1996 1995 Amount % ---- ---- ------ ------ (dollars expressed in thousands) Noninterest income: Service charges on deposit accounts and customer service fees.... $ 12,521 10,661 1,860 17.4% Credit card fees................................................. 2,475 2,179 296 13.6 Loan servicing fees, net......................................... 1,837 2,932 (1,095) (37.3) Gain (loss) on mortgage loans sold and held for sale: Originated for sale............................................ 40 (324) 364 112.4 Other loan sales............................................... -- (284) 284 -- Trust and brokerage fees......................................... 782 699 83 11.9 Net loss on sales of securities.................................. (311) (866) 555 64.1 Gain on sale of mortgage loan servicing rights................... -- 3,843 (3,843) -- Loss on cancellation of interest rate swap agreements............ -- (3,342) 3,342 -- Other............................................................ 3,377 3,909 (532) (13.61) -------- ------- ------ Total noninterest income................................. $ 20,721 19,407 1,314 6.77 ======== ====== ====== ====== Noninterest expense: Salaries and employee benefits................................... $ 39,995 37,941 2,054 5.4% Occupancy, net of rental income.................................. 9,758 8,709 1,049 12.0 Furniture and equipment.......................................... 7,218 6,852 366 5.3 Federal Deposit Insurance Corporation premiums................... 11,715 4,911 6,804 138.5 Postage, printing and supplies................................... 4,687 4,678 9 .2 Data processing fees............................................. 4,477 4,838 (361) (7.5) Legal, examination and professional fees......................... 4,901 5,412 (511) (9.4) Credit card expenses............................................. 2,913 2,490 423 17.0 Communications................................................... 2,635 2,476 159 6.4 Advertising...................................................... 2,224 2,182 42 1.9 (Gain) loss on foreclosed real estate, net of expenses........... 1,927 1,302 625 48.0 Other............................................................ 13,291 9,775 3,516 36.0 -------- ------- ------- Total noninterest expense................................. $105,741 91,566 14,175 15.5 ======== ====== ====== ======
Noninterest income was $20.7 million for the year ended December 31, 1996, in comparison to $19.4 million for 1995. The increase for the year ended December 31, 1996 is primarily attributable to the additional noninterest income generated from the acquisitions completed throughout 1995. The increase of $2.2 million in service charges, customer service fees and credit card fees for the year ended December 31, 1996, compared to 1995, relates primarily to the aforementioned acquisitions. For the year ended December 31, 1996, loan servicing fees, net, decreased by $1.1 million, in comparison to 1995. As more fully described under "-- Mortgage Banking Activities," the decrease is attributable to the sale of $427 million of mortgage loan servicing rights during July 1995. First Banks decided to sell the mortgage servicing rights due to favorable pricing available in the marketplace at that time. This sale resulted in a gain of $3.8 million. In addition, First Banks sold $147 million of residential mortgage loans during the year ended December 31, 1995, resulting in a loss of $284,000. In connection with the sale of these loans, First Banks terminated an interest rate swap agreement, resulting in a loss of $3.3 million for the year ended December 31, 1995. Noninterest income also includes net loss on sales of securities of $311,000 for the year ended December 31, 1996, in comparison to net loss on sales of securities of $866,000 for 1995. The securities sold were classified as available for sale within the investment security portfolio. Noninterest expense was $105.7 million and $91.6 million for the years ended December 31, 1996 and 1995, respectively. The increase of $14.1 million is primarily attributable to the one-time special assessment discussed below and incremental operating expenses of the seven acquisitions completed throughout 1995. In particular, salaries and employee benefits increased by $2.1 million to $40.0 million from $37.9 million for the years ended December 31, 1996 and 1995, respectively. In addition, occupancy expense, net increased by $1.1 million to $9.8 million from $8.7 million for the years ended December 31, 1996 and 1995, respectively. FDIC premiums expense for the year ended December 31, 1996 includes an $8.2 million charge for the one-time special deposit insurance assessment passed by Congress and signed by President Clinton on September 30, 1996. This special assessment was used to recapitalize the SAIF of the FDIC and bring it into parity with the BIF of the FDIC. Loans and Allowance for Possible Loan Losses Interest earned on the loan portfolio represents the principal source of income for First Banks and its Subsidiary Banks. Interest and fees on loans were 85.7%, 89.2% and 84.8% of total interest income for the years ended December 31, 1997, 1996 and 1995, respectively. Loans, net of unearned discount, were 72.1%, 75.0% and 75.7% of total assets at December 31, 1997, 1996 and 1995, respectively. Consequently, First Banks views the quality, yield and growth of the loan portfolio to be primary objectives in its growth and profitability. During the three years ended December 31, 1997, total loans, net of unearned discount, increased 44.8% from $2.07 billion at December 31, 1994 to $3.00 billion at December 31, 1997. As discussed under "--General," in 1993 First Banks began a process of substantially enhancing its capabilities to achieve and manage internal growth. A key element of this process was the expansion of the corporate business development staff which is responsible for the internal development of both loan and deposit relationships with commercial customers. These customers require loans categorized by type of collateral as commercial, financial and agricultural loans, real estate construction and land development loans and commercial real estate loans. While this process was occurring, in order to achieve more diversification, a higher level of interest yield and a reduction in interest rate risk within its loan portfolio, in 1995 First Banks began reorienting its portfolio. This reorientation provided that as the corporate business development effort continued to originate a substantial volume of new loans, substantially all of the conforming residential mortgage loan production of First Banks would be sold in the secondary mortgage market, and the origination of indirect automobile loans would be substantially reduced. Consequently, these sectors of the portfolio began to decline substantially. This process was accelerated in 1995 by the sale of $147 million of residential real estate loans from the portfolio. As a result, much of the growth in corporate lending was offset by reductions in residential real estate and indirect automobile lending. In addition, First Banks' acquisitions during this period added substantial portfolios of new loans. However, many of these portfolios contained significant loan problems. As these banks resolved their asset quality issues, those portfolios tended to decline because many of the resources which would otherwise be directed toward generating new loans were concentrated on improving or eliminating old ones.
A summary of the effects of these factors on the loan portfolio for the three years ended December 31, 1997 follows: Increase (decrease) in loans for the year ended December 31, --------------------------- 1997 1996 1995 ---- ---- ---- (dollars expressed in thousands) Internal loan volumes: Commercial lending.......................................... $ 378,882 209,251 119,017 Residential real estate lending............................. (144,707) (164,400) (127,648) Consumer lending, net of unearned discount.................. (54,305) (82,231) (42,453) Loans provided by acquisitions................................... 54,361 61,130 721,733 ---------- --------- --------- Total increase in loans..................................... $ 234,231 23,750 670,649 ========== ========= ========= Increase (decrease) in potential problem loans (1)............... $ (7,600) (25,500) 52,700 ========== ========= ========= - --------------------- (1) Potential problem loans include nonperforming loans and other loans identified by management as having potential credit problems.
First Banks' lending strategy stresses quality, growth and diversification by collateral, geography and industry. A common credit underwriting structure is in place throughout First Banks. The commercial lenders focus principally on small to middle-market companies. Retail lenders focus principally on residential loans, including home equity loans, automobile financing and other consumer financing needs arising out of First Banks' branch banking network. Commercial, financial, agricultural and municipal and industrial development loans include loans that are made primarily based on the borrowers' general credit strength and ability to generate repayment cash flows from income sources even though such loans and bonds may also be secured by real estate or other assets. Real estate construction and development loans, primarily relating to residential properties, represent interim financing secured by real estate under construction. Real estate mortgage loans consist primarily of loans secured by single-family owner-occupied properties and various types of commercial properties on which the income from the property is the intended source of repayment. Consumer and installment loans are loans to individuals and consist primarily of loans secured by automobiles. Loans held for sale are primarily fixed and adjustable rate residential loans pending sale in the secondary mortgage market in the form of a mortgage-backed security, or to various private third-party investors.
The following table shows the composition of the loan portfolio by major category and the percent of each category to the total portfolio as of the dates presented: December 31, ----------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 -------------- ------------- ------------- ------------ ------------- Amount % Amount % Amount % Amount % Amount % (dollars expressed in thousands) Commercial, financial and agricultural.. $ 621,618 21.1% $ 457,186 16.7% $ 364,018 13.5%$ 208,649 10.2% $ 160,211 12.8% Real estate construction and development 413,107 14.0 289,378 10.5 209,802 7.8 122,912 6.0 76,049 6.1 Real estate mortgage: One-to-four-family residential loans 915,205 31.1 1,059,770 38.7 1,199,491 44.4 967,129 47.1 584,868 46.6 Other real estate loans............. 713,910 24.3 600,810 21.9 512,264 19.0 332,075 16.1 243,382 19.4 Consumer and installment, net of unearned discount................... 279,279 9.5 333,340 12.2 413,609 15.3 422,461 20.6 189,851 15.1 ---------- ---- --------- ---- ------- ---- --------- ---- --------- ---- Total loans, excluding loans held for sale......... 2,943,119 100.0% 2,740,484 100.0% 2,699,184 100.0% 2,053,226 100.0% 1,254,361 100.0% ===== ===== ===== ===== ===== Loans held for sale..................... 59,081 27,485 45,035 20,344 107,657 ---------- --------- ------- --------- --------- Total loans.................... $3,002,200 $2,767,969 $2,744,219 $2,073,570 $1,362,018 ========== ========== ========== ========== ==========
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, financial and agricultural................ $ 492,939 100,011 22,141 4,483 2,044 621,618 Real estate construction and development.............. 392,117 13,571 6,957 115 347 413,107 Real estate mortgage ................................ 858,676 343,837 280,855 134,189 11,558 1,629,115 Consumer and installment, net of unearned discount.... 76,381 191,042 223 11,633 -- 279,279 Loans held for sale................................... 59,081 -- -- -- -- 59,081 ----------- ------- ------- -------- ------- ---------- Total loans.................................. $ 1,879,194 648,461 310,176 150,420 13,949 3,002,200 =========== ======= ========= ======== ======= ==========
Following is a summary of loan loss experience for the five years ended December 31, 1997: December 31, -------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (dollars expressed in thousands) Allowance for possible loan losses, beginning of period........................................ $ 46,781 52,665 28,410 23,053 20,897 Acquired allowances for possible loan losses......... 30 2,338 24,655 5,026 2,079 ---------- ---------- -------- --------- --------- 46,811 55,003 53,065 28,079 22,976 ---------- ---------- -------- --------- --------- Loans charged-off: Commercial, financial and agricultural........... (2,308) (8,918) (2,337) (813) (2,023) Real estate construction and development......... (2,242) (1,241) (275) (119) (19) Real estate mortgage............................. (6,250) (10,308) (5,948) (1,282) (2,212) Consumer and installment......................... (6,032) (8,549) (7,060) (4,482) (5,277) ---------- ----------- -------- --------- --------- Total.................................... (16,832) (29,016) (15,620) (6,696) (9,531) ---------- ----------- -------- --------- --------- Recoveries of loans previously charged-off: Commercial, financial and agricultural........... 2,146 2,642 1,714 831 1,191 Real estate construction and development......... 269 495 666 401 241 Real estate mortgage............................. 3,666 3,255 290 840 1,396 Consumer and installment......................... 3,149 2,908 2,189 3,097 2,324 ---------- ---------- -------- --------- --------- Total.................................... 9,230 9,300 4,859 5,169 5,152 ---------- ---------- -------- --------- --------- Net loans charged-off.................... (7,602) (19,716) (10,761) (1,527) (4,379) ---------- ---------- -------- --------- --------- Provision for possible loan losses................... 11,300 11,494 10,361 1,858 4,456 ---------- ---------- -------- --------- --------- Allowance for possible loan losses, end of period.... $ 50,509 46,781 52,665 28,410 23,053 ========== ========== ======== ========== ========= Loans outstanding: Average.......................................... $2,846,157 2,726,297 2,598,936 1,616,634 1,340,641 End of period.................................... 3,002,200 2,767,969 2,744,219 2,073,570 1,362,018 End of period, excluding loans held for sale..... 2,943,119 2,740,484 2,699,184 2,053,226 1,254,361 ========== ========== ========= ========= ========= Ratio of allowance for possible loan losses to loans outstanding: Average..................................... 1.77% 1.72% 2.03% 1.76% 1.72% End of period............................... 1.68 1.69 1.92 1.37 1.69 End of period, excluding loans held for sale............................. 1.72 1.71 1.95 1.38 1.84 Ratio of net charge-offs to average loans outstanding.................................... 0.27 0.72 0.41 0.09 0.33 ========== ========= ======== ========= ======== Allocation of allowance for possible loan losses at end of period: Commercial, financial and agricultural........... $ 14,879 13,579 12,501 4,160 3,531 Real estate construction and development......... 7,148 4,584 4,665 2,440 2,867 Real estate mortgage............................. 18,317 14,081 19,849 8,051 6,712 Consumer and installment......................... 5,089 10,296 10,016 6,225 2,925 Unallocated...................................... 5,076 4,241 5,634 7,534 7,018 ---------- --------- -------- --------- -------- Total.................................... $ 50,509 46,781 52,665 28,410 23,053 ========== ========= ======== ========= ======== Percent of categories to loans, net of unearned discount: Commercial, financial and agricultural........... 20.71% 16.52% 13.27% 10.06% 11.76% Real estate construction and development......... 13.76 10.45 7.65 5.93 5.58 Real estate mortgage............................. 54.26 60.00 62.49 62.66 60.81 Consumer and installment......................... 9.30 12.04 14.95 20.37 13.94 Loans held for sale.............................. 1.97 0.99 1.64 0.98 7.91 ----------- --------- -------- ---------- -------- Total.................................... 100.00% 100.00% 100.00% 100.00% 100.00% =========== ========= ======== ========== ========
