UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-8937
First Banks America, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-1604965
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
135 North Meramec
Clayton, Missouri 63105
(Address of principal executive offices) (Zip Code)
(314) 854-4600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
Title of class which registered
-------------- ----------------
Common Stock, $.15 Par Value Per Share New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the closing price of the Common Stock on the New York Stock
Exchange on March 18, 1998 was $34,535,397. For purposes of this computation,
officers, directors and 5% beneficial owners of the registrant are deemed to be
affiliates. Such determination should not be deemed an admission that such
directors, officers or 5% beneficial owners are, in fact, affiliates of the
registrant.
As of March 18, 1998, 2,758,661 shares of the registrant's Common Stock, $0.15
par value and 2,500,000 shares of the registrant's Class B Common Stock, $0.15
par value, were outstanding.
Documents incorporated by reference: Portions of the Annual Report to
Stockholders for the year ended December 31, 1997 are incorporated by reference
into Parts I, II and IV of this report.
PART I
The following portions of the 1997 Annual Report to Stockholders (the
"1997 Annual Report") of First Banks America, Inc. ("FBA" or the "Company") are
incorporated by reference in this report:
Page(s) in 1997
Section Annual Report
Management's Discussion and Analysis of
Financial Condition and Results of Operations 3-22
Selected Consolidated and Other Financial Data 2
Consolidated Financial Statements 24-46
Supplementary Financial Data 23
Range of Price of Common Stock 48
Except for the parts of the 1997 Annual Report to Stockholders
expressly incorporated by reference, such report is not deemed filed with the
Securities and Exchange Commission.
Information appearing in this report, in documents incorporated by
reference herein and in documents subsequently filed with the Securities and
Exchange Commission which are not statements of historical fact may include
forward-looking statements. Such forward-looking statements are subject to
certain risks and uncertainties, not all of which can be predicted or
anticipated. Factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements include general market
conditions as well as conditions affecting the banking industry generally and
factors having a specific impact on the Company, including but not limited to
fluctuations in interest rates and in the economy; the impact of laws and
regulations applicable to the Company and changes therein; competitive
conditions in the markets in which the Company conducts its operations; and the
ability of the Company to respond to changes in technology. With regard to the
Company's efforts to grow through acquisitions, factors that could affect the
accuracy or completeness of such forward-looking statements include the
potential for higher than acceptable operating costs arising from the geographic
dispersion of the offices of FBA's subsidiaries, as compared with competitors
operating solely in contiguous markets; the competition of larger acquirers with
greater resources than FBA; fluctuations in the prices at which acquisition
targets may be available for sale and in the market for FBA's securities; and
the potential for difficulty or unanticipated costs in realizing the benefits of
particular acquisition transactions.
Readers should therefore not place undue reliance on forward-looking statements.
Item 1. Business
General
FBA is a bank holding company which was organized as a Delaware
corporation in 1978 and was previously known as BancTEXAS Group Inc. The
Company's executive office is located at 135 North Meramec, Clayton, Missouri.
The principal function of the Company is to assist management of its two banking
subsidiaries, BankTEXAS N.A. ("BankTEXAS") and First Bank of California ("FB
California"). BankTEXAS and FB California are collectively referred to herein as
the "Subsidiary Banks." At December 31, 1997, FBA had approximately $451.3
million in total assets, $313.4 million in total loans, net of unearned
discount, $383.9 million in total deposits and $39.9 million in total
stockholders' equity.
In 1994 FBA sold 2,500,000 shares of Class B common stock (the "Class B
Stock") for $30 million cash in a private placement to First Banks, Inc., a
multi-bank holding company headquartered in Clayton, Missouri ("First Banks").
As a result, First Banks became the owner of approximately 65% of the
then-outstanding voting stock of FBA, which includes the Class B Stock and the
class of common stock owned by all other stockholders (referred to herein as the
"Common Stock"). The Class B Stock has the same voting rights per share as the
Common Stock, and the two classes of stock are generally equivalent except the
Class B Stock is not registered with the Securities and Exchange Commission, not
listed on any exchange and, with limited exceptions, it is not transferable,
other than to an affiliate of First Banks. In the event FBA were to commence the
payment of dividends to its stockholders, the Class B Stock would receive
dividends only to the extent that dividends on the Common Stock exceed $.45 per
share annually. The terms of the Class B Stock allow First Banks to purchase
additional shares of Class B Stock if a sufficient number of additional shares
of Common Stock are issued to cause First Banks' voting power to fall below 55%,
at prices to be determined based on a formula related to the book value per
share of common stock. The Class B Stock is convertible into shares of Common
Stock at any time after August 31, 1999 at the option of First Banks.
