-----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, Wrc9Kh0ls77FApc/ppCUZ1DP+v+6zxKgwSmtTrHcK+7oKxgGo5cDCkkxEhvZWZyD j1RvTLdX+FlLuMUmvokd5A== 0001085204-02-000013.txt : 20020415 0001085204-02-000013.hdr.sgml : 20020415 ACCESSION NUMBER: 0001085204-02-000013 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020325 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: 1934 Act SEC FILE NUMBER: 000-20632 FILM NUMBER: 02584682 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 fbi2001ar.txt FORM 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, 2001 [ ] 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 of (I.R.S. Employer Identification Number) 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) 9.00% Cumulative Trust Preferred Securities (issued by First Preferred Capital Trust III 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 22, 2002, 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, 2001, or our 2001 Annual Report, are incorporated by reference into Parts I, II and IV of this report, as follows: The following portions of our 2001 Annual Report to Stockholders, or our 2001 Annual Report, are incorporated by reference in this report: Page(s) in the 2001 Section Annual Report ------- ------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")......... 3-32 Selected Consolidated and Other Financial Data......... 2 Consolidated Financial Statements...................... 34-63 Supplementary Financial Data........................... 33 Range of Prices of Preferred Securities................ 65 Except for the parts of our 2001 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, including the negative impact on the economy resulting from the events of September 11, 2001 in New York City and Washington, D.C. and the national response to those events; the impact of laws and regulations applicable to us and changes therein; the impact of accounting pronouncements 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 anticipated 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. 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, 2001, we had $6.78 billion in total assets, $5.41 billion in total loans, net of unearned discount, $5.68 billion in total deposits and $448.7 million in total stockholders' equity. 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, debit cards, brokerage services, credit-related insurance, internet banking, automated teller machines, telephone banking, safe deposit boxes, escrow and bankruptcy deposit services, stock option services, and trust, private banking and institutional money management services. We operate through two subsidiary banks, three subsidiary bank holding companies, and through our subsidiary leasing company, as follows: Union Financial Group, Ltd., or UFG, headquartered in Swansea, Illinois, and its wholly owned subsidiary: 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 San Francisco, California, and its wholly owned subsidiaries: The San Francisco Company, or SFC, headquartered in San Francisco, California, and its wholly owned subsidiary: First Bank & Trust, or FB&T, headquartered in San Francisco, California. Our subsidiary banks and FCG are wholly owned by their respective parent companies. We owned 93.69% of FBA at December 31, 2001. 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, 2001:
Loans, Net of Number of Total Unearned Total Name Locations Assets Discount Deposits ---- --------- ------ -------- -------- (dollars expressed in thousands) UFG: First Bank.......................... 93 $ 3,707,081 3,086,023 3,142,676 FCG (1)..................................... 1 482 -- -- FBA: SFC: FB&T.......................... 56 3,057,920 2,323,263 2,555,396
--------------------------------- (1) FCG was purchased on February 29, 2000. As of December 31, 2001, there were approximately $149.0 million of commercial leases originated by FCG. The commercial leases are recorded as assets of our subsidiary banks. As described under "MD&A - Financial Condition and Average Balances" in our 2001 Annual Report, on November 15, 2001, First Preferred Capital Trust III, or First Preferred III, our newly formed Delaware statutory business trust subsidiary, issued 2,208,000 shares of 9.00% cumulative trust preferred securities for $55.2 million. In addition, First Preferred III issued 68,290 shares of common securities to us for $1.7 million. In October 2000, First Preferred Capital Trust II, or First Preferred II, our 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, the preferred securities of First Preferred II and First Preferred III 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 his adult children, own all of our voting stock. Mr. Dierberg and his family, therefore, control our management and policies, and the election of our directors. At December 31, 2001, we, Mr. Dierberg and an affiliate of Mr. Dierberg owned 7.93%, 0.08% and 1.86%, respectively, of the outstanding shares of common stock of Allegiant Bancorp, Inc., or Allegiant, located in St. Louis, Missouri. Further discussion of our business operations and our policies is set forth in the MD&A section of our 2001 Annual Report. Acquisitions. Historically, we concentrated our acquisitions within the market areas of eastern Missouri and central and southern Illinois. However, the premiums required to successfully pursue these acquisitions escalated sharply in 1993, reducing the economic viability of many potential acquisitions in these areas. 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, we noted that acquisition pricing in other areas being considered was similar to that in our eastern Missouri and central and southern Illinois acquisition areas. 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 the acquisition of BancTEXAS Group Inc. in 1994, which had offices in Dallas and Houston, Texas, and numerous acquisitions of financial institutions that had offices in Los Angeles, Marin, Napa, Orange, Placer, Riverside, Santa Barbara, San Francisco, San Jose, San Mateo, Sonoma, Ventura and Sacramento counties in California during the seven years ended December 31, 2001. During 2001, we completed two acquisitions located primarily within our existing market areas in California, and one acquisition in Swansea, Illinois, located within our primary market area, which is the St. Louis, Missouri metropolitan area (as further discussed below). For the three years ended December 31, 2001, we completed ten acquisitions of banks, one branch office purchase and a purchase of certain assets and assumption of certain liabilities of a leasing company. These transactions provided us with total assets of $1.78 billion and 38 banking facilities. For a description of these acquisitions, see "MD&A - Acquisitions" and Note 2 to the Consolidated Financial Statements in our 2001 Annual Report. Market Area. As of December 31, 2001, our subsidiary banks' 149 banking facilities were located throughout California, eastern Missouri, Illinois and Texas. Our primary market area is the St. Louis, Missouri metropolitan area. Our second and third largest market areas are southern and northern California and central and southern Illinois, 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, 2001:
Total Deposits Number Deposits as a Percentage of Geographic Area (in millions) of Total Deposits Locations --------------- ------------- ----------------- --------- St. Louis, Missouri metropolitan area (1)............................... $ 1,183.7 20.8% 29 Regional Missouri (1)................................................... 397.4 7.0 15 Central and southern Illinois (1)....................................... 1,104.3 19.4 34 Northern Illinois (1)................................................... 443.2 7.8 15 Texas (2)............................................................... 266.9 4.7 6 Southern California (2)................................................. 1,072.8 18.9 32 Northern California (2)................................................. 1,215.6 21.4 18 --------- ----- ---- Total deposits...................................................... $ 5,683.9 100.0% 149 ========= ===== ====
- ------------------------ (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 greater Los Angeles metropolitan area, including Ventura County, Riverside and Orange County, California; in Santa Barbara County, California; in northern California, including the greater San Francisco, San Jose and Sacramento metropolitan areas; in the Houston, Dallas, Irving and McKinney metropolitan areas. Competition and Branch Banking. Our subsidiary banks engage in highly competitive activities. 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. Financial institutions compete 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. Our principal competitors include other commercial banks, savings banks, savings and loan associations, mutual funds, finance companies, trust companies, insurance companies, leasing companies, credit unions, mortgage companies, private issuers of debt obligations and suppliers of other investment alternatives, such as securities firms and financial holding companies. Many of our non-bank competitors are not subject to the same degree of regulation as that imposed on bank holding companies, federally insured banks and national or state chartered banks. As a result, such non-bank competitors have advantages over us in providing certain services. We also compete with major multi-bank holding companies, which are significantly larger than us and have greater access to capital and other resources. We believe we will continue to face competition in the acquisition of independent banks and savings banks from bank and financial holding companies. We often compete with larger financial institutions that have substantially greater resources available for making acquisitions. Subject to regulatory approval, commercial banks situated in California, Illinois, Missouri and Texas are permitted to establish branches throughout their respective states, thereby creating the potential for additional competition in our service areas. Supervision and Regulation General. Federal and state laws extensively regulate our subsidiary banks and us 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 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 us and our subsidiary banks in the future. We are a registered bank holding company under the Bank Holding Company Act of 1956. Consequently, the Board of Governors of the Federal Reserve System (Federal Reserve) regulates, supervises and examines us. We file annual reports with the Federal Reserve and provide to the Federal Reserve additional information as it may require. Since First Bank is an institution chartered by the State of Missouri and a member of the Federal Reserve, both the State of Missouri Division of Finance and the Federal Reserve supervise, regulate and examine First Bank. FB&T is chartered by the State of California and is subject to supervision, regulation and examination by the California Department of Financial Institutions. Our subsidiary banks are also regulated by the Federal Deposit Insurance Corporation (FDIC), which provides deposit insurance of up to $100,000 for each insured depositor. Bank Holding Company Regulation. Our activities and those of our subsidiary banks 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 all of their 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 Bank Holding Company Act also requires a bank holding company to obtain approval from the Federal Reserve before: o 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); o acquiring all or substantially all of the assets of another bank or bank holding company; or o merging or consolidating with another bank holding company. The Federal Reserve 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 Federal Reserve 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 Federal Reserve's source of strength policy, which obligates a bank holding company such as us to provide financial and managerial strength to its subsidiary banks; restrictions on the nature and size of certain affiliate 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 obligations and financial instruments into weighted categories, with higher levels of capital being required for categories deemed to represent greater risk. Federal Reserve 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 must be composed of common equity, retained earnings, qualifying noncumulative 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, which amount is referred to as "Tier I capital." The remainder 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 I capital and a limited amount of loan and lease loss reserves, which amount, together with Tier I capital, is referred to as "Total Risk-Based Capital." In addition to the risk-based standard, we are subject to minimum requirements with respect to the ratio of our Tier I capital to our average assets less goodwill and certain other intangible assets, or 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 Office of the Comptroller of the Currency (OCC) and the FDIC have established capital requirements for banks under their respective jurisdictions that are consistent with those imposed by the Federal Reserve 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 our 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 depends 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: o "well capitalized" if it has a total risk-based capital ratio of 10% or greater, a Tier I 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; o "adequately capitalized" if it has a total risk-based capital ratio of 8% or greater, a Tier I capital ratio of 4% or greater and a Leverage Ratio of 4% or greater (3% in certain circumstances); o "undercapitalized" if it has a total risk-based capital ratio of less than 8%, a Tier I capital ratio of less than 4% or a Leverage Ratio of less than 4% (3% in certain circumstances); o "significantly undercapitalized" if it has a total risk-based capital ratio of less than 6%, a Tier I capital ratio of less than 3% or a Leverage Ratio of less than 3%; and o "critically undercapitalized" if its tangible equity is equal to or less than 2% of average quarterly tangible assets. Under certain circumstances, a depository institution's primary federal regulatory agency may use its authority to lower the institution's capital category. The banking agencies are permitted to establish individual minimum capital requirements exceeding the general requirements described above. Generally, failing to maintain the status of "well capitalized" or "adequately capitalized" subjects a bank to restrictions and limitations on its business that become progressively more severe as the capital levels decrease. 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." Limitations exist for "undercapitalized" depository institutions regarding, among other things, asset growth, acquisitions, branching, new lines of business, acceptance of brokered deposits and borrowings from the Federal Reserve System. These institutions are also 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. The appointment of a receiver or conservator may be required for "critically undercapitalized" institutions. 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 terms of the subordinated debentures associated with $47.4 million of trust preferred securities issued by FBA's financing subsidiary prevent FBA's payment of dividends to us under certain circumstances, including the deferral by FBA of interest payments on those subordinated debentures. 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 must 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 requires that, in connection with examinations of financial institutions within their jurisdiction, the federal banking regulators 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 Gramm-Leach-Bliley Act, or GLB Act, enacted in 1999, amended and repealed portions of the Glass-Steagall Act and other federal laws restricting the ability of bank holding companies, securities firms and insurance companies to affiliate with each other and to enter new lines of business. The GLB Act established a comprehensive framework to permit financial companies to expand their activities, including through such affiliations, and to modify the federal regulatory structure governing some financial services activities. This authority of financial firms to broaden the types of financial services offered to customers and to affiliates with other types of financial services companies may lead to further consolidation in the financial services industry. However, it may lead to additional competition in the markets in which we operate by allowing new entrants into various segments of those markets that are not the traditional competitors in those segments. Furthermore, the authority granted by the GLB Act may encourage the growth of larger competitors. The GLB Act also adopted consumer privacy safeguards requiring financial services providers to disclose their policies regarding the privacy of customer information to their customers and, subject to some exceptions, allowing customers to "opt out" of policies permitting such companies to disclose confidential financial information to non-affiliated third parties. Final regulations implementing the new privacy standards became effective in 2001. Reserve Requirements; Federal Reserve System and Federal Home Loan Bank System. The Federal Reserve 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 Federal Reserve may be used to satisfy liquidity requirements. Institutions are authorized to borrow from the Federal Reserve Bank "discount window," but Federal Reserve regulations require institutions to exhaust other reasonable alternative sources of funds, including advances from Federal Home Loan Banks, before borrowing from the Federal Reserve Bank. First Bank is a member of the Federal Reserve System. Both First Bank and FB&T are members of the Federal Home Loan Bank System. As members, they are required to hold investments in regional banks within those systems. Our subsidiary banks were in compliance with these requirements at December 31, 2001, with investments of $8.1 million in stock of the Federal Home Loan Bank of Des Moines held by First Bank, $1.1 million in stock of the Federal Home Loan Bank of Chicago held by First Bank (associated with the acquisition of UFG completed on December 31, 2001), $1.3 million in stock of the Federal Home Loan Bank of San Francisco held by FB&T, and $5.5 million in stock of the Federal Reserve Bank of St. Louis held by First Bank. Monetary Policy and Economic Control. The commercial banking business is affected by legislation, regulatory policies and general economic conditions as well as the monetary policies of the Federal Reserve. The instruments of monetary policy available to the Federal Reserve include the following: o changes in the discount rate on member bank borrowings and the targeted federal funds rate; o the availability of credit at the "discount window;" o open market operations; o the imposition of changes in reserve requirements against deposits of domestic banks; o the imposition of changes in reserve requirements against deposits and assets of foreign branches; and o the imposition of and changes in reserve requirements against certain borrowings by banks and their affiliates. 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 Federal Reserve 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, and short-term and long-term changes in the international trade balance and in the fiscal policies of the U.S. Government. We cannot predict the effect that changes in monetary policy or in the discount rate on member bank borrowings will have on our future business and earnings or those of our subsidiary banks. Employees As of March 22, 2002, we employed approximately 2,350 employees. None of the 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 149 offices and three operations and administrative facilities, 90 are located in buildings that we own and 62 are located in buildings that we lease. We consider the properties at which we do business to be in good condition and 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 7 to our Consolidated Financial Statements incorporated herein by reference. Item 3. Legal Proceedings In the ordinary course of business, we and our subsidiaries become involved in legal proceedings. Our management, in consultation with legal counsel, believes the ultimate resolution of these proceedings will not have a material adverse effect on our business, financial condition 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 his adult children, 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 2001 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 32 of our 2001 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 14 of our 2001 Annual Report under the caption "MD&A - Interest Rate Risk Management." In addition to the information included in our 2001 Annual Report under the caption "MD&A - Interest Rate Risk Management," we also prepare and review a more traditional interest rate sensitivity position in conjunction with the results of our simulation model. The following table presents the projected maturities and periods to repricing of our rate sensitive assets and liabilities as of December 31, 2001, adjusted to account for anticipated prepayments:
Over Over three six Over Three through through one Over months six twelve through five or less months months five years years Total ------- ------ ------ ---------- ----- ----- (dollars expressed in thousands) Interest-earning assets: Loans (1)....................................... $3,896,251 506,967 526,655 473,356 5,640 5,408,869 Investment securities........................... 232,294 42,966 46,280 238,819 70,709 631,068 Federal funds sold and other.................... 60,352 -- -- -- -- 60,352 ---------- --------- --------- --------- --------- --------- Total interest-earning assets................. 4,188,897 549,933 572,935 712,175 76,349 6,100,289 Effect of interest rate swap agreements......... (900,000) -- -- 900,000 -- -- ---------- --------- --------- --------- --------- --------- Total interest-earning assets after the effect of interest rate swap agreements...................... $3,288,897 549,933 572,935 1,612,175 76,349 6,100,289 ========== ========= ========= ========= ========= ========= Interest-bearing liabilities: Interest-bearing demand accounts................ $ 232,736 144,673 94,352 69,192 88,062 629,015 Money market demand accounts.................... 1,333,199 -- -- -- -- 1,333,199 Savings accounts................................ 84,956 69,964 59,969 84,956 199,895 499,740 Time deposits................................... 551,183 505,684 634,250 608,653 725 2,300,495 Note payable.................................... -- -- 27,500 -- -- 27,500 Other borrowed funds............................ 176,120 544 (17,159) 81,340 2,289 243,134 ---------- --------- --------- --------- --------- --------- Total interest-bearing liabilities............ 2,378,194 720,865 798,912 844,141 290,971 5,033,083 Effect of interest rate swap agreements......... 200,000 -- -- (200,000) -- -- ---------- --------- --------- --------- --------- --------- Total interest-bearing liabilities after the effect of interest rate swap agreements...................... $2,578,194 720,865 798,912 644,141 290,971 5,033,083 ========== ========= ========= ========= ========= ========= Interest-sensitivity gap: Periodic........................................ $ 710,703 (170,932) (225,977) 968,034 (214,622) 1,067,206 ========= Cumulative...................................... 710,703 539,771 313,794 1,281,828 1,067,206 ========== ========= ========= ========= ========= Ratio of interest-sensitive assets to interest-sensitive liabilities: Periodic................................... 1.28 0.76 0.72 2.50 0.26 1.21 ========= Cumulative................................. 1.28 1.16 1.08 1.27 1.21 ========== ========= ========= ========= =========
- ---------------------- (1) Loans are presented net of unearned discount. Management made certain assumptions in preparing the following table. These assumptions included: o loans will repay at projected repayment speeds; o mortgage-backed securities, included in investment securities, will repay at projected repayment speeds; o 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 o fixed maturity deposits will not be withdrawn prior to maturity. A significant variance in actual results from one or more of these assumptions could materially affect the results reflected in the table. At December 31, 2001, our asset-sensitive position on a cumulative basis through the twelve-month time horizon was $313.8 million, or 4.63% of total assets, in comparison to our liability-sensitive position on a cumulative basis through the twelve-month time horizon of $40.4 million, or 0.69% of total assets at December 31, 2000. The liability-sensitive position for 2000 is attributable to the composition of our loan and investment security portfolios as compared to our deposit base. We attribute the change for 2001 to our interest rate swap agreements entered into in conjunction with our interest rate risk management program in September 2000 and during 2001. 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 our simulation model for monitoring our interest rate risk exposure. Item 8. Financial Statements and Supplementary Data Our consolidated financial statements are incorporated herein by reference from pages 34 through 63 of our 2001 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 33 of our 2001 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 eight 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 (1) 64 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, First America Capital Trust, First Preferred Capital Trust II and First Preferred Capital Trust III since 1997, 1998, May 2001 and October 2001, respectively. Allen H. Blake 59 1988 President of First Banks, Inc. since October 1999; Chief Operating Officer of First Banks, Inc. since 1998; Director and Secretary of First Banks, Inc. since 1988; Chief Financial Officer of First Banks, Inc. from 1984 to September 1999 and since June 2001; Director, Executive Vice President, Chief Operating Officer and Secretary of FBA since 1998; Chief Financial Officer of FBA from 1994 to September 1999 and since June 2001; Vice President and Secretary of FBA from 1994 to 1998; Trustee of First Preferred Capital Trust, First America Capital Trust, First Preferred Capital Trust II and First Preferred Capital Trust III since 1997, 1998, 2000 and October 2001, respectively. Donald W. Williams 54 2001 Senior Executive Vice President and Chief Credit Officer of First Banks, Inc. since 2000; Executive Vice President and Chief Credit Officer of First Banks, Inc. since 1996; Executive Vice President and Chief Credit Officer of FBA; Chairman of the Board of Directors, President and Chief Executive Officer of First Bank since 2000; Chairman of the Board of Directors of First Capital Group, Inc. since 2000. Michael J. Dierberg (1) 31 2001 Senior Vice President (Northern California Region) of First Bank & Trust since July 2001. Prior to joining First Banks, Inc., Mr. Dierberg served as an attorney for the Office of the Comptroller of the Currency in Washington, D.C. Gordon A. Gundaker (2) 68 2001 President and Chief Executive Officer of Coldwell Banker Gundaker in St. Louis, Missouri. David L. Steward (2) 50 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. Hal J. Upbin (2) 63 2001 Director of Kellwood Company in St. Louis, Missouri since 1995; Chairman of the Board of Directors, President and Chief Executive Officer of Kellwood Company since 1997; President and Chief Operating Officer of Kellwood Company from 1994 to 1997; Executive Vice President Corporate Development from 1992 to 1994; Vice President Corporate Development from 1990 to 1992. Douglas H. Yaeger (2) 52 2000 Chairman of the Board of Directors, President and Chief Executive Officer of The Laclede Group, Inc. in St. Louis, Missouri since October 2001; 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 Central Institute for the Deaf, the St. Louis Regional Commerce 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, The Municipal Theatre Association of St. Louis and Webster University. - ---------------------------------- (1) Mr. Michael J. Dierberg is the son of Mr. James F. Dierberg. See Item 12. Security Ownership of Certain Beneficial Owners and Management. (2) 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 22, 2002, were as follows:
Current First Banks Principal Occupation(s) Name Age Office(s) Held During Last Five Years ---- --- -------------- ---------------------- James F. Dierberg 64 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 59 President, Chief Operating Officer, See Item 10 - "Directors and Executive Chief Financial Officer, Secretary Officers of the Registrant - Board of and Director. Directors." Donald W. Williams 54 Senior Executive Vice President, See Item 10 - "Directors and Executive Chief Credit Officer and Director. Officers of the Registrant - Board of Directors." Michael F. Hickey 44 Executive Vice President and Chief Executive Vice President and Chief Information Officer; Director of Information Officer of First Banks, First Bank; President of First Inc. since November 1999; Director of Services, L.P. First Bank since November 1999; President of First Services, L.P. since November 1999; Vice President - Senior Group Manager of Information Systems, Mercantile Bank in St. Louis, Missouri from 1996 to November 1999; Group Manager of Information Systems, Mercantile Bancorporation, Inc. from 1992 to 1996. Terrance M. McCarthy 47 Executive Vice President; Executive Mr. McCarthy has been employed in Vice President of FBA; Chairman of various executive capacities with First the Board of Directors, President Banks, Inc. since 1995. and Chief Executive Officer of FB&T. Michael F. McWhortor 50 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. in St. Louis, Missouri from 1998 to 1999; Vice President and Manager of Customer Information Management of Mercantile Bancorporation, Inc. from 1997 to 1998. Mark T. Turkcan 46 Executive Vice President - Mortgage Mr. Turkcan has been employed in Banking; Director and Executive various executive capacities with First Vice President of First Bank; Banks, Inc. since 1990. Chairman of the Board of Directors, President and Chief Executive Officer of First Banc Mortgage, Inc.
Section 16(a) Beneficial Ownership Reporting Compliance To our knowledge, our directors, executive officers or shareholders, who are 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, filed on a timely basis reports required by Section 16(a) of the Exchange Act during the year ended December 31, 2001. 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, 2001, 2000 and 1999:
SUMMARY COMPENSATION TABLE -------------------------- All Other Name and Principal Position(s) Year Salary Bonus Compensation (1) ------------------------------ ---- ------ ----- ---------------- James F. Dierberg 2001 $ 585,000 100,000 2,850 Chairman of the Board of Directors 2000 560,000 90,000 5,250 and Chief Executive Officer 1999 543,000 20,000 5,000 Allen H. Blake 2001 343,700 58,000 2,590 President, Chief Operating Officer 2000 282,900 45,000 6,150 and Chief Financial Officer 1999 204,800 20,000 5,000 Donald W. Williams 2001 297,000 48,000 5,250 Senior Executive Vice President 2000 241,250 40,000 6,450 and Chief Credit Officer 1999 208,750 36,600 5,000 Terrance M. McCarthy 2001 220,000 38,000 5,200 Executive Vice President; 2000 180,000 25,000 6,650 Chairman of the Board of Directors, President 1999 147,500 20,000 4,950 and Chief Executive Officer of FB&T Mark T. Turkcan 2001 177,500 22,500 5,250 Executive Vice President - Mortgage Banking; 2000 167,500 15,000 6,570 Director and Executive Vice President of First Bank; 1999 156,250 15,000 4,950 and Chairman of the Board of Directors, President and Chief Executive Officer of First Banc Mortgage, Inc.