Following is a summary of nonperforming assets by category: December 31, ----------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (dollars expressed in thousands) Commercial, financial and agricultural: Nonaccrual....................................... $ 4,017 4,113 9,930 2,540 4,278 Restructured terms............................... -- 130 -- 60 60 Real estate construction and development: Nonaccrual....................................... 4,097 817 2,002 1,448 70 Real estate mortgage: Nonaccrual....................................... 10,402 24,486 27,159 11,637 7,546 Restructured terms............................... 5,456 278 -- 222 227 Consumer and installment: Nonaccrual....................................... 94 440 300 293 49 Restructured terms............................... -- 5 -- -- -- ----------- -------- ---------- --------- --------- Total nonperforming loans.................. 24,066 30,269 39,391 16,200 12,230 Other real estate.................................... 7,324 10,607 7,753 6,740 2,529 ----------- --------- ---------- --------- --------- Total nonperforming assets................ $ 31,390 40,876 47,144 22,940 14,759 =========== ========= ========== ========= ========= Loans, net of unearned discount...................... $ 3,002,200 2,767,969 2,744,219 2,073,570 1,362,018 =========== ========= ========== ========= ========= Loans past due 90 days or more and still accruing.... $ 2,725 3,779 8,474 1,885 1,199 =========== ========= ========== ========= ========= Allowance for possible loan losses to loans.......... 1.68% 1.69% 1.92% 1.37% 1.69% Nonperforming loans to loans......................... 0.80 1.09 1.44 0.78 0.90 Allowance for possible loan losses to nonperforming loans.............................. 209.88 154.55 133.70 175.37 188.50 Nonperforming assets to loans and foreclosed assets................................ 1.04 1.47 1.71 1.10 1.08 =========== ========= ========== ========= =========
As of December 31, 1997 and 1996, $30.7 million and $31.5 million, respectively, of loans not included in the table above were identified by management as having potential credit problems which raised doubts as to the ability of the borrowers to comply with the present loan repayment terms. First Banks' credit management policy and procedures focus on identifying, measuring and controlling credit exposure. These procedures employ a lender-initiated system of rating credits, which is ratified in the loan approval process and subsequently tested in internal loan reviews, external audits and regulatory bank examinations. Basically, the system requires rating all loans at the time they are made, except for homogeneous categories of loans, such as residential real estate mortgage loans, indirect automobile loans and credit card loans. These homogeneous loans are assigned an initial rating based on First Banks' experience with each type of loan. Adjustments to these ratings are based on payment experience subsequent to their origination. Adversely rated credits, including loans requiring close monitoring which would not normally be considered criticized credits by regulators, are included on a monthly loan watch list. Loans may be added to the watch list for reasons which are temporary and correctable, such as the absence of current financial statements of the borrower, or a deficiency in loan documentation. Other loans are added whenever any adverse circumstance is detected which might affect the borrower's ability to meet the terms of the loan. This could be initiated by the delinquency of a scheduled loan payment, a deterioration in the borrower's financial condition identified in a review of periodic financial statements, a decrease in the value of the collateral securing the loan, or a change in the economic environment within which the borrower operates. Loans on the watch list require detailed loan status reports prepared by the responsible officer every four months, which are then discussed in formal meetings with the loan review and credit administration staffs. Downgrades of loan risk ratings may be initiated by the responsible loan officer at any time. However, upgrades of risk ratings may only be made with the concurrence of the loan review and credit administration staffs generally at the time of the formal watch list review meetings. Each month, credit administration provides First Banks' management with detailed lists of loans on the watch list and summaries of the entire loan portfolio of each Subsidiary Bank by risk rating. These are coupled with analyses of changes in the risk profiles of the portfolios, changes in past due and nonperforming loans and changes in watch list and classified loans over time. In this manner, the overall increases or decreases in the levels of risk in the portfolios are monitored continually. Factors are applied to the loan portfolios for each category of loan risk to determine acceptable levels of allowance for possible loan losses. These factors are derived primarily from the actual loss experience of the Subsidiary Banks and from published national surveys of norms in the industry. The calculated allowances required for the portfolios are then compared to the actual allowance balances to determine the provisions necessary to maintain the allowances at appropriate levels. In addition, management exercises judgment in its analysis of determining the overall level of the allowance for possible loan losses. In its analysis, management considers the change in the portfolio, including growth and composition, and the economic conditions of the regions in which First Banks operates. Based on this quantitative and qualitative analysis, the allowance for possible loan losses is adjusted. Such adjustments are reflected in the consolidated statements of income. First Banks does not engage in foreign lending. Additionally, First Banks does not have any concentrations of loans exceeding 10% of total loans which are not otherwise disclosed in the loan portfolio composition table. First Banks does not have a material amount of interest-bearing assets which would have been included in nonaccrual, past due or restructured loans if such assets were loans. Deposits Deposits are the primary source of funds for the Subsidiary Banks. First Banks' deposits consist principally of core deposits from its Subsidiary Banks' local market areas. The following table sets forth the distribution of First Banks' deposit accounts at the dates indicated and the weighted average nominal interest rates on each category of deposit:
December 31, ------------ 1997 1996 1995 ---------------------- ------------------------- ------------------------ Percent Percent Percent of of of Amount deposits Rate Amount deposits Rate Amount deposits Rate ------ -------- ---- ------ -------- ---- ------ -------- ---- (dollars expressed in thousands) Demand deposits................. $ 485,222 13.17% -- $418,193 12.91% -- $ 389,658 12.24% -- Interest-bearing demand deposits..................... 348,080 9.45 1.76 337,618 10.42 1.73 307,584 9.66 1.89 Savings deposits................ 947,029 25.70 3.68 671,286 20.73 3.07 690,902 21.70 3.16 Time deposits of $100,000 or more...................... 219,417 5.95 5.63 169,057 5.22 5.64 201,025 6.31 5.69 Other time deposits............. 1,684,847 45.73 5.66 1,642,413 50.72 5.69 1,594,522 50.09 5.72 ---------- ------ ==== --------- ------ ==== ----------- ------ ==== Total deposits......... $3,684,595 100.00% $3,238,567 100.00% $ 3,183,691 100.00% ========== ====== ========== ====== =========== ======
Capital and Dividends Historically, First Banks has accumulated capital to support its acquisitions by retaining most of its earnings. Relatively small dividends are paid on the Class A convertible, adjustable rate preferred stock and the Class B adjustable rate preferred stock, totaling $786,000 for the years ended December 31, 1997, 1996 and 1995. The dividends paid on the Class C Preferred Stock were $4.28 million, $4.94 million and $4.95 million for the years ended December 31, 1997, 1996 and 1995, respectively. First Banks has never paid, and has no present intention to pay, dividends on its common stock. As discussed under "--Company Profile" and "Financial Condition and Average Balances," in 1997 First Banks formed First Trust for the purpose of issuing $86.25 million of Preferred Securities. First Banks received the proceeds and issued a subordinated debenture to First Trust. The Preferred Securities are considered Tier 1 capital for regulatory purposes. See Note 18 to the consolidated financial statements. Liquidity The liquidity of First Banks and its Subsidiary Banks is the ability to maintain a cash flow which is adequate to fund operations, service its debt obligations and meet other commitments on a timely basis. The Subsidiary Banks' primary sources for liquidity are customer deposits, loan payments, maturities and sales of investments and earnings. In addition, First Banks and its Subsidiary Banks may avail themselves of more volatile sources of funds through issuance of certificates of deposit in denominations of $100,000 or more, federal funds borrowed, securities sold under agreements to repurchase, borrowings from the Federal Home Loan Banks (FHLB) and other borrowings, including First Banks' $90 million Credit Agreement. The aggregate funds acquired from those sources were $328.7 million and $315.4 million at December 31, 1997 and 1996, respectively. At December 31, 1997, First Banks' more volatile sources of funds mature as follows: (dollars expressed in thousands) Three months or less......................................... $ 122,622 Over three months through six months......................... 52,921 Over six months through twelve months........................ 55,701 Over twelve months........................................... 97,470 ---------- Total............................................... $ 328,714 ========== Management believes the earnings of its Subsidiary Banks will be sufficient to provide funds for growth and to permit the distribution of dividends to First Banks sufficient to meet First Banks' operating and debt service requirements both on a short-term and long-term basis and to pay the dividends on the Preferred Securities issued in February 1997. Year 2000 Compatibility First Banks has significant dependence on various computer equipment and software for its daily operations. Most software systems were originally designed to operate using date fields which contain two digits to correspond to the last two digits of the year. With the approaching change to the Year 2000, this limitation in these systems could cause the computers to misinterpret years beginning with "20" as instead being years beginning with "19". If not corrected, this could cause miscalculation of data for financial purposes, and operating failure of equipment which is date dependent. While the most obvious location of this problem is the mainframe computer system, there are many other potential ramifications. These can be categorized as: (1) the ancillary software systems which are used for various other purposes throughout First Banks on secondary mainframe computers, personal computers or intelligent terminals; (2) other types of equipment which are not related to or connected to computer equipment, such as vault time locks, elevators, security equipment and heating/air conditioning systems, which are used in bank branches for various purposes; and (3) the effects which the transition to the Year 2000 may have on external suppliers and servicers, as well as the loan and deposit customers of First Banks. Recognizing this, First Banks has established an operating committee to identify all of the various Year 2000 problems which may arise and work with the various departments within First Banks to address these issues. Since most of the software used by First Banks is purchased from outside vendors, First Banks has been working with these vendors to ensure that the issues are being corrected. In a few instances, there are particular systems or equipment which the vendors do not intend to convert to Year 2000 compatibility. However, generally these are items which are at the end of their economic lives and scheduled for replacement. Consequently, First Banks believes its cost of Year 2000 compliance will not be material to its financial position or results of operation. These costs are expensed as they occur. First Banks' Subsidiary Banks are subject to risks associated with the Year 2000 software problem, a term which refers to uncertainties about the ability of various software systems to interpret dates correctly after the beginning of the Year 2000. First Banks' process of evaluating potential effects of Year 2000 issues on customers of the Subsidiary Banks is in its early stages, and it is therefore impossible to quantify the potential adverse effects of incompatible software systems on loan customers of First Banks' Subsidiary Banks. The failure of a commercial bank customer to prepare adequately for Year 2000 compatibility could have a significant adverse effect on such customer operations and profitability, in turn inhibiting its ability to repay loans in accordance with their terms. Until sufficient information is accumulated from customers of the Subsidiary Banks to enable First Banks to assess the degree to which customers' operations are susceptible to potential problems, First Banks will be unable to quantify the potential for losses from loans to commercial customers. Effects of New Accounting Standards During 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130 - Reporting Comprehensive Income. The statement establishes standards for reporting and displaying income and its components (revenues, gains, and losses) in a full set of general purpose financial statements. The statement requires all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Although the statement is effective for fiscal years beginning after December 15, 1997, First Banks does not believe the SFAS will have a material impact to the Company's financial statements. In addition, the FASB issued SFAS No. 131 - Disclosures about Segments of an Enterprise and Related Information. The statement establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires those enterprises report selected information about operating segments in interim financial reports issued to shareholders. Additionally, the statement establishes standards for related disclosures about products and services, geographic areas, and major customers superseding SFAS No. 14 - Financial Reporting for Segments of a Business Enterprise. First Banks is currently evaluating information required in the statement and believes expanded disclosure information will be required to be included in First Banks' financial statements beginning in 1998. Effects of Inflation Financial institutions are less affected by inflation than other types of companies. Financial institutions make relatively few significant asset acquisitions which are directly affected by changing prices. Instead, the assets and liabilities are primarily monetary in nature. Consequently, interest rates are more significant to the performance of financial institutions than the effect of general inflation levels. While a relationship exists between the inflation rate and interest rates, First Banks believes this is generally manageable through its asset/liability management program.