On February 2, 1998, FBA completed its acquisition of First Commercial
Bancorp, Inc. ("FCB"), Sacramento, California, as described further in the
Management's Discussion and Analysis section of the 1997 Annual Report and in
Note 2 to the Consolidated Financial Statements, both of which are incorporated
herein by reference. In connection with the acquisition of FCB, FBA issued
approximately 1,555,700 shares of Common Stock, of which 1,266,176 shares were
issued to First Banks. FBA also issued to First Banks a convertible debenture in
the principal amount of $6.5 million (the "Debenture") in exchange for
outstanding debentures of FCB; principal and interest on the Debenture are
convertible at the option of First Banks into shares of Common Stock. As of
March 18, 1998, the total Common Stock and Class B Stock owned by First Banks,
including the shares of Common Stock that would be issued to First Banks upon
conversion of the Debenture, constituted approximately 74.8% of the outstanding
voting stock of FBA. First Banks exercises control over the management and
policies of FBA and the election of its officers and directors.
The Company implemented a one-for-fifteen stock split in 1995, whereby
each fifteen shares of Common Stock and Class B Stock were converted into one
share of Common Stock and Class B Stock, respectively, and the par value of each
share of stock of each class was changed from $.01 to $.15. References in this
report to either class of such stock refer to the same after giving effect to
the reverse stock split, and the numbers of shares referred to in periods prior
to the effective date of the reverse stock split are restated in this Report to
give effect to the reverse stock split.
Descriptions of the business operations of FBA and the Subsidiary Banks
and the Company's policies with respect to potential acquisitions are set forth
in the Management's Discussion and Analysis section of the 1997 Annual Report
which is incorporated herein by reference.
FBA, BankTEXAS and FB California purchase certain services and
supplies, including data processing services, internal auditing, loan review,
income tax preparation and assistance, accounting, asset/liability and
investment services, loan servicing and other management and administrative
services, through its majority stockholder, First Banks. Additional information
regarding the nature of the arrangements with First Banks appears in Note 13 to
the Consolidated Financial Statements incorporated herein by reference.
Competition and Branch Banking
The activities in which the Subsidiary Banks are engaged are highly
competitive. Those activities and the geographic markets served primarily
involve competition with other banks and thrift institutions, some of which are
affiliated with large regional or national holding companies. Competition among
financial institutions is based upon interest rates offered on deposit accounts,
interest rates charged on loans and other credit and service charges, the
quality of services rendered, the convenience of banking facilities and, in the
case of loans to large commercial borrowers, relative lending limits.
In addition to competing with other banks and thrift institutions
within their primary service areas, the Subsidiary Banks also compete with other
financial intermediaries, such as credit unions, industrial loan associations,
securities firms, insurance companies, small loan companies, finance companies,
mortgage companies, real estate investment trusts, certain governmental
agencies, credit organizations and other enterprises. Additional competition for
depositors' funds comes from United States Government securities, private
issuers of debt obligations and suppliers of other investment alternatives for
depositors. Many of the Company's non-bank competitors are not subject to the
same extensive federal regulations that govern bank holding companies and
federally-insured banks and state regulations governing state-chartered banks.
As a result, such non-bank competitors may have certain advantages over the
Company in providing some services.
The trend in the Subsidiary Banks' markets has been for holding
companies to acquire independent banks and thrifts. The Company believes it will
continue to face competition in the acquisition of banks and thrifts from larger
holding companies. Many of the financial institutions with which the Company
competes are larger than the Company and have substantially greater resources
available for making acquisitions.
Subject to regulatory approval, both commercial banks and thrift
institutions situated in Texas and California are permitted to establish
branches throughout each of those states, thereby creating the potential for
additional competition in the Subsidiary Banks' service areas.
Supervision and Regulation
General
The Company and the Subsidiary Banks are extensively regulated under
federal and state law. These laws and regulations are intended to protect
depositors, not stockholders. To the extent the following information describes
statutory or regulatory provisions, it is qualified in its entirety by reference
to the particular statutory and regulatory provisions. Changes in applicable
laws or regulations may have a material effect on the business and prospects of
the Company. The operations of the Company may be affected by legislative
changes and by the policies of various regulatory authorities. The Company is
unable to predict the nature or the extent of the effects on its business and
earnings that fiscal or monetary policies, economic controls or new federal or
state legislation may have in the future.