- ----------------------- (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. Mr. 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 Mr. Williams pursuant to his employment agreement is set forth in the salary column of the Summary Compensation Table. Mr. 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 Mr. 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, Mr. 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. Gordon Gundaker, David Steward, Hal Upbin and Douglas Yaeger) 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. Steward, Upbin and Yaeger received $17,000, $8,000 and $17,000, respectively, in director's fees during 2001. Mr. Gundaker did not receive any director's fees during 2001. 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, Blake, Williams and McCarthy who are executive officers, are also members of the Board of Directors and/or 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 2001 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 2001, 2000 and 1999, Tidal Insurance Limited, or Tidal, a corporation owned indirectly by our Chairman and his adult children, received approximately $132,000, $212,000 and $316,000, 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 2001, 2000 and 1999, 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 $316,000, $235,000 and $194,000, respectively, in commissions and insurance premiums for policies purchased by us or by customers of our subsidiary banks from unaffiliated, third-party insurors. 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 $3.0 million, $2.1 million and $2.3 million for the years ended December 31, 2001, 2000 and 1999, 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 our subsidiary banks. First Services, L.P., a limited partnership indirectly owned by our Chairman and his adult children, provides information technology services and operational support for our subsidiary banks and us. Fees paid under agreements with First Services, L.P. were $23.1 million, $19.3 million and $16.4 million for the years ended December 31, 2001, 2000 and 1999, respectively. During 2001, 2000 and 1999, First Services, L.P. paid us $2.0 million, $1.8 million and $1.2 million, respectively, in rental fees for the use of data processing and other equipment owned by us. Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth, as of March 22, 2002, 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% * Ellen C. Dierberg Family Trust (1)........................... 7,714.676(2) 32.605% * Michael J. Dierberg Family Trust (1)......................... 4,255.319(2) 17.985% * 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, 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 these shares. (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, 2001 is 745, 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, 2001. (c) The index of required exhibits is included beginning on page 21 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) Date: March 25, 2002 By: /s/ Allen H. Blake -------------------------------------- Allen H. Blake President, Chief Operating Officer and Chief Financial Officer (Principal Financial and Accounting Officer) Date: March 25, 2002 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 25, 2002 ----------------------- James F. Dierberg /s/ Allen H. Blake Director March 25, 2002 ----------------------- Allen H. Blake /s/ Donald W. Williams Director March 25, 2002 ----------------------- Donald W. Williams /s/ Michael J. Dierberg Director March 25, 2002 ----------------------- Michael J. Dierberg /s/ Gordon A. Gundaker Director March 25, 2002 ----------------------- Gordon A. Gundaker /s/ David L. Steward Director March 25, 2002 ----------------------- David L. Steward /s/ Hal J. Upbin Director March 25, 2002 ----------------------- Hal J. Upbin /s/ Douglas H. Yaeger Director March 25, 2002 ----------------------- 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 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 ("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 Agreement as to Expenses and Liabilities between First Banks, Inc. and First Preferred Capital Trust III, dated November 15, 2001 (relating to First Preferred Capital Trust III ("First Preferred III") (filed as Exhibit 4.8 to the Company's Registration Statement on Form S-2, File No. 333-71652, dated October 15, 2001). 4.6 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). 4.7 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). 4.8 Preferred Securities Guarantee Agreement by and between First Banks, Inc. and State Street Bank and Trust Company of Connecticut, National Association, dated November 15, 2001 (relating to First Preferred III) (filed as Exhibit 4.7 to the Company's Registration Statement on Form S-2, File No. 333-71652, dated October 15, 2001). 4.9 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). 4.10 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). 4.11 Indenture between First Banks, Inc. and State Street Bank and Trust Company of Connecticut, National Association, as Trustee, dated November 15, 2001 (relating to First Preferred III) (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-2, File No. 333-71652, dated October 15, 2001). 4.12 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). 4.13 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). 4.14 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 November 15, 2001 (relating to First Preferred III) (filed as Exhibit 4.5 to the Company's Registration Statement on Form S-2, File No. 333-71652, dated October 15, 2001). 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 Secured Credit Agreement, dated as of August 23, 2001, among First Banks, Inc., and Wells Fargo Bank Minnesota, National Association, American National Bank and Trust Company of Chicago, Harris Trust and Savings Bank, The Northern Trust Company, Union Bank of California, N.A., SunTrust Bank, Nashville, LaSalle Bank National Association and Wells Fargo Bank Minnesota, National Association, as Agent (incorporated herein by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-2, File No. 333-71652, dated October 15, 2001). 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 Banks, Inc., dated October 15, 2001 - filed herewith. 10.7* Service Agreement by and between First Services, L.P. and First Bank, dated October 15, 2001 - filed herewith. 10.8* Service Agreement by and between First Services, L.P. and First Banc Mortgage, Inc., dated October 15, 2001 - filed herewith. 10.9* Service Agreement by and between First Services, L.P. and First Bank & Trust, dated October 15, 2001 - filed herewith. 13.1 The Company's 2001 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 10.6 SERVICE AGREEMENT THIS SERVICE AGREEMENT is made and entered into as of the Fifteenth day of October, 2001, by and between FIRST SERVICES, L.P., a Missouri Limited Partnership and FIRST BANKS, INC., a bank holding company duly organized and existing by virtue of the laws of the State of Missouri. For and in consideration of the mutual promises and covenants contained herein, and the sum of Ten Dollars ($10.00) in hand paid, each to the other, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: I. SERVICES A. First Services, L.P. shall furnish First Banks, Inc. data processing services selected by First Banks, Inc. from the Product and Price Schedule as per Attachment 1, attached hereto and incorporated herein by reference thereto. Additional services may be selected upon prior written notice to First Services, L.P. at First Services, L.P.'s then current list price by executing an amended Summary Page. B. First Services, L.P. will provide conversion and training services for the fees specified from the Product and Price Schedule (Attachment 1). Classroom training in the use and operation of the system for the number of First Banks, Inc. personnel mutually agreed upon in the conversion planning process will be provided at a training facility mutually agreed upon. Conversion services are those activities designed to transfer the processing of First Banks, Inc.'s data from its present processing company to First Services, L.P. C. First Services, L.P. will also provide Network Support Service consisting of communication line monitoring and diagnostic equipment and support personnel to discover, diagnose, repair or report line problems to the appropriate telephone company. The fee for this service is also listed from the Product and Price Schedule (Attachment 1). D. First Services, L.P. shall upon request act as First Banks, Inc.'s designated representative to arrange for the purchase, and installation of data lines necessary to access the First Services, L.P. system. Where requested, additional dial-up lines and equipment to be utilized as a backup to the regular data lines may also be ordered. First Services, L.P. shall bill First Banks, Inc. for the actual charges incurred for the data lines and for the maintenance of the modems and other interface devices. E. First Services, L.P. will provide e-mail, Internet, and Intranet capabilities at a fee listed on the Product and Pricing Schedule (Attachment 1). F. Processing priorities will be determined by mutual agreement of the parties hereto. II. TERM The term of this Agreement shall be twelve (12) months commencing on October 15, 2001. Upon expiration, the Agreement will automatically renew for successive terms of twelve (12) months each unless either party shall have provided written notice to the other at least one-hundred eighty (180) days prior to the expiration of the then current term, of its intent not to renew. In the event of termination, First Services, L.P. shall provide reasonable time allowance to allow First Banks, Inc. to convert to another system. III. SOFTWARE / FIRMWARE Unmodified third party software or firmware ("Software") may be supplied as part of the Agreement. All such Software shall be provided subject to Software License Agreements. IV. PRICE AND PAYMENT A. Fees for First Services, L.P.'s services are set forth from the Product and Price Schedule (Attachment 1) including where applicable minimum monthly charges and payment schedules for onetime fees. B. Standard Fees shall be invoiced no later than the fifteenth (15th) of each month for the then current month. Terms of payment shall be net cash. C. The Base Service Charge listed from the Product and Price Schedule (Attachment 1) shall not change more than twice a year. The fee schedule shall be reviewed annually to ensure fair market value in pricing. Comparisons will be made with peers and other providers of similar services. New products and services can be added as they become available and will be priced accordingly. D. This above limitation shall not apply to pass-thru expenses. A pass-thru expense is a charge for goods or services by First Services, L.P. on First Banks, Inc.'s behalf that are to be billed to First Banks, Inc. without mark-up. E. The fees listed from the Product and Price Schedule (Attachment 1) do not include and First Banks, Inc. is responsible for furnishing transportation or transmission of information between First Services, L.P.'s data center and First Banks, Inc.'s sites. Where First Banks, Inc. has elected to have First Services, L.P. provide Telecommunication Services, the price for the Services will be provided and billed as a pass-thru expense. F. Network Support Service Fees and Local Network Feed are based upon services rendered from First Services, L.P.'s premises. Off-premise support will be provided upon First Banks, Inc.'s request on an as available basis at First Services, L.P. then current charges for time and materials, plus reasonable travel and living expenses. V. CLIENT OBLIGATIONS A. First Banks, Inc. shall be solely responsible for the input, transmission or delivery of all information and data required by First Services, L.P. to perform the services except where First Banks, Inc. has retained First Services, L.P. to handle such responsibilities on its behalf. The data shall be provided in a format and manner approved by First Services, L.P. First Banks, Inc. will provide at its own expense or procure from First Services, L.P. all equipment, computer software communication lines and interface devices required to access the First services, L.P. System. If First Banks, Inc. has elected to provide such items itself, First Services, L.P. shall provide First Banks, Inc. with a list of compatible equipment and software. B. First Banks, Inc. shall designate appropriate First Banks, Inc. personnel for training in the use of the First services, L.P. System, shall allow First Services, L.P. access to First Banks, Inc.'s site during normal business hours for conversion and shall cooperate with First services, L.P. personnel in the conversion and implementation of the services. C. First Banks, Inc. shall comply with any operating instructions on the use of the First Services, L.P. reports furnished by First Services, L.P. for accuracy and shall work with First Services, L.P. to reconcile any out of balance conditions. First Banks, Inc. shall determine and be responsible for the authenticity and accuracy of all information and data submitted to First Services, L.P. D. First Banks, Inc. shall furnish, or if First Services, L.P. agrees to so furnish, reimburse First Services, L.P. for courier services applicable to the services requested. VI. GENERAL ADMINISTRATION First Services, L.P. is continually reviewing and modifying the First Services, L.P. system to improve service and to comply with federal government regulations applicable to the data utilized in providing services to First Banks, Inc. First Services, L.P. reserves the right to make changes in the service, including, but not limited to operating procedures, security procedures, the type of equipment resident at and the location of First Services, L.P.'s data center. VII. CLIENT CONFIDENTIAL INFORMATION A. First Services, L.P. shall treat all information and data relating to First Banks, Inc. business provided to First Services, L.P. by First Banks, Inc., or information relating to First Banks, Inc.'s customers, as confidential and shall safe-guard First Banks, Inc.'s information with the same degree of care used to protect First Services, L.P.'s confidential information. First Services, L.P. and First Banks, Inc. agree that master and transaction data files are owned by and constitute property of First Banks, Inc. data and records shall be subject to regulation and examination by State and Federal supervisory agencies to the same extent as if such information were on First Banks, Inc.'s premises. First Services, L.P.'s obligations under this Section VIII shall survive the termination or expiration of this Agreement. B. First Services, L.P. agrees now and at all times in the future that all such Confidential Information shall be held in strict confidence and disclosed only to those employees whose duties reasonably require access to such information. First Services, L.P. may use such Confidential Information only in connection with its performance under this Agreement. Confidential Information shall be returned to First Banks, Inc. or destroyed upon First Banks, Inc.'s request once the services contemplated by this Agreement have been completed or upon termination of this Agreement. C. First Services, L.P. shall maintain adequate backup procedures including storage of duplicate record files as necessary to reproduce First Banks, Inc.'s records and data. In the event of a service disruption due to reasons beyond First Services, L.P.'s control, First Services L.P. shall use diligent efforts to mitigate the effects of such an occurrence. D. First Services, L.P. shall establish and maintain policies and procedures to insure compliance with this section. First Services, L.P. agrees to permit First Banks, Inc. to audit First Services' compliance with this section during regular business hours upon reasonable notice to First Services, L.P. The provisions of this section shall survive any termination of this Agreement. VIII. FIRST SERVICES, L.P. CONFIDENTIAL INFORMATION A. First Banks, Inc. shall not use or disclose to any third persons any confidential information concerning First Services, L.P. confidential information is that which relates to First Services, L.P.'s software, research, development, trade secrets or business affairs including, but not limited to, the terms conditions of this Agreement but does not include information in the public domain through no fault of First Banks, Inc. First Banks, Inc. obligations under this Section IX shall survive the termination or expiration of this agreement. B. First Services, L.P.'s system contains information and computer software that is proprietary and confidential information of First Services, L.P., its suppliers and licensees. First Banks, Inc. agrees not to attempt to circumvent the devices employed by First Services, L.P. to prevent unauthorized access to the First Services, L.P.'s system. IX. WARRANTIES First Services, L.P. will accurately process First Banks, Inc.'s work provided that First Banks, Inc. supplies accurate data and follows the procedures described in First Services, L.P.'s User Manuals, notices and advises. First Services, L.P. personnel will exercise due care in the processing of First Banks, Inc.'s work. In the event of an error caused by First Services, L.P.'s personnel, programs or equipment, First Services, L.P. shall correct the data and/or reprocess the affected report at no additional cost to First Banks, Inc. X. LIMITATION OF LIABILITY IN NO EVENT SHALL FIRST SERVICES, L.P. BE LIABLE FOR LOSS OF GOODWILL, OR FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING FROM FIRST BANKS, INC.'S USE OF FIRST SERVICES, L.P.'S SERVICES, OR FIRST SERVICES, L.P.'S SUPPLY OF EQUIPMENT OR SOFTWARE, UNDER THIS AGREEMENT REGARDLESS OF WHETHER SUCH CLAIM ARISES IN TORT OR IN CONTRACT. FIRST SERVICES, L.P.'S AGGREGATE LIABILITY FOR ANY AND ALL CAUSES OF ACTION RELATING TO SERVICES PERFORMED HEREUNDER OR ANY DAMAGE OR LOSS INCURRED OR SUSTAINED BY FIRST BANKS, INC. RELATING TO THIS AGREEMENT AND THE SERVICES PERFORMED HEREUNDER SHALL BE LIMITED TO THE AMOUNT OF TOTAL FEES PAID BY FIRST BANKS, INC. TO FIRST SERVICES, L.P. IN THE THREE (3) MONTH PERIOD PRECEDING THE DATE THE CLAIM ACCRUED. FIRST SERVICES, L.P.'S AGGREGATE LIABILITY FOR A DEFAULT RELATING TO EQUIPMENT OR SOFTWARE SHALL BE LIMITED TO THE AMOUNT PAID FOR THE EQUIPMENT OR SOFTWARE. XI. PERFORMANCE STANDARDS A. On-Line Availability - First Services, L.P.'s standard of performance shall be on-line availability of the system 98% of the time that it is scheduled to be so available over a three (3) month period (the "Measurement Period"). Actual on-line performance will be calculated monthly by comparing the number of hours which the system was scheduled to be operational on an on-line basis with the number of hours, or a portion thereof, it was actually operational on an on-line basis. Downtime may be caused by operator error, hardware malfunction or failure, or environmental failures such as loss of power or air conditioning. Downtime caused by reasons beyond First Services, L.P.'s control should not be considered in the statistics. B. Report Availability - First Services, L.P.'s standard of performance for report availability shall be that, over a three (3) month period, ninety-five percent (95%) of all Critical Daily Reports shall be available for remote printing on time without significant errors. A Critical Daily Report shall mean priority group reports, which First Services, L.P. and First Banks, Inc. have mutually agreed in writing, are necessary to properly account for the previous day's activity and properly notify First Banks, Inc. of overdraft, NSF or return items. A significant error is one that impairs First Banks, Inc.'s ability to properly account for the previous days activity and/or properly account for overdraft, NSF or return items. Actual performance will be calculated monthly by comparing the total number of First Banks, Inc. reports scheduled to be available from First Services, L.P. to the number of reports which were available on time and without error. C. Exclusive Remedy - In the event that First Services, L.P.'s performance fails to meet the standards listed above and such failure is not the result of First Banks, Inc.'s error or omission, First Banks, Inc. sole and exclusive remedy for such default shall be the right to terminate this Agreement in accordance with the provisions of this paragraph. In the event that First Services, L.P. fails to achieve any Performance Standards, alone or in combination, for the prescribed measurement period, First Banks, Inc. shall notify First Services, L.P. of its intent to terminate this agreement if First Services, L.P. fails to restore performance to the committed levels. First Services, L.P. shall advise First Banks, Inc. promptly upon correction of the system deficiencies (in no event shall corrective action exceed sixty (60) days from the notice date) and shall begin an additional measurement period. Should First Services, L.P. fail to achieve the required Performance Standards during the remeasurement period, First Banks, Inc. may terminate this Agreement and First Services, L.P. shall cooperate with First Banks, Inc. to achieve an orderly transition to First Banks, Inc.'s replacement processing system. First Banks, Inc. may also terminate this Agreement if First Services, L.P.'s performance for the same standard is below the relevant performance standard for more than two (2) measurement periods in any consecutive twelve (12) months or for more than five (5) measurement periods during the term of this agreement. During the period of transition, First Banks, Inc. shall pay only such charges as are incurred for monthly fees until the date of deconversion. First Services, L.P. shall not charge First Banks, Inc. for services relating to First Banks, Inc.'s deconversion. D. Audit - First Banks, Inc. shall have the right to perform reasonable audits, at its cost, upon giving written notice to First Services, L.P. of its intent to do so. First Services, L.P. shall provide, upon request, financial information to First Banks, Inc. XII. BUSINESS CONTINUITY / DISASTER RECOVERY A. A Disaster shall mean any unplanned interruption of the operations of or inaccessibility to the First Services, L.P. data center which appears in First Services, L.P.'s reasonable judgment to require relocation of processing to an alternative site. First Services, L.P. shall notify First Banks, Inc. as soon as possible after it deems a service outage to be a Disaster. First Services, L.P. shall move the processing of First Banks, Inc.'s critical services to an alternative processing center as expeditiously as possible. First Services, L.P. shall work with First Banks, Inc. to define those services deemed as critical to the operation, revenue, and capital preservation of First Banks, Inc. First Banks, Inc. shall maintain adequate records of all transactions during the period of service interruption and shall have personnel available to assist First Services, L.P., Inc. in implementing the switch over to be alternative processing site. During a disaster, non-critical, optional or on-request services shall be provided by First Services, L.P. only to the extent that there is adequate capacity at the alternate center and only after stabilizing the provision of critical services. B. First Services, L.P. shall work with First Banks, Inc. to establish a plan for alternative data communications in the event of a disaster. First Banks, Inc. shall be responsible for furnishing any additional communications equipment and data lines required under the adopted plan. C. First Services, L.P. shall test the Business Continuity Plan by conducting, at least, one annual test. First Banks, Inc. agrees to participate in and assist First Services, L.P. with such testing. Test results will be made available to First Banks, Inc.'s regulators, internal and external auditors, and (upon request) to First Banks, Inc.'s insurance underwriters. First Banks, Inc. understands and agrees that the Business Continuity Plan is designed to minimize but not eliminate risks associated with a disaster affecting First Services, L.P.'s data center. First Services, L.P. does not warrant that service will be uninterrupted or error free in the event of a disaster. First Banks, Inc. maintains responsibility for adopting a business continuity plan relating to disasters affecting First Banks, Inc.'s facilities and for securing resources necessary to properly protect First Banks, Inc.'s revenues in the event of a disaster. XIII. DEFAULT A. In the event that First Banks, Inc. is thirty (30) days in arrears in making any payment required, or in the event of any other material default by either First Services, L.P. or First Banks, Inc. in the performance of their obligations, the affected party shall have the right to give written notice to the other of the default and its intent to terminate this Agreement stating with reasonable particularity the nature of the claimed default. This Agreement shall terminate if the default has not been cured within a reasonable time with a minimum being thirty (30) days from the effective date of the notice. B. Upon the expiration of this Agreement, or its termination, First Services, L.P. shall furnish to First Banks, Inc. such copies of First Banks, Inc.'s data files as First Banks, Inc. may request in machine readable format form along with such other information and assistance as or is reasonable and customary to enable First Banks, Inc. to deconvert from the First Services, L.P. system. First Banks, Inc. shall reimburse First Services, L.P. for the production of data records and other services at First Services, L.P.'s current fees for such services. XIV. INSURANCE First Services, L.P. carries Comprehensive General Liability insurance with primary limits of two million dollars, Commercial Crime Insurance covering Employee Dishonesty in the amount of thirty million dollars, all-risk replacement cost coverage on all equipment used at First Services, L.P.'s data center and Worker Compensation coverage on First Services, L.P. employees wherever located in the United States. In addition, First Services, L.P. carries coverage for computer/computer related theft in the amount of twenty million dollars. First Banks, Inc. shall carry adequate insurance to cover liability for source documents while in transit and in case of data loss through errors and omissions. XV. GENERAL A. This Agreement is binding upon the parties and their respective successors and permitted assigns. Neither party may assign this Agreement in whole or in part without the consent of First Banks, Inc. and/or First Services, L.P., provided, however, that First Services, L.P. may subcontract any or all of the services to be performed under this Agreement without the written consent of First Banks, Inc. Any such subcontractors shall be required to comply with all of the applicable terms and conditions of this Agreement. B. The parties agree that, in connection with the performance of their obligations hereunder, they will comply with applicable Federal, State, and local laws including the laws and regulations regarding Equal Employment Opportunities. C. First Services, L.P. agrees that the Federal Reserve Bank, and FDIC will have the authority and responsibility pursuant to the Bank Service Corporation Act, 12 U.S.C. 1867(C)relating to service performed by contract or otherwise. First Services, L.P., also agrees that its services shall be subject to oversight by the Federal Reserve Bank, FDIC or state banking departments as may be applicable under laws and regulations pertaining to First Banks, Inc.'s charter and shall, if applicable, provide the Federal Reserve Bank and FDIC with a copy of First Services, L.P.'s current audit and financial statements and a copy of any current third party review report when a review has been performed. D. Neither party shall be liable for any errors, delays or non-performance due to events beyond its reasonable control including, but not limited to, acts of God, failure or delay of power or communications, changes in law or regulation or other acts of governmental authority, strike, weather conditions or transportation. E. All written notices required to be given under this Agreement shall be sent by Registered or Certified Mail, Return Receipt Requested, postage prepaid, or by confirmed facsimile to the persons and at the addresses listed below or to such other address or person as a party shall have designated in writing. First Services, L.P. First Banks, Inc. 600 James S. McDonnell Blvd. 135 North Meramec Hazelwood, MO 63042 Clayton, MO 63105 F. The failure of either party to exercise in any respect any right provided for herein shall not be deemed a waiver of any rights. G. Each party acknowledges that is has read this Agreement, understands it, and agrees that it is the complete and exclusive statement of the Agreement between the parties and supersedes and merges any prior or simultaneous proposals, understandings and all other agreements with respect to the subject matter. This Agreement may not be modified or altered except by a written instrument duly executed by both parties. H. No waiver of any of the terms of this Agreement shall be effective unless in writing and signed by the duly authorized representative of the party charged therewith. No waiver of any provision hereof shall extend to or affect any obligation not expressly waived, impair any rights consequent on such obligation or imply a subsequent waiver of that or any other provision. I. This Agreement shall be governed by, construed and interpreted in accordance with the laws of the State of Missouri. IN WITNESS WHEREOF, the parties have executed this Agreement the date first above written. First Banks, Inc. First Services, L.P. 135 North Meramec 600 James S. McDonnell Boulevard Clayton, Missouri 63105 Hazelwood, Missouri 63042 BY:/s/ Allen H. Blake BY:/s/ Michael F. Hickey - ------------------------ --------------------------------- Allen H. Blake Michael F. Hickey President President Attachment 1 First Services, L.P. Product and Price Schedule Effective January 1, 2001 ACCOUNT/ITEM/TRANSACTION BASED SERVICES ACCOUNTS PROCESSED - BASE SERVICES DDA Accounts $ .75 Savings Accounts $ .70 Time Accounts $ .70 Loan Accounts $ .75 CIF Records $ .20 ATM/Debit Cards $ .225 Accounts Processed - Base Services Include:
Collection System (Cyber Resources) ACH Origination Recovery System (Cyber Resources) ATM/Debit Card Processing Organizational Profitability (IPS) General Ledger Asset/Liability (Bankware) Loan Tracking (Baker Hill) Fixed Asset Interface Optical System (RVI) Loan Spread Sheet (Baker Hill) Interactive Voice MCIF (Okra) Credit Scoring (Fair Issac) Card Management System Loan Documentation (FTI/CFI) Cash Management System (Firstlink) Wire Transfer (Fundtech) Bank Audit Commercial Analysis NOW Reclassification Accounts Payable Interface Charge Back System Long Distance Management Remote Laser Printing Teller (Encore) Retrofit/New Releases Query Report Writer Mortgage (Unify) Forms and Supplies Currency Transaction Reporting Year-end Processing STATEMENTS PRODUCED DDA $ .30 Savings $ .10 Time $ .02 Loan $ .15 Year End $1.00 5498 $1.00 TRANSACTIONS PROCESSED - BASE SERVICES - ITEM PROCESSING Proof Items $ .040 POD and EFT Items $ .014 Inclearing and Transmission Items $ .014 Transactions Processed - Base Services - Item Processing Includes: MICR Rejects Serial Sort Teller Adjustments Transit Float Analysis Microfilming Deposit Corrections Endorsement Services Forms and Supplies Check Truncation Exception Item Sort Statement Sort Interest Check Mailings Statement Enclosures Notice Mailings
TRANSACTIONS PROCESSED - OTHER SERVICES Wire Activity $ 5.00 First Link Activity $ 30.00 ACH Activity $ .042 Research Requests $ 15.00 Adjustments Processed $ 15.00 Lock Box Transactions $ .45 Lock Box Postage as incurred Lock Box Copies $ .08 Mail Services: FB Midwest $ 900.00 per month FB&T $ 900.00 per month BRANCH BASED SERVICES CONNECTION CHARGES Support Unit Data Connections $ varies Branch Data Connections $ 900.00 per location ATM Connections $ 100.00 per location Dierbergs ATM Connections $ 700.00 per location Contingency Pln/Disaster Rec $ 200.00 per location Mail Courier Routes (MO/IL) $ 40.00 per day USER BASED SERVICES Network/Telecom Support/Infrastructure $ 60.00 per user Help Desk Support $ 25.00 per user Microsoft Application Licenses $ 25.00 per user Email $ 10.00 per user Web (Internet) Access $ 15.00 per user Dial-In (Remote) Access $ 20.00 per user Information Security $ 25.00 per user User Based Services include: Network Technical support Network Infrastructure Help Desk MS Word MS Excel MS Access MS Powerpoint Anti-Virus Email usage Web usage Dial-In Access capability User/Password Administration Security Monitoring Access Control APPLICATION/PROJECT BASED SERVICES Application Support/Software Maintenance $ 60.00/hr Project Management and Support $ 60.00/hr Project Office $ 60.00/hr Acquisition/New Business Support $ 60.00/hr Asset Management/Technical Purchasing $ 28.85/hr The Above Services Include: Production problem support Application Q/A Application software upgrades/releases Project Management Project Office tracking and reporting Acquisition Conversions Branch Deconversions Mergers Equipment quotes, orders, and delivery Asset tracking Invoice payment Operations Support $ 28.85/hr IRA Support $ 17.50/hr Reconciliation/Appl Balancing $ 14.50/hr Records Management $ 32.00/hr Bookkeeping Support $ 20.50/hr
Bookkeeping Support includes: Returns Large Item Notification Signature Verification Chargebacks Kiting Savings Bonds Unposted Items OFAC American Express NSF Notices Year-End Notifications
EXHIBIT 10.7 SERVICE AGREEMENT THIS SERVICE AGREEMENT is made and entered into as of the Fifteenth day of October, 2001, by and between FIRST SERVICES, L.P., a Missouri Limited Partnership and FIRST BANK, a banking institution duly organized and existing by virtue of the laws of the State of Missouri. WHEREAS, FIRST BANK and FIRST SERVICES, L.P. entered into a Service Agreement dated April 1, 1997; and WHEREAS, said Service Agreement was assigned to First Services, L.P. on or about April 1, 1997; and WHEREAS, FIRST SERVICES, L.P. and FIRST BANK desire to amend and restate said Service Agreement in its entirety. NOW, THEREFORE, for and in consideration of the mutual promises and covenants contained herein, and the sum of Ten Dollars ($10.00) in hand paid, each to the other, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: I. TERMINATION AND REVOCATION The Parties hereto hereby revoke, cancel and hold for naught the Service Agreement dated April 1, 1997, and hereby substitute in its place the Service Agreement herein contained. II. SERVICES A. First Services, L.P. shall furnish First Bank data processing and item processing services selected by First Bank from the Product and Price Schedule as per Attachment 1, attached hereto and incorporated herein by reference thereto. Additional services may be selected upon prior written notice to First Services, L.P. at First Services, L.P.'s then current list price by executing an amended Summary Page. B. First Services, L.P. will provide conversion and training services for the fees specified from the Product and Price Schedule (Attachment 1). Classroom training in the use and operation of the system for the number of First Bank personnel mutually agreed upon in the conversion planning process will be provided at a training facility mutually agreed upon. Conversion services are those activities designed to transfer the processing of First Bank's data from its present processing company to First Services, L.P. C. First Services, L.P. will also provide Network Support Service consisting of communication line monitoring and diagnostic equipment and support personnel to discover, diagnose, repair or report line problems to the appropriate telephone company. The fee for this service is also listed from the Product and Price Schedule (Attachment 1). D. First Services, L.P. shall upon request act as First Bank's designated representative to arrange for the purchase, and installation of data lines necessary to access the First Services, L.P. system. Where requested, additional dial-up lines and equipment to be utilized as a backup to the regular data lines may also be ordered. First Services, L.P. shall bill First Bank for the actual charges incurred for the data lines and for the maintenance of the modems and other interface devices. E. First Services, L.P. will provide and support an Internet Banking application capability, at a fee listed on the Product and Pricing Schedule (Attachment 1). First Services, L.P. will ensure access to this system by employees and those customers who meet the requirements established by the First Bank Internet Banking Group. Any request for access that is denied will be resolved by mutual agreement of the parties hereto. F. First Services, L.P. will provide e-mail, Internet, and Intranet capabilities at a fee listed on the Product and Pricing Schedule (Attachment 1). G. Processing priorities will be determined by mutual agreement of the parties hereto. H. In addition, First Services, L.P. acknowledges that First Bank acts as a correspondent bank to certain Affiliate Banks and that as part of its duties hereunder First Services, L.P. will be performing certain services for First Bank which are necessary because of its status as a correspondent bank. III. TERM The term of this Agreement shall be twelve (12) months commencing on October 15, 2001. Upon expiration, the Agreement will automatically renew for successive terms of twelve (12) months each unless either party shall have provided written notice to the other at least one-hundred eighty (180) days prior to the expiration of the then current term, of its intent not to renew. In the event of termination, First Services, L.P. shall provide reasonable time allowance to allow First Bank to convert to another system. IV. SOFTWARE / FIRMWARE Unmodified third party software or firmware ("Software") may be supplied as part of the Agreement. All such Software shall be provided subject to Software License Agreements. V. PRICE AND PAYMENT A. Fees for First Services, L.P.'s services are set forth from the Product and Price Schedule (Attachment 1) including where applicable minimum monthly charges and payment schedules for onetime fees. B. Standard Fees shall be invoiced no later than the fifteenth (15th) of each month for the then current month. Terms of payment shall be net cash. C. The Base Service Charge listed from the Product and Price Schedule (Attachment 1) shall not change more than twice a year. The fee schedule shall be reviewed annually to ensure fair market value in pricing. Comparisons will be made with peers and other providers of similar services. New products and services can be added as they become available and will be priced accordingly. D. This above limitation shall not apply to pass-thru expenses. A pass-thru expense is a charge for goods or services by First Services, L.P. on First Bank's behalf that are to be billed to First Bank without mark-up. E. The fees listed from the Product and Price Schedule (Attachment 1) do not include and First Bank is responsible for furnishing transportation or transmission of information between First Services, L.P.'s data center, First Bank's site and any applicable clearing house, regulatory agency or Federal Reserve Bank. Where First Bank has elected to have First Services, L.P. provide Telecommunication Services, the price for the Services will be provided and billed as a pass-thru expense. F. Network Support Service Fees and Local Network Fees are based upon services rendered from First Services, L.P.'s premises. Off-premise support will be provided upon First Bank's request on an as available basis at First Services, L.P. then current charges for time and materials, plus reasonable travel and living expenses. G. First Services, L.P.'s Price Schedule for First Bank shall allow for a discount from the Schedule of Fees (Attachment 1) in return for the use by First Services, L.P. of certain of First Bank's computer hardware, software and equipment. The monthly discount is determined by adding the monthly depreciation of the assets used and a reasonable cost of funds factor, said cost of funds factor may be changed from time to time with the written consent of the parties hereto. VI. CLIENT OBLIGATIONS A. First Bank shall be solely responsible for the input, transmission or delivery of all information and data required by First Services, L.P. to perform the services except where First Bank has retained First Services, L.P. to handle such responsibilities on its behalf. The data shall be provided in a format and manner approved by First Services, L.P. First Bank will provide at its own expense or procure from First Services, L.P. all equipment, computer software communication lines and interface devices required to access the First services, L.P. System. If First Bank has elected to provide such items itself, First Services, L.P. shall provide First Bank with a list of compatible equipment and software. B. First Bank shall designate appropriate First Bank personnel for training in the use of the First services, L.P. System, shall allow First Services, L.P. access to First Bank's site during normal business hours for conversion and shall cooperate with First services, L.P. Personnel in the conversion and implementation of the services. C. First Bank shall comply with any operating instructions on the use of the First Services, L.P. reports furnished by First Services, L.P. for accuracy and shall work with First Services, L.P. to reconcile any out of balance conditions. First Bank shall determine and be responsible for the authenticity and accuracy of all information and data submitted to First Services, L.P. D. First Bank shall furnish, or if First Services, L.P. agrees to so furnish, reimburse First Services, L.P. for courier services applicable to the services requested. VII. GENERAL ADMINISTRATION First Services, L.P. is continually reviewing and modifying the First Services, L.P. system to improve service and to comply with federal government regulations applicable to the data utilized in providing services to First Bank. First Services, L.P. reserves the right to make changes in the service, including, but not limited to operating procedures, security procedures, the type of equipment resident at and the location of First Services, L.P.'s data center. VIII. CLIENT CONFIDENTIAL INFORMATION A. First Services, L.P. shall treat all information and data relating to First Bank business provided to First Services, L.P. by First Bank, or information relating to First Bank's customers, as confidential and shall safe-guard First Bank's information with the same degree of care used to protect First Services, L.P.'s confidential information. First Services, L.P. and First Bank agree that master and transaction data files are owned by and constitute property of First Bank data and records shall be subject to regulation and examination by State and Federal supervisory agencies to the same extent as if such information were on First Bank's premises. First Services, L.P.'s obligations under this Section VIII shall survive the termination or expiration of this Agreement. B. First Services, L.P. agrees now and at all times in the future that all such Confidential Information shall be held in strict confidence and disclosed only to those employees whose duties reasonably require access to such information. First Services, L.P. may use such Confidential Information only in connection with its performance under this Agreement. Confidential Information shall be returned to First Bank or destroyed upon First Bank's request once the services contemplated by this Agreement have been completed or upon termination of this Agreement. C. First Services, L.P. shall maintain adequate backup procedures including storage of duplicate record files as necessary to reproduce First Bank's records and data. In the event of a service disruption due to reasons beyond First Services, L.P.'s control, First Services L.P. shall use diligent efforts to mitigate the effects of such an occurrence. D. First Services, L.P. shall establish and maintain policies and procedures to insure compliance with this section. First Services, L.P. agrees to permit First Bank to audit First Services' compliance with this section during regular business hours upon reasonable notice to First Services, L.P. The provisions of this section shall survive any termination of this Agreement. IX. FIRST SERVICES, L.P. CONFIDENTIAL INFORMATION A. First Bank shall not use or disclose to any third persons any confidential information concerning First Services, L.P. confidential information is that which relates to First Services, L.P.'s software, research, development, trade secrets or business affairs including, but not limited to, the terms conditions of this Agreement but does not include information in the public domain through no fault of First Bank. First Bank obligations under this Section IX shall survive the termination or expiration of this agreement. B. First Services, L.P.'s system contains information and computer software that is proprietary and confidential information of First Services, L.P., its suppliers and licensees. First Bank agrees not to attempt to circumvent the devices employed by First Services, L.P. to prevent unauthorized access to the First Services, L.P.'s system. X. WARRANTIES First