Quarterly Condensed Financial Data (Unaudited) 1997 Quarter Ended ------------------ Septem- Decem- March 31 June 30 ber 30 ber 31 -------- ------- ------ ------ (dollars expressed in thousands, except per share data) Interest income................................................. $ 69,300 72,779 74,740 78,282 Interest expense................................................ 34,756 35,338 39,071 39,666 -------- ------- ------- -------- Net interest income............................. 34,544 37,441 35,669 38,616 Provision for possible loan losses.............................. 2,850 3,175 3,100 2,175 -------- ------- ------- -------- Net interest income after provision for possible loan losses...................... 31,694 34,266 32,569 36,441 Noninterest income.............................................. 5,209 5,706 8,829 5,953 Noninterest expense............................................. 25,152 27,682 27,862 29,591 -------- ------- ------- -------- Income before provision for income taxes and minority interest in (income) loss of subsidiaries............................... 11,751 12,290 13,536 12,803 Provision for income taxes...................................... 3,714 4,051 4,632 3,686 -------- ------- ------- -------- Income before minority interest in income of subsidiaries........................ 8,037 8,239 8,904 9,117 Minority interest in income of subsidiaries..................... (201) (376) (363) (330) -------- ------- ------- -------- Net income...................................... $ 7,836 7,863 8,541 8,787 ======== ======= ======= ======== Earnings per share:............................................. Basic....................................................... $ 277.11 281.23 307.87 315.49 Diluted..................................................... 266.69 268.02 295.45 306.11 ======== ======= ======= ======== 1996 Quarter Ended ------------------ Septem- Decem- March 31 June 30 ber 30 ber 31 -------- ------- ------ ------ (dollars expressed in thousands except per share data) Interest income................................................. $ 66,656 65,453 64,899 69,013 Interest expense................................................ 36,551 35,317 34,712 35,090 -------- ------- ------- ------- Net interest income............................. 30,105 30,136 30,187 33,923 Provision for possible loan losses.............................. 3,104 3,100 2,570 2,720 -------- ------- ------- ------- Net interest income after provision for possible loan losses...................... 27,001 27,036 27,617 31,203 Noninterest income.............................................. 5,119 5,169 5,510 4,923 Noninterest expense............................................. 25,037 24,043 32,157 24,504 -------- ------- ------- ------- Income before provision (benefit) for income taxes and minority interest in income of subsidiaries............................... 7,083 8,162 970 11,622 Provision (benefit) for income taxes............................ 2,564 2,554 (814) 2,656 -------- ------- ------- ------- Income before minority interest in income of subsidiaries........................ 4,519 5,608 1,784 8,966 Minority interest in income of subsidiaries..................... (82) (138) (252) (187) -------- ------- ------- ------- Net income...................................... $ 4,437 5,470 1,532 8,779 ======== ======= ======= ======= Earnings per share:............................................. Basic....................................................... $ 126.92 173.34 4.14 308.05 Diluted..................................................... 125.39 166.96 4.14 296.09 ======== ======= ======= =======
KPMG Peat Marwick LLP The Board of Directors and Stockholders First Banks, Inc.: We have audited the accompanying consolidated balance sheets of First Banks, Inc. and subsidiaries (the Company) as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the financial position of First Banks, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/KPMG Peat Marwick LLP St. Louis, Missouri March 6, 1998 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........................................................ $ 142,125 147,804 Interest-bearing deposits with other financial institutions - with maturities of three months or less...................................... 2,840 6,050 Federal funds sold............................................................. 23,515 74,100 ----------- --------- Total cash and cash equivalents..................................... 168,480 227,954 ----------- --------- Investment securities: Trading, at fair value......................................................... 3,110 -- Available for sale, at fair value.............................................. 773,271 532,605 Held to maturity, at amortized cost (fair value of $19,835 and $20,611 at December 31, 1997 and 1996, respectively)......................... 19,149 20,196 ----------- --------- Total investment securities......................................... 795,530 552,801 ----------- --------- Loans: Commercial, financial and agricultural......................................... 621,618 457,186 Real estate construction and development....................................... 413,107 289,378 Real estate mortgage........................................................... 1,629,115 1,660,580 Consumer and installment....................................................... 287,752 341,154 Loans held for sale............................................................ 59,081 27,485 ----------- --------- Total loans......................................................... 3,010,673 2,775,783 Unearned discount.............................................................. (8,473) (7,814) Allowance for possible loan losses............................................. (50,509) (46,781) ----------- --------- Net loans........................................................... 2,951,691 2,721,188 ----------- --------- Bank premises and equipment, net of accumulated depreciation and amortization.................................................. 51,505 48,078 Intangibles associated with the purchase of subsidiaries........................... 25,835 23,303 Mortgage servicing rights, net of amortization..................................... 9,046 10,230 Accrued interest receivable........................................................ 28,358 23,250 Other real estate.................................................................. 7,324 10,607 Deferred income taxes.............................................................. 43,355 43,406 Other assets....................................................................... 83,890 28,337 ----------- --------- Total assets........................................................ $ 4,165,014 3,689,154 =========== ========= The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Balance Sheets (Continued) (dollars expressed in thousands, except per share data) December 31, ------------ 1997 1996 ---- ---- LIABILITIES ----------- Deposits: Demand: Non-interest-bearing........................................................ $ 485,222 418,193 Interest-bearing............................................................ 348,080 337,618 Savings....................................................................... 947,029 671,286 Time: Time deposits of $100 or more............................................... 219,417 169,057 Other time deposits......................................................... 1,684,847 1,642,413 ----------- ---------- Total deposits.......................................................... 3,684,595 3,238,567 Other borrowings.................................................................. 54,153 69,982 Notes payable..................................................................... 55,144 76,330 Accrued interest payable.......................................................... 9,976 10,288 Deferred income taxes............................................................. 9,029 6,194 Accrued and other liabilities..................................................... 20,990 23,521 Minority interest in subsidiaries................................................. 16,407 12,883 ----------- ---------- Total liabilities....................................................... 3,850,294 3,437,765 ----------- ---------- Guaranteed preferred beneficial interests in First Banks, Inc. subordinated debenture........................................................ 83,183 -- ----------- ---------- STOCKHOLDERS' EQUITY Preferred stock: Preferred stock, $1.00 par value; 5,000,000 shares authorized; no shares issued and outstanding at December 31, 1997; Class C 9.00% increasing rate, redeemable, cumulative, $25.00 stated value; 2,155,500 shares issued and outstanding at December 31, 1996................ -- 53,887 Class A convertible, adjustable rate, $20.00 par value; 750,000 shares authorized; 641,082 shares issued and outstanding.................... 12,822 12,822 Class B adjustable rate, $1.50 par value; 200,000 shares authorized, 160,505 shares issued and outstanding....................................... 241 241 Common stock, $250.00 par value; 25,000 shares authorized; 23,661 shares issued and outstanding................................................. 5,915 5,915 Capital surplus................................................................... 3,978 3,289 Retained earnings................................................................. 199,143 171,182 Net fair value adjustment for securities available for sale....................... 9,438 4,053 ----------- ---------- Total stockholders' equity.............................................. 231,537 251,389 ----------- ---------- Total liabilities and stockholders' equity.............................. $ 4,165,014 3,689,154 =========== ==========
Consolidated Statements of Income (dollars expressed in thousands, except per share data) Years ended December 31, ------------------------ 1997 1996 1995 ---- ---- ---- Interest income: Interest and fees on loans............................................... $252,766 237,379 221,934 Investment securities: Taxable............................................................... 35,248 22,639 34,379 Nontaxable............................................................ 1,008 1,240 1,390 Federal funds sold and other............................................. 6,079 4,763 3,918 -------- ------ ------- Total interest income............................................... 295,101 266,021 261,621 -------- ------- ------- Interest expense: Deposits: Interest-bearing demand............................................... 5,648 4,845 5,760 Savings............................................................... 27,383 22,687 22,737 Time deposits of $100 or more......................................... 10,386 8,977 9,315 Other time deposits................................................... 95,244 88,228 78,250 Interest rate exchange agreements, net................................... 6,574 7,623 6,911 Notes payable and other borrowings....................................... 3,596 9,310 21,972 -------- ------ ------- Total interest expense.............................................. 148,831 141,670 144,945 -------- ------- ------- Net interest income................................................. 146,270 124,351 116,676 Provision for possible loan losses........................................... 11,300 11,494 10,361 -------- ------- ------- Net interest income after provision for possible loan losses........ 134,970 112,857 106,315 -------- ------- ------- Noninterest income: Service charges on deposit accounts and customer service fees............ 12,491 12,521 10,661 Credit card fees......................................................... 2,914 2,475 2,179 Loan servicing fees, net................................................. 1,628 1,837 2,932 Gain (loss) on mortgage loans sold and held for sale..................... 716 40 (608) Net gain (loss) on sales of securities................................... 2,335 (311) (866) Net gain on sales of trading securities.................................. 121 -- -- Gain on sale of mortgage loan servicing rights........................... -- -- 3,843 Loss on cancellation of interest rate swap agreement..................... -- -- (3,342) Other income............................................................. 5,492 4,159 4,608 -------- ------ ------- Total noninterest income............................................ 25,697 20,721 19,407 -------- ------ ------- Noninterest expense: Salaries and employee benefits........................................... 43,011 39,995 37,941 Occupancy, net of rental income.......................................... 10,617 9,758 8,709 Furniture and equipment.................................................. 7,618 7,218 6,852 Federal Deposit Insurance Corporation premiums........................... 804 11,715 4,911 Postage, printing and supplies........................................... 4,187 4,687 4,678 Data processing fees..................................................... 8,450 4,477 4,838 Legal, examination and professional fees................................. 4,587 4,901 5,412 Credit card expenses..................................................... 3,343 2,913 2,490 Communications........................................................... 2,611 2,635 2,476 Advertising.............................................................. 4,054 2,224 2,182 (Gain) loss on foreclosed real estate, net of expenses................... (331) 1,927 1,302 Guaranteed preferred debenture expense................................... 7,322 -- -- Other expenses........................................................... 14,014 13,291 9,775 -------- ------- ------- Total noninterest expense........................................... 110,287 105,741 91,566 -------- ------- ------- Income before provision for income taxes and minority interest in (income) loss of subsidiaries............................. 50,380 27,837 34,156 Provision for income taxes................................................... 16,083 6,960 11,038 -------- ------ ------- Income before minority interest in (income) loss of subsidiaries.... 34,297 20,877 23,118 Minority interest in (income) loss of subsidiaries........................... (1,270) (659) 1,353 -------- ------ ------- Net income.......................................................... 33,027 20,218 24,471 Preferred stock dividends.................................................... 5,067 5,728 5,736 -------- ------ ------- Net income available to common stockholders......................... $ 27,960 14,490 18,735 ======== ======= ======= Earnings per common share: Basic.................................................................... $1,181.69 612.46 791.82 Diluted.................................................................. $1,134.28 596.83 759.09 ========= ====== ======= Weighted average shares of common stock outstanding.......................... 23,661 23,661 23,661 ======== ====== ======= The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Changes in Stockholders' Equity (dollars expressed in thousands, except per share data) Three years ended December 31, 1997 Class C Net fair preferred Adjustable rate value stock, preferred stock adjustment Total --------------- for increasing Class A securities stock- rate, conver- Common Capital Retained available holders' redeemable tible Class B stock surplus earnings for sale equity ---------- ----- ------- ----- ------- -------- -------- ------- Consolidated balances, January 1, 1995........... $ 55,000 12,822 241 5,915 4,479 137,957 898 217,312 Year ended December 31, 1995: Consolidated net income........................ -- -- -- -- -- 24,471 -- 24,471 Class C preferred stock dividends, $2.25 per share.................................. -- -- -- -- -- (4,950) -- (4,950) Class A preferred stock dividends, $1.20 per share................................... -- -- -- -- -- (769) -- (769) Class B preferred stock dividends, $.11 per share.................................. -- -- -- -- -- (17) -- (17) Effect of capital stock transactions of majority-owned subsidiary................... -- -- -- -- (172) -- -- (172) Net fair value adjustment for securities available for sale.......................... -- -- -- -- -- -- (1,270) (1,270) -------- ------ --- ----- ----- -------- ----- ------- Consolidated balances, December 31, 1995......... 55,000 12,822 241 5,915 4,307 156,692 (372) 234,605 Year ended December 31, 1996: Consolidated net income...................... -- -- -- -- -- 20,218 -- 20,218 Class C preferred stock dividends, $2.25 per share.................................. -- -- -- -- -- (4,942) -- (4,942) Class A preferred stock dividends, $1.20 per share.................................. -- -- -- -- -- (769) -- (769) Class B preferred stock dividends, $.11 per share................................... -- -- -- -- -- (17) -- (17) Purchase and retirement of Class C preferred shares.......................... (1,113) -- -- -- (26) -- -- (1,139) Effect of capital stock transactions of majority-owned subsidiary................. -- -- -- -- (992) -- -- (992) Net fair value adjustment for securities available for sale........................ -- -- -- -- -- -- 4,425 4,425 -------- ------ --- ----- ----- -------- ----- ------- Consolidated balances, December 31, 1996......... 53,887 12,822 241 5,915 3,289 171,182 4,053 251,389 Year ended December 31, 1997: Consolidated net income...................... -- -- -- -- -- 33,027 -- 33,027 Class C preferred stock dividends, $2.25 per share.................................. -- -- -- -- -- (4,280) -- (4,280) Class A preferred stock dividends, $1.20 per share.................................. -- -- -- -- -- (769) -- (769) Class B preferred stock dividends, $.11 per share.................................. -- -- -- -- -- (17) -- (17) Purchase and retirement of Class C preferred shares.......................... (6,774) -- -- -- (161) -- -- (6,935) Redemption of Class C preferred shares....... (47,113) -- -- -- -- -- -- (47,113) Effect of capital stock transactions of majority-owned subsidiary................. -- -- -- -- 850 -- -- 850 Net fair value adjustment for securities available for sale........................ -- -- -- -- -- -- 5,385 5,385 -------- ----- ---- ---- ---- -------- ----- ------- Consolidated balances, December 31, 1997......... $ -- 12,822 241 5,915 3,978 199,143 9,438 231,537 ======== ====== ==== ===== ===== ======== ===== ======= The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Cash Flows (dollars expressed in thousands) Years ended December 31, ------------------------ 1997 1996 1995 ---- ---- ---- Cash flows from operating activities: Net income.................................................................. $ 33,027 20,218 24,471 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of bank premises and equipment............. 5,687 5,784 5,534 Amortization, net of accretion........................................... 9,512 12,481 4,520 Originations and purchases of loans held for sale........................ (174,330) (135,792) (67,005) Proceeds from the sale of loans held for sale............................ 148,350 113,074 207,077 Provision for possible loan losses....................................... 11,300 11,494 10,361 Provision for income taxes............................................... 16,083 6,960 11,039 Payments of income taxes................................................. (17,976) (7,655) (1,105) (Increase) decrease in accrued interest receivable....................... (5,107) (623) 1,320 Net increase in trading securities....................................... (3,110) -- -- Interest accrued on liabilities.......................................... 148,831 141,670 144,946 Payments of interest on liabilities...................................... (149,380) (142,210) (145,066) Other operating activities, net.......................................... (7,284) (6,637) (5,190) Minority interest in income (loss) of subsidiaries....................... 1,270 659 (1,353) -------- ------- -------- Net cash provided by operating activities............................. 16,873 19,423 189,549 -------- ------- -------- Cash flows from investing activities: Cash paid for acquired entities, net of cash and cash equivalents received.. 84,556 10,715 54,458 Sales of investment securities of acquired entity........................... -- -- 88,334 Sales of investment securities available for sale........................... 20,930 91,147 279,537 Maturities of investment securities available for sale...................... 447,547 440,314 147,395 Maturities of investment securities held to maturity........................ 1,804 14,643 36,469 Purchases of investment securities available for sale....................... (686,474) (527,091) (282,599) Purchases of investment securities held to maturity......................... (844) (916) (2,397) Net (increase) decrease in loans............................................ (174,804) 20,350 (71,211) Recoveries of loans previously charged-off.................................. 9,230 9,300 4,859 Purchases of bank premises and equipment.................................... (6,413) (3,299) (5,337) Interest rate futures contracts, net........................................ -- -- (22,167) Other investing activities.................................................. (54,681) 10,657 3,946 --------- ------ -------- Net cash provided by (used in) investing activities................... (359,149) 65,820 231,287 --------- ------ -------- Cash flows from financing activities: Increase (decrease) in demand and savings deposits....................... 304,193 (20,466) (123,260) Increase (decrease) in time deposits..................................... (8,348) (15,804) 55,885 Decrease in federal funds purchased...................................... -- (3,000) (67,300) Decrease in Federal Home Loan Bank advances.............................. (37,218) (10,606) (170,644) Increase (decrease) in securities sold under agreements to repurchase.... 21,390 13,525 (55,615) Increase (decrease) in notes payable..................................... (21,186) (13,284) 13,751 Purchase and retirement of Class C preferred shares...................... (54,048) (1,139) -- Proceeds from issuance of guaranteed preferred subordinated debenture.... 83,086 -- -- Payment of preferred stock dividends..................................... (5,067) (5,728) (5,736) Net cash provided by (used in) financing activities................... 282,802 (56,502) (352,919) -------- ------- -------- Net increase (decrease) in cash and cash equivalents.................. (59,474) 28,741 67,917 Cash and cash equivalents, beginning of year.................................... 227,954 199,213 131,296 -------- ------- -------- Cash and cash equivalents, end of year.......................................... $168,480 227,954 199,213 ======== ======= ======== Noncash investing and financing activities: Loans transferred to foreclosed real estate................................. $ 4,295 10,451 5,395 Loans to facilitate sales of foreclosed real estate......................... -- -- 587 Investment securities transferred to available for sale..................... -- -- 174,113 Receivable from sale of investment securities............................... -- -- 41,265 Loans transferred to held for sale.......................................... -- 39,996 146,991 ======== ====== ======== The accompanying notes are an integral part of the consolidated financial statements.