FBA is a registered bank holding company under the Bank Holding Company
Act of 1956, as amended (the "BHC Act") and, as such, is subject to regulation,
supervision and examination by the Board of Governors of the Federal Reserve
System (the "FRB"). FBA is required to file annual reports with the FRB and to
provide the FRB such additional information as it may require.
BankTEXAS and FB California are subject to supervision and regulation
by the Office of the Comptroller of the Currency (the "OCC") and the State
Banking Department of the State of California, respectively. The Subsidiary
Banks are also regulated by the Federal Deposit Insurance Corporation ("FDIC"),
which provides deposit insurance to the Subsidiary Banks.
Recent and Pending Legislation
The enactment of the legislation described below has significantly
affected the banking industry generally and will have an ongoing effect on the
Company and the Subsidiary Banks in the future.
Financial Institutions Reform, Recovery, and Enforcement Act of 1989.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") reorganized and reformed the regulatory structure applicable to
financial institutions generally. Among other things, FIRREA enhanced the
supervisory and enforcement powers for the federal bank regulatory agencies;
required insured financial institutions to guaranty repayment of losses incurred
by the FDIC in connection with the failure of an affiliated financial
institution; required financial institutions to provide their primary federal
regulator with notice, under certain circumstances, of changes in senior
management and broadened authority for bank holding companies to acquire savings
institutions.
Under FIRREA, federal bank regulators were granted expanded enforcement
authority over "institution-affiliated parties" (i.e., officers, directors,
controlling stockholders, attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution). Federal banking regulators have power to bring enforcement
actions against insured institutions and institution-affiliated parties,
including cease and desist orders, prohibition orders, civil money penalties,
termination of insurance and the imposition of operating restrictions and
capital plan requirements. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Since the enactment of FIRREA, the federal bank regulators have
significantly increased the use of written agreements to correct compliance
deficiencies with respect to applicable laws and regulations and to ensure safe
and sound practices. Violations of such written agreements are grounds for
initiation of cease-and-desist proceedings. FIRREA granted the FDIC back-up
enforcement authority to recommend enforcement action to an appropriate federal
banking agency and to bring such enforcement action against a financial
institution or an institution-affiliated party if such federal banking agency
fails to follow the FDIC's recommendation. In addition, FIRREA generally
requires public disclosure of final enforcement actions by the federal banking
agencies.
FIRREA also established a cross-guarantee provision ("Cross-Guarantee")
pursuant to which the FDIC may recover from a depository institution losses the
FDIC incurs in providing assistance to, or paying off the depositors of, any of
such depository institution's affiliated insured banks or thrifts. The
Cross-Guarantee thus enables the FDIC to assess a holding company's healthy Bank
Insurance Fund (the "BIF") members and Savings Association Insurance Fund (the
"SAIF") members for the losses of any of such holding company's failed BIF and
SAIF members. Cross-Guarantee liabilities are generally superior in priority to
obligations of the depository institution to its stockholders due solely to
their status as stockholders and obligations to other affiliates.
Cross-Guarantee liabilities are generally subordinated to deposit liabilities,
secured obligations or any other general or senior liabilities, and any
obligations subordinated to depositors or other general creditors.
The Federal Deposit Insurance Corporation Improvement Act of 1991. The
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was
adopted to recapitalize the BIF and impose certain supervisory and regulatory
reforms on insured depository institutions. FDICIA includes provisions, among
others, to: (i) increase the FDIC's line of credit with the U. S. Treasury in
order to provide the FDIC with additional funds to cover the losses of federally
insured banks; (ii) reform the deposit insurance system, including the
implementation of risk-based deposit insurance premiums; (iii) establish a
format for closer monitoring of financial institutions to enable prompt
corrective action by banking regulators when a financial institution begins to
experience financial difficulty; (iv) establish five capital levels for
financial institutions ("well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized") that would impose more scrutiny and restrictions on less
capitalized institutions; (v) require the banking regulators to set operational
and managerial standards for all insured depository institutions and holding
companies, including limits on excessive compensation to executive officers,
directors, employees and principal stockholders, and establish standards for
loans secured by real estate; (vi) adopt certain accounting reforms and require
annual on-site examinations of federally insured institutions, including the
ability to require independent audits of banks and thrifts; (vii) revise
risk-based capital standards to ensure they (a) take adequate account of
interest-rate changes, concentration of credit risk and the risks of
nontraditional activities, and (b) reflect the actual performance and expected
risk of loss of multi-family mortgages; and (viii) restrict state-chartered
banks from engaging in activities not permitted for national banks unless they
are adequately capitalized and have FDIC approval. Further, FDICIA permits the
FDIC to make special assessments on insured depository institutions, in amounts
determined by the FDIC to be necessary to give it adequate assessment income to
repay amounts borrowed from the U.S. Treasury and other sources or for any other
purpose the FDIC deems necessary. FDICIA also grants authority to the FDIC to
establish semiannual assessment rates on BIF and SAIF member banks so as to
maintain these funds at the designated reserve ratios.