Services, L.P. will accurately process First Bank's work provided that First Bank supplies accurate data and follows the procedures described in First Services, L.P.'s User Manuals, notices and advises. First Services, L.P. personnel will exercise due care in the processing of First Bank's work. In the event of an error caused by First Services, L.P.'s personnel, programs or equipment, First Services, L.P. shall correct the data and/or reprocess the affected report at no additional cost to First Bank. XI. LIMITATION OF LIABILITY IN NO EVENT SHALL FIRST SERVICES, L.P. BE LIABLE FOR LOSS OF GOODWILL, OR FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING FROM FIRST BANK'S USE OF FIRST SERVICES, L.P.'S SERVICES, OR FIRST SERVICES, L.P.'S SUPPLY OF EQUIPMENT OR SOFTWARE, UNDER THIS AGREEMENT REGARDLESS OF WHETHER SUCH CLAIM ARISES IN TORT OR IN CONTRACT. FIRST SERVICES, L.P.'S AGGREGATE LIABILITY FOR ANY AND ALL CAUSES OF ACTION RELATING TO SERVICES PERFORMED HEREUNDER OR ANY DAMAGE OR LOSS INCURRED OR SUSTAINED BY FIRST BANK RELATING TO THIS AGREEMENT AND THE SERVICES PERFORMED HEREUNDER SHALL BE LIMITED TO THE AMOUNT OF TOTAL FEES PAID BY FIRST BANK TO FIRST SERVICES, L.P. IN THE THREE (3) MONTH PERIOD PRECEDING THE DATE THE CLAIM ACCRUED. FIRST SERVICES, L.P.'S AGGREGATE LIABILITY FOR A DEFAULT RELATING TO EQUIPMENT OR SOFTWARE SHALL BE LIMITED TO THE AMOUNT PAID FOR THE EQUIPMENT OR SOFTWARE. XII. PERFORMANCE STANDARDS A. On-Line Availability - First Services, L.P.'s standard of performance shall be on-line availability of the system 98% of the time that it is scheduled to be so available over a three (3) month period (the "Measurement Period"). Actual on-line performance will be calculated monthly by comparing the number of hours which the system was scheduled to be operational on an on-line basis with the number of hours, or a portion thereof, it was actually operational on an on-line basis. Downtime may be caused by operator error, hardware malfunction or failure, or environmental failures such as loss of power or air conditioning. Downtime caused by reasons beyond First Services, L.P.'s control should not be considered in the statistics. B. Report Availability - First Services, L.P.'s standard of performance for report availability shall be that, over a three (3) month period, ninety-five percent (95%) of all Critical Daily Reports shall be available for remote printing on time without significant errors. A Critical Daily Report shall mean priority group reports, which First Services, L.P. and First Bank have mutually agreed in writing, are necessary to properly account for the previous day's activity and properly notify First Bank of overdraft, NSF or return items. A significant error is one that impairs First Bank's ability to properly account for the previous days activity and/or properly account for overdraft, NSF or return items. Actual performance will be calculated monthly by comparing the total number of First Bank reports scheduled to be available from First Services, L.P. to the number of reports which were available on time and without error. C. Exclusive Remedy - In the event that First Services, L.P.'s performance fails to meet the standards listed above and such failure is not the result of First Bank's error or omission, First Bank sole and exclusive remedy for such default shall be the right to terminate this Agreement in accordance with the provisions of this paragraph. In the event that First Services, L.P. fails to achieve any Performance Standards, alone or in combination, for the prescribed measurement period, First Bank shall notify First Services, L.P. of its intent to terminate this agreement if First Services, L.P. fails to restore performance to the committed levels. First Services, L.P. shall advise First Bank promptly upon correction of the system deficiencies (in no event shall corrective action exceed sixty (60) days from the notice date) and shall begin an additional measurement period. Should First Services, L.P. fail to achieve the required Performance Standards during the remeasurement period, First Bank may terminate this Agreement and First Services, L.P. shall cooperate with First Bank to achieve an orderly transition to First Bank's replacement processing system. First Bank may also terminate this Agreement if First Services, L.P.'s performance for the same standard is below the relevant performance standard for more than two (2) measurement periods in any consecutive twelve (12) months or for more than five (5) measurement periods during the term of this agreement. During the period of transition, First Bank shall pay only such charges as are incurred for monthly fees until the date of deconversion. First Services, L.P. shall not charge First Bank for services relating to First Bank's deconversion. D. Audit - First Bank shall have the right to perform reasonable audits, at its cost, upon giving written notice to First Services, L.P. of its intent to do so. First Services, L.P. shall provide, upon request, financial information to First Bank. XIII. BUSINESS CONTINUITY / DISASTER RECOVERY A. A Disaster shall mean any unplanned interruption of the operations of or inaccessibility to the First Services, L.P. data center which appears in First Services, L.P.'s reasonable judgment to require relocation of processing to an alternative site. First Services, L.P. shall notify First Bank as soon as possible after it deems a service outage to be a Disaster. First Services, L.P. shall move the processing of First Bank's critical services to an alternative processing center as expeditiously as possible. First Services, L.P. shall work with First Bank to define those services deemed as critical to the operation, revenue, and capital preservation of the Bank. First Bank shall maintain adequate records of all transactions during the period of service interruption and shall have personnel available to assist First Services, L.P., Inc. in implementing the switch over to be alternative processing site. During a disaster, non-critical, optional or on-request services shall be provided by First Services, L.P. only to the extent that there is adequate capacity at the alternate center and only after stabilizing the provision of critical services. B. First Services, L.P. shall work with First Bank to establish a plan for alternative data communications in the event of a disaster. First Bank shall be responsible for furnishing any additional communications equipment and data lines required under the adopted plan. C. First Services, L.P. shall test the Business Continuity Plan by conducting, at least, one annual test. First Bank agrees to participate in and assist First Services, L.P. with such testing. Test results will be made available to First Bank's regulators, internal and external auditors, and (upon request) to First Bank's insurance underwriters. D. First Bank understands and agrees that the Business Continuity Plan is designed to minimize but not eliminate risks associated with a disaster affecting First Services, L.P.'s data center. First Services, L.P. does not warrant that service will be uninterrupted or error free in the event of a disaster. First Bank maintains responsibility for adopting a business continuity plan relating to disasters affecting First Bank's facilities and for securing resources necessary to properly protect First Bank's revenues in the event of a disaster. XIV. DEFAULT A. In the event that First Bank is thirty (30) days in arrears in making any payment required, or in the event of any other material default by either First Services, L.P. or First Bank in the performance of their obligations, the affected party shall have the right to give written notice to the other of the default and its intent to terminate this Agreement stating with reasonable particularity the nature of the claimed default. This Agreement shall terminate if the default has not been cured within a reasonable time with a minimum being thirty (30) days from the effective date of the notice. B. Upon the expiration of this Agreement, or its termination, First Services, L.P. shall furnish to First Bank such copies of First Bank's data files as First Bank may request in machine readable format form along with such other information and assistance as or is reasonable and customary to enable First Bank to deconvert from the First Services, L.P. system. First Bank shall reimburse First Services, L.P. for the production of data records and other services at First Services, L.P.'s current fees for such services. XV. INSURANCE First Services, L.P. carries Comprehensive General Liability insurance with primary limits of two million dollars, Commercial Crime Insurance covering Employee Dishonesty in the amount of thirty million dollars, all-risk replacement cost coverage on all equipment used at First Services, L.P.'s data center and Worker Compensation coverage on First Services, L.P. employees wherever located in the United States. In addition, First Services, L.P. carries coverage for computer/computer related theft in the amount of twenty million dollars. First Bank shall carry adequate insurance to cover liability for source documents while in transit and in case of data loss through errors and omissions. XVI. GENERAL A. This Agreement is binding upon the parties and their respective successors and permitted assigns. Neither party may assign this Agreement in whole or in part without the consent of First Bank and/or First Services, L.P., provided, however, that First Services, L.P. may subcontract any or all of the services to be performed under this Agreement without the written consent of First Bank. Any such subcontractors shall be required to comply with all of the applicable terms and conditions of this Agreement. B. The parties agree that, in connection with the performance of their obligations hereunder, they will comply with applicable Federal, State, and local laws including the laws and regulations regarding Equal Employment Opportunities. C. First Services, L.P. agrees that the Federal Reserve Bank, and FDIC will have the authority and responsibility pursuant to the Bank Service Corporation Act, 12 U.S.C. 1867(C)relating to service performed by contract or otherwise. First Services, L.P., also agrees that its services shall be subject to oversight by the Federal Reserve Bank, FDIC or state banking departments as may be applicable under laws and regulations pertaining to First Bank's charter and shall, if applicable, provide the Federal Reserve Bank and FDIC with a copy of First Services, L.P.'s current audit and financial statements and a copy of any current third party review report when a review has been performed. D. Neither party shall be liable for any errors, delays or non-performance due to events beyond its reasonable control including, but not limited to, acts of God, failure or delay of power or communications, changes in law or regulation or other acts of governmental authority, strike, weather conditions or transportation. E. All written notices required to be given under this Agreement shall be sent by Registered or Certified Mail, Return Receipt Requested, postage prepaid, or by confirmed facsimile to the persons and at the addresses listed below or to such other address or person as a party shall have designated in writing. First Services, L.P. First Bank 600 James S. McDonnell Blvd. 11901 Olive Blvd. Hazelwood, MO 63042 Creve Coeur, MO 63141 F. The failure of either party to exercise in any respect any right provided for herein shall not be deemed a waiver of any rights. G. Each party acknowledges that is has read this Agreement, understands it, and agrees that it is the complete and exclusive statement of the Agreement between the parties and supersedes and merges any prior or simultaneous proposals, understandings and all other agreements with respect to the subject matter. This Agreement may not be modified or altered except by a written instrument duly executed by both parties. H. No waiver of any of the terms of this Agreement shall be effective unless in writing and signed by the duly authorized representative of the party charged therewith. No waiver of any provision hereof shall extend to or affect any obligation not expressly waived, impair any rights consequent on such obligation or imply a subsequent waiver of that or any other provision. I. This Agreement shall be governed by, construed and interpreted in accordance with the laws of the State of Missouri. IN WITNESS WHEREOF, the parties have executed this Agreement the date first above written. First Bank First Services, L.P. 11901 Olive Boulevard 600 James S. McDonnell Boulevard Creve Coeur, Missouri 63141 Hazelwood, Missouri 63042 BY:/s/Donald W. Williams BY:/s/ Michael F. Hickey - ------------------------ ------------------------ Donald W. Williams Michael F. Hickey President President Attachment 1 First Services, L.P. Product and Price Schedule Effective January 1, 2001 ACCOUNT/ITEM/TRANSACTION BASED SERVICES ACCOUNTS PROCESSED - BASE SERVICES DDA Accounts $ .75 Savings Accounts $ .70 Time Accounts $ .70 Loan Accounts $ .75 CIF Records $ .20 ATM/Debit Cards $ .225 Accounts Processed - Base Services Include:
Collection System (Cyber Resources) ACH Origination Recovery System (Cyber Resources) ATM/Debit Card Processing Organizational Profitability (IPS) General Ledger Asset/Liability (Bankware) Loan Tracking (Baker Hill) Fixed Asset Interface Optical System (RVI) Loan Spread Sheet (Baker Hill) Interactive Voice MCIF (Okra) Credit Scoring (Fair Issac) Card Management System Loan Documentation (FTI/CFI) Cash Management System (Firstlink) Wire Transfer (Fundtech) Bank Audit Commercial Analysis NOW Reclassification Accounts Payable Interface Charge Back System Long Distance Management Remote Laser Printing Teller (Encore) Retrofit/New Releases Query Report Writer Mortgage (Unify) Forms and Supplies Currency Transaction Reporting Year-end Processing STATEMENTS PRODUCED DDA $ .30 Savings $ .10 Time $ .02 Loan $ .15 Year End $1.00 5498 $1.00 TRANSACTIONS PROCESSED - BASE SERVICES - ITEM PROCESSING Proof Items $ .040 POD and EFT Items $ .014 Inclearing and Transmission Items $ .014 Transactions Processed - Base Services - Item Processing Includes: MICR Rejects Serial Sort Teller Adjustments Transit Float Analysis Microfilming Deposit Corrections Endorsement Services Forms and Supplies Check Truncation Exception Item Sort Statement Sort Interest Check Mailings Statement Enclosures Notice Mailings
TRANSACTIONS PROCESSED - OTHER SERVICES Wire Activity $ 5.00 First Link Activity $ 30.00 ACH Activity $ .042 Research Requests $ 15.00 Adjustments Processed $ 15.00 Lock Box Transactions $ .45 Lock Box Postage as incurred Lock Box Copies $ .08 Mail Services: FB Midwest $ 900.00 per month FB&T $ 900.00 per month BRANCH BASED SERVICES CONNECTION CHARGES Support Unit Data Connections $ varies Branch Data Connections $ 900.00 per location ATM Connections $ 100.00 per location Dierbergs ATM Connections $ 700.00 per location Contingency Pln/Disaster Rec $ 200.00 per location Mail Courier Routes (MO/IL) $ 40.00 per day USER BASED SERVICES Network/Telecom Support/Infrastructure $ 60.00 per user Help Desk Support $ 25.00 per user Microsoft Application Licenses $ 25.00 per user Email $ 10.00 per user Web (Internet) Access $ 15.00 per user Dial-In (Remote) Access $ 20.00 per user Information Security $ 25.00 per user User Based Services include: Network Technical support Network Infrastructure Help Desk MS Word MS Excel MS Access MS Powerpoint Anti-Virus Email usage Web usage Dial-In Access capability User/Password Administration Security Monitoring Access Control APPLICATION/PROJECT BASED SERVICES Application Support/Software Maintenance $ 60.00/hr Project Management and Support $ 60.00/hr Project Office $ 60.00/hr Acquisition/New Business Support $ 60.00/hr Asset Management/Technical Purchasing $ 28.85/hr The Above Services Include: Production problem support Application Q/A Application software upgrades/releases Project Management Project Office tracking and reporting Acquisition Conversions Branch Deconversions Mergers Equipment quotes, orders, and delivery Asset tracking Invoice payment Operations Support $ 28.85/hr IRA Support $ 17.50/hr Reconciliation/Appl Balancing $ 14.50/hr Records Management $ 32.00/hr Bookkeeping Support $ 20.50/hr
Bookkeeping Support includes: Returns Large Item Notification Signature Verification Chargebacks Kiting Savings Bonds Unposted Items OFAC American Express NSF Notices Year-End Notifications
EXHIBIT 10.8 SERVICE AGREEMENT THIS SERVICE AGREEMENT is made and entered into as of the Fifteenth day of October, 2001, by and between FIRST SERVICES, L.P., a Missouri Limited Partnership and FIRST BANC MORTGAGE, INC., a mortgage banking institution duly organized and existing by virtue of the laws of the State of Missouri. For and in consideration of the mutual promises and covenants contained herein, and the sum of Ten Dollars ($10.00) in hand paid, each to the other, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: I. SERVICES A. First Services, L.P. shall furnish First Banc Mortgage, Inc. data processing services selected by First Banc Mortgage, Inc. from the Product and Price Schedule as per Attachment 1, attached hereto and incorporated herein by reference thereto. Additional services may be selected upon prior written notice to First Services, L.P. at First Services, L.P.'s then current list price by executing an amended Summary Page. B. First Services, L.P. will provide conversion and training services for the fees specified from the Product and Price Schedule (Attachment 1). Classroom training in the use and operation of the system for the number of First Banc Mortgage, Inc. personnel mutually agreed upon in the conversion planning process will be provided at a training facility mutually agreed upon. Conversion services are those activities designed to transfer the processing of First Banc Mortgage, Inc.'s data from its present processing company to First Services, L.P. C. First Services, L.P. will also provide Network Support Service consisting of communication line monitoring and diagnostic equipment and support personnel to discover, diagnose, repair or report line problems to the appropriate telephone company. The fee for this service is also listed from the Product and Price Schedule (Attachment 1). D. First Services, L.P. shall upon request act as First Banc Mortgage, Inc.'s designated representative to arrange for the purchase, and installation of data lines necessary to access the First Services, L.P. system. Where requested, additional dial-up lines and equipment to be utilized as a backup to the regular data lines may also be ordered. First Services, L.P. shall bill First Banc Mortgage, Inc. for the actual charges incurred for the data lines and for the maintenance of the modems and other interface devices. E. First Services, L.P. will provide e-mail, Internet, and Intranet capabilities at a fee listed on the Product and Pricing Schedule (Attachment 1). F. Processing priorities will be determined by mutual agreement of the parties hereto. II. TERM The term of this Agreement shall be twelve (12) months commencing on October 15, 2001. Upon expiration, the Agreement will automatically renew for successive terms of twelve (12) months each unless either party shall have provided written notice to the other at least one-hundred eighty (180) days prior to the expiration of the then current term, of its intent not to renew. In the event of termination, First Services, L.P. shall provide reasonable time allowance to allow First Banc Mortgage, Inc. to convert to another system. III. SOFTWARE / FIRMWARE Unmodified third party software or firmware ("Software") may be supplied as part of the Agreement. All such Software shall be provided subject to Software License Agreements. IV. PRICE AND PAYMENT A. Fees for First Services, L.P.'s services are set forth from the Product and Price Schedule (Attachment 1) including where applicable minimum monthly charges and payment schedules for onetime fees. B. Standard Fees shall be invoiced no later than the fifteenth (15th) of each month for the then current month. Terms of payment shall be net cash. C. The Base Service Charge listed from the Product and Price Schedule (Attachment 1) shall not change more than twice a year. The fee schedule shall be reviewed annually to ensure fair market value in pricing. Comparisons will be made with peers and other providers of similar services. New products and services can be added as they become available and will be priced accordingly. D. This above limitation shall not apply to pass-thru expenses. A pass-thru expense is a charge for goods or services by First Services, L.P. on First Banc Mortgage, Inc.'s behalf that are to be billed to First Banc Mortgage, Inc. without mark-up. E. The fees listed from the Product and Price Schedule (Attachment 1) do not include and First Banc Mortgage, Inc. is responsible for furnishing transportation or transmission of information between First Services, L.P.'s data center and First Banc Mortgage, Inc.'s sites. Where First Banc Mortgage, Inc. has elected to have First Services, L.P. provide Telecommunication Services, the price for the Services will be provided and billed as a pass-thru expense. F. Network Support Service Fees and Local Network Fees are based upon services rendered from First Services, L.P.'s premises. Off-premise support will be provided upon First Banc Mortgage, Inc.'s request on an as available basis at First Services, L.P. then current charges for time and materials, plus reasonable travel and living expenses. V. CLIENT OBLIGATIONS A. First Banc Mortgage, Inc. shall be solely responsible for the input, transmission or delivery of all information and data required by First Services, L.P. to perform the services except where First Banc Mortgage, Inc. has retained First Services, L.P. to handle such responsibilities on its behalf. The data shall be provided in a format and manner approved by First Services, L.P. First Banc Mortgage, Inc. will provide at its own expense or procure from First Services, L.P. all equipment, computer software communication lines and interface devices required to access the First services, L.P. System. If First Banc Mortgage, Inc. has elected to provide such items itself, First Services, L.P. shall provide First Banc Mortgage, Inc. with a list of compatible equipment and software. B. First Banc Mortgage, Inc. shall designate appropriate First Banc Mortgage, Inc. personnel for training in the use of the First services, L.P. System, shall allow First Services, L.P. access to First Banc Mortgage, Inc.'s site during normal business hours for conversion and shall cooperate with First services, L.P. personnel in the conversion and implementation of the services. C. First Banc Mortgage, Inc. shall comply with any operating instructions on the use of the First Services, L.P. reports furnished by First Services, L.P. for accuracy and shall work with First Services, L.P. to reconcile any out of balance conditions. First Banc Mortgage, Inc. shall determine and be responsible for the authenticity and accuracy of all information and data submitted to First Services, L.P. D. First Banc Mortgage, Inc. shall furnish, or if First Services, L.P. agrees to so furnish, reimburse First Services, L.P. for courier services applicable to the services requested. VI. GENERAL ADMINISTRATION First Services, L.P. is continually reviewing and modifying the First Services, L.P. system to improve service and to comply with federal government regulations applicable to the data utilized in providing services to First Banc Mortgage, Inc. First Services, L.P. reserves the right to make changes in the service, including, but not limited to operating procedures, security procedures, the type of equipment resident at and the location of First Services, L.P.'s data center. VII. CLIENT CONFIDENTIAL INFORMATION A. First Services, L.P. shall treat all information and data relating to First Banc Mortgage, Inc. business provided to First Services, L.P. by First Banc Mortgage, Inc., or information relating to First Banc Mortgage, Inc.'s customers, as confidential and shall safe-guard First Banc Mortgage, Inc.'s information with the same degree of care used to protect First Services, L.P.'s confidential information. First Services, L.P. and First Banc Mortgage, Inc. agree that master and transaction data files are owned by and constitute property of First Banc Mortgage, Inc. data and records shall be subject to regulation and examination by State and Federal supervisory agencies to the same extent as if such information were on First Banc Mortgage, Inc.'s premises. First Services, L.P.'s obligations under this Section VIII shall survive the termination or expiration of this Agreement. B. First Services, L.P. agrees now and at all times in the future that all such Confidential Information shall be held in strict confidence and disclosed only to those employees whose duties reasonably require access to such information. First Services, L.P. may use such Confidential Information only in connection with its performance under this Agreement. Confidential Information shall be returned to First Banc Mortgage, Inc. or destroyed upon First Banc Mortgage, Inc.'s request once the services contemplated by this Agreement have been completed or upon termination of this Agreement. C. First Services, L.P. shall maintain adequate backup procedures including storage of duplicate record files as necessary to reproduce First Banc Mortgage, Inc.'s records and data. In the event of a service disruption due to reasons beyond First Services, L.P.'s control, First Services L.P. shall use diligent efforts to mitigate the effects of such an occurrence. D. First Services, L.P. shall establish and maintain policies and procedures to insure compliance with this section. First Services, L.P. agrees to permit First Banc Mortgage, Inc. to audit First Services' compliance with this section during regular business hours upon reasonable notice to First Services, L.P. The provisions of this section shall survive any termination of this Agreement. VIII. FIRST SERVICES, L.P. CONFIDENTIAL INFORMATION A. First Banc Mortgage, Inc. shall not use or disclose to any third persons any confidential information concerning First Services, L.P. confidential information is that which relates to First Services, L.P.'s software, research, development, trade secrets or business affairs including, but not limited to, the terms conditions of this Agreement but does not include information in the public domain through no fault of First Banc Mortgage, Inc. First Banc Mortgage, Inc. obligations under this Section IX shall survive the termination or expiration of this agreement. B. First Services, L.P.'s system contains information and computer software that is proprietary and confidential information of First Services, L.P., its suppliers and licensees. First Banc Mortgage, Inc. agrees not to attempt to circumvent the devices employed by First Services, L.P. to prevent unauthorized access to the First Services, L.P.'s system. IX. WARRANTIES First Services, L.P. will accurately process First Banc Mortgage, Inc.'s work provided that First Banc Mortgage, Inc. supplies accurate data and follows the procedures described in First Services, L.P.'s User Manuals, notices and advises. First Services, L.P. personnel will exercise due care in the processing of First Banc Mortgage, Inc.'s work. In the event of an error caused by First Services, L.P.'s personnel, programs or equipment, First Services, L.P. shall correct the data and/or reprocess the affected report at no additional cost to First Banc Mortgage, Inc. X. LIMITATION OF LIABILITY IN NO EVENT SHALL FIRST SERVICES, L.P. BE LIABLE FOR LOSS OF GOODWILL, OR FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING FROM FIRST BANC MORTGAGE, INC.'S USE OF FIRST SERVICES, L.P.'S SERVICES, OR FIRST SERVICES, L.P.'S SUPPLY OF EQUIPMENT OR SOFTWARE, UNDER THIS AGREEMENT REGARDLESS OF WHETHER SUCH CLAIM ARISES IN TORT OR IN CONTRACT. FIRST SERVICES, L.P.'S AGGREGATE LIABILITY FOR ANY AND ALL CAUSES OF ACTION RELATING TO SERVICES PERFORMED HEREUNDER OR ANY DAMAGE OR LOSS INCURRED OR SUSTAINED BY FIRST BANC MORTGAGE, INC. RELATING TO THIS AGREEMENT AND THE SERVICES PERFORMED HEREUNDER SHALL BE LIMITED TO THE AMOUNT OF TOTAL FEES PAID BY FIRST BANC MORTGAGE, INC. TO FIRST SERVICES, L.P. IN THE THREE (3) MONTH PERIOD PRECEDING THE DATE THE CLAIM ACCRUED. FIRST SERVICES, L.P.'S AGGREGATE LIABILITY FOR A DEFAULT RELATING TO EQUIPMENT OR SOFTWARE SHALL BE LIMITED TO THE AMOUNT PAID FOR THE EQUIPMENT OR SOFTWARE. XI. PERFORMANCE STANDARDS A. On-Line Availability - First Services, L.P.'s standard of performance shall be on-line availability of the system 98% of the time that it is scheduled to be so available over a three (3) month period (the "Measurement Period"). Actual on-line performance will be calculated monthly by comparing the number of hours which the system was scheduled to be operational on an on-line basis with the number of hours, or a portion thereof, it was actually operational on an on-line basis. Downtime may be caused by operator error, hardware malfunction or failure, or environmental failures such as loss of power or air conditioning. Downtime caused by reasons beyond First Services, L.P.'s control should not be considered in the statistics. B. Report Availability - First Services, L.P.'s standard of performance for report availability shall be that, over a three (3) month period, ninety-five percent (95%) of all Critical Daily Reports shall be available for remote printing on time without significant errors. A Critical Daily Report shall mean priority group reports, which First Services, L.P. and First Banc Mortgage, Inc. have mutually agreed in writing, are necessary to properly account for the previous day's activity and properly notify First Banc Mortgage, Inc. of overdraft, NSF or return items. A significant error is one that impairs First Banc Mortgage, Inc.'s ability to properly account for the previous days activity and/or properly account for overdraft, NSF or return items. Actual performance will be calculated monthly by comparing the total number of First Banc Mortgage, Inc. reports scheduled to be available from First Services, L.P. to the number of reports which were available on time and without error. C. Exclusive Remedy - In the event that First Services, L.P.'s performance fails to meet the standards listed above and such failure is not the result of First Banc Mortgage, Inc.'s error or omission, First Banc Mortgage, Inc. sole and exclusive remedy for such default shall be the right to terminate this Agreement in accordance with the provisions of this paragraph. In the event that First Services, L.P. fails to achieve any Performance Standards, alone or in combination, for the prescribed measurement period, First Banc Mortgage, Inc. shall notify First Services, L.P. of its intent to terminate this agreement if First Services, L.P. fails to restore performance to the committed levels. First Services, L.P. shall advise First Banc Mortgage, Inc. promptly upon correction of the system deficiencies (in no event shall corrective action exceed sixty (60) days from the notice date) and shall begin an additional measurement period. Should First Services, L.P. fail to achieve the required Performance Standards during the remeasurement period, First Banc Mortgage, Inc. may terminate this Agreement and First Services, L.P. shall cooperate with First Banc Mortgage, Inc. to achieve an orderly transition to First Banc Mortgage, Inc.'s replacement processing system. First Banc Mortgage, Inc. may also terminate this Agreement if First Services, L.P.'s performance for the same standard is below the relevant performance standard for more than two (2) measurement periods in any consecutive twelve (12) months or for more than five (5) measurement periods during the term of this agreement. During the period of transition, First Banc Mortgage, Inc. shall pay only such charges as are incurred for monthly fees until the date of deconversion. First Services, L.P. shall not charge First Banc Mortgage, Inc. for services relating to First Banc Mortgage, Inc.'s deconversion. D. Audit - First Banc Mortgage, Inc. shall have the right to perform reasonable audits, at its cost, upon giving written notice to First Services, L.P. of its intent to do so. First Services, L.P. shall provide, upon request, financial information to First Banc Mortgage, Inc. XII. BUSINESS CONTINUITY / DISASTER RECOVERY A. A Disaster shall mean any unplanned interruption of the operations of or inaccessibility to the First Services, L.P. data center which appears in First Services, L.P.'s reasonable judgment to require relocation of processing to an alternative site. First Services, L.P. shall notify First Banc Mortgage, Inc. as soon as possible after it deems a service outage to be a Disaster. First Services, L.P. shall move the processing of First Banc Mortgage, Inc.'s critical services to an alternative processing center as expeditiously as possible. First Services, L.P. shall work with First Banc Mortgage, Inc. to define those services deemed as critical to the operation, revenue, and capital preservation of First Banc Mortgage, Inc. First Banc Mortgage, Inc. shall maintain adequate records of all transactions during the period of service interruption and shall have personnel available to assist First Services, L.P., Inc. in implementing the switch over to be alternative processing site. During a disaster, non-critical, optional or on-request services shall be provided by First Services, L.P. only to the extent that there is adequate capacity at the alternate center and only after stabilizing the provision of critical services. B. First Services, L.P. shall work with First Banc Mortgage, Inc. to establish a plan for alternative data communications in the event of a disaster. First Banc Mortgage, Inc. shall be responsible for furnishing any additional communications equipment and data lines required under the adopted plan. C. First Services, L.P. shall test the Business Continuity Plan by conducting, at least, one annual test. First Banc Mortgage, Inc. agrees to participate in and assist First Services, L.P. with such testing. Test results will be made available to First Banc Mortgage, Inc.'s regulators, internal and external auditors, and (upon request) to First Banc Mortgage, Inc.'s insurance underwriters. D. First Banc Mortgage, Inc. understands and agrees that the Business Continuity Plan is designed to minimize but not eliminate risks associated with a disaster affecting First Services, L.P.'s data center. First Services, L.P. does not warrant that service will be uninterrupted or error free in the event of a disaster. First Banc Mortgage, Inc. maintains responsibility for adopting a business continuity plan relating to disasters affecting First Banc Mortgage, Inc.'s facilities and for securing resources necessary to properly protect First Banc Mortgage, Inc.'s revenues in the event of a disaster. XIII. DEFAULT A. In the event that First Banc Mortgage, Inc. is thirty (30) days in arrears in making any payment required, or in the event of any other material default by either First Services, L.P. or First Banc Mortgage, Inc. in the performance of their obligations, the affected party shall have the right to give written notice to the other of the default and its intent to terminate this Agreement stating with reasonable particularity the nature of the claimed default. This Agreement shall terminate if the default has not been cured within a reasonable time with a minimum being thirty (30) days from the effective date of the notice. B. Upon the expiration of this Agreement, or its termination, First Services, L.P. shall furnish to First Banc Mortgage, Inc. such copies of First Banc Mortgage, Inc.'s data files as First Banc Mortgage, Inc. may request in machine readable format form along with such other information and assistance as or is reasonable and customary to enable First Banc Mortgage, Inc. to deconvert from the First Services, L.P. system. First Banc Mortgage, Inc. shall reimburse First Services, L.P. for the production of data records and other services at First Services, L.P.'s current fees for such services. XIV. INSURANCE First Services, L.P. carries Comprehensive General Liability insurance with primary limits of two million dollars, Commercial Crime Insurance covering Employee Dishonesty in the amount of thirty million dollars, all-risk replacement cost coverage on all equipment used at First Services, L.P.'s data center and Worker Compensation coverage on First Services, L.P. employees wherever located in the United States. In addition, First Services, L.P. carries coverage for computer/computer related theft in the amount of twenty million dollars. First Banc Mortgage, Inc. shall carry adequate insurance to cover liability for source documents while in transit and in case of data loss through errors and omissions. XV. GENERAL A. This Agreement is binding upon the parties and their respective successors and permitted assigns. Neither party may assign this Agreement in whole or in part without the consent of First Banc Mortgage, Inc. and/or First Services, L.P., provided, however, that First Services, L.P. may subcontract any or all of the services to be performed under this Agreement without the written consent of First Banc Mortgage, Inc. Any such subcontractors shall be required to comply with all of the applicable terms and conditions of this Agreement. B. The parties agree that, in connection with the performance of their obligations hereunder, they will comply with applicable Federal, State, and local laws including the laws and regulations regarding Equal Employment Opportunities. C. First Services, L.P. agrees that the Federal Reserve Bank, and FDIC will have the authority and responsibility pursuant to the Bank Service Corporation Act, 12 U.S.C. 1867(C)relating to service performed by contract or otherwise. First Services, L.P., also agrees that its services shall be subject to oversight by the Federal Reserve Bank, FDIC or state banking departments as may be applicable under laws and regulations pertaining to First Banc Mortgage, Inc.'s charter and shall, if applicable, provide the Federal Reserve Bank and FDIC with a copy of First Services, L.P.'s current audit and financial statements and a copy of any current third party review report when a review has been performed. D. Neither party shall be liable for any errors, delays or non-performance due to events beyond its reasonable control including, but not limited to, acts of God, failure or delay of power or communications, changes in law or regulation or other acts of governmental authority, strike, weather conditions or transportation. E. All written notices required to be given under this Agreement shall be sent by Registered or Certified Mail, Return Receipt Requested, postage prepaid, or by confirmed facsimile to the persons and at the addresses listed below or to such other address or person as a party shall have designated in writing. First Services, L.P. First Banc Mortgage, Inc. 600 James S. McDonnell Blvd. 135 North Meramec Hazelwood, MO 63042 Clayton, MO 63105 F. The failure of either party to exercise in any respect any right provided for herein shall not be deemed a waiver of any rights. G. Each party acknowledges that is has read this Agreement, understands it, and agrees that it is the complete and exclusive statement of the Agreement between the parties and supersedes and merges any prior or simultaneous proposals, understandings and all other agreements with respect to the subject matter. This Agreement may not be modified or altered except by a written instrument duly executed by both parties. H. No waiver of any of the terms of this Agreement shall be effective unless in writing and signed by the duly authorized representative of the party charged therewith. No waiver of any provision hereof shall extend to or affect any obligation not expressly waived, impair any rights consequent on such obligation or imply a subsequent waiver of that or any other provision. I. This Agreement shall be governed by, construed and interpreted in accordance with the laws of the State of Missouri. IN WITNESS WHEREOF, the parties have executed this Agreement the date first above written. First Banc Mortgage, Inc. First Services, L.P. 135 North Meramec 600 James S. McDonnell Boulevard Clayton, Missouri 63105 Hazelwood, Missouri 63042 BY:/s/Mark T. Turkcan BY: /s/ Michael F. Hickey - --------------------- ------------------------- Mark T. Turkcan Michael F. Hickey President President Attachment 1 First Services, L.P. Product and Price Schedule Effective January 1, 2001 ACCOUNT/ITEM/TRANSACTION BASED SERVICES ACCOUNTS PROCESSED - BASE SERVICES DDA Accounts $ .75 Savings Accounts $ .70 Time Accounts $ .70 Loan Accounts $ .75 CIF Records $ .20 ATM/Debit Cards $ .225 Accounts Processed - Base Services Include:
Collection System (Cyber Resources) ACH Origination Recovery System (Cyber Resources) ATM/Debit Card Processing Organizational Profitability (IPS) General Ledger Asset/Liability (Bankware) Loan Tracking (Baker Hill) Fixed Asset Interface Optical System (RVI) Loan Spread Sheet (Baker Hill) Interactive Voice MCIF (Okra) Credit Scoring (Fair Issac) Card Management System Loan Documentation (FTI/CFI) Cash Management System (Firstlink) Wire Transfer (Fundtech) Bank Audit Commercial Analysis NOW Reclassification Accounts Payable Interface Charge Back System Long Distance Management Remote Laser Printing Teller (Encore) Retrofit/New Releases Query Report Writer Mortgage (Unify) Forms and Supplies Currency Transaction Reporting Year-end Processing STATEMENTS PRODUCED DDA $ .30 Savings $ .10 Time $ .02 Loan $ .15 Year End $1.00 5498 $1.00 TRANSACTIONS PROCESSED - BASE SERVICES - ITEM PROCESSING Proof Items $ .040 POD and EFT Items $ .014 Inclearing and Transmission Items $ .014 Transactions Processed - Base Services - Item Processing Includes: MICR Rejects Serial Sort Teller Adjustments Transit Float Analysis Microfilming Deposit Corrections Endorsement Services Forms and Supplies Check Truncation Exception Item Sort Statement Sort Interest Check Mailings Statement Enclosures Notice Mailings
TRANSACTIONS PROCESSED - OTHER SERVICES Wire Activity $ 5.00 First Link Activity $ 30.00 ACH Activity $ .042 Research Requests $ 15.00 Adjustments Processed $ 15.00 Lock Box Transactions $ .45 Lock Box Postage as incurred Lock Box Copies $ .08 Mail Services: FB Midwest $ 900.00 per month FB&T $ 900.00 per month BRANCH BASED SERVICES CONNECTION CHARGES Support Unit Data Connections $ varies Branch Data Connections $ 900.00 per location ATM Connections $ 100.00 per location Dierbergs ATM Connections $ 700.00 per location Contingency Pln/Disaster Rec $ 200.00 per location Mail Courier Routes (MO/IL) $ 40.00 per day USER BASED SERVICES Network/Telecom Support/Infrastructure $ 60.00 per user Help Desk Support $ 25.00 per user Microsoft Application Licenses $ 25.00 per user Email $ 10.00 per user Web (Internet) Access $ 15.00 per user Dial-In (Remote) Access $ 20.00 per user Information Security $ 25.00 per user User Based Services include: Network Technical support Network Infrastructure Help Desk MS Word MS Excel MS Access MS Powerpoint Anti-Virus Email usage Web usage Dial-In Access capability User/Password Administration Security Monitoring Access Control APPLICATION/PROJECT BASED SERVICES Application Support/Software Maintenance $ 60.00/hr Project Management and Support $ 60.00/hr Project Office $ 60.00/hr Acquisition/New Business Support $ 60.00/hr Asset Management/Technical Purchasing $ 28.85/hr The Above Services Include: Production problem support Application Q/A Application software upgrades/releases Project Management Project Office tracking and reporting Acquisition Conversions Branch Deconversions Mergers Equipment quotes, orders, and delivery Asset tracking Invoice payment Operations Support $ 28.85/hr IRA Support $ 17.50/hr Reconciliation/Appl Balancing $ 14.50/hr Records Management $ 32.00/hr Bookkeeping Support $ 20.50/hr
Bookkeeping Support includes: Returns Large Item Notification Signature Verification Chargebacks Kiting Savings Bonds Unposted Items OFAC American Express NSF Notices Year-End Notifications