44 (1) Summary of Significant Accounting Policies The accompanying consolidated financial statements of First Banks, Inc. and subsidiaries (First Banks) have been prepared in accordance with generally accepted accounting principles and conform to practices prevalent among financial institutions. The following is a summary of the more significant policies followed by First Banks: Basis of Presentation. The consolidated financial statements of First Banks have been prepared in accordance with generally accepted accounting principles and conform to predominant practices within the banking industry. Management of First Banks has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare the consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Certain 1996 and 1995 amounts have been reclassified to conform with the classifications and format used for 1997. Principles of Consolidation. The consolidated financial statements include the accounts of First Banks, Inc. and all of its subsidiaries, net of minority interest, as more fully described below. All significant intercompany accounts and transactions have been eliminated in consolidation. First Banks operates through its subsidiary bank holding companies and financial institutions (Subsidiary Banks) as follows: First Bank, headquartered in St. Louis County, Missouri (First Bank). First Banks America, Inc., headquartered in St. Louis County, Missouri (FBA), and its holly owned subsidiaries: BankTEXAS N. A., headquartered in Houston, Texas (BankTEXAS). First Bank of California, headquartered in Roseville, California (FB California). CCB Bancorp, Inc., headquartered in Irvine, California (CCB), and its wholly owned subsidiary: First Bank & Trust, headquartered in Irvine, California (FB&T). FirstCommercial Bancorp, Inc., headquartered in Sacramento, California (FCB), and its wholly owned subsidiary: First Commercial Bank, headquartered in Sacramento, California (First Commercial). All of the Subsidiary Banks are wholly owned by their respective parents except FBA and FCB, which were 65.85% and 61.48% owned, respectively, by First Banks at December 31, 1997. As discussed under "--Acquisitions," FB California is a newly-formed California state bank resulting from the merger of Sunrise Bank of California, which was acquired by FBA on November 1, 1996 and Surety Bank, Vallejo, California, which was acquired by FBA on December 1, 1997. In February 1998, FCB was acquired by FBA, and its subsidiary bank, First Commercial, was merged into FB California. Cash and Cash Equivalents. Cash, due from banks, federal funds sold, and interest-bearing deposits with original maturities of three months or less are considered to be cash and cash equivalents for purposes of the consolidated statements of cash flows. The Subsidiary Banks are required to maintain certain daily reserve balances on hand in accordance with regulatory requirements. The reserve balances maintained in accordance with such requirements at December 31, 1997 and 1996 were $31.3 million and $41.4 million, respectively. Investment Securities. The classification of investment securities as trading, available for sale or held to maturity is determined at the date of purchase. Investment securities designated as trading, which include any security held for near term sale, are valued at fair value. Realized and unrealized gains and losses are included in noninterest income. Investment securities designated as available for sale, which include any security which First Banks has no immediate plan to sell but which may be sold in the future under different circumstances, are stated at fair value. Realized gains and losses are included in noninterest income upon commitment to sell, based on the amortized cost of the individual security sold. Unrealized gains and losses are recorded, net of related income tax effects, in a separate component of stockholders' equity. All previous fair value adjustments included in the separate component of stockholders' equity are reversed upon sale. Investment securities designated as held to maturity, which include any security for which First Banks has the positive intent and ability to hold to maturity, are stated at cost, net of amortization of premiums and accretion of discounts computed on the level yield method taking into consideration the level of current and anticipated prepayments. Loans Held for Portfolio. Loans held for portfolio are carried at cost, adjusted for amortization of premiums and accretion of discounts using a method which approximates the level yield method. Interest and fees on loans are recognized as income using the interest method. Loans held for portfolio are stated at cost as First Banks has the ability and it is management's intention to hold them to maturity. The accrual of interest on loans is discontinued when it appears that interest or principal may not be paid in a timely manner in the normal course of business. Generally, payments received on nonaccrual loans are recorded as principal reductions. Interest income is recognized after all principal has been repaid or an improvement in the condition of the loan has occurred which would warrant resumption of interest accruals. A loan is considered impaired when it is probable a creditor will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan agreement. When measuring impairment, the expected future cash flows of an impaired loan are discounted at the loan's effective interest rate. Alternatively, impairment is measured by reference to an observable market price, if one exists, or the fair value of the collateral for a collateral-dependent loan. Regardless of the historical measurement method used, First Banks measures impairment based on the fair value of the collateral when the creditor determines foreclosure is probable. Additionally, impairment of a restructured loan is measured by discounting the total expected future cash flows at the loan's effective rate of interest as stated in the original loan agreement. First Banks continues to use its existing nonaccrual methods for recognizing interest income on impaired loans. Loans Held for Sale. Mortgage loans held for sale are carried at the lower of cost or market value which is determined on an individual loan basis. Gains or losses on the sale of loans held for sale are determined on a specific identification method. Loan Servicing Income. Loan servicing income represents fees earned for servicing real estate mortgage loans owned by investors, net of federal agency guarantee fees, interest shortfall, and amortization of the cost of loan servicing rights. The fees are generally calculated on the outstanding principal balance of the loans serviced and are recorded as income when earned. Allowance for Possible Loan Losses. The allowance for possible loan losses is maintained at a level considered adequate to provide for potential losses. The provision for possible loan losses is based on a periodic analysis of the loans held for portfolio and held for sale, considering, among other factors, current economic conditions, loan portfolio composition, past loan loss experience, independent appraisals, loan collateral and payment experience. In addition to the allowance for estimated losses on identified problem loans, an overall unallocated allowance is established to provide for unidentified credit losses which are inherent in the portfolio. As adjustments become necessary, they are reflected in the results of operations in the periods in which they become known. Bank Premises and Equipment. Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed primarily using the straight-line method over the estimated useful lives of the related assets. Amortization of leasehold improvements is calculated using the straight-line method over the shorter of the useful life of the improvement or term of the lease. Bank premises and improvements are depreciated over five to 40 years and equipment over two to ten years. Intangibles Associated With the Purchase of Subsidiaries. Intangibles associated with the purchase of subsidiaries include excess of cost over net assets acquired and deposit base premium. The excess of cost over net assets acquired of purchased subsidiaries is amortized using the straight-line method over the estimated periods to be benefited, which range from approximately 10 to 15 years. Mortgage Servicing Rights. Mortgage servicing rights are amortized in proportion to the related estimated net servicing income on a disaggregated, discounted basis over the estimated lives of the related mortgages considering the level of current and anticipated repayments, which range from five to 12 years. Other Real Estate. Other real estate, consisting of real estate acquired through foreclosure or deed in lieu of foreclosure, is stated at the lower of fair value less applicable selling costs or cost at the time the property is acquired. The excess of cost over fair value of other real estate at the date of acquisition is charged to the allowance for possible loan losses. Subsequent reductions in carrying value to reflect current fair value or costs incurred in maintaining the properties are charged to expense as incurred. Income Taxes. First Banks, Inc. and its eligible subsidiaries file a consolidated federal income tax return and unitary or consolidated state income tax returns in California, Illinois and Missouri. In addition, First Bank is subject to a financial institutions tax which is based on income. Additionally, included in the unitary Illinois and California income tax returns is the investment in FBA as First Banks' ownership is greater than 50%. FBA and its eligible subsidiaries file a consolidated federal income tax return which is separate from that of First Banks. Earnings Per Common Share. First Banks adopted the provisions of SFAS 128, Earnings Per Share (SFAS 128), on a retroactive basis effective December 31, 1997. Accordingly, earnings per common share (EPS) data has been restated to conform with the provisions of SFAS 128. SFAS 128 provides for the calculation of a "Basic" and "Diluted" EPS. Basic EPS is computed by dividing the income available to common stockholders (the numerator) by the weighted average number of common shares outstanding (the denominator) during the year. The computation of dilutive EPS is similar except the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential shares had been issued. In addition, in computing the dilutive effect of convertible securities, the numerator is adjusted to add back (a) any convertible preferred dividends and (b) the after-tax amount of interest recognized in the period associated with any convertible debt. The implementation of SFAS 128 did not have a material impact on the calculation of EPS. Financial Instruments. A financial instrument is defined as cash, evidence of an ownership interest in an entity, or a contract that conveys or imposes on an entity the contractual right or obligation to either receive or deliver cash or another financial instrument. Financial Instruments With Off-Balance-Sheet Risk. First Banks utilizes financial instruments to reduce the interest rate risk arising from its financial assets and liabilities. These instruments involve, in varying degrees, elements of interest rate risk and credit risk in excess of the amount recognized in the consolidated balance sheets. Risk that interest rates may move unfavorably from the perspective of First Banks is defined as interest rate risk. The risk that a counterparty to an agreement entered into by First Banks may default is defined as credit risk. These financial instruments currently include interest rate floor and cap agreements and forward contracts to sell mortgage-backed securities. First Banks is party to commitments to extend credit and commercial and standby letters of credit in the normal course of business to meet the financing needs of its customers. These commitments involve, in varying degrees, elements of interest rate risk and credit risk in excess of the amount recognized in the consolidated balance sheets. Interest Rate Swap, Floor and Cap Agreements. Interest rate swap, floor and cap agreements are accounted for on an accrual basis with the net interest differential being recognized as an adjustment to interest expense of the related liability. Premiums and fees paid upon the purchase of interest rate swap, floor and cap agreements are amortized to interest expense over the life of the agreement using the interest method. In the event of early termination of these derivative financial instruments, the net proceeds received or paid are deferred and amortized over the shorter of the remaining contract life of the derivative financial instrument or the maturity of the related liability. If, however, the amount of the underlying hedged liability is repaid, then the gains or losses on the agreements are recognized immediately in the consolidated statements of income. The unamortized premiums, fees paid and deferred losses on early terminations are included in other assets in the accompanying consolidated balance sheets. Interest Rate Futures Contracts. Gains and losses on interest rate futures, which qualify as hedges, are deferred. Amortization of the net deferred gains or losses is applied to the interest income of the securities available-for-sale portfolio using the straight-line method. The net deferred gains and losses are applied to the carrying value of the securities available-for-sale portfolio as part of the mark-to-market valuation. In the event the hedged assets are sold, the related gain or loss of the interest rate futures contracts is immediately recognized in the consolidated statements of income. Forward Contracts to Sell Mortgage-Backed Securities. Gains and losses on forward contracts, which qualify as hedges, are deferred. The net unamortized balance of such deferred gains and losses is applied to the carrying value of the loans held for sale as part of the lower of cost or market valuation. (2) Acquisitions On January 4, 1995, First Banks completed its acquisition of River Valley Holdings, Inc. and its wholly owned subsidiary, River Valley Savings Bank, F.S.B. (River Valley), for a purchase price of $37.4 million. River Valley's total assets were $412 million, consisting primarily of residential loans of $225 million and investment securities of $125 million. River Valley was merged with First Bank. In addition, River Valley operated a mortgage banking division which serviced approximately $669 million of residential loans for others which was merged into and centralized with First Banks' mortgage banking division effective upon completion of the acquisition. The excess of the cost over the fair value of the net assets acquired was approximately $11.5 million and is being amortized over 15 years. On March 15, 1995, First Banks completed its acquisition of CCB and its wholly owned subsidiary, Commercial Center Bank, in exchange for $30.4 million in cash. CCB was headquartered in Santa Ana, California and operated three banking locations in Santa Ana, San Jose and Walnut Creek. The acquisition of CCB represents First Banks' initial entry into the southern California market. CCB's total assets were $193.4 million, consisting primarily of loans and investment securities of $114.5 million and $31.1 million, respectively. The excess of the fair value of the net assets acquired over the