As noted above, FDICIA authorizes and, under certain circumstances,
requires the federal banking agencies to take certain actions against
institutions that fail to meet certain capital-based requirements. Under FDICIA,
the federal banking agencies are required to establish five levels of insured
depository institutions based on leverage limit and risk-based capital
requirements established for institutions subject to their jurisdiction, plus,
in their discretion, individual additional capital requirements for such
institutions. Under the final rules that have been adopted by each of the
federal banking agencies, an institution will be designated: (i) well
capitalized if the institution has a total risk-based capital ratio of 10% or
greater, a Tier 1 risk-based capital ratio of 6% or greater and a leverage ratio
of 5% or greater, and the institution is not subject to an order, written
agreement, capital directive or prompt corrective action directive to meet and
maintain a specific capital level for any capital measure; (ii) adequately
capitalized if the institution has a total risk-based capital ratio of 8% or
greater, a Tier 1 risk-based capital ratio of 4% or greater and a leverage ratio
of 4% or greater; (iii) undercapitalized if the institution has a total
risk-based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio
that is less than 4% or a leverage ratio that is less than 4%; (iv)
significantly undercapitalized if the institution has a total risk-based capital
ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than
3% or a leverage ratio that is less than 3%; and (v) critically undercapitalized
if the institution has a ratio of tangible equity to total assets that is equal
to or less than 2%.
Undercapitalized, significantly undercapitalized and critically
undercapitalized institutions are required to submit capital restoration plans
to the appropriate federal banking agency and are subject to certain operational
restrictions. Moreover, companies controlling an undercapitalized institution
are required to guarantee the subsidiary institution's compliance with the
capital restoration plan subject to an aggregate limitation of the lesser of 5%
of the institution's assets at the time it received notice that it was
undercapitalized or the amount of the capital deficiency when the institution
first failed to meet the plan.
Significantly or critically undercapitalized institutions and
undercapitalized institutions that fail to submit or comply with acceptable
capital restoration plans will be subject to regulatory sanctions. A forced sale
of shares or merger, restriction on affiliate transactions and restrictions on
rates paid on deposits are required to be imposed by the banking agency unless
it is determined they would not further capital improvement. FDICIA generally
requires the appointment of a conservator or receiver within 90 days after an
institution becomes critically undercapitalized. The federal banking agencies
have adopted uniform procedures for the issuance of directives by the
appropriate federal banking agency. Under these procedures, an institution will
generally be provided advance notice when the appropriate federal banking agency
proposes to impose one or more of the sanctions set forth above. These
procedures provide an opportunity for the institution to respond to the proposed
agency action or where circumstances warrant immediate agency action, an
opportunity for administrative review of the agency's action.
As described in Note 16 to the Consolidated Financial Statements,
incorporated herein by reference, each of the Subsidiary Banks was "well
capitalized" as of December 31, 1997.
Pursuant to FDICIA, the federal banking agencies adopted real estate
lending guidelines pursuant to which each insured depository institution is
required to adopt and maintain written real estate lending policies in
conformity with the prescribed guidelines. Under these guidelines, each
institution is expected to set loan-to-value ratios not exceeding the
supervisory limits set forth in the guidelines. A loan-to-value ratio is
generally defined as the total loan amount divided by the appraised value of the
property at the time the loan is originated. The guidelines require the
institution's real estate policy also require proper loan documentation, and
that it establish prudent underwriting standards.