EXHIBIT 10.9 SERVICE AGREEMENT THIS SERVICE AGREEMENT is made and entered into as of the Fifteenth day of October, 2001, by and between FIRST SERVICES, L.P., a Missouri Limited Partnership and FIRST BANK & TRUST, a banking institution duly organized and existing by virtue of the laws of the State of California. WHEREAS, FIRST BANK & TRUST and FIRST SERVICES, L.P. entered into a Service Agreement dated April 1, 1997; and WHEREAS, said Service Agreement was assigned to First Services, L.P. on or about April 1, 1997; and WHEREAS, FIRST SERVICES, L.P. and FIRST BANK & TRUST desire to amend and restate said Service Agreement in its entirety. NOW, THEREFORE, for and in consideration of the mutual promises and covenants contained herein, and the sum of Ten Dollars ($10.00) in hand paid, each to the other, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: I. TERMINATION AND REVOCATION The Parties hereto hereby revoke, cancel and hold for naught the Service Agreement dated April 1, 1997, and hereby substitute in its place the Service Agreement herein contained. II. SERVICES A. First Services, L.P. shall furnish First Bank & Trust data processing and item processing services selected by First Bank & Trust from the Product and Price Schedule as per Attachment 1, attached hereto and incorporated herein by reference thereto. Additional services may be selected upon prior written notice to First Services, L.P. at First Services, L.P.'s then current list price by executing an amended Summary Page. B. First Services, L.P. will provide conversion and training services for the fees specified from the Product and Price Schedule (Attachment 1). Classroom training in the use and operation of the system for the number of First Bank & Trust personnel mutually agreed upon in the conversion planning process will be provided at a training facility mutually agreed upon. Conversion services are those activities designed to transfer the processing of First Bank & Trust's data from its present processing company to First Services, L.P. C. First Services, L.P. will also provide Network Support Service consisting of communication line monitoring and diagnostic equipment and support personnel to discover, diagnose, repair or report line problems to the appropriate telephone company. The fee for this service is also listed from the Product and Price Schedule (Attachment 1). D. First Services, L.P. shall upon request act as First Bank & Trust's designated representative to arrange for the purchase, and installation of data lines necessary to access the First Services, L.P. system. Where requested, additional dial-up lines and equipment to be utilized as a backup to the regular data lines may also be ordered. First Services, L.P. shall bill First Bank & Trust for the actual charges incurred for the data lines and for the maintenance of the modems and other interface devices. E. First Services, L.P. will provide and support an Internet Banking application capability, at a fee listed on the Product and Pricing Schedule (Attachment 1). First Services, L.P. will ensure access to this system by employees and those customers who meet the requirements established by the First Bank Internet Banking Group. Any request for access that is denied will be resolved by mutual agreement of the parties hereto. F. First Services, L.P. will provide e-mail, Internet, and Intranet capabilities at a fee listed on the Product and Pricing Schedule (Attachment 1). G. Processing priorities will be determined by mutual agreement of the parties hereto. H. In addition, First Services, L.P. acknowledges that First Bank & Trust acts as a correspondent bank to certain Affiliate Banks and that as part of its duties hereunder First Services, L.P. will be performing certain services for First Bank & Trust which are necessary because of its status as a correspondent bank. III. TERM The term of this Agreement shall be twelve (12) months commencing on October 15, 2001. Upon expiration, the Agreement will automatically renew for successive terms of twelve (12) months each unless either party shall have provided written notice to the other at least one-hundred eighty (180) days prior to the expiration of the then current term, of its intent not to renew. In the event of termination, First Services, L.P. shall provide reasonable time allowance to allow First Bank & Trust to convert to another system. IV. SOFTWARE / FIRMWARE Unmodified third party software or firmware ("Software") may be supplied as part of the Agreement. All such Software shall be provided subject to Software License Agreements. V. PRICE AND PAYMENT A. Fees for First Services, L.P.'s services are set forth from the Product and Price Schedule (Attachment 1) including where applicable minimum monthly charges and payment schedules for onetime fees. B. Standard Fees shall be invoiced no later than the fifteenth (15th) of each month for the then current month. Terms of payment shall be net cash. C. The Base Service Charge listed from the Product and Price Schedule (Attachment 1) shall not change more than twice a year. The fee schedule shall be reviewed annually to ensure fair market value in pricing. Comparisons will be made with peers and other providers of similar services. New products and services can be added as they become available and will be priced accordingly. D. This above limitation shall not apply to pass-thru expenses. A pass-thru expense is a charge for goods or services by First Services, L.P. on First Bank & Trust's behalf that are to be billed to First Bank & Trust without mark-up. E. The fees listed from the Product and Price Schedule (Attachment 1) do not include and First Bank & Trust is responsible for furnishing transportation or transmission of information between First Services, L.P.'s data center, First Bank & Trust's site and any applicable clearing house, regulatory agency or Federal Reserve Bank. Where First Bank & Trust has elected to have First Services, L.P. provide Telecommunication Services, the price for the Services will be provided and billed as a pass-thru expense. F. Network Support Service Fees and Local Network Fees are based upon services rendered from First Services, L.P.'s premises. Off-premise support will be provided upon First Bank & Trust's request on an as available basis at First Services, L.P. then current charges for time and materials, plus reasonable travel and living expenses. VI. CLIENT OBLIGATIONS A. First Bank & Trust shall be solely responsible for the input, transmission or delivery of all information and data required by First Services, L.P. to perform the services except where First Bank & Trust has retained First Services, L.P. to handle such responsibilities on its behalf. The data shall be provided in a format and manner approved by First Services, L.P. First Bank & Trust will provide at its own expense or procure from First Services, L.P. all equipment, computer software communication lines and interface devices required to access the First services, L.P. System. If First Bank & Trust has elected to provide such items itself, First Services, L.P. shall provide First Bank & Trust with a list of compatible equipment and software. B. First Bank & Trust shall designate appropriate First Bank & Trust personnel for training in the use of the First services, L.P. System, shall allow First Services, L.P. access to First Bank & Trust's site during normal business hours for conversion and shall cooperate with First services, L.P. Personnel in the conversion and implementation of the services. C. First Bank & Trust shall comply with any operating instructions on the use of the First Services, L.P. reports furnished by First Services, L.P. for accuracy and shall work with First Services, L.P. to reconcile any out of balance conditions. First Bank & Trust shall determine and be responsible for the authenticity and accuracy of all information and data submitted to First Services, L.P. D. First Bank & Trust shall furnish, or if First Services, L.P. agrees to so furnish, reimburse First Services, L.P. for courier services applicable to the services requested. VII. GENERAL ADMINISTRATION First Services, L.P. is continually reviewing and modifying the First Services, L.P. system to improve service and to comply with federal government regulations applicable to the data utilized in providing services to First Bank & Trust. First Services, L.P. reserves the right to make changes in the service, including, but not limited to operating procedures, security procedures, the type of equipment resident at and the location of First Services, L.P.'s data center. VIII. CLIENT CONFIDENTIAL INFORMATION A. First Services, L.P. shall treat all information and data relating to First Bank & Trust business provided to First Services, L.P. by First Bank & Trust, or information relating to First Bank & Trust's customers, as confidential and shall safe-guard First Bank & Trust's information with the same degree of care used to protect First Services, L.P.'s confidential information. First Services, L.P. and First Bank & Trust agree that master and transaction data files are owned by and constitute property of First Bank & Trust data and records shall be subject to regulation and examination by State and Federal supervisory agencies to the same extent as if such information were on First Bank & Trust's premises. First Services, L.P.'s obligations under this Section VIII shall survive the termination or expiration of this Agreement. B. First Services, L.P. agrees now and at all times in the future that all such Confidential Information shall be held in strict confidence and disclosed only to those employees whose duties reasonably require access to such information. First Services, L.P. may use such Confidential Information only in connection with its performance under this Agreement. Confidential Information shall be returned to First Bank & Trust or destroyed upon First Bank & Trust's request once the services contemplated by this Agreement have been completed or upon termination of this Agreement. C. First Services, L.P. shall maintain adequate backup procedures including storage of duplicate record files as necessary to reproduce First Bank & Trust's records and data. In the event of a service disruption due to reasons beyond First Services, L.P.'s control, First Services L.P. shall use diligent efforts to mitigate the effects of such an occurrence. D. First Services, L.P. shall establish and maintain policies and procedures to insure compliance with this section. First Services, L.P. agrees to permit First Bank & Trust to audit First Services' compliance with this section during regular business hours upon reasonable notice to First Services, L.P. The provisions of this section shall survive any termination of this Agreement. IX. FIRST SERVICES, L.P. CONFIDENTIAL INFORMATION A. First Bank & Trust shall not use or disclose to any third persons any confidential information concerning First Services, L.P. confidential information is that which relates to First Services, L.P.'s software, research, development, trade secrets or business affairs including, but not limited to, the terms conditions of this Agreement but does not include information in the public domain through no fault of First Bank & Trust. First Bank & Trust obligations under this Section IX shall survive the termination or expiration of this agreement. B. First Services, L.P.'s system contains information and computer software that is proprietary and confidential information of First Services, L.P., its suppliers and licensees. First Bank & Trust agrees not to attempt to circumvent the devices employed by First Services, L.P. to prevent unauthorized access to the First Services, L.P.'s system. X. WARRANTIES First Services, L.P. will accurately process First Bank & Trust's work provided that First Bank & Trust supplies accurate data and follows the procedures described in First Services, L.P.'s User Manuals, notices and advises. First Services, L.P. personnel will exercise due care in the processing of First Bank & Trust's work. In the event of an error caused by First Services, L.P.'s personnel, programs or equipment, First Services, L.P. shall correct the data and/or reprocess the affected report at no additional cost to First Bank & Trust. XI. LIMITATION OF LIABILITY IN NO EVENT SHALL FIRST SERVICES, L.P. BE LIABLE FOR LOSS OF GOODWILL, OR FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING FROM FIRST BANK & TRUST'S USE OF FIRST SERVICES, L.P.'S SERVICES, OR FIRST SERVICES, L.P.'S SUPPLY OF EQUIPMENT OR SOFTWARE, UNDER THIS AGREEMENT REGARDLESS OF WHETHER SUCH CLAIM ARISES IN TORT OR IN CONTRACT. FIRST SERVICES, L.P.'S AGGREGATE LIABILITY FOR ANY AND ALL CAUSES OF ACTION RELATING TO SERVICES PERFORMED HEREUNDER OR ANY DAMAGE OR LOSS INCURRED OR SUSTAINED BY FIRST BANK & TRUST RELATING TO THIS AGREEMENT AND THE SERVICES PERFORMED HEREUNDER SHALL BE LIMITED TO THE AMOUNT OF TOTAL FEES PAID BY FIRST BANK & TRUST TO FIRST SERVICES, L.P. IN THE THREE (3) MONTH PERIOD PRECEDING THE DATE THE CLAIM ACCRUED. FIRST SERVICES, L.P.'S AGGREGATE LIABILITY FOR A DEFAULT RELATING TO EQUIPMENT OR SOFTWARE SHALL BE LIMITED TO THE AMOUNT PAID FOR THE EQUIPMENT OR SOFTWARE. XII. PERFORMANCE STANDARDS A. On-Line Availability - First Services, L.P.'s standard of performance shall be on-line availability of the system 98% of the time that it is scheduled to be so available over a three (3) month period (the "Measurement Period"). Actual on-line performance will be calculated monthly by comparing the number of hours which the system was scheduled to be operational on an on-line basis with the number of hours, or a portion thereof, it was actually operational on an on-line basis. Downtime may be caused by operator error, hardware malfunction or failure, or environmental failures such as loss of power or air conditioning. Downtime caused by reasons beyond First Services, L.P.'s control should not be considered in the statistics. B. Report Availability - First Services, L.P.'s standard of performance for report availability shall be that, over a three (3) month period, ninety-five percent (95%) of all Critical Daily Reports shall be available for remote printing on time without significant errors. A Critical Daily Report shall mean priority group reports, which First Services, L.P. and First Bank & Trust have mutually agreed in writing, are necessary to properly account for the previous day's activity and properly notify First Bank & Trust of overdraft, NSF or return items. A significant error is one that impairs First Bank & Trust's ability to properly account for the previous days activity and/or properly account for overdraft, NSF or return items. Actual performance will be calculated monthly by comparing the total number of First Bank & Trust reports scheduled to be available from First Services, L.P. to the number of reports which were available on time and without error. C. Exclusive Remedy - In the event that First Services, L.P.'s performance fails to meet the standards listed above and such failure is not the result of First Bank & Trust's error or omission, First Bank & Trust sole and exclusive remedy for such default shall be the right to terminate this Agreement in accordance with the provisions of this paragraph. In the event that First Services, L.P. fails to achieve any Performance Standards, alone or in combination, for the prescribed measurement period, First Bank & Trust shall notify First Services, L.P. of its intent to terminate this agreement if First Services, L.P. fails to restore performance to the committed levels. First Services, L.P. shall advise First Bank & Trust promptly upon correction of the system deficiencies (in no event shall corrective action exceed sixty (60) days from the notice date) and shall begin an additional measurement period. Should First Services, L.P. fail to achieve the required Performance Standards during the remeasurement period, First Bank & Trust may terminate this Agreement and First Services, L.P. shall cooperate with First Bank & Trust to achieve an orderly transition to First Bank & Trust's replacement processing system. First Bank & Trust may also terminate this Agreement if First Services, L.P.'s performance for the same standard is below the relevant performance standard for more than two (2) measurement periods in any consecutive twelve (12) months or for more than five (5) measurement periods during the term of this agreement. During the period of transition, First Bank & Trust shall pay only such charges as are incurred for monthly fees until the date of deconversion. First Services, L.P. shall not charge First Bank & Trust for services relating to First Bank & Trust's deconversion. D. Audit - First Bank & Trust shall have the right to perform reasonable audits, at its cost, upon giving written notice to First Services, L.P. of its intent to do so. First Services, L.P. shall provide, upon request, financial information to First Bank & Trust. XII. BUSINESS CONTINUITY / DISASTER RECOVERY A. A Disaster shall mean any unplanned interruption of the operations of or inaccessibility to the First Services, L.P. data center which appears in First Services, L.P.'s reasonable judgment to require relocation of processing to an alternative site. First Services, L.P. shall notify First Bank & Trust as soon as possible after it deems a service outage to be a Disaster. First Services, L.P. shall move the processing of First Bank & Trust's critical services to an alternative processing center as expeditiously as possible. First Services, L.P. shall work with First Bank & Trust to define those services deemed as critical to the operation, revenue, and capital preservation of the Bank. First Bank & Trust shall maintain adequate records of all transactions during the period of service interruption and shall have personnel available to assist First Services, L.P., Inc. in implementing the switch over to be alternative processing site. During a disaster, non-critical, optional or on-request services shall be provided by First Services, L.P. only to the extent that there is adequate capacity at the alternate center and only after stabilizing the provision of critical services. B. First Services, L.P. shall work with First Bank & Trust to establish a plan for alternative data communications in the event of a disaster. First Bank & Trust shall be responsible for furnishing any additional communications equipment and data lines required under the adopted plan. C. First Services, L.P. shall test the Business Continuity Plan by conducting, at least, one annual test. First Bank & Trust agrees to participate in and assist First Services, L.P. with such testing. Test results will be made available to First Bank & Trust's regulators, internal and external auditors, and (upon request) to First Bank & Trust's insurance underwriters. D. First Bank & Trust understands and agrees that the Business Continuity Plan is designed to minimize but not eliminate risks associated with a disaster affecting First Services, L.P.'s data center. First Services, L.P. does not warrant that service will be uninterrupted or error free in the event of a disaster. First Bank & Trust maintains responsibility for adopting a business continuity plan relating to disasters affecting First Bank & Trust's facilities and for securing resources necessary to properly protect First Bank & Trust's revenues in the event of a disaster. XIV. DEFAULT A. In the event that First Bank & Trust is thirty (30) days in arrears in making any payment required, or in the event of any other material default by either First Services, L.P. or First Bank & Trust in the performance of their obligations, the affected party shall have the right to give written notice to the other of the default and its intent to terminate this Agreement stating with reasonable particularity the nature of the claimed default. This Agreement shall terminate if the default has not been cured within a reasonable time with a minimum being thirty (30) days from the effective date of the notice. B. Upon the expiration of this Agreement, or its termination, First Services, L.P. shall furnish to First Bank & Trust such copies of First Bank & Trust's data files as First Bank & Trust may request in machine readable format form along with such other information and assistance as or is reasonable and customary to enable First Bank & Trust to deconvert from the First Services, L.P. system. First Bank & Trust shall reimburse First Services, L.P. for the production of data records and other services at First Services, L.P.'s current fees for such services. XV. INSURANCE First Services, L.P. carries Comprehensive General Liability insurance with primary limits of two million dollars, Commercial Crime Insurance covering Employee Dishonesty in the amount of thirty million dollars, all-risk replacement cost coverage on all equipment used at First Services, L.P.'s data center and Worker Compensation coverage on First Services, L.P. employees wherever located in the United States. In addition, First Services, L.P. carries coverage for computer/computer related theft in the amount of twenty million dollars. First Bank & Trust shall carry adequate insurance to cover liability for source documents while in transit and in case of data loss through errors and omissions. LVI. GENERAL A. This Agreement is binding upon the parties and their respective successors and permitted assigns. Neither party may assign this Agreement in whole or in part without the consent of First Bank & Trust and/or First Services, L.P., provided, however, that First Services, L.P. may subcontract any or all of the services to be performed under this Agreement without the written consent of First Bank & Trust. Any such subcontractors shall be required to comply with all of the applicable terms and conditions of this Agreement. B. The parties agree that, in connection with the performance of their obligations hereunder, they will comply with applicable Federal, State, and local laws including the laws and regulations regarding Equal Employment Opportunities. C. First Services, L.P. agrees that the Federal Reserve Bank, and FDIC will have the authority and responsibility pursuant to the Bank Service Corporation Act, 12 U.S.C. 1867(C)relating to service performed by contract or otherwise. First Services, L.P., also agrees that its services shall be subject to oversight by the Federal Reserve Bank, FDIC or state banking departments as may be applicable under laws and regulations pertaining to First Bank & Trust's charter and shall, if applicable, provide the Federal Reserve Bank and FDIC with a copy of First Services, L.P.'s current audit and financial statements and a copy of any current third party review report when a review has been performed. D. Neither party shall be liable for any errors, delays or non-performance due to events beyond its reasonable control including, but not limited to, acts of God, failure or delay of power or communications, changes in law or regulation or other acts of governmental authority, strike, weather conditions or transportation. E. All written notices required to be given under this Agreement shall be sent by Registered or Certified Mail, Return Receipt Requested, postage prepaid, or by confirmed facsimile to the persons and at the addresses listed below or to such other address or person as a party shall have designated in writing. First Services, L.P. First Bank & Trust 600 James S. McDonnell Blvd. 550 Montgomery Street Hazelwood, MO 63042 San Francisco, CA 94111 F. The failure of either party to exercise in any respect any right provided for herein shall not be deemed a waiver of any rights. G. Each party acknowledges that is has read this Agreement, understands it, and agrees that it is the complete and exclusive statement of the Agreement between the parties and supersedes and merges any prior or simultaneous proposals, understandings and all other agreements with respect to the subject matter. This Agreement may not be modified or altered except by a written instrument duly executed by both parties. H. No waiver of any of the terms of this Agreement shall be effective unless in writing and signed by the duly authorized representative of the party charged therewith. No waiver of any provision hereof shall extend to or affect any obligation not expressly waived, impair any rights consequent on such obligation or imply a subsequent waiver of that or any other provision. I. This Agreement shall be governed by, construed and interpreted in accordance with the laws of the State of Missouri. IN WITNESS WHEREOF, the parties have executed this Agreement the date first above written. First Bank & Trust First Services, L.P. 550 Montgomery Street 600 James S. McDonnell Boulevard San Francisco, California 94111 Hazelwood, Missouri 63042 BY:/s/ Terrance M. McCarthy BY:/s/ Michael F. Hickey - --------------------------- ------------------------ Terrance M. McCarthy Michael F. Hickey President President Attachment 1 First Services, L.P. Product and Price Schedule Effective January 1, 2001 ACCOUNT/ITEM/TRANSACTION BASED SERVICES ACCOUNTS PROCESSED - BASE SERVICES DDA Accounts $ .75 Savings Accounts $ .70 Time Accounts $ .70 Loan Accounts $ .75 CIF Records $ .20 ATM/Debit Cards $ .225 Accounts Processed - Base Services Include:
Collection System (Cyber Resources) ACH Origination Recovery System (Cyber Resources) ATM/Debit Card Processing Organizational Profitability (IPS) General Ledger Asset/Liability (Bankware) Loan Tracking (Baker Hill) Fixed Asset Interface Optical System (RVI) Loan Spread Sheet (Baker Hill) Interactive Voice MCIF (Okra) Credit Scoring (Fair Issac) Card Management System Loan Documentation (FTI/CFI) Cash Management System (Firstlink) Wire Transfer (Fundtech) Bank Audit Commercial Analysis NOW Reclassification Accounts Payable Interface Charge Back System Long Distance Management Remote Laser Printing Teller (Encore) Retrofit/New Releases Query Report Writer Mortgage (Unify) Forms and Supplies Currency Transaction Reporting Year-end Processing STATEMENTS PRODUCED DDA $ .30 Savings $ .10 Time $ .02 Loan $ .15 Year End $1.00 5498 $1.00 TRANSACTIONS PROCESSED - BASE SERVICES - ITEM PROCESSING Proof Items $ .040 POD and EFT Items $ .014 Inclearing and Transmission Items $ .014 Transactions Processed - Base Services - Item Processing Includes: MICR Rejects Serial Sort Teller Adjustments Transit Float Analysis Microfilming Deposit Corrections Endorsement Services Forms and Supplies Check Truncation Exception Item Sort Statement Sort Interest Check Mailings Statement Enclosures Notice Mailings
TRANSACTIONS PROCESSED - OTHER SERVICES Wire Activity $ 5.00 First Link Activity $ 30.00 ACH Activity $ .042 Research Requests $ 15.00 Adjustments Processed $ 15.00 Lock Box Transactions $ .45 Lock Box Postage as incurred Lock Box Copies $ .08 Mail Services: FB Midwest $ 900.00 per month FB&T $ 900.00 per month BRANCH BASED SERVICES CONNECTION CHARGES Support Unit Data Connections $ varies Branch Data Connections $ 900.00 per location ATM Connections $ 100.00 per location Dierbergs ATM Connections $ 700.00 per location Contingency Pln/Disaster Rec $ 200.00 per location Mail Courier Routes (MO/IL) $ 40.00 per day USER BASED SERVICES Network/Telecom Support/Infrastructure $ 60.00 per user Help Desk Support $ 25.00 per user Microsoft Application Licenses $ 25.00 per user Email $ 10.00 per user Web (Internet) Access $ 15.00 per user Dial-In (Remote) Access $ 20.00 per user Information Security $ 25.00 per user User Based Services include: Network Technical support Network Infrastructure Help Desk MS Word MS Excel MS Access MS Powerpoint Anti-Virus Email usage Web usage Dial-In Access capability User/Password Administration Security Monitoring Access Control APPLICATION/PROJECT BASED SERVICES Application Support/Software Maintenance $ 60.00/hr Project Management and Support $ 60.00/hr Project Office $ 60.00/hr Acquisition/New Business Support $ 60.00/hr Asset Management/Technical Purchasing $ 28.85/hr The Above Services Include: Production problem support Application Q/A Application software upgrades/releases Project Management Project Office tracking and reporting Acquisition Conversions Branch Deconversions Mergers Equipment quotes, orders, and delivery Asset tracking Invoice payment Operations Support $ 28.85/hr IRA Support $ 17.50/hr Reconciliation/Appl Balancing $ 14.50/hr Records Management $ 32.00/hr Bookkeeping Support $ 20.50/hr
Bookkeeping Support includes: Returns Large Item Notification Signature Verification Chargebacks Kiting Savings Bonds Unposted Items OFAC American Express NSF Notices Year-End Notifications
EXHIBIT 13.1 FIRST BANKS, INC. 2001 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.................................. 33 FINANCIAL STATEMENTS: CONSOLIDATED BALANCE SHEETS................................................ 34 CONSOLIDATED STATEMENTS OF INCOME.......................................... 36 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME.............................................. 37 CONSOLIDATED STATEMENTS OF CASH FLOWS...................................... 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................. 39 INDEPENDENT AUDITORS' REPORT.................................................... 63 DIRECTORS AND SENIOR MANAGEMENT................................................. 64 INVESTOR INFORMATION............................................................ 65
LETTER TO SHAREHOLDERS To Our Valued Investors, Customers and Friends: First Banks, Inc. prides itself on its foundation of sound financial condition and operating results. We pay relatively small dividends on our Class A and Class B preferred stock and we have never paid, and have no intention to pay, dividends on our common stock. This practice of retaining net income allows us to reinvest our earnings to support future growth. Total assets increased over $901.8 million during 2001 to $6.78 billion, representing a 15.3% increase over December 31, 2000. Despite significantly declining interest rates and slowing economic conditions in our market areas, the Company reported earnings of $64.5 million for 2001, compared to $56.1 million in 2000. These earnings equated to a return on average assets of 1.08% and a return on average stockholders' equity of 15.96%. The improved earnings reflect increased net interest income and noninterest income, including a nonrecurring pre-tax gain of $19.0 million, as well as a reduced provision for income taxes. The overall improvement in our earnings was partially offset by an increased provision for loan losses and higher operating expenses. Our primary strategic objective remains progressive and profitable growth through the continued development of our existing banking franchise, supplemented by the acquisition of other financial institutions. In 2001, our growth was primarily driven by acquisitions. During October 2001, we increased our presence in our southern California market areas through the acquisitions of Charter Pacific Bank in Agoura Hills, California, and BYL Bancorp in Orange, California, and in December 2001, we further augmented our Midwest franchise with the acquisition of Union Financial Group, Ltd. in Swansea, Illinois. These acquisitions added assets of approximately $743.0 million. One of the key components of our earnings and growth is net interest income. We continue to emphasize our commercial and commercial real estate lending activities, which resulted in an increase in average loans of $593.3 million, or 13.8%, in 2001. This increase contributed to the improvement in our net interest income to $253.7 million in 2001, compared to $235.1 million in 2000. However, the improvement in our net interest income was significantly mitigated by continued reductions in prevailing interest rates throughout 2001. Our net interest rate margin decreased 24 basis points from 2000 to 4.69% of our interest-earning assets in 2001. To assist us in limiting the adverse impact that changes in interest rates, similar to those experienced in 2001, may have on our net interest income, we employ an interest rate risk management program. We utilize various derivative financial instruments, including interest rate swap, floor and cap agreements, in the overall management of our interest rate exposure. This program contributed $23.4 million to net interest income and $18.6 million to noninterest income in 2001. Our credit quality weakened somewhat in 2001, primarily as a result of slowing economic conditions. Nonperforming loans increased $14.1 million to $67.3 million, representing 1.24% of our loan portfolio at the end of 2001, compared to 1.12% at the end of 2000. In addition, we experienced an increase in past due loans to $74.5 million at the end of 2001, also reflective of current economic conditions prevalent within our market areas. Our allowance for loan losses covered 144.36% of our nonperforming loans at the end of the year. We anticipate these trends will continue in the upcoming months. In November 2001, we completed our fourth public offering of trust preferred securities, raising an additional $55.2 million to support our future growth and expansion efforts. This financial strength allows us to invest in technology and diversified business lines to better serve you. In addition to our existing array of commercial lending and deposit product offerings, we are continually striving to provide high quality products and services, as well as the necessary flexibility, to meet your changing financial needs. Our goal is to help you reach your goal! The year 2001 certainly represents a memorable year in light of the tragic events of September 11, 2001 in New York City and Washington, D.C. as well as the future challenges facing our nation. Now more than ever, I wish to extend my deepest appreciation for the dedication of our employees, the loyalty of our customers and the continued support of our shareholders. 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 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) ----------------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (dollars expressed in thousands, except per share data) Income Statement Data: Interest income................................... $ 444,743 422,826 353,082 327,860 295,101 Interest expense.................................. 191,014 187,679 158,701 162,179 148,831 ---------- --------- --------- --------- --------- Net interest income............................... 253,729 235,147 194,381 165,681 146,270 Provision for loan losses......................... 23,510 14,127 13,073 9,000 11,300 ---------- --------- --------- --------- --------- Net interest income after provision for loan losses............................... 230,219 221,020 181,308 156,681 134,970 Noninterest income................................ 98,609 42,778 41,650 36,497 25,697 Noninterest expense............................... 230,261 171,163 150,807 138,704 110,287 ---------- --------- --------- --------- --------- Income before provision for income taxes, minority interest in income of subsidiary and cumulative effect of change in accounting principle.......................... 98,567 92,635 72,151 54,474 50,380 Provision for income taxes........................ 30,048 34,482 26,313 19,693 16,083 ---------- --------- --------- --------- --------- Income before minority interest in income of subsidiary and cumulative effect of change in accounting principle................ 68,519 58,153 45,838 34,781 34,297 Minority interest in income of subsidiary......... 2,629 2,046 1,660 1,271 1,270 ---------- --------- --------- --------- --------- Income before cumulative effect of change in accounting principle.......................... 65,890 56,107 44,178 33,510 33,027 Cumulative effect of change in accounting principle, net of tax......................... (1,376) -- -- -- -- ---------- --------- --------- --------- --------- Net income........................................ $ 64,514 56,107 44,178 33,510 33,027 ========== ========= ========= ========= ========= Dividends: Preferred stock................................... $ 786 786 786 786 5,067 Common stock...................................... -- -- -- -- -- Ratio of total dividends declared to net income... 1.22% 1.40% 1.78% 2.35% 15.34% Per Share Data: Earnings per common share: Basic: Income before cumulative effect of change in accounting principle..................... $ 2,751.54 2,338.04 1,833.91 1,383.04 1,181.69 Cumulative effect of change in accounting principle, net of tax....................... (58.16) -- -- -- -- ---------- --------- --------- --------- --------- Basic......................................... $ 2,693.38 2,338.04 1,833.91 1,383.04 1,181.69 ========== ========= ========= ========= ========= Diluted: Income before cumulative effect of change in accounting principle..................... $ 2,684.93 2,267.41 1,775.47 1,337.09 1,134.28 Cumulative effect of change in accounting principle, net of tax............ (58.16) -- -- -- -- ---------- --------- --------- --------- --------- Diluted....................................... $ 2,626.77 2,267.41 1,775.47 1,337.09 1,134.28 ========== ========= ========= ========= ========= Weighted average common stock outstanding....... 23,661 23,661 23,661 23,661 23,661 Balance Sheet Data: Investment securities............................. $ 631,068 563,534 451,647 534,796 795,530 Loans, net of unearned discount................... 5,408,869 4,752,265 3,996,324 3,580,105 3,002,200 Total assets...................................... 6,778,451 5,876,691 4,867,747 4,554,810 4,165,014 Total deposits.................................... 5,683,904 5,012,415 4,251,814 3,939,985 3,684,595 Notes payable..................................... 27,500 83,000 64,000 50,048 55,144 Guaranteed preferred beneficial interests in First Banks, Inc. and First Banks America, Inc. subordinated debentures......... 235,881 182,849 127,611 127,443 83,183 Common stockholders' equity....................... 435,594 339,783 281,842 250,300 218,474 Total stockholders' equity........................ 448,657 352,846 294,905 263,363 231,537 Earnings Ratios: Return on average total assets.................... 1.08% 1.09% 0.95% 0.78% 0.87% Return on average total stockholders' equity...... 15.96 17.43 15.79 13.64 12.91 Efficiency ratio (2).............................. 65.35 61.59 63.89 68.60 64.13 Net interest margin (3)........................... 4.69 4.93 4.52 4.19 4.09 Asset Quality Ratios: Allowance for loan losses to loans................ 1.80 1.72 1.72 1.70 1.68 Nonperforming loans to loans (4).................. 1.24 1.12 0.99 1.22 0.80 Allowance for loan losses to nonperforming loans (4)....................... 144.36 153.47 172.66 140.04 209.88 Nonperforming assets to loans and other real estate (5)......................... 1.32 1.17 1.05 1.32 1.04 Net loan charge-offs to average loans............. 0.45 0.17 0.22 0.05 0.27 Capital Ratios: Average total stockholders' equity to average total assets...................... 6.74 6.25 6.00 5.73 6.70 Total risk-based capital ratio.................... 10.53 10.21 10.05 10.28 10.26 Leverage ratio.................................... 7.24 7.45 7.14 7.77 6.80
- ----------------------------- (1) The comparability of the selected data presented is affected by the acquisitions of 13 banks and five branch offices during the five-year period ended December 31, 2001. 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) Net interest rate margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average interest-earning assets. (4) Nonperforming loans consist of nonaccrual loans and certain loans with restructured terms. (5) 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, including the negative impact on the economy resulting from the events of September 11, 2001 in New York City and Washington, D.C. and the national response to those events; the impact of laws and regulations applicable to us and changes therein; the impact of accounting pronouncements 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 anticipated 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 have banking operations in California, Illinois, Missouri and Texas. At December 31, 2001, we had total assets of $6.78 billion, loans, net of unearned discount, of $5.41 billion, total deposits of $5.68 billion and total stockholders' equity of $448.7 million. 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, debit cards, brokerage services, credit-related insurance, internet banking, automated teller machines, telephone banking, safe deposit boxes, escrow and bankruptcy deposit services, stock option services, and trust, private banking and institutional money management services. We operate through two subsidiary banks, three subsidiary bank holding companies, and through our subsidiary leasing company, as follows: Union Financial Group, Ltd., or UFG, headquartered in Swansea, Illinois, and its wholly owned subsidiary: First Bank, headquartered in St. Louis County, Missouri; First Capital Group, Inc., or FCG, headquartered in Albuquerque, New Mexico; and First Banks America, Inc, or FBA, headquartered in San Francisco, California, and its wholly owned subsidiaries: The San Francisco Company, or SFC, headquartered in San Francisco, California, and its wholly owned subsidiary: First Bank & Trust, or FB&T, headquartered in San Francisco, California. Our subsidiary banks and FCG are wholly owned by their respective parent companies. We owned 93.69% of FBA at December 31, 2001. 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 his adult children, own all of our voting stock. Mr. Dierberg and his family, therefore, control our management, policies and the election of our directors. 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, 2001:
Loans, Net of Number of Total Unearned Total Name Locations Assets Discount Deposits ---- --------- ------ -------- -------- (dollars expressed in thousands) UFG: First Bank.................................. 93 $3,707,081 3,086,023 3,142,676 FCG (1)......................................... 1 482 -- -- FBA: SFC: FB&T................................... 56 3,057,920 2,323,263 2,555,396
------------------------------------ (1) FCG was purchased on February 29, 2000. As of December 31, 2001, there were approximately $149.0 million of commercial leases originated by FCG. The commercial leases are recorded as assets of our subsidiary banks. 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 and the related advantages of tax-free exchanges to the selling shareholders. Our acquisition activities are generally 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 approach 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, ownership, regulatory or other problems unique to the respective acquisition target, which we seek to address the risks of these issues through pricing and other means. In these institutions, these issues may diminish their attractiveness to other potential acquirers, and therefore reduce 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 may not be economically viable in extremely competitive acquisition markets. During the five years ended December 31, 2001, we have primarily concentrated our acquisitions in California, completing 13 acquisitions of banks and five purchases of branch offices, which provided us with an aggregate of $2.05 billion in total assets and 47 banking locations as of the dates of acquisition. 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. In addition, in February 2000, we completed our purchase of certain assets and assumption of certain liabilities of FCG, a multi-state commercial leasing business headquartered in Albuquerque, New Mexico. We have also recently expanded our Midwest banking franchise with our Swansea, Illinois acquisition, completed in December 2001, and our Chicago, Illinois acquisition, completed in January 2002. 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, 2001, the majority of our efforts have been concentrated in various areas including, but not limited to: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED) >> improving asset quality, which was primarily associated with our acquisitions completed in 1997 and 1998; >> reducing unnecessary and/or excessive expenses including personnel, information technology and certain other operational and administrative expenses; >> maintaining, repairing and, in some cases, refurbishing bank premises necessitated by the deferral of such projects by some of 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 actual or pending litigation 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 our combined entity to take advantage of the opportunities available to us. This investment contributed to increases in noninterest expense during the five years ended December 31, 2001, 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 have also focused on building and reorganizing the infrastructure necessary to accomplish our objectives for internal growth. This process has 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. We continue to focus on modifying and effectively repositioning our internal and external resources to better serve the markets in which we operate. Although these efforts have primarily led to increased capital expenditures and noninterest expenses, we anticipate they will lead to additional internal growth, more efficient operations and improved profitability over the long term. In February 1997, our initial financing subsidiary, First Preferred Capital Trust, issued $86.25 million of 9.25% trust preferred securities, and, in October 2000, our second financing subsidiary, First Preferred Capital Trust II, issued $57.5 million of 10.24% trust preferred securities. On November 15, 2001, our third financing subsidiary, First Preferred Capital Trust III, issued $55.2 million of 9.00% 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. 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. Lending Activities 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 certain instances, sales of loans. As a result, our portfolio of one-to-four family residential real estate loans, after reaching a high of $1.20 billion at December 31, 1995, decreased over the past MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) five years from $915.2 million at December 31, 1997 to $798.1 million at December 31, 2001. Similarly, our portfolio of consumer and installment loans, net of unearned discount, decreased significantly from $279.3 million at December 31, 1997 to $122.1 million at December 31, 2001. For the year ended December 31, 2001, the overall decline in our consumer and installment portfolio, exclusive of loans held for sale, also reflects the sale of our student loan and credit card portfolios, the reduction in new consumer and installment loan volumes and the repayment of principal on our existing consumer and installment loan portfolio, all of which are consistent with our objectives of diversifying our loan portfolio, expanding commercial lending and reducing the amount of under-performing loan types. As various components of our loan portfolio have decreased, we have replaced them with more diversified and higher yielding loans that were internally generated by our business development staff. 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 $3.00 billion at December 31, 1997 to $5.41 billion at December 31, 2001. Our expanded level of commercial lending carries with it greater credit risk which, although managed through loan policies, procedures, underwriting and credit administration, must be accompanied by adequate allowances for loan losses. We associate the increased level of commercial lending activities and our acquisitions with the increases of $13.4 million and $14.1 million in nonperforming loans for the years ended December 31, 2000 and 2001, respectively. The increase in 2000 as compared to 1999 primarily results from a small number of credit relationships that were placed on nonaccrual during the year ended December 31, 2000, reflecting problems that were specific to these relationships. The increase for 2001, while partially attributable to the overall risk in our loan portfolio, is primarily reflective of cyclical trends experienced within the banking industry as a result of economic slowdown. In addition, the loan portfolios of our acquisitions completed during the fourth quarter, particularly UFG, exhibited significant distress, which further contributed to the overall increase in nonperforming loans for 2001. In addition to restructuring our loan portfolio, we also have changed the composition of our deposit base. The majority of our 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. This is accomplished by cross-selling various products and services, packaging 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, 1997, total time deposits were $1.90 billion, or 51.68% of total deposits. Although time deposits have increased to $2.30 billion at December 31, 2001, they represented only 40.5% of total deposits at December 31, 2001, reflecting our continued focus on transactional accounts and full service deposit relationships with our customers. 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. For the years ended December 31, 2001 and 2000, net income was $64.5 million and $56.1 million, respectively, compared with $44.2 million, $33.5 million and $33.0 million in 1999, 1998 and 1997, respectively. Net income for 2001 reflects a decline in our net interest rate margin, primarily attributable to the prevailing interest rate environment, and higher operating expenses, including nonrecurring charges associated with the establishment of a specific reserve relating to a contingent liability, the settlement of certain litigation and the implementation of a change in accounting principle. These trends, which reduced net income for 2001, were offset by a reduction in the deferred tax asset valuation allowance of FBA. Although 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. Acquisitions 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. 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 primarily utilized cash, borrowings, FBA's voting stock and the issuance of trust preferred securities to meet our growth objectives under our acquisition program. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) During the three years ended December 31, 2001, we completed ten acquisitions of banks, one branch office purchase and the acquisition of certain assets and assumption of certain liabilities of a leasing company. As demonstrated below, our acquisitions during the three years ended December 31, 2001 have primarily served to increase our presence in the California markets we originally entered into during 1995 and to further augment our existing markets and our Midwest banking franchise. These transactions are summarized as follows:
Number Loans, Net of of Total Unearned Investment Banking Entity Date Assets Discount Securities Deposits Locations ------ ---- ------ -------- ---------- -------- --------- (dollars expressed in thousands) 2001 - ---- Union Financial Group, Ltd. Swansea, Illinois December 31, 2001 $360,000 263,500 1,150 283,300 9 BYL Bancorp Orange, California October 31, 2001 281,500 175,000 12,600 251,800 7 Charter Pacific Bank Agoura Hills, California October 16, 2001 101,500 70,200 7,500 89,000 2 -------- -------- -------- -------- ---- $743,000 508,700 21,250 624,100 18 ======== ======== ======== ======== ==== 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 December 29, 2000 117,000 81,700 21,100 104,200 2 Commercial Bank of San Francisco San Francisco, California October 31, 2000 155,600 97,700 45,500 109,400 1 Bank of Ventura Ventura, California 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 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 September 17, 1999 $ 23,600 6,300 -- 17,300 1 Century Bank Beverly Hills, California August 31, 1999 156,000 94,800 26,100 132,000 6 Redwood Bancorp San Francisco, California March 4, 1999 183,900 134,400 34,400 162,900 4 -------- -------- -------- -------- ---- $363,500 235,500 60,500 312,200 11 ======== ======== ======== ======== ====
In addition to the acquisitions included in the table above, on January 15, 2002, we completed our acquisition of Plains Financial Corporation, or PFC, and its wholly owned banking subsidiary, PlainsBank of Illinois, National Association, Des Plaines, Illinois, in exchange for $36.5 million in cash. PFC operated a total of three banking facilities in Des Plaines, Illinois, and one banking facility in Elk Grove Village, Illinois. At the time of the transaction, PFC had $256.3 million in total assets, $150.4 million in loans, net of unearned discount, $81.0 million in investment securities and $213.4 million in deposits. 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 proceeds from the of the issuance of trust preferred securities. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Critical Accounting Policies Our financial condition and results of operations presented in the consolidated financial statements, accompanying notes to the consolidated financial statements, selected consolidated and other financial data appearing elsewhere within this report, and management's discussion and analysis of financial condition and results of operations are, to large degree, dependent upon our accounting policies. The selection and application of our accounting policies involve judgments, estimates and uncertainties that are susceptible to change. We have identified the following accounting policies that we believe are the most critical to the understanding of our financial condition and results of operations. These critical accounting policies require management's most difficult, subjective and complex judgments about matters that are inherently uncertain. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations could be a reasonable likelihood. The impact and any associated risks related to our critical accounting policies on our business operations is discussed throughout "--Management's Discussion and Analysis of Financial Condition and Results of Operations," where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 1 to our consolidated financial statements. Loans and Allowance for Loan Losses. We maintain an allowance for loan losses at a level considered adequate to provide for probable losses in our loan portfolio. The determination of our allowance for loan losses requires management to make significant judgments and estimates based upon a periodic analysis of our loans held for portfolio and held for sale considering, among other factors, current economic conditions, loan portfolio composition, past loan loss experience, independent appraisals, the fair value of underlying loan collateral, our customers' ability to pay and selected key financial ratios. If actual events prove the estimates and assumptions we used in determining our allowance for loan losses were incorrect, we may need to make additional provisions for loan losses. See further discussion under "--Loans and Allowance for Loan Losses" and Note 4 to our consolidated financial statements. Derivative Financial Instruments. We utilize derivative financial instruments to assist in our management of interest rate sensitivity by modifying the repricing, maturity and option characteristics of certain assets and liabilities. The judgments and assumptions that are most critical to the application of this critical accounting policy are those affecting the estimation of fair value and hedge effectiveness. Fair value is based on quoted market prices where available. If quoted market prices are unavailable, fair value is based upon quoted market prices of comparable derivative instruments. Factors that affect hedge effectiveness include the initial selection of the derivative that will be used as a hedge and how well changes in its cash flow or fair value has correlated and is expected to correlate with changes in the cash flow or fair value of the underlying hedged asset or liability. Past correlation is easy to demonstrate, but expected correlation depends upon projections and trends that may not always hold true within acceptable limits. Changes in assumptions and conditions could result in greater than expected inefficiencies that, if large enough, could reduce or eliminate the economic benefits anticipated when the hedges were established and/or invalidate continuation of hedge accounting. The consequence of greater inefficiency and discontinuation of hedge accounting results in increased volatility to reported earnings. For cash flow hedges, this would result as more or all of the change in the fair value of the affected derivative would be reported in noninterest income. For fair value hedges, this would result as less or none of the change in the fair value of the derivative would be offset by changes in the fair value of the underlying hedged asset or liability. See further discussion under "--Interest Rate Risk Management" and Note 5 to our consolidated financial statements. Deferred Tax Assets. We recognize deferred tax assets and liabilities for the estimated future tax effects of temporary differences, net operating loss carryforwards and tax credits. We recognize deferred tax assets subject to management's judgment based upon available evidence that realization is more likely than not. Our deferred tax assets are reduced, if necessary, by a deferred tax asset valuation allowance. In the event that we determine we would not be able to realize all or part of our net deferred tax assets in the future, we would need to adjust the recorded value of our deferred tax assets, which would result in a direct charge to our provision for income taxes in the period in such determination is made. See further discussion under "--Comparison of Results of Operations for the Years Ended December 31, 2001 and 2000 - Provision for Income Taxes" and Note 11 to our consolidated financial statements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Business Combinations. We emphasize acquiring other financial institutions as one means of achieving our growth objectives. The determination of the fair value of the assets and liabilities acquired in these transactions as well as the returns on investment that may be achieved requires management to make significant judgments and estimates based upon detailed analyses of the existing and future economic value of such assets and liabilities and/or the related income steams, including the resulting intangible assets. If actual events prove the estimates and assumptions we used in determining the fair values of the acquired assets and liabilities or the projected income were incorrect, we may need to make additional adjustments to the recorded values of such assets and liabilities, which could result in increased volatility to reported earnings. In addition, we may need to make additional adjustments to the recorded value of our intangible assets, which directly impact our regulatory capital levels. See further discussion under "--Acquisitions," "--Effects of New Accounting Standards," and Note 2 and Note 19 to our consolidated financial statements. Financial Condition and Average Balances Our average total assets were $6.00 billion for the year ended December 31, 2001, compared to $5.15 billion and $4.66 billion for the years ended December 31, 2000 and 1999, respectively. We attribute the increase of $844.7 million in total average assets for 2001 primarily to our acquisitions completed during the fourth quarter of 2000 and in 2001; internal loan growth generated through the efforts of our business development staff; increased bank premises and equipment associated with the expansion and renovation of various corporate and branch offices; and, increased derivative instruments resulting from a change in accounting principle. The acquisition of UFG, which provided total assets of $360.0 million, was completed on December 31, 2001, and therefore did not have a significant impact on our average total assets for the year ended December 31, 2001. Similarly, we attribute the increase 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, however, 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 44.9%, of the total assets we acquired in 2000. The increase in assets for 2001 was primarily funded by an increase in average deposits of $612.9 million to $5.09 billion for the year ended December 31, 2001, and an increase of $51.9 million in average short-term borrowings to $158.0 million for the year ended December 31, 2001. We utilized the majority of the funds generated from our deposit growth to fund a portion of our loan growth, and the remaining funds were either temporarily invested in federal funds sold or invested in available-for-sale investment securities, resulting in increases in average federal funds sold and average investment securities of $26.1 million and $19.4 million, respectively, to $93.6 million and $451.4 million for the year ended December 31, 2001, respectively. Similarly, we funded the increase in assets for 2000 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. Loans, net of unearned discount, averaged $4.88 billion, $4.29 billion and $3.81 billion for the years ended December 31, 2001, 2000 and 1999, respectively. The acquisitions we completed during 2000 and 2001 provided loans, net of unearned discount, of $440.0 million and $508.7 million, respectively. In addition to the growth provided by these acquisitions, for 2001, $174.6 million of net loan growth was provided by corporate banking business development, consisting of increases of $20.4 million of commercial, financial and agricultural loans, $145.8 million of commercial real estate loans and $8.4 million of real estate construction and development loans. Furthermore, the increase in loans is also attributable to an increase in residential real estate lending, including loans held for sale, of $48.6 million for the year ended December 31, 2001. We primarily attribute this increase to be the result of a significantly higher volume of residential mortgage loans originated, including both new fundings and refinancings, as a result of declining interest rates experienced throughout 2001 as well as an expansion of our mortgage banking activities. These overall increases were partially offset by continuing reductions in consumer and installment loans, net of unearned discount, which decreased $75.3 million to $122.1 million at December 31, 2001. This decrease reflects the sale of our student loan and credit card loan portfolios, reductions in new loan volumes and the repayment of principal on our existing portfolio, and is also consistent with our objectives of de-emphasizing consumer lending and expanding commercial lending. These changes result from the focus we have placed on our business development efforts and the portfolio repositioning which we originally began in the mid-1990s. This repositioning provided for substantially all of our residential mortgage loan production to be sold in the secondary mortgage market and the origination of indirect automobile loans to be substantially reduced. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Investment securities averaged $451.4 million, $431.9 million and $454.4 million for the years ended December 31, 2001, 2000 and 1999, respectively, reflecting an increase of $19.4 million for the year ended December 31, 2001 and a decrease of $22.5 million for the year ended December 31, 2000. The increase for 2001 is primarily associated with the investment securities that we acquired in conjunction with our 2000 and 2001 acquisitions and the investment of excess funds available due to reduced loan demand. This increase was partially offset by the liquidation of certain acquired investment securities, a higher than normal level of calls of investment securities prior to their normal maturity dates experienced throughout 2001 resulting from the general decline in interest rates, and sales of certain available-for-sale investment securities. Our average nonearning assets were $570.2 million for the year ended December 31, 2001, compared to $364.3 million and $344.9 million for the years ended December 31, 2000 and 1999, respectively. The increase in average nonearning assets for the year ended December 31, 2001 is primarily due to derivative instruments of $54.9 million at December 31, 2001, resulting solely from the implementation of Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by 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, and SFAS No. 138 - Accounting for Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133. Bank premises and equipment, net of depreciation and amortization, increased $34.8 million to $149.6 million at December 31, 2001 from $114.8 million at December 31, 2000. We primarily attribute the increase in bank premises and equipment to our acquisitions, the purchase and remodeling of a new operations center and corporate administrative building, and the construction and/or renovation of various branch offices. In addition, the increase in intangibles associated with the purchase of subsidiaries is due to the cost in excess of the fair value of the net assets acquired of the 2001 acquisitions. 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 $5.09 billion, $4.48 billion and $4.06 billion for the years ended December 31, 2001, 2000 and 1999, respectively. Total deposits increased by $671.5 million to $5.68 billion at December 31, 2001 from $5.01 billion at December 31, 2000. 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 for 2001 was partially offset by an anticipated level of account attrition associated with our acquisitions during the fourth quarter of 2000 and $50.0 million of time deposits of $100,000 or more that either matured or were called in September 2001. The overall increase for 2000 was partially offset by the divestiture of one of our central Illinois branches, which resulted in a reduction in First Bank's deposit base of approximately $8.8 million. Short-term borrowings averaged $158.0 million, $106.1 million and $87.4 million for the years ended December 31, 2001, 2000 and 1999, respectively. Short-term borrowings increased by $102.5 million to $243.1 million at December 31, 2001 from $140.6 million at December 31, 2000. This increase reflects a $17.5 million increase in securities sold under agreements to repurchase, a $15.1 million increase in Federal Home Loan Bank advances acquired in conjunction with our UFG acquisition, and a $70.0 million increase in federal funds purchased. Note payable averaged $41.6 million, $51.9 million and $56.4 million for the years ended December 31, 2001, 2000 and 1999, respectively. Our note payable decreased by $55.5 million to $27.5 million at December 31, 2001 from $83.0 million at December 31, 2000. The reduction for 2001 was primarily funded with dividends from our subsidiaries and the issuance of additional trust preferred securities. In addition, the merger of our former subsidiary, First Bank & Trust, with and into Bank of San Francisco, effective March 29, 2001, allowed us to further reduce our note payable through a capital reduction of $23.0 million. In conjunction with this merger, Bank of San Francisco was renamed FB&T. The balance of our note payable at December 31, 2001 results from a $27.5 million advance drawn on December 31, 2001 to fund our purchase of UFG. 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 and subsequently to partially fund our acquisitions of Commercial Bank of San Francisco in October 2000 and Millennium Bank in December 2000. Distributions payable on these trust preferred securities were $6.0 million and $1.2 million for the years ended December 31, 2001 and 2000, respectively. On November 15, 2001, First Preferred Capital Trust III issued $55.2 million of 9.00% trust preferred securities. Proceeds from this offering, net of underwriting fees and offering expenses, were approximately $52.9 million and were used to reduce borrowings. Distributions payable on these trust preferred securities were $634,000 for the year ended December 31, 2001. The distributions on all issues of our trust preferred securities are recorded as noninterest expense in our accompanying consolidated financial statements. Stockholders' equity averaged $404.1 million, $321.9 million and $279.8 million for the years ended December 31, 2001, 2000 and 1999, respectively. We primarily attribute the increase for 2001 to net income of $64.5 million and an increase in accumulated other comprehensive income of $28.3 million. The increase in accumulated other comprehensive income reflects an increase of $30.1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) million associated with our derivative financial instruments as accounted for under SFAS 133, as amended, offset by a $1.9 million reduction in other comprehensive income resulting from the change in unrealized gains and losses on available-for-sale investment securities. The overall increase in stockholders' equity for 2001 also reflects an increase of $3.8 million associated with capital stock and certain other equity transactions of FBA, partially offset by dividends paid on our Class A and Class B preferred stock. We associate the increase in stockholders' equity 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. 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, ------------------------------------------------------------------------------------- 2001 2000 1999 ----------------------------- -------------------------- ------------------------- 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........................ $4,876,615 411,663 8.44% $4,281,290 389,687 9.10% $3,805,351 322,703 8.48% Tax-exempt (4)................. 7,684 754 9.81 9,668 992 10.26 7,157 775 10.83 Investment securities: Taxable........................ 433,454 26,244 6.05 412,932 27,331 6.62 435,189 26,206 6.02 Tax-exempt (4)................. 17,910 1,366 7.63 18,996 1,478 7.78 19,247 1,442 7.49 Federal funds sold and other...... 93,561 5,458 5.83 67,498 4,202 6.23 51,342 2,732 5.32 ---------- -------- ---------- ------- ---------- ------- Total interest-earning assets. 5,429,224 445,485 8.21 4,790,384 423,690 8.84 4,318,286 353,858 8.19 -------- ------- ---------- ------- Nonearning assets..................... 570,162 364,333 344,942 ---------- ---------- ---------- Total assets.................. $5,999,386 $5,154,717 $4,663,228 ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY -------------------- Interest-bearing liabilities: Interest-bearing deposits: Interest-bearing demand deposits............... $ 507,011 7,019 1.38% $ 421,986 5,909 1.40% $ 391,892 5,098 1.30% Savings deposits............... 1,548,441 50,388 3.25 1,279,378 51,656 4.04 1,220,425 44,101 3.61 Time deposits (3).............. 2,278,263 125,131 5.49 2,139,305 120,257 5.62 1,899,218 101,653 5.35 ---------- -------- ---------- ------- ---------- ------- Total interest- bearing deposits........... 4,333,715 182,538 4.21 3,840,669 177,822 4.63 3,511,535 150,852 4.30 Short-term borrowings............. 158,047 5,847 3.70 106,123 5,881 5.54 87,374 4,220 4.83 Note payable...................... 41,590 2,629 6.32 51,897 3,976 7.66 56,376 3,629 6.44 ---------- -------- ---------- ------- ---------- ------- Total interest-bearing liabilities................ 4,533,352 191,014 4.21 3,998,689 187,679 4.69 3,655,285 158,701 4.34 -------- ------- ------- Noninterest-bearing liabilities: Demand deposits................... 754,763 634,886 552,029 Other liabilities................. 307,164 199,215 176,102 ---------- ---------- ---------- Total liabilities............. 5,595,279 4,832,790 4,383,416 Stockholders' equity.................. 404,107 321,927 279,812 ---------- ---------- ---------- Total liabilities and stockholders' equity....... $5,999,386 $5,154,717 $4,663,228 ========== ========== ========== Net interest income................... 254,471 236,011 195,157 ======== ======= ======= Interest rate spread.................. 4.00 4.15 3.85 Net interest margin (5)............... 4.69% 4.93% 4.52% ==== ===== =====
- ------------------------ (1) For purposes of these computations, nonaccrual loans are included in the average loan amounts. (2) Interest income on loans includes loan fees. (3) Interest income and interest expense includes the effects of interest rate swap agreements. (4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustments were approximately $742,000, $864,000 and $776,000 for the years ended December 31, 2001, 2000 and 1999, respectively. (5) Net interest margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average interest-earning assets. 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, 2001 Compared December 31, 2000 Compared to December 31, 2000 to December 31, 1999 ----------------------------- ------------------------------ Net Net Volume Rate Change Volume Rate Change ------ ---- ------ ------ ---- ------ (dollars expressed in thousands) Interest earned on: Loans: (1) (2) (3) Taxable............................. $ 51,584 (29,608) 21,976 42,273 24,711 66,984 Tax-exempt (4)...................... (196) (42) (238) 260 (43) 217 Investment securities: Taxable............................. 1,325 (2,412) (1,087) (1,389) 2,514 1,125 Tax-exempt (4)...................... (84) (28) (112) (19) 55 36 Federal funds sold and other........... 1,540 (284) 1,256 956 514 1,470 -------- ------- ------ ------ ------ ------ Total interest income........... 54,169 (32,374) 21,795 42,081 27,751 69,832 -------- ------- ------ ------ ------ ------ Interest paid on: Interest-bearing demand deposits....... 1,194 (84) 1,110 405 406 811 Savings deposits....................... 9,818 (11,086) (1,268) 2,180 5,375 7,555 Time deposits (3) ..................... 7,696 (2,822) 4,874 13,296 5,308 18,604 Short-term borrowings.................. 2,306 (2,340) (34) 986 675 1,661 Note payable........................... (716) (631) (1,347) (304) 651 347 -------- ------- ------ ------ ------ ------ Total interest expense.......... 20,298 (16,963) 3,335 16,563 12,415 28,978 -------- ------- ------ ------ ------ ------ Net interest income............. $ 33,871 (15,411) 18,460 25,518 15,336 40,854 ======== ======= ====== ====== ====== ====== - ------------------------ (1) For purposes of these computations, nonaccrual loans are included in the average loan amounts. (2) Interest income on loans includes loan fees. (3) Interest income and interest expense includes the effect of interest rate swap 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) increased to $254.5 million, or 4.69% of average interest-earning assets, for the year ended December 31, 2001, from $236.0 million, or 4.93% of interest-earning assets, and $195.2 million, or 4.52% of interest-earning assets, for the years ended December 31, 2000 and 1999, respectively. We credit the increased net interest income for 2001 primarily to the net interest-earning assets provided by our acquisitions completed during 2000 and 2001, internal loan growth, and earnings on our interest rate swap agreements that we entered into in conjunction with our interest rate risk management program. The overall increase in net interest income was significantly offset by reductions in prevailing interest rates throughout 2001, resulting in the overall decline in our net interest rate margin. We credit the increased net interest income for 2000 primarily to the net interest-earning assets provided by our acquisitions completed during 1999 and 2000, internal loan growth and increases in prevailing interest rates which resulted in increased yields on interest-earning assets. However, the overall increase in net interest income for 2000 was partially offset by the expense associated with our interest rate swap agreements. Average total loans, net of unearned discount, increased by $593.3 million to $4.88 billion for the year ended December 31, 2001, from $4.29 billion and $3.81 billion for the years ended December 31, 2000 and 1999, respectively. The yield on our loan portfolio, however, declined to 8.44% for the year ended December 31, 2001, in comparison to 9.10% for 2000. This was a major contributor to the 24 basis point decline in our net interest rate margin for 2001. We attribute the decline in yields and our net interest rate margin primarily to decreases in prevailing interest rates. During 2001, the Board of Governors of the Federal Reserve System decreased the targeted federal funds rate 11 times, resulting in 11 decreases in the prime rate of interest from 9.50% to 4.75%. 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 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) repriced during this period. As further discussed under "--Interest Rate Risk Management," the reduced level of interest income earned on our loan portfolio as a result of declining interest rates was partially mitigated by the earnings associated with our interest rate swap agreements. For the year ended December 31, 2001, these agreements provided net interest income of $23.4 million. In addition, increased competition within our market areas led to reduced lending rates. Conversely, the yield on our loan portfolio for the year ended December 31, 2000 increased to 9.10% from 8.48% for the year ended December 31, 1999, principally as a result of increases in prevailing interest rates. During the period from June 30, 1999 to December 31, 2000, the Board of Governors of the Federal Reserve System increased the targeted federal funds rate six times, resulting in six increases in the prime rate of interest from 7.75% to 9.50%, respectively. However the improved yield on our loan portfolio was partially offset by the expense associated with our interest rate swap agreements, which was $4.7 million for the year ended December 31, 2000. For the years ended December 31, 2001, 2000 and 1999, the aggregate weighted average rate paid on our interest-bearing deposit portfolio was 4.21%, 4.63% and 4.30%, respectively. We attribute the decline in 2001 primarily to rates paid on savings deposits, which have continued to decline with the interest rate reductions previously discussed. The overall decrease in rates paid is a result of generally decreasing interest rates in 2001 as compared to generally increasing rates in 2000. However, the competitive pressures on deposits within our market areas precluded us from fully reflecting the general interest rate decreases in our deposit pricing and still providing an adequate funding source for continued loan growth. The aggregate weighted average rate on our note payable decreased to 6.32% for the year ended December 31, 2001, from 7.66% and 6.44% for the years ended December 31, 2000 and 1999, respectively, reflecting changing market interest rates during these periods. 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 of the note payable and our profitability. Thus, the revolving credit line represents a relatively high-cost funding source which, although it has been mitigated by the continued reductions in the prime lending rate during 2001, has the effect of increasing our weighted average rate of non-deposit liabilities. During 2000, we utilized the note payable to fund our acquisitions of Commercial Bank of San Francisco, Millenium Bank and Bank of San Francisco, thus resulting in a higher level of borrowings occurring during the fourth quarter of 2000. During 2001, our note payable was fully repaid from the proceeds of the trust preferred securities issued by First Preferred Capital Trust III. However, on December 31, 2001, we obtained a $27.5 million advance to fund our acquisition of UFG. 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 may differ significantly from those within its deposit structure. The nature of the loan and deposit markets within which a financial 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 over 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 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 and Chief Executive Officer, President and 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 managing sensitivity, we strive to reduce the adverse impact on earnings by managing interest rate risk within internal policy constraints. 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 project 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 interest 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, an instantaneous, parallel decline in the interest yield curve of 100 basis points indicates a pre-tax projected loss of approximately 6.1% of net interest income, based on assets and liabilities at December 31, 2001. Although we do not anticipate that instantaneous shifts in the yield curve as projected in our simulation model are likely, these are indications of the effects that changes in interest rates would have over time. As previously discussed, we utilize derivative financial instruments to assist in our management of interest rate sensitivity by modifying the repricing, maturity and option characteristics of certain assets and liabilities. The derivative financial instruments we hold are summarized as follows:
December 31, 2001 December 31, 2000 ------------------- ---------------------- Notional Credit Notional Credit Amount Exposure Amount Exposure ------ -------- ------ -------- (dollars expressed in thousands) Cash flow hedges.............................. $900,000 1,764 1,055,000 3,449 Fair value hedges............................. 200,000 6,962 50,000 758 Interest rate floor agreements................ -- -- 35,000 6 Interest rate cap agreements.................. 450,000 2,063 450,000 3,753 Interest rate lock commitments................ 88,000 -- 4,100 -- Forward commitments to sell mortgage-backed securities............... 209,000 -- 32,000 -- ======== ====== ========= ======
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 our 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. During 2001 and 1999, we realized net interest income on derivative financial instruments of $23.4 million and $430,000, respectively, in comparison to net interest expense of $4.7 million in 2000. In addition, we realized a net gain on derivative instruments, which is included in noninterest income in the consolidated statements of income, of $18.6 million for the year ended December 31, 2001. Cash Flow Hedges. 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 prior to 1998. The net interest expense associated with these agreements, consisting primarily of amortization of deferred losses, was $5.7 million for the year ended December 31, 1999. There were no remaining unamortized deferred losses on the terminated swap agreements at December 31, 1999. We entered into the following interest rate swap agreements, designated as cash flow hedges, 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: 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 that provided for us to receive a fixed rate of interest and pay an adjustable rate of interest equivalent to the daily weighted average prime lending rate minus 2.705%. The terms of the swap agreements provided for us to pay quarterly and receive payment semiannually. >> In June 2001 and November 2001, we terminated $205.0 million and $75.0 million notional amount, respectively, of these swap agreements, which would have expired in 2002, in order to appropriately modify our overall hedge position in accordance with our interest rate risk management program. In conjunction with these terminations, we recorded pre-tax gains of $2.8 million and $1.7 million, respectively. >> During September 1999, we entered into $175.0 million notional amount of interest rate swap agreements that provided 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 provided for us to pay and receive interest on a quarterly basis. In April 2001, we terminated these swap agreements, which would have expired in September 2001, and replaced them with similar swap agreements with extended maturities in order to lengthen the period covered by the swaps. In conjunction with the termination of these swap agreements, we recorded a pre-tax gain of $985,000. >> During September 2000, March 2001 and April 2001, we entered into $600.0 million, $200.0 million, and $175.0 million notional amount, respectively, of interest rate swap agreements that provide for us to receive a fixed rate of interest and pay an adjustable rate equivalent to the weighted average prime lending rate minus either 2.70% or 2.82%. The terms of the swap agreements provide for us to pay and receive interest on a quarterly basis. In November 2001, we terminated $75.0 million notional amount of these swap agreements, which would have expired in April 2006, in order to appropriately modify our overall hedge position in accordance with our interest rate risk management program. We recorded a pre-tax gain of $2.6 million in conjunction with the termination of these swap agreements. The amount receivable by us under the remaining swap agreements was $2.9 million at December 31, 2001, and the amount payable by us was $1.1 million at December 31, 2001. The amount receivable and payable by us under the swap agreements was $1.2 million at December 31, 2000. The maturity dates, notional amounts, interest rates paid and received and fair value of our interest rate swap agreements designated as cash flow hedges as of December 31, 2001 and 2000 were as follows:
Notional Interest Rate Interest Rate Fair Maturity Date Amount Paid Received Value ------------- -------- ----------- ------------- ---------- (dollars expressed in thousands) December 31, 2001: September 20, 2004....................... $ 600,000 2.05% 6.78% $ 40,980 March 21, 2005........................... 200,000 1.93 5.24 4,951 April 2, 2006............................ 100,000 1.93 5.45 2,305 ---------- -------- $ 900,000 2.01 6.29 $ 48,236 ========== ===== ===== ======== December 31, 2000: September 27, 2001....................... $ 175,000 6.80% 6.14% $ 65 June 11, 2002............................ 15,000 6.80 6.00 7 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 ---------- -------- $1,055,000 6.80 5.92 $ 14,475 ========== ===== ===== ========
Fair Value Hedges. We entered into the following interest rate swap agreements, designated as fair value hedges, to effectively shorten the repricing characteristics of certain interest-bearing liabilities to correspond more closely with their funding source with the objective of stabilizing net interest income over time: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) >> During September 2000, we entered into $25.0 million notional amount of one-year interest rate swap agreements and $25.0 million notional amount of five and one-half year interest rate swap agreements that provided for us to receive fixed rates of interest ranging from 6.60% 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 provided for us to pay interest on a quarterly basis and receive interest on either a semiannual basis or an annual basis. In September 2001, the one-year interest rate swap agreements matured, and we terminated the five and one-half year interest rate swap agreements because the underlying interest-bearing liabilities had either matured or been called by their respective counterparties. There was no gain or loss recorded as a result of the terminations. >> During January 2001, we entered into $50.0 million notional amount of three-year interest rate swap agreements and $150.0 million notional amount of five-year interest rate swap agreements that provide for us to receive a fixed rate of interest and pay an adjustable rate of interest equivalent to the three-month London Interbank Offering Rate. 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 $5.2 million and $1.2 million at December 31, 2001, respectively. The maturity dates, notional amounts, interest rates paid and received and fair value of our interest rate swap agreements designated as fair value hedges as of December 31, 2001 and 2000 were as follows:
Notional Interest Rate Interest Rate Fair Maturity Date Amount Paid Received Value ------------- -------- ----------- ------------- ---------- (dollars expressed in thousands) December 31, 2001: January 9, 2004.......................... $ 50,000 2.48% 5.37% $ 1,761 January 9, 2006.......................... 150,000 2.48 5.50 3,876 --------- ------- $ 200,000 2.48 5.47 $ 5,637 ========= ===== ===== ======= December 31, 2000: September 13, 2001....................... $ 12,500 6.56% 6.80% $ 42 September 21, 2001....................... 12,500 6.47 6.60 43 March 13, 2006........................... 12,500 6.47 7.25 5 March 22, 2006........................... 12,500 6.39 7.20 6 --------- ------- $ 50,000 6.47 6.96 $ 96 ========= ===== ===== =======