cost was approximately $3.3 million and is being accreted to income over 10 years. On April 28, 1995, First Banks completed its acquisition of HNB Financial Group, Huntington Beach, California (HNB) and its wholly owned subsidiary, Huntington National Bank, in exchange for $10.9 million in cash. HNB's total assets were $88.0 million, consisting primarily of loans and investment securities of $62.8 million and $10.5 million, respectively. The excess of the cost over the fair value of the net assets acquired was approximately $1.1 million and is being amortized over 10 years. On May 31, 1995, First Banks completed its acquisition of Irvine City Financial, Irvine, California (Irvine) and its wholly owned subsidiary, Irvine City Bank, f.s.b., in exchange for $4.2 million in cash. Irvine's total assets were $83.3 million, consisting primarily of loans of $68.7 million and investment securities and federal funds sold of $10.6 million. The purchase price approximated the fair value of the net assets acquired. During 1995, First Banks completed its investment in QCB Bancorp (QCB), a California corporation and sole shareholder of Queen City Bank, N.A., Long Beach, California. QCB's total assets were $56.2 million, consisting primarily of loans of $35.1 million and cash and cash equivalents and investment securities of $20.5 million. The excess of the cost over the fair value of the net assets acquired was approximately $465,000 and is being amortized over 10 years. On August 7, 1995, First Banks executed an Amended and Restated Stock Purchase Agreement (FCB Agreement) with FCB. Under the FCB Agreement and subsequent agreements entered into with FCB, FCB and its subsidiary, First Commercial, were recapitalized through a series of transactions. As a result of these transactions, First Banks owned 93.29% of the outstanding common stock of FCB and $6.5 million of convertible debentures maturing in October and December 2000. The debentures bear interest at 12% annually. FCB's total assets were $169.0 million, consisting primarily of loans, cash and cash equivalents and investment securities of $84.6 million, $50.3 million and $30.7 million, respectively. The excess of the cost over the fair value of the net assets acquired was approximately $2.4 million and is being amortized over 10 years. The FCB Agreement also provided for FCB to offer to its shareholders, other than First Banks, rights to acquire an aggregate of $400,000 of newly issued common stock at $12.50 per share. FCB completed the offering during 1996 and issued approximately 288,000 shares in exchange for $2.97 million in cash and $643,000 of outstanding dividend obligations. As a result of the offering, First Banks' ownership was reduced to 61.48% at December 31, 1997. On September 1, 1995, First Banks completed its acquisition of La Cumbre Savings Bank F.S.B. (La Cumbre) in exchange for $5.5 million in cash. La Cumbre's total assets were $144 million, consisting primarily of loans of $131 million and cash and cash equivalents and investment securities of $7.6 million. The excess of the cost over the fair value of the net assets acquired was approximately $697,000 and is being amortized over 10 years. On November 1, 1996, First Banks completed its acquisition of Sunrise Bancorp, a California corporation (Sunrise), and its wholly owned subsidiary, Sunrise Bank, a state chartered bank, in exchange for $17.5 million in cash. At the time of the transaction, Sunrise had $110.8 million in total assets; $45.5 million in cash and cash equivalents and investment securities; $61.1 million in total loans, net of unearned discount; and $91.1 million in total deposits. The acquisition was funded from available cash and borrowings of $14.0 million. The excess of the cost over the fair value of the net assets acquired was $3.2 million and is being amortized to expense over 15 years. On December 1, 1997, First Banks completed its acquisition of Surety Bank in exchange for 264,622 shares of FBA common stock and cash of $3.8 million. The cash portion of this transaction was funded in January 1998 with available cash. At the time of the transaction, Surety had $72.8 million in total assets; $14.9 million in cash and cash equivalents and investment securities; $54.4 million in total loans net of unearned discount; and $67.5 million in total deposits. The excess of the cost over the fair value of the net assets acquired was $3.3 million and is being amortized over 15 years. During 1997, First Banks completed its assumption of the deposits and purchase of selected assets of three banking locations of Highland Federal Bank, FSB. The transaction resulted in the acquisition of $82.8 million in deposits. The banking locations operate as branches of FB&T. The excess of the cost over the fair value of the net assets acquired was $1.4 million and is being amortized 10 years. The aforementioned acquisitions were accounted for using the purchase method of accounting and, accordingly, the consolidated financial statements include the financial position and results of operations for the period subsequent to the acquisition date, and the assets acquired and liabilities assumed were recorded at fair value at the acquisition date. The acquisitions were funded by available cash, proceeds from the maturity of short-term investments, borrowings under First Banks' credit agreement and notes payable to former shareholders.
(3) Investments in Debt and Equity Securities Securities Available for Sale. The amortized cost, contractual maturity, unrealized gains and losses and fair value of investment securities available for sale at December 31, 1997 and 1996 were as follows: Maturity Total -------- ----- After amor- Gross Weighted 1 Year 1-5 5-10 10 tized unrealized Fair average or less years years years cost Gains Losses value yield ------- ----- ----- ----- ---- ----- ------ ----- ----- (dollars expressed in thousands) December 31, 1997: Carrying value: U.S. Treasury.................. $ 62,537 216,594 -- -- 279,131 1,580 (39) 280,672 5.94% U.S. government agencies and corporations: Mortgage-backed............. 674 51,692 23,856 108,275 184,497 427 (493) 184,431 6.38 Other....................... 60,719 183,652 18,056 -- 262,427 381 (183) 262,625 6.11 Other.......................... 256 -- -- 9 265 1 (6) 260 6.31 Equity investments in other financial institutions....... 8,255 -- -- -- 8,255 13,025 -- 21,280 4.93 Federal Home Loan Bank and Federal Reserve Bank stock... 24,003 -- -- -- 24,003 -- -- 24,003 6.76 --------- -------- ------- ------- ------- ----- ----- ------ Total................. $ 156,444 451,938 41,912 108,284 758,578 15,414 (721) 773,271 6.12 ========= ======== ======= ======= ======= ====== ===== ======= ====== Market value: Debt securities................ $ 124,195 453,470 41,920 108,403 Equity securities.............. 45,283 -- -- -- --------- -------- ------- ------- Total................. $ 169,478 453,470 41,920 108,403 ========= ======== ======= ======= Weighted average yield............ 5.82% 6.07% 6.32% 6.70% ==== ==== ==== ==== December 31, 1996: Carrying value: U.S. Treasury.................. $ 115,675 31,259 -- -- 146,934 166 (73) 147,027 5.38% U.S. government agencies and corporations: Mortgage-backed............. 1,504 70,953 26,500 106,223 205,180 416 (1,383) 204,213 6.11 Other....................... 65,351 81,722 -- -- 147,073 496 (220) 147,349 5.73 Other.......................... 28 704 -- 10 742 2 (2) 742 5.89 Equity investments in other financial institutions....... 5,256 -- -- -- 5,256 6,808 -- 12,064 4.93 Federal Home Loan Bank and Federal Reserve Bank stock... 21,210 -- -- -- 21,210 -- -- 21,210 --------- -------- ------- ------- ------- ---- ----- ------- 6.92 Total................. $ 209,024 184,638 26,500 106,233 526,395 7,888 (1,678) 532,605 ========= ======== ======= ======= ======= ===== ====== ======= 5.82 Market value: Debt securities................ $ 182,629 184,361 26,320 106,021 Equity securities.............. 33,274 -- -- -- --------- --------- -------- -------- Total................. $ 215,903 184,361 26,320 106,021 ========= ======== ======= ======= Weighted average yield............ 5.44% 5.93% 5.88% 6.37% ==== ==== ==== ====
Securities Held to Maturity. The amortized cost, contractual maturity, unrealized gains and losses and fair value of investment securities held to maturity at December 31, 1997 and 1996 were as follows: Maturity Total -------- ----- After amor- Gross Weighted 1 Year 1-5 5-10 10 tized unrealized Fair average or less years years years cost Gains Losses value yield ------- ----- ----- ----- ---- ----- ------ ------ ----- (dollars expressed in thousands) December 31, 1997: Carrying value : State and political subdivisions.. $1,093 5,324 10,422 2,310 19,149 690 (4) 19,835 5.65% ====== ===== ====== ======= ====== === === ====== ===== Market value : Debt securities................... $1,111 5,431 10,677 2,616 ====== ===== ====== ===== Weighted average yield................ 7.09% 5.38% 5.33% 7.03% ===== ===== ====== ===== December 31, 1996: Carrying value : State and political subdivisions.................. $ 589 4,033 13,171 2,403 20,196 485 (70) 20,611 5.56% ===== ====== ====== ===== ====== ==== ==== ====== ==== Market value : Debt securities................. $ 592 4,098 13,360 2,561 ====== ===== ====== ===== Weighted average yield................ 5.88% 5.82% 5.20% 7.01% ==== ==== ===== =====
The expected maturities of investment securities may differ from contractual maturities since borrowers have the right to call or prepay the obligations with or without prepayment penalties. Proceeds from sales of securities designated as available for sale were $18.6 million for the year ended December 31, 1997. Gross gains of $2.3 million were realized on these sales. No losses were realized in 1997. Proceeds from the sales of debt securities classified as available for sale during 1996 were $100.0 million. Gross gains of $556,000 and gross losses of $166,000 were realized on these sales. The gross gains, net of gross losses, were offset by the recognition of $701,000 of hedging losses. Proceeds from the sales of debt securities classified as available for sale during 1995 were $388.0 million. Gross gains of $9.1 million and gross losses of $900,000 were realized on those sales. The gross gains, net of gross losses, were offset by the recognition of $10.1 million of hedging losses. Proceeds from the sales of equity securities classified as available for sale during 1995 were $20.5 million. Gross gains of $1.3 million and gross losses of $200,000 were realized on those sales. Various subsidiaries of First Banks maintain investments in the Federal Home Loan Bank (FHLB) or the Federal Reserve Bank (FRB). The investment in FHLB stock is maintained at a minimum amount equal to the greater of 1% of the aggregate outstanding balance of the applicable Subsidiary Bank's loans secured by residential real estate, or 5% of advances from the FHLB to each Subsidiary Bank. First Bank, FB&T and BankTEXAS are members of the FHLB system. The investment in the FRB stock is maintained at a minimum of 6% of the applicable Subsidiary Bank's capital stock and capital surplus. First Bank and BankTEXAS are members of the FRB system. Investment securities with a carrying value of approximately $209.1 million and $212.1 million were pledged in connection with deposits of public and trust funds and for other purposes as required by law at December 31, 1997 and 1996, respectively. (4) Loans
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..................................... $ 46,781 52,665 28,410 Acquired allowances for possible loan losses........... 30 2,338 24,655 -------- -------- ------- 46,811 55,003 53,065 -------- -------- ------- Loans charged-off...................................... (16,832) (29,016) (15,620) Recoveries of loans previously charged-off............. 9,230 9,300 4,859 -------- -------- ------- Net loans charged-off.................................. (7,602) (19,716) (10,761) -------- -------- ------ Provision charged to operations........................ 11,300 11,494 10,361 -------- -------- ------- Balance, December 31................................... $ 50,509 46,781 52,665 ======== ======== =======
At December 31, 1997 and 1996, First Banks had $19.7 million and $30.3 million, respectively, of loans on nonaccrual status. Interest on nonaccrual loans, which would have been recorded under the original terms of the loans, was $4.7 million for the year ended December 31, 1997 and $4.2 million for the years ended December 31, 1996 and 1995. Of these amounts, $2.0 million, $2.7 million and $1.9 million were actually recorded as interest income on such loans in 1997, 1996 and 1995, respectively. At December 31, 1997 and 1996, First Banks had impaired loans in the amount of $29.2 million and $30.3 million, respectively, consisting of $19.7 million and $30.3 million of loans on nonaccrual status, respectively. At December 31, 1997, impaired loans also include $5.5 million of restructured loans. The impaired loans in the amount of $4.7 million had specific reserves of $1.7 million at December 31, 1997. The impaired loans had no specific reserves at December 31, 1996. The average recorded investment in impaired loans was $28.3 million and $36.2 million for the years ended December 31, 1997 and 1996, respectively. The amount of interest income recognized using a cash basis method of accounting during the time these loans were impaired was $2.4 million and $2.7 million in 1997 and 1996, respectively. First Banks' primary market areas are the states of Missouri, Illinois and California. At December 31, 1997 and 1996, 88% of the total loan portfolio and 93% and 92% of the commercial, financial and agricultural loan portfolio were to borrowers within these regions, respectively. Real estate lending constituted the only other significant concentration of credit risk. Real estate loans comprised approximately 70% and 67% of the loan portfolio at December 31, 1997 and 1996, respectively, of which 48% and 51% were consumer-related in the form of residential real estate mortgages and home equity lines of credit. First Banks is, in general, a secured lender. At December 31, 1997 and 1996, 96% of the loan portfolio was secured. Collateral is required in accordance with the normal credit evaluation process based upon the creditworthiness of the customer and the credit risk associated with the particular transaction. (5) Mortgage Banking Activities At December 31, 1997 and 1996, First Banks serviced loans for others amounting to $784 million and $847 million, respectively. Borrowers' escrow balances held by First Banks on such loans were $2.2 million and $4.2 million at December 31, 1997 and 1996, respectively. Changes in the mortgage servicing rights for the years ended December 31 were as follows: 1997 1996 ---- ---- (dollars expressed in thousands) Balance, January 1................................... $ 10,230 12,122 Originated mortgage servicing rights................. 718 -- Purchases of mortgage servicing rights............... 5 65 Amortization......................................... (1,907) (1,957) -------- ------- Balance, December 31................................. $ 9,046 10,230 ======== ======= (6) Bank Premises and Equipment Bank premises and equipment were comprised of the following at December 31: 1997 1996 ---- ---- (dollars expressed in thousands) Land................................................ $ 14,213 13,431 Buildings and improvements.......................... 39,922 39,256 Furniture, fixtures and equipment................... 37,597 36,329 Leasehold improvements.............................. 6,851 6,916 Construction in progress............................ 3,536 2,149 --------- ------- 102,119 98,081 Less accumulated depreciation and amortization...... 50,614 50,003 --------- ------- Bank premises and equipment, net................ $ 51,505 48,078 ========= ======= Total rent expense was $5.0 million, $4.2 million and $3.2 million for the years ended December 31, 1997, 1996 and 1995, respectively. (7) Notes Payable Notes payable include a Revolving Line and Term Credit Agreement (Credit Agreement) and promissory notes payable to former shareholders of acquired entities. First Banks' Credit Agreement, dated November 24, 1997, replaced the revolving credit agreement outstanding dated July 18, 1996. The Credit Agreement provides a $40 million revolving loan commitment and a $50 million term loan. Interest under the revolving loan commitment and the term loan is payable at the lead bank's corporate base rate or, at the option of First Banks, is payable at the Eurodollar Rate plus 1.25%, respectively, and is paid monthly. Loans may be made under the revolving loan commitment until November 23, 1998, at which date the principal and accrued interest is due and payable. The term loan requires quarterly principal payments of $2.5 million and matures on November 22, 2002, at which date the remaining principal and accrued interest is due and payable. Loans under the Credit Agreement are secured by all of the stock of the Subsidiary Banks which is owned by First Banks. Under the Credit Agreement there were $55.0 million in outstanding borrowings at December 31, 1997 and $75.0 million at December 31, 1996. The Credit Agreement requires maintenance of certain minimum capital ratios for each financial institution subsidiary. In addition, it prohibits the payment of dividends on First Banks' common stock. At December 31, 1997 and 1996, First Banks and the Subsidiary Banks were in compliance with all restrictions and requirements in the Credit Agreement. The promissory notes totaled $144,000 and $1.3 million at December 31, 1997 and 1996, respectively. Interest under the promissory notes are payable under similar terms as the Credit Agreement. The average balance and maximum month-end balance of the notes payable outstanding for the years ended December 31 were as follows: 1997 1996 (dollars expressed in thousands) Average balance.................................. $ 17,883 76,739 Maximum month-end balance........................ 75,213 86,899 ======== ====== The average rates paid on notes payable outstanding during the years ended December 31, 1997, 1996 and 1995 were 7.10%, 7.15% and 7.22%, respectively. (8) Guaranteed Preferred Beneficial Interests in First Banks, Inc. Subordinated Debentures On February 4, 1997, First Preferred Capital Trust (First Capital), a newly-formed Delaware business trust subsidiary of First Banks, issued 3.45 million shares of 9.25% Cumulative Trust Preferred Securities (Preferred Securities) at $25 per share in an unwritten public offering, and issued 106,702 shares of common securities to First Banks at $25 per share. First Banks owns all of First Capital's common securities. The gross proceeds of the offering were used by First Capital to purchase $88.9 million of 9.25% Subordinated Debentures (Subordinated Debentures) from First Banks, maturing on March 31, 2027. The maturity date may be shortened to a date not earlier than March 31, 2002 or extended to a date no later than March 31, 2046 if certain conditions and regulatory approval are met. The Subordinated Debentures are the sole asset of First Capital. In connection with the issuance of the Preferred Securities, First Banks made certain guarantees and commitments that, in the aggregate, constitute a full and unconditional guarantee by First Banks of the obligations of First Capital under the Preferred Securities. First Banks' proceeds from the issuance of the Subordinated Debentures to First Capital, net of underwriting fees and offering expenses, were $83.1 million. Distributions payable on the Preferred Securities were $7.3 million for the year ended December 31, 1997 and included in noninterest expense in the consolidated financial statements.
(9) Income Taxes Income tax expense attributable to income from continuing operations for the years ended December 31 consists of : Years ended December 31, ------------------------ 1997 1996 1995 ---- ---- ---- (dollars expressed in thousands) Current income taxes: Federal..................................................... $ 15,062 6,106 2,638 State....................................................... 169 1,068 870 -------- ------- ------- 15,231 7,174 3,508 -------- ------- ------- Deferred income tax expense (benefit): Federal............................................... 2,608 1,837 8,584 State................................................. 24 3,192 (94) -------- ------- ------- 2,632 5,029 8,490 -------- ------- ------- Reduction in valuation allowance.......................... (1,780) (5,243) (960) -------- ------- ------- Total......................................... $ 16,083 6,960 11,038 ======== ======= =======
The federal income tax rates and amounts are reconciled with the effective income tax rates and amounts as follows: Years ended December 31, 1997 1996 1995 --------------- -------------- ---------- % of % of % of pretax pretax pretax Amount income Amount income Amount income ------ ------ ------ ------ ------ ------ (dollars expressed in thousands) Income before provision for income taxes and minority interest in (income) loss of subsidiaries............................. $50,380 $27,837 $ 34,156 ======= ======= ======== Taxes on income calculated at statutory rates.. 17,633 35.0% 9,743 35.0% 11,955 35.0% Effects of differences in tax reporting: Tax-exempt interest income.................. (576) (1.1) (730) (2.6) (817) (2.4) Tax preference adjustment of interest income.......................... 69 0.1 82 0.3 99 0.3 Amortization of excess cost................. 754 1.5 729 2.6 645 1.8 State income taxes.......................... 126 0.3 715 2.6 504 1.5 Change in deferred valuation allowance...... (1,780) (3.5) (5,243) (18.8) (960) (2.8) Other, net.................................. (143) (0.4) 1,664 5.9 (388) (1.1) ------- ----- ------- ----- -------- ---- Provision for income taxes.......... $16,083 31.9% $ 6,960 25.0% $ 11,038 32.3% ======= ===== ======= ==== ======== ====
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities, including amounts attributable to entities acquired in purchase transactions are listed below. December 31, ------------ 1997 1996 ---- ---- (dollars expressed in thousands) Deferred tax assets: Allowance for possible loan losses.................................... $ 19,665 19,421 Other real estate..................................................... 971 2,179 Alternative minimum tax credits....................................... 2,067 2,102 Book losses on investment securities currently not allowable for tax purposes................................................... 1,958 1,134 Net operating loss carryforwards...................................... 33,080 33,821 Other................................................................. 3,361 4,276 -------- -------- Total gross deferred tax assets............................... 61,102 62,933 Less valuation allowance.............................................. (17,747) (19,527) -------- -------- Gross deferred tax assets, net of valuation allowance......... 43,355 43,406 -------- -------- Deferred tax liabilities: Depreciation on bank premises and equipment........................... 1,860 2,231 FHLB stock dividends.................................................. 1,269 1,063 State taxes........................................................... 307 354 Net fair value adjustment for securities available for sale........... 5,142 2,207 Other................................................................. 451 339 -------- -------- Total gross deferred tax liabilities.......................... 9,029 6,194 -------- -------- Net deferred tax assets....................................... $ 34,326 37,212 ======== ========
At December 31, 1997 and 1996, for federal income taxes purposes, First Banks had net operating loss (NOL) carryforwards of approximately $57.3 million and $60.1 million, respectively, exclusive of the NOL carryforwards available to FBA and FCB as further described below. The NOL carryforwards for First Banks expire as follows: (dollars expressed in thousands) Year ending December 31: 2002................................................. $ 3,244 2003................................................. 7,470 2004................................................. 7,516 2005................................................. 12,928 2006 - 2009.......................................... 26,189 --------- $ 57,347 ========= With the completion of the acquisition of FBA, the NOL carryforwards generated prior to the transaction are subject to an annual limitation in subsequent tax years. The following schedule reflects the NOL carryforwards that will be available to offset future taxable income of FBA and do not affect the taxable income of First Banks. At December 31, 1997 and 1996, for federal income tax purposes, FBA had NOL carryforwards of approximately $34.3 million and $35.4 million, respectively. The NOL carryforwards at December 31, 1997 expire as follows: (dollars expressed in thousands) Year ending December 31: 1998................................................... $ 4,140 1999................................................... 2,641 2000................................................... 103 2001 - 2010............................................ 27,417 ------ $ 34,301 ======== The remaining net deferred tax assets of FBA were evaluated to determine whether it is more likely than not the deferred tax assets will be recognized in the future. Taking all positive and negative criteria into consideration, it was determined the valuation allowance established for FBA should remain at $3.4 million. With the completion of the acquisition of FCB, the NOL carryforwards generated prior to the transaction were subject to an annual limitation in subsequent tax years. The following schedule reflects the NOL carryforwards that will be available to offset future taxable income of FCB and do not affect the taxable income of First Banks. At December 31, 1997 and 1996, for federal income tax purposes, FCB had NOL carryforwards of approximately $2.9 million and $1.1 million, respectively. The NOL carryforwards at December 31, 1997 expire as follows: (dollars expressed in thousands) Year ending December 31: 2008.................................................. $ 394 2009.................................................. 747 2011.................................................. 660 2017.................................................. 1,064 ------ $2,865 ====== The realization of First Banks' net deferred tax assets is based on the availability of carrybacks to prior taxable periods, the expectation of future taxable income and the utilization of tax planning strategies. Based on these factors, management believes it is more likely than not that First Banks will realize the recognized net deferred tax asset of $34.3 million. The net change in the valuation allowance, related to deferred tax assets, was a decrease of $1.8 million for the year ended December 31, 1997. The decrease was comprised of the following components: (1) a reduction of $2.2 million related to the recognition of deferred tax assets for certain loans and foreclosed property; and (2) the establishment of $372,000 of additional valuation reserves resulting from tax net operating losses at First Commercial Bancorp, Inc. First Commercial Bancorp, Inc. files a separate tax return and based on the surrounding facts and circumstances, management believes the realization of the tax benefit related to these tax losses is not likely to occur.
Changes to the deferred tax assets valuation allowance are as follows: Years ended December 31, ------------------------ 1997 1996 ---- ---- (dollars expressed in thousands) Balance, beginning of year................................................ $ 19,527 24,111 Current year deferred provision, change in deferred tax valuation allowance...................................... (1,780) (5,243) Purchase acquisitions..................................................... -- 659 -------- ------- Balance, end of year...................................................... $ 17,747 19,527 ======== =======
The valuation allowance for deferred tax assets at December 31, 1997 and 1996 includes $2.0 million and $1.9 million, respectively, which when recognized, will be credited to intangibles associated with the purchase of subsidiaries. The valuation allowance for deferred tax assets at December 31, 1997 and 1996 includes $6.0 million and $5.9 million, respectively, which when recognized will be credited to capital surplus under the terms of the quasi-reorganizations implemented for FBA and FCB as of December 31, 1994 and 1996, respectively. (10) Earnings Per Share The following represents a reconciliation of the numerators and denominators of the basic and diluted EPS computations for the periods indicated:
Income Shares Per-share (numerator) (denominator) Amount ----------- ------------- ------ (dollars in thousands, except per share data) Year ended December 31, 1997: Basic EPS-income available to common stockholders......... $ 27,960 23,661 $ 1,181.69 ========== Effect of dilutive securities: Class A convertible preferred stock................... 769 1,645 Subsidiary bank stock options......................... (25) -- -------- -------- Diluted EPS-income available to common stockholders....... $ 28,704 25,306 $ 1,134.28 ======== ======== ========== Year ended December 31, 1996: Basic EPS-income available to common stockholders......... $ 14,490 23,661 $ 612.46 ========== Effect of dilutive securities: Class A convertible preferred stock..................... 769 1,822 Subsidiary bank stock options and warrants.............. (50) -- --------- -------- Diluted EPS-income available to common stockholders....... $ 15,209 25,483 $ 596.83 ======== ======== ========== Year ended December 31, 1995: Basic EPS--income available to common stockholders........ $ 18,735 23,661 $ 791.82 ========== Effect of dilutive securities: Class A convertible preferred stock..................... 769 2,033 -------- -------- Diluted EPS-income available to common stockholders....... $ 19,504 25,694 $ 759.09 ======== ======== ==========
(11) Interest Rate Risk Management and Derivative Financial Instruments With Off-Balance-Sheet Risk First Banks periodically uses off-balance-sheet derivative financial instruments to assist in the management of interest rate sensitivity. These off-balance-sheet derivative financial instruments are utilized to modify the repricing, maturity and option characteristics of on-balance-sheet assets and liabilities. The use of such derivative financial instruments is strictly limited to reducing the interest rate exposure of First Banks.