FDICIA also contained the Truth in Savings Act, which requires clear
and uniform disclosure of the rates and interest payable on deposit accounts by
depository institutions and the fees assessable against deposit accounts, so
that consumers can make a meaningful comparison between the competing claims of
financial institutions with regard to deposit accounts and products.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. In
1994 Congress enacted the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act"). Beginning in 1995, bank holding
companies have had the right to expand, by acquiring existing banks, into all
states, even those which had theretofore restricted entry. The legislation also
provides that, subject to future action by individual states, a holding company
would have the right commencing in 1997, to convert the banks which it owns in
different states to branches of a single bank. A state is permitted to "opt-out"
of the law which will permit conversion of separate banks to branches, but is
not permitted to "opt-out" of the law allowing bank holding companies from other
states to enter the state. The State of Texas adopted ""opt-out"" legislation in
1995 which has the effect of delaying, or possibly preventing permanently, the
conversion of banks in Texas to branches of banks headquartered in other states.
The Interstate Act also establishes limits on acquisitions by large banking
organizations, providing that no acquisition may be undertaken if it would
result in the organization having deposits exceeding either 10% of all bank
deposits in the United States or 30% of the bank deposits in the state in which
the acquisition would occur.
Economic Growth and Regulatory Paperwork Reduction Act of 1996. The
Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("EGRPRA")
streamlined the non-banking activities application process for well-capitalized
and well-managed bank holding companies. Under EGRPRA, qualified bank holding
companies may commence a regulatory approved non-banking acquisition or share
purchase, assuming the size of the acquisition does not exceed 10% of
risk-weighted assets of the acquiring bank holding company and the consideration
does not exceed 15% of Tier 1 capital. The foregoing prior notice requirement
also applies to commencing non-banking activity de novo which has been
previously approved by order of the FRB, but has not yet been implemented by
regulations. EGRPRA also provides for the recapitalization of the SAIF in order
to bring it into parity with the BIF of the FDIC.
Pending Legislation. Because of concerns relating to competitiveness
and the safety and soundness of the banking industry, Congress is considering a
number of wide-ranging proposals for altering the structure, regulation and
competitive relationships of the nation's financial institutions. Among such
bills are proposals to merge the BIF and the SAIF insurance funds, to eliminate
the federal thrift charter, to alter the statutory separation of commercial and
investment banking and to further expand the powers of banks, bank holding
companies and competitors of banks. It cannot be predicted whether or in what
form any of these proposals will be adopted or the extent to which the business
of the Company may be affected thereby.
Bank and Bank Holding Company Regulation
BHC Act. Under the BHC Act, the activities of a bank holding company
are limited to businesses so closely related to banking, managing or controlling
banks as to be a proper incident thereto. The Company is also subject to capital
requirements applied on a consolidated basis in a form substantially similar to
those required of the Subsidiary Banks. The BHC Act also requires a bank holding
company to obtain approval from the FRB before: (i) acquiring, directly or
indirectly, ownership or control of any voting shares of another bank or bank
holding company if, after such acquisition, it would own or control more than 5%
of such shares (unless it already owns or controls the majority of such shares);
(ii) acquiring all or substantially all of the assets of another bank or bank
holding company; or (iii) merging or consolidating with another bank holding
company. The FRB will not approve any acquisition, merger or consolidation that
would have a substantially anticompetitive result, unless the anticompetitive
effects of the proposed transaction are clearly outweighed by a greater public
interest in meeting the convenience and needs of the community to be served. The
FRB also considers capital adequacy and other financial and managerial factors
in reviewing acquisitions or mergers.
The BHC Act also prohibits a bank holding company, with certain limited
exceptions: (i) from acquiring or retaining direct or indirect ownership or
control of more than 5% of the voting shares of any company which is not a bank
or bank holding company; or (ii) from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks, or
providing services for its subsidiaries. The principal exceptions to these
prohibitions involve certain non-bank activities which, by statute or by FRB
regulation or order, have been identified as activities closely related to the
business of banking or of managing or controlling banks. In making this
determination, the FRB considers whether the performance of such activities by a
bank holding company can be expected to produce benefits to the public such as
greater convenience, increased competition or gains in efficiency in resources,
which can be expected to outweigh the risks of possible adverse effects such as
decreased or unfair competition, conflicts of interest or unsound banking
practices. FIRREA, which is described in more detail above, made a significant
addition to this list of permitted non-bank activities for bank holding
companies by providing that bank holding companies may acquire thrift
institutions upon approval by the FRB and the applicable regulatory authority
for the thrift institutions.
Insurance of Accounts. The FDIