-----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, LG9EzEnaIA1PPn5cftodfTbriYemqwHRG6wTaFRhFBn73wDdvnMVmBcjKWTjh65M J2hxSiuPSOMytTb7tRCZcA== 0001085204-01-000016.txt : 20010329 0001085204-01-000016.hdr.sgml : 20010329 ACCESSION NUMBER: 0001085204-01-000016 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010328 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: 000-20632 FILM NUMBER: 1582572 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 0001.txt 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to ________ Commission File Number - 0-20632 FIRST BANKS, INC. (Exact name of registrant as specified in its charter) MISSOURI 43-1175538 (State or other jurisdiction (I.R.S. Employer Identification Number) of incorporation or organization) 135 North Meramec, Clayton, Missouri 63105 (Address of principal executive offices) (Zip code) (314) 854-4600 (Registrant's telephone number, including area code) ------------------------------------ Securities registered pursuant to Section 12(b) of the Act: Name of each exchange 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 of class) 10.24% Cumulative Trust Preferred Securities (issued by First Preferred Capital Trust II and guaranteed by its parent, First Banks, Inc.) (Title of 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 nonaffiliates. 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 and Chief Executive Officer, and members of his immediate family. At March 20, 2001, there were 23,661 shares of the registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the year ended December 31, 2000, or our 2000 Annual Report, are incorporated by reference into Parts I, II and IV of this report, as follows: The following portions of our 2000 Annual Report to Stockholders, or our 2000 Annual Report, are incorporated by reference in this report:
Page(s) in the 2000 Section Annual Report ------- ------------- Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")........................... 3 - 30 Selected Consolidated and Other Financial Data............................ 2 Consolidated Financial Statements......................................... 32 - 60 Supplementary Financial Data.............................................. 31 Range of Prices of Preferred Securities................................... 63
Except for the parts of our 2000 Annual Report expressly incorporated by reference, such report is not deemed filed with the Securities and Exchange Commission. PART I Information appearing in this report, in documents incorporated by reference herein and in documents subsequently filed with the Securities and Exchange Commission that are not statements of historical fact may include forward-looking statements with respect to our financial condition, results of operations and business. These forward-looking statements are subject to certain risks and uncertainties, not all of which can be predicted or anticipated. Factors that may cause our actual results to differ materially from those contemplated by the forward-looking statements herein include market conditions as well as conditions affecting the banking industry generally and factors having a specific impact on us, including but not limited to fluctuations in interest rates and in the economy; the impact of laws and regulations applicable to us and changes therein; competitive conditions in the markets in which we conduct our operations, including competition from banking and nonbanking companies with substantially greater resources, some of which may offer and develop products and services that we do not offer; our ability to control the composition of our loan portfolio without adversely affecting interest income; and our ability to respond to changes in technology. With regard to our 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 our offices, as compared with competitors operating solely in contiguous markets; the competition of larger acquirers with greater resources; fluctuations in the prices at which acquisition targets may be available for sale and in the market for our securities; and the potential for difficulty or unanticipated costs in realizing the benefits of particular acquisition transactions. Readers of our Form 10-K should therefore not place undue reliance on forward-looking statements. Item 1. Business General. First Banks, Inc. is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, or the BHC Act. We were incorporated in Missouri in 1978 and our corporate headquarters are located in St. Louis, Missouri. Our principal function is to assist in the management of our banking subsidiaries. At December 31, 2000, we had $5.88 billion in total assets, $4.75 billion in total loans, net of unearned discount, $5.01 billion in total deposits and $352.8 million in total stockholders' equity. We operate through three subsidiary banks, two subsidiary bank holding companies, and through our subsidiary leasing company, as follows: First Bank, headquartered in St. Louis County, Missouri; First Capital Group, Inc., or FCG, headquartered in Albuquerque, New Mexico; First Banks America, Inc., or FBA, headquartered in St. Louis County, Missouri, and its wholly owned subsidiaries: First Bank & Trust, or FB&T, headquartered in San Francisco, California; and The San Francisco Company, or SFC, headquartered in San Francisco, California, and its wholly owned subsidiary: Bank of San Francisco, or BSF, headquartered in San Francisco, California. Our subsidiary banks and FCG are wholly owned by their respective parent companies. We owned 92.86% of FBA at December 31, 2000. Through our subsidiary banks, we offer a broad range of commercial and personal deposit products, including demand, savings, money market and time deposit accounts. In addition, we market combined basic services for various customer groups, including packaged accounts for more affluent customers, and sweep accounts, lock-box deposits and cash management products for commercial customers. We also offer both consumer and commercial loans. Consumer lending includes residential real estate, home equity and installment lending. Commercial lending includes commercial, financial and agricultural loans, real estate construction and development loans, commercial real estate loans, asset-based loans, commercial leasing and trade financing. Other financial services include mortgage banking, credit and debit cards, brokerage services, credit-related insurance, automated teller machines, telephone banking, safe deposit boxes and trust, private banking and institutional money management services. Primary responsibility for managing our subsidiary banking units rests with the officers and directors of each unit. However, in keeping with our policy, we centralize overall corporate policies, procedures and administrative functions and provide operational support functions for our subsidiaries. This practice allows us to achieve various operating efficiencies while allowing our subsidiary banking units to focus on customer service. The following table summarizes selected data about our subsidiaries at December 31, 2000:
Loans, net of Number of Total unearned Total Name locations assets discount deposits ---- --------- ------ -------- -------- (dollars expressed in thousands) First Bank...................................... 86 $ 3,152,885 2,694,004 2,729,489 FCG (1)......................................... 1 153 -- -- FBA: FB&T........................................ 52 2,516,993 1,943,013 2,168,742 SFC: BSF.................................... 1 216,552 115,615 137,727
------------------------------ (1) FCG was purchased on February 29, 2000. As of December 31, 2000, there were approximately $124.1 million of commercial leases. The commercial leases are recorded as assets of our subsidiary banks. As described under "MD&A - Financial Condition and Average Balances" in our 2000 Annual Report, on October 19, 2000, First Preferred Capital Trust II, or First Preferred II, our newly formed Delaware statutory business trust subsidiary, issued 2,300,000 shares of 10.24% cumulative trust preferred securities for $57.5 million. In addition, First Preferred II issued 71,135 shares of common securities to us for $1.8 million. Similar to the preferred securities issued in February 1997 by First Preferred Capital Trust, our initial Delaware statutory business trust subsidiary, First Preferred II's 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. Various trusts, which were created by and are administered by and for the benefit of Mr. James F. Dierberg, our Chairman of the Board and Chief Executive Officer, and members of his immediate family, own all of our voting stock. Mr. Dierberg and his family, therefore, control our management, policies and the election of our directors. At December 31, 2000, we, Mr. Dierberg and an affiliate of Mr. Dierberg owned 18.87%, 0.20% and 4.43%, respectively, of the outstanding shares of common stock of Southside Bancshares Corporation, or Southside, located in St. Louis, Missouri. Further discussion of our business operations and our policies is set forth in the MD&A section of our 2000 Annual Report. Acquisitions. Prior to 1994, our acquisitions were concentrated within the market areas of eastern Missouri and central and southern Illinois. The premiums required to successfully pursue acquisitions escalated sharply in 1993, reducing the economic viability of many potential acquisitions in that area. Recognizing this, we began to expand the geographic area in which we approached acquisition candidates. While we were successful in making acquisitions in Chicago and northern Illinois, it became apparent to us that acquisition pricing, in Chicago and other areas being considered, was comparable to that of the eastern Missouri and central and southern Illinois acquisition area. As a result, while we continued to pursue acquisitions within these areas, we turned much of our attention to institutions that could be acquired at more attractive prices that were within major metropolitan areas outside of these market areas. This led to our acquisition of a bank in Texas in 1994 that had offices in Dallas and Houston, Texas, and numerous acquisitions of financial institutions that had offices in Los Angeles, Orange County, Santa Barbara, San Francisco, San Jose and Sacramento, California during the five years ended December 31, 2000. In addition, on February 29, 2000, we acquired certain assets and assumed certain liabilities of FCG, our commercial leasing subsidiary that is headquartered in Albuquerque, New Mexico. For the three years ended December 31, 2000, we completed ten acquisitions and two branch office purchases. These transactions provided us with total assets of $1.21 billion and 25 banking locations. For a description of these acquisitions, see "MD&A - Acquisitions" and Note 2 to the Consolidated Financial Statements of our 2000 Annual Report. Market Area. As of December 31, 2000, our subsidiary banks' 139 banking offices were located throughout eastern Missouri and in Illinois, Texas and California. Our primary market area is the St. Louis, Missouri metropolitan area. Our second and third largest market areas are central and southern Illinois and southern and northern California, respectively. We also have locations in the Houston, Dallas, Irving and McKinney, Texas metropolitan areas, rural eastern Missouri and the greater Chicago, Illinois metropolitan area. In addition, FCG, our leasing subsidiary, operates from its headquarters in Albuquerque, New Mexico. The following table lists the market areas in which our subsidiary banks operate, total deposits, deposits as a percentage of total deposits and the number of locations as of December 31, 2000:
Total Deposits Number deposits as a percentage of Geographic area (in millions) of total deposits locations --------------- ------------ ----------------- --------- St. Louis, Missouri metropolitan area (1).......................... $ 1,050.0 21.0% 29 Regional Missouri (1).............................................. 400.6 8.0 15 Central and southern Illinois (1).................................. 878.6 17.5 39 Northern Illinois (1).............................................. 376.8 7.5 3 Texas (2).......................................................... 271.4 5.4 6 Southern California (2)............................................ 922.2 18.4 26 Northern California (2) (3)........................................ 1,112.8 22.2 21 --------- ----- ----- Total deposits................................................. $ 5,012.4 100.0% 139 ========= ===== =====
------------------------ (1) First Bank operates in the St. Louis metropolitan area, in regional Missouri, in central and southern Illinois and in northern Illinois, including Chicago. (2) FB&T operates in the Houston, Dallas, Irving and McKinney metropolitan areas; in the greater Los Angeles metropolitan area, including Ventura County and Orange County, California; in Santa Barbara County, California; and in northern California, including the greater San Francisco, San Jose and Sacramento metropolitan areas. (3) BSF operates in the greater San Francisco metropolitan area. Competition and Branch Banking. The activities in which our subsidiary banks engage are highly competitive. Those activities and the geographic markets served primarily involve competition with other banks, some of which are affiliated with large regional or national holding companies. Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans and other credit and service charges, the quality of services rendered, the convenience of banking facilities and, in the case of loans to large commercial borrowers, relative lending limits. In addition to competing with other banks within their primary service areas, our 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 our non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally-insured banks and state regulations governing state-chartered banks. As a result, such non-bank competitors may have certain advantages over us in providing some services. The trend in Missouri, Illinois, Texas and California has been for multi-bank holding companies to acquire independent banks and thrifts in communities throughout these states. We believe we 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 we compete are larger than us and have substantially greater resources available for making acquisitions. Subject to regulatory approval, commercial banks situated in Missouri, Illinois, Texas and California are permitted to establish branches throughout their respective states, thereby creating the potential for additional competition in our subsidiary banks' service areas. Supervision and Regulation General. We are extensively regulated under federal and state laws designed primarily to protect depositors and customers of our subsidiary banks. To the extent this discussion refers to statutory or regulatory provisions, it is not intended to summarize all of such provisions and is qualified in its entirety by reference to the relevant statutory and regulatory provisions. Changes in applicable laws, regulations or regulatory policies may have a material effect on our business and prospects. We are unable to predict the nature or extent of the effects on our business and earnings that new federal and state legislation or regulation may have. The enactment of the legislation described below has significantly affected the banking industry generally and is likely to have ongoing effects on our subsidiary banks and us in the future. We are a registered bank holding company under the BHC Act and, as such, we are subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System, or the FRB. We are required to file annual reports with the FRB and to provide to the FRB additional information as it may require. First Bank is chartered by the State of Missouri and is subject to supervision, regulation and examination by the State of Missouri Division of Finance. FB&T and BSF are chartered by the State of California and are subject to supervision, regulation and examination by the California Department of Financial Institutions. Our subsidiary banks are also regulated and examined by the Federal Deposit Insurance Corporation, or the FDIC, which provides deposit insurance of up to $100,000 for each insured depositor. Bank Holding Company Regulation. Our activities and those of our subsidiaries have in the past been limited to the business of banking and activities "closely related" or "incidental" to banking. Under the Gramm-Leach-Bliley Act, which was enacted in November 1999 and is discussed below, bank holding companies now have the opportunity to seek broadened authority, subject to limitations on investment, to engage in activities that are "financial in nature" if its subsidiary depository institutions are well capitalized, well managed and have at least a satisfactory rating under the Community Reinvestment Act (discussed briefly below). We are also subject to capital requirements applied on a consolidated basis which are substantially similar to those required of our subsidiary banks (briefly summarized below). 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 a majority of such shares); (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company. The FRB will not approve any acquisition, merger or consolidation that would have a substantially anti-competitive result, unless the anti-competitive effects of the proposed transaction are clearly outweighed by a greater public interest in meeting the convenience and needs of the community to be served. The FRB also considers capital adequacy and other financial and managerial factors in reviewing acquisitions and mergers. Safety and Soundness and Similar Regulations. We are subject to various regulations and regulatory policies directed at the financial soundness of our subsidiary banks. These include, but are not limited to, the FRB's source of strength policy, which obligates a bank holding company to provide financial and managerial strength to our subsidiary banks; restrictions on the nature and size of certain transactions between a bank holding company and its subsidiary depository institutions; and restrictions on extensions of credit by our subsidiary banks to executive officers, directors, principal stockholders and the related interests of such persons. Regulatory Capital Standards. The federal bank regulatory agencies have adopted substantially similar risk-based and leverage capital guidelines for banking organizations. Risk-based capital ratios are determined by classifying assets and specified off-balance-sheet financial instruments into weighted categories, with higher levels of capital being required for categories deemed to represent greater risk. FRB policy also provides that banking organizations generally, and in particular those that are experiencing internal growth or actively making acquisitions, are expected to maintain capital positions that are substantially above the minimum supervisory levels, without significant reliance on intangible assets. Under the risk-based capital standard, the minimum consolidated ratio of total capital to risk-adjusted assets required for bank holding companies is 8%. At least one-half of the total capital, or Tier I capital, must be composed of common equity, retained earnings, qualifying non-cumulative perpetual preferred stock, a limited amount of qualifying cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less certain items such as goodwill and certain other intangible assets. The remainder, or Tier 2 capital, may consist of qualifying hybrid capital instruments, perpetual debt, mandatory convertible debt securities, a limited amount of subordinated debt, preferred stock that does not qualify as Tier 1 capital and a limited amount of loan and lease loss reserves. In addition to the risk-based standard, we are subject to minimum requirements with respect to the ratio of our Tier 1 capital to our average assets less goodwill and certain other intangible assets, referred to as the Leverage Ratio. Applicable requirements provide for a minimum Leverage Ratio of 3% for bank holding companies that have the highest supervisory rating, while all other bank holding companies must maintain a minimum Leverage Ratio of at least 4% to 5%. The FDIC has established capital requirements for banks under its jurisdiction that are consistent with those imposed by the FRB on bank holding companies. Information regarding our capital levels and our subsidiary banks' capital levels under the federal capital requirements is contained in Note 19 to the Consolidated Financial Statements incorporated herein by reference. Prompt Corrective Action. The FDIC Improvement Act requires the federal bank regulatory agencies to take prompt corrective action in respect to depository institutions that do not meet minimum capital requirements. A depository institution's status under the prompt corrective action provisions will depend upon how its capital levels compare to various relevant capital measures and other factors as established by regulation. The federal regulatory agencies have adopted regulations establishing relevant capital measures and relevant capital levels. Under the regulations, a bank will be: (i) "well capitalized" if it has a total capital ratio of 10% or greater, a Tier 1 capital ratio of 6% or greater and a Leverage Ratio of 5% or greater and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) "adequately capitalized" if it has a total capital ratio of 8% or greater, a Tier 1 capital ratio of 4% or greater and a Leverage Ratio of 4% or greater (3% in certain circumstances); (iii) "undercapitalized" if it has a total capital ratio of less than 8%, a Tier 1 capital ratio of less than 4% or a Leverage Ratio of less than 4% (3% in certain circumstances); (iv) "significantly undercapitalized" if it has a total capital ratio of less than 6%, a Tier 1 capital ratio of less than 3% or a Leverage Ratio of less than 3%; and (v) "critically undercapitalized" if its tangible equity is equal to or less than 2% of average quarterly tangible assets. A depository institution's primary federal regulatory agency is authorized to lower the institution's capital category under certain circumstances. The banking agencies are permitted to establish individualized minimum capital requirements exceeding the general requirements described above. Generally, a bank which does not maintain the status of "well capitalized" or "adequately capitalized" will be subject to restrictions and limitations on its business that are progressively more severe. A bank is prohibited from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the bank would thereafter be "undercapitalized." "Undercapitalized" depository institutions are subject to limitations on, among other things, asset growth, acquisitions, branching, new lines of business, acceptance of brokered deposits and borrowings from the Federal Reserve System, and they are required to submit a capital restoration plan that includes a guarantee from the institution's holding company. "Significantly undercapitalized" depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become "adequately capitalized," requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. "Critically undercapitalized" institutions are subject to the appointment of a receiver or conservator. Dividends. Our primary source of funds in the future is the dividends, if any, paid by our subsidiary banks. The ability of our subsidiary banks to pay dividends is limited by federal laws, by regulations promulgated by the bank regulatory agencies and by principles of prudent bank management. The amount of dividends our subsidiary banks may pay to us is also limited by our credit agreement with a group of unaffiliated financial institutions. Additional information concerning limitations on the ability of our subsidiary banks to pay dividends appears in Note 20 to the Consolidated Financial Statements incorporated herein by reference. Customer Protection. Our subsidiary banks are also subject to consumer laws and regulations intended to protect consumers in transactions with depository institutions, as well as other laws or regulations affecting customers of financial institutions generally. These laws and regulations mandate various disclosure requirements and substantively regulate the manner in which financial institutions must deal with their customers. Our subsidiary banks are required to comply with numerous regulations in this regard and are subject to periodic examinations with respect to their compliance with the requirements. Community Reinvestment Act. The Community Reinvestment Act of 1977, or CRA, requires that, in connection with examinations of financial institutions within their jurisdiction, the federal banking regulators must evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those banks. These factors are also considered in evaluating mergers, acquisitions and other applications to expand. The Gramm-Leach-Bliley Act. The activities of bank holding companies have historically been limited to the business of banking and activities "closely related" or "incidental" to banking. The enactment of the Gramm-Leach-Bliley Act in 1999 has relaxed the previous limitations and permits some bank holding companies to engage in a broader range of financial activities. Bank holding companies may elect to become "financial holding companies" that may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. In addition to lending, activities that will be deemed "financial in nature" include securities underwriting, dealing in or making a market in securities, sponsoring mutual funds and investment companies, insurance underwriting and agency activities, merchant banking activities and other activities which the FRB determines to be closely related to banking. A bank holding company may become a financial holding company only if each of its subsidiary banks is well capitalized and well managed and has a rating of satisfactory or higher under CRA. A bank holding company that ceases to be in compliance with those requirements may be required to stop engaging in specified activities. The Gramm-Leach-Bliley Act also permits banks to own subsidiaries that engage in a somewhat broader range of financial activities than was previously permitted, including some insurance activities. In order to take advantage of any new powers, a bank must satisfy standards governing capital adequacy and is also required to have satisfactory examination ratings of its management and CRA compliance, among other factors. The powers available to bank subsidiaries are not as broad as those available to qualifying financial holding companies. Under the Gramm-Leach-Bliley Act, the FRB has supervisory authority over each parent financial holding company and limited authority over its subsidiaries. The determination of which federal regulatory agency is given primary authority over a subsidiary of a financial holding company will depend on the types of activities conducted by the subsidiary. In that regard, broker-dealer subsidiaries will be regulated primarily by securities regulators and insurance subsidiaries will primarily be regulated by insurance authorities. The Gramm-Leach-Bliley Act also will impose significant new regulatory requirements regarding the privacy of customer information when implementing regulations become effective in July 2001. Each bank and other provider of financial services will be required to protect the security and confidentiality of nonpublic information about its customers, to adopt a privacy policy regarding its practices for sharing information about customers, and, for consumer accounts, to disclose its privacy policy when an account relationship is established and at least annually thereafter. Unless an exemption from the requirements in the Act is available for a particular type of disclosure, a bank or other financial company must provide an opportunity for the consumer to "opt out" of disclosure of information to third parties, and third parties with whom information is shared will be subject to restrictions on their use of shared information. The Act will also prohibit the disclosure to unaffiliated third parties of account numbers and other specified information for use in telemarketing, direct mail and electronic mail marketing. Reserve Requirements; Federal Reserve System and Federal Home Loan Bank System. The FRB requires all depository institutions to maintain reserves against their transaction accounts and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the FRB may be used to satisfy liquidity requirements. Institutions are authorized to borrow from the Federal Reserve Bank "discount window," but FRB regulations require institutions to exhaust other reasonable alternative sources of funds, including advances from Federal Home Loan Banks, or FHLBs, before borrowing from the Federal Reserve Bank. Certain of our subsidiary banks are members of the Federal Reserve System and the Federal Home Loan Bank System and are required to hold investments in regional banks within those systems. Our subsidiary banks were in compliance with these requirements at December 31, 2000, with investments of $10.3 million in stock of the FHLB of Des Moines held by First Bank, $2.0 million and $767,000 in stock of the FHLB of San Francisco held by FB&T and BSF, respectively, $1.5 million in stock of the FHLB of Dallas held by FB&T; $4.9 million in stock of the Federal Reserve Bank of St. Louis held by First Bank, and $328,000 in stock of the Federal Reserve Bank of San Francisco held by FB&T. Monetary Policy and Economic Control. The commercial banking business is affected not only by legislation, regulatory policies and general economic conditions, but also by the monetary policies of the FRB. Changes in the discount rate on member bank borrowings, the availability of credit at the "discount window," open market operations, the imposition of changes in reserve requirements against deposits and assets of foreign branches, and the imposition of and changes in reserve requirements against certain borrowings by banks and their affiliates are some of the instruments of monetary policy available to the FRB. These monetary policies are used in varying combinations to influence overall growth and distributions of bank loans, investments and deposits, and this use may affect interest rates charged on loans or paid on liabilities. 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. Such policies 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 our future business and earnings and on the future business and earnings of our subsidiary banks cannot be predicted. Employees As of March 20, 2001, we employed approximately 1,985 employees. None of our employees are subject to a collective bargaining agreement. We consider our relationships with our employees to be good. Executive Officers of the Registrant Information regarding executive officers is contained in Item 10 of Part III hereof (pursuant to General Instruction G) and is incorporated herein by this reference. Item 2. Properties We own our office building which houses our principal place of business, which is located at 135 North Meramec, Clayton, Missouri 63105. The property is in good condition and consists of approximately 41,763 square feet, of which approximately 1,791 square feet is currently leased to others. Of our other 138 offices and facilities, 85 are located in buildings that we own and 53 are located in buildings that we lease. We consider the properties at which we do business to be in good condition, suitable for our business conducted at each location. To the extent our properties or those acquired in connection with our acquisition of other entities provide space in excess of that effectively utilized in the operations of our subsidiary banks, we seek to lease or sub-lease any excess space to third parties. Additional information regarding the premises and equipment utilized by our subsidiary banks appears in Note 6 to our Consolidated Financial Statements incorporated herein by reference. Item 3. Legal Proceedings There are various claims and pending actions against our subsidiaries and us in the ordinary course of business. It is our opinion, in consultation with legal counsel, the ultimate liability, if any, resulting from such claims and pending actions will not have a material adverse effect on our financial position or results of operations. 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 Market Information. There is no established public trading market for our common stock. Various trusts, which were created by and are administered by and for the benefit of Mr. James F. Dierberg, our Chairman of the Board and Chief Executive Officer, and members of his immediate family, own all of our voting stock. Dividends. In recent years, we have paid minimal dividends on our Class A Convertible Adjustable Rate Preferred Stock and our Class B Non-Convertible Adjustable Rate Preferred Stock, and have paid no dividends on our Common Stock. Our ability to pay dividends is limited by regulatory requirements and by the receipt of dividend payments from our subsidiary banks, which are also subject to regulatory requirements. See Note 20 to the Consolidated Financial Statements incorporated herein by reference. Item 6. Selected Financial Data The information required by this item is incorporated herein by reference from page 2 of our 2000 Annual Report under the caption "Selected Consolidated and Other Financial Data." Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required by this item is incorporated herein by reference from pages 3 through 30 of our 2000 Annual Report under the caption "MD&A." Item 7a. Quantitative and Qualitative Disclosures about Market Risk The information required by this item is incorporated herein by reference from page 13 of our 2000 Annual Report under the caption "MD&A - Interest Rate Risk Management." Item 8. Financial Statements and Supplementary Data Our consolidated financial statements are incorporated herein by reference from pages 32 through 60 of our 2000 Annual Report under the captions "Consolidated Balance Sheets," "Consolidated Statements of Income," "Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income," "Consolidated Statements of Cash Flows," "Notes to Consolidated Financial Statements" and "Independent Auditors' Report." Our Supplementary Financial Information is incorporated herein by reference from page 31 of our 2000 Annual Report under the caption "Quarterly Condensed Financial Data - Unaudited." Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant Board of Directors Our Board of Directors, consisting of four members, is identified in the following table. Each of our directors was elected or appointed to serve a one-year term and until his successor has been duly qualified for office.
Director Principal Occupation(s) During Last Five Years Name Age Since and Directorships of Public Companies ---- --- ----- ------------------------------------- James F. Dierberg 63 1979 Chairman of the Board of Directors and Chief Executive Officer of First Banks, Inc. since 1988; President of First Banks, Inc. from 1979 to 1992 and from 1994 to October 1999; Chairman of the Board of Directors, President and Chief Executive Officer of FBA since 1994; Trustee of First Preferred Capital Trust and First America Capital Trust since 1997 and 1998, respectively. Allen H. Blake 58 1988 President of First Banks, Inc. since October 1999; Executive Vice President and Chief Financial Officer of First Banks, Inc. from 1996 to September 1999; Chief Operating Officer of First Banks, Inc. since 1998; Senior Vice President and Chief Financial Officer of First Banks, Inc. from 1992 to 1996; Secretary of First Banks, Inc. since 1988; Director, Executive Vice President, Chief Operating Officer and Secretary of FBA since 1998; Chief Financial Officer of FBA from 1994 to September 1999; Director, Senior Vice President and Secretary of FBA from 1994 to 1998; Trustee of First Preferred Capital Trust, First America Capital Trust and First Preferred Capital Trust II since 1997, 1998 and September 2000, respectively. David L. Steward (1) 49 2000 Chairman of the Board of Directors, President and Chief Executive Officer of World Wide Technology, Inc.; Chairman of the Board of Directors of Telcobuy.com (an affiliate of World Wide Technology, Inc.); Director of the 21st Century Workforce, Civic Progress, the St. Louis Regional Commerce and Growth Association, Missouri Technology Corporation, Webster University, BJC Health System, Union Memorial Outreach Center, St.Louis Science Center, the United Way of Greater St. Louis, Greater St. Louis Area Council - Boy Scouts of America, INROADS and New Cornerstone. Douglas H. Yaeger (1) 52 2000 Chairman of the Board of Directors, President and Chief Executive Officer of Laclede Gas Company since 1999; President of Laclede Gas Company since 1997; Director and Chief Operating Officer of Laclede Gas Company from 1997 to 1999; Executive Vice President - Operations and Marketing of Laclede Gas Company from 1995 to 1997; Director of Southern Gas Association, the American Gas Association, the American Gas Cooling Center, the Central Institute for the Deaf, the St. Louis Regional Chamber and Growth Association, the St. Louis Science Center, Civic Progress, Greater St. Louis Area Council - Boy Scouts of America, the United Way of Greater St. Louis, Junior Achievement, The Municipal Theatre Association of St. Louis and Webster University.