Derivative financial instruments held by First Banks are summarized as follows: December 31, ------------ 1997 1996 ---- ---- Notional Credit Notional Credit amount exposure amount exposure ------ -------- ------ -------- (dollars expressed in thousands) Interest rate swap agreements................. $ -- -- 70,000 -- Interest rate floor agreements ............... 70,000 26 05,000 141 Interest rate cap agreements ................. 10,000 222 10,000 335 Forward commitments to sell mortgage-backed securities .............. 60,000 -- 35,000 308
The notional amounts of derivative financial instruments do not represent amounts exchanged by the parties and, therefore, are not a measure of First Banks' credit exposure through its use of derivative financial instruments. The amounts exchanged are determined by reference to the notional amounts and the other terms of the derivatives. Previously, First Banks sold interest rate futures contracts and purchased options on interest rate futures contracts to hedge the interest rate risk of its available-for-sale securities portfolio. There were no unamortized net deferred losses on interest rate futures contract remaining at December 31, 1997 or 1996. The unamortized balance of net deferred losses on interest rate futures contracts of $4.6 million at December 31, 1995, was applied to the carrying value of the available-for-sale securities portfolio as part of the mark-to-market valuation. Of the remaining balance of $4.6 million at December 31, 1995, $3.9 million was amortized against interest income and $701,000 was realized in connection with sales of investment securities during the year ended December 31, 1996. Interest rate swap agreements were utilized to extend the repricing characteristics of certain interest-bearing liabilities to correspond more closely with the assets of First Banks, with the objective of stabilizing net interest income over time. The net interest expense for these agreements was $6.4 million, $7.4 million and $6.6 million for the years ended December 31, 1997, 1996 and 1995, respectively. The maturity dates, notional amounts, interest rates paid and received, and fair values of interest rate swap agreements outstanding as of December 31, 1996 were as follows:
Fair value Notional Interest rate Interest rate gain amount paid received (loss) ------ ---- -------- ------ (dollars expressed in thousands) September 30, 1997........................ $ 35,000 7.04% 5.59% $ (417) September 30, 1999........................ 35,000 7.32 5.59 (1,160) -------- -------- $ 70,000 7.18 5.59 $ (1,577) ======== ===== ==== ========
In connection with the sale of certain residential mortgage loans and repayment of certain borrowings, on May 25, 1995, First Banks terminated a $100 million interest rate swap agreement resulting in a loss of $3.3 million. The loss on the termination of the $100 million interest rate swap agreement was reflected in the consolidated statement of income for the year ended December 31, 1995. In addition, First Banks experienced a shortening of the expected life of its loan portfolio. This shortening resulted from the significant decline in interest rates during 1995, which caused an increase in the projections of principal prepayments of residential mortgage loans. These increased prepayment projections and the overall reduction in the residential loan portfolio disproportionately shortened the expected life of the loan portfolio in comparison to the effective maturity created with the interest rate swap agreements. As a result, during July 1995, November 1996 and July 1997, First Banks shortened the maturity of its interest-bearing liabilities through the termination of $225 million, $75 million and $35 million of interest rate swap agreements resulting in losses of $13.5 million, $5.3 million and $1.4 million, respectively. These losses have been deferred and are being amortized over the remaining lives of the agreements, unless the underlying liabilities are repaid. The unamortized balance of these losses was $9.4 million and $13.4 million at December 31, 1997 and 1996, respectively, and is included in other assets. First Banks also has interest rate cap and floor agreements to limit the interest expense associated with certain of its interest-bearing liabilities and the net interest expense of certain interest rate swap agreements, respectively. At December 31, 1997 and 1996, the unamortized costs for these agreements were $290,000 and $433,000, respectively, and were included in other assets. Derivative financial instruments issued by First Banks consist of commitments to originate fixed-rate loans. Commitments to originate fixed-rate loans consist primarily of residential real estate loans. These loan commitments, net of estimated underwriting fallout, and loans held for sale were $67.4 million and $36.7 million at December 31, 1997 and 1996, respectively. These net loan commitments and loans held for sale are hedged with forward contracts to sell mortgage-backed securities of $60 million and $35 million at December 31, 1997 and 1996, respectively. Gains and losses from forward contracts are deferred and included in the cost basis of loans held for sale. At December 31, 1997 and 1996, the net unamortized losses were $783,000 and $452,000, respectively, which were applied to the carrying value of the loans held for sale as part of the lower of cost or market valuation. (12) Credit Commitments First Banks is party to commitments to extend credit and commercial and standby letters of credit in the normal course of business to meet the financing needs of its customers. These commitments involve, in varying degrees, elements of interest rate risk and credit risk in excess of the amount recognized in the consolidated balance sheets. The interest rate risk associated with these credit commitments relates primarily to the commitments to originate residential fixed-rate loans. As more fully discussed in Note 11 to the accompanying consolidated financial statements, the interest rate risk of the commitments to originate fixed-rate loans has been hedged with forward contracts to sell mortgage-backed securities. The credit risk amounts are equal to the contractual amounts, assuming the amounts are fully advanced and the collateral or other security is of no value. First Banks uses the same credit policies in granting commitments and conditional obligations as it does for on-balance-sheet items
Commitments to extend credit at December 31 are as follows: December 31, ------------ 1997 1996 ---- ---- (dollars expressed in thousands) Commitments to extend credit............................................. $ 898,723 716,967 Commercial and standby letters of credit................................. 33,672 25,256 --------- -------- $ 932,395 742,223 ========= =======
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since certain of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. First Banks evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by First Banks upon extension of credit is based on management's credit evaluation of the counterparty. Collateral held varies, but is generally residential or income-producing commercial property. Commercial and standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. First Banks generally holds real property as collateral supporting those commitments for which collateral is deemed necessary. (13) Fair Value of Financial Instruments Fair values of financial instruments are management's estimate of the values at which the instruments could be exchanged in a transaction between willing parties. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including the mortgage banking operation, deferred tax assets, premises and equipment and goodwill. Further, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in any of the estimates.
The estimated fair value of First Banks' financial instruments at December 31 were as follows: 1997 1996 -------------------- ----------------------- Carrying Estimated Carrying Estimated value fair value value fair value Financial assets: Cash and cash equivalents...................... $ 168,480 168,480 227,954 227,954 Investment securities: Trading..................................... 3,110 3,110 -- -- Available for sale.......................... 773,271 773,271 532,605 532,605 Held to maturity............................ 19,149 19,835 20,196 20,611 Net loans...................................... 2,951,691 2,964,115 2,721,188 2,744,737 Accrued interest receivable.................... 28,358 28,358 23,250 23,250 ========= ========= ========= ======== Financial liabilities: Deposits: Demand: Non-interest-bearing..................... 485,222 485,222 418,193 418,193 Interest-bearing......................... 348,080 348,080 337,618 337,618 Savings and money market................. 947,029 947,029 671,286 671,286 Time deposits............................... 1,904,264 1,912,461 1,811,470 1,815,779 Borrowings..................................... 109,297 109,297 146,312 146,312 Accrued interest payable....................... 9,976 9,976 10,288 10,288 ========= ======== ========= ======== Off-balance-sheet: Interest rate swap, cap and floor agreements... 9,689 248 14,702 (1,101) Forward contracts to sell mortgage-backed securities.................................. (341) (341) 308 308 Credit commitments............................. -- -- -- -- ========= ======== ========= ========
The following methods and assumptions were used in estimating the fair value of financial instruments: Financial Assets: Cash and cash equivalents and accrued interest receivable: The carrying values reported in the consolidated balance sheets approximate fair value. Investment securities: Fair value for trading securities and securities available for sale are the amounts reported in the consolidated balance sheets, and securities held to maturity are based on quoted market prices where available. If quoted market prices are not available, fair values are based upon quoted market prices of comparable instruments. Net loans: The fair values for most loans held for portfolio are estimated utilizing discounted cash flow calculations that apply interest rates currently being offered for similar loans to borrowers with similar risk profiles. The fair values of loans held for sale, which are the amounts in the consolidated balance sheets, are based on quoted market prices where available. If quoted market prices are not available, fair values are based upon quoted market prices of comparable instruments. The carrying value for loans is net of the allowance for possible loan losses and unearned discount. Financial Liabilities: Deposits: The fair value disclosed for deposits generally payable on demand (i.e., non-interest-bearing and interest-bearing demand, savings and money market accounts) is considered equal to their respective carrying amounts as reported in the consolidated balance sheets. The fair value disclosed for demand deposits does not include the benefit that results from the low-cost funding provided by deposit liabilities compared to the cost of borrowing funds in the market. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar certificates to a schedule of aggregated monthly maturities of time deposits. Borrowings and accrued interest payable: The carrying values reported in the consolidated balance sheets approximate fair value. Off-Balance-Sheet: Interest rate swap, cap and floor agreements: The fair values of interest rate swap, cap and floor agreements are estimated by comparing the contractual rates First Banks is paying to market rates quoted on new agreements with similar creditworthiness. Forward contracts to sell mortgage-backed securities: The fair values for forward contracts to sell mortgage-backed securities are based upon quoted market prices. The fair value of these contracts has been reflected in the consolidated balance sheets in the carrying value of the loans held for sale portfolio as part of the lower of cost or market valuation. Credit commitments: The majority of the commitments to extend credit and commercial and standby letters of credit contain variable interest rates and credit deterioration clauses and, therefore, the carrying value of these credit commitments approximates fair value. (14) Employee Benefits First Banks' profit-sharing plan is a self-administered savings and incentive plan covering substantially all employees. Under the plan, employer matching contributions are determined annually by First Banks' Board of Directors. Employee contributions are limited to 15% of an employee's compensation, not to exceed $9,500 for 1997. Total employer contributions under the plan were $506,000, $576,000 and $448,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Postretirement benefits other than pensions and postemployment benefits are generally not provided for First Banks' employees. (15) Preferred Stock First Banks had three classes of preferred stock outstanding during the years ended December 31, 1997 and 1996. On September 15, 1992, First Banks issued and sold, pursuant to an effective registration statement under the Securities Act of 1933, 2,200,000 shares of Class C 9% cumulative increasing rate, redeemable, preferred stock. Class C preferred stock ranks senior to both the Class A preferred stock and the Class B preferred stock in terms of dividend and liquidation rights. Holders of the Class C preferred stock do not have any voting rights except in limited circumstances or as expressly required by law. The holders of the Class A and Class B preferred stock have full voting rights. Dividends on the Class A and Class B preferred stock are adjustable quarterly based on the highest of the Treasury Bill Rate or the Ten Year Constant Maturity Rate for the two-week period immediately preceding the beginning of the quarter. This rate shall not be less than 6% nor more than 12% on Class A preferred stock, or less than 7% nor more than 15% on Class B preferred stock. Dividends on the Class C preferred stock were 9% through November 30, 1997. On December 1, 1997, First Banks redeemed all of the outstanding Class C preferred stock. Class A preferred stock is convertible into shares of common stock at a rate based on the ratio of the par value of the preferred stock to the current market value of the common stock at the date of conversion, to be determined by independent appraisal at the time of conversion. Shares of Class A preferred stock may be redeemed by First Banks at any time at 105% of par value. Class B preferred stock may not be redeemed or converted. Redemption of any issue of preferred stock requires the prior approval of the Federal Reserve Board. The annual dividend rates were as follows: 1997 1996 1995 ---- ---- ---- Class C preferred stock (1)....................... 9.0% 9.0% 9.0% Class A preferred stock........................... 6.0 6.0 6.0 Class B preferred stock........................... 7.0 7.0 7.0 - --------------- (1) Redeemed on December 1, 1997. (16) Transactions With Related Parties Outside of normal customer relationships, no directors or officers of First Banks, no stockholders holding over 5% of First Banks' voting securities and no corporations or firms with which such persons or entities are associated currently maintain or have maintained, since the beginning of the last full fiscal year, any significant business or personal relationship with First Banks or its subsidiaries, other than such as arises by virtue of such position or ownership interest in First Banks or its subsidiaries, except as described in the following paragraphs. During 1997, 1996 and 1995, Tidal Insurance Limited (Tidal), a corporation owned indirectly by First Banks' Chairman and his children, received approximately $214,000, $326,000 and $192,000, respectively, in insurance premiums for accident, health and life insurance policies purchased by loan customers of First Banks. The insurance policies are issued by an unaffiliated company and then ceded to Tidal. First Banks believes the premiums paid by the loan customers of First Banks are comparable to those that such loan customers would have paid if the premiums were subsequently being ceded to an unaffiliated third-party insurer. In addition, for the years ended December 31, 1997, 1996 and 1995, First Securities America, Inc., doing business as First Banc Insurors, received approximately $206,000, $231,000 and $196,000, respectively, in commissions or insurance premiums for policies purchased by First Banks or customers of the Subsidiary Banks from the unaffiliated, third-party insurors to which First Banc Insurors placed such policies. First Banc Insurors received an additional $136,000 and $999,000 in annuity sales commissions for the years ended December 31, 1996 and 1995, respectively. In addition, First Brokerage L.P. received approximately $707,000 and $822,000 for the years ended December 31, 1997 and 1996, respectively, in commissions and lease payments in connection with annuities and securities and other insurance product sales services provided to certain customers of the Subsidiary Banks. Commissions received by First Banc Insurors and First Brokerage L.P. in connection with the purchase and/or sale of such annuities and securities were paid by an unaffiliated, third-party company. First Securities America, Inc. and First Brokerage L.P. are owned by a trust established and administered by and for the benefit of First Banks' Chairman and members of his immediate family. The insurance premiums on which the aforementioned commissions were earned were competitively bid and First Banks deems the commissions First Banc Insurors earned to be comparable to those which would have been earned by an unaffiliated third-party agent. First Services, L.P., a limited partnership indirectly owned by First Banks' Chairman and his children through its General Partners and Limited Partners, provides data processing services and operational support for First Banks and its subsidiaries. Fees paid under the agreement to First Services L.P. were $6.4 million, $3.2 million and $2.9 million for the years ended December 31, 1997, 1996 and 1995, respectively. During 1997, First Services, L.P. paid First Banks $1.1 million in rental fees for the use of data processing and other equipment owned by First Banks. (17) Capital Stock of Subsidiaries First Banks owns all of the Class B common stock of FBA representing 65.85% and 68.82% of all classes of outstanding voting stock at December 31, 1997 and 1996, respectively. FBA common stock, which is publicly traded on the New York Stock Exchange, is the only other class of voting stock. In addition, First Banks owns 61.48% of all outstanding voting stock of FCB at December 31, 1997 and 1996. On February 2, 1998, FBA and FCB were merged. Under the terms of the Agreement and Plan of Merger (Agreement), FCB was merged into FBA, and First Commercial was merged into FB California. The FCB shareholders received .8888 shares of FBA common stock for each share of FCB common stock that they held. In total, FCB shareholders received approximately 751,728 shares of FBA common stock, of which 462,176 shares were issued to First Banks. The transaction also provided for First Banks to receive 804,000 shares of FBA common stock in exchange for $10.0 million advanced to FBA under a promissory note payable. In addition, FCB's convertible debentures of $6.5 million, which are owned by First Banks, were exchanged for comparable debentures in FBA. First Banks' ownership interest in FBA would have been 70.4% of the outstanding voting stock of FBA at December 31, 1997, had the acquisition of FCB been completed on that date. The merger of FBA and FCB will not have a significant impact on the financial condition or results of operations of First Banks. (18) Regulatory Capital The Subsidiary Banks are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Subsidiary Banks' financial statements. Under capital adequacy guidelines and the regulatory framework for Prompt Corrective Action, the Subsidiary Banks must meet specific capital guidelines that involve quantitative measures of the Subsidiary Banks' assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Subsidiary Banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Subsidiary Banks to maintain certain minimum ratios. The Subsidiary Banks are required to maintain a minimum risk-based capital to risk-weighted assets ratio of 8.0%, with at least 4.0% being "Tier 1" capital (as defined in the regulations). In addition, a minimum leverage ratio (Tier 1 capital to total assets) of 3.0% plus an additional cushion of 100 to 200 basis points is expected. In order to be considered well capitalized under Prompt Corrective Action provisions, a bank is required to maintain a risk weighted asset ratio of at least 10%, a Tier 1 to risk weighted assets ratio of at least 6%, and a leverage ratio of at least 5%. As of December 31, 1996, the date of the most recent notification from First Banks' primary regulator, each of the Subsidiary Banks were categorized as well capitalized under the regulatory framework for prompt corrective action. Management believes, as of December 31, 1997, each of the Subsidiary Banks' were well capitalized as defined by the FDIC Improvement Act.