Interest Rate Floor Agreements. During January 2001 and March 2001, we entered into $200.0 million and $75.0 million notional amount, respectively, of four-year interest rate floor agreements to further stabilize net interest income in the event of a falling rate scenario. The interest rate floor agreements provided for us to receive a quarterly adjustable rate of interest equivalent to the differential between the three-month London Interbank Offering Rate and the strike prices of 5.50% or 5.00%, respectively, should the three-month London Interbank Offering Rate fall below the respective strike prices. In November 2001, we terminated these interest rate floor agreements in order to appropriately modify our overall hedge position in accordance with our interest rate risk management program. In conjunction with the termination, we recorded a pre-tax adjustment of $4.0 million representing the decline in fair value from our previous month-end measurement date. These agreements provided net interest income of $2.1 million for the year ended December 31, 2001. Interest Rate Cap Agreements. In conjunction with the interest rate swap agreements that we entered into in September 2000, we also entered into $450.0 million notional amount of four-year interest rate cap agreements to limit the net interest expense associated with our interest rate swap agreements in the event of a rising rate scenario. The interest rate cap agreements provide for us to receive a quarterly adjustable rate of interest equivalent to the differential between the three-month London Interbank Offering Rate and the strike price of 7.50% should the three-month London Interbank Offering Rate exceed the strike price. At December 31, 2001 and 2000, the carrying value of these interest rate cap agreements, which is included in derivative instruments in the consolidated balance sheets, was $2.1 million and $3.8 million, respectively. Pledged Collateral. At December 31, 2001 and 2000, we had pledged investment securities available for sale with a carrying value of $1.1 and $8.6 million, respectively, in connection with the interest rate swap agreements. In addition, at December 31, 2001 and 2000, we had accepted, as collateral in connection with the interest rate swap agreements, cash of $4.9 million and $4.9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) million and $400,000, respectively, and investment securities with a fair value of 53.9 million and $18.6 million, respectively. We are permitted by contract to sell or repledge the collateral accepted from counterparties; however; at December 31, 2001 and 2000, we had not done so. Interest Rate Lock Commitments/Forward Commitments to Sell Mortgage-Backed Securities. Derivative financial instruments issued by us consist of interest rate lock commitments to originate fixed-rate loans. Commitments to originate fixed-rate loans consist primarily of residential real estate loans. These net loan commitments and loans held for sale are hedged with forward contracts to sell mortgage-backed securities. 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, 2001, 2000 and 1999, we originated and purchased loans for resale totaling $1.52 billion, $532.2 million and $452.9 million and sold loans totaling $992.0 million, $413.2 million and $507.1 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 or loss 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 $1.07 billion, $957.2 million and $957.1 million at December 31, 2001, 2000 and 1999, respectively. The gain on mortgage loans originated for resale, including loans sold and held for sale, was $15.0 million, $7.8 million and $6.9 million for the years ended December 31, 2001, 2000 and 1999, 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. The overall increase for 2001 is primarily attributable to a significant increase in the volume of loans originated and sold commensurate with the prevailing interest rate environment experienced throughout 2001, including continued reductions in mortgage loan rates and our growth in mortgage banking activities. The increases for 2000 and 1999 reflect the expansion of our mortgage banking activities into our California and Texas markets. The interest income on loans held for sale was $11.1 million for the year ended December 31, 2001, in comparison to $3.5 million and $4.9 million for the years ended December 31, 2000 and 1999, 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 $149.0 million, $47.0 million and $79.1 million for the years ended December 31, 2001, 2000 and 1999, respectively. On an annualized basis, our yield on the portfolio of loans held for sale was 7.45%, 7.45% and 6.19% for the years ended December 31, 2001, 2000 and 1999, respectively. This compares with our cost of funds, as a percentage of average interest-bearing liabilities, of 4.21%, 4.69% and 4.34% for the years ended December 31, 2001, 2000 and 1999, 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 $222,000, $486,000 and $657,000 for the years ended December 31, 2001, 2000 and 1999, respectively. We attribute the decrease in loan servicing fees for 2001, 2000 and 1999 primarily 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. Amortization of mortgage servicing rights was $3.7 million, $3.1 million and $2.8 million for the years ended December 31, 2001, 2000 and 1999, respectively. 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, 2001, 2000 and 1999, we had $197.5 million, $37.6 million and $31.5 million, respectively, of loans held for sale and related commitments, net of committed loan sales and estimated underwriting fallout, of which $209.9 million, $32.0 million and $33.0 million, respectively, were hedged through the use of such forward commitments. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Comparison of Results of Operations for 2001 and 2000 Net Income. Net income was $64.5 million for the year ended December 31, 2001, compared to $56.1 million for 2000. The implementation of SFAS 133, as amended, on January 1, 2001, resulted in the recognition of a cumulative effect of change in accounting principle of $1.4 million, net of tax, which reduced net income. Excluding this item, net income was $65.9 million for the year ended December 31, 2001. The improved earnings primarily result from increased net interest income and noninterest income, including a gain on the exchange of an equity investment in an unaffiliated financial institution in October 2001, as well as a reduced provision for income taxes. The reduced provision for income taxes includes the effect of an $8.1 million reduction in FBA's deferred tax asset valuation allowance that was no longer deemed necessary as FBA's overall net deferred tax assets are expected to be recoverable through future earnings. The overall improvement in earnings was partially offset by an increased provision for loan losses and higher operating expenses, including nonrecurring charges associated with the establishment of a specific reserve related to a contingent liability and the settlement of certain litigation. Net interest income (expressed on a tax-equivalent basis) improved to $254.5 million for the year ended December 31, 2001, compared to $236.0 million for 2000. However, our net interest rate margin declined to 4.69% for the year ended December 31, 2001 from 4.93% for 2000. Net interest income increased primarily as a result of increased earning assets generated through internal loan growth along with our acquisitions completed throughout 2000 and 2001. However, the improvement in net interest income was significantly mitigated by continued reductions in prevailing interest rates throughout 2001. We funded the overall loan growth primarily through deposits added through acquisitions and internal deposit growth. During the year ended December 31, 2001, noninterest income improved significantly to $98.6 million from $42.8 million for the years ended December 31, 2001 and 2000, respectively as further discussed under "--Noninterest Income." The improvement in net interest income and noninterest income was partially offset by a $59.1 million increase in operating expenses to $230.3 million for the year ended December 31, 2001, compared to $171.2 million for 2000. The increased operating expenses are primarily attributable to: >> the operating expenses of our 2000 and 2001 acquisitions subsequent to their respective acquisition dates; >> increased salaries and employee benefit expenses; >> increased information technology fees; >> increased legal, examination and professional fees; >> increased amortization of intangibles associated with the purchase of subsidiaries; >> a nonrecurring litigation settlement charge; and >> a charge to other expense associated with the establishment of a specific reserve on an unfunded letter of credit. Additionally, guaranteed preferred debentures expense of $6.0 million on the trust preferred securities issued by First Preferred Capital Trust II in October 2000, and $634,000 on the trust preferred securities issued by First Preferred Capital Trust III on November 15, 2001, further contributed to the overall increase in operating expenses for the year ended December 31, 2001. These higher operating expenses, exclusive of the litigation settlement and the specific reserve on the unfunded letter of credit, are reflective of significant investments that we have made in personnel, technology, capital expenditures and new business lines in conjunction with our overall strategic growth plan. The payback on these investments is expected to occur over a longer period of time through higher and more diversified revenue streams. Provision for Loan Losses. The provision for loan losses was $23.5 million and $14.1 million for the years ended December 31, 2001 and 2000, respectively. The provision for loan losses reflects the level of loan charge-offs and recoveries, the adequacy of the allowance for loan losses and the effect of economic conditions within our markets. We attribute the increase in the provision for loan losses primarily to the overall growth in our loan portfolio, both internal and through acquisitions, a general increase in risk associated with the continued changing composition of our loan portfolio and a significant increase in nonperforming assets and past due loans, which is further discussed under "--Loans and Allowance for Loan Losses." Loan charge-offs were $31.5 million for the year ended December 31, 2001, in comparison to $17.1 million for the year ended December 31, 2000. The increase in loan charge-offs is due to $5.9 million in charge-offs related to our commercial leasing business, a single loan in the amount of $4.5 million that was charged-off due to suspected fraud on the part of the borrower, $3.7 million MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) in charge-offs on shared national credit relationships as well as the effects of the general slowdown in economic conditions prevalent within our markets. Loan recoveries were $9.5 million for the year ended December 31, 2001, in comparison to $9.8 million for 2000. Nonperforming assets and past-due loans have increased significantly during 2001, and we anticipate these trends will continue in the near future. However, we believe these trends represent normal cyclical trends experienced within the banking industry during times of economic slowdown. Management considered these trends in its overall assessment of the adequacy of the allowance for loan losses. Our acquisitions during 2000 and 2001 provided $6.1 million and $14.0 million, respectively, in additional allowance for loan losses at their respective acquisition dates. Noninterest Income and Expense. The following table summarizes noninterest income and noninterest expense for the years ended December 31, 2001 and 2000:
December 31, Increase (Decrease) ----------------- ------------------- 2001 2000 Amount % ---- ---- ------ --- (dollars expressed in thousands) Noninterest income: Service charges on deposit accounts and customer service fees.... $ 22,865 19,794 3,071 15.51% Gain on mortgage loans sold and held for sale.................... 14,983 7,806 7,177 91.94 Gain on sale of credit card portfolio, net of expenses........... 1,853 -- 1,853 100.00 Net gain on sales of available-for-sale securities............... 18,722 168 18,554 -- Gain on sales of branches, net of expenses....................... -- 1,355 (1,355) (100.00) Bank-owned life insurance investment income...................... 4,415 4,314 101 2.34 Gain on derivative instruments, net.............................. 18,583 -- 18,583 100.00 Other............................................................ 17,188 9,341 7,847 84.01 --------- -------- ------- Total noninterest income................................... $ 98,609 42,778 55,831 130.51 ========= ======== ======= ========= Noninterest expense: Salaries and employee benefits................................... $ 93,452 73,391 20,061 27.33% Occupancy, net of rental income.................................. 17,432 14,675 2,757 18.79 Furniture and equipment.......................................... 12,612 11,702 910 7.78 Postage, printing and supplies................................... 4,869 4,431 438 9.88 Information technology fees...................................... 26,981 22,359 4,622 20.67 Legal, examination and professional fees......................... 6,988 4,523 2,465 54.50 Amortization of intangibles associated with the purchase of subsidiaries................................. 8,248 5,297 2,951 55.71 Communications................................................... 3,247 2,625 622 23.70 Advertising and business development............................. 5,237 4,331 906 20.92 Guaranteed preferred debentures.................................. 18,590 13,173 5,417 41.12 Other............................................................ 32,605 14,656 17,949 122.47 --------- -------- ------- Total noninterest expense.................................. $ 230,261 171,163 59,098 34.53 ========= ======== ======= ========
Noninterest Income. Noninterest income was $98.6 million for the year ended December 31, 2001, compared to $42.8 million for 2000. Noninterest income consists primarily of service charges on deposit accounts and customer service fees, mortgage banking revenues, net gains on sales of available-for-sale securities, net gains on derivative instruments and other income. Service charges on deposit accounts and customer service fees increased to $22.9 million for 2001, from $19.8 million for 2000. We attribute the increase in service charges and customer service fees to: >> increased deposit balances provided by internal growth; >> our acquisitions completed during 2000 and, to a lesser degree, 2001; >> 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 June 30, 2000, and July 1, 2001, and enhanced control of fee waivers; and >> increased income associated with automated teller machine services and debit cards. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The gain on mortgage loans sold and held for sale increased to $15.0 million from $7.8 million for the years ended December 31, 2001 and 2000, respectively. We attribute the increase to a significant increase in the volume of loans originated and sold commensurate with the continued reductions in mortgage loan rates experienced during 2001 as well as the continued expansion of our mortgage banking activities into new and existing markets. During 2001, we recorded a $1.9 million pre-tax gain on the sale of our credit card portfolio, which results from our strategic decision to exit this product line and enter into an agent relationship with a larger credit card service provider. Noninterest income for the years ended December 31, 2001 and 2000 included net gains on the sale of available-for-sale investment securities of $18.7 million and $168,000, respectively. The significant increase in 2001 results from a $19.1 million pre-tax gain recognized in conjunction with the exchange of an equity investment in the common stock of an unaffiliated publicly-traded financial institution for $10.0 million in cash and a $14.4 million equity investment in the acquiring unaffiliated financial institution. We owned 7.93% of the outstanding shares of common stock of the unaffiliated financial institution at December 31, 2001. This gain was partially offset by a net loss that resulted from the liquidation of certain equity investment securities held by FBA. The net gain for 2000 resulted primarily from the sales of certain investment securities held by acquired institutions that did not meet our overall investment objectives. The gain on sales of branches, net of expenses, was $1.4 million for the year ended December 31, 2000, and results from the divestiture of one of our branch locations in central Illinois. In 2001, we did not sell any existing branches. The net gain on derivative instruments of $18.6 million for the year ended December 31, 2001 includes $4.1 million of gains resulting from the terminations of certain interest rate floor and swap agreements to adjust our interest rate hedge position consistent with changes in the portfolio structure and mix. In addition, the net gain reflects changes in the fair value of our interest rate cap agreements, interest rate floor agreements and fair value hedges, in accordance with the requirements of SFAS 133, as amended, which was implemented on January 1, 2001. Other income was $17.2 million and $9.3 million for the years ended December 31, 2001 and 2000, respectively. We attribute the primary components of this increase to: >> our acquisitions completed during 2000 and, to a lesser extent, 2001; >> increased portfolio management fee income of $3.4 million associated with our Institutional Money Management Division, which was formed in August 2000; >> increased brokerage revenue of $1.1 million, which is primarily associated with the stock option services acquired in conjunction with our acquisition of Bank of San Francisco in December 2000; >> increased rental income of $2.1 million associated with our commercial leasing activities that were acquired in conjunction with our acquisition of FCG in February 2000; and >> income of approximately $1.2 million associated with equipment leasing activities that were acquired in conjunction with our acquisition of Bank of San Francisco. Noninterest Expense. Noninterest expense was $230.3 million for the year ended December 31, 2001, in comparison to $171.2 million for 2000. The increase reflects: >> the noninterest expense associated with our acquisitions completed during 2000 and 2001, including certain nonrecurring expenses associated with those acquisitions; >> increased salaries and employee benefit expenses; >> increased information technology fees; >> increased legal, examination and professional fees; >> increased amortization of intangibles associated with the purchase of subsidiaries; >> increased guaranteed preferred debentures expense; and >> increased other expense. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Salaries and employee benefits increased by $20.1 million to $93.5 million from $73.4 million for the years ended December 31, 2001 and 2000, respectively. We primarily associate the increase with our 2000 and 2001 acquisitions and our Institutional Money Management Division, which was formed in August 2000. 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 staff throughout 2000 to enhance executive and senior management expertise, improve technological support, strengthen centralized operational functions and expand our product lines. Occupancy, net of rental income, and furniture and equipment expense totaled $30.0 million and $26.4 million for the years ended December 31, 2001 and 2000, respectively. The increase is attributable to our acquisitions, the relocation of certain branches and operational areas and increased depreciation expense associated with numerous capital expenditures, including our new facility that houses various centralized operations and certain corporate and administrative functions. Information technology fees were $27.0 million and $22.4 million for the years ended December 31, 2001 and 2000, respectively. First Services, L.P., a limited partnership indirectly owned by our Chairman and his adult children, provides information technology and various related services to our subsidiary banks and us under the terms of information technology agreements. We attribute the increased information technology fees to growth and technological advancements consistent with our product and service offerings, continued expansion and upgrades to technological equipment, networks and communication channels, and certain nonrecurring expenses associated with the data processing conversions of Redwood Bank, Commercial Bank of San Francisco, Bank of San Francisco, Millennium Bank, Charter Pacific Bank and BYL completed in 2001. Legal, examination and professional fees were $7.0 million and $4.5 million for the years ended December 31, 2001 and 2000, respectively. We primarily attribute the increase in these fees to the ongoing professional services utilized by certain of our acquired entities, increased professional fees associated with our Institutional Money Management Division, which was formed in August 2000, and increased legal fees associated with commercial loan documentation, collection efforts, expanded corporate activities and certain defense litigation. Amortization of intangibles associated with the purchase of subsidiaries was $8.2 million and $5.3 million for the years ended December 31, 2001 and 2000, respectively. The increase for 2001 is primarily attributable to amortization of the cost in excess of the fair value of the net assets acquired for the six acquisitions that we completed during 2000. Guaranteed preferred debentures expense was $18.6 million and $13.2 million for the years ended December 31, 2001 and 2000, respectively. The increase for 2001 is solely attributable to the issuance of $57.5 million of trust preferred securities by First Preferred Capital Trust II in October 2000 and the issuance of $55.2 million of trust preferred securities on November 15, 2001 by First Preferred Capital Trust III. Other expense was $32.6 million and $14.7 million for the years ended December 31, 2001 and 2000, respectively. Other expense encompasses numerous general and administrative expenses including travel, meals and entertainment, insurance, freight and courier services, correspondent bank charges, advertising and business development, miscellaneous losses and recoveries, memberships and subscriptions, transfer agent fees and sales taxes. We attribute the majority of the increase in other expense to: >> our acquisitions completed during 2000 and 2001; >> increased advertising and business development expenses associated with various product and service initiatives and enhancements; >> increased travel expenses primarily associated with business development efforts and the ongoing integration of the recently acquired entities into our corporate culture and systems; >> a nonrecurring litigation settlement charge in the amount of $11.5 million associated with a lawsuit brought by an unaffiliated bank against one of our subsidiaries and certain individuals related to allegations arising from the employment by our subsidiary of individuals previously employed by the plaintiff bank, as well as the conduct of those individuals while employed by the plaintiff bank; >> the establishment of a $1.8 million specific reserve on an unfunded letter of credit; and >> overall continued growth and expansion of our banking franchise. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Provision for Income Taxes. The provision for income taxes was $30.0 million for the year ended December 31, 2001, representing an effective income tax rate of 30.5%, in comparison to $34.5 million, representing an effective income tax rate of 37.2%, for the year ended December 31, 2000. The decrease in the effective income tax rate is primarily attributable to: >> a reduction of FBA's deferred tax asset valuation allowance of $13.1 million recorded in December 2001. This reduction, of which $8.1 million represented a reduction in our provision for income taxes and $5.0 million represented an increase in capital surplus, reflects the recognition of deferred tax assets for net operating loss carryforwards and the expectation of future taxable income sufficient to realize the net deferred tax assets; partially offset by >> the increase in amortization of intangibles associated with the purchase of subsidiaries, which is not deductible for tax purposes. 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 information technology 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. 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% 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) Gain on sales of branches, net of expenses....................... 1,355 4,406 (3,051) (69.25) Bank-owned life insurance investment income...................... 4,314 3,919 395 10.08 Other............................................................ 9,341 7,949 1,392 17.51 --------- -------- ------- 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 Information technology fees...................................... 22,359 18,567 3,792 20.42 Legal, examination and professional fees......................... 4,523 9,109 (4,586) (50.35) Amortization of intangibles associated with the purchase of subsidiaries................................. 5,297 4,401 896 20.36 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............................................................ 14,656 13,652 1,004 7.35 --------- -------- ------- 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. 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 automated 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. 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 investment 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 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Bank-owned life insurance investment income was $4.3 million and $3.9 million for the years ended December 31, 2000 and 1999, respectively. The increase for 2000 reflects an increased rate of return on this product primarily associated with the current interest rate environment as well as the reinvestment of product earnings. Other income was $9.3 million and $7.9 million for the years ended December 31, 2000 and 1999, respectively. The increase in other income is primarily attributable to rental income associated with FCG's leasing activities and increased rental fees received from First Services, L.P. for the use of information technology 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 information technology 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. 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 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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. Information technology fees were $22.4 million and $18.6 million for the years ended December 31, 2000 and 1999, respectively. First Services, L.P., a limited partnership indirectly owned by our Chairman and his adult children, provides information technology and various related services to our subsidiary banks and us under the terms of information technology agreements. We attribute the increased information technology 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. Amortization of intangibles associated with the purchase of subsidiaries was $5.3 million and $4.4 million for the years ended December 31, 2000 and 1999, respectively. The increase for 2000 is primarily attributable to amortization of the cost in excess of the fair value of the net assets acquired for the acquisitions that we completed throughout 1999 and 2000. 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 in October 2000. Other expense was $14.7 million and $13.7 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, miscellaneous losses and recoveries, and sales taxes. The overall increase in these expenses primarily reflects: >> continued growth and expansion of our banking franchise; >> 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. Provision for Income Taxes. The provision for income taxes was $34.5 million for the year ended December 31, 2000, representing an effective income tax rate of 37.2%, in comparison to $26.3 million, representing an effective income tax rate of 36.5%, for the year ended December 31, 1999. The increase in the effective income tax rate is primarily attributable to: >> the increase in amortization of intangibles associated with the purchase of subsidiaries, which is not deductible for tax purposes; and >> a reduction of the deferred tax asset valuation reserve of approximately $405,000 related to the utilization of net operating losses associated with a previously acquired entity, which was recorded in March 2000. Investment Securities We classify the securities within our investment portfolio as held to maturity or available for sale. We do not engage in the trading of investment securities. Our investment security portfolio consists primarily of securities designated as available for sale. The investment security portfolio was $631.1 million and $563.5 million at December 31, 2001 and 2000, respectively, compared to $451.6 million at December 31, 1999. We attribute the increase in investment securities during 2000 and 2001 to securities acquired through acquisitions and the overall level of loan demand within our market areas, which affects the MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) amount of funds available for investment. In addition, the increase for 2001 is partially offset by the liquidation of certain investment securities held by FBA and a significant increase in calls of investment securities prior to their normal maturity dates resulting from the general decline in interest rates during 2001. 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 92.7%, 92.3% and 91.5% of total interest income for the years ended December 31, 2001, 2000 and 1999, respectively. Loans, net of unearned discount, represented 79.8% of total assets as of December 31, 2001, compared to 80.9% of total assets at December 31, 2000. Total loans, net of unearned discount, increased $656.6 million to $5.41 billion for the year ended December 31, 2001, and $750.0 million to $4.75 billion for the year ended December 31, 2000. We view the quality, yield and growth of our loan portfolio to be instrumental elements in determining our profitability. During the five years ended December 31, 2001, total loans, net of unearned discount, increased significantly from $3.00 billion at December 31, 1997 to $5.41 billion at December 31, 2001. 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 and management of both loan and deposit relationships with commercial customers. While this process was occurring, in an attempt 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 residential mortgage loan production has been sold in the secondary mortgage market. We have also substantially reduced our consumer lending through reductions in new loan volumes, the repayment of principal on our existing loan portfolio, and the sale of our student loan and credit card loan portfolios. This allowed us to fund part of the growth in corporate lending through reductions in residential real estate, indirect automobile and other consumer-related loans. In addition, our acquisitions added substantial portfolios of new loans. Some of these portfolios, particularly those from acquisitions completed in the mid-1990s, contained significant loan problems, which we anticipated and considered in our acquisition pricing. 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. The following table summarizes the effects of these factors on our loan portfolio for the five years ended December 31, 2001:
Increase (Decrease) For the Year Ended December 31, --------------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (dollars expressed in thousands) Internal loan volume increase (decrease): Commercial lending................................ $ 174,568 360,410 363,486 633,660 378,882 Residential real estate lending (1) .............. 48,616 20,137 (126,418) (152,849) (144,707) Consumer lending, net of unearned discount........ (75,280) (64,606) (56,349) (30,506) (54,305) Loans provided by acquisitions........................ 508,700 440,000 235,500 127,600 54,361 --------- -------- -------- -------- -------- Total increase in loans, net of unearned discount. $ 656,604 755,941 416,219 577,905 234,231 ========= ======== ======== ======== ========
------------------------- (1) Includes loans held for sale, which increased $135.1 million for the year ended December 31, 2001. 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, and other consumer financing opportunities arising out of our branch banking network. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 and bonds 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 during the period projects are being developed secured by the 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 summarizes 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, ---------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ----------------- --------------- -------------- ------------- --------------- Amount % Amount % Amount % Amount % Amount % ------ - ------ - ------ - ------ - ------ - (dollars expressed in thousands) Commercial, financial and agricultural............. $1,681,846 32.3% $1,496,284 32.0% $1,086,919 27.4%$ 920,007 26.7% $ 621,618 21.1% Real estate construction and development.............. 954,913 18.4 809,682 17.3 795,081 20.1 720,910 20.9 413,107 14.0 Real estate mortgage: One-to-four-family residential loans.......... 798,089 15.3 726,474 15.5 720,630 18.2 739,442 21.5 915,205 31.1 Other real estate loans...... 1,647,758 31.7 1,476,383 31.5 1,130,939 28.6 789,735 22.9 713,910 24.3 Consumer and installment, net of unearned discount............ 122,057 2.3 174,337 3.7 225,343 5.7 274,392 8.0 279,279 9.5 ---------- ----- --------- ------ ---------- ----- --------- ------ ---------- ----- Total loans, excluding loans held for sale...... 5,204,663 100.0% 4,683,160 100.0% 3,958,912 100.0% 3,444,486 100.0% 2,943,119 100.0% ===== ====== ===== ====== ===== Loans held for sale.............. 204,206 69,105 37,412 135,619 59,081 ---------- ---------- ---------- ---------- ---------- Total loans................ $5,408,869 $4,752,265 $3,996,324 $3,580,105 $3,002,200 ========== ========== ========== ========== ==========
Loans at December 31, 2001 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.................... $ 1,432,117 207,884 22,956 17,382 1,507 1,681,846 Real estate construction and development.................. 907,907 43,162 2,345 1,499 -- 954,913 Real estate mortgage...................................... 1,410,772 623,413 243,841 162,081 5,740 2,445,847 Consumer and installment, net of unearned discount........ 32,198 66,099 771 22,989 -- 122,057 Loans held for sale....................................... 204,206 -- -- -- -- 204,206 ----------- -------- -------- ------- ------- --------- Total loans......................................... $ 3,987,200 940,558 269,913 203,951 7,247 5,408,869 =========== ======== ======== ======= ======= =========
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, 2001:
As of or For the Years Ended December 31, ------------------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (dollars expressed in thousands) Allowance for loan losses, beginning of year......... $ 81,592 68,611 60,970 50,509 46,781 Acquired allowances for loan losses.................. 14,046 6,062 3,008 3,200 30 ---------- ---------- ---------- --------- ---------- 95,638 74,673 63,978 53,709 46,811 ---------- ---------- ---------- --------- ---------- Loans charged-off: Commercial, financial and agricultural........... (27,834) (9,768) (10,855) (3,908) (2,308) Real estate construction and development......... (108) (2,229) (577) (185) (2,242) Real estate mortgage............................. (1,818) (2,213) (2,561) (2,389) (6,250) Consumer and installment......................... (1,693) (2,840) (3,728) (3,701) (6,032) ---------- ---------- ---------- --------- ---------- Total...................................... (31,453) (17,050) (17,721) (10,183) (16,832) ---------- ---------- ---------- --------- ---------- Recoveries of loans previously charged-off: Commercial, financial and agricultural........... 4,450 5,621 3,602 3,417 2,146 Real estate construction and development......... 1,171 319 849 342 269 Real estate mortgage............................. 2,102 1,937 2,357 2,029 3,666 Consumer and installment......................... 1,746 1,965 2,473 2,656 3,149 ---------- ---------- ---------- --------- ---------- Total...................................... 9,469 9,842 9,281 8,444 9,230 ---------- ---------- ---------- --------- ---------- Net loans charged-off...................... (21,984) (7,208) (8,440) (1,739) (7,602) ---------- ---------- ---------- --------- ---------- Provision for loan losses............................ 23,510 14,127 13,073 9,000 11,300 ---------- ---------- ---------- --------- ---------- Allowance for loan losses, end of year............... $ 97,164 81,592 68,611 60,970 50,509 ========== ========== ========== ========= ========== Loans outstanding, net of unearned discount: Average.......................................... $4,884,299 4,290,958 3,812,508 3,250,719 2,846,157 End of year...................................... 5,408,869 4,752,265 3,996,324 3,580,105 3,002,200 End of year, excluding loans held for sale....... 5,204,663 4,683,160 3,958,912 3,444,486 2,943,119 ========== ========== ========== ========= ========== Ratio of allowance for loan losses to loans outstanding: Average.......................................... 1.99% 1.90% 1.80% 1.88% 1.77% End of year...................................... 1.80 1.72 1.72 1.70 1.68 End of year, excluding loans held for sale....... 1.87 1.74 1.73 1.77 1.72 Ratio of net charge-offs to average loans outstanding...................................... 0.45 0.17 0.22 0.05 0.27 Ratio of current year recoveries to preceding year's total charge-offs............... 55.54 55.54 91.14 50.17 31.81 ========== ========== ========== ========= ========== Allocation of allowance for loan losses at end of year: Commercial, financial and agricultural........... $ 40,161 32,352 24,898 19,239 14,879 Real estate construction and development......... 21,598 14,667 13,264 15,073 7,148 Real estate mortgage............................. 31,406 24,691 20,750 18,774 18,317 Consumer and installment......................... 3,999 3,142 4,390 5,180 5,089 Unallocated (1).................................. -- 6,740 5,309 2,704 5,076 ---------- ---------- ---------- --------- ---------- Total...................................... $ 97,164 81,592 68,611 60,970 50,509 ========== ========== ========== ========= ==========
- -------------------- (1) During 2001, we reviewed our practice of maintaining unallocated reserves in light of continuing refinement in our loss estimation processes. We concluded the use of unallocated reserves would be discontinued. Consequently, reserves were aligned with their respective portfolios. 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, --------------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (dollars expressed in thousands) Commercial, financial and agricultural: Nonaccrual...................................... $ 19,326 22,437 18,397 15,385 4,017 Restructured terms.............................. -- 22 29 -- -- Real estate construction and development: Nonaccrual...................................... 3,270 11,068 1,886 3,858 4,097 Real estate mortgage: Nonaccrual...................................... 41,898 16,524 16,414 18,858 10,402 Restructured terms.............................. 2,013 2,952 2,979 5,221 5,456 Consumer and installment: Nonaccrual...................................... 794 155 32 216 94 Restructured terms.............................. 7 8 -- -- -- ----------- --------- --------- --------- --------- Total nonperforming loans................ 67,308 53,166 39,737 43,538 24,066 Other real estate.................................. 4,316 2,487 2,129 3,709 7,324 ----------- --------- --------- --------- --------- Total nonperforming assets.............. $ 71,624 55,653 41,866 47,247 31,390 =========== ========= ========= ========= ========= Loans, net of unearned discount.................... $ 5,408,869 4,752,265 3,996,324 3,580,105 3,002,200 =========== ========= ========= ========= ========= Loans past due 90 days or more and still accruing.. $ 15,156 3,009 5,844 4,674 2,725 =========== ========= ========= ========= ========= Ratio of: Allowance for loan losses to loans.............. 1.80% 1.72% 1.72% 1.70% 1.68% Nonperforming loans to loans.................... 1.24 1.12 0.99 1.22 0.80 Allowance for loan losses to nonperforming loans........................... 144.36 153.47 172.66 140.04 209.88 Nonperforming assets to loans and other real estate......................... 1.32 1.17 1.05 1.32 1.04 =========== ========= ========= ========= =========
Nonperforming loans, consisting of loans on nonaccrual status and certain restructured loans, were $67.3 million at December 31, 2001, in comparison to $53.2 million and $39.7 million at December 31, 2000 and 1999, respectively. The increase in nonperforming and past due loans for 2001 reflects cyclical trends experienced within the banking industry as a result of economic slowdown, as well as the asset quality of acquired institutions. Consistent with the economic slowdown experienced within our primary markets, we anticipate this trend will continue in the upcoming months. In addition, our UFG acquisition, completed on December 31, 2001, resulted in the addition of approximately $8.9 million of nonperforming loans and $3.6 million of loans past due 90 days or more. Furthermore, nonperforming loans at December 31, 2000 included a single borrowing relationship of $10.9 million that was removed from nonaccrual status during the third quarter of 2001. The relationship relates to a residential and recreational development project that had significant financial difficulties and experienced inadequate project financing at inception, project delays and weak project management. Financing for this project was recast with a new borrower, and is presently meeting developmental expectations. The increase in nonperforming and past-due loans in 2000 primarily resulted 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. At December 31, 1998, nonperforming assets and problem loans increased to $68.5 million from $59.3 million at December 31, 1997. We associate the increase for 1998 to two commercial loans totaling $6.0 million, net of charge-offs; our acquisitions of Republic Bank and Pacific Bay Bank; and the overall growth of our loan portfolio, principally commercial, financial and agricultural, real estate construction and development and commercial real estate loans. As of December 31, 2001, 2000 and 1999, $123.2 million, $50.2 million and $36.3 million, respectively, of loans not included in the table above were identified by management as having potential credit problems (problem loans). We attribute the increases primarily to our acquisitions and to portfolio growth, as well as the slowdown and uncertainties that have occurred in the economy surrounding the markets in which we operate. As of December 31, 1998 and 1997, problem loans totaled $21.3 million and $27.9 million, respectively. 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 and other various types of consumer MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 performance subsequent to their origination. We include adversely rated credits, including loans requiring close monitoring which would not normally be considered criticized credits by regulators, on our 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 loan losses. In its analysis, management considers the change in the portfolio, including growth, composition and the ratio of net loans to total assets, as well as 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. 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 for the years indicated and the weighted average interest rates on each category of deposits:
Year Ended December 31, ----------------------------------------------------------------------------------- 2001 2000 1999 -------------------------- -------------------------- -------------------------- Percent Percent Percent of of of Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate ------ -------- ---- ------ -------- ---- ------ -------- ---- (dollars expressed in thousands) Noninterest-bearing demand...... $ 754,763 14.83% --% $ 634,886 14.18% --% $ 552,029 13.59% --% Interest-bearing demand......... 507,011 9.97 1.38 421,986 9.43 1.40 391,892 9.65 1.30 Savings......................... 1,548,441 30.43 3.25 1,279,378 28.59 4.04 1,220,425 30.03 3.61 Time deposits .................. 2,278,263 44.77 5.49 2,139,305 47.80 5.62 1,899,218 46.73 5.35 ---------- ------ ==== ---------- ------- ==== ---------- ------ ==== Total average deposits.... $5,088,478 100.00% $4,475,555 100.00% $4,063,564 100.00% ========== ====== ========== ======= ========== ======
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, 2001, 2000 and 1999. We have never paid, and have no present intention to pay, dividends on our common stock. Management believes as of December 31, 2001 and 2000, our subsidiary banks and we were "well capitalized" as defined by the Federal Deposit Insurance Corporation Improvement Act of 1991. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 in October 2000, we formed our second financing subsidiary, First Preferred Capital Trust II, for the purpose of issuing $57.5 million of trust preferred securities. On October 5, 2001, we formed our third financing subsidiary, First Preferred Capital Trust III, for the purpose of issuing $55.2 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. Because of these limitations, as of December 31, 2001, $100.8 million of these preferred securities were not includable in Tier I capital, although this amount was included in total risk-based 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 other sources of funds by issuing certificates of deposit in denominations of $100,000 or more, borrowing federal funds, selling securities 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 sources were $754.8 million and $723.5 million at December 31, 2001 and 2000, respectively. The following table presents the maturity structure of these other sources of funds, which consists of certificates of deposit of $100,000 or more, short-term borrowings and our note payable, at December 31, 2001: (dollars expressed in thousands) Three months or less.............................. $393,255 Over three months through six months.............. 120,073 Over six months through twelve months............. 136,205 Over twelve months................................ 105,302 -------- Total.................................... $754,835 ======== In addition to these sources of funds, our subsidiary banks have established borrowing relationships with the Federal Reserve Banks 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, 2001 and 2000, the borrowing capacity of our subsidiary banks under these agreements was approximately $1.21 billion and $1.24 billion, respectively. In addition, our subsidiary banks' borrowing capacity through their relationships with the Federal Home Loan Banks was approximately $234.6 million and $262.1 million at December 31, 2001 and 2000, 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. Effects of New Accounting Standards 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, 2000. On December 31, 2000, we implemented the disclosure requirements of SFAS 140, which did not have a material effect on our consolidated financial statements. In addition, on April 1, 2001, we implemented the additional requirements of SFAS 140, which did not have a material effect on our consolidated financial statements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) In July 2001, the FASB issued SFAS No. 141 -- Business Combinations, and SFAS No. 142 -- Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121 -- Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The amortization of goodwill ceases upon adoption of SFAS No. 142, which for calendar year-end companies, will be January 1, 2002. On July 1, 2001, we implemented SFAS No. 141, which did not have a material impact on our consolidated financial statements as all of our acquisitions have been accounted for under the purchase method of accounting. As of January 1, 2002, the date we adopted SFAS No. 142, we had unamortized goodwill of $115.9 million and core deposit intangibles of $9.6 million, all of which was subject to the transition provisions of SFAS No. 141 and SFAS No. 142. Amortization of intangibles associated with the purchase of subsidiaries was $8.2 million, $5.3 million and $4.4 million for the years ended December 31, 2001, 2000 and 1999, respectively. Under SFAS No. 142, we will continue to amortize our core deposit intangibles and goodwill associated with purchases of branch offices. We are currently evaluating the ongoing future requirements of SFAS No. 142, particularly the impairment testing provisions, to determine their potential impact on our consolidated financial statements. However, we do not believe these requirements will have a material effect on our consolidated financial statements. In August 2001, the FASB issued SFAS No. 144 -- Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 144 addresses financial accounting and reporting requirements for the impairment or disposal of long-lived assets and requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. SFAS No. 144 broadens the presentation of discontinued operations to include more disposal transactions. Therefore, the accounting for similar events and circumstances will be the same. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. The provisions of SFAS No. 144 generally are to be applied prospectively. We are currently evaluating the requirements of SFAS No. 144 to determine their potential impact on our consolidated financial statements. However, we do not believe these requirements will have a material effect 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