- ----------------------- (1) Member of the Audit Committee. Executive Officers Our executive officers, each of whom was elected to the office(s) indicated by the Board of Directors, as of March 20, 2001 were as follows:
Current First Banks Principal Occupation(s) Name Age Office(s) Held During Last Five Years ---- --- -------------- ---------------------- James F. Dierberg 63 Chairman of the Board of Directors See Item 10 - "Directors and Executive and Chief Executive Officer. Officers of the Registrant - Board of Directors." Allen H. Blake 58 President, Chief Operating Officer See Item 10 - "Directors and Executive and Secretary. Officers of the Registrant - Board of Directors." Donald W. Williams 53 Senior Executive Vice President and Mr. Williams has been employed in various Chief Credit Officer; Director, executive capacities with First Banks, Executive Vice President and Chief Inc. since 1993. Credit Officer of FBA; Chairman of the Board of Directors, President and Chief Executive Officer of First Bank; Chairman of the Board of Directors of First Capital Group, Inc. Michael F. Hickey 43 Executive Vice President and Chief Executive Vice President and Chief Information Officer; Director of Information Officer of First Banks, Inc. First Bank; President of First since November 1999; Director of First Services, L.P. Bank since November 1999; President of First Services L.P. since November 1999; Vice President - Senior Group Manager of Information Systems, Mercantile Bank, St. Louis, Missouri from 1996 to November 1999; Group Manager of Information Systems, Mercantile Bank, from 1992 to 1996. Terrance M. McCarthy 46 Executive Vice President; Executive Mr. McCarthy has been employed in various Vice President of FBA; Chairman of executive capacities with First Banks, the Board of Directors, President Inc. since 1995. and Chief Executive Officer of FB&T. Michael F. McWhortor 46 Executive Vice President - Banking Executive Vice President - Banking Support. Support since March 2000; Senior Vice President and Manager of the Business Intelligence Group of Firstar Bank, N.A. in St. Louis, Missouri from September 1999 to March 2000; Senior Vice President and Manager of Retail Banking and Consumer Products of Mercantile Bancorporation, Inc. from 1998 to 1999; Vice President and Manager of Customer Information Management of Mercantile Bancorporation, Inc. from 1997 to 1998; Vice President and Regional Manager of the Western Region Credit Card Division of Bank One Corp. in Phoenix, Arizona from 1996 to 1997; and Chief Financial Officer of the Western Region Credit Card Division of Bank One Corp. from 1995 to 1996.
Frank H. Sanfilippo 38 Executive Vice President and Chief Executive Vice President and Chief Financial Officer; Executive Vice Financial Officer of First Banks, Inc. President and Chief Financial and FBA since September 1999; Director, Officer of FBA; Director, Executive Executive Vice President, Chief Financial Vice President and Secretary of Officer, Secretary and Treasurer of First First Bank; Trustee of First Bank since September 1999; Trustee of Preferred Capital Trust II. First Preferred Capital Trust II since September 2000; Senior Vice President and Director of Management Accounting of Mercantile Bancorporation, Inc., St. Louis, Missouri, from 1998 to September 1999; Vice President and Chief Financial Officer - Mercantile Bank Operations Division, from 1996 to 1997; Vice President and Assistant Comptroller of Mercantile Bank N.A. from 1994 to 1996. Mark T. Turkcan 45 Executive Vice President - Mortgage Mr. Turkcan has been employed in various Banking; Director and Executive executive capacities with First Banks Vice President of First Bank. since 1994.
Section 16(a) Beneficial Ownership Reporting Compliance To our knowledge, none of our directors, executive officers or shareholders, subject, in their capacity as such, to the reporting obligations set forth in Section 16 of the Securities Exchange Act of 1934, as amended, or 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, 2000. Item 11. Executive Compensation The following table sets forth certain information regarding compensation earned by the named executive officers for the years ended December 31, 2000, 1999 and 1998: SUMMARY COMPENSATION TABLE --------------------------
All Other Name and Principal Position(s) Year Salary Bonus Compensation (1) ------------------------------ ---- ------ ----- ---------------- James F. Dierberg 2000 $ 560,000 90,000 5,250 Chairman of the Board of Directors 1999 543,000 20,000 5,000 and Chief Executive Officer 1998 536,000 0 5,000 Allen H. Blake 2000 282,900 45,000 6,150 President and 1999 204,800 20,000 5,000 Chief Operating Officer 1998 157,300 40,000 5,000 Donald W. Williams 2000 241,250 40,000 6,450 Senior Executive Vice President 1999 208,750 36,600 5,000 and Chief Credit Officer 1998 181,900 40,000 5,000 Frank H. Sanfilippo 2000 139,200 83,500 3,700 Executive Vice President 1999 35,800 0 0 and Chief Financial Officer 1998 0 0 0 Terrance M. McCarthy 2000 180,000 25,000 6,650 Executive Vice President; 1999 147,500 20,000 4,950 Chairman of the Board of Directors, 1998 121,600 27,000 4,450 President and Chief Executive Officer of FB&T and BSF
- ----------------------- (1) All other compensation reported includes matching contributions to our 401(k) Plan for the year indicated and ownership interests granted in units of Star Lane Trust, our unit investment trust that was created on January 21, 2000. Employment Agreement. Messr. Williams is a party to an employment agreement with First Bank and us. The term of his contract is one year, and it is automatically renewable for additional one-year periods. As part of the annual renewal process, the base salary payable under the employment agreement is reviewed and may be adjusted at the discretion of our Board of Directors. The base salary paid to Messr. Williams pursuant to his employment agreement is set forth in the salary column of the Summary Compensation Table. Messr. Williams' employment contract provides for a bonus of up to twenty percent (20%) of his annual base salary, with the exact percentage to be determined by our Chairman of the Board if Messr. Williams meets the criteria set by First Bank and us at the beginning of each contract year. The annual bonus is payable within ninety (90) days after the close of the year to which it relates. In addition, Messr. Williams is entitled to participate in our 401(k) Plan, our health insurance plan and in other additional benefit plans that we may adopt for our employees. Under the terms of his employment contract, if Mr. Williams is terminated for a reason other than retirement, death, "disability" or for "cause," as those terms are defined in the employment agreement, or is terminated due to a change in our control, Mr. Williams will be entitled to receive two years' base salary. Should Mr. Williams voluntarily terminate his employment with First Bank and us, he would be entitled to receive the balance of his base salary for that year or a minimum of six months salary, provided that he would not 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 Mr. Williams, his employment agreement provides that his estate would be entitled to receive compensation that would have been payable to him 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 neither our employees nor employees of any of our subsidiaries receive remuneration for their services as directors. Such non-employee directors (currently Messrs. Douglas Yaeger and David Steward) receive a fee of $3,000 for each Board meeting attended and $1,000 for each Audit Committee meeting attended. The Audit Committee is currently the only committee of our Board of Directors. Messrs. Yaeger and Steward each received $4,000 in director's fees during 2000. Our Executive officers who are also directors do not receive remuneration other than salaries and bonuses for serving on our Board of Directors. Compensation Committee Interlocks and Insider Participation. Messrs. Dierberg and Blake, who are executive officers, are also members of the Board of Directors and executive officers of FBA. FBA does not have a compensation committee, but its Board of Directors performs the functions of such a committee. Except for the foregoing, none of our executive officers served during 2000 as a member of the compensation committee, or any other committee performing similar functions, or as a director of another entity, any of whose executive officers or directors served on our Board of Directors. During 2000, 1999 and 1998, Tidal Insurance Limited, or Tidal, a corporation owned indirectly by our Chairman and his adult children, received approximately $212,000, $316,000 and $280,000, respectively, in insurance premiums for accident, health and life insurance policies purchased by our loan customers. The insurance policies are issued by an unaffiliated company and subsequently ceded to Tidal. We believe the premiums paid by our loan customers are comparable to those that such loan customers would have paid if the premiums were subsequently ceded to an unaffiliated third-party insurer. During 2000, 1999 and 1998, First Securities America, Inc., or FSA, a trust established and administered by and for the benefit of our Chairman and members of his immediate family, received approximately $235,000, $194,000 and $265,000, respectively, in commissions and insurance premiums for policies purchased by us or by customers of our subsidiary banks from unaffiliated, third-party insurors to which First Banc Insurors placed such policies. The insurance premiums on which the aforementioned commissions were earned were competitively bid and we deem the commissions FSA earned from unaffiliated third-party companies to be comparable to those that would have been earned by an unaffiliated third-party agent. First Brokerage America, L.L.C., a limited liability corporation which is indirectly owned by our Chairman and members of his immediate family, received approximately $2.1 million, $2.3 million and $1.8 million for the years ended December 31, 2000, 1999 and 1998, respectively, in commissions paid by unaffiliated third-party companies. The commissions received were primarily in connection with the sales of annuities and securities and other insurance products to customers of our subsidiary banks. First Services, L.P., a limited partnership indirectly owned by our Chairman and his adult children, provides data processing services and operational support for our subsidiary banks and us. Fees paid under agreements with First Services, L.P. were $19.3 million, $16.4 million and $12.2 million for the years ended December 31, 2000, 1999 and 1998, respectively. During 2000, 1999 and 1998, First Services, L.P. paid us $1.8 million, $1.2 million and $799,000, respectively, in rental fees for the use of data processing and other equipment owned by us. The fees paid by us for data processing services are at least as favorable as could have been obtained from unaffiliated third parties. Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth, as of March 20, 2001, certain information with respect to the beneficial ownership of all classes of our voting capital stock by each person known to us to be the beneficial owner of more than five percent of the outstanding shares of the respective classes of our stock:
Percent of Number of Total Title of Class Shares Percent Voting and Name of Owner Owned of Class Power ----------------- ----- -------- ----- Common Stock ($250.00 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 Family Trust (1)....................................... 7,714.676(2) 32.605% * Michael J. Dierberg Irrevocable Trust (1)................................ 3,459.358(2) 14.621% * First Trust (Mary W. Dierberg and First Bank, Trustees) (1).............. 516.830(3) 2.184% * Class A Convertible Adjustable Rate Preferred Stock ($20.00 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% All executive officers and directors other than Mr. James F. Dierberg and members of his immediate family....................................... 0 0% 0.0%
- -------------------- * Represents less than 1.0%. (1) Each of the above-named trustees and beneficial owners are United States citizens, and the business address for each such individual is 135 North Meramec Avenue, Clayton, Missouri 63105. Mr. James F. Dierberg, our Chairman of the Board and Chief Executive Officer, and Mrs. Mary W. Dierberg, are husband and wife, and Messrs. James F. Dierberg II, Michael J. Dierberg and Mrs. Ellen D. Schepman, formerly Ms. Ellen C. Dierberg, are their adult children. (2) Due to the relationship between Mr. James F. Dierberg, his wife and their children, Mr. Dierberg is deemed to share voting and investment power over our 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, 2000 is 892, which shares are not included in the above table. (5) Sole voting and investment power. Item 13. Certain Relationships and Related Transactions Outside of normal customer relationships, no directors, executive officers or stockholders holding over 5% of our 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 our subsidiaries or us, other than that which arises by virtue of such position or ownership interest in our subsidiaries or us, except as set forth in Item 11 - "Executive Compensation - Compensation of Directors," or as described in the following paragraphs. Our subsidiary banks have had in the past, and may have in the future, loan transactions in the ordinary course of business with our directors or their affiliates. These loan transactions have been and will be on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unaffiliated persons and did not and will not involve more than the normal risk of collectibility or present other unfavorable features. Our subsidiary banks do not extend credit to our officers or to officers of our subsidiary banks, except extensions of credit secured by mortgages on personal residences, loans to purchase automobiles and personal credit card accounts. Certain of our directors and officers and their respective affiliates have deposit accounts with our subsidiary banks. It is the policy of our subsidiary banks not to permit any of their officers or directors or their affiliates to overdraw their respective deposit accounts unless that person has been previously approved for overdraft protection under a plan whereby a credit limit has been established in accordance with the standard credit criteria of our subsidiary banks. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Financial Statements and Supplementary Data - The financial statements and supplementary data filed as part of this Report are listed under Item 8. 2. Financial Statement Schedules - These schedules are omitted for the reason they are not required or are not applicable. 3. Exhibits - The exhibits are listed in the index of exhibits required by Item 601 of Regulation S-K at Item (c) below and are incorporated herein by reference. (b) Reports on Form 8-K. We filed no reports on Form 8-K during the quarter ended December 31, 2000. (c) The index of required exhibits is included beginning on page 18 of this Report. 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 and Chief Executive Officer (Principal Executive Officer) By: /s/ Frank H. Sanfilippo ------------------------------------------ Frank H. Sanfilippo Executive Vice President and Chief Financial Officer (Principal Financial Officer) By: /s/ Lisa K. Vansickle ------------------------------------------ Lisa K. Vansickle Senior Vice President and Controller (Principal Accounting Officer) Date: March 28, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signatures Title Date - ------------------------------------------------------------------------------- /s/ James F. Dierberg Director March 28, 2001 --------------------------- James F. Dierberg /s/ Allen H. Blake Director March 28, 2001 --------------------------- Allen H. Blake /s/ David L. Steward Director March 28, 2001 --------------------------- David L. Steward /s/ Douglas H. Yaeger Director March 28, 2001 --------------------------- Douglas H. Yaeger INDEX TO EXHIBITS Exhibit Number Description ------ ----------- 3.1 Restated Articles of Incorporation of the Company, as amended (incorporated herein by reference to Exhibit 3(i) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 3.2 Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 to Amendment No. 2 to the Company's Registration Registration Statement on Form S-1, File No. 33-50576, dated September 15, 1992). 4.1 Reference is made to Article III of the Company's Restated Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 4.2 The Company agrees to furnish to the Securities and Exchange Commission upon request pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of instruments defining the rights of holders of long term debt of the Company and its subsidiaries. 4.3 Agreement as to Expenses and Liabilities (relating to First Preferred Capital Trust I ("First Preferred I") (incorporated herein by reference to Exhibit 4(a) to the Company's Report on Form 10-Q for the quarter ended March 31, 1997). 4.4 Agreement as to Expenses and Liabilities dated October 19, 2000 (relating to First Preferred Capital Trust II ("First Preferred II") (filed as Exhibit 4.8 to the Company's Registration Statement on Form S-2, File No. 333-46270, dated September 20, 2000). 4.5 Preferred Securities Guarantee Agreement (relating to First Preferred I) (incorporated herein by reference to Exhibit 4(b) to the Company's Report on Form 10-Q for the quarter ended March 31, 1997). 4.6 Preferred Securities Guarantee Agreement by and between First Banks, Inc. and State Street Bank and Trust Company of Connecticut, National Association, dated October 19, 2000 (relating to First Preferred II) (filed as Exhibit 4.7 to the Company's Registration Statement on Form S-2, File No. 333-46270, dated September 20, 2000). 4.7 Indenture (relating to First Preferred I)(incorporated herein by reference to Exhibit 4(c) to the Company's Report on Form 10-Q for the quarter ended March 31, 1997). 4.8 Indenture between First Banks, Inc. and State Street Bank and Trust Company of Connecticut, National Association, as Trustee, dated October 19, 2000 (relating to First Preferred II) (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-2, File No. 333-46270, dated September 20, 2000). 4.9 Amended and Restated Trust Agreement (relating to First Preferred I) (incorporated herein by reference to Exhibit 4(d) to the Company's Report on Form 10-Q for the quarter ended March 31, 1997). 4.10 Amended and Restated Trust Agreement among First Banks, Inc., as Depositor, State Street Bank and Trust Company of Connecticut, National Association, as Property Trustee, Wilmington Trust Company, as Delaware Trustee, and the Administrative Trustees, dated October 19, 2000 (relating to First Preferred II) (filed as Exhibit 4.5 to the Company's Registration Statement on Form S-2, File No. 333-46270, dated September 20, 2000). 10.1 Shareholders' Agreement by and among James F. Dierberg, II and Mary W. Dierberg, Trustees under the 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 the 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). 10.3* 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 Annual Report on Form 10-K for the year ended December 31, 1993). 10.4 $120,000,000 Second Amended and Restated Secured Credit Agreement, dated as of August 24, 2000, among First Banks, Inc. and Firstar Bank, N.A., American National Bank and Trust Company of Chicago, Harris Trust and Savings Bank, Wells Fargo Bank Minnesota, N.A., the Frost National Bank, Union Bank of California, N.A., LaSalle Bank National Association and Firstar Bank, N.A., as Agent (incorporated herein by reference to Exhibit 10.6 to the Company's Registration cStatement on Form S-2, File No. 333-46270, dated September 20, 2000). 10.5 Stock Purchase and Operating Agreement by and between the Company and BancTEXAS Group, Inc., dated May 19, 1994 (incorporated herein by reference to Exhibit 2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994). 10.6* Service Agreement by and between First Services, L.P. and First Bank dated April 1, 1997 (incorporated herein by reference to Exhibit 10.8 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 10.7* Service Agreement by and between First Services, L.P. and First Bank & Trust dated April 1, 1997 (incorporated herein by reference to Exhibit 10.9 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 10.8* Management Services Agreement by and between First Banks, Inc. and Redwood Bank, dated June 1, 1999 (incorporated herein by reference to Exhibit 10.11 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999). 13.1 The Company's 2000 Annual Report to Shareholders filed herewith. Portions not specifically incorporated by reference in this Report are not deemed "filed" for purposes of the Securities Exchange Act of 1934 - filed herewith. 21.1 Subsidiaries of the Company - filed herewith. - ------------------------- * Exhibits designated by an asterisk in the Index to Exhibits relate to management contracts and/or compensatory plans or arrangements. EXHIBIT 13.1 FIRST BANKS, INC. 2000 ANNUAL REPORT TABLE OF CONTENTS
PAGE LETTER TO SHAREHOLDERS.............................................................................. 1 SELECTED CONSOLIDATED AND OTHER FINANCIAL DATA...................................................... 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................................................... 3 QUARTERLY CONDENSED FINANCIAL DATA - UNAUDITED...................................................... 31 FINANCIAL STATEMENTS: CONSOLIDATED BALANCE SHEETS.................................................................... 32 CONSOLIDATED STATEMENTS OF INCOME.............................................................. 34 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME................................................................ 35 CONSOLIDATED STATEMENTS OF CASH FLOWS.......................................................... 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................................................... 37 INDEPENDENT AUDITORS' REPORT........................................................................ 60 DIRECTORS AND SENIOR MANAGEMENT..................................................................... 61 INVESTOR INFORMATION................................................................................ 63
LETTER TO SHAREHOLDERS To Our Valued Investors, Customers and Friends: One of the tenets of our longevity has been our sound financial condition and operating results. Total assets increased over $1.01 billion during 2000, a 20.7% increase over the prior year. Net income reached a record $56.1 million, which was 27.0% higher than 1999 net income of $44.2 million. First Banks' practice continues to be one of not paying dividends on its common stock, so net income is retained and supports future growth. First Banks' equity is now over $352.8 million. Our asset quality remains outstanding, given the nature of our loan portfolio. While nonperforming loans were 1.12% of total loans at December 31, 2000, net loan charge-offs during the year represented only 17 basis points of average loans. Our allowance for loan losses covered 153.47% of our nonperforming loans at the end of the year. Our new tag line, "BANK FIRST. BE FIRST." reflects our dedication to serving our customers and our communities. With the continued rapid consolidation in the banking industry, consistent, high-quality service is becoming more difficult to find. But at family-owned First Banks, we have been providing this level of service since 1910 and will continue to do so in the future. We believe in knowing our customers well and doing what it takes for you to meet your financial objectives. We know that if you succeed, we succeed. At nearly $6 billion in assets, we are the largest family owned bank in America. This financial strength allows us to invest in technology and business lines to serve many customer needs. Development of our Internet technology continues to be one of our main priorities and enhanced functionality will be available to our customers this year. During 2000, our acquisition activities resulted in several new or complementary business lines including commercial equipment leasing, international letters of credit and import/export inventory financing, bankruptcy trustee deposit processing, institutional money management, stock option and non real estate escrow services. These additional services supplement our existing array of commercial lending and deposit product offerings. We listen to our customers and will pursue opportunities to acquire or develop internally the products you need to BE FIRST. Our primary strategic objective remains progressive and profitable growth through the continued development of our existing franchise, augmented by the acquisition of other financial institutions. In 2000, our growth was primarily driven by acquisitions. Total loans grew $755.9 million or 18.9% to $4.75 billion. While internal growth accounted for 7-8% of this growth, the rest came from our acquisitions of Lippo Bank, Commercial Bank of San Francisco, Millennium Bank and Bank of San Francisco, all headquartered in San Francisco, California. We also acquired Bank of Ventura, in Ventura, California and certain assets and liabilities of First Capital Group, Inc. in Albuquerque, New Mexico. To give our customers greater convenience as well as to achieve better utilization of our marketing and business development resources, we consolidated our California and Texas bank charters into one on October 31, 2000 and named the charter, First Bank & Trust. I am very proud of the progress First Banks has achieved and look forward to the future with confidence. We have over 2,000 employees and over 140 locations in five states to serve our customers. Our staff is trained to give our customers outstanding personal service, diversified product offerings and the necessary flexibility to meet your changing financial needs. In closing, I would like to express my sincere appreciation to our employees, customers and investors for your hard work and confidence in the Company. Your support enabled First Banks, Inc. to have an outstanding year! Sincerely, /s/James F. Dierberg - -------------------- Chairman of the Board and Chief Executive Officer SELECTED CONSOLIDATED AND OTHER FINANCIAL DATA (1) The selected consolidated financial data set forth below, insofar as they relate to the five years ended December 31, 2000, are derived from our consolidated financial statements, which have been audited by KPMG LLP. This information is qualified by reference to our consolidated financial statements included herein. This information should be read in conjunction with such consolidated financial statements, the related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
As of or for the year ended December 31, (1) ----------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (dollars expressed in thousands, except per share data) Income Statement Data: Interest income................................... $ 422,826 353,082 327,860 295,101 266,021 Interest expense.................................. 187,679 158,701 162,179 148,831 141,670 ---------- -------- -------- --------- --------- Net interest income............................... 235,147 194,381 165,681 146,270 124,351 Provision for loan losses......................... 14,127 13,073 9,000 11,300 11,494 ---------- -------- -------- --------- --------- Net interest income after provision for loan losses................................. 221,020 181,308 156,681 134,970 112,857 Noninterest income................................ 42,778 41,650 36,497 25,697 20,721 Noninterest expense............................... 171,163 150,807 138,704 110,287 105,741 ---------- -------- -------- --------- --------- Income before provision for income taxes and minority interest in income of subsidiaries..... 92,635 72,151 54,474 50,380 27,837 Provision for income taxes........................ 34,482 26,313 19,693 16,083 6,960 ---------- -------- -------- --------- --------- Income before minority interest in income of subsidiaries................................. 58,153 45,838 34,781 34,297 20,877 Minority interest in income of subsidiaries....... (2,046) (1,660) (1,271) (1,270) (659) ---------- -------- -------- --------- --------- Net income........................................ $ 56,107 44,178 33,510 33,027 20,218 ========== ======== ======== ========= ========= Dividends: Preferred stock................................... $ 786 786 786 5,067 5,728 Common stock...................................... -- -- -- -- -- Ratio of total dividends declared to net income... 1.40% 1.78% 2.35% 15.34% 28.33% Per Share Data: Earnings per common share: Basic........................................... $ ,338.04 1,833.91 1,383.04 1,181.69 612.46 Diluted......................................... 2,267.41 1,775.47 1,337.09 1,134.28 596.83 Weighted average common stock outstanding......... 23,661 23,661 23,661 23,661 23,661 Balance Sheet Data: Investment securities............................. $ 563,534 451,647 534,796 795,530 552,801 Loans, net of unearned discount................... 4,752,265 3,996,324 3,580,105 3,002,200 2,767,969 Total assets...................................... 5,876,691 4,867,747 4,554,810 4,165,014 3,689,154 Total deposits.................................... 5,012,415 4,251,814 3,939,985 3,684,595 3,238,567 Notes payable..................................... 83,000 64,000 50,048 55,144 76,330 Guaranteed preferred beneficial interests in First Banks, Inc. and First Banks America, Inc. subordinated debentures......................... 182,849 127,611 127,443 83,183 -- Common stockholders' equity....................... 339,783 281,842 250,300 218,474 184,439 Total stockholders' equity........................ 352,846 294,905 263,363 231,537 251,389 Earnings Ratios: Return on average total assets.................... 1.09% 0.95% 0.78% 0.87% 0.57% Return on average total stockholders' equity...... 17.43 15.79 13.64 12.91 8.43 Efficiency ratio (2).............................. 61.59 63.89 68.60 64.13 72.89 Net interest margin............................... 4.93 4.52 4.19 4.09 3.79 Asset Quality Ratios: Allowance for loan losses to loans................ 1.72 1.72 1.70 1.68 1.69 Nonperforming loans to loans (3).................. 1.12 0.99 1.22 0.80 1.09 Allowance for loan losses to nonperforming loans (3).......................... 153.47 172.66 140.04 209.88 154.55 Nonperforming assets to loans and other real estate (4)........................... 1.17 1.05 1.32 1.04 1.47 Net loan charge-offs to average loans............. 0.17 0.22 0.05 0.27 0.72 Capital Ratios: Average total stockholders' equity to average total assets......................... 6.25 6.00 5.73 6.70 6.79 Total risk-based capital ratio.................... 10.21 10.05 10.28 10.26 9.23 Leverage ratio.................................... 7.45 7.14 7.77 6.80 5.99
------------------------------ (1) The comparability of the selected data presented is affected by the acquisitions of 11 banks and five branch offices during the five-year period ended December 31, 2000. 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 respective date of acquisition. (2) Efficiency ratio is the ratio of noninterest expense to the sum of net interest income and noninterest income. (3) Nonperforming loans consist of nonaccrual loans and certain loans with restructured terms. (4) Nonperforming assets consist of nonperforming loans and other real estate. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 our financial condition, results of operations and business. These forward-looking statements are subject to certain risks and uncertainties, not all of which can be predicted or anticipated. Factors that may cause our actual results to differ materially from those contemplated by the forward-looking statements herein include market conditions as well as conditions affecting the banking industry generally and factors having a specific impact on us, including but not limited to fluctuations in interest rates and in the economy; the impact of laws and regulations applicable to us and changes therein; competitive conditions in the markets in which we conduct our operations, including competition from banking and non-banking companies with substantially greater resources, some of which may offer and develop products and services that we do not offer; our ability to control the composition of our loan portfolio without adversely affecting interest income; and our ability to respond to changes in technology. With regard to our 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 our offices, as compared with competitors operating solely in contiguous markets; the competition of larger acquirers with greater resources, fluctuations in the prices at which acquisition targets may be available for sale and in the market for our securities; and the potential for difficulty or unanticipated costs in realizing the benefits of particular acquisition transactions. Readers of our Annual Report should therefore not place undue reliance on forward-looking statements. Company Profile We are a registered bank holding company incorporated in Missouri and headquartered in St. Louis County, Missouri. Through the operation of our subsidiaries, we offer a broad array of financial services to consumer and commercial customers. Over the years, our organization has grown significantly, primarily as a result of our acquisition strategy, as well as through internal growth. We currently operate banking subsidiaries in California, Illinois, Missouri and Texas. At December 31, 2000, we had total assets of $5.88 billion, loans, net of unearned discount, of $4.75 billion, total deposits of $5.01 billion and total stockholders' equity of $352.8 million. We operate through three subsidiary banks, two subsidiary bank holding companies, and through our subsidiary leasing company, as follows: First Bank, headquartered in St. Louis County, Missouri; First Capital Group, Inc., or FCG, headquartered in Albuquerque, New Mexico; First Banks America, Inc, or FBA, headquartered in St. Louis County, Missouri, and its wholly owned subsidiaries: First Bank & Trust, or FB&T, headquartered in San Francisco, California; The San Francisco Company, or SFC, headquartered in San Francisco, California, and its wholly owned subsidiary: Bank of San Francisco, or BSF, headquartered in San Francisco, California. Our subsidiary banks and FCG are wholly owned by their respective parent companies. We owned 92.86% of FBA at December 31, 2000. On October 31, 2000, our former wholly owned subsidiary bank, First Bank & Trust, was acquired by FBA through an exchange of 6,530,769 shares of FBA common stock for all of the issued and outstanding shares of common stock of First Bank & Trust that we held. As a result of this transaction, our ownership percentage of FBA's issued and outstanding voting stock increased from 84.42% to approximately 92.82%. Through our subsidiary banks, we offer a broad range of commercial and personal deposit products, including demand, savings, money market and time deposit accounts. In addition, we market combined basic services for various customer groups, including packaged accounts for more affluent customers, and sweep accounts, lock-box deposits and cash management products for commercial customers. We also offer both consumer and commercial loans. Consumer lending includes residential real estate, home equity and installment lending. Commercial lending includes commercial, financial and agricultural loans, real estate construction and development loans, commercial real estate loans, asset-based loans, commercial leasing and trade financing. Other financial services include mortgage banking, credit and debit cards, brokerage services, credit-related insurance, automated teller machines, telephone banking, safe deposit boxes and trust, private banking and institutional money management services. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Primary responsibility for managing our subsidiary banking units rests with the officers and directors of each unit. However, in keeping with our policy, we centralize overall corporate policies, procedures and administrative functions and provide operational support functions for our subsidiaries. This practice allows us to achieve various operating efficiencies while allowing our subsidiary banking units to focus on customer service. The following table summarizes selected data about our subsidiaries at December 31, 2000:
Loans, net of Number of Total unearned Total Name locations assets discount deposits ---- --------- ------ -------- -------- (dollars expressed in thousands) First Bank...................................... 86 $ 3,152,885 2,694,004 2,729,489 FCG (1)......................................... 1 153 -- -- FBA: FB&T........................................ 52 2,516,993 1,943,013 2,168,742 SFC: BSF.................................... 1 216,552 115,615 137,727
------------------------------------ (1) FCG was purchased on February 29, 2000. As of December 31, 2000, there were approximately $124.1 million of commercial leases. The commercial leases are recorded as assets of our subsidiary banks. Various trusts, which were created by and are administered by and for the benefit of Mr. James F. Dierberg, our Chairman of the Board and Chief Executive Officer, and members of his immediate family, own all of our voting stock. Mr. Dierberg and his family, therefore, control our management, policies and the election of our directors. As more fully described in Note 9 to our accompanying consolidated financial statements, in February 1997, our initial financing subsidiary, First Preferred Capital Trust, issued $86.25 million of 9.25% trust preferred securities. In addition, in July 1998, FBA's financing subsidiary, First America Capital Trust, issued $46.0 million of 8.50% trust preferred securities. On October 19, 2000, our second financing subsidiary, First Preferred Capital Trust II, issued $57.5 million of 10.24% trust preferred securities. Each of these financing subsidiaries operates as a Delaware statutory business trust. The trust preferred securities issued by our financing subsidiaries are publicly held and traded in the Nasdaq National Market. The trust preferred securities issued by FBA's financing subsidiary are publicly held and traded on the New York Stock Exchange. These trust preferred securities have no voting rights except in certain limited circumstances. We pay distributions on these trust preferred securities quarterly in arrears on March 31, June 30, September 30 and December 31 of each year. General In the development of our banking franchise, we emphasize acquiring other financial institutions as one means of achieving our growth objectives. Acquisitions may serve to enhance our presence in a given market, to expand the extent of our market area or to enable us to enter new or noncontiguous markets. However, by using cash in our acquisitions, the characteristics of the acquisition arena may, at times, place us at a competitive disadvantage relative to other acquirers offering stock transactions. This results from 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, our acquisition activities appear somewhat sporadic because we consummate multiple transactions in a particular period, followed by substantially less active acquisition periods. Furthermore, the intangible assets recorded in conjunction with these 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, we follow certain patterns in our acquisitions. First, we typically acquire several smaller institutions, sometimes over an extended period of time, rather than a single larger one. We attribute this to the constraints imposed by the amount of funds required for a larger transaction, as well as the opportunity to minimize the aggregate premium required through smaller individual transactions. Secondly, in some acquisitions, we may acquire institutions having significant asset-quality problems, and we seek to address the risks of this approach through pricing and other means. This diminishes their attractiveness to other potential acquirers, and therefore reduces the amount of acquisition premium required. Finally, we may pursue our acquisition strategy in other geographic areas, or pursue internal growth more aggressively because cash transactions are not economically viable in extremely competitive acquisition markets. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED) During the five years ended December 31, 2000, we have primarily concentrated our acquisitions in California, completing 11 acquisitions of banks and five purchases of branch offices, which provided us with an aggregate of $1.41 billion in total assets and 32 banking locations as of the dates of acquisition. In addition, on February 29, 2000, we completed our purchase of certain assets and liabilities of First Capital Group, Inc., a multi-state commercial leasing business headquartered in Albuquerque, New Mexico. These acquisitions have allowed us to significantly expand our presence throughout the state of California, improve operational efficiencies, convey a more consistent image and quality of service and more cohesively market and deliver our products and services. Management continues to meld the acquired entities into our operations, systems and culture. Some of the acquired institutions exhibited elements of financial distress prior to their acquisitions, which contributed to marginal earnings performance. Generally, these elements were the result of asset quality problems and/or high noninterest expenses. Following our acquisitions, various tasks are necessary to effectively integrate the acquired entities into our business systems and culture. While the activities required are specifically dependent upon the individual circumstances surrounding each acquisition, during the five years ended December 31, 2000, the majority of our efforts have been concentrated in various areas including, but not limited to: >> improving asset quality, which was primarily associate with the acquisitions completed in 1996, 1997 and 1998; >> reducing unnecessary and/or excessive expenses; >> maintaining, repairing and, in some cases, refurbishing bank premises necessitated by the deferral of such projects by the acquired entities; >> renegotiating long-term leases which provide space in excess of that necessary for banking activities and/or rates in excess of current market rates, or subleasing excess space to third parties; >> relocating branch offices which are not adequate, conducive or convenient for banking operations; and >> managing lawsuits that existed with respect to acquired entities to minimize the overall costs of negotiation, settlement or litigation. The post-acquisition process also required the combining of separate and distinct entities together to form a cohesive organization with common objectives and focus. We invested significant resources to reorganize staff, recruit personnel where needed, and establish the direction and focus necessary for the combined entity to take advantage of the opportunities available to it. This investment contributed to the increases in noninterest expense during the five years ended December 31, 2000, and resulted in the creation of new banking entities, which conveyed a more consistent image and quality of service. The new banking entities provide a broad array of banking 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 modifications did not contribute to reductions of noninterest expense, they contributed to the commercial and retail business development efforts of the banks, and ultimately to their overall profile to improve future profitability. In conjunction with our acquisition strategy, we were also building the infrastructure necessary to accomplish our objectives for internal growth. This process, which began in 1993, required significant increases in the resources dedicated to commercial and retail business development, financial service product line and delivery systems, branch development and training, advertising and marketing programs and administrative and operational support. In addition, during 1999, we began an internal restructuring process designed to better position us for future growth and opportunities expected to become available as consolidation and changes continue in the delivery of financial services. The magnitude of this project was extensive and covered almost every area of our organization. Although these efforts have primarily led to increased capital expenditures and noninterest expenses in the short-term, we anticipate they will lead to more effective internal growth, more efficient operations and improved profitability over the long term. Our enhanced business development resources assisted in the realignment of certain acquired loan portfolios, which were skewed toward loan types that reflected the abilities and experiences of the management of the acquired entities. In order to achieve a more diversified portfolio, to address asset-quality issues in our portfolios and to achieve a higher interest yield on our loan portfolio, we reduced a substantial portion of the loans which were acquired during this time through payments, refinancing with other financial institutions, charge-offs, and, in two instances, sales of loans. As a result, the portfolio of one-to-four family residential real estate loans, after reaching a maximum of $1.20 billion at December 31, 1995, was reduced over the MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) past four years from $1.06 billion at December 31, 1996 to $726.5 million at December 31, 2000. Similarly, our portfolio of consumer and installment loans, net of unearned discount, decreased 47.7% from $333.3 million at December 31, 1996 to $174.3 million at December 31, 2000. As these components of our loan portfolio decreased, we replaced them with more diversified and higher yielding loans that were internally generated by our business development function. With our acquisitions, we expanded our business development function into the new market areas in which we were then operating. Consequently, in spite of relatively large reductions in acquired portfolios, our aggregate loan portfolio, net of unearned discount, increased from $2.77 billion at December 31, 1996 to $3.00 billion, $3.58 billion, $4.00 billion and $4.75 billion at December 31, 1997, 1998, 1999 and 2000, respectively. Our expanded level of commercial lending carries with it greater credit risk which, although managed through loan policies and procedures, underwriting and credit administration, must be recognized through adequate allowances for loan losses. We associate the increased level of commercial lending activities with the increase of $13.4 million in nonperforming loans as of December 31, 2000, compared to December 31, 1999. However, this increase primarily results from a small number of credit relationships that were placed on nonaccrual during the year ended December 31, 2000, reflecting problems that are specific to these relationships. In addition to restructuring our loan portfolio, we also have changed the composition of our deposit base. The majority of our recent 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 to them through packaging various account types and offering incentives to deposit customers on other deposit or non-deposit services. In addition, commercial borrowers are encouraged to maintain their operating deposit accounts with us. At December 31, 1996, total time deposits were $1.81 billion, or 55.9% of total deposits. Although time deposits have continued to increase to $2.31 billion at December 31, 2000, this represented only 46.0% of total deposits. The simultaneous growth by acquisition of financial institutions and the building of the infrastructure necessary to achieve significant internal growth has adversely impacted our operating results. However, despite the significant expenses we incurred in the amalgamation of the acquired entities into our corporate culture and systems, and in the expansion of our organizational capabilities, the earnings of the acquired entities and the improved net interest income resulting from the transition in the composition of our loan and deposit portfolios have contributed to improving net income during 2000 and 1999. For the years ended December 31, 2000 and 1999, net income was $56.1 million and $44.2 million, respectively, compared with $33.5 million, $33.0 million and $20.2 million in 1998, 1997 and 1996, respectively. While we anticipate certain short-term adverse effects on our operating results associated with acquisitions, we believe the long-term benefits of our acquisition program will exceed the short-term issues encountered with some acquisitions. As such, in addition to concentrating on internal growth through continued efforts to further develop our corporate infrastructure and product and service offerings, we expect to continue to identify and pursue opportunities for growth through acquisitions. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Acquisitions To enhance our banking franchise, we emphasize acquiring other financial institutions as a means of accelerating our growth, in order to significantly expand our presence in a given market, to increase the extent of our market area or to enter new or noncontiguous market areas. After we consummate an acquisition, we expect to enhance the franchise of the acquired entity by supplementing the marketing and business development efforts to broaden the customer bases, strengthening particular segments of the business or filling voids in the overall market coverage. We have utilized cash, borrowings, FBA's voting stock and the issuance of additional securities to meet our growth objectives under our acquisition program. During the three years ended December 31, 2000, we completed nine acquisitions of banks and two branch office purchases. As demonstrated below, our acquisitions during the three years ended December 31, 2000 have primarily served to increase our presence in markets that we originally entered into during 1995. These transactions, as more fully described in Note 2 to our accompanying consolidated financial statements, are summarized as follows:
Number Loans, net of of Total unearned Investment banking Entity Date assets discount securities Deposits locations ------ ---- ------ -------- ---------- -------- --------- (dollars expressed in thousands) 2000 - ---- The San Francisco Company San Francisco, California December 31, 2000 $183,800 115,700 38,300 137,700 1 Millennium Bank San Francisco, California (1) December 29, 2000 117,000 81,700 21,100 104,200 2 Commercial Bank of San Francisco San Francisco, California (1) October 31, 2000 155,600 97,700 45,500 109,400 1 Bank of Ventura Ventura, California (2) August 31, 2000 63,800 39,400 15,500 57,300 1 First Capital Group, Inc. Albuquerque, New Mexico February 29, 2000 64,600 64,600 -- -- 1 Lippo Bank San Francisco, California (3) February 29, 2000 85,300 40,900 37,400 76,400 3 -------- -------- -------- -------- ---- $670,100 440,000 157,800 485,000 9 ======== ======== ======== ======== ==== 1999 - ---- Brentwood Bank of California Malibu, California branch office (4) September 17, 1999 $ 23,600 6,300 -- 17,300 1 Century Bank Beverly Hills, California (2) August 31, 1999 156,000 94,800 26,100 132,000 6 Redwood Bancorp San Francisco, California (5) March 4, 1999 183,900 134,400 34,400 162,900 4 -------- -------- -------- -------- ---- $363,500 235,500 60,500 312,200 11 ======== ======== ======== ======== ====
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Number Loans, net of of Total unearned Investment banking Entity Date assets discount securities Deposits locations ------ ---- ------ -------- ---------- -------- --------- (dollars expressed in thousands) 1998 - ---- Republic Bank Torrance, California (2) September 15, 1998 $124,100 97,900 7,500 117,200 3 Bank of America Solvang, California branch office (4) March 19, 1998 15,500 -- -- 15,500 1 Pacific Bay Bank San Pablo, California (3) February 2, 1998 38,300 29,700 232 35,200 1 -------- -------- ------- -------- ---- $177,900 127,600 7,732 167,900 5 ======== ======== ======= ======== ====
- ------------------------- (1) Millennium Bank and Commercial Bank of San Francisco were merged into our existing subsidiary bank, FB&T. (2) Bank of Ventura, Century Bank and Republic Bank were merged into our former subsidiary, First Bank & Trust. On October 31, 2000, First Bank & Trust and two of our former wholly owned subsidiary banks, First Bank of California and First Bank Texas N.A., were merged with and into Redwood Bank, our other wholly owned subsidiary bank, which was renamed FB&T. (3) Lippo Bank and Pacific Bay Bank were merged with and into our former subsidiary bank, First Bank of California. (4) The Malibu branch office of Brentwood Bank of California and the Solvang branch office of Bank of America were acquired by the former First Bank & Trust through a purchase of certain assets and assumption of deposit liabilities of the branch office. Total assets consist primarily of cash received upon assumption of the deposit liabilities and selected loans. (5) Redwood Bancorp was merged with and into its wholly owned subsidiary, the former Redwood Bank. We funded these acquisitions from available cash reserves, proceeds from the sales and maturities of available-for-sale investment securities, borrowings under our $120.0 million revolving credit line with a group of unaffiliated banks and the proceeds of the issuance of trust preferred securities by our financing subsidiaries. Financial Condition and Average Balances Our average total assets were $5.15 billion for the year ended December 31, 2000, compared to $4.66 billion and $4.29 billion for the years ended December 31, 1999 and 1998, respectively. We attribute the increase of $491.5 million in total average assets for 2000 primarily to our acquisitions completed during 2000, which provided total assets of $670.1 million, and internal loan growth resulting from the continued expansion and development of our business development staff. The acquisitions of Millennium Bank and The San Francisco Company were completed on December 29, 2000 and December 31, 2000, respectively, and therefore did not have a significant impact on our average total assets for the year ended December 31, 2000. These acquisitions alone provided $300.8 million, or 61.2%, of the assets we acquired in 2000. Similarly, we attribute the increase of $377.6 million in total average assets for 1999 primarily to: >> our acquisitions of Redwood Bancorp and Century Bank, which provided total assets of $183.9 million and $156.0 million, respectively; >> our purchase of the deposit accounts of the Malibu, California banking location of Brentwood Bank of California; >> internal loan growth; and >> the issuance of trust preferred securities in July 1998 by FBA's financing subsidiary, First America Capital Trust. The increase in assets for 2000 was primarily funded by an increase in total average deposits of $412.0 million to $4.48 billion for the year ended December 31, 2000, a decrease in average investment securities of $22.5 million to $431.9 million for the year ended December 31, 2000, and an increase of $18.7 million in average short-term borrowings to $106.1 million for the year ended December 31, 2000. We utilized the majority of the funds generated from our deposit growth to fund a portion of our loan growth, and the remaining funds MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) were temporarily invested in federal funds sold, resulting in an increase in average federal funds sold of $15.0 million to $64.5 million for the year ended December 31, 2000. Similarly, we funded the increase in assets for 1999 by an increase in total average deposits of $283.3 million to $4.06 billion for the year ended December 31, 1999, an increase in average short-term borrowings of $26.2 million and a decrease in average investment securities of $221.3 million during 1999. Loans, net of unearned discount, averaged $4.29 billion, $3.81 billion and $3.25 billion for the years ended December 31, 2000, 1999 and 1998, respectively. As summarized under "--Acquisitions," the acquisitions we completed during 1999 and 2000 provided loans, net of unearned discount, of $235.5 million and $440.0 million, respectively. In addition to the growth provided by these acquisitions, for 2000, $360.4 million of net loan growth was provided by corporate banking business development, consisting of increases of $192.9 million of commercial, financial and agricultural loans and $175.9 million of commercial real estate loans, offset by a decrease of $8.4 million of real estate construction and land development loans. These overall increases were partially offset by continuing reductions in consumer and installment loans, net of unearned discount, which consist primarily of indirect automobile loans, of $64.6 million. While residential real estate loans have continued to decline throughout the past three years, these loans increased slightly in 2000 by $20.1 million, primarily as a result of significant volume experienced during the fourth quarter associated with refinancing activity. These changes result from the focus we have placed on our business development efforts and the portfolio repositioning which we began in 1995. This repositioning provided for substantially all of our conforming residential mortgage loan production to be sold in the secondary mortgage market and the origination of indirect automobile loans to be substantially reduced. Investment securities averaged $431.9 million, $454.4 million and $675.7 million for the years ended December 31, 2000, 1999 and 1998, respectively, reflecting decreases of $22.5 million and $221.3 million for the years ended December 31, 2000 and 1999, respectively. We attribute these decreases primarily to the liquidation of certain acquired investment securities and to sales of investment securities available for sale necessary to provide an additional source of funds for our loan growth. The investment securities that we obtained in conjunction with our acquisitions during 1999 and 2000 and that we retained in our portfolio partially offset the decreases. We use deposits as our primary funding source and acquire them from a broad base of local markets, including both individual and corporate customers. Deposits averaged $4.48 billion, $4.06 billion and $3.78 billion for the years ended December 31, 2000, 1999 and 1998, respectively. We credit the increases primarily to our acquisitions completed during the respective periods and the expansion of our deposit product and service offerings available to our customer base. The overall increase was partially offset by the divestiture of certain branches in 1999 and 2000, which resulted in a reduction in First Bank's deposit base of approximately $54.8 million and $8.8 million, respectively. During July 1998, First America Capital Trust issued $46.0 million of 8.50% trust preferred securities. Proceeds from this offering, net of underwriting fees and offering expenses, were approximately $44.0 million and were used to reduce borrowings, to support possible repurchases of our common stock from time to time and for general corporate purposes. We temporarily invested the remaining proceeds in interest-bearing deposits and subsequently used them to fund our acquisition of Redwood Bancorp completed in March 1999. Distributions payable on the trust preferred securities were $3.9 million, $4.0 million and $1.8 million for the years ended December 31, 2000, 1999 and 1998, respectively, and are recorded as noninterest expense in our accompanying consolidated financial statements. During October 2000, First Preferred Capital Trust II issued $57.5 million of 10.24% trust preferred securities. Proceeds from this offering, net of underwriting fees and offering expenses, were approximately $55.1 million and were used to reduce borrowings. Distributions payable on the trust preferred securities were $1.2 million for the year ended December 31, 2000 and are recorded as noninterest expense in our accompanying consolidated financial statements. Stockholders' equity averaged $321.9 million, $279.8 million and $245.6 million for the years ended December 31, 2000, 1999 and 1998, respectively. We associate the increase for 2000 primarily to net income of $56.1 million and a $3.7 million increase in accumulated other comprehensive income, resulting from the change in unrealized gains and losses on available-for-sale investment securities. The increase was partially offset by FBA's stock repurchases during 2000 and dividends paid on our Class A and Class B preferred stock. We associate the increase for 1999 primarily to net income of $44.2 million and a reduction of the deferred tax asset valuation reserve of $811,000 relating to the utilization of tax net operating losses incurred by certain subsidiary banks prior to completing quasi-reorganizations. The increase was partially offset by a $9.4 million reduction in other comprehensive income, resulting from the change in unrealized gains and losses on available-for-sale investment securities, FBA's stock repurchases during 1999 and dividends paid on our Class A and Class B preferred stock. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The following table sets forth, on a tax-equivalent basis, certain information relating to our 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.
Years Ended December 31, ------------------------------------------------------------------------------------ 2000 1999 1998 ----------------------------- ------------------------ ----------------------- Interest Interest Interest Average income/ Yield/ Average income/ Yield/ Average income/ Yield/ balance expense rate balance expense rate balance expense rate (dollars expressed in thousands) ASSETS ------ Interest-earning assets: Loans: (1) (2) (3) Taxable........................ $4,281,290 389,687 9.10% $3,805,351 322,703 8.48% $3,243,183 283,661 8.75% Tax-exempt (4)................. 9,668 992 10.26 7,157 775 10.83 7,536 794 10.54 Investment securities: Taxable........................ 412,932 27,331 6.62 435,189 26,206 6.02 657,385 39,898 6.07 Tax-exempt (4)................. 18,996 1,478 7.78 19,247 1,442 7.49 18,318 1,515 8.27 Federal funds sold................ 64,465 4,004 6.21 49,464 2,617 5.29 46,509 2,630 5.65 Other............................. 3,033 198 6.53 1,878 115 6.12 2,853 170 5.96 ---------- ------- ---------- ------- ---------- ------- Total interest- earning assets.............. 4,790,384 423,690 8.84 4,318,286 353,858 8.19 3,975,784 328,668 8.27 ------- ------- ------- Nonearning assets..................... 364,333 344,942 309,811 ---------- ---------- ---------- Total assets................. $5,154,717 $4,663,228 $4,285,595 ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY -------------------- Interest-bearing liabilities: Interest-bearing deposits: Interest-bearing demand deposits............... $ 421,986 5,909 1.40% $ 391,892 5,098 1.30% $ 357,463 5,135 1.44% Savings deposits............... 1,279,378 51,656 4.04 1,220,425 44,101 3.61 1,076,524 42,591 3.96 Time deposits (3).............. 2,139,305 120,257 5.62 1,899,218 101,653 5.35 1,882,329 108,019 5.74 --------- ------- ---------- ------- ---------- ------- Total interest- bearing deposits........... 3,840,669 177,822 4.63 3,511,535 150,852 4.30 3,316,316 155,745 4.70 Short-term borrowings (3)......... 106,123 5,881 5.54 87,374 4,220 4.83 61,178 2,959 4.84 Notes payable and other........... 51,897 3,976 7.66 56,376 3,629 6.44 50,718 3,475 6.85 ---------- ------- ---------- ------- ---------- ------- Total interest- bearing liabilities........ 3,998,689 187,679 4.69 3,655,285 158,701 4.34 3,428,212 162,179 4.73 ------- ------- ------- Noninterest-bearing liabilities: Demand deposits................... 634,886 552,029 463,939 Other liabilities................. 199,215 176,102 147,849 ---------- ---------- ---------- Total liabilities............ 4,832,790 4,383,416 4,040,000 Stockholders' equity.................. 321,927 279,812 245,595 ---------- ---------- ---------- Total liabilities and stockholders' equity........ $5,154,717 $4,663,228 $4,285,595 ========== ========== ========== Net interest income................... 236,011 195,157 166,489 ======= ======= ======= Interest rate spread.................. 4.15 3.85 3.54 Net interest margin................... 4.93% 4.52% 4.19% ===== ===== =====
- -------------------------------- (1) For purposes of these computations, nonaccrual loans are included in the average loan amounts. (2) Interest income on loans includes loan fees. (3) Includes the effects of interest rate exchange agreements. (4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustments were approximately $864,000, $776,000 and $808,000 for the years ended December 31, 2000, 1999 and 1998, respectively. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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, 2000 compared December 31, 1999 compared to December 31, 1999 to December 31, 1998 ------------------------------- ------------------------------ Net Net Volume Rate Change Volume Rate Change ------ ---- ------ ------ ---- ------ (dollars expressed in thousands) Interest earned on: Loans: (1) (2) (3) Taxable........................... $ 42,273 24,711 66,984 48,009 (8,967) 39,042 Tax-exempt (4).................... 260 (43) 217 (41) 22 (19) Investment securities: Taxable........................... (1,389) 2,514 1,125 (13,366) (326) (13,692) Tax-exempt (4).................... (19) 55 36 74 (147) (73) Federal funds sold................... 881 506 1,387 161 (174) (13) Other................................ 75 8 83 (59) 4 (55) -------- ------ ------ ------- ------- ------- Total interest income......... 42,081 27,751 69,832 34,778 (9,588) 25,190 -------- ------ ------ ------- ------- ------- Interest paid on: Interest-bearing demand deposits..... 405 406 811 480 (517) (37) Savings deposits..................... 2,180 5,375 7,555 5,445 (3,935) 1,510 Time deposits (3) ................... 13,296 5,308 18,604 970 (7,336) (6,366) Short-term borrowings (3)............ 986 675 1,661 1,267 (6) 1,261 Notes payable and other.............. (304) 651 347 371 (217) 154 -------- ------ ------ ------- ------- ------- Total interest expense........ 16,563 12,415 28,978 8,533 (12,011) (3,478) -------- ------ ------ ------- ------- ------- Net interest income........... $ 25,518 15,336 40,854 26,245 2,423 28,668 ======== ====== ====== ======= ======= =======
- ----------------------------- (1) For purposes of these computations, nonaccrual loans are included in the average loan amounts. (2) Interest income on loans includes loan fees. (3) Includes the effect of interest rate exchange agreements. (4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%. Net Interest Income The primary source of our income is net interest income, which is the difference between the interest earned on our interest-earning assets and the interest paid on our interest-bearing liabilities. Net interest income (expressed on a tax-equivalent basis) improved to $236.0 million, or 4.93% of average interest-earning assets, for the year ended December 31, 2000, from $195.2 million, or 4.52% of interest-earning assets, and $166.5 million, or 4.19% of interest-earning assets, for the years ended December 31, 1999 and 1998, respectively. We credit the improved net interest income primarily to the net interest-earning assets provided by our acquisitions, internal loan growth and increases in the prime lending rate which resulted in increased yields on interest-earning assets. During 2000, the cost of interest-bearing liabilities increased with prevailing interest rates. However, since this increase was less dramatic than the increase in earnings on interest-earning assets, it contributed to an improvement in net interest margins. Average total loans, net of unearned discount, increased by $480.0 million to $4.29 billion for the year ended December 31, 2000, from $3.81 billion and $3.25 billion for the years ended December 31, 1999 and 1998, respectively. During the period from June 30, 1999 through December 31, 2000, the Board of Governors of the Federal Reserve System increased the discount rate several times, resulting in six increases in the prime rate of interest from 7.75% to 9.50%, respectively. This is reflected not only in the rate of interest earned on loans that are indexed to the prime rate, but also in other assets and liabilities which either have variable or adjustable rates, or which matured or repriced during this period. The yield on our loan portfolio increased to 9.10% for the year ended December 31, 2000, from 8.48% for the year ended December 31, 1999, principally as the result of an increase in prevailing interest rates. However, the improved yield on our loan portfolio was partially offset by the expense associated with our interest rate swap agreements that we entered into in conjunction with our risk management program. Although our net interest margin has continued to improve over the last three years, the yield on our loan portfolio declined to 8.48% for the year ended December 31, 1999, in comparison to 8.75% for the year MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) ended December 31, 1998. This reduction primarily resulted from the overall decline in prevailing interest rates that occurred during the fourth quarter of 1998. In addition, increased competition within our market areas led to reduced lending rates. The effect of the reduced yield on our loan portfolio was partially mitigated in 1999 by the earnings impact of our interest rate swap agreements as well as: >> the reduction of First Bank's deposit base associated with the divested branches, which was primarily concentrated in certificates of deposit; and >> a decrease in the cost of interest-bearing liabilities to 4.34% from 4.73% for the years ended December 31, 1999 and 1998, respectively. For the years ended December 31, 2000, 1999 and 1998, the aggregate weighted average rate paid on our interest-bearing deposit portfolio was 4.63%, 4.30% and 4.70%, respectively. The increase for 2000 reflects increased rates that we paid to provide a funding source for continued loan growth, whereas the decrease for 1999 primarily reflects our ongoing realignment of the deposit portfolio and the reduction of First Bank's deposit base. The reduced rates paid on our deposit portfolio in 1999 were partially offset by increased expense associated with our interest rate swap agreements. As further discussed under "--Interest Rate Risk," for 1999 and 1998, the increased expense associated with our derivative financial instruments resulted from the liquidation of a portion of the underlying interest-bearing liabilities. This reduction in interest-bearing liabilities, primarily associated with our branch divestitures, resulted in the recognition of a portion of the related deferred losses on our previously terminated interest rate swap agreements. The aggregate weighted average rate on the amounts outstanding under our revolving credit line increased to 7.66% for the year ended December 31, 2000, from 6.44% and 6.85% for the years ended December 31, 1999 and 1998, respectively, reflecting an increase in market interest rates. Amounts outstanding under our $120.0 million revolving line of credit with a group of unaffiliated banks bear interest at the lead bank's corporate base rate or, at our option, at the Eurodollar rate plus a margin determined by the outstanding balance and our profitability. Thus, the revolving credit line represents a relatively high-cost funding source, so that increased advances under the revolving credit line have the effect of increasing our weighted average rate of non-deposit liabilities. Interest Rate Risk Management For financial institutions, the maintenance of a satisfactory level of net interest income is a primary factor in achieving acceptable income levels. However, the maturity and repricing characteristics of the institution's loan and investment portfolios, relative to those within its deposit structure, may differ significantly. The nature of the loan and deposit markets within which such institution operates, and its objectives for business development within those markets at any point in time influence these characteristics. 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 direction 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, managing a financial institution requires establishing effective control of the exposure of the institution to changes in interest rates. We manage our interest rate risk by: >> maintaining an Asset Liability Committee, or ALCO, responsible to our Board of Directors, to review the overall interest rate risk management activity and approve actions taken to reduce risk; >> maintaining an effective simulation model to determine our exposure to changes in interest rates; >> coordinating the lending, investing and deposit-generating functions to control the assumption of interest rate risk; and >> employing various off-balance-sheet financial instruments, including derivatives, to offset inherent interest rate risk when it becomes excessive. The objective of these procedures is to limit the adverse impact that changes in interest rates may have on our net interest income. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The ALCO has overall responsibility for the effective management of interest rate risk and the approval of policy guidelines. The ALCO includes our Chairman, Chief Executive Officer and President as well as the senior executives of investments, credit, banking support and finance, and certain other officers. The Asset Liability Management Group, which monitors interest rate risk, supports the ALCO, prepares analyses for review by the ALCO and implements actions which are either specifically directed by the ALCO or established by policy guidelines. In interest sensitivity management, we strive to optimize earnings results, while managing interest rate risk within internal policy constraints. Regarding rate sensitivity, our policy 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, we calculate our net income over two one-year horizons on a pro forma basis. The analysis assumes various scenarios for increases and decreases in interest rates including both instantaneous and gradual, and parallel and non-parallel shifts in the yield curve, in varying amounts. For purposes of arriving at reasonably possible near-term changes in interest rates, we include scenarios based on actual changes in interest rates, which have occurred over a two-year period, simulating both a declining and rising interest rate scenario. We are "asset-sensitive," and our simulation model indicates a loss of projected net income should interest rates decline. While a decline in interest rates of less than 100 basis points has a relatively minimal impact on our net interest income, a decline in interest rates of 100 basis points indicates a projected pre-tax loss of approximately 5.2% of net interest income, and a decline in interest rates of 200 basis points indicates a pre-tax projected loss of approximately 7.1% of net interest income, based on assets and liabilities at December 31, 2000. We utilize off-balance-sheet derivative financial instruments to assist in our management of interest rate sensitivity and to modify the repricing, maturity and option characteristics of on-balance-sheet assets and liabilities. We limit the use of such derivative financial instruments to reducing our interest rate exposure. As more fully described in Note 12 to our consolidated financial statements, the derivative financial instruments we hold, for purposes of managing interest rate risk, are summarized as follows:
December 31, ------------------------------------------------------ 2000 1999 -------------------------- -------------------------- Notional Credit Notional Credit amount exposure amount exposure ------ -------- ------ -------- (dollars expressed in thousands) Interest rate swap agreements - pay adjustable rate, receive fixed rate................. $ 1,105,000 4,207 455,000 3,349 Interest rate swap agreements - pay adjustable rate, receive adjustable rate............ -- -- 500,000 -- Interest rate floor agreements........................ 35,000 6 35,000 13 Interest rate cap agreements.......................... 450,000 3,753 10,000 26 Forward commitments to sell mortgage-backed securities.......................... 32,000 -- 33,000 -- =========== ===== ======= =====
The notional amounts of derivative financial instruments do not represent amounts exchanged by the parties and, therefore, are not a measure of our credit exposure through the use of these instruments. The credit exposure represents the accounting loss we would incur in the event the counterparties failed completely to perform according to the terms of the derivative financial instruments and the collateral held to support the credit exposure was of no value. Previously, we utilized interest rate swap agreements to extend the repricing characteristics of certain interest-bearing liabilities to more closely correspond with our assets, with the objective of stabilizing cash flow, and accordingly, net interest income, over time. These swap agreements were terminated due to a change in the composition of our balance sheet. The change in the composition of our balance sheet was primarily driven by the significant decline in interest rates experienced during 1995, which caused an increase in the principal prepayments of residential mortgage loans. The net interest expense associated with these agreements, consisting primarily of amortization of deferred losses, was $5.7 million and $3.7 million for the years ended December 31, 1999 and 1998, respectively. The deferred losses on terminated swap agreements were amortized over the remaining lives of the agreements, unless the underlying liabilities were repaid, in which case the deferred losses were immediately charged to operations. There were no remaining unamortized deferred losses on the terminated swap agreements at December 31, 1999. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) During 1998, we entered into $280.0 million notional amount of interest rate swap agreements. The swap agreements effectively lengthen the repricing characteristics of certain interest-earning assets to correspond more closely with their funding source with the objective of stabilizing cash flow, and accordingly, net interest income, over time. The swap agreements initially provided for us to receive a fixed rate of interest and pay an adjustable rate equivalent to the 90-day London Interbank Offering Rate. In March 2000, the terms of the swap agreements were modified such that we currently pay an adjustable rate of interest equivalent to the daily weighted average prime lending rate minus 2.705%. The terms of the swap agreements provide for us to pay quarterly and receive payment semiannually. The amount receivable by us under the swap agreements was $4.1 million at December 31, 2000 and 1999, and the amounts payable by us under the swap agreements were $744,000 and $770,000 at December 31, 2000 and 1999, respectively. During May 1999, we entered into $500.0 million notional amount of interest rate swap agreements with the objective of stabilizing the net interest margin during the six-month period surrounding the Year 2000 century date change. The swap agreements provided for us to receive an adjustable rate of interest equivalent to the daily weighted average 30-day London Interbank Offering Rate and pay an adjustable rate of interest equivalent to the daily weighted average prime lending rate minus 2.665%. The terms of the swap agreements, which had an effective date of October 1, 1999 and a maturity date of March 31, 2000, provided for us to pay and receive interest on a monthly basis. In January 2000, we determined these swap agreements were no longer necessary based upon the results of the Year 2000 transition and terminated these agreements resulting in a cost of $150,000. During September 1999, we entered into $175.0 million notional amount of interest rate swap agreements to effectively lengthen the repricing characteristics of certain interest-earning assets to correspond more closely with their funding source with the objective of stabilizing cash flow, and accordingly, net interest income, over time. The swap agreements provide for us to receive a fixed rate of interest and pay an adjustable rate equivalent to the weighted average prime lending rate minus 2.70%. The terms of the swap agreements provide for us to pay and receive interest on a quarterly basis. The amount receivable by us under the swap agreements was $119,000 at December 31, 2000 and 1999 and the amounts payable by us under the swap agreements were $165,000 and $141,000 at December 31, 2000 and 1999, respectively. During September 2000, we entered into $600.0 million notional amount of interest rate swap agreements to effectively lengthen the repricing characteristics of certain interest-earning assets to correspond more closely with their funding source with the objective of stabilizing cash flow, and accordingly, net interest income, over time. The swap agreements provide for us to receive a fixed rate of interest and pay an adjustable rate equivalent to the weighted average prime lending rate minus 2.70%. The terms of the swap agreements provide for us to pay and receive interest on a quarterly basis. The amount receivable and payable by us under the swap agreements was $1.2 million at December 31, 2000. In conjunction with these interest rate swap agreements, we also entered into $450.0 million notional amount of interest rate cap agreements to limit the net interest expense associated with the interest rate swap agreements. The interest rate cap agreements provide for us to receive a quarterly adjustable rate of interest equivalent to the three-month London Interbank Offering Rate, should such rate exceed the predetermined interest rate of 7.50%. At December 31, 2000, the unamortized costs associated with the interest rate cap agreements were $3.8 million, and were included in other assets. During September 2000, we entered into $25.0 million notional amount of one-year interest rate swap agreements and $25.0 million of five and one-half year interest rate swap agreements to effectively shorten the repricing characteristics of certain interest-bearing liabilities with the objective of stabilizing cash flow, and accordingly, net interest income, over time. The swap agreements provide for us to receive fixed rates of interest ranging from 6.6% to 7.25% and pay an adjustable rate equivalent to the three-month London Interbank Offering Rate minus rates ranging from 0.02% to 0.11%. The terms of the swap agreements provide for us to pay interest on a quarterly basis and receive interest on either a semi-annual basis or an annual basis. The amount receivable by us under the swap agreements was $1.0 million at December 31, 2000 and the amount payable by us under the swap agreements was $119,000 at December 31, 2000. We also utilize interest rate cap and floor agreements to limit the interest expense associated with certain interest-bearing liabilities and the net interest expense of certain interest rate swap agreements, respectively. At December 31, 2000 and 1999, the unamortized costs of these agreements were $6,000 and $32,000, respectively, and were included in other assets. During 2000 and 1998, we realized net interest expense on our derivative financial instruments of $4.7 million and $4.0 million, respectively, in comparison to net interest income of $430,000 that we realized on our derivative financial instruments in 1999. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) As more fully described in Note 1 to our accompanying consolidated financial statements, in the event of early termination of the interest rate swap agreements, the net proceeds received or paid are deferred and amortized over the shorter of the remaining contract life or the maturity of the related asset. If, however, the amount of the underlying asset is repaid, then the fair value gains or losses on the interest rate swap agreements are recognized immediately in our consolidated statements of income. As further discussed under "--Mortgage Banking Activities," derivative financial instruments that we issue consist solely 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, we also prepare and review a more traditional interest rate sensitivity position in conjunction with the results of the simulation model. The following table presents the projected maturities and periods to repricing of our rate sensitive assets and liabilities as of December 31, 2000, adjusted to account for anticipated prepayments:
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).................................. $3,021,904 411,886 585,481 715,661 17,333 4,752,265 Investment securities...................... 201,079 29,041 33,151 242,969 57,294 563,534 Federal funds sold......................... 26,800 -- -- -- -- 26,800 Interest-bearing deposits with other financial institutions................... 4,005 -- -- -- -- 4,005 ---------- -------- -------- --------- -------- --------- Total interest-earning assets.......... 3,253,788 440,927 618,632 958,630 74,627 5,346,604 Effect of interest rate swap agreements.... (1,105,000) -- 200,000 880,000 25,000 -- ---------- -------- -------- --------- -------- --------- Total interest-earning assets after the effect of interest rate swap agreements................ $2,148,788 440,927 818,632 1,838,630 99,627 5,346,604 ========== ======== ======== ========= ======== ========= Interest-bearing liabilities: Interest-bearing demand accounts........... $ 165,814 103,074 67,222 49,296 62,740 448,146 Savings accounts........................... 258,749 52,586 45,074 63,855 150,246 570,510 Money market demand accounts............... 877,388 -- -- -- -- 877,388 Time deposits.............................. 499,229 449,177 692,428 641,728 25,558 2,308,120 Other borrowed funds....................... 130,025 -- 83,000 10,544 -- 223,569 ---------- -------- -------- -------- -------- --------- Total interest-bearing liabilities..... 1,931,205 604,837 887,724 765,423 238,544 4,427,733 Effect of interest rate swap agreements.... 50,000 -- (25,000) -- (25,000) -- ---------- -------- -------- --------- -------- --------- Total interest-bearing liabilities after the effect of interest rate swap agreements................ $1,981,205 604,837 862,724 765,423 213,544 4,427,733 ========== ======== ======== ========= ======== ========= Interest sensitivity gap: Periodic................................... $ 167,583 (163,910) (44,092) 1,073,207 (113,917) 918,871 ========= Cumulative................................. 167,583 3,673 (40,419) 1,032,788 918,871 ========== ======== ======== ========= ======== Ratio of interest-sensitive assets to interest-sensitive liabilities: Periodic................................. 1.08 0.73 0.95 2.40 0.47 1.21 ========= Cumulative............................... 1.08 1.00 0.99 1.25 1.21 ========== ======== ======== ========= ========
- ----------------------- (1) Loans are presented net of unearned discount. Management made certain assumptions in preparing the table above. These assumptions included: >> loans will repay at projected repayment speeds; >> mortgage-backed securities, included in investment securities, will repay at projected repayment speeds; >> interest-bearing demand accounts and savings accounts are interest- sensitive at rates ranging from 11% to 37% and 12% to 40%, respectively, of the remaining balance for each period presented; and >> fixed maturity deposits will not be withdrawn prior to maturity. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) A significant variance in actual results from one or more of these assumptions could materially affect the results reflected in the table. At December 31, 2000, our liability-sensitive position on a cumulative basis through the twelve-month time horizon was $40.4 million, or 0.69% of total assets, in comparison to our asset-sensitive position on a cumulative basis through the twelve-month time horizon of $76.1 million, or 1.56% of total assets at December 31, 1999. The liability sensitive position is attributable to the composition of our loan and investment security portfolios as compared to our deposit base. We attribute the change for 2000 to the interest rate swap agreements entered into in June 1998, September 1998, September 1999 and September 2000. 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 our assets and liabilities and changes in interest rates. For this reason, we place greater emphasis on a simulation model for monitoring our interest rate risk exposure. Mortgage Banking Activities Our mortgage banking activities consist of the origination, purchase and servicing of residential mortgage loans. Generally, we sell our production of residential mortgage loans in the secondary loan markets. Servicing rights are retained with respect to conforming fixed-rate residential mortgage loans. We sell other loans, including adjustable-rate and nonconforming residential mortgage loans, on a servicing released basis. For the three years ended December 31, 2000, 1999 and 1998, we originated and purchased loans for resale totaling $532.2 million, $452.9 million and $628.5 million and sold loans totaling $413.2 million, $507.1 million and $521.0 million, respectively. The origination and purchase of residential mortgage loans and the related sale of the loans provides us with additional sources of income including the gain realized upon sale, the interest income earned while the loan is held awaiting sale and the ongoing loan servicing fees from the loans sold with servicing rights retained. Mortgage loans serviced for investors aggregated $957.2 million, $957.1 million and $923.0 million at December 31, 2000, 1999 and 1998, respectively. The gain on mortgage loans originated for resale, including loans sold and held for sale, was $7.8 million, $6.9 million and $5.6 million for the years ended December 31, 2000, 1999 and 1998, respectively. We determine these gains, net of losses, on a lower of cost or market basis. These gains are realized at the time of sale. The cost basis reflects: (1) adjustments of the carrying values of loans held for sale to the lower of cost, adjusted to include the cost of hedging the loans held for sale, or current market values; and (2) adjustments for any gains or losses on loan commitments for which the interest rate has been established, net of anticipated underwriting "fallout," adjusted for the cost of hedging these loan commitments. We credit the increases for 2000 and 1999 to the continued expansion of our mortgage banking activities into the California and Texas markets and the related additional volume of nonconforming loans prominent in those markets. The interest income on loans held for sale was $3.5 million for the year ended December 31, 2000 in comparison to $4.9 million and $6.8 million for the years ended December 31, 1999 and 1998, 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 $47.0 million, $79.1 million and $102.7 million for the years ended December 31, 2000, 1999 and 1998, respectively. On an annualized basis, our yield on the portfolio of loans held for sale was 7.45%, 6.19% and 6.62% for the years ended December 31, 2000, 1999 and 1998, respectively. This compares with our cost of funds, as a percentage of average interest-bearing liabilities, of 4.69%, 4.34% and 4.73% for the years ended December 31, 2000, 1999 and 1998, respectively. We report mortgage loan servicing fees net of amortization of mortgage servicing rights, interest shortfall and mortgage-backed security guarantee fee expense. Interest shortfall equals the difference between the interest collected from a loan-servicing customer upon prepayment of the loan and a full month's interest that is required to be remitted to the security owner. Loan servicing fees, net, were $486,000, $657,000 and $1.0 million for the years ended December 31, 2000, 1999 and 1998, respectively. We attribute the decrease in loan servicing fees for 2000 and 1999 to increased amortization of mortgage servicing rights, reduced late charge fees and our strategy of selling the new production of adjustable-rate and nonconforming residential mortgage loans on a servicing released basis. In addition, mortgage-backed security expense increased by $333,000 to $1.2 million from $867,000 for the years ended December 31, 1999 and 1998, respectively, reflecting the increased level of serviced loans sold into the secondary market in the form of securities. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) As described under "--Interest Rate Risk Management," our interest rate risk management policy provides certain hedging parameters to reduce the interest rate risk exposure arising from changes in loan prices from the time of commitment until the sale of the security or loan. To reduce this exposure, we use forward commitments to sell fixed-rate mortgage-backed securities at a specified date in the future. At December 31, 2000, 1999 and 1998, we had $37.6 million, $31.5 million and $103.1 million, respectively, of loans held for sale and related commitments, net of committed loan sales and estimated underwriting fallout, of which $32.0 million, $33.0 million and $95.0 million, respectively, were hedged through the use of such forward commitments. Comparison of Results of Operations for 2000 and 1999 Net Income. Net income was $56.1 million for the year ended December 31, 2000, compared to $44.2 million for 1999. The earnings progress for 2000 was primarily driven by increased net interest income generated from our acquisitions completed throughout 1999 and 2000; the continued growth and diversification in the composition of our loan portfolio; and increased yields on interest-earning assets. We funded the overall loan growth primarily through deposits added through acquisitions and internal deposit growth. Net interest income (expressed on a tax-equivalent basis) improved to $236.0 million, or 4.93% of average interest-earning assets, from $195.2 million, or 4.52% of average interest-earning assets, for the years ended December 31, 2000 and 1999, respectively. The increase in net income was partially offset by an increased provision for loan losses and an increase in operating expenses of $20.4 million for the year ended December 31, 2000, in comparison to 1999. The increased operating expenses reflect the operating expenses of our 1999 and 2000 acquisitions subsequent to their respective acquisition dates; increased salaries and employee benefit expenses; increased data processing fees; increased amortization of intangibles associated with the purchase of subsidiaries and increased guaranteed preferred debentures expense. A reduction in legal, examination and professional fees partially offset the increase in operating expenses. Provision for Loan Losses. The provision for loan losses was $14.1 million and $13.1 million for the years ended December 31, 2000 and 1999, respectively. We attribute the increase in the provision for loan losses primarily to the overall growth in the loan portfolio, both internal and through acquisitions, as well as a general increase in risk associated with the continued changing composition of our loan portfolio and an increase in nonperforming assets, which is further discussed under "--Loans and Allowance for Loan Losses." Loan charge-offs were $17.1 million for the year ended December 31, 2000, in comparison to $17.7 million for the year ended December 31, 1999. Included in charge-offs for the year ended December 31, 2000 was $1.6 million relating to a single loan. The overall decrease in loan charge-offs, excluding the large single-loan charge-off, is indicative of the generally strong economic conditions prevalent in our markets, as well as management's continued efforts to effectively monitor and manage our loan portfolio. Loan recoveries were $9.8 million for the year ended December 31, 2000, in comparison to $9.3 million for 1999, reflecting continued aggressive collection efforts. Our acquisitions during 1999 and 2000 provided $3.0 million and $6.1 million, respectively, in additional allowance for loan losses at their respective acquisition dates. The following table represents a summary of loan loss experience and nonperforming assets for First Bank and FB&T (including BSF, which will be merged with FB&T) for the years ended December 31, 2000 and 1999:
First Bank FB&T ---------------- ----------------- 2000 1999 2000 1999 ---- ---- ---- ---- (dollars expressed in thousands) Total loans....................................................... $2,694,005 2,527,649 2,058,628 1,469,093 Total assets...................................................... 3,152,885 3,028,046 2,733,545 1,854,827 Provision for loan losses......................................... 12,250 8,890 1,877 4,183 Net loan charge-offs.............................................. 7,007 6,494 201 1,946 Net loan charge-offs as a percentage of average loans............. 0.26% 0.26% 0.01% 0.15% Nonperforming loans............................................... 38,161 23,493 15,005 16,244 Nonperforming assets.............................................. 39,954 25,233 15,699 16,633
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Noninterest Income and Expense. The following table summarizes noninterest income and noninterest expense for the years ended December 31, 2000 and 1999:
December 31, Increase (Decrease) ----------------- ------------------- 2000 1999 Amount % ---- ---- ------ - (dollars expressed in thousands) Noninterest income: Service charges on deposit accounts and customer service fees.... $ 19,794 17,676 2,118 11.98% Credit card fees................................................. 236 409 (173) (42.30) Loan servicing fees, net......................................... 486 657 (171) (26.03) Gain on mortgage loans sold and held for sale.................... 7,806 6,909 897 12.98 Net gain on sales of available-for-sale securities............... 168 791 (623) (78.76) Net loss on trading securities................................... -- (303) 303 (100.00) Gain on sales of branches, net of expenses....................... 1,355 4,406 (3,051) (69.25) Other............................................................ 12,933 11,105 1,828 16.46 --------- -------- ------- Total noninterest income................................... $ 42,778 41,650 1,128 2.71 ========= ======== ======= ======= Noninterest expense: Salaries and employee benefits................................... $ 73,391 61,524 11,867 19.29% Occupancy, net of rental income.................................. 14,675 12,518 2,157 17.23 Furniture and equipment.......................................... 11,702 8,520 3,182 37.35 Postage, printing and supplies................................... 4,431 4,244 187 4.41 Data processing fees............................................. 22,359 18,567 3,792 20.42 Legal, examination and professional fees......................... 4,523 9,109 (4,586) (50.35) Communications................................................... 2,625 2,488 137 5.51 Advertising and business development............................. 4,331 3,734 597 15.99 Guaranteed preferred debentures.................................. 13,173 12,050 1,123 9.32 Other............................................................ 19,953 18,053 1,900 10.52 --------- -------- ------- Total noninterest expense................................... $ 171,163 150,807 20,356 13.50 ========= ======== ======= =======
Noninterest Income. Noninterest income was $42.8 million for the year ended December 31, 2000, compared to $41.7 million for 1999. Noninterest income consists primarily of service charges on deposit accounts and customer service fees, mortgage banking revenues and other income. Service charges on deposit accounts and customer service fees increased to $19.8 million for 2000, from $17.7 million for 1999. We attribute the increase in service charges and customer service fees to: >> increased deposit balances provided by internal growth; >> our acquisitions completed throughout 1999 and 2000; >> additional products and services available and utilized by our expanding base of retail and commercial customers; >> increased fee income resulting from revisions of customer service charge rates effective April 1, 1999 and June 30, 2000, and enhanced control of fee waivers; and >> increased interchange income associated with automatic teller machine services and debit and credit cards. The gain on mortgage loans sold and held for sale increased to $7.8 million from $6.9 million for the years ended December 31, 2000 and 1999, respectively. We attribute the increase to an increased volume of loans sold and held for sale, primarily during the fourth quarter of 2000, including fixed rate residential mortgage loans, which are sold on a servicing retained basis, and adjustable-rate and non-conforming residential mortgage loans, which are sold on a servicing released basis. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The net gain on sales of available-for-sale securities was $168,000 and $791,000 for the years ended December 31, 2000 and 1999, respectively. These gains resulted from sales of available-for-sale securities necessary to facilitate the funding of loan growth. The decrease in the net gains reflects the sales, at a loss, of certain investment securities that did not meet our overall investment objectives. The net loss on sales of trading securities was $303,000 for the year ended December 31, 1999 resulted from the termination of our trading division, effective December 31, 1998, and the liquidation of all trading securities during the first quarter of 1999. The gain on sales of branches, net of expenses, was $1.4 million and $4.4 million for the years ended December 31, 2000 and 1999, respectively. The reduction in these gains results from a reduced number of branch divestitures. During 2000, we divested one of our branch locations in central Illinois, whereas in 1999, we divested seven branch offices in central and northern Illinois. Other income was $12.9 million and $11.1 million for the years ended December 31, 2000 and 1999, respectively. The increase in other income is primarily attributable to increased income earned on our investment in bank-owned life insurance, rental income associated with FCG's leasing activities and increased rental fees received from First Services, L.P. for the use of data processing and other equipment owned by us. The increase in rental fees corresponds to the replacement of our teller system and certain other technological upgrades, including local and wide area network-based systems, core processors and item processing equipment that were replaced in 1999 in preparation for the Year 2000 transition. Noninterest Expense. Noninterest expense was $171.2 million for the year ended December 31, 2000, in comparison to $150.8 million for 1999. The increase reflects: >> the noninterest expense associated with our acquisitions completed throughout 1999 and 2000 subsequent to their respective acquisition dates, including certain nonrecurring expenses associated with those acquisitions; >> increased salaries and employee benefit expenses; >> increased data processing fees; >> increased amortization of intangibles associated with the purchase of subsidiaries; >> increased guaranteed preferred debentures expense; and >> increased expenses associated with our internal restructuring process. The overall increase in noninterest expense was partially offset by a decrease in legal, examination and professional fees. During 1999, we began an internal restructuring process designed to better position us for future growth and opportunities expected to become available as consolidation and changes continue in the delivery of financial services. The magnitude of this project was extensive and covered almost every area of our organization. The primary objectives of the restructuring process were to: >> redesign the corporate organization to provide clearer lines of authority which are more conducive to the effective delivery of services to customers; >> enhance our technological strength to enable us to more effectively and efficiently provide the products, services and delivery channels necessary to remain competitive in the financial services industry of the future; >> establish the infrastructure necessary to better support our service delivery and business development efforts, and to provide more efficient, better quality services to customers; >> increase the depth and abilities of all levels of our management and provide supervision to lead its efforts to accomplish our corporate objectives; and >> improve internal monitoring systems in order to better assess the progress of all of our areas in achieving our corporate objectives. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Although these efforts have primarily led to increased capital expenditures and noninterest expenses in the short term as further discussed below, we anticipate they will lead to more effective internal growth, more efficient operations and improved profitability over the long term. Salaries and employee benefits increased by $11.9 million to $73.4 million from $61.5 million for the years ended December 31, 2000 and 1999, respectively. We primarily associate the increase with our acquisitions completed throughout 1999 and 2000 as well as the additional lines of business that we entered into in 2000, including institutional money management, international banking and fiduciary deposit management for bankruptcy trustees, receivers and other estate administrators. However, the increase also reflects the competitive environment in the employment market that has resulted in a higher demand for limited resources, thus escalating industry salary and employee benefit costs associated with employing and retaining qualified personnel. In addition, the increase includes various additions to our staff to enhance executive and senior management expertise, improve technological support and strengthen centralized operational functions. Occupancy, net of rental income, and furniture and equipment expense totaled $26.4 million and $21.0 million for the years ended December 31, 2000 and 1999, respectively. The increase is primarily attributable to our acquisitions, the relocation of certain California and Texas branches and increased depreciation expense associated with numerous capital expenditures made throughout 1999, including the implementation of our new teller system. Our selective elimination of 16 branch offices by sales, mergers or closures during 1999 and 2000 partially offset this increase. Data processing fees were $22.4 million and $18.6 million for the years ended December 31, 2000 and 1999, respectively. As more fully discussed in Note 17 to our accompanying consolidated financial statements, First Services, L.P., a limited partnership indirectly owned by our Chairman and his adult children, provides data processing and various related services to our subsidiary banks and us under the terms of data processing agreements. We attribute the increased data processing fees to growth and technological advancements consistent with our product and service offerings and upgrades to technological equipment, networks and communication channels. Legal, examination and professional fees were $4.5 million and $9.1 million for the years ended December 31, 2000 and 1999, respectively. The decrease in these fees results from a decline in our utilization of external consultants who provided assistance throughout 1999 associated with the development and expansion of selected business initiatives. The decrease also reflects the settlement of certain litigation completed in 1999. Guaranteed preferred debentures expense was $13.2 million and $12.1 million for the years ended December 31, 2000 and 1999, respectively. The increase for 2000 is solely attributable to First Preferred Capital Trust II's issuance of trust preferred securities on October 19, 2000 as further described in Note 9 to our accompanying consolidated financial statements. Other expense was $20.0 million and $18.1 million for the years ended December 31, 2000 and 1999, respectively. Other expense encompasses numerous general and administrative expenses including but not limited to travel, meals and entertainment, insurance, freight and courier services, correspondent bank charges, amortization of intangibles associated with the purchase of subsidiaries, miscellaneous losses and recoveries, and sales taxes. The overall increase in these expenses primarily reflects: >> continued growth and expansion of our banking franchise; >> increased amortization of intangibles associated with the purchase of subsidiaries of $900,000, attributable solely to our acquisitions completed throughout 1999 and 2000; >> a $700,000 provision for an estimated loss on equipment underlying leases associated with a previously acquired entity; and >> a $200,000 provision for estimated losses associated with certain pending litigation. Offsetting the overall increase in other expenses in 2000 were recoveries of $1.8 million from loans of acquired entities that had been fully charged off prior to the acquisition dates. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Comparison of Results of Operations for 1999 and 1998 Net Income. Net income was $44.2 million for the year ended December 31, 1999, compared to $33.5 million for 1998. We associate the improved operating results for 1999 with our efforts to realign the composition of our loan portfolio through further diversification and growth; the improvement in the composition of the interest-earning assets and interest-bearing liabilities; the results of our acquisitions of Century Bank and Redwood Bancorp; and the divestiture of certain branch facilities. Net interest income (expressed on a tax-equivalent basis) improved to $195.2 million, or 4.52% of average interest-earning assets, from $166.5 million, or 4.19% of average interest-earning assets, for 1999 and 1998, respectively. An increased provision for loan losses and an increase in operating expenses partially offset the improvement in net income. The increase in operating expense reflects the additional cost of the trust preferred securities issued by FBA in July 1998; the continuing expansion of commercial and retail banking activities; the acquisitions of Century Bank and Redwood Bancorp; increased legal, examination and professional fees; and increased data processing fees primarily associated with Year 2000 activities. Provision for Loan Losses. The provision for loan losses was $13.1 million and $9.0 million for the years ended December 31, 1999 and 1998, respectively. We primarily attribute the increase in the provision for loan losses for 1999 to the continued growth and changing composition of our loan portfolio combined with an increase in loans charged-off. Net loan charge-offs were $8.4 million for the year ended December 31, 1999, compared to $1.7 million for 1998. The increase in net loan charge-offs reflects overall growth in our loan portfolio and increased risk associated with the continued change in the composition of our loan portfolio. In addition, nonperforming assets have, in general, increased at December 31, 1999 and 1998, in comparison to previous periods. The allowances for loan losses of Century Bank and Redwood Bancorp at their dates of acquisition added approximately $3.0 million to our consolidated allowance for loan losses. The following table represents a summary of loan loss experience and nonperforming assets for First Bank and FB&T for the years ended December 31, 1999 and 1998:
First Bank FB&T ---------------- ----------------- 1999 1998 1999 1998 ---- ---- ----- ---- (dollars expressed in thousands) Total loans........................................................ $2,527,649 2,490,556 1,469,093 1,089,966 Total assets....................................................... 3,028,046 3,024,600 1,854,827 1,504,311 Provision for loan losses.......................................... 8,890 7,250 4,183 1,750 Net loan charge-offs............................................... 6,494 1,150 1,946 589 Net loan charge-offs as a percentage of average loans.............. 0.26% 0.05% 0.15% 0.06% Nonperforming loans................................................ 23,493 18,494 16,244 25,044 Nonperforming assets............................................... 25,233 21,268 16,633 25,979
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Noninterest Income and Expense. The following table summarizes noninterest income and noninterest expense for the years ended December 31, 1999 and 1998:
December 31, Increase (Decrease) --------------- ------------------- 1999 1998 Amount % ---- ---- ------ --- (dollars expressed in thousands) Noninterest income: Service charges on deposit accounts and customer service fees.... $ 17,676 14,876 2,800 18.82% Credit card fees................................................. 409 2,999 (2,590) (86.36) Loan servicing fees, net......................................... 657 1,017 (360) (35.40) Gain on mortgage loans sold and held for sale.................... 6,909 5,563 1,346 24.20 Net gain on sales of available-for-sale securities............... 791 1,466 (675) (46.04) Net (loss) gain on trading securities............................ (303) 607 (910) (149.92) Gain on sales of branches, net of expenses....................... 4,406 -- 4,406 -- Other............................................................ 11,105 9,969 1,136 11.40 --------- -------- ------- Total noninterest income................................... $ 41,650 36,497 5,153 14.12 ========= ======== ======= ======= Noninterest expense: Salaries and employee benefits................................... $ 61,524 55,907 5,617 10.05% Occupancy, net of rental income.................................. 12,518 11,037 1,481 13.42 Furniture and equipment.......................................... 8,520 8,122 398 4.90 Postage, printing and supplies................................... 4,244 5,230 (986) (18.85) Data processing fees............................................. 18,567 13,917 4,650 33.41 Legal, examination and professional fees......................... 9,109 5,326 3,783 71.03 Credit card...................................................... 667 3,396 (2,729) (80.36) Communications................................................... 2,488 2,874 (386) (13.43) Advertising and business development............................. 3,734 4,668 (934) (20.01) Guaranteed preferred debentures.................................. 12,050 9,842 2,208 22.43 Other............................................................ 17,386 18,385 (999) (5.43) --------- -------- ------- Total noninterest expense................................... $ 150,807 138,704 12,103 8.73 ========= ======== ======= =======
Noninterest Income. Noninterest income was $41.7 million for the year ended December 31, 1999, compared to $36.5 million for 1998. Noninterest income consists primarily of service charges on deposit accounts and customer service fees, mortgage banking revenues and other income. Service charges on deposit accounts and customer service fees increased to $17.7 million for 1999, from $14.9 million for 1998. The increase in service charges and customer service fees is attributable to: >> increased deposit balances provided by internal growth; >> our acquisitions completed throughout 1998 and 1999; >> additional products and services available and utilized by our expanding base of retail and commercial customers; >> increased fee income resulting from revisions of customer service charge rates effective April 1, 1999, and enhanced control of fee waivers; and >> increased interchange income associated with automatic teller machine services and debit and credit cards. As described below, this increase was partially offset by the foregone revenue associated with the divestiture of certain branches in 1999, which resulted in a reduction in First Bank's deposit base of approximately $54.8 million. Credit card fees declined to $409,000 for 1999, from $3.0 million for 1998. The reduction in credit card fees primarily results from the liquidation of our merchant credit card processing operation effective December 31, 1998. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Our mortgage banking revenues consist primarily of loan servicing fees, net, and gain on mortgage loans sold and held for sale. Loan servicing fees, net, decreased to $657,000 from $1.0 million for the years ended December 31, 1999 and 1998, respectively. We attribute the decrease in loan servicing fees to aggregate increases of $698,000 in additional amortization of mortgage servicing rights, interest shortfall and mortgage-backed security expense. This decrease in loan servicing fees was partially offset by an increase in loan servicing fees resulting from the increase in the portfolio of loans serviced for others. The gain on mortgage loans sold and held for sale increased to $6.9 million from $5.6 million for 1999 and 1998, respectively. This increase regarding mortgage loans is attributable to an increased volume of loans sold and held for sale, including fixed rate residential mortgage loans, which are sold on a servicing retained basis, and adjustable-rate and non-conforming residential mortgage loans, which are sold on a servicing released basis. The net gain on sales of available-for-sale securities was $791,000 and $1.5 million for the years ended December 31, 1999 and 1998, respectively. These gains resulted from sales of available-for-sale securities necessary to facilitate the funding of loan growth. Net loss on sales of trading securities was $303,000 for the year ended December 31, 1999, in comparison to a net gain of $607,000 for 1998. The loss for 1999 resulted from the termination of our trading division, effective December 31, 1998, and the liquidation of all trading portfolio securities. The gain on sales of branches, net of expenses, of $4.4 million resulted from the divestiture of seven branches in the central and northern Illinois market areas. Other income was $11.1 million and $10.0 million for the years ended December 31, 1999 and 1998, respectively. The primary components of the increase are attributable to increased income earned on our investment in bank-owned life insurance and expanded brokerage and private banking and trust services. The bank-owned life insurance income increased to $3.9 million for 1999, in comparison to $3.1 million for 1998. This increase results from twelve months of earnings on FBA's investment in bank-owned life insurance in 1999, in comparison to nine months of earnings in 1998. In addition, trust services income increased to $1.8 million for 1999 from $1.4 million for 1998 due to the continued expansion of these services, primarily in California. Noninterest Expense. Noninterest expense increased to $150.8 million for the year ended December 31, 1999 from $138.7 million for 1998. The increase reflects: >> our acquisitions completed throughout 1998 and 1999; >> increased data processing fees primarily associated with our Year 2000 Program; >> increased legal, examination and professional fees; and >> FBA's issuance of the trust preferred securities in July 1998. The overall increase in noninterest expense was partially offset by a decline in credit card expenses and a reduction in advertising and business development expenses, postage, printing and supplies expenses and communications expenses. This is consistent with management's efforts to more effectively manage these expenditures. Specifically, salaries and employee benefits increased by $5.6 million to $61.5 million from $55.9 million for the years ended December 31, 1999 and 1998, respectively. We associate the increase with the newly-acquired banks and our continued commitment to expanding our commercial, mortgage banking and retail business development capabilities associated with the expansion and delivery of our products and services. The overall increase also reflects the competitive environment in the employment market that has resulted in a higher demand for limited resources, thus escalating industry salary and employee benefit costs. Data processing fees were $18.6 million and $13.9 million for 1999 and 1998, respectively. First Services, L.P., a limited partnership indirectly owned by our Chairman and his adult children, provides data processing and various related services to us and our subsidiary banks under the terms of data processing agreements. We attribute the increase in data processing fees to growth and technological advancements consistent with our product and service offerings, increased expenses attributable to communication data lines related to the expansion of the branch network infrastructure and expenses associated with our Year 2000 Program. Legal, examination and professional fees increased by $3.8 million to $9.1 million in 1999, from $5.3 million in 1998. We attribute the increase in these fees to our expanded utilization of external consultants in conjunction with the development and expansion of selected business initiatives. Increased legal expenditures associated with the settlement of certain litigation further contributed to the overall increase. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Credit card expenses declined by $2.7 million to $667,000 from $3.4 million for the years ended December 31, 1999 and 1998, respectively. As previously discussed, this decline primarily results from the liquidation of our merchant credit card processing operation, effective December 31, 1998. Guaranteed preferred debentures increased by $2.2 million to $12.1 million from $9.8 million for the years ended December 31, 1999 and 1998, respectively. We associate the increase for 1999 with the issuance by FBA's financing subsidiary of its trust preferred securities in July 1998. Investment Securities We classify the securities within our investment portfolio as held to maturity or available for sale. We no longer engage in the trading of investment securities. As more fully described in Notes 1 and 3 to our accompanying consolidated financial statements, our investment security portfolio consists primarily of securities designated as available for sale. The investment security portfolio was $563.5 million at December 31, 2000 compared to $451.6 million and $534.8 million at December 31, 1999 and 1998, respectively. See "--Financial Condition and Average Balances" for further discussion of our investment security portfolio. Loans and Allowance for Loan Losses Interest earned on our loan portfolio represents the principal source of income for our subsidiary banks. Interest and fees on loans were 92.3%, 91.5% and 86.7% of total interest income for the years ended December 31, 2000, 1999 and 1998, respectively. Loans, net of unearned discount, represented 80.9% of total assets as of December 31, 2000, compared to 82.1% and 78.6% of total assets at December 31, 1999 and 1998, respectively. Total loans, net of unearned discount, increased $750.0 million to $4.75 billion for the year ended December 31, 2000, and $420.0 million to $4.00 billion for the year ended December 31, 1999. We view the quality, yield and growth of our loan portfolio to be instrumental elements in determining our profitability. As summarized in the composition of loan portfolio table, during the five years ended December 31, 2000, total loans, net of unearned discount, increased 71.5% from $2.77 billion at December 31, 1996 to $4.75 billion at December 31, 2000. Throughout this period, we have substantially enhanced our capabilities for achieving and managing internal growth. A key element of this process has been the expansion of our corporate business development staff, which is responsible for the internal development of both loan and deposit relationships with commercial customers. 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 our loan portfolio, we also focused on repositioning our portfolio. As the corporate business development effort continued to originate a substantial volume of new loans, substantially all of our conforming residential mortgage loan production has been sold in the secondary mortgage market. We have also substantially reduced our origination of indirect automobile loans. This allowed us to fund part of the growth in corporate lending through reductions in residential real estate and indirect automobile lending. In addition, our acquisitions added substantial portfolios of new loans. Some of these portfolios, particularly those from acquisitions completed in 1995, contained significant loan problems. As we resolved the asset quality issues, the portfolios of the acquired entities tended to decline because many of the resources which would otherwise be directed toward generating new loans were concentrated on improving or eliminating existing relationships. A summary of the effects of these factors on our loan portfolio for the years ended December 31 is as follows:
Increase (decrease) for the year ended December 31, -------------------------------------------- 2000 1999 1998 1997 ---- ---- ---- ---- (dollars expressed in thousands) Internal loan volume increase (decrease): Commercial lending............................. $ 360,410 363,486 633,660 378,882 Residential real estate lending................ 20,137 (126,418) (152,849) (144,707) Consumer lending, net of unearned discount..... (64,606) (56,349) (30,506) (54,305) Loans provided by acquisitions...................... 440,000 235,500 127,600 54,361 --------- -------- --------- --------- Total increase in loans, net of unearned discount..................... $ 755,941 416,219 577,905 234,231 ========= ======== ========== ========= Increase (decrease) in potential problem loans (1).. $ 27,400 11,200 12,800 (9,800) ========= ======== ========= =========
------------------------- (1) Potential problem loans include nonperforming loans and other loans identified by management as having potential credit problems. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Our lending strategy stresses quality, growth and diversification. Throughout our organization, we employ a common credit underwriting policy. Our commercial lenders focus principally on small to middle-market companies. Consumer lenders focus principally on residential loans, including home equity loans, automobile financing and other consumer financing opportunities arising out of our branch banking network. Commercial, financial and agricultural loans include loans that are made primarily based on the borrowers' general credit strength and ability to generate cash flows for repayment from income sources even though such loans may also be secured by real estate or other assets. Real estate construction and development loans, primarily relating to residential properties and commercial properties, represent 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 our loan portfolio by major category and the percent of each category to the total portfolio as of the dates presented:
December 31, --------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ----------------- --------------- -------------- ------------- -------------- Amount % Amount % Amount % Amount % Amount % ------ - ------ - ------ - ------ - ------ - (dollars expressed in thousands) Commercial, financial and agricultural............. $1,496,284 32.0% $1,086,919 27.4% $ 920,007 26.7%$ 621,618 21.1% $ 457,186 16.7% Real estate construction and development.............. 809,682 17.3 795,081 20.1 720,910 20.9 413,107 14.0 289,378 10.5 Real estate mortgage: One-to-four-family residential loans............ 726,474 15.5 720,630 18.2 739,442 21.5 915,205 31.1 1,059,770 38.7 Other real estate loans...... 1,476,383 31.5 1,130,939 28.6 789,735 22.9 713,910 24.3 600,810 21.9 Consumer and installment, net of unearned discount............ 174,337 3.7 225,343 5.7 274,392 8.0 279,279 9.5 333,340 12.2 ---------- ----- --------- ------ ---------- ----- --------- ------ --------- ----- Total loans, excluding loans held for sale...... 4,683,160 100.0% 3,958,912 100.0% 3,444,486 100.0% 2,943,119 100.0% 2,740,484 100.0% ===== ====== ===== ===== Loans held for sale.............. 69,105 37,412 135,619 59,081 27,485 ---------- ---------- ---------- ---------- ---------- Total loans................ $4,752,265 $3,996,324 $3,580,105 $3,002,200 $2,767,969 ========== ========== ========== ========== ==========
Loans at December 31, 2000 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.................... $ 1,253,183 159,905 54,266 18,524 10,406 1,496,284 Real estate construction and development.................. 775,615 27,314 4,231 206 2,316 809,682 Real estate mortgage...................................... 1,130,611 466,735 317,581 174,650 113,280 2,202,857 Consumer and installment, net of unearned discount........ 45,751 104,364 1,207 21,308 1,707 174,337 Loans held for sale....................................... 69,105 -- -- -- -- 69,105 ----------- -------- -------- ------- ------- --------- Total loans......................................... $ 3,274,265 758,318 377,285 214,688 127,709 4,752,265 =========== ======== ======== ======= ======= =========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The following table is a summary of loan loss experience for the five years ended December 31, 2000:
December 31, ------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (dollars expressed in thousands) Allowance for loan losses, beginning of year......... $ 68,611 60,970 50,509 46,781 52,665 Acquired allowances for loan losses.................. 6,062 3,008 3,200 30 2,338 ---------- ---------- ---------- --------- ---------- 74,673 63,978 53,709 46,811 55,003 ---------- ---------- ---------- --------- ---------- Loans charged-off: Commercial, financial and agricultural........... (9,768) (10,855) (3,908) (2,308) (8,918) Real estate construction and development......... (2,229) (577) (185) (2,242) (1,241) Real estate mortgage............................. (2,213) (2,561) (2,389) (6,250) (10,308) Consumer and installment......................... (2,840) (3,728) (3,701) (6,032) (8,549) ---------- ---------- ---------- --------- ---------- Total ..................................... (17,050) (17,721) (10,183) (16,832) (29,016) ---------- ---------- ---------- --------- ---------- Recoveries of loans previously charged-off: Commercial, financial and agricultural........... 5,621 3,602 3,417 2,146 2,642 Real estate construction and development......... 319 849 342 269 495 Real estate mortgage............................. 1,937 2,357 2,029 3,666 3,255 Consumer and installment......................... 1,965 2,473 2,656 3,149 2,908 ---------- ---------- ---------- --------- ---------- Total ..................................... 9,842 9,281 8,444 9,230 9,300 ---------- ---------- ---------- --------- ---------- Net loans charged-off...................... (7,208) (8,440) (1,739) (7,602) (19,716) ---------- ---------- ---------- --------- ---------- Provision for loan losses............................ 14,127 13,073 9,000 11,300 11,494 ---------- ---------- ---------- --------- ---------- Allowance for loan losses, end of year............... $ 81,592 68,611 60,970 50,509 46,781 ========== ========== ========== ========= ========== Loans outstanding, net of unearned discount: Average.......................................... $4,290,958 3,812,508 3,250,719 2,846,157 2,726,297 End of year...................................... 4,752,265 3,996,324 3,580,105 3,002,200 2,767,969 End of year, excluding loans held for sale....... 4,683,160 3,958,912 3,444,486 2,943,119 2,740,484 ========== ========== ========== ========= ========== Ratio of allowance for loan losses to loans outstanding: Average.......................................... 1.90% 1.80% 1.88% 1.77% 1.72% End of year ..................................... 1.72 1.72 1.70 1.68 1.69 End of year, excluding loans held for sale....... 1.74 1.73 1.77 1.72 1.71 Ratio of net charge-offs to average loans outstanding................................ 0.17 0.22 0.05 0.27 0.72 Ratio of current year recoveries to preceding year's total charge-offs............... 55.54 91.14 50.17 31.81 59.54 ========== ========== ========== ========= ========== Allocation of allowance for loan losses at end of year: Commercial, financial and agricultural........... $ 32,352 24,898 19,239 14,879 13,579 Real estate construction and development......... 14,667 13,264 15,073 7,148 4,584 Real estate mortgage............................. 24,691 20,750 18,774 18,317 14,081 Consumer and installment......................... 3,142 4,390 5,180 5,089 10,296 Unallocated...................................... 6,740 5,309 2,704 5,076 4,241 ---------- ---------- ---------- --------- ---------- Total ..................................... $ 81,592 68,611 60,970 50,509 46,781 ========== ========== ========== ========= ========== Percent of categories to loans, net of unearned discount: Commercial, financial and agricultural........... 31.49% 27.20% 25.70% 20.71% 16.52% Real estate construction and development......... 17.04 19.90 20.14 13.76 10.45 Real estate mortgage............................. 46.35 46.33 42.71 54.26 60.00 Consumer and installment......................... 3.67 5.64 7.66 9.30 12.04 Loans held for sale.............................. 1.45 0.93 3.79 1.97 0.99 ---------- ---------- ---------- --------- --------- Total ..................................... 100.00% 100.00% 100.00% 100.00% 100.00% ========== ========== ========== ========= =========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Nonperforming assets include nonaccrual loans, restructured loans and other real estate. The following table presents the categories of nonperforming assets and certain ratios as of the dates indicated:
December 31, --------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (dollars expressed in thousands) Commercial, financial and agricultural: Nonaccrual...................................... $ 22,437 18,397 15,385 4,017 4,113 Restructured terms.............................. 22 29 -- -- 130 Real estate construction and development: Nonaccrual...................................... 11,068 1,886 3,858 4,097 817 Real estate mortgage: Nonaccrual...................................... 16,524 16,414 18,858 10,402 24,486 Restructured terms.............................. 2,952 2,979 5,221 5,456 278 Consumer and installment: Nonaccrual...................................... 155 32 216 94 440 Restructured terms.............................. 8 -- -- -- 5 ----------- --------- --------- --------- --------- Total nonperforming loans................ 53,166 39,737 43,538 24,066 30,269 Other real estate.................................. 2,487 2,129 3,709 7,324 10,607 ----------- --------- --------- --------- --------- Total nonperforming assets.............. $ 55,653 41,866 47,247 31,390 40,876 =========== ========= ========= ========= ========= Loans, net of unearned discount.................... $ 4,752,265 3,996,324 3,580,105 3,002,200 2,767,969 =========== ========= ========= ========= ========= Loans past due 90 days or more and still accruing.. $ 3,009 5,844 4,674 2,725 3,779 =========== ========= ========= ========= ========= Allowance for loan losses to loans................. 1.72% 1.72% 1.70% 1.68% 1.69% Nonperforming loans to loans....................... 1.12 0.99 1.22 0.80 1.09 Allowance for loan losses to nonperforming loans............................. 153.47 172.66 140.04 209.88 154.55 Nonperforming assets to loans and other real estate........................... 1.17 1.05 1.32 1.04 1.47 =========== ========= ========= ========== =========
Nonperforming loans (also considered impaired loans), consisting of loans on nonaccrual status and certain restructured loans, were $53.2 million at December 31, 2000 in comparison to $39.7 million and $43.5 million at December 31, 1999 and 1998, respectively. The increase in nonperforming loans in 2000 primarily results from a small number of credit relationships that were placed on nonaccrual during the year ended December 31, 2000. These nonperforming loans are symptomatic of circumstances that are specific to these relationships, and are not indicative of distress across the broad spectrum of our loan portfolio. As previously discussed, certain acquired loan portfolios, particularly those acquired during 1994 and 1995, exhibited varying degrees of distress prior to their acquisition. While these problems had been identified and considered in our acquisition pricing, the acquisitions led to an increase in nonperforming assets and problem loans (as defined below) to $95.0 million at December 31, 1995. Problem loans were reduced to $59.3 million at December 31, 1997. At December 31, 1998, nonperforming assets and problem loans increased to $68.5 million. We associate the increase for 1998 to two commercial loans totaling $6.0 million, net of charge-off; our acquisitions of Republic Bank and Pacific Bay Bank; and the overall growth of our loan portfolio, principally in commercial, financial and agricultural, real estate construction and development and commercial real estate loans. As of December 31, 2000, 1999 and 1998, $50.2 million, $36.3 million and $21.3 million, respectively, of loans not included in the table above were identified by management as having potential credit problems (problem loans). Problem loans totaled $27.9 million and $31.5 million at December 31, 1997 and 1996, respectively. We attribute the increase in problem loans primarily to the gradual slow down and uncertainties that have recently occurred in the economy surrounding the markets in which First Bank operates. Our credit management policies 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. The system requires rating all loans at the time they are originated, except for homogeneous categories of loans, such as residential real estate mortgage loans, indirect automobile loans and credit card loans. These homogeneous loans are assigned an initial rating based on our experience with each type of loan. We adjust these ratings based on payment experience subsequent to their origination. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) We include adversely rated credits, including loans requiring close monitoring which would not normally be considered criticized credits by regulators, on a monthly loan watch list. Loans may be added to our watch list for reasons that 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. 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 could initiate the addition of a loan to the list. Loans on the watch list require periodic detailed loan status reports prepared by the responsible officer, which are discussed in formal meetings with loan review and credit administration staff members. Downgrades of loan risk ratings may be initiated by the responsible loan officer at any time. However, upgrades of risk ratings may only be made with the concurrence of selected loan review and credit administration staff members generally at the time of the formal watch list review meetings. Each month, the credit administration department provides 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, we continually monitor the overall increases or decreases in the levels of risk in the portfolios. Factors are applied to the loan portfolios for each category of loan risk to determine acceptable levels of allowance for loan losses. We derive these factors from the actual loss experience of our 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 a certain degree of judgment in its analysis of the overall adequacy of the allowance for losses. In its analysis, management considers the change in the portfolio, including growth, composition and the ratio of net loans to total assets, and the economic conditions of the regions in which we operate. Based on this quantitative and qualitative analysis, provisions are made to the allowance for loan losses. Such provisions are reflected in our consolidated statements of income. We do not engage in lending to foreign countries or activities based in foreign countries. Additionally, we do not have any concentrations of loans exceeding 10% of total loans that are not otherwise disclosed in the loan portfolio composition table and Note 4 to our accompanying consolidated financial statements. We do not have a material amount of interest-earning assets that 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 our subsidiary banks. Our deposits consist principally of core deposits from each bank's local market areas, including individual and corporate customers. The following table sets forth the distribution of our average deposit accounts at the dates indicated and the weighted average interest rates on each category of deposits:
Year Ended December 31, ---------------------------------------------------------------------------------- 2000 1999 1998 -------------------------- -------------------------- -------------------------- Percent Percent Percent of of of Amount deposits Rate Amount deposits Rate Amount deposits Rate ------ -------- ---- ------ -------- ---- ------ -------- ---- (dollars expressed in thousands) Noninterest-bearing demand....... $ 634,886 14.18% --% $ 552,029 13.59% --% $ 463,939 12.27% --% Interest-bearing demand......... 421,986 9.43 1.40 391,892 9.65 1.30 357,463 9.45 1.44 Savings......................... 1,279,378 28.59 4.04 1,220,425 30.03 3.61 1,076,524 28.48 3.96 Time deposits .................. 2,139,305 47.80 5.62 1,899,218 46.73 5.35 1,882,329 49.80 5.74 ---------- ------ ==== ---------- ------- ==== ---------- ------ ==== Total average deposits.... $4,475,555 100.00% $4,063,564 100.00% $3,780,255 100.00% ========== ====== ========== ======= ========== ======
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Capital and Dividends Historically, we have accumulated capital to support our acquisitions by retaining most of our earnings. We pay relatively small dividends on our Class A convertible, adjustable rate preferred stock and our Class B adjustable rate preferred stock, totaling $786,000 for the years ended December 31, 2000, 1999 and 1998. We have never paid, and have no present intention to pay, dividends on our common stock. As more fully discussed in Note 19 to our accompanying consolidated financial statements, management believes as of December 31, 2000 and 1999, our subsidiary banks and we were "well capitalized" as defined by the Federal Deposit Insurance Corporation Improvement Act of 1991. As more fully discussed under "--Company Profile," "--Financial Condition and Average Balances," and Note 9 to our accompanying consolidated financial statements, in December 1996, we formed our initial financing subsidiary, First Preferred Capital Trust, for the purpose of issuing $86.25 million of trust preferred securities, and on October 6, 2000, we formed our second financing subsidiary, First Preferred Capital Trust II, for the purpose of issuing $57.5 million of trust preferred securities. In June 1998, FBA formed its financing subsidiary, First America Capital Trust, for the purpose of issuing $46.0 million of trust preferred securities. For regulatory reporting purposes, these preferred securities are eligible for inclusion, subject to certain limitations, in our Tier 1 capital. Liquidity Our liquidity and the liquidity of our subsidiary banks is the ability to maintain a cash flow which is adequate to fund operations, service debt obligations and meet other commitments on a timely basis. Our subsidiary banks receive funds for liquidity from customer deposits, loan payments, maturities of loans and investments, sales of investments and earnings. In addition, we may avail ourselves of more volatile sources of funds by issuing certificates of deposit in denominations of $100,000 or more, borrowing federal funds, selling securities sold under agreements to repurchase and utilizing borrowings from the Federal Home Loan Banks and other borrowings, including our revolving credit line. The aggregate funds acquired from these more volatile sources were $723.5 million and $476.8 million at December 31, 2000 and 1999, respectively. The following table presents the maturity structure of volatile funds, which consists of certificates of deposit of $100,000 or more, short-term borrowings and the note payable, at December 31, 2000:
December 31, 2000 ----------------- (dollars expressed in thousands) Three months or less................................................... $ 260,410 Over three months through six months................................... 100,224 Over six months through twelve months.................................. 230,333 Over twelve months..................................................... 132,558 --------- Total......................................................... $ 723,525 =========
In addition to these more volatile sources of funds, in 1999, our subsidiary banks established borrowing relationships with the Federal Reserve Bank in their respective districts. These borrowing relationships, which are secured by commercial loans, provide an additional liquidity facility that may be utilized for contingency purposes. At December 31, 2000 and 1999, the borrowing capacity of our subsidiary banks under these agreements was approximately $1.24 billion and $1.67 billion, respectively. In addition, our subsidiary banks' borrowing capacity through their relationships with the Federal Home Loan Banks was approximately $262.1 million and $395.9 million at December 31, 2000 and 1999, respectively. Management believes the available liquidity and operating results of our subsidiary banks will be sufficient to provide funds for growth and to permit the distribution of dividends to us sufficient to meet our operating and debt service requirements, both on a short-term and long-term basis, and to pay the dividends on the trust preferred securities issued by our financing subsidiaries and FBA's financing subsidiary. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Effects of New Accounting Standards In June 1998, the Financial Accounting Standards Board, or the FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 133 -- Accounting for Derivative Instruments and Hedging Activities. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge in one of three categories. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. Under SFAS 133, an entity that elects to apply hedge accounting is required to establish, at the inception of the hedge, the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk. SFAS 133 applies to all entities. In June 1999, the FASB issued SFAS No. 137 - Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, an Amendment of FASB Statement No. 133, which defers the effective date of SFAS 133 from fiscal years beginning after June 15, 1999 to fiscal years beginning after June 15, 2000. Initial application should be as of the beginning of an entity's fiscal quarter; on that date, hedging relationships must be designated and documented pursuant to the provisions of SFAS 133, as amended. Earlier application of all of the provisions is encouraged but is permitted only as of the beginning of any fiscal quarter that begins after the issuance date of SFAS 133, as amended. Additionally, SFAS 133, as amended, should not be applied retroactively to financial statements of prior periods. In June 2000, the FASB issued SFAS No. 138 - Accounting for Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133, which addresses a limited number of issues causing implementation difficulties for numerous entities that apply SFAS 133, as amended. SFAS 138 amends the accounting and reporting standards of SFAS 133, as amended, for certain derivative instruments, certain hedging activities and for decisions made by the FASB relating to the Derivatives Implementation Group, or the DIG, process. The DIG presently has additional issues and questions pending and continues to release guidance and interpretations as such issues are resolved. We continue to consider the actions and conclusions of the DIG as they are released in order to determine their potential impact on our consolidated financial statements. On January 1, 2001, we implemented SFAS 133, as amended. The implementation of SFAS 133, as amended, did not have a material impact on our consolidated financial statements as it relates to the derivative financial instruments that existed at December 31, 2000. However, the effect of future derivative transactions as well as further guidance from the DIG may result in modifications of our current assessment of SFAS 133, as amended, and its overall impact on our consolidated financial statements. In September 2000, the FASB issued SFAS No. 140 -- Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement 125. SFAS 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. SFAS 140 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities which are based on the consistent application of a financial-components approach. SFAS 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001, and is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2001. On December 31, 2000, we implemented the disclosure requirements of SFAS 140, which did not have a material effect on our consolidated financial statements. We are currently evaluating the additional requirements of SFAS 140 to determine their potential impact on our consolidated financial statements. Effects of Inflation Inflation affects financial institutions less than other types of companies. Financial institutions make relatively few significant asset acquisitions that 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, we believe this is generally manageable through our asset-liability management program. QUARTERLY CONDENSED FINANCIAL DATA - UNAUDITED
2000 Quarter Ended --------------------------------------------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- (dollars expressed in thousands) Interest income.............................................. $ 97,717 104,161 107,582 113,366 Interest expense............................................. 42,287 45,771 48,140 51,481 --------- --------- ---------- --------- Net interest income................................... 55,430 58,390 59,442 61,885 Provision for loan losses.................................... 3,582 3,620 3,865 3,060 --------- --------- ---------- --------- Net interest income after provision for loan losses... 51,848 54,770 55,577 58,825 Noninterest income........................................... 9,564 11,471 10,750 10,993 Noninterest expense.......................................... 37,793 41,917 42,776 48,677 --------- --------- ---------- --------- Income before provision for income taxes and minority interest in income of subsidiary........... 23,619 24,324 23,551 21,141 Provision for income taxes................................... 8,544 9,197 8,947 7,794 --------- --------- ---------- --------- Income before minority interest in income of subsidiary................................ 15,075 15,127 14,604 13,347 Minority interest in income of subsidiary.................... 488 455 546 557 --------- --------- ---------- --------- Net income............................................ $ 14,587 14,672 14,058 12,790 ========= ========= ========== ========= Earnings per common share: Basic.................................................... $ 608.21 614.51 585.87 529.46 Diluted.................................................. 589.52 594.12 570.33 519.78 ========= ========= ========== ======== 1999 Quarter Ended --------------------------------------------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- (dollars expressed in thousands) Interest income.............................................. $ 82,560 85,641 89,045 95,836 Interest expense............................................. 38,966 38,150 39,544 42,041 --------- --------- ---------- --------- Net interest income................................... 43,594 47,491 49,501 53,795 Provision for loan losses.................................... 2,490 3,373 2,880 4,330 --------- --------- ---------- --------- Net interest income after provision for loan losses... 41,104 44,118 46,621 49,465 Noninterest income........................................... 9,603 13,515 9,021 9,511 Noninterest expense.......................................... 35,487 37,248 37,515 40,557 --------- --------- ---------- --------- Income before provision for income taxes and minority interest in income of subsidiary........... 15,220 20,385 18,127 18,419 Provision for income taxes................................... 5,638 7,465 6,689 6,521 --------- --------- ---------- --------- Income before minority interest in income of subsidiary................................ 9,582 12,920 11,438 11,898 Minority interest in income of subsidiary.................... 311 361 416 572 --------- --------- ---------- --------- Net income............................................ $ 9,271 12,559 11,022 11,326 ========= ========= ========== ========= Earnings per common share: Basic.................................................... $ 383.52 525.23 457.54 467.62 Diluted.................................................. 372.57 505.15 444.11 456.94 ========= ========= ========== =========
CONSOLIDATED BALANCE SHEETS (dollars expressed in thousands, except per share data)
December 31, --------------------- 2000 1999 ---- ---- ASSETS ------ Cash and cash equivalents: Cash and due from banks....................................................... $ 167,474 126,720 Interest-bearing deposits with other financial institutions with maturities of three months or less..................................... 4,005 1,674 Federal funds sold............................................................ 26,800 42,500 ------------ ----------- Total cash and cash equivalents..................................... 198,279 170,894 ------------ ----------- Investment securities: Available for sale, at fair value............................................. 539,386 430,093 Held to maturity, at amortized cost (fair value of $24,507 and $21,476 at December 31, 2000 and 1999, respectively)........................ 24,148 21,554 ------------ ----------- Total investment securities......................................... 563,534 451,647 ------------ ----------- Loans: Commercial, financial and agricultural........................................ 1,496,284 1,086,919 Real estate construction and development...................................... 809,682 795,081 Real estate mortgage.......................................................... 2,202,857 1,851,569 Consumer and installment...................................................... 181,602 233,374 Loans held for sale........................................................... 69,105 37,412 ------------ ----------- Total loans......................................................... 4,759,530 4,004,355 Unearned discount............................................................. (7,265) (8,031) Allowance for loan losses..................................................... (81,592) (68,611) ------------ ----------- Net loans........................................................... 4,670,673 3,927,713 ------------ ----------- Bank premises and equipment, net of accumulated depreciation and amortization................................................. 114,771 75,647 Intangibles associated with the purchase of subsidiaries........................... 85,021 46,085 Mortgage servicing rights, net of amortization..................................... 7,048 8,665 Accrued interest receivable........................................................ 45,226 33,491 Deferred income taxes.............................................................. 75,699 51,972 Other assets....................................................................... 116,440 101,633 ------------ ----------- Total assets........................................................ $ 5,876,691 4,867,747 ============ ===========
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, ------------------------ 2000 1999 ---- ---- LIABILITIES ----------- Deposits: Demand: Non-interest-bearing........................................................ $ 808,251 606,064 Interest-bearing............................................................ 448,146 415,113 Savings....................................................................... 1,447,898 1,198,314 Time: Time deposits of $100 or more............................................... 499,956 339,214 Other time deposits......................................................... 1,808,164 1,693,109 ------------ ----------- Total deposits........................................................... 5,012,415 4,251,814 Short-term borrowings.............................................................. 140,569 73,554 Note payable....................................................................... 83,000 64,000 Accrued interest payable........................................................... 23,227 11,607 Deferred income taxes.............................................................. 12,774 6,582 Accrued expenses and other liabilities............................................. 54,944 25,616 Minority interest in subsidiary.................................................... 14,067 12,058 ------------ ----------- Total liabilities........................................................ 5,340,996 4,445,231 ------------ ----------- Guaranteed preferred beneficial interests in: First Banks, Inc. subordinated debentures..................................... 138,569 83,394 First Banks America, Inc. subordinated debentures............................. 44,280 44,217 ------------ ----------- Total guaranteed preferred beneficial interests in subordinated debentures.............................................. 182,849 127,611 ------------ ----------- STOCKHOLDERS' EQUITY -------------------- Preferred stock: $1.00 par value, 5,000,000 shares authorized, no shares issued and outstanding at December 31, 2000 and 1999............................... -- -- 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.................................................................... 2,267 3,318 Retained earnings.................................................................. 325,580 270,259 Accumulated other comprehensive income............................................. 6,021 2,350 ------------ ----------- Total stockholders' equity............................................... 352,846 294,905 ------------ ----------- Total liabilities and stockholders' equity............................... $ 5,876,691 4,867,747 ============ ===========
CONSOLIDATED STATEMENTS OF INCOME (dollars expressed in thousands, except per share data)
Years ended December 31, ----------------------------- 2000 1999 1998 ---- ---- ---- Interest income: Interest and fees on loans.............................................. $ 390,332 323,207 284,177 Investment securities: Taxable............................................................... 27,331 26,206 39,898 Nontaxable............................................................ 961 937 985 Federal funds sold and other............................................ 4,202 2,732 2,800 --------- -------- --------- Total interest income.............................................. 422,826 353,082 327,860 --------- -------- --------- Interest expense: Deposits: Interest-bearing demand............................................... 5,909 5,098 5,135 Savings............................................................... 51,656 44,101 42,591 Time deposits of $100 or more......................................... 20,654 11,854 12,024 Other time deposits................................................... 99,603 84,639 92,305 Interest rate exchange agreements, net.................................. -- 5,397 3,810 Short-term borrowings................................................... 5,881 3,983 2,903 Note payable............................................................ 3,976 3,629 3,411 --------- -------- --------- Total interest expense............................................. 187,679 158,701 162,179 --------- -------- --------- Net interest income................................................ 235,147 194,381 165,681 Provision for loan losses.................................................... 14,127 13,073 9,000 --------- -------- --------- Net interest income after provision for loan losses................ 221,020 181,308 156,681 --------- -------- --------- Noninterest income: Service charges on deposit accounts and customer service fees........... 19,794 17,676 14,876 Credit card fees........................................................ 236 409 2,999 Loan servicing fees, net................................................ 486 657 1,017 Gain on mortgage loans sold and held for sale........................... 7,806 6,909 5,563 Net gain on sales of available-for-sale securities...................... 168 791 1,466 Net (loss) gain on trading securities................................... -- (303) 607 Gain on sales of branches, net of expenses.............................. 1,355 4,406 -- Other................................................................... 12,933 11,105 9,969 --------- -------- --------- Total noninterest income........................................... 42,778 41,650 36,497 --------- -------- --------- Noninterest expense: Salaries and employee benefits.......................................... 73,391 61,524 55,907 Occupancy, net of rental income......................................... 14,675 12,518 11,037 Furniture and equipment................................................. 11,702 8,520 8,122 Postage, printing and supplies.......................................... 4,431 4,244 5,230 Data processing fees.................................................... 22,359 18,567 13,917 Legal, examination and professional fees................................ 4,523 9,109 5,326 Communications.......................................................... 2,625 2,488 2,874 Advertising and business development.................................... 4,331 3,734 4,668 Guaranteed preferred debentures......................................... 13,173 12,050 9,842 Other................................................................... 19,953 18,053 21,781 --------- -------- --------- Total noninterest expense.......................................... 171,163 150,807 138,704 --------- -------- --------- Income before provision for income taxes and minority interest in income of subsidiary........................ 92,635 72,151 54,474 Provision for income taxes................................................... 34,482 26,313 19,693 --------- -------- --------- Income before minority interest in income of subsidiary............ 58,153 45,838 34,781 Minority interest in income of subsidiary.................................... 2,046 1,660 1,271 --------- -------- --------- Net income......................................................... 56,107 44,178 33,510 Preferred stock dividends.................................................... 786 786 786 --------- -------- --------- Net income available to common stockholders........................ $ 55,321 43,392 32,724 ========= ======== ========= Earnings per common share: Basic................................................................... $2,338.04 1,833.91 1,383.04 Diluted................................................................. 2,267.41 1,775.47 1,337.09 ========= ======== ========= 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 AND COMPREHENSIVE INCOME Three years ended December 31, 2000 (dollars expressed in thousands, except per share data)
Accu- Adjustable rate mulated preferred stock other Total --------------- Class A Compre- compre- stock- conver- Common Capital hensive Retained hensive holders' tible Class B stock surplus income earnings income equity ----- ------- ----- ------- --------------- ------ ------ Consolidated balances, January 1, 1998........... $ 12,822 241 5,915 3,978 199,143 9,438 231,537 Year ended December 31, 1998: Comprehensive income: Net income................................. -- -- -- -- 33,510 33,510 -- 33,510 Other comprehensive income, net of tax Unrealized gains on securities, net of reclassification adjustment (1).......... -- -- -- -- 2,300 -- 2,300 2,300 ------- Comprehensive income....................... 35,810 ======= Class A preferred stock dividends, $1.20 per share............................ -- -- -- -- (769) -- (769) Class B preferred stock dividends, $0.11 per share............................ -- -- -- -- (17) -- (17) Effect of capital stock transactions of majority-owned subsidiary................. -- -- -- (3,198) -- -- (3,198) -------- ---- ----- ------ ------- ------ ------- Consolidated balances, December 31, 1998......... 12,822 241 5,915 780 231,867 11,738 263,363 Year ended December 31, 1999: Comprehensive income: Net income................................. -- -- -- -- 44,178 44,178 -- 44,178 Other comprehensive income, net of tax Unrealized losses on securities, net of reclassification adjustment (1).......... -- -- -- -- (9,388) -- (9,388) (9,388) ------- Comprehensive income....................... 34,790 ======= Class A preferred stock dividends, $1.20 per share............................ -- -- -- -- (769) -- (769) Class B preferred stock dividends, $0.11 per share............................ -- -- -- -- (17) -- (17) Effect of capital stock transactions of majority-owned subsidiary................. -- -- -- (3,273) -- -- (3,273) Reclassification of retained earnings........ -- -- -- 5,000 (5,000) -- -- Reduction of deferred tax asset valuation allowance....................... -- -- -- 811 -- -- 811 ------- ---- ----- ------ ------- ------ ------- Consolidated balances, December 31,1999.......... 12,822 241 5,915 3,318 270,259 2,350 294,905 Year ended December 31, 2000: Comprehensive income: Net income................................. -- -- -- -- 56,107 56,107 -- 56,107 Other comprehensive income, net of tax Unrealized gains on securities, net of reclassification adjustment (1).......... -- -- -- -- 3,671 -- 3,671 3,671 ------- Comprehensive income....................... 59,778 ======= Class A preferred stock dividends, $1.20 per share............................ -- -- -- -- (769) -- (769) Class B preferred stock dividends, $0.11 per share............................ -- -- -- -- (17) -- (17) Effect of capital stock transactions of majority-owned subsidiary................. -- -- -- (1,051) -- -- (1,051) -------- ---- ----- ------ ------- ------ ------- Consolidated balances, December 31, 2000......... $ 12,822 241 5,915 2,267 325,580 6,021 352,846 ======== ==== ===== ====== ======= ====== =======
- ------------------------- (1) Disclosure of reclassification adjustment:
Years ended December 31, 2000 ----------------------------- 2000 1999 1998 ---- ---- ---- Unrealized gains (losses) arising during the year................................... $3,780 (8,874) 3,253 Less reclassification adjustment for gains included in net income................... 109 514 953 ------ ------ ----- Unrealized gains (losses) on securities............................................. $3,671 (9,388) 2,300 ====== ====== =====
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, --------------------------- 2000 1999 1998 ---- ---- ---- Cash flows from operating activities: Net income................................................................. $ 56,107 44,178 33,510 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation, amortization and accretion, net......................... 17,906 20,241 15,787 Originations and purchases of loans held for sale..................... (532,178) (452,941) (628,544) Proceeds from sales of loans held for sale............................ 413,247 507,077 520,994 Provision for loan losses............................................. 14,127 13,073 9,000 Provision for income taxes............................................ 34,482 26,313 19,693 Payments of income taxes.............................................. (10,525) (23,904) (16,091) (Increase) decrease in accrued interest receivable.................... (7,338) (3,164) 256 Net decrease (increase) in trading securities......................... -- 3,425 (315) Interest accrued on liabilities....................................... 187,679 158,701 162,368 Payments of interest on liabilities................................... (177,764) (154,056) (167,090) Other operating activities, net....................................... (13,307) (7,201) (5,582) Minority interest in income of subsidiary............................. 2,046 1,660 1,271 -------- -------- -------- Net cash (used in) provided by operating activities.............. (15,518) 133,402 (54,743) -------- -------- -------- Cash flows from investing activities: Cash (paid) received for acquired entities, net of cash and cash equivalents received (paid)................................ (86,106) (15,961) 29,339 Proceeds from sales of investment securities............................... 46,279 63,938 136,042 Maturities of investment securities available for sale..................... 347,642 350,940 395,961 Maturities of investment securities held to maturity....................... 1,169 2,708 2,314 Purchases of investment securities available for sale...................... (289,875) (288,023) (167,082) Purchases of investment securities held to maturity........................ (3,806) (2,627) (4,910) Net increase in loans...................................................... (339,575) (268,238) (443,741) Recoveries of loans previously charged-off................................. 9,842 9,281 8,444 Purchases of bank premises and equipment................................... (30,856) (17,099) (14,851) Other investing activities................................................. 5,052 (10) (13,919) -------- -------- -------- Net cash used in investing activities............................ (340,234) (165,091) (72,403) -------- -------- -------- Cash flows from financing activities: Increase (decrease) in demand and savings deposits......................... 155,058 (72,895) 258,757 Increase (decrease) in time deposits....................................... 129,008 144,499 (171,207) (Decrease) increase in Federal Home Loan Bank advances..................... -- (50,000) 48,485 Decrease in federal funds purchased........................................ (27,100) -- -- Increase in securities sold under agreements to repurchase................. 52,015 2,223 18,692 Increase (decrease) in notes payable....................................... 19,000 13,952 (24,637) Proceeds from issuance of guaranteed preferred subordinated debentures..... 55,050 -- 44,124 Sale of branch deposits.................................................... 892 (49,172) -- Payment of preferred stock dividends....................................... (786) (786) (786) -------- -------- -------- Net cash provided by (used in) financing activities.............. 383,137 (12,179) 173,428 -------- -------- -------- Net increase (decrease) in cash and cash equivalents............. 27,385 (43,868) 46,282 Cash and cash equivalents, beginning of year.................................... 170,894 214,762 168,480 -------- -------- -------- Cash and cash equivalents, end of year.......................................... $198,279 170,894 214,762 ======== ======== ======== Noncash investing and financing activities: Loans transferred to other real estate..................................... $ 1,761 4,039 3,067 Loans exchanged for and transferred to available-for-sale investment securities................................. 37,634 -- 65,361 Loans held for sale exchanged for and transferred to available-for-sale investment securities.............................. 19,805 3,985 23,898 Loans held for sale transferred to loans................................... 72,847 32,982 -- ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of the more significant accounting policies followed by First Banks, Inc. and subsidiaries (First Banks or the Company): Basis of Presentation. The accompanying consolidated financial statements of First Banks have been prepared in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. Principles of Consolidation. The consolidated financial statements include the accounts of the parent company and its subsidiaries, net of minority interest, as more fully described below. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications of 1999 and 1998 amounts have been made to conform with the 2000 presentation. First Banks operates through its subsidiary bank holding companies and subsidiary financial institutions (collectively referred to as the Subsidiary Banks) as follows: First Bank, headquartered in St. Louis County, Missouri (First Bank); First Capital Group, Inc., headquartered in Albuquerque, New Mexico (FCG); First Banks America, Inc., headquartered in St. Louis County, Missouri (FBA) and its wholly owned subsidiaries: First Bank & Trust, headquartered in San Francisco, California (FB&T); and The San Francisco Company, headquartered in San Francisco, California (SFC), and its wholly owned subsidiary: Bank of San Francisco, headquartered in San Francisco, California. The Subsidiary Banks are wholly owned by their respective parent companies except FBA, which was 83.37% owned by First Banks at December 31, 1999. On October 31, 2000, FBA issued 6,530,769 shares of its common stock to First Banks in conjunction with FBA's acquisition of First Bank & Trust, a wholly owned subsidiary of First Banks. This transaction increased First Banks' ownership interest in FBA to approximately 92.82%. First Banks owned 92.86% of FBA at December 31, 2000. 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. These reserve balances maintained in accordance with such requirements were $22.3 million and $10.8 million at December 31, 2000 and 1999, respectively. Investment Securities. The classification of investment securities available for sale or held to maturity is determined at the date of purchase. First Banks no longer engages in the trading of investment securities. Investment securities designated as available for sale, which include any security that 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 accumulated other comprehensive income. All previous fair value adjustments included in the separate component of accumulated other comprehensive income are reversed upon sale. Investment securities designated as held to maturity, which include any security that 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Loans Held for Portfolio. Loans held for portfolio are carried at cost, adjusted for amortization of premiums and accretion of discounts using the interest method. Interest and fees on loans are recognized as income using the interest method. Loan origination fees are deferred and accreted over the estimated life of the loans 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 and impaired loans are recorded as principal reductions. Interest income is recognized after all principal has been repaid or an improvement in the condition of the loan has occurred which would warrant resumption of interest accruals. A loan is considered impaired when it is probable that First Banks will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan agreement. When measuring impairment, the expected future cash flows of an impaired loan are discounted at the loan's effective interest rate. Alternatively, impairment is measured by reference to an observable market price, if one exists, or the fair value of the collateral for a collateral-dependent loan. Regardless of the historical measurement method used, First Banks measures impairment based on the fair value of the collateral when foreclosure is probable. Additionally, impairment of a restructured loan is measured by discounting the total expected future cash flows at the loan's effective rate of interest as stated in the original loan agreement. First Banks uses its existing nonaccrual methods for recognizing interest income on impaired loans. Loans Held for Sale. 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 mortgage servicing rights. Such fees are generally calculated on the outstanding principal balance of the loans serviced and are recorded as income when earned. Allowance for Loan Losses. The allowance for loan losses is maintained at a level considered adequate to provide for probable losses. The provision for 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, payment experience and selected key financial ratios. 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 three to seven years. Intangibles Associated With the Purchase of Subsidiaries. Intangibles associated with the purchase of subsidiaries consist of excess of cost over net assets acquired. The excess of cost over net assets acquired of purchased subsidiaries is amortized using the straight-line method over the estimated periods to be benefited, which range from approximately 10 to 15 years. First Banks reviews intangible assets for impairment whenever events or changes in circumstances indicate the carrying value of an underlying asset may not be recoverable. First Banks measures recoverability based upon the future cash flows expected to result from the use of the underlying asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying value of the underlying asset, First Banks recognizes an impairment loss. The impairment loss recognized represents the amount by which the carrying value of the underlying asset exceeds the fair value of the underlying asset. As such adjustments become necessary, they are reflected in the results of operations in the periods in which they become known. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 cost or fair value less applicable selling costs. The excess of cost over fair value of the property at the date of acquisition is charged to the allowance for 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. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in the tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income tax expense. First Banks, Inc. and its eligible subsidiaries file a consolidated federal income tax return and unitary or consolidated state income tax returns in all applicable states. 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. "Interest rate risk" is defined as the possibility that interest rates may move unfavorably from the perspective of First Banks. The risk that a counterparty to an agreement entered into by First Banks may default is defined as "credit risk." First Banks is party to commitments to extend credit and commercial and standby letters of credit in the normal course of business to meet the financing needs of its customers. These commitments involve, in varying degrees, elements of interest rate risk and credit risk in excess of the amount recognized in the consolidated balance sheets. Interest Rate Swap, Floor and Cap Agreements. Interest rate swap, floor and cap agreements are accounted for on an accrual basis with the net interest differential being recognized as an adjustment to interest income or interest expense of the related asset or liability. Premiums and fees paid upon the purchase of interest rate swap, floor and cap agreements are amortized over the life of the agreements 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 asset or liability. If, however, the amount of the underlying hedged asset or 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. Forward Contracts to Sell Mortgage-Backed Securities. Gains and losses on forward contracts to sell mortgage-backed securities, 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. Earnings Per Common Share. Basic earnings per shares (EPS) are 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (2) ACQUISITIONS AND DIVESTITURES During the three years ended December 31, 2000, First Banks completed 10 acquisitions as follows:
Total Purchase Excess Entity Date assets price cost ------ ---- ------ ----- ---- (dollars expressed in thousands) 2000 ---- The San Francisco Company San Francisco, California December 31, 2000 $ 183,800 62,200 16,300 Millennium Bank San Francisco, California December 29, 2000 117,000 20,700 8,700 Commercial Bank of San Francisco San Francisco, California October 31, 2000 155,600 26,400 9,300 Bank of Ventura Ventura, California August 31, 2000 63,800 14,200 7,200 First Capital Group, Inc. Albuquerque, New Mexico February 29, 2000 64,600 66,100 1,500 Lippo Bank San Francisco, California February 29, 2000 85,300 17,200 4,800 ---------- -------- -------- $ 670,100 206,800 47,800 ========== ======== ======== 1999 ---- Century Bank Beverly Hills, California August 31, 1999 $ 156,000 31,500 4,500 Redwood Bancorp San Francisco, California March 4, 1999 183,900 26,000 9,500 ---------- -------- -------- $ 339,900 57,500 14,000 ========== ======== ======== 1998 ---- Republic Bank Torrance, California September 15, 1998 $ 124,100 19,300 10,200 Pacific Bay Bank San Pablo, California February 2, 1998 38,300 4,200 1,500 ---------- -------- -------- $ 162,400 23,500 11,700 ========== ======== ========
In addition to the acquisitions included in the table above, during the three years ended December 31, 2000, First Banks also completed two branch office purchases. On September 17, 1999, FB&T completed its assumption of the deposits and certain liabilities and the purchase of selected assets of the Malibu, California branch office of Brentwood Bank of California. The transaction resulted in the acquisition of approximately $6.3 million in loans, $17.3 million of deposits and one branch office. The excess of the cost over the fair value of the net assets acquired was $325,000 and is being amortized over 15 years. On March 19, 1998, First Banks completed its assumption of the deposits and purchase of selected assets of the Solvang, California banking location of Bank of America. The transaction resulted in the acquisition of approximately $15.5 million in deposits and one office. The excess of the cost over the fair value of the net assets acquired was $1.8 million and is being amortized over 15 years. In April 2000, First Bank completed its divestiture of one branch office in central Illinois. In March and April 1999, First Bank completed its divestiture of seven branches in the northern and central Illinois market areas. For the years ended December 31, 2000 and 1999, these branch divestitures resulted in a reduction of the deposit base of approximately $8.8 million and $54.8 million, resulting in pre-tax gains of $1.4 million and $4.4 million, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The aforementioned acquisition transactions 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 periods subsequent to the respective acquisition dates, and the assets acquired and liabilities assumed were recorded at fair value at the acquisition dates. These acquisitions were funded from available cash reserves, proceeds from sales and maturities of available-for-sale investment securities, borrowings under First Banks' $120.0 million revolving credit agreement and the proceeds from the issuance of trust preferred securities. Due to the immaterial effect on previously reported financial information, pro forma disclosures have not been prepared for the aforementioned transactions. (3) INVESTMENTS IN DEBT AND EQUITY SECURITIES Securities Available for Sale. The amortized cost, contractual maturity, gross unrealized gains and losses and fair value of investment securities available for sale at December 31, 2000 and 1999 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, 2000: Carrying value: U.S. Treasury.................. $ 89,229 801 -- -- 90,030 30 (37) 90,023 5.85% U.S. Government agencies and corporations: Mortgage-backed......... 1,078 29,625 12,472 159,143 202,318 826 (160) 202,984 7.02 Other................... 22,059 151,242 10,131 20,256 203,688 2,028 (1,521) 204,195 6.70 Corporate debt securities...... 912 1,961 -- 500 3,373 -- (20) 3,353 7.65 Equity investments in other financial institutions...... 11,299 -- -- -- 11,299 8,121 (369) 19,051 7.98 Federal Home Loan Bank and Federal Reserve Bank stock (no stated maturity)........ 19,780 -- -- -- 19,780 -- -- 19,780 6.69 -------- ------- ------ ------- ------- ------ ------ ------- Total.............. $144,357 183,629 22,603 179,899 530,488 11,005 (2,107) 539,386 6.60 ======== ======= ====== ======= ======= ====== ====== ======= ==== Fair value: Debt securities................ $113,277 184,942 22,798 179,538 Equity securities.............. 38,831 -- -- -- -------- ------- ------ ------- Total.............. $152,108 184,942 22,798 179,538 ======== ======= ====== ======= Weighted average yield............ 6.19% 6.73% 6.89% 7.09% ======== ======= ====== ======= December 31, 1999: Carrying value: U.S. Treasury.................. $ 21,036 29,240 -- -- 50,276 58 (45) 50,289 6.10% U.S. Government agencies and corporations: Mortgage-backed......... 12,489 2,274 20,946 98,935 134,644 20 (1,540) 133,124 6.64 Other................... 144,185 26,073 13,170 24,256 207,684 4 (3,607) 204,081 6.02 Foreign debt securities........ 2,995 -- -- -- 2,995 286 -- 3,281 9.42 Equity investments in other financial institutions...... 9,605 -- -- -- 9,605 8,492 (434) 17,663 8.53 Federal Home Loan Bank and Federal Reserve Bank stock (no stated maturity)........ 21,655 -- -- -- 21,655 -- -- 21,655 6.07 -------- ------- ------ ------- ------- ------ ------ ------- Total.............. $211,965 57,587 34,116 123,191 426,859 8,860 (5,626) 430,093 6.26 ======== ======= ====== ======= ======= ====== ====== ======= ==== Fair value: Debt securities................ $177,426 57,448 32,998 119,621 Equity securities.............. 42,600 -- -- -- -------- ------- ------ ------- Total.............. $220,026 57,448 32,998 119,621 ======== ======= ====== ======= Weighted average yield............ 6.00% 6.44% 6.26% 6.79% ======== ======= ====== =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Securities Held to Maturity. The amortized cost, contractual maturity, gross unrealized gains and losses and fair value of investment securities held to maturity at December 31, 2000 and 1999 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, 2000: Carrying value: U.S. Government agencies and corporations: Mortgage-backed......... $ -- -- -- 5,130 5,130 3 (63) 5,070 6.72% State and political subdivisions............... 950 11,692 5,896 270 18,808 419 -- 19,227 5.03 Other.......................... 210 -- -- -- 210 -- -- 210 6.90 ------ ------ ----- ----- ------ --- ---- ------ Total.............. $1,160 11,692 5,896 5,400 24,148 422 (63) 24,507 5.33 ====== ====== ===== ===== ====== === ==== ====== ==== Fair value: Debt securities................ $1,167 11,854 6,124 5,362 ====== ====== ===== ===== Weighted average yield............ 4.64% 4.98% 5.16% 6.74% ====== ====== ===== ===== December 31, 1999: Carrying value: U.S. Government agencies and corporations: Mortgage-backed......... $ -- -- -- 2,355 2,355 -- (155) 2,200 6.28% State and political subdivisions............... 506 11,196 5,322 1,965 18,989 275 (198) 19,066 5.05 Other.......................... -- 210 -- -- 210 -- -- 210 6.92 ------ ------ ----- ----- ------ --- ---- ------ Total.............. $ 506 11,406 5,322 4,320 21,554 275 (353) 21,476 5.22 ====== ====== ===== ===== ====== === ==== ====== ==== Fair value: Debt securities................ $ 512 11,505 5,125 4,334 ====== ====== ===== ===== Weighted average yield............ 5.09% 4.97% 4.55% 6.62% ====== ====== ===== =====
Proceeds from sales of available-for-sale investment securities were $46.3 million, $63.9 million and $136.0 million for the years ended December 31, 2000, 1999 and 1998, respectively. Gross gains of $565,000, $791,000 and $1.5 million were realized on these sales during the years ended December 31, 2000, 1999 and 1998, respectively. Gross losses of $396,000 were realized on these sales during the year ended December 31, 2000. There were no losses realized on these sales in 1999 and 1998. Proceeds from calls of investment securities were $111,000 and $20,000 for the years ended December 31, 2000 and 1999, respectively. Gross gains of $300 were realized on these called securities during the year ended December 31, 2000. There were no gross gains on called securities in 1999. Gross losses of $1,800 and $1,200 were realized on these called securities during the years ended December 31, 2000 and 1999, respectively. Proceeds from sales of trading investment securities were $2.9 million and $311 million for the years ended December 31, 1999 and 1998, respectively. There were no gross gains realized on these sales for the year ended December 31, 1999. Gross gains of $879,000 were realized on these sales for the year ended December 31, 1998. Gross losses of $303,000 and $234,000 were realized on these sales for the years ended December 31, 1999 and 1998, respectively. Certain of the Subsidiary Banks maintain investments in the Federal Home Loan Bank (FHLB) and/or the Federal Reserve Bank (FRB). These investments are recorded at cost, which represents redemption value. The investment in FHLB stock is maintained at a minimum amount equal to the greater of 1% of the aggregate outstanding balance of 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 BSF are members of the FHLB system. The investment in FRB stock is maintained at a minimum of 6% of the applicable Subsidiary Bank's capital stock and capital surplus. First Bank and FB&T are members of the FRB system. Investment securities with a carrying value of approximately $180.5 million and $222.3 million at December 31, 2000 and 1999, respectively, were pledged in connection with deposits of public and trust funds, securities sold under agreements to repurchase and for other purposes as required by law. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (4) LOANS AND ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses for the years ended December 31 were as follows:
2000 1999 1998 ---- ---- ---- (dollars expressed in thousands) Balance, beginning of year..................................... $ 68,611 60,970 50,509 Acquired allowances for loan losses............................ 6,062 3,008 3,200 -------- -------- --------- 74,673 63,978 53,709 -------- -------- --------- Loans charged-off.............................................. (17,050) (17,721) (10,183) Recoveries of loans previously charged-off..................... 9,842 9,281 8,444 -------- -------- --------- Net loans charged-off.......................................... (7,208) (8,440) (1,739) -------- -------- --------- Provision charged to operations................................ 14,127 13,073 9,000 -------- -------- --------- Balance, end of year........................................... $ 81,592 68,611 60,970 ======== ======== =========
At December 31, 2000 and 1999, First Banks had $50.2 million and $36.7 million, respectively, of loans on nonaccrual status. Interest on nonaccrual loans, which would have been recorded under the original terms of the loans, was $5.8 million, $5.8 million and $4.5 million for the years ended December 31, 2000, 1999 and 1998, respectively. Of these amounts, $1.9 million, $2.7 million and $1.9 million were actually recorded as interest income on such loans in 2000, 1999 and 1998, respectively. At December 31, 2000 and 1999, First Banks had $53.2 million and $39.7 million of impaired loans, including $50.2 million and $36.7 million of loans on nonaccrual status, respectively. At December 31, 2000 and 1999, impaired loans also include $3.0 million of restructured loans. The allowance for loan losses includes an allocation for each impaired loan. The aggregate allocation of the allowance for loan losses related to impaired loans was approximately $10.3 million and $8.2 million at December 31, 2000 and 1999, respectively. The average recorded investment in impaired loans was $45.1 million, $46.0 million and $35.2 million for the years ended December 31, 2000, 1999 and 1998, respectively. The amount of interest income recognized using a cash basis method of accounting during the time these loans were impaired was $2.2 million, $2.8 million and $2.3 million in 2000, 1999 and 1998, respectively. First Banks' primary market areas are the states of Missouri, Illinois, Texas and California. At December 31, 2000 and 1999, approximately 91% and 90% of the total loan portfolio and 83% and 88% of the commercial and financial loan portfolio, respectively, were to borrowers within these regions. Real estate lending constituted the only significant concentration of credit risk. Real estate loans comprised approximately 65% and 67% of the loan portfolio at December 31, 2000 and 1999, of which 26% and 28%, respectively, 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, 2000 and 1999, 96% and 97%, respectively, 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, 2000 and 1999, First Banks serviced loans for others amounting to $957.2 million and $957.1 million, respectively. Borrowers' escrow balances held by First Banks on such loans were $653,000 and $1.0 million at December 31, 2000 and 1999, respectively. Changes in mortgage servicing rights, net of amortization, for the years ended December 31 were as follows:
2000 1999 ---- ---- (dollars expressed in thousands) Balance, beginning of year........................................... $ 8,665 9,825 Originated mortgage servicing rights................................. 1,455 1,670 Amortization......................................................... (3,072) (2,830) -------- -------- Balance, end of year................................................. $ 7,048 8,665 ======== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (6) BANK PREMISES AND EQUIPMENT Bank premises and equipment were comprised of the following at December 31:
2000 1999 ---- ---- (dollars expressed in thousands) Land................................................................ $ 18,266 17,582 Buildings and improvements........................................... 66,474 52,491 Furniture, fixtures and equipment.................................... 66,460 55,344 Leasehold improvements............................................... 23,794 11,635 Construction in progress............................................. 15,655 2,896 --------- --------- Total............................................................ 190,649 139,948 Less accumulated depreciation and amortization....................... 75,878 64,301 --------- --------- Bank premises and equipment, net................................. $ 114,771 75,647 ========= =========
Depreciation and amortization expense for the years ended December 31, 2000, 1999 and 1998 totaled $9.5 million, $7.6 million and $5.3 million, respectively. First Banks leases land, office properties and some items of equipment under operating leases. Certain of the leases contain renewal options and escalation clauses. Total rent expense was $10.7 million, $7.4 million and $5.3 million for the years ended December 31, 2000, 1999 and 1998, respectively. Future minimum lease payments under noncancellable operating leases extend through 2084 as follows:
(dollars expressed in thousands) Year ending December 31: 2001............................................................... $ 7,420 2002............................................................... 6,101 2003............................................................... 5,321 2004............................................................... 3,941 2005............................................................... 3,198 Thereafter......................................................... 21,578 -------- Total future minimum lease payments........................... $ 47,559 ========
First Banks leases to unrelated parties a portion of its banking facilities. Total rental income was $2.6 million, $2.6 million and $2.5 million for the years ended December 31, 2000, 1999 and 1998, respectively. (7) SHORT-TERM BORROWINGS Short-term borrowings were comprised of the following at December 31:
2000 1999 ---- ---- (dollars expressed in thousands) Securities sold under agreements to repurchase....................... $ 125,025 73,010 FHLB borrowings...................................................... 15,544 544 --------- -------- Short-term borrowings............................................ $ 140,569 73,554 ========= ========
The average balance of short-term borrowings was $106.1 million and $87.4 million, respectively, and the maximum month-end balance of short-term borrowings was $158.4 million and $176.4 million, respectively, for the years ended December 31, 2000 and 1999. The average rates paid on short-term borrowings during the years ended December 31, 2000, 1999 and 1998 were 5.54%, 4.83% and 4.84%, respectively. The assets underlying the short-term borrowings are under First Banks' control. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (8) NOTE PAYABLE First Banks has a $120.0 million revolving line of credit with a group of unaffiliated banks (Credit Agreement). The Credit Agreement, dated August 24, 2000, replaced a similar revolving credit agreement dated August 25, 1999. Interest under the Credit Agreement is payable on a monthly basis at the lead bank's corporate base rate or, at the option of First Banks, is payable at the Eurodollar Rate plus a margin based upon the outstanding loans and First Banks' profitability. The interest rate for borrowings under the Credit Agreement was 7.65% at December 31, 2000, and was based on the applicable Eurodollar Rate plus a margin of 1.00%. Amounts may be borrowed under the Credit Agreement until August 23, 2001, at which time the principal and accrued interest is due and payable. Loans under the Credit Agreement are secured by all of the stock of the Subsidiary Banks, which is owned by First Banks. Under the Credit Agreement, there were outstanding borrowings of $83.0 million at December 31, 2000. There were outstanding borrowings of $64.0 million under the previous credit agreement at December 31, 1999. The Credit Agreement requires maintenance of certain minimum capital ratios for each of the Subsidiary Banks. In addition, it prohibits the payment of dividends on First Banks' common stock. At December 31, 2000 and 1999, First Banks and the Subsidiary Banks were in compliance with all restrictions and requirements of the respective credit agreements. The average balance and maximum month-end balance outstanding of advances under the Credit Agreement during the years ended December 31 were as follows:
2000 1999 ---- ---- (dollars expressed in thousands) Average balance........................................................... $ 51,897 56,376 Maximum month-end balance................................................. 83,000 75,000 ======== ======
The average rates paid on the outstanding advances during the years ended December 31, 2000, 1999 and 1998 were 7.66%, 6.44% and 6.85%, respectively. (9) GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED DEBENTURES In February 1997, First Preferred Capital Trust (First Preferred I), a newly formed Delaware business trust subsidiary of First Banks, issued 3.45 million shares of 9.25% cumulative trust preferred securities at $25 per share in an underwritten public offering, and issued 106,702 shares of common securities to First Banks at $25 per share. First Banks owns all of First Preferred I's common securities. The gross proceeds of the offering were used by First Preferred I to purchase $88.9 million of 9.25% 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 not later than March 31, 2046 if certain conditions are met. The subordinated debentures are the sole asset of First Preferred I. 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 Preferred I under the First Preferred I preferred securities. First Banks' proceeds from the issuance of the subordinated debentures to First Preferred I, net of underwriting fees and offering expenses, were $83.1 million. Distributions on First Preferred I's preferred securities, which are payable quarterly in arrears, were $8.0 million for the years ended December 31, 2000, 1999 and 1998, and are included in noninterest expense in the consolidated financial statements. In July 1998, First America Capital Trust (FACT), a newly formed Delaware business trust subsidiary of FBA, issued 1.84 million shares of 8.50% cumulative trust preferred securities at $25 per share in an underwritten public offering, and issued 56,908 shares of common securities to FBA at $25 per share. FBA owns all of FACT's common securities. The gross proceeds of the offering were used by FACT to purchase $47.4 million of 8.50% subordinated debentures from FBA, maturing on June 30, 2028. The maturity date may be shortened to a date not earlier than June 30, 2003 or extended to a date not later than June 30, 2037 if certain conditions are met. The subordinated debentures are the sole asset of FACT. In connection with the issuance of the FACT preferred securities, FBA made certain guarantees and commitments that, in the aggregate, constitute a full and unconditional guarantee by FBA of the obligations of FACT under the FACT preferred securities. FBA's proceeds from the issuance of the subordinated debentures to FACT, net of underwriting fees and offering expenses, were $44.0 million. Distributions payable on the FACT preferred securities, which are payable quarterly in arrears, were $3.9 million, $4.0 million and $1.8 million for the years ended December 31, 2000, 1999 and 1998, respectively, and are included in noninterest expense in the consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) On October 19, 2000, First Preferred Capital Trust II (First Preferred II), a newly formed Delaware business trust subsidiary of First Banks, issued 2.3 million shares of 10.24% cumulative trust preferred securities at $25 per share in an underwritten public offering, and issued 71,135 shares of common securities to First Banks at $25 per share. First Banks owns all of First Preferred II's common securities. The gross proceeds of the offering were used by First Preferred II to purchase $59.3 million of 10.24% subordinated debentures from First Banks, maturing on September 30, 2030. The maturity date may be shortened to a date not earlier than September 30, 2005, if certain conditions are met. The subordinated debentures are the sole asset of First Preferred II. 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 Preferred II under the First Preferred II preferred securities. First Banks' proceeds from the issuance of the subordinated debentures to First Preferred II, net of underwriting fees and offering expenses, were $55.1 million. Distributions on First Preferred II's preferred securities, which are payable quarterly in arrears, were $1.2 million for the year ended December 31, 2000, and are included in noninterest expense in the consolidated financial statements. (10) INCOME TAXES Income tax expense attributable to income from continuing operations for the years ended December 31 consists of:
Years ended December 31, ------------------------ 2000 1999 1998 ---- ---- ---- (dollars expressed in thousands) Current income tax expense: Federal.................................................... $28,215 19,731 16,801 State...................................................... 2,731 2,247 1,292 ------- ------ ------ 30,946 21,978 18,093 ------- ------ ------ Deferred income tax expense: Federal.................................................... 4,001 5,056 1,895 State...................................................... (60) 14 273 ------- ------ ------ 3,941 5,070 2,168 ------- ------ ------ Reduction in deferred valuation allowance...................... (405) (735) (568) ------- ------ ------ Total.................................................. $34,482 26,313 19,693 ======= ====== ======
The effective rates of federal income taxes for the years ended December 31 differ from statutory rates of taxation as follows:
Years ended December 31, ---------------------------------------------------------- 2000 1999 1998 ----------------- -------------- ----------------- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- (dollars expressed in thousands) Income before provision for income taxes and minority interest in income of subsidiary.... $ 92,635 $72,151 $ 54,474 ======== ======= ======== Provision for income taxes calculated at federal statutory income tax rates........ $ 32,422 35.0% $25,253 35.0% $ 19,066 35.0% Effects of differences in tax reporting: Tax-exempt interest income, net of tax preference adjustment................ (587) (0.6) (439) (0.6) (461) (0.9) State income taxes........................... 1,736 1.8 1,470 2.0 1,018 1.9 Amortization of intangibles associated with the purchase of subsidiaries........ 1,567 1.7 1,261 1.8 864 1.6 Reduction in deferred valuation allowance.... (405) (0.4) (735) (1.0) (568) (1.0) Other, net................................... (251) (0.3) (497) (0.7) (226) (0.4) -------- ----- ------- ---- -------- ---- Provision for income taxes............. $ 34,482 37.2% $26,313 36.5% $ 19,693 36.2% ======== ===== ======= ==== ======== ====
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
December 31, ------------ 2000 1999 ---- ---- (dollars expressed in thousands) Deferred tax assets: Net operating loss carryforwards................................ $ 47,043 30,792 Allowance for loan losses....................................... 29,965 27,071 Alternative minimum tax credits................................. 3,319 2,841 Disallowed losses on investment securities...................... 3,197 2,443 Other real estate............................................... 65 15 Other........................................................... 5,185 3,556 -------- -------- Gross deferred tax assets................................... 88,774 66,718 Valuation allowance............................................. (13,075) (14,746) -------- -------- Deferred tax assets, net of valuation allowance............. 75,699 51,972 -------- -------- Deferred tax liabilities: Depreciation on bank premises and equipment..................... 6,151 3,332 Net fair value adjustment for securities available for sale..... 3,258 1,132 Operating leases................................................ 1,313 -- FHLB stock dividends............................................ 890 1,094 State taxes..................................................... 568 591 Other........................................................... 594 433 -------- -------- Deferred tax liabilities.................................... 12,774 6,582 -------- -------- Net deferred tax assets..................................... $ 62,925 45,390 ======== ========
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 $62.9 million. The net change in the valuation allowance, related to deferred tax assets, was a decrease of $1.7 million for the year ended December 31, 2000. The decrease related to the recognition of deferred tax assets for certain loans and other real estate, and the reversal of valuation reserves resulting from the utilization of net operating loss carryforwards. Changes to the deferred tax asset valuation allowance for the years ended December 31 were as follows:
2000 1999 1998 ---- ---- ---- (dollars expressed in thousands) Balance, beginning of year......................................... $ 14,746 17,179 17,747 Current year deferred provision, change in deferred tax valuation allowance............................... (405) (735) (568) Reduction attributable to utilization of deferred tax assets: Adjustment to capital surplus................................... -- (811) -- Adjustment to intangibles associated with the purchase of subsidiaries..................................... (1,266) (887) -- -------- ------- ------- Balance, end of year............................................... $ 13,075 14,746 17,179 ======== ======= =======
The valuation allowance for deferred tax assets at December 31, 1999 included $1.3 million that was recognized in 2000 and credited to intangibles associated with the purchase of subsidiaries. In addition, the valuation allowance for deferred tax assets at December 31, 2000 and 1999 includes $5.0 million which when recognized, will be credited to capital surplus under the terms of the quasi-reorganizations implemented for FBA and First Commercial Bancorp, Inc. as of December 31, 1994 and 1996, respectively. At December 31, 2000 and 1999, the accumulation of prior years' earnings representing tax bad debt deductions were approximately $30.8 million. If these tax bad debt reserves were charged for losses other than bad debt losses, First Bank and FB&T would be required to recognize taxable income in the amount of the charge. It is not contemplated that such tax-restricted retained earnings will be used in a manner that would create federal income tax liabilities. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At December 31, 2000 and 1999, for federal income taxes purposes, First Banks had net operating loss carryforwards of approximately $134.4 million and $88.0 million, respectively. The net operating loss carryforwards for First Banks expire as follows:
(dollars expressed in thousands) Year ending December 31: 2001................................................. $ 561 2002................................................. 4,562 2003................................................. 4,611 2004................................................. 4,148 2005................................................. 21,052 2006 - 2020.......................................... 99,475 --------- Total............................................ $ 134,409 =========
(11) EARNINGS PER COMMON SHARE The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for the periods indicated:
Income Shares Per share (numerator) (denominator) amount ----------- ------------- ------ (dollars in thousands, except for per share data) Year ended December 31, 2000: Basic EPS - income available to common stockholders............. $ 55,321 23,661 $ 2,338.04 ========== Effect of dilutive securities: Class A convertible preferred stock........................... 769 1,076 --------- ------- Diluted EPS - income available to common stockholders........... $ 56,090 24,737 $ 2,267.41 ========= ======= ========== Year ended December 31, 1999: Basic EPS - income available to common stockholders............. $ 43,392 23,661 $ 1,833.91 ========== Effect of dilutive securities: Class A convertible preferred stock........................... 769 1,212 --------- ------- Diluted EPS - income available to common stockholders........... $ 44,161 24,873 $ 1,775.47 ========= ======= ========== Year ended December 31, 1998: Basic EPS - income available to common stockholders............. $ 32,724 23,661 $ 1,383.04 ========== Effect of dilutive securities: Class A convertible preferred stock........................... 769 1,389 --------- ------- Diluted EPS - income available to common stockholders........... $ 33,493 25,050 $ 1,337.09 ========= ======= ==========
(12) INTEREST RATE RISK MANAGEMENT / DERIVATIVE FINANCIAL INSTRUMENTS First Banks utilizes off-balance-sheet derivative financial instruments to assist in the management of interest rate sensitivity and to modify the repricing, maturity and option characteristics of on-balance-sheet assets and liabilities. The use of such derivative financial instruments is strictly limited to reducing First Banks' interest rate risk exposure. Derivative financial instruments held by First Banks for purposes of managing interest rate risk are summarized as follows:
December 31, ------------------------------------------------- 2000 1999 --------------------- -------------------- Notional Credit Notional Credit amount exposure amount exposure ------ -------- ------ -------- (dollars expressed in thousands) Interest rate swap agreements - pay adjustable rate, receive fixed rate................. $1,105,000 4,207 455,000 3,349 Interest rate swap agreements - pay adjustable rate, receive adjustable rate............ -- -- 500,000 -- Interest rate floor agreements........................ 35,000 6 35,000 13 Interest rate cap agreements.......................... 450,000 3,753 10,000 26 Forward commitments to sell mortgage-backed securities.......................... 32,000 -- 33,000 -- ========== ======= ========= ======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The notional amounts of derivative financial instruments do not represent amounts exchanged by the parties and, therefore, are not a measure of our credit exposure through the use of these instruments. The credit exposure represents the accounting loss we would incur in the event the counterparties failed completely to perform according to the terms of the derivative financial instruments and the collateral held to support the credit exposure was of no value. Previously, First Banks utilized interest rate swap agreements to extend the repricing characteristics of certain interest-bearing liabilities to more closely correspond with its assets, with the objective of stabilizing cash flow, and accordingly, net interest income, over time. These swap agreements were terminated due to a change in the composition of the balance sheet. The change in the composition of the balance sheet was primarily driven by the significant decline in interest rates experienced during 1995, which caused an increase in the principal prepayments of residential mortgage loans. The net interest expense associated with these agreements, consisting primarily of amortization of deferred losses, was $5.7 million and $3.7 million for the years ended December 31, 1999 and 1998, respectively. The deferred losses on terminated swap agreements were amortized over the remaining lives of the agreements, unless the underlying liabilities were repaid, in which case the deferred losses were immediately charged to operations. There were no remaining unamortized deferred losses on the terminated swap agreements at December 31, 1999. During 1998, First Banks entered into $280.0 million notional amount of interest rate swap agreements. The swap agreements effectively lengthen the repricing characteristics of certain interest-earning assets to correspond more closely with their funding source with the objective of stabilizing cash flow, and accordingly, net interest income, over time. The swap agreements initially provided for First Banks to receive a fixed rate of interest and pay an adjustable rate equivalent to the 90-day London Interbank Offering Rate. In March 2000, the terms of the swap agreements were modified such that First Banks currently pay an adjustable rate of interest equivalent to the daily weighted average prime lending rate minus 2.705%. The terms of the swap agreements provide for First Banks to pay quarterly and receive payment semiannually. The amount receivable by First Banks under the swap agreements was $4.1 million at December 31, 2000 and 1999, respectively, and the amount payable by First Banks under the swap agreements was $744,000 and $770,000 at December 31, 2000 and 1999, respectively. During May 1999, First Banks entered into $500.0 million notional amount of interest rate swap agreements with the objective of stabilizing the net interest margin during the six-month period surrounding the Year 2000 century date change. The swap agreements provided for First Banks to receive an adjustable rate of interest equivalent to the daily weighted average 30-day London Interbank Offering Rate and pay an adjustable rate of interest equivalent to the daily weighted average prime lending rate minus 2.665%. The terms of the swap agreements, which had an effective date of October 1, 1999 and a maturity date of March 31, 2000, provided for First Banks to pay and receive interest on a monthly basis. In January 2000, First Banks determined these swap agreements were no longer necessary based upon the results of the Year 2000 transition and terminated these agreements resulting in a cost of $150,000. During September 1999, First Banks entered into $175.0 million notional amount of interest rate swap agreements to effectively lengthen the repricing characteristics of certain interest-earning assets to correspond more closely with their funding source with the objective of stabilizing cash flow, and accordingly, net interest income, over time. The swap agreements provide for First Banks to receive a fixed rate of interest and pay an adjustable rate equivalent to the weighted average prime lending rate minus 2.70%. The terms of the swap agreements provide for First Banks to pay and receive interest on a quarterly basis. The amount receivable by First Banks under the swap agreements was $119,000 at December 31, 2000 and 1999 and the amount payable by First Banks under the swap agreements was $165,000 and $141,000 at December 31, 2000 and 1999, respectively. During September 2000, First Banks entered into $600.0 million notional amount of interest rate swap agreements to effectively lengthen the repricing characteristics of certain interest-earning assets to correspond more closely with their funding source with the objective of stabilizing cash flow, and accordingly, net interest income, over time. The swap agreements provide for First Banks to receive a fixed rate of interest and pay an adjustable rate equivalent to the weighted average prime lending rate minus 2.70%. The terms of the swap agreements provide for First Banks to pay and receive interest on a quarterly basis. The amount receivable and payable by First Banks under the swap agreements was $1.2 million at December 31, 2000. In conjunction with these interest rate swap agreements, First Banks also entered into $450.0 million notional amount of interest rate cap agreements to limit the net interest expense associated with the interest rate swap agreements. The interest rate cap agreements provide for First Banks to receive a quarterly adjustable rate of interest equivalent to the three-month London Interbank Offering Rate, should such rate exceed the predetermined interest rate of 7.50%. At December 31, 2000, the unamortized costs associated with the interest rate cap agreements were $3.8 million, and were included in other assets, and the fair value of the interest rate cap agreements was $1.6 million. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) During September 2000, First Banks entered into $25.0 million notional amount of one-year interest rate swap agreements and $25.0 million of five and one-half year interest rate swap agreements to effectively shorten the repricing characteristics of certain interest-bearing liabilities with the objective of stabilizing cash flow, and accordingly, net interest income, over time. The swap agreements provide for First Banks to receive fixed rates of interest ranging from 6.6% to 7.25% and pay an adjustable rate equivalent to the three-month London Interbank Offering Rate minus rates ranging from 0.02% to 0.11%. The terms of the swap agreements provide for First Banks to pay interest on a quarterly basis and receive interest on either a semiannual basis or an annual basis. The amount receivable by First Banks under the swap agreements was $1.0 million at December 31, 2000 and the amount payable by First Banks under the swap agreements was $119,000 at December 31, 2000. At December 31, 2000, First Banks had pledged investment securities available for sale with a carrying value of $8.6 million in connection with the interest rate swap agreements. In addition, at December 31, 2000, First Banks had accepted investment securities with a fair value of $19.0 million as collateral in connection with the interest rate swap agreements. First Banks is permitted by contract to sell or repledge the collateral accepted from its counterparties, however, at December 31, 2000, First Banks had not sold or repledged any of this collateral. The maturity dates, notional amounts, interest rates paid and received, and fair values of interest rate swap agreements outstanding as of December 31, 2000 and 1999 were as follows:
Notional Interest rate Interest rate Fair Maturity date amount paid received Value ------------- ------ ---- -------- ----- (dollars expressed in thousands) December 31, 2000: September 27, 2001........................... $ 175,000 6.80% 6.14% $ 65 June 11, 2002................................ 15,000 6.80 6.00 7 September 13, 2001........................... 12,500 6.56 6.80 42 September 21, 2001........................... 12,500 6.47 6.60 43 September 16, 2002........................... 195,000 6.80 5.36 (1,776) September 18, 2002........................... 70,000 6.80 5.33 (690) September 20, 2004........................... 600,000 6.80 6.78 16,869 March 13, 2006............................... 12,500 6.47 7.25 5 March 22, 2006............................... 12,500 6.39 7.20 6 ---------- -------- $1,105,000 6.70 6.43 $ 14,571 ========== ====== ===== ======== December 31, 1999: March 31, 2000............................... $ 500,000 5.84% 6.45% $ 124 September 27, 2001........................... 175,000 5.80 6.14 (1,598) June 11, 2002................................ 15,000 6.12 6.00 (291) September 16, 2002........................... 195,000 6.12 5.36 (7,325) September 18, 2002........................... 70,000 6.14 5.33 (2,700) ---------- -------- $ 955,000 5.91 6.08 $(11,790) ========== ====== ===== ========
First Banks also utilizes interest rate cap and floor agreements to limit the interest expense associated with certain interest-bearing liabilities and the net interest expense of certain interest rate swap agreements, respectively. At December 31, 2000 and 1999, the unamortized costs of these agreements were $6,000 and $32,000, respectively, and were included in other assets. During 2000 and 1998, the net interest expense realized on the derivative financial instruments was $4.7 million and $4.0 million, respectively, in comparison to net interest income of $430,000 realized on the derivative financial instruments in 1999. 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 $37.6 million and $31.5 million at December 31, 2000 and 1999, respectively. These net loan commitments and loans held for sale are hedged with forward contracts to sell mortgage-backed securities of $32.0 million and $33.0 million at December 31, 2000 and 1999, respectively. Gains and losses from forward contracts are deferred and included in the cost basis of loans held for sale. At December 31, 2000, the net unamortized losses were $165,000, in comparison to net unamortized gains of $838,000 at December 31, 1999. Such gains and losses were applied to the carrying value of the loans held for sale as part of the lower of cost or market valuation. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (13) CREDIT COMMITMENTS First Banks is a party to commitments to extend credit and commercial and standby letters of credit in the normal course of business to meet the financing needs of its customers. These instruments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The interest rate risk associated with these credit commitments relates primarily to the commitments to originate fixed-rate loans. As more fully discussed in Note 12 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 were as follows:
December 31, ------------ 2000 1999 ---- ---- (dollars expressed in thousands) Commitments to extend credit.......................................... $ 1,484,278 1,310,249 Commercial and standby letters of credit.............................. 94,802 64,455 ----------- --------- $ 1,579,080 1,374,704 =========== =========
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant, equipment, income-producing commercial properties or single family residential properties. Collateral is generally required except for consumer credit card commitments. Commercial and standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Most letters of credit extend for less than one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Upon issuance of the commitments, First Banks holds marketable securities, certificates of deposit, inventory, real property or other assets as collateral supporting those commitments for which collateral is deemed necessary. (14) FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of financial instruments is 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, bank premises and equipment and intangibles associated with the purchase of subsidiaries. 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The estimated fair value of First Banks' financial instruments at December 31 were as follows:
2000 1999 ----------------------- ----------------------- Carrying Estimated Carrying Estimated value fair value value fair value ----- ---------- ----- ---------- Financial assets: Cash and cash equivalents.................... $ 198,279 198,279 170,894 170,894 Investment securities: Available for sale......................... 539,386 539,386 430,093 430,093 Held to maturity........................... 24,148 24,509 21,554 21,476 Net loans.................................... 4,670,673 4,694,594 3,927,713 3,908,065 Accrued interest receivable.................. 45,226 45,226 33,491 33,491 ========== ========== ========== ========== Financial liabilities: Deposits: Demand: Non-interest-bearing.................... $ 808,251 808,251 606,064 606,064 Interest-bearing........................ 448,146 448,146 415,113 415,113 Savings and money market................... 1,447,898 1,447,898 1,198,314 1,198,314 Time deposits.............................. 2,308,120 2,351,418 2,032,323 2,032,323 Short-term borrowings........................ 140,569 140,569 73,554 73,554 Note payable................................. 83,000 83,000 64,000 64,000 Accrued interest payable..................... 23,227 23,227 11,607 11,607 Guaranteed preferred beneficial interests in subordinated debentures................. 182,849 185,608 127,611 127,391 ========== ========== ========== ========== Off-balance-sheet: Interest rate swap, cap and floor agreements. $ 7,966 16,208 3,388 (11,742) Forward contracts to sell mortgage-backed securities................................. -- 32,393 -- 32,207 Credit commitments........................... -- 4,183 -- 4,517 ========== ========== ========== ==========
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: The fair value of investment securities available for sale is the amount reported in the consolidated balance sheets. The fair value of investment securities held to maturity is based on quoted market prices where available. If quoted market prices were not available, the fair value was based upon quoted market prices of comparable instruments. Net loans: The fair value of most loans held for portfolio was estimated utilizing discounted cash flow calculations that applied interest rates currently being offered for similar loans to borrowers with similar risk profiles. The fair value of loans held for sale, which is the amount reported in the consolidated balance sheets, is based on quoted market prices where available. If quoted market prices are not available, the fair value is based upon quoted market prices of comparable instruments. The carrying value of loans is net of the allowance for 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The fair value disclosed for certificates of deposit was estimated utilizing a discounted cash flow calculation that applied interest rates currently being offered on similar certificates to a schedule of aggregated monthly maturities of time deposits. Guaranteed preferred beneficial interests in subordinated debentures: The fair value is based on quoted market prices. Short-term borrowings, note payable and accrued interest payable: The carrying value reported in the consolidated balance sheets approximates fair value. Off-Balance-Sheet: Interest rate swap, cap and floor agreements: The fair value of the interest rate swap, cap and floor agreements is estimated by comparison to market rates quoted on new agreements with similar terms and creditworthiness. Forward contracts to sell mortgage-backed securities: The fair value of forward contracts to sell mortgage-backed securities is 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 fair value of the commitments to extend credit associated with loans held for sale in which First Banks has interest rate risk exposure are based on quoted market prices of comparable mortgage-backed securities less estimated fallout. The majority of the other 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 reported in the consolidated balance sheets approximates fair value. (15) EMPLOYEE BENEFITS First Banks' 401(k) 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 the employee's annual compensation, not to exceed $10,500 for 2000. Total employer contributions under the plan were $1.1 million, $863,000 and $648,000 for the years ended December 31, 2000, 1999 and 1998, respectively. The plan assets are held and managed under a trust agreement with First Bank's trust department. (16) PREFERRED STOCK First Banks has two classes of preferred stock outstanding. The 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 105.0% of par value. The Class B preferred stock may not be redeemed or converted. The redemption of any issue of preferred stock requires the prior approval of the Federal Reserve Board. 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 6.0% nor more than 12.0% on the Class A preferred stock, or less than 7.0% nor more than 15.0% on the Class B preferred stock. The annual dividend rates for the Class A and Class B preferred stock were 6.0% and 7.0%, respectively, for the years ended December 31, 2000, 1999 and 1998. In addition to the Class A and Class B preferred stock, First Banks has two issues of trust preferred securities outstanding and FBA has one issue of trust preferred securities outstanding. The structure of the trust preferred securities, as further described in Note 9, satisfies the regulatory requirements for inclusion, subject to certain limitation, in First Banks' capital base. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (17) 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 relationships 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 2000, 1999 and 1998, Tidal Insurance Limited (Tidal), a corporation owned indirectly by First Banks' Chairman and his adult children, received approximately $212,000, $316,000 and $280,000, 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 subsequently ceded to Tidal. First Banks believes the premiums paid by the loan customers of First Banks are comparable to those that such loan customers would have paid if the premiums were subsequently ceded to an unaffiliated third-party insurer. During 2000, 1999 and 1998, First Securities America, Inc. (FSA), a corporation established and administered by and for the benefit of First Banks' Chairman and members of his immediate family, received approximately $235,000, $194,000 and $265,000, respectively, in commissions and insurance premiums for policies purchased by First Banks or customers of the Subsidiary Banks from unaffiliated, third-party insurors. The insurance premiums on which the aforementioned commissions were earned were competitively bid, and First Banks deems the commissions FSA earned from unaffiliated third-party companies to be comparable to those that would have been earned by an unaffiliated third-party agent. First Brokerage America, L.L.C., a limited liability corporation which is indirectly owned by First Banks' Chairman and members of his immediate family, received approximately $2.1 million, $2.3 million and $1.8 million for the years ended December 31, 2000, 1999 and 1998, respectively, in commissions paid by unaffiliated third-party companies. The commissions received were primarily in connection with the sales of annuities, securities and other insurance products to customers of the Subsidiary Banks. First Services, L.P., a limited partnership indirectly owned by First Banks' Chairman and his adult children, provides data processing services and operational support for First Banks, Inc. and its Subsidiary Banks. Fees paid under agreements with First Services L.P. were $19.3 million, $16.4 million and $12.2 million for the years ended December 31, 2000, 1999 and 1998, respectively. During 2000, 1999 and 1998, First Services, L.P. paid First Banks $1.8 million, $1.2 million and $799,000, respectively, in rental fees for the use of data processing and other equipment owned by First Banks. The fees paid by First Banks for data processing services are at least as favorable as could have been obtained from unaffiliated third parties. (18) CAPITAL STOCK OF FIRST BANKS AMERICA, INC. First Banks owned 2,500,000 shares of FBA's Class B common stock and 8,741,350 shares of FBA's common stock at December 31, 2000, representing 92.86% of FBA's outstanding voting stock. In comparison, First Banks owned 2,500,000 shares of FBA's Class B common stock and 2,210,581 shares of FBA's common stock at December 31, 1999, representing 83.37% of FBA's outstanding voting stock. The increase for 2000 is attributable to FBA's issuance of 6,530,769 shares of its common stock to First Banks in conjunction with its purchase of First Bank & Trust, a wholly owned subsidiary of First Banks. This transaction, which occurred on October 31, 2000, increased First Banks' ownership interest in FBA from 84.42% to approximately 92.82%. FBA's common stock is publicly traded on the New York Stock Exchange. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (19) REGULATORY CAPITAL First Banks and 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 First Banks' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, First Banks and the Subsidiary Banks must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classifications 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 First Banks and the Subsidiary Banks to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2000, First Banks and the Subsidiary Banks were each well capitalized. As of December 31, 2000, the most recent notification from First Banks' primary regulator categorized First Banks and the Subsidiary Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, First Banks and the Subsidiary Banks must maintain minimum total risk-based, Tier 1 risk-based and Tier 2 leverage ratios as set forth in the table below. At December 31, 2000 and 1999, First Banks' and the Subsidiary Banks' required and actual capital ratios were as follows:
To be well capitalized under Actual For capital prompt corrective ------ 2000 1999 adequacy purposes action provisions ---- ---- ----------------- ----------------- Total capital (to risk-weighted assets): First Banks............................. 10.21% 10.05% 8.0% 10.0% First Bank.............................. 10.71 10.60 8.0 10.0 FB&T.................................... 10.58 11.17 8.0 10.0 BSF (1)................................. 22.38 -- 8.0 10.0 Tier 1 capital (to risk-weighted assets): First Banks............................. 7.56 8.00 4.0 6.0% First Bank.............................. 9.46 9.35 4.0 6.0 FB&T.................................... 9.32 9.94 4.0 6.0 BSF (1)................................. 21.42 -- 4.0 6.0 Tier 1 capital (to average assets): First Banks............................. 7.45 7.14 3.0 5.0% First Bank.............................. 8.49 8.10 3.0 5.0 FB&T.................................... 9.27 9.15 3.0 5.0 BSF (1)................................. 22.00 -- 3.0 5.0
----------------------------- (1) BSF was acquired by FBA on December 31, 2000. (20) DISTRIBUTION OF EARNINGS OF THE SUBSIDIARY BANKS The Subsidiary Banks are restricted by various state and federal regulations, as well as by the terms of the Credit Agreement described in Note 8, as to the amount of dividends which are available for payment to First Banks, Inc. Under the most restrictive of these requirements, the future payment of dividends from the Subsidiary Banks is limited to approximately $45.2 million at December 31, 2000, unless prior permission of the regulatory authorities and/or the lending banks is obtained. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (21) BUSINESS SEGMENT RESULTS First Banks' business segments are its Subsidiary Banks. The reportable business segments are consistent with the management structure of First Banks, the Subsidiary Banks and the internal reporting system that monitors performance. Through the respective branch networks, the Subsidiary Banks provide similar products and services in their defined geographic areas. The products and services offered include a broad range of commercial and personal deposit products, including demand, savings, money market and time deposit accounts. In addition, the Subsidiary Banks market combined basic services for various customer groups, including packaged accounts for more affluent customers, and sweep accounts, lock-box deposits and cash management products for commercial customers. The Subsidiary Banks also offer both consumer and commercial loans. Consumer lending includes residential real estate, home equity and installment lending. Commercial lending includes commercial, financial and agricultural loans, real estate construction and development loans, commercial real estate loans, asset-based loans, commercial leasing and trade financing.
First Bank FB&T (1) --------------------------------- ---------------------------------- 2000 1999 1998 2000 1999 1998 ---- ---- ---- ---- ---- ---- (dollars expressed in thousands) Balance sheet information: Investment securities................... $ 214,005 241,624 264,364 330,478 192,357 247,566 Loans, net of unearned discount......... 2,694,005 2,527,649 2,490,556 2,058,628 1,469,093 1,089,965 Total assets............................ 3,152,885 3,028,046 3,024,600 2,733,545 1,854,827 1,504,311 Deposits................................ 2,729,489 2,689,671 2,659,030 2,306,469 1,590,490 1,329,253 Stockholders' equity.................... 273,848 263,466 243,673 333,186 204,617 148,239 ========== ========== ========= ========= ========= ========= Income statement information: Interest income......................... $ 247,290 221,195 219,609 176,902 132,407 108,662 Interest expense........................ 115,421 105,231 111,656 71,167 51,544 48,320 ---------- ---------- --------- --------- --------- --------- Net interest income................ 131,869 115,964 107,953 105,735 80,863 60,342 Provision for possible loan losses...... 12,250 8,890 7,250 1,877 4,183 1,750 ---------- ---------- --------- --------- --------- --------- Net interest income after provision for possible loan losses......... 119,619 107,074 100,703 103,858 76,680 58,592 Noninterest income...................... 32,152 32,260 29,582 12,343 10,774 8,322 Noninterest expense..................... 90,746 77,786 79,748 65,567 54,992 47,105 ---------- ---------- --------- --------- --------- --------- Income (loss) before provision (benefit) for income taxes and minority interest in income of subsidiary....................... 61,025 61,548 50,537 50,634 32,462 19,809 Provision (benefit) for income taxes.... 20,889 20,811 17,238 20,064 12,353 8,163 ---------- ---------- --------- --------- --------- --------- Income (loss) before minority interest in income of subsidiary. 40,136 40,737 33,299 30,570 20,109 11,646 Minority interest in income of subsidiary.................... -- -- -- -- -- -- ---------- ---------- --------- --------- --------- --------- Net income......................... $ 40,136 40,737 33,299 30,570 20,109 11,646 ========== ========== ========= ========= ========= =========
- ------------------------ (1) Includes BSF, which was acquired by FBA on December 31, 2000. (2) Corporate and other includes $8.6 million, $7.9 million and $6.4 million of guaranteed preferred debentures expense, after applicable income tax benefit of $4.6 million, $4.2 million and $3.4 million for the years ended December 31, 2000, 1999 and 1998, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Other financial services include mortgage banking, credit and debit cards, brokerage services, credit-related insurance, automated teller machines, telephone banking, safe deposit boxes and trust, private banking and institutional money management services. The revenues generated by each business segment consist primarily of interest income, generated from the loan and investment security portfolios, and service charges and fees, generated from the deposit products and services. The geographic areas include Missouri, Illinois, southern and northern California and Houston, Dallas, Irving and McKinney Texas. The products and services are offered to customers primarily within their respective geographic areas, with the exception of loan participations executed between the Subsidiary Banks. The business segment results are consistent with First Banks' internal reporting system and, in all material respects, with generally accepted accounting principles and practices predominant in the banking industry. Such principles and practices are summarized in Note 1 to the consolidated financial statements.
Corporate, Other and Intercompany Reclassifications (2) Consolidated Totals ---------------------------------------- ------------------------------------------- 2000 1999 1998 2000 1999 1998 ---- ---- ---- ---- ---- ---- (dollars expressed in thousands) 19,051 17,666 22,866 563,534 451,647 534,796 (368) (418) (416) 4,752,265 3,996,324 3,580,105 (9,739) (15,126) 25,899 5,876,691 4,867,747 4,554,810 (23,543) (28,347) (48,298) 5,012,415 4,251,814 3,939,985 (254,188) (173,178) (128,549) 352,846 294,905 263,363 ========= ========= ========= ========== ========= ========= (1,366) (520) (411) 422,826 353,082 327,860 1,091 1,926 2,203 187,679 158,701 162,179 --------- --------- --------- ---------- --------- --------- (2,457) (2,446) (2,614) 235,147 194,381 165,681 -- -- -- 14,127 13,073 9,000 --------- --------- --------- ---------- --------- --------- (2,457) (2,446) (2,614) 221,020 181,308 156,681 (1,717) (1,384) (1,407) 42,778 41,650 36,497 14,850 18,029 11,851 171,163 150,807 138,704 --------- --------- --------- ---------- --------- --------- (19,024) (21,859) (15,872) 92,635 72,151 54,474 (6,471) (6,851) (5,708) 34,482 26,313 19,693 --------- --------- --------- --------- --------- --------- (12,553) (15,008) (10,164) 58,153 45,838 34,781 2,046 1,660 1,271 2,046 1,660 1,271 --------- --------- --------- ---------- --------- --------- (14,599) (16,668) (11,435) 56,107 44,178 33,510 ========= ========= ========= ========== ========= =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (22) PARENT COMPANY ONLY FINANCIAL INFORMATION Following are condensed balance sheets of First Banks, Inc. as of December 31, 2000 and 1999, and condensed statements of income and cash flows for the years ended December 31, 2000, 1999 and 1998: CONDENSED BALANCE SHEETS
December 31, ----------------- 2000 1999 ---- ---- (dollars expressed in thousands) Assets ------ Cash deposited in subsidiary banks........................................... $ 8,079 4,347 Investment securities........................................................ 14,309 13,848 Investment in subsidiaries................................................... 461,753 429,255 Advances to FBA ............................................................. 98,000 -- Other assets................................................................. 15,333 12,278 ---------- --------- Total assets........................................................... $ 597,474 459,728 ========== ========= Liabilities and Stockholders' Equity ------------------------------------ Note payable................................................................ $ 83,000 64,000 Subordinated debentures..................................................... 148,196 88,918 Accrued expenses and other liabilities...................................... 13,432 11,905 ---------- --------- Total liabilities..................................................... 244,628 164,823 Stockholders' equity........................................................ 352,846 294,905 ---------- --------- Total liabilities and stockholders' equity............................ $ 597,474 459,728 ========== =========
CONDENSED STATEMENTS OF INCOME
Years ended December 31, ---------------------------- 2000 1999 1998 ---- ---- ---- (dollars expressed in thousands) Income: Dividends from subsidiaries........................................ $ 43,000 25,250 23,000 Management fees from subsidiaries.................................. 17,325 12,977 10,154 Other.............................................................. 1,956 1,313 2,796 --------- ------ ------- Total income................................................... 62,281 39,540 35,950 --------- ------ ------- Expense: Interest........................................................... 3,964 3,628 3,411 Salaries and employee benefits..................................... 12,180 8,999 7,307 Legal, examination and professional fees........................... 2,031 7,006 1,988 Other.............................................................. 13,969 12,947 12,639 --------- ------ ------- Total expense.................................................. 32,144 32,580 25,345 --------- ------ ------- Income before benefit for income taxes and equity in undistributed earnings of subsidiaries............ 30,137 6,960 10,605 Benefit for income taxes............................................. (3,922) (5,649) (3,999) --------- ------ ------- Income before equity in undistributed earnings of subsidiaries. 34,059 12,609 14,604 Equity in undistributed earnings of subsidiaries..................... 22,048 31,569 18,906 --------- ------ ------- Net income..................................................... $ 56,107 44,178 33,510 ========= ====== =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, --------------------------------- 2000 1999 1998 ---- ---- ---- (dollars expressed in thousands) Cash flows from operating activities: Net income...................................................... $ 56,107 44,178 33,510 Adjustments to reconcile net income to net cash provided by operating activities: Net income of subsidiaries.................................. (64,937) (56,676) (42,107) Dividends from subsidiaries................................. 43,000 25,250 23,000 Other, net.................................................. 272 1,900 4,963 --------- -------- ------- Net cash provided by operating activities................ 34,442 14,652 19,366 --------- -------- ------- Cash flows from investing activities: (Increase) decrease in investment securities.................... (860) (100) 3,000 Investment in common securities of First Preferred II........... (1,778) -- -- Acquisitions of subsidiaries.................................... -- (31,500) (31,586) Capital contributions to subsidiaries........................... (6,100) (3,000) -- Return of subsidiary capital.................................... -- 10,000 -- (Increase) decrease in advances to subsidiaries................. (98,000) -- 14,900 Other, net...................................................... (1,464) (3,646) (3,350) --------- -------- ------- Net cash used in investing activities.................... (108,202) (28,246) (17,036) --------- -------- ------- Cash flows from financing activities: Increase (decrease) in note payable............................. 19,000 13,952 (5,096) Proceeds from issuance of First Preferred II subordinated debentures..................................... 59,278 -- -- Payment of preferred stock dividends............................ (786) (786) (786) --------- -------- ------- Net cash provided by (used in) financing activities...... 77,492 13,166 (5,882) --------- -------- ------- Net increase (decrease) in cash and cash equivalents..... 3,732 (428) (3,552) Cash deposited in subsidiary banks, beginning of year............. 4,347 4,775 8,327 --------- -------- ------- Cash deposited in subsidiary banks, end of year................... $ 8,079 4,347 4,775 ========= ======== ======= Noncash investing activities: Cash paid for interest.......................................... $ 4,117 3,420 3,747 Reduction of deferred tax valuation reserve..................... -- 811 -- ========= ======== =======
(23) CONTINGENT LIABILITIES In the ordinary course of business, there are various legal proceedings pending against First Banks and/or its subsidiaries. Management, in consultation with legal counsel, is of the opinion the ultimate resolution of these proceedings will have no material effect on the financial condition or results of operations of First Banks or its subsidiaries. INDEPENDENT AUDITORS' REPORT 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, 2000 and 1999, and the related consolidated statements of income, changes in stockholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/KPMG LLP ----------- St. Louis, Missouri March 16, 2001
DIRECTORS AND SENIOR MANAGEMENT First Banks, Inc. James F. Dierberg Chairman of the Board and Chief Executive Officer Allen H. Blake Director, President, Chief Operating Officer and Secretary Michael F. Hickey Executive Vice President and Chief Information Officer Terrance M. McCarthy Executive Vice President Michael F. McWhortor Executive Vice President - Banking Support Frank H. Sanfilippo Executive Vice President and Chief Financial Officer David L. Steward Director, Chairman of the Board, President and Chief Executive Officer of World Wide Technology, Inc., St. Louis, Missouri Mark T. Turkcan Executive Vice President - Mortgage Banking Lisa K. Vansickle Senior Vice President and Controller Donald W. Williams Senior Executive Vice President and Chief Credit Officer Douglas H. Yaeger Director, Chairman of the Board, President and Chief Executive Officer of Laclede Gas Company, St. Louis, Missouri First Banks America, Inc. James F. Dierberg Chairman of the Board, President and Chief Executive Officer Allen H. Blake Director, Executive Vice President, Chief Operating Officer and Secretary Charles A. Crocco, Jr. Director, Counsel to the law firm of Crocco & De Maio, P.C., Mount Kisco, New York Albert M. Lavezzo Director, President and Chief Operating Officer of the law firm of Favaro, Lavezzo, Gill, Caretti & Heppell, Vallejo, California Terrance M. McCarthy Executive Vice President Frank H. Sanfilippo Executive Vice President and Chief Financial Officer Ellen D. Schepman Director, Retail Marketing Officer, First Banks, Inc., St. Louis, Missouri Edward T. Story, Jr. Director, President and Chief Executive Officer of SOCO International, plc, Comfort, Texas David F. Weaver Executive Vice President Donald W. Williams Director, Senior Executive Vice President and Chief Credit Officer, First Banks, Inc., St. Louis, Missouri First Bank Donald W. Williams Chairman of the Board, President and Chief Executive Officer Douglas R. Distler Director, Senior Vice President and Regional President Michael F. Hickey Director, Executive Vice President and Chief Information Officer Michael F. McWhortor Director, Executive Vice President - Banking Support Frank H. Sanfilippo Director, Executive Vice President, Chief Financial Officer and Secretary Mark T. Turkcan Director and Executive Vice President - Mortgage Banking First Bank & Trust Terrance M. McCarthy Chairman of the Board, President and Chief Executive Officer Norman O. Broyer Director, Senior Vice President and Senior Credit Officer - Southern California Patrick S. Day Director, Senior Vice President and Senior Credit Officer - Northern California Fred D. Jensen Vice Chairman of the Board Albert M. Lavezzo Director Kathryn L. Perrine Director, Senior Vice President and Chief Financial Officer David F. Weaver Director and President - Texas Region
DIRECTORS AND SENIOR MANAGEMENT (CONTINUED) Bank of San Francisco Terrance M. McCarthy Chairman of the Board, President and Chief Executive Officer Keary L. Colwell Executive Vice President and Chief Financial Officer Patrick S. Day Director, Senior Vice President and Senior Credit Officer Peter A. Goetze Director Joanne J. Haakinson Executive Vice President and Chief Administrative Officer William G. Nelle, Jr. Director, Senior Vice President - Commercial / Private Banking Kathryn L. Perrine Director
INVESTOR INFORMATION First Banks' Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, is available without charge to any stockholder upon request. Requests should be directed, in writing, to Frank H. Sanfilippo, First Banks, Inc., 11901 Olive Boulevard, Creve Coeur, Missouri 63141. PREFERRED SECURITIES The preferred securities of First Banks are traded on the Nasdaq National Market System with the ticker symbols "FBNKO" and "FBNKN." As of March 20, 2001, there were approximately 484 record holders of First Preferred Capital Trust. This number does not include any persons or entities that hold their preferred securities in nominee or "street" name through various brokerage firms. The preferred securities of First Preferred Capital Trust II are represented by a global security that has been deposited with and registered in the name of The Depository Trust Company, New York, New York (DTC). The beneficial ownership interests of these preferred securities are recorded through the DTC book-entry system. The high and low preferred securities prices and the dividends declared for 2000 and 1999 are summarized as follows: FIRST PREFERRED CAPITAL TRUST - FBNKO
2000 1999 Dividend -------------- ------------- High Low High Low Declared ---- --- ---- --- ------------- First quarter............................................ $ 25.25 23.13 27.25 25.13 $ 0.578125 Second quarter........................................... 26.00 23.50 27.00 25.25 0.578125 Third quarter............................................ 25.13 23.50 26.63 24.94 0.578125 Fourth quarter........................................... 25.00 23.38 26.00 23.88 0.578125 FIRST PREFERRED CAPITAL TRUST II - FBNKN 2000 1999 Dividend -------------- ------------- High Low High Low Declared ---- --- ---- --- ------------- First quarter............................................ $ -- -- -- -- $ -- Second quarter........................................... -- -- -- -- -- Third quarter............................................ -- -- -- -- -- Fourth quarter........................................... 27.00 25.13 -- -- 0.504888
For information concerning First Banks, please contact: Allen H. Blake Frank H. Sanfilippo President and Chief Operating Officer Executive Vice President and 11901 Olive Boulevard Chief Financial Officer Creve Coeur, Missouri 63141 11901 Olive Boulevard Telephone - (314) 995-8700 Creve Coeur, Missouri 63141 Telephone - (314) 995-8700 Transfer Agent: State Street Bank and Trust Company Corporate Trust Department P. O. Box 778 Boston, Massachusetts 02102-0778 Telephone - (800) 531-0368 www.statestreet.com EXHIBIT 21.1 FIRST BANKS, INC. Subsidiaries The following is a list of our subsidiaries and the jurisdiction of incorporation or organization. Jurisdiction of Incorporation Name of Subsidiary of Organization ------------------ --------------- First Bank Missouri First Land Trustee Corp. Missouri FB Commercial Finance, Inc. Missouri First Banc Mortgage, Inc. Missouri Missouri Valley Partners, Inc. Missouri Star Lane Holdings Trust Statutory Trust Connecticut Star Lane Trust New York First Capital Group, Inc. New Mexico First Banks America, Inc. Delaware First Bank & Trust California Eucalyptus Financial Corp. California The San Francisco Company Delaware Bank of San Francisco California Bank of San Francisco Investors, Inc. California -----END PRIVACY-ENHANCED MESSAGE-----