At December 31, 1997 and 1996, First Banks' and the subsidiary depository institutions' capital ratios were as follows: Risk-based capital ratios ------------------------- Total Tier 1 Leverage ratio ----- ---- - -------------- 1997 1996 1997 1996 1997 1996 ---- ---- ---- ---- ---- ---- First Banks.................................... 10.26% 9.23% 8.78% 7.92% 6.80% 5.99% First Bank..................................... 10.78 10.47 9.52 9.21 7.19 7.25 First Bank Illinois (1)........................ -- 11.06 -- 9.88 -- 7.17 First Bank FSB (1)............................. -- 11.00 -- 9.75 -- 6.45 FB&T........................................... 12.71 16.45 11.45 15.18 7.70 11.43 BankTEXAS...................................... 12.26 10.29 11.00 9.04 8.90 7.53 FB California.................................. 13.03 -- 11.77 -- 13.80 -- Sunrise Bank (2)............................... -- 17.67 -- 16.39 -- 10.88 First Commercial............................... 11.89 13.13 10.61 11.84 8.43 8.87 - ---------------- (1) Merged into First Bank effective November 1, 1997. (2) Merged into FB California effective December 1, 1997.
(19) Distribution of Earnings of Subsidiaries The Subsidiary Banks are restricted by various state and federal regulations, as well as by the terms of the Credit Agreement described in Note 7, in the amount of dividends which is available for payment of dividends to First Banks, Inc. Under the most restrictive of these requirements, the future payment of dividends from subsidiary financial institutions is limited to approximately $29.7 million, unless prior permission of the regulatory authorities or the lending banks is obtained. (20) Parent Company Only Financial Information
Following are condensed balance sheets of First Banks, Inc. as of December 31, 1997 and 1996, and condensed statements of income and cash flows for the years ended December 31, 1997, 1996 and 1995: CONDENSED BALANCE SHEETS December 31, ------------ Assets 1997 1996 ------ ---- ---- (dollars expressed in thousands) Cash deposited in subsidiary banks.................................................... $ 8,327 3,887 Investment in subsidiaries, at equity................................................. 317,092 290,305 Investment securities................................................................. 27,781 18,564 Other assets.......................................................................... 32,408 19,933 ---------- -------- Total assets............................................................... $ 385,608 332,689 ========== ======== Liabilities and Stockholders' Equity Notes payable......................................................................... $ 55,144 76,330 Long term debt........................................................................ 88,918 -- Accrued expenses and other liabilities................................................ 10,009 4,970 ---------- -------- Total liabilities.......................................................... 154,071 81,300 Stockholders' equity.................................................................. 231,537 251,389 ---------- -------- Total liabilities and stockholders' equity................................. $ 385,608 332,689 ========= ========
CONDENSED STATEMENTS OF INCOME Years ended December 31, ------------------------ 1997 1996 1995 ---- ---- ---- (dollars expressed in thousands) Income: Dividends from subsidiaries........................................... $ 17,221 20,714 57,901 Management fees from subsidiaries..................................... 9,010 7,393 5,108 Other income.......................................................... 3,094 1,684 2,015 --------- ------ ------- Total income....................................................... 29,325 29,791 65,024 --------- ------ ------- Expenses: Interest expense...................................................... 8,815 5,461 5,861 Salaries and employee benefits........................................ 7,072 5,538 4,597 Legal and professional fees........................................... 1,765 1,978 2,426 Other expenses........................................................ 5,221 3,415 3,035 --------- ------ ------- Total expenses..................................................... 22,873 16,392 15,919 --------- ------ ------- Income before income tax benefit and equity in undistributed earnings (loss) of subsidiaries.................................. 6,452 13,399 49,105 Income tax benefit........................................................ (2,831) (1,880) (2,007) --------- ------ ------- Income before equity in undistributed earnings (loss) of subsidiaries.......................................... 9,283 15,279 51,112 Equity in undistributed earnings (loss) of subsidiaries, net of dividends paid.................................................. 23,744 4,939 (26,641) ------ ------- ------- Net income......................................................... $ 33,027 20,218 24,471 ========= ====== =======
CONDENSED STATEMENTS OF CASH FLOWS Years ended December 31, ------------------------ 1997 1996 1995 ---- ---- ---- (dollars expressed in thousands) Cash flows from operating activities: Net income......................................................... $ 33,027 20,218 24,471 Adjustments to reconcile net income to net cash provided by operating activities: Net income of subsidiaries.................................... (41,015) (25,610) (30,973) Dividends from subsidiaries................................... 17,221 20,714 57,901 Other, net.................................................... (2,773) (998) 58 --------- -------- ------- Net cash provided by operating activities................... 6,460 14,324 51,457 --------- -------- ------- Cash flows from investing activities: (Increase) decrease in investment securities....................... (3,000) -- 2,420 Investment in common securities of First Trust..................... (2,668) -- -- Acquisitions of subsidiaries....................................... -- -- (49,996) Capital contributions to subsidiaries.............................. (190) (200) (44,329) Return of subsidiary capital....................................... 2,000 7,786 12,149 Decrease in advances to subsidiaries............................... (121) (950) (13,529) Other, net......................................................... (6,659) 268 (1,011) --------- -------- ------- Net cash provided by (used in) investing activities......... (10,638) 6,904 (94,296) --------- -------- ------ Cash flows from financing activities: Increase (decrease) in notes payable............................... (21,186) (11,805) 41,932 Increase in long term debt......................................... 88,918 -- -- Payment of preferred stock dividends............................... (5,066) (5,728) (5,736) Purchase and retirement of Class C preferred stock................. (54,048) (1,139) -- --------- -------- ------ Net cash provided by (used in) financing activities......... 8,618 (18,672) 36,196 --------- -------- ------- Net increase (decrease) in cash and cash equivalents........ 4,440 2,556 (6,643) Cash and cash equivalents, beginning of year........................... 3,887 1,331 7,974 --------- -------- ------- Cash and cash equivalents, end of year................................. $ 8,327 3,887 1,331 ========= ======== =======
(21) Contingent Liabilities In the ordinary course of business, there are various legal proceedings pending against First Banks. Management, after consultation with legal counsel, is of the opinion the ultimate resolution of these proceedings will have no material effect on the consolidated financial position or results of operations of First Banks.
DIRECTORS AND EXECUTIVE OFFICERS First Banks, Inc. James F. Dierberg Chairman of the Board, President and Chief Executive Officer Allen H. Blake Director, Executive Vice President and Chief Financial Officer George J. Markos Director; President, Profit Management Systems, Richardson, Texas Donald J. Gunn Director; Attorney-At-Law, Gunn and Gunn, Creve Coeur, Missouri John A. Schreiber Executive Vice President and Chief Lending Officer Mark T. Turkcan Executive Vice President, Retail and Mortgage Banking Donald W. Williams Executive Vice President and Chief Credit Officer Thomas J. Bangert Senior Vice President and Chief Operations Officer Laurence J. Brost Senior Vice President and Controller First Banks America, Inc. James F. Dierberg Chairman of the Board, President and Chief Executive Officer Allen H. Blake Director, Vice President, Chief Financial Officer and Secretary Charles A. Crocco, Jr. Director; Partner in the law firm of Crocco & De Maio, P.C., New York, New York. Albert M. Lavezzo Director; Partner in the law firm of Favaro, Lavezzo, Gill, Caretti & Neppell, Vallejo, California. Edward T. Story, Jr. Director; President and Chief Executive Officer of SOCO International, Inc., Comfort, Texas. Mark T. Turkcan Director Donald W. Williams Director David F. Weaver Executive Vice President
First Bank John A. Schreiber Chairman of the Board, President and Chief Executive Officer Allen H. Blake Director, Secretary, Treasurer and Chief Financial Officer Thomas A. Bangert Director and Executive Vice President Douglas R. Distler Director, Senior Vice President and Regional President Donald W. Williams Director and Executive Vice President Mark T. Turkcan Director and Executive Vice President First Bank & Trust Donald W. Williams Chairman of the Board and Chief Executive Officer Fred D. Jensen Director and President Terrance M. McCarthy Director, Senior Vice President and Chief Credit Officer Kathryn L. Perrine Director, Vice President, Controller and Secretary Timothy Marme' Director and Regional President First Bank of California Donald W. Williams Chairman of the Board and Chief Executive Officer Jerry Brannigan Director; Retired Title Company President, Sacaramento, California James E. Culleton Director, President, Chief Operating Officer and Secretary Fred L. Harris Director; Attorney at Law, Rancho Cordova, California Albert M. Lavezzo Director; Partner in the law firm of Favaro, Lavezzo, Gill, Caretti & Neppell, Vallejo, California Terrance M. McCarthy Director, Senior Vice President and Chief Credit Officer Arleen R. Scavone Director and Vice President, Retail Banking Fred K. Sibley Director; Retired Bank President, Vallejo, California BankTEXAS N.A. David F. Weaver Chairman of the Board, President and Chief Executive Officer Donald W. Williams Director Alan M. Meyer Director Joseph Milcoun, Jr. Director and Vice President, Retail Banking Arved E. White Director, Senior Vice President and Chief Lending Officer
INVESTOR INFORMATION Stock Quotation Symbol NASDAQ National Market System: First Preferred Capital Trust FBNKO Market price (1) Dividend 1997 High Low declared ---- ---- --- ---------- First Quarter $ 26-1/8 25 $ .38542 Second Quarter 26-3/4 25-1/8 .57812 Third Quarter 27 25-5/8 .57812 Fourth Quarter 28-3/4 25-7/8 .57812 ======= ======= $ 2.11978 =========== - ------------------- (1) Per NASDAQ National Market System. Dividends are scheduled to be paid the last day of March, June, September and December. A copy of the First Banks, Inc. Annual Report on Form 10-K as filed with the Securities and Exchange Commission may be obtained without charge upon written request. Please direct your request to the following address. Allen H. Blake Transfer Agent Executive Vice President and ChaseMellon Shareholder Chief Financial Officer Service L.L.C. First Banks, Inc. 85 Challenger Road 11901 Olive Boulevard Overpeck Centre Creve Coeur, Missouri 63141 Ridgefield Park, New Jersey 07660 (314) 995-8700 (888) 213-0965 www.chasemellon.com EXHIBIT 21.1 First Banks, Inc. Significant Subsidiaries The following is a list of all subsidiaries of the Company And the jurisdiction of incorporation or organization. Jurisdiction of Incorporation Name of Subsidiary or Organization ------------------ --------------- First Bank Missouri CCB Bancorp, Inc. (1) California First Banks America, Inc. (2) Delaware First Serve, Inc. Missouri - --------------- (1) CCB Bancorp, Inc. is the parent company of First Bank & Trust, a California state chartered bank. (2) First Banks America, Inc., a majority owned subsidiary of First Banks, is the parent company of Sundowner Corporation, a Nevada corporation. Sundowner Corporation is the parent company of BankTEXAS, N.A., a national association, and First Bank of California, a state chartered bank. EX-27 2 FDS --
9 0000710507 First Banks, Inc. 1,000 12-mos Dec-31-1997 Jan-01-1997 Dec-31-1997 142,125 2,840 23,515 3,110 773,271 19,149 0 3,002,200 50,509 4,165,014 3,684,595 59,297 56,402 133,183 0 13,063 5,915 212,559 4,165,014 252,766 36,256 6,079 295,101 138,661 148,831 146,270 11,300 2,456 110,287 50,380 50,380 0 0 33,027 1,181.69 1,134.28 8.22 18,610 2,725 5,456 30,700 46,781 (16,832) 9,230 50,509 50,509 0 5,076
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