2001 Quarter Ended --------------------------------------------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- (dollars expressed in thousands) Interest income.............................................. $ 116,037 113,356 110,724 104,626 Interest expense............................................. 54,140 50,772 46,461 39,641 --------- -------- ------- -------- Net interest income...................................... 61,897 62,584 64,263 64,985 Provision for loan losses.................................... 3,390 3,720 6,800 9,600 --------- -------- ------- -------- Net interest income after provision for loan losses...... 58,507 58,864 57,463 55,385 Noninterest income........................................... 16,474 19,424 21,846 40,865 Noninterest expense.......................................... 51,618 64,398 54,812 59,433 --------- -------- ------- -------- Income before provision for income taxes, minority interest in income of subsidiary and cumulative effect of change in accounting principle............... 23,363 13,890 24,497 36,817 Provision for income taxes................................... 9,124 5,457 9,539 5,928 --------- -------- ------- -------- Income before minority interest in income of subsidiary and cumulative effect of change in accounting principle......................... 14,239 8,433 14,958 30,889 Minority interest in income of subsidiary.................... 511 534 577 1,007 --------- -------- ------- -------- Income before cumulative effect of change in accounting principle................................... 13,728 7,899 14,381 29,882 Cumulative effect of change in accounting principle, net of tax............................................... (1,376) -- -- -- --------- -------- ------- -------- Net income............................................... $ 12,352 7,899 14,381 29,882 ========= ======== ======= ======== Earnings per common share: Basic: Income before cumulative effect of change in accounting principle................................. $ 571.94 328.27 599.47 1,251.86 Cumulative effect of change in accounting principle.... (58.16) -- -- -- --------- -------- ------- -------- Basic.................................................. $ 571.94 328.27 599.47 1,251.86 ========= ======== ======= ======== Diluted: Income before cumulative effect of change in accounting principle................................. $ 561.09 322.78 587.93 1,225.79 Cumulative effect of change in accounting principle.... (58.16) -- -- -- --------- -------- ------- -------- Diluted................................................ $ 502.93 322.78 587.93 1,225.79 ========= ======== ======= ======== 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 ========= ======== ======= ========
CONSOLIDATED BALANCE SHEETS (dollars expressed in thousands, except share and per share data)
December 31, -------------------- 2001 2000 ---- ---- ASSETS ------ Cash and cash equivalents: Cash and due from banks....................................................... $ 181,522 167,474 Interest-bearing deposits with other financial institutions with maturities of three months or less..................................... 4,664 4,005 Federal funds sold............................................................ 55,688 26,800 ----------- ---------- Total cash and cash equivalents..................................... 241,874 198,279 ----------- ---------- Investment securities: Available for sale, at fair value............................................. 610,466 539,386 Held to maturity, at amortized cost (fair value of $20,812 and $24,507 at December 31, 2001 and 2000, respectively)........................ 20,602 24,148 ----------- ---------- Total investment securities......................................... 631,068 563,534 ----------- ---------- Loans: Commercial, financial and agricultural........................................ 1,681,846 1,496,284 Real estate construction and development...................................... 954,913 809,682 Real estate mortgage.......................................................... 2,445,847 2,202,857 Consumer and installment...................................................... 124,542 181,602 Loans held for sale........................................................... 204,206 69,105 ----------- ---------- Total loans......................................................... 5,411,354 4,759,530 Unearned discount............................................................. (2,485) (7,265) Allowance for loan losses..................................................... (97,164) (81,592) ----------- ---------- Net loans........................................................... 5,311,705 4,670,673 ----------- ---------- Derivative instruments............................................................. 54,889 3,759 Bank premises and equipment, net of accumulated depreciation and amortization...... 149,604 114,771 Intangibles associated with the purchase of subsidiaries, net of amortization...... 125,440 85,021 Bank-owned life insurance.......................................................... 87,200 83,292 Accrued interest receivable........................................................ 37,349 45,226 Deferred income taxes.............................................................. 94,546 77,956 Other assets....................................................................... 44,776 34,180 ----------- ---------- Total assets........................................................ $ 6,778,451 5,876,691 =========== ========== The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED BALANCE SHEETS (CONTINUED) (dollars expressed in thousands, except share and per share data)
December 31, -------------------- 2001 2000 ---- ---- LIABILITIES ----------- Deposits: Demand: Non-interest-bearing........................................................ $ 921,455 808,251 Interest-bearing............................................................ 629,015 448,146 Savings....................................................................... 1,832,939 1,447,898 Time: Time deposits of $100 or more............................................... 484,201 499,956 Other time deposits......................................................... 1,816,294 1,808,164 ----------- ---------- Total deposits........................................................... 5,683,904 5,012,415 Short-term borrowings.............................................................. 243,134 140,569 Note payable....................................................................... 27,500 83,000 Accrued interest payable........................................................... 16,006 23,227 Deferred income taxes.............................................................. 43,856 15,031 Accrued expenses and other liabilities............................................. 61,515 52,687 Minority interest in subsidiary.................................................... 17,998 14,067 ----------- ---------- Total liabilities........................................................ 6,093,913 5,340,996 ----------- ---------- Guaranteed preferred beneficial interests in: First Banks, Inc. subordinated debentures..................................... 191,539 138,569 First Banks America, Inc. subordinated debentures............................. 44,342 44,280 ----------- ---------- Total guaranteed preferred beneficial interests in subordinated debentures.............................................. 235,881 182,849 ----------- ---------- STOCKHOLDERS' EQUITY -------------------- Preferred stock: $1.00 par value, 5,000,000 shares authorized, no shares issued and outstanding at December 31, 2001 and 2000............................... -- -- 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.................................................................... 6,074 2,267 Retained earnings.................................................................. 389,308 325,580 Accumulated other comprehensive income............................................. 34,297 6,021 ----------- ---------- Total stockholders' equity............................................... 448,657 352,846 ----------- ---------- Total liabilities and stockholders' equity............................... $ 6,778,451 5,876,691 =========== ==========
CONSOLIDATED STATEMENTS OF INCOME (dollars expressed in thousands, except per share data)
Years Ended December 31, ----------------------------- 2001 2000 1999 ---- ---- ---- Interest income: Interest and fees on loans.............................................. $ 412,153 390,332 323,207 Investment securities: Taxable............................................................... 26,244 27,331 26,206 Nontaxable............................................................ 888 961 937 Federal funds sold and other............................................ 5,458 4,202 2,732 --------- -------- -------- Total interest income.............................................. 444,743 422,826 353,082 --------- -------- -------- Interest expense: Deposits: Interest-bearing demand............................................... 7,019 5,909 5,098 Savings............................................................... 50,388 51,656 44,101 Time deposits of $100 or more......................................... 28,026 20,654 11,854 Other time deposits................................................... 97,105 99,603 84,639 Interest rate exchange agreements, net.................................. -- -- 5,397 Short-term borrowings................................................... 5,847 5,881 3,983 Note payable............................................................ 2,629 3,976 3,629 --------- -------- -------- Total interest expense............................................. 191,014 187,679 158,701 --------- -------- -------- Net interest income................................................ 253,729 235,147 194,381 Provision for loan losses.................................................... 23,510 14,127 13,073 --------- -------- -------- Net interest income after provision for loan losses................ 230,219 221,020 181,308 --------- -------- -------- Noninterest income: Service charges on deposit accounts and customer service fees........... 22,865 19,794 17,676 Gain on mortgage loans sold and held for sale........................... 14,983 7,806 6,909 Gain on sale of credit card portfolio, net of expenses.................. 1,853 -- -- Net gain on sales of available-for-sale securities...................... 18,722 168 791 Gain on sales of branches, net of expenses.............................. -- 1,355 4,406 Bank-owned life insurance investment income............................. 4,415 4,314 3,919 Gain on derivative instruments, net..................................... 18,583 -- -- Other................................................................... 17,188 9,341 7,949 --------- -------- -------- Total noninterest income........................................... 98,609 42,778 41,650 --------- -------- -------- Noninterest expense: Salaries and employee benefits.......................................... 93,452 73,391 61,524 Occupancy, net of rental income......................................... 17,432 14,675 12,518 Furniture and equipment................................................. 12,612 11,702 8,520 Postage, printing and supplies.......................................... 4,869 4,431 4,244 Information technology fees............................................. 26,981 22,359 18,567 Legal, examination and professional fees................................ 6,988 4,523 9,109 Amortization of intangibles associated with the purchase of subsidiaries.................................................... 8,248 5,297 4,401 Communications.......................................................... 3,247 2,625 2,488 Advertising and business development.................................... 5,237 4,331 3,734 Guaranteed preferred debentures......................................... 18,590 13,173 12,050 Other................................................................... 32,605 14,656 13,652 --------- -------- -------- Total noninterest expense.......................................... 230,261 171,163 150,807 --------- -------- -------- Income before provision for income taxes, minority interest in income of subsidiary and cumulative effect of change in accounting principle........................ 98,567 92,635 72,151 Provision for income taxes................................................... 30,048 34,482 26,313 --------- -------- -------- Income before minority interest in income of subsidiary and cumulative effect of change in accounting principle.................................. 68,519 58,153 45,838 Minority interest in income of subsidiary.................................... 2,629 2,046 1,660 --------- -------- -------- Income before cumulative effect of change in accounting principle.. 65,890 56,107 44,178 Cumulative effect of change in accounting principle, net of tax.............. ( 1,376) -- -- --------- -------- -------- Net income......................................................... 64,514 56,107 44,178 Preferred stock dividends.................................................... 786 786 786 --------- -------- -------- Net income available to common stockholders........................ $ 63,728 55,321 43,392 ========= ======== ======== Basic earnings per common share: Income before cumulative effect of change in accounting principle....... $2,751.54 2,338.04 1,833.91 Cumulative effect of change in accounting principle, net of tax......... (58.16) -- -- --------- -------- -------- Basic................................................................... $2,693.38 2,338.04 1,833.91 ========= ======== ======== Diluted earnings per common share: Income before cumulative effect of change in accounting principle....... $2,684.93 2,267.41 1,775.47 Cumulative effect of change in accounting principle, net of tax......... (58.16) -- -- --------- -------- -------- Diluted................................................................. $2,626.77 2,267.41 1,775.47 ========= ======== ======== 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, 2001 (dollars expressed in thousands, except per share data)
Adjustable Rate Accu- Preferred Stock mulated --------------- 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, 1999........... $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 Year ended December 31, 2001: Comprehensive income: Net income................................. -- -- -- -- 64,514 64,514 -- 64,514 Other comprehensive income, net of tax: Unrealized gains on securities, net of reclassification adjustment (1)........ -- -- -- -- (1,871) -- (1,871) ( 1,871) Derivative instruments: Cumulative effect of change in accounting principle, net............. -- -- -- -- 9,069 9,069 9,069 Current period transactions............ -- -- -- -- 27,021 7,021 27,021 Reclassification to earnings........... -- -- -- -- (5,943) (5,943) (5,943) ------- Comprehensive income....................... 92,790 ======= 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................. -- -- -- 3,807 -- -- 3,807 ------- ---- ----- ------ ------- ------ ------- Consolidated balances, December 31, 2001......... $12,822 241 5,915 6,074 389,308 34,297 448,657 ======= ==== ===== ====== ======= ====== =======
- -------------------------------------- (1) Disclosure of reclassification adjustment:
Years Ended December 31, -------------------------- 2001 2000 1999 ---- ---- ---- Unrealized gains (losses) arising during the year................................... $10,298 3,780 (8,874) Less reclassification adjustment for gains included in net income................... 12,169 109 514 ------- ----- ------ Unrealized (losses) gains on investment securities.................................. $(1,871) 3,671 (9,388) ======= ===== ====== 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, -------------------------------- 2001 2000 1999 ---- ---- ---- Cash flows from operating activities: Net income............................................................... $ 64,514 56,107 44,178 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Cumulative effect of change in accounting principle, net of tax..... 1,376 -- -- Depreciation and amortization of bank premises and equipment........ 12,713 9,536 7,609 Amortization, net of accretion...................................... 11,203 8,370 12,632 Originations and purchases of loans held for sale................... (1,524,156) (532,178) (452,941) Proceeds from sales of loans held for sale.......................... 1,348,772 413,247 507,077 Provision for loan losses........................................... 23,510 14,127 13,073 Provision for income taxes.......................................... 30,048 34,482 26,313 Payments of income taxes............................................ (19,297) (10,525) (23,904) Decrease (increase) in accrued interest receivable.................. 11,513 (7,338) (3,164) Interest accrued on liabilities..................................... 191,014 187,679 158,701 Payments of interest on liabilities................................. (199,739) (177,764) (154,056) Gain on mortgage loans sold and held for sale....................... (14,983) (7,806) (6,909) Gain on sale of credit card portfolio, net of expenses.............. (1,853) -- -- Net gain on sales of available-for-sale securities.................. (18,722) (168) (791) Gain on sales of branches, net of expenses.......................... -- (1,355) (4,406) Gain on derivative instruments, net................................. (18,583) -- -- Other operating activities, net..................................... 4,690 (3,978) 8,330 Minority interest in income of subsidiary........................... 2,629 2,046 1,660 ---------- -------- --------- Net cash (used in) provided by operating activities............ (95,351) (15,518) 133,402 ---------- -------- --------- Cash flows from investing activities: Cash received (paid) for acquired entities, net of cash and cash equivalents received (paid).............................. 6,351 (86,106) (15,961) Proceeds from sales of investment securities............................. 85,824 46,279 63,938 Maturities of investment securities available for sale................... 762,548 347,642 350,940 Maturities of investment securities held to maturity..................... 4,292 1,169 2,708 Purchases of investment securities available for sale.................... (822,593) (289,875) (288,023) Purchases of investment securities held to maturity...................... (750) (3,806) (2,627) Proceeds from terminations of derivative instruments..................... 22,203 -- -- Net increase in loans.................................................... (6,252) (339,575) (268,238) Recoveries of loans previously charged-off............................... 9,469 9,842 9,281 Purchases of bank premises and equipment................................. (36,452) (30,856) (17,099) Other investing activities............................................... (331) 5,052 (10) ---------- -------- --------- Net cash provided by (used in) investing activities............ 24,309 (340,234) (165,091) ---------- -------- --------- Cash flows from financing activities: Increase (decrease) in demand and savings deposits....................... 299,466 155,058 (72,895) (Decrease) increase in time deposits..................................... (254,748) 129,008 144,499 Repayments of Federal Home Loan Bank advances............................ (5,000) -- (50,000) Increase (decrease) in federal funds purchased........................... 70,000 (27,100) -- Increase in securities sold under agreements to repurchase............... 8,438 52,015 2,223 Advances drawn on note payable........................................... 69,500 137,000 32,000 Repayments of note payable............................................... (125,000) (118,000) (18,048) Proceeds from issuance of guaranteed preferred subordinated debentures... 55,200 55,050 -- Sale of branch deposits.................................................. -- 892 (49,172) Payment of preferred stock dividends..................................... (786) (786) (786) Other financing activities, net.......................................... (2,433) -- -- ---------- -------- --------- Net cash provided by (used in) financing activities............ 114,637 383,137 (12,179) ---------- -------- --------- Net increase (decrease) in cash and cash equivalents........... 43,595 27,385 (43,868) Cash and cash equivalents, beginning of year.................................. 198,279 170,894 214,762 ---------- -------- --------- Cash and cash equivalents, end of year........................................ $ 241,874 198,279 170,894 ========== ======== ========= Noncash investing and financing activities: Reduction of deferred tax asset valuation reserve........................ $ 4,971 1,267 -- Loans transferred to other real estate................................... 3,493 1,761 4,039 Loans exchanged for and transferred to available-for-sale investment securities.................................................. -- 37,634 -- Loans held for sale exchanged for and transferred to available-for-sale investment securities............................ -- 19,805 3,985 Loans held for sale transferred to loans................................. 38,343 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 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 2000 and 1999 amounts have been made to conform with the 2001 presentation. First Banks operates through its subsidiary bank holding companies and subsidiary financial institutions (collectively referred to as the Subsidiary Banks) as follows: Union Financial Group, Ltd., headquartered in Swansea, Illinois (UFG) and its wholly owned subsidiary: 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 San Francisco, California (FBA) and its wholly owned subsidiaries: The San Francisco Company, headquartered in San Francisco, California (SFC), and its wholly owned subsidiary: First Bank & Trust, headquartered in San Francisco, California (FB&T). 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%. On October 31, 2001, FBA issued 803,757 shares of its common stock to First Banks in conjunction with FBA's acquisition of BYL Bancorp. First Banks owned 93.69% of FBA at December 31, 2001. 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 $24.2 million and $22.3 million at December 31, 2001 and 2000, respectively. Investment Securities. The classification of investment securities available for sale or held to maturity is determined at the date of purchase. First Banks does not engage 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 to interest income 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. 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. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies may require First Banks to increase its allowance for loan losses based on their judgment about information available to them at the time of their examination. Derivative Instruments and Hedging Activities. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133 -- Accounting for Derivative Instruments and Hedging Activities (SFAS 133). In June 1999 and June 2000, 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, and SFAS No. 138 - Accounting for Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133, respectively. SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS 133, as amended, requires an entity to 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, as amended, 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. On January 1, 2001, First Banks implemented SFAS 133, as amended. The implementation of SFAS 133, as amended, resulted in an increase in derivative instruments of $12.5 million, an increase in deferred tax liabilities of $5.1 million and an increase in other comprehensive income of $9.1 million. In addition, First Banks recorded a cumulative effect of change in accounting principle of $1.4 million, net of taxes of $741,000, as a reduction of net income. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) First Banks utilizes derivative instruments and hedging activities to assist in the management of interest rate sensitivity and to modify the repricing, maturity and option characteristics of certain assets and liabilities. First Banks uses such derivative instruments solely to reduce its interest rate risk exposure. First Banks' accounting policies for derivative instruments and hedging activities under SFAS 133, as amended, are as follows: >> Interest Rate Swap Agreements - Cash Flow Hedges. Interest rate swap agreements designated as cash flow hedges are accounted for at fair value. The effective portion of the change in the cash flow hedge's gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into noninterest income when the underlying transaction affects earnings. The ineffective portion of the change in the cash flow hedge's gain or loss is recorded in noninterest income on each monthly measurement date. The net interest differential is recognized as an adjustment to interest income or interest expense of the related asset or liability being hedged. In the event of early termination, the net proceeds received or paid on the interest rate swap agreements are recognized immediately in noninterest income. >> Interest Rate Swap Agreements - Fair Value Hedges. Interest rate swap agreements designated as fair value hedges are accounted for at fair value. Changes in the fair value of the swap agreements are recognized currently in noninterest income. The change in the fair value of the underlying hedged item attributable to the hedged risk adjusts the carrying amount of the underlying hedged item and is also recognized currently in noninterest income. All changes in fair value are measured on a monthly basis. The net interest differential is recognized as an adjustment to interest income or interest expense of the related asset or liability. In the event of early termination, the net proceeds received or paid are recognized immediately in noninterest income. The cumulative change in the fair value of the underlying hedged item is deferred and amortized or accreted to noninterest income over the weighted average life of the related asset or liability. If, however, the underlying hedged item is repaid, the cumulative change in the fair value of the underlying hedged item is recognized immediately in noninterest income. >> Interest Rate Cap and Floor Agreements. Interest rate cap and floor agreements are accounted for at fair value. Changes in the fair value of interest rate cap and floor agreements are recognized in noninterest income on each monthly measurement date. >> Interest Rate Lock Commitments. Commitments to originate loans (interest rate lock commitments), which primarily consist of commitments to originate fixed rate residential mortgage loans, are recorded at fair value. Changes in the fair value are recognized in noninterest income on a monthly basis. >> Forward Contracts to Sell Mortgage-Backed Securities. Forward commitments to sell mortgage-backed securities are recorded at fair value. Changes in the fair value of forward contracts to sell mortgage-backed securities are recognized in noninterest income on a monthly basis. Prior to the implementation of SFAS 133, interest rate swap, floor and cap agreements were 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 were amortized over the life of the agreements using the straight-line method. In the event of early termination of the derivative financial instruments, the net proceeds received or paid were 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 asset or liability was repaid, then the gains or losses on the agreements were recognized immediately in the consolidated statements of income. The unamortized premiums and fees paid are included in derivative instruments in the accompanying consolidated balance sheets. In addition, interest rate lock commitments represented off-balance-sheet items and, therefore, were not reflected in the consolidated balance sheets. Gains and losses on forward contracts to sell mortgage-backed securities, which qualified as hedged, were deferred. The net unamortized balance of such deferred gains and losses was 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) 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 include excess of cost over net assets acquired and core deposit intangibles. 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 10 to 15 years. The core deposit intangibles are amortized using the straight-line method over the estimated periods to be benefited, which has been estimated at seven 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. 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 taxes. 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. Earnings Per Common Share. Basic earnings per share (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, 2001, First Banks completed the following acquisitions:
Total Purchase Excess Entity Date Assets Price Cost ------ ---- ------ ----- ---- (dollars expressed in thousands) 2001 ---- Union Financial Group, Ltd. Swansea, Illinois December 31, 2001 $ 360,000 26,700 11,500 BYL Bancorp Orange, California October 31, 2001 281,500 49,000 19,000 Charter Pacific Bank Agoura Hills, California October 16, 2001 101,500 18,900 6,300 --------- -------- -------- $ 743,000 94,600 36,800 ========= ======== ======== 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 ========= ======== ========
In addition to the acquisitions included in the table above, in September 1999, First Banks also completed one branch office purchase in Malibu, California. Furthermore, on January 15, 2002, First Banks completed its acquisition of Plains Financial Corporation, or PFC, and its wholly owned banking subsidiary, PlainsBank of Illinois, National Association, Des Plaines, Illinois, in exchange for $36.5 million in cash. PFC operated a total of three banking facilities in Des Plaines, Illinois, and one banking facility in Elk Grove Village, Illinois. At the time of the transaction, PFC had $256.3 million in total assets, $150.4 million in loans, net of unearned discount, $81.0 million in investment securities and $213.4 million in deposits. 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. 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) (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, 2001 and 2000 were as follows:
Maturity --------------------------------------- Total Gross After Amor- Unrealized Weighted 1 Year 1-5 5-10 10 tized -------------- Fair Average or Less Years Years Years Cost Gains Losses Value Yield ------- ----- ----- ----- ---- ----- ------ ----- ----- (dollars expressed in thousands) December 31, 2001: Carrying value: U.S. Treasury.................. $136,326 -- -- -- 136,326 3 (39) 136,290 1.76% U.S. Government agencies and corporations: Mortgage-backed......... 88 21,650 18,224 262,846 302,808 2,422 -- 305,230 6.00 Other................... 22,284 99,353 6,612 974 129,223 2,235 (16) 131,442 4.58 State and political subdivisions............... 317 1,191 46 -- 1,554 -- -- 1,554 3.92 Corporate debt securities...... -- 1,985 -- -- 1,985 107 -- 2,092 6.76 Equity investments in other financial institutions (no stated maturity)........ 15,916 -- -- -- 15,916 2,171 (272) 17,815 8.55 Federal Home Loan Bank and Federal Reserve Bank stock (no stated maturity)........ 16,043 -- -- -- 16,043 -- -- 16,043 6.49 -------- ------- ------ ------- ------- ------ ------ ------- Total................... $190,974 124,179 24,882 263,820 603,855 6,938 (327) 610,466 4.75 ======== ======= ====== ======= ======= ====== ====== ======= ==== Fair value: Debt securities................ $159,303 126,673 25,378 265,254 Equity securities.............. 33,858 -- -- -- -------- ------- ------ ------- Total................... $193,161 126,673 25,378 265,254 ======== ======= ====== ======= Weighted average yield............ 3.25% 4.67% 5.76% 5.92% ======== ======= ====== ======= 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 (no stated maturity)........ 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% ======== ======= ====== =======
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, 2001 and 2000 were as follows:
Matuity ---------------------------------------- Total Gross After Amor- Unrealized Weighted 1 Year 1-5 5-10 10 tized -------------- Fair Average or Less Years Years Years Cost Gains Losses Value Yield ------- ----- ----- ----- ---- ----- ------ ----- ----- (dollars expressed in thousands) December 31, 2001: Carrying value: Mortgage-backed securities..... $ -- -- -- 4,051 4,051 67 (10) 4,108 6.83% State and political subdivisions................. 1,943 8,802 5,806 -- 16,551 300 (147) 16,704 4.93 -------- ------- ------ ------- ------ ----- ------ ------ Total................. $ 1,943 8,802 5,806 4,051 20,602 367 (157) 20,812 5.25 ======== ======= ====== ======= ====== ===== ====== ====== ==== Fair value: Debt securities................ $ 1,930 9,071 5,703 4,108 ======== ======= ====== ======= Weighted average yield............ 4.58% 4.98% 4.98% 6.83% ======== ======= ====== ======= December 31, 2000: Carrying value: Mortgage-backed securities..... $ -- -- -- 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% ======== ======= ====== =======
Proceeds from sales of available-for-sale investment securities were $85.8 million, $46.3 million and $63.9 million for the years ended December 31, 2001, 2000 and 1999, respectively. Gross gains of $19.1 million, $565,000 and $791,000 were realized on these sales during the years ended December 31, 2001, 2000 and 1999, respectively. Gross losses of $384,000 and $396,000 were realized on these sales during the years ended December 31, 2001 and 2000, respectively. There were no losses realized on these sales in 1999. Proceeds from calls of investment securities were $121.8 million, $111,000 and $20,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Gross gains of $6,800 and $300 were realized on these called securities during the years ended December 31, 2001 and 2000, respectively. There were no gross gains on called securities in 1999. Gross losses of $1,400, $1,800 and $1,200 were realized on these called securities during the years ended December 31, 2001, 2000 and 1999, respectively. 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 and FB&T 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 is a member of the FRB system. Investment securities with a carrying value of approximately $300.0 million and $180.5 million at December 31, 2001 and 2000, 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:
2001 2000 1999 ---- ---- ---- (dollars expressed in thousands) Balance, beginning of year..................................... $ 81,592 68,611 60,970 Acquired allowances for loan losses............................ 14,046 6,062 3,008 -------- -------- --------- 95,638 74,673 63,978 -------- -------- --------- Loans charged-off.............................................. (31,453) (17,050) (17,721) Recoveries of loans previously charged-off..................... 9,469 9,842 9,281 -------- -------- --------- Net loans charged-off....................................... (21,984) (7,208) (8,440) -------- -------- --------- Provision charged to operations................................ 23,510 14,127 13,073 -------- -------- --------- Balance, end of year........................................... $ 97,164 81,592 68,611 ======== ======== =========
At December 31, 2001 and 2000, First Banks had $67.3 million and $53.2 million of impaired loans, including $65.3 million and $50.2 million, respectively, of loans on nonaccrual status. At December 31, 2001 and 2000, impaired loans also include $2.0 million and $3.0 million, respectively, of restructured loans. Interest on nonaccrual loans, which would have been recorded under the original terms of the loans, was $8.2 million, $5.8 million and $5.8 million for the years ended December 31, 2001, 2000 and 1999, respectively. Of these amounts, $2.9 million, $1.9 million and $2.7 million was actually recorded as interest income on such loans in 2001, 2000 and 1999, respectively. 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 $16.5 million and $10.3 million at December 31, 2001 and 2000, respectively. The average recorded investment in impaired loans was $62.4 million, $45.1 million and $46.0 million for the years ended December 31, 2001, 2000 and 1999, respectively. The amount of interest income recognized using a cash basis method of accounting during the time these loans were impaired was $5.8 million, $2.2 million and $2.8 million in 2001, 2000 and 1999, respectively. First Banks' primary market areas are the states of Missouri, Illinois, Texas and California. At December 31, 2001 and 2000, approximately 92% and 91% of the total loan portfolio, respectively, and 80% and 83% of the commercial, financial and agricultural loan portfolio, respectively, were made to borrowers within these states. Real estate lending constituted the only significant concentration of credit risk. Real estate loans comprised approximately 67% and 65% of the loan portfolio at December 31, 2001 and 2000, of which 28% and 26%, respectively, were made to consumers 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, 2001 and 2000, 96% of the loan portfolio was secured. Collateral is required in accordance with the normal credit evaluation process based upon the creditworthiness of the customer and the credit risk associated with the particular transaction. (5) DERIVATIVE INSTRUMENTS First Banks utilizes derivative financial instruments to assist in the management of interest rate sensitivity by modifying the repricing, maturity and option characteristics of certain assets and liabilities. The use of such derivative financial instruments is limited to reducing First Banks' interest rate exposure. Derivative financial instruments held by First Banks for purposes of managing interest rate risk are summarized as follows:
December 31, ------------------------------------------------ 2001 2000 ---------------------- ---------------------- Notional Credit Notional Credit Amount Exposure Amount Exposure (dollars expressed in thousands) Cash flow hedges.............................. $900,000 1,764 1,055,000 3,449 Fair value hedges............................. 200,000 6,962 50,000 758 Interest rate floor agreements................ -- -- 35,000 6 Interest rate cap agreements.................. 450,000 2,063 450,000 3,753 Interest rate lock commitments................ 88,000 -- 4,100 -- Forward commitments to sell mortgage-backed securities............... 209,000 -- 32,000 -- ======== ===== ========= ======
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 First Banks' credit exposure through its use of these instruments. The credit exposure represents the accounting loss First Banks 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. During 2001 and 1999, First Banks realized net interest income on derivative financial instruments of $23.4 million and $430,000, respectively, in comparison to net interest expense of $4.7 million in 2000. In addition, First Banks realized a net gain on derivative instruments, which is included in noninterest income in the consolidated statements of income, of $18.6 million for the year ended December 31, 2001. Cash Flow Hedges 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 prior to 1998. The net interest expense associated with these agreements, consisting primarily of amortization of deferred losses, was $5.7 million for the year ended December 31, 1999. There were no remaining unamortized deferred losses on the terminated swap agreements at December 31, 1999. First Banks entered into the following interest rate swap agreements, designated as cash flow hedges, 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: >> During 1998, First Banks entered into $280.0 million notional amount of interest rate swap agreements that provided for First Banks to receive a fixed rate of interest and pay an adjustable rate of interest equivalent to the daily weighted average prime lending rate minus 2.705%. The terms of the swap agreements provided for First Banks to pay quarterly and receive payment semiannually. In June 2001 and November 2001, First Banks terminated $205.0 million and $75.0 million notional amount, respectively, of these swap agreements, which would have expired in 2002, in order to appropriately modify its overall hedge position in accordance with its interest rate risk management program. In conjunction with these terminations, First Banks recorded pre-tax gains of $2.8 million and $1.7 million, respectively. >> During September 1999, First Banks entered into $175.0 million notional amount of interest rate swap agreements that provided 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 provided for First Banks to pay and receive interest on a quarterly basis. In April 2001, First Banks terminated these swap agreements, which would have expired in September 2001, and replaced them with similar swap agreements with extended maturities in order to lengthen the period covered by the swaps. In conjunction with the termination of these swap agreements, First Banks recorded a pre-tax gain of $985,000. >> During September 2000, March 2001 and April 2001, First Banks entered into $600.0 million, $200.0 million, and $175.0 million notional amount, respectively, of interest rate swap agreements that 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 either 2.70% or 2.82%. The terms of the swap agreements provide for First Banks to pay and receive interest on a quarterly basis. In November 2001, First Banks terminated $75.0 million notional amount of these swap agreements, which would have expired in April 2006, in order to appropriately modify its overall hedge position in accordance with its interest rate risk management program. First Banks recorded a pre-tax gain of $2.6 million in conjunction with the termination of these swap agreements. The amount receivable by First Banks under the remaining swap agreements was $2.9 million at December 31, 2001, and the amount payable by First Banks under the swap agreements was $1.1 million at December 31, 2001. The amount receivable and payable by First Banks under the swap agreements was $1.2 million at December 31, 2000. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The maturity dates, notional amounts, interest rates paid and received and fair value of First Banks' interest rate swap agreements designated as cash flow hedges as of December 31, 2001 and 2000 were as follows:
Notional Interest Rate Interest Rate Fair Maturity Date Amount Paid Received Value ------------- -------------- ----------- ------------- ---------- (dollars expressed in thousands) December 31, 2001: September 20, 2004....................... $ 600,000 2.05% 6.78% $ 40,980 March 21, 2005........................... 200,000 1.93 5.24 4,951 April 2, 2006............................ 100,000 1.93 5.45 2,305 ---------- -------- $ 900,000 2.01 6.29 $ 48,236 ========== ==== ==== ======== December 31, 2000: September 27, 2001....................... $ 175,000 6.80% 6.14% $ 65 June 11, 2002............................ 15,000 6.80 6.00 7 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 ---------- -------- $1,055,000 6.80 5.92 $ 14,475 ========== ==== ==== ========
Fair Value Hedges First Banks entered into the following interest rate swap agreements, designated as fair value hedges, to effectively shorten the repricing characteristics of certain interest-bearing liabilities to correspond more closely with their funding source with the objective of stabilizing net interest income over time: >> During September 2000, First Banks entered into $25.0 million notional amount of one-year interest rate swap agreements and $25.0 million notional amount of five and one-half year interest rate swap agreements that provided for First Banks to receive fixed rates of interest ranging from 6.60% 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 provided for First Banks to pay interest on a quarterly basis and receive interest on either a semiannual basis or an annual basis. In September 2001, the one-year interest rate swap agreements matured, and First Banks terminated the five and one-half year interest rate swap agreements because the underlying interest-bearing liabilities had either matured or been called by their respective counterparties. There was no gain or loss recorded as a result of the terminations. >> During January 2001, First Banks entered into $50.0 million notional amount of three-year interest rate swap agreements and $150.0 million notional amount of five-year interest rate swap agreements that provide for First Banks to receive a fixed rate of interest and pay an adjustable rate of interest equivalent to the three-month London Interbank Offering Rate. 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 $5.2 million and $1.2 million at December 31, 2001, respectively. The maturity dates, notional amounts, interest rates paid and received and fair value of First Banks' interest rate swap agreements designated as fair value hedges as of December 31, 2001 and 2000 were as follows:
Notional Interest Rate Interest Rate Fair Maturity Date Amount Paid Received Value ------------- ----------- ----------- ------------- ---------- (dollars expressed in thousands) December 31, 2001: January 9, 2004.......................... $ 50,000 2.48% 5.37% $ 1,761 January 9, 2006.......................... 150,000 2.48 5.50 3,876 -------- ------- $200,000 2.48 5.47 $ 5,637 ======== ==== ==== ======= December 31, 2000: September 13, 2001....................... $ 12,500 6.56% 6.80% $ 42 September 21, 2001....................... 12,500 6.47 6.60 43 March 13, 2006........................... 12,500 6.47 7.25 5 March 22, 2006........................... 12,500 6.39 7.20 6 -------- ------- $ 50,000 6.47 6.96 $ 96 ======== ==== ==== =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Interest Rate Floor Agreements During January 2001 and March 2001, First Banks entered into $200.0 million and $75.0 million notional amount, respectively, of four-year interest rate floor agreements to further stabilize net interest income in the event of a falling rate scenario. The interest rate floor agreements provided for First Banks to receive a quarterly adjustable rate of interest equivalent to the differential between the three-month London Interbank Offering Rate and the strike prices of 5.50% or 5.00%, respectively, should the three-month London Interbank Offering Rate fall below the respective strike prices. In November 2001, First Banks terminated these interest rate floor agreements in order to appropriately modify its overall hedge position in accordance with its interest rate risk management program. In conjunction with the termination, First Banks recorded a pre-tax adjustment of $4.0 million representing a decline in the fair value from the previous month-end measurement date. These agreements provided net interest income of $2.1 million for the year ended December 31, 2001. Interest Rate Cap Agreements In conjunction with the interest rate swap agreements entered into in September 2000, First Banks also entered into $450.0 million notional amount of four-year interest rate cap agreements to limit the net interest expense associated with the interest rate swap agreements in the event of a rising rate scenario. The interest rate cap agreements provide for First Banks to receive a quarterly adjustable rate of interest equivalent to the differential between the three-month London Interbank Offering Rate and the strike price of 7.50% should the three-month London Interbank Offering Rate exceed the strike price. At December 31, 2001 and 2000, the carrying value of these interest rate cap agreements, which is included in derivative instruments in the consolidated balance sheets, was $2.1 million and $3.8 million, respectively. Pledged Collateral At December 31, 2001 and 2000, First Banks had pledged investment securities available for sale with a carrying value of $1.1 and $8.6 million, respectively, in connection with the interest rate swap agreements. In addition, at December 31, 2001 and 2000, First Banks had accepted, as collateral in connection with the interest rate swap agreements, cash of $4.9 million and $400,000, respectively, and investment securities with a fair value of $53.9 million and $18.6 million, respectively. First Banks is permitted by contract to sell or repledge the collateral accepted from counterparties; however, at December 31, 2001 and 2000, First Banks had not done so. Interest Rate Lock Commitments / Forward Commitments to Sell Mortgage- Backed Securities Derivative financial instruments issued by First Banks consist of interest rate lock commitments to originate fixed-rate loans. Commitments to originate fixed-rate loans consist primarily of residential real estate loans. These net loan commitments and loans held for sale are hedged with forward contracts to sell mortgage-backed securities. (6) MORTGAGE BANKING ACTIVITIES At December 31, 2001 and 2000, First Banks serviced loans for others amounting to $1.07 billion and $957.2 million, respectively. Borrowers' escrow balances held by First Banks on such loans were $485,000 and $653,000 at December 31, 2001 and 2000, respectively. Changes in mortgage servicing rights, net of amortization, for the years ended December 31 were as follows:
2001 2000 ---- ---- (dollars expressed in thousands) Balance, beginning of year........................................... $ 7,048 8,665 Originated mortgage servicing rights................................. 6,802 1,455 Amortization......................................................... (3,725) (3,072) --------- -------- Balance, end of year................................................. $ 10,125 7,048 ========= ========
The fair value of mortgage servicing rights was $15.8 million and $13.0 million at December 31, 2001 and 2000, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (7) BANK PREMISES AND EQUIPMENT Bank premises and equipment were comprised of the following at December 31:
2001 2000 ---- ---- (dollars expressed in thousands) Land................................................................. $ 22,063 18,266 Buildings and improvements........................................... 87,372 66,474 Furniture, fixtures and equipment.................................... 95,626 66,460 Leasehold improvements............................................... 28,400 23,794 Construction in progress............................................. 13,865 15,655 --------- --------- Total............................................................ 247,326 190,649 Less accumulated depreciation and amortization....................... 97,722 75,878 --------- --------- Bank premises and equipment, net................................. $ 149,604 114,771 ========= =========
Depreciation and amortization expense for the years ended December 31, 2001, 2000 and 1999 totaled $12.7 million, $9.5 million and $7.6 million, respectively. First Banks leases land, office properties and equipment under operating leases. Certain of the leases contain renewal options and escalation clauses. Total rent expense was $12.9 million, $10.7 million and $7.4 million for the years ended December 31, 2001, 2000 and 1999, respectively. Future minimum lease payments under noncancellable operating leases extend through 2084 as follows:
(dollars expressed in thousands) Year ending December 31: 2002................................................................... $ 8,681 2003................................................................... 7,760 2004................................................................... 5,880 2005................................................................... 5,058 2006................................................................... 4,137 Thereafter............................................................. 22,385 -------- Total future minimum lease payments................................ $ 53,901 ========
First Banks leases to unrelated parties a portion of its banking facilities. Total rental income was $4.8 million, $2.6 million and $2.6 million for the years ended December 31, 2001, 2000 and 1999, respectively. (8) SHORT-TERM BORROWINGS Short-term borrowings were comprised of the following at December 31:
2001 2000 ---- ---- (dollars expressed in thousands) Securities sold under agreements to repurchase....................... $ 142,534 125,025 Federal funds purchased.............................................. 70,000 -- FHLB borrowings...................................................... 30,600 15,544 --------- -------- Total short-term borrowings...................................... $ 243,134 140,569 ========= ========
The average balance of short-term borrowings was $158.0 million and $106.1 million, respectively, and the maximum month-end balance of short-term borrowings was $243.1 million and $158.4 million, respectively, for the years ended December 31, 2001 and 2000. The average rates paid on short-term borrowings during the years ended December 31, 2001, 2000 and 1999 were 3.70%, 5.54% and 4.83%, respectively. The assets underlying the securities sold under agreements to repurchase and FHLB borrowings are under First Banks' physical control. (9) 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 23, 2001, replaced a similar revolving credit agreement dated August 24, 2000. 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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Eurodollar Rate plus a margin based upon the outstanding loans and First Banks' profitability. The interest rate for borrowings under the Credit Agreement was 2.94% at December 31, 2001, 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, 2002, at which time the principal and accrued interest is due and payable. Loans under the Credit Agreement are secured by First Banks' ownership interest in the capital stock of FBA and First Bank, and a $100.0 million intercompany promissory note receivable due from FBA. Under the Credit Agreement, there were outstanding borrowings of $27.5 million at December 31, 2001. At December 31, 2000, there were outstanding borrowings of $83.0 million under the previous credit agreement. The Credit Agreement requires maintenance of certain minimum capital ratios for First Banks and each of the Subsidiary Banks, certain maximum nonperforming assets ratios for First Banks and each of the Subsidiary Banks and a minimum return on assets ratio for First Banks and the Subsidiary Banks. In addition, it prohibits the payment of dividends on First Banks' common stock. At December 31, 2001 and 2000, 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 of advances outstanding under the Credit Agreement during the years ended December 31 were as follows:
2001 2000 ---- ---- (dollars expressed in thousands) Average balance........................................................... $ 41,590 51,897 Maximum month-end balance................................................. 66,500 83,000 ======== ======
The average rates paid on the outstanding advances during the years ended December 31, 2001, 2000 and 1999 were 6.32%, 7.66% and 6.44%, respectively. (10) 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, 2001, 2000 and 1999. 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 $4.0 million for years ended December 31, 2001, 2000 and 1999, respectively. In October 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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 $6.0 million and $1.2 million for the years ended December 31, 2001 and 2000, respectively. On November 15, 2001, First Preferred Capital Trust III (First Preferred III), a newly formed Delaware business trust subsidiary of First Banks, issued 2.2 million shares of 9.00% cumulative trust preferred securities at $25 per share in an underwritten public offering, and issued 68,290 shares of common securities to First Banks at $25 per share. First Banks owns all of First Preferred III's common securities. The gross proceeds of the offering were used by First Preferred III to purchase $56.9 million of 9.00% subordinated debentures from First Banks, maturing on September 30, 2031. The maturity date may be shortened to a date not earlier than September 30, 2006, if certain conditions are met. The subordinated debentures are the sole asset of First Preferred III. 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 III under the First Preferred III preferred securities. First Banks' proceeds from the issuance of the subordinated debentures to First Preferred III, net of underwriting fees and offering expenses, were $52.9 million. Distributions on First Preferred III's preferred securities, which are payable quarterly in arrears, were $634,000 for the year ended December 31, 2001. The distributions payable on all issues of First Banks' and FBA's trust preferred securities are included in noninterest expense in the consolidated statements of income. (11) INCOME TAXES Income tax expense attributable to income from continuing operations for the years ended December 31 consists of:
2001 2000 1999 ---- ---- ---- (dollars expressed in thousands) Current income tax expense: Federal.................................................... $22,252 28,215 19,731 State...................................................... 1,583 2,731 2,247 ------- ------ ------ 23,835 30,946 21,978 ------- ------ ------ Deferred income tax expense: Federal.................................................... 13,691 4,001 5,056 State...................................................... 626 (60) 14 ------- ------ ------ 14,317 3,941 5,070 ------- ------ ------ Reduction in deferred valuation allowance...................... (8,104) (405) (735) ------- ------ ------ Total.................................................. $30,048 34,482 26,313 ======= ====== ======
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, -------------------------------------------------------- 2001 2000 1999 ---------------- ---------------- ----------------- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- (dollars expressed in thousands) Income before provision for income taxes, minority interest in income of subsidiary and cumulative effect of change in accounting principle............... $98,567 $92,635 $ 72,151 ======= ======= ======== Provision for income taxes calculated at federal statutory income tax rates........ $34,498 35.0% $32,422 35.0% $ 25,253 35.0% Effects of differences in tax reporting: Tax-exempt interest income, net of tax preference adjustment................ (539) (0.5) (587) (0.6) (439) (0.6) State income taxes........................... 1,436 1.5 1,736 1.8 1,470 2.0 Amortization of intangibles associated with the purchase of subsidiaries........ 2,827 2.9 1,567 1.7 1,261 1.8 Reduction in deferred valuation allowance.... (8,104) (8.2) (405) (0.4) (735) (1.0) Other, net................................... (70) (0.2) (251) (0.3) (497) (0.7) ------- ----- ------- ------ -------- ------ Provision for income taxes............. $30,048 30.5% $34,482 37.2% $ 26,313 36.5% ======= ===== ======= ====== ======== ======
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, ------------ 2001 2000 ---- ---- (dollars expressed in thousands) Deferred tax assets: Net operating loss carryforwards................................ $ 44,100 47,043 Allowance for loan losses....................................... 36,000 29,965 Alternative minimum tax credits................................. 2,841 3,319 Disallowed losses on investment securities...................... 1,287 3,197 Quasi-reorganization adjustment of bank premises................ 1,176 1,226 Interest on non-accrual loans................................... 2,084 1,673 Mortgage servicing rights....................................... 4,161 1,547 Other real estate............................................... 184 65 Other........................................................... 2,713 2,996 -------- -------- Gross deferred tax assets................................... 94,546 91,031 Valuation allowance............................................. -- (13,075) -------- -------- Deferred tax assets, net of valuation allowance............. 94,546 77,956 -------- -------- Deferred tax liabilities: Depreciation on bank premises and equipment..................... 6,936 6,151 Net fair value adjustment for securities available for sale..... 2,314 3,258 Net fair value adjustment for derivative instruments............ 16,883 -- Operating leases................................................ 6,424 1,313 Deposit base premiums........................................... 2,777 -- Discount on loans............................................... 2,900 2,257 Equity investments in other financial institutions.............. 3,656 -- FHLB stock dividends............................................ 462 890 State taxes..................................................... 766 568 Other........................................................... 738 594 -------- -------- Deferred tax liabilities.................................... 43,856 15,031 -------- -------- Net deferred tax assets..................................... $ 50,690 62,925 ======== ========
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 $50.7 million. The net change in the valuation allowance, related to deferred tax assets, was a decrease of $13.1 million for the year ended December 31, 2001. The decrease was comprised of the reversal of valuation allowances resulting from the utilization of net operating losses and the reversal of the valuation allowances due to management's expectation of future taxable income sufficient to realize the net deferred assets of $50.7 million. Changes to the deferred tax asset valuation allowance for the years ended December 31 were as follows:
2001 2000 1999 ---- ---- ---- (dollars expressed in thousands) Balance, beginning of year......................................... $ 13,075 14,746 17,179 Current year deferred provision, change in deferred tax valuation allowance............................... (8,104) (405) (735) Reduction attributable to utilization of deferred tax assets: Adjustment to capital surplus................................... (4,971) -- (811) Adjustment to intangibles associated with the purchase of subsidiaries..................................... -- (1,266) (887) -------- ------- ------- Balance, end of year............................................... $ -- 13,075 14,746 ======== ======= =======
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 included $5.0 million which was credited to capital surplus in 2001 under the terms of the quasi-reorganizations implemented for FBA and First Commercial Bancorp, Inc. as of December 31, 1994 and 1996, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At December 31, 2001 and 2000, 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. At December 31, 2001 and 2000, for federal income taxes purposes, First Banks had net operating loss carryforwards of approximately $126.0 million and $134.4 million, respectively. The net operating loss carryforwards for First Banks expire as follows: (dollars expressed in thousands) Year ending December 31: 2002..................................... $ 1,362 2003..................................... 1,854 2004..................................... 2,407 2005..................................... 16,523 2006..................................... 3,461 2007 - 2020.............................. 100,392 --------- Total................................ $ 125,999 ========= (12) 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 per share data) Year ended December 31, 2001: Basic EPS - income before cumulative effect..................... $ 65,104 23,661 $2,751.54 Cumulative effect of change in accounting principle, net of tax.................................................... (1,376) -- (58.16) --------- ------- --------- Basic EPS - income available to common stockholders............. 63,728 23,661 $2,693.38 Effect of dilutive securities: Class A convertible preferred stock........................... 769 893 (66.61) --------- ------- --------- Diluted EPS - income available to common stockholders........... $ 64,497 24,554 $2,626.77 ========= ======= ========= 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 (70.63) --------- ------- --------- 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 (58.44) --------- ------- --------- Diluted EPS - income available to common stockholders........... $ 44,161 24,873 $1,775.47 ========= ======= =========
(13) CREDIT COMMITMENTS First Banks is a party to commitments to extend credit and commercial and standby letters in credit in the normal course of business to meet the financing needs of its customers. These instruments involve, in 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 5 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Commitments to extend credit at December 31 were as follows: December 31, ------------ 2001 2000 ---- ---- (dollars expressed in thousands) Commitments to extend credit.......................................... $ 1,723,568 1,484,278 Commercial and standby letters of credit.............................. 137,345 94,802 ----------- -------- $ 1,860,913 1,579,080 =========== =========
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 typically 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. The estimated fair value of First Banks' financial instruments at December 31 were as follows:
2001 2000 ------------------------- ------------------------ Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value ----- ---------- ----- ---------- (dollars expressed in thousands) Financial Assets: Cash and cash equivalents.......................... $ 241,874 241,874 198,279 198,279 Investment securities: Available for sale............................... 610,466 610,466 539,386 539,386 Held to maturity................................. 20,602 20,812 24,148 24,507 Net loans.......................................... 5,311,705 5,346,853 4,670,673 4,694,594 Derivative instruments............................. 54,889 54,889 3,759 16,208 Accrued interest receivable........................ 37,349 37,349 45,226 45,226 Forward contracts to sell mortgage-backed securities....................... 545 545 -- (202) ========== ========= ========= ========= Financial Liabilities: Deposits: Demand: Non-interest-bearing........................... $ 921,455 921,455 808,251 808,251 Interest-bearing............................... 629,015 629,015 448,146 448,146 Savings and money market......................... 1,832,939 1,832,939 1,447,898 1,447,898 Time deposits.................................... 2,300,495 2,342,892 2,308,120 2,351,418 Short-term borrowings............................ 243,134 243,134 140,569 140,569 Note payable..................................... 27,500 27,500 83,000 83,000 Accrued interest payable......................... 16,006 16,006 23,227 23,227 Interest rate lock commitments................... 1,048 1,048 -- 4,183 Guaranteed preferred beneficial interests in subordinated debentures..................... 235,881 256,278 182,849 185,608 ========== ========= ========= ========= Off-Balance Sheet - Credit commitments............... $ -- -- -- -- ========== ========= ========= =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 were not available, the fair value was based upon quoted market prices of comparable instruments. The carrying value of loans is net of the allowance for loan losses and unearned discount. Derivative instruments: The fair value of derivative instruments 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. 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. 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. 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. Short-term borrowings, note payable, accrued interest payable and interest rate lock commitments: The carrying values reported in the consolidated balance sheets approximate fair value. Guaranteed preferred beneficial interests in subordinated debentures: The fair value is based on quoted market prices. Off-Balance-Sheet: Credit commitments: The majority of the commitments to extend credit and commercial and standby letters of credit contain variable interest rates and credit deterioration clauses and, therefore, the carrying value of these credit commitments 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 2001. Total employer contributions under the plan were $1.3 million, $1.1 million and $863,000 for the years ended December 31, 2001, 2000 and 1999, respectively. The plan assets are held and managed under a trust agreement with First Bank's trust department. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (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, 2001, 2000 and 1999. In addition to the Class A and Class B preferred stock, First Banks has three 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 10, satisfies the regulatory requirements for inclusion, subject to certain limitation, in First Banks' capital base. (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 that which arises by virtue of such position or ownership interest in First Banks or its subsidiaries, except as described in the following paragraphs. During 2001, 2000 and 1999, Tidal Insurance Limited (Tidal), a corporation owned indirectly by First Banks' Chairman and his adult children, received approximately $132,000, $212,000 and $316,000, 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 2001, 2000 and 1999, 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 $316,000, $235,000 and $194,000, 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 $3.0 million, $2.1 million and $2.3 million for the years ended December 31, 2001, 2000 and 1999, 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 information technology and various related services to First Banks, Inc. and its Subsidiary Banks. Fees paid under agreements with First Services, L.P., were $23.1 million, $19.3 million and $16.4 million for the years ended December 31, 2001, 2000 and 1999, respectively. During 2001, 2000 and 1999, First Services, L.P. paid First Banks $2.0 million, $1.8 million and $1.2 million, respectively, in rental fees for the use of data processing and other equipment owned by First Banks. (18) CAPITAL STOCK OF FIRST BANKS AMERICA, INC. First Banks owned 2,500,000 shares of FBA's Class B common stock and 9,545,107 shares of FBA's common stock at December 31, 2001, representing 93.69% of FBA's outstanding voting stock. In comparison, 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, 2001, representing 92.86% of FBA's outstanding voting stock. The increase for 2001 is attributable to FBA's issuance of 803,757 shares of its common stock to First Banks in conjunction with FBA's purchase of BYL Bancorp on October 31, 2001. FBA's common stock is publicly traded on the New York Stock Exchange. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (19) 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) --------------------------------- ---------------------------------- 2001 2000 1999 2001 2000 1999 ---- ---- ---- ---- ---- ---- (dollars expressed in thousands) Balance sheet information: Investment securities................... $ 245,365 214,005 241,624 368,207 330,478 192,357 Loans, net of unearned discount......... 3,086,023 2,694,005 2,527,649 2,323,263 2,058,628 1,469,093 Total assets............................ 3,707,081 3,152,885 3,028,046 3,057,920 2,733,545 1,854,827 Deposits................................ 3,142,676 2,729,489 2,689,671 2,555,396 2,306,469 1,590,490 Stockholders' equity.................... 321,336 273,848 263,466 398,713 333,186 204,617 ========== ========== ========= ========= ========= ========= Income statement information: Interest income......................... $ 236,889 247,290 221,195 208,291 176,902 132,407 Interest expense........................ 111,410 115,421 105,231 78,547 71,167 51,544 ---------- ---------- --------- --------- --------- --------- Net interest income................ 125,479 131,869 115,964 129,744 105,735 80,863 Provision for loan losses............... 18,500 12,250 8,890 5,010 1,877 4,183 ---------- ---------- --------- --------- --------- --------- Net interest income after provision for loan losses........ 106,979 119,619 107,074 124,734 103,858 76,680 Noninterest income...................... 53,623 32,152 32,260 27,469 12,343 10,774 Noninterest expense..................... 105,550 90,746 77,786 89,112 65,567 54,992 ---------- ---------- --------- --------- --------- --------- Income before provision for income taxes, minority interest in income of subsidiary and cumulative effect of change in accounting principle 55,052 61,025 61,548 63,091 50,634 32,462 Provision for income taxes.............. 19,246 20,889 20,811 16,972 20,064 12,353 ---------- ---------- --------- --------- --------- --------- Income before minority interest in income of subsidiary and cumulative effect of change in accounting principle.......... 35,806 40,136 40,737 46,119 30,570 20,109 Minority interest in income of subsidiary.................... -- -- -- -- -- -- ---------- ---------- ---------- -------- --------- --------- Income before cumulative effect of change in accounting principle............. 35,806 40,136 40,737 46,119 30,570 20,109 Cumulative effect of change in accounting principle, net of tax......................... (917) -- -- (459) -- -- ---------- ---------- --------- --------- --------- --------- Net income......................... $ 34,889 40,136 40,737 45,660 30,570 20,109 ========== ========== ========= ========= ========= =========
- ------------------------ (1) Includes BSF, which was acquired by FBA on December 31, 2000. (2) Corporate and other includes $12.1 million, $8.6 million and $7.9 million of guaranteed preferred debentures expense, after applicable income tax benefit of $6.5 million, $4.6 million and $4.2 million, for the years ended December 31, 2001, 2000 and 1999, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Other financial services include mortgage banking, debit cards, brokerage services, credit-related insurance, automated teller machines, telephone banking, safe deposit boxes, escrow and bankruptcy deposit services, stock option services, 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 ---------------------------------------- ------------------------------------------- 2001 2000 1999 2001 2000 1999 ---- ---- ---- ---- ---- ---- (dollars expressed in thousands) 17,496 19,051 17,666 631,068 563,534 451,647 (417) (368) (418) 5,408,869 4,752,265 3,996,324 13,450 (9,739) (15,126) 6,778,451 5,876,691 4,867,747 (14,168) (23,543) (28,347) 5,683,904 5,012,415 4,251,814 (271,392) (254,188) (173,178) 448,657 352,846 294,905 ========= ========= ========= ========== ========= ========= (437) (1,366) (520) 444,743 422,826 353,082 1,057 1,091 1,926 191,014 187,679 158,701 --------- --------- --------- ---------- --------- --------- (1,494) (2,457) (2,446) 253,729 235,147 194,381 -- -- -- 23,510 14,127 13,073 --------- --------- --------- ---------- --------- --------- (1,494) (2,457) (2,446) 230,219 221,020 181,308 17,517 (1,717) (1,384) 98,609 42,778 41,650 35,599 14,850 18,029 230,261 171,163 150,807 --------- --------- --------- ---------- --------- --------- (19,576) (19,024) (21,859) 98,567 92,635 72,151 (6,170) (6,471) (6,851) 30,048 34,482 26,313 --------- --------- --------- ---------- --------- --------- (13,406) (12,553) (15,008) 68,519 58,153 45,838 2,629 2,046 1,660 2,629 2,046 1,660 --------- --------- --------- ---------- --------- --------- (16,035) (14,599) (16,668) 65,890 56,107 44,178 -- -- -- (1,376) -- -- --------- --------- --------- ---------- --------- --------- (16,035) (14,599) (16,668) 64,514 56,107 44,178 ========= ========= ========= ========== ========= =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (20) 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, 2001, First Banks and the Subsidiary Banks were each well capitalized. As of December 31, 2001, 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 1 leverage ratios as set forth in the table below. At December 31, 2001 and 2000, First Banks' and the Subsidiary Banks' required and actual capital ratios were as follows:
To be Well Actual Capitalized Under ----------------- For Capital Prompt Corrective 2001 2000 Adequacy Purposes Action Provisions ---- ---- ----------------- ----------------- Total capital (to risk-weighted assets): First Banks............................. 10.53 10.21% 8.0% 10.0% First Bank.............................. 10.14 10.71 8.0 10.0 FB&T.................................... 11.27 10.58 8.0 10.0 Tier 1 capital (to risk-weighted assets): First Banks............................. 7.57 7.56 4.0 6.0 First Bank.............................. 8.89 9.46 4.0 6.0 FB&T.................................... 10.02 9.32 4.0 6.0 Tier 1 capital (to average assets): First Banks............................. 7.24 7.45 3.0 5.0 First Bank.............................. 8.67 8.49 3.0 5.0 FB&T.................................... 9.47 9.27 3.0 5.0
(21) 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 9, 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 $12.3 million at December 31, 2001, unless prior permission of the regulatory authorities and/or the lending banks is obtained. 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, 2001 and 2000, and condensed statements of income and cash flows for the years ended December 31, 2001, 2000 and 1999:
CONDENSED BALANCE SHEETS December 31, ----------------- 2001 2000 ---- ---- (dollars expressed in thousands) Assets ------ Cash deposited in subsidiary banks........................................... $ 4,894 8,079 Investment securities........................................................ 17,497 14,309 Investment in subsidiaries................................................... 594,152 461,753 Advances to FBA.............................................................. 71,000 98,000 Other assets................................................................. 10,232 15,333 ---------- -------- Total assets........................................................... $ 697,775 597,474 ========== ======== Liabilities and Stockholders' Equity ------------------------------------ Note payable................................................................ $ 27,500 83,000 Subordinated debentures..................................................... 205,103 148,196 Accrued expenses and other liabilities...................................... 16,515 13,432 ---------- -------- Total liabilities..................................................... 249,118 244,628 Stockholders' equity........................................................ 448,657 352,846 ---------- -------- Total liabilities and stockholders' equity............................ $ 697,775 597,474 ========== ========
CONDENSED STATEMENTS OF INCOME
Years Ended December 31, ----------------------------- 2001 2000 1999 ---- ---- ---- (dollars expressed in thousands) Income: Dividends from subsidiaries........................................ $ 53,500 43,000 25,250 Management fees from subsidiaries.................................. 20,443 17,325 12,977 Gain on sale of securities......................................... 19,134 -- -- Other.............................................................. 6,008 1,956 1,313 --------- ------ ------ Total income................................................... 99,085 62,281 39,540 --------- ------ ------ Expense: Interest........................................................... 2,621 3,964 3,628 Salaries and employee benefits..................................... 13,309 12,180 8,999 Legal, examination and professional fees........................... 2,895 2,031 7,006 Guaranteed preferred debentures.................................... 15,138 9,547 8,330 Other.............................................................. 20,339 4,422 4,617 --------- ------ ------ Total expense.................................................. 54,302 32,144 32,580 --------- ------ ------ Income before income tax benefit and equity in undistributed earnings of subsidiary..................... 44,783 30,137 6,960 Income tax benefit................................................... (2,418) (3,922) (5,649) --------- ------ ------ Income before equity in undistributed earnings of subsidiary... 47,201 34,059 12,609 Equity in undistributed earnings of subsidiary....................... 17,313 22,048 31,569 --------- ------ ------ Net income..................................................... $ 64,514 56,107 44,178 ========= ====== ======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------------------ 2001 2000 1999 ---- ---- ---- (dollars expressed in thousands) Cash flows from operating activities: Net income...................................................... $ 64,514 56,107 44,178 Adjustments to reconcile net income to net cash provided by operating activities: Net income of subsidiaries.................................. (70,730) (64,937) (56,676) Dividends from subsidiaries................................. 53,500 43,000 25,250 Other, net.................................................. (3,875) 272 1,900 --------- -------- ------- Net cash provided by operating activities................ 43,409 34,442 14,652 --------- -------- ------- Cash flows from investing activities: Increase in investment securities............................... (9,382) (860) (100) Investment in common securities of First Preferred III and II... (1,707) (1,778) -- Acquisitions of subsidiaries.................................... (63,767) -- (31,500) Capital contributions to subsidiaries........................... (5,900) (6,100) (3,000) Return of subsidiary capital.................................... -- -- 10,000 Decrease (increase) in advances to subsidiary................... 27,000 (98,000) -- Other, net...................................................... 6,540 (1,464) (3,646) --------- -------- ------- Net cash used in investing activities.................... (47,216) (108,202) (28,246) --------- -------- ------- Cash flows from financing activities: (Decrease) increase in note payable............................. (55,500) 19,000 13,952 Proceeds from issuance of First Preferred III and II subordinated debentures....................................... 56,908 59,278 -- Payment of preferred stock dividends............................ (786) (786) (786) --------- -------- ------- Net cash provided by financing activities................ 622 77,492 13,166 --------- -------- ------- Net (decrease) increase in cash and cash equivalents..... (3,185) 3,732 (428) Cash deposited in subsidiary banks, beginning of year............. 8,079 4,347 4,775 --------- -------- ------- Cash deposited in subsidiary banks, end of year................... $ 4,894 8,079 4,347 ========= ======== ======= Noncash investing activities: Cash paid for interest.......................................... $ 2,676 4,117 3,420 Reduction of deferred tax valuation reserve..................... 636 -- 811 ========= ======== =======
(23) CONTINGENT LIABILITIES In the ordinary course of business, First Banks and its subsidiaries become involved in legal proceedings. Management, in consultation with legal counsel, believes the ultimate resolution of these proceedings will not have a material adverse effect on the financial condition or results of operations of First Banks and/or its subsidiaries. (24) SUBSEQUENT EVENTS On January 15, 2002, First Banks completed its acquisition of Plains Financial Corporation (PFC) and its wholly owned banking subsidiary, PlainsBank of Illinois, National Association (PlainsBank), Des Plaines, Illinois, in exchange for $36.5 million in cash. PFC operated a total of three banking facilities in Des Plaines, Illinois, and one banking facility in Elk Grove Village, Illinois. The acquisition was funded from borrowings under First Banks' credit agreement with a group of unaffiliated financial institutions. At the time of the transaction, PFC had $256.3 million in total assets, $150.4 million in loans, net of unearned discount, $81.0 million in investment securities and $213.4 million in deposits. This transaction was accounted for using the purchase method of accounting. The excess of the cost over the fair value of the net assets acquired was approximately $11.1 million and is not expected to be tax deductible. The excess of the cost over the fair value of the net assets acquired will not be amortized, but instead will be periodically tested for impairment in accordance with the requirements of SFAS 142. The core deposit intangibles were approximately $2.9 million and will be amortized over approximately seven years utilizing the straight-line method. PFC was merged with and into UFG, and PlainsBank was merged with and into First Bank. INDEPENDENT AUDITORS' REPORT [KPMG Logo] 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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. As discussed in note 1 to the consolidated financial statements, the Company changed its method of accounting for derivative instruments and hedging activities in 2001. /s/ KPMG LLP ------------ St. Louis, Missouri March 15, 2002
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, Chief Financial Officer and Secretary Donald W. Williams Director, Senior Executive Vice President and Chief Credit Officer Michael J. Dierberg Director Gordon A. Gundaker Director, President and Chief Executive Officer of Coldwell Banker Gundaker, St. Louis, Missouri Michael F. Hickey Executive Vice President and Chief Information Officer Terrance M. McCarthy Executive Vice President Michael F. McWhortor Executive Vice President - Banking Support 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 Hal J. Upbin Director, Chairman of the Board, President and Chief Executive Officer of Kellwood Company, St. Louis, Missouri Lisa K. Vansickle Senior Vice President and Controller 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, Chief Financial 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 Executive Officer of the law firm of Favaro, Lavezzo, Gill, Caretti & Heppell, Vallejo, California Terrance M. McCarthy Director and Executive Vice President 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 Donald W. Williams Executive Vice President and Chief Credit Officer First Bank Donald W. Williams Chairman of the Board, President and Chief Executive Officer Douglas R. Distler Director, Senior Vice President and Regional President - Southern Illinois Michael F. Hickey Director, Executive Vice President and Chief Information Officer Michael F. McWhortor Director, Executive Vice President - Banking Support Steven F. Schepman Director and Senior Vice President - Trust and Financial Services Mark T. Turkcan Director and Executive Vice President - Mortgage Banking Lisa K. Vansickle Director, Senior Vice President and Controller First Bank & Trust Terrance M. McCarthy Chairman of the Board, President and Chief Executive Officer Gilbert J. Dalmau Director and Regional President - Southern California Patrick S. Day Director, Senior Vice President and Senior Credit Officer - Northern California Michael J. Dierberg Director and Regional President - Northern California Albert M. Lavezzo Director Kathryn L. Perrine Director, Senior Vice President and Chief Financial Officer David F. Weaver Director and Regional President - Texas Region
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 Lisa K. Vansickle, First Banks, Inc., 600 James S. McDonnell Boulevard, Mail Code - #014, Hazelwood, Missouri 63042. FIRST BANKS, INC. PREFERRED SECURITIES The preferred securities of First Banks are traded on the Nasdaq National Market System with the ticker symbols "FBNKO" "FBNKN" and "FBNKM." As of March 22, 2002, there were approximately 420 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 and First Preferred Capital Trust III 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 2001 and 2000 are summarized as follows:
FIRST PREFERRED CAPITAL TRUST (ISSUE DATE - FEBRUARY 1997) - FBNKO 2001 2000 Dividend -------------- ------------- High Low High Low Declared ---- --- ---- --- ------------- First quarter............................................ $26.25 24.38 25.25 23.13 $ 0.578125 Second quarter........................................... 27.35 25.00 26.00 23.50 0.578125 Third quarter............................................ 27.25 25.00 25.13 23.50 0.578125 Fourth quarter........................................... 26.90 25.02 25.00 23.38 0.578125
FIRST PREFERRED CAPITAL TRUST II (ISSUE DATE - OCTOBER 2000) - FBNKN 2001 2000 --------------------------------- ------------------------------- Dividend Dividend High Low Declared High Low Declared ---- --- ------------- ---- --- ------------- First quarter................................ $27.75 26.38 $0.640000 $ -- -- -- Second quarter............................... 27.40 26.25 0.640000 -- -- -- Third quarter................................ 28.50 26.95 0.640000 -- -- -- Fourth quarter............................... 28.30 27.00 0.640000 27.00 25.13 0.504888
FIRST PREFERRED CAPITAL TRUST III (ISSUE DATE - NOVEMBER 2001) - FBNKM 2001 -------------- Dividend High Low Declared ---- --- -------- First quarter............................................ $ -- -- $ -- Second quarter........................................... -- -- -- Third quarter............................................ -- -- -- Fourth quarter........................................... 26.10 25.25 0.281250 For information concerning First Banks, please contact: Allen H. Blake Lisa K. Vansickle President, Chief Operating Officer Senior Vice President and Controller and Chief Financial Officer 600 James S. McDonnell Boulevard 600 James S. McDonnell Boulevard Mail Code - #014 Mail Code - #014 Hazelwood, Missouri 63042 Hazelwood, Missouri 63042 Telephone - (314) 592-5000 Telephone - (314) 592-5000
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 ------------------ ----------------------------- Union Financial Group, Ltd. Delaware 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 The San Francisco Company Delaware First Bank & Trust California Bank of San Francisco Realty Investors, Inc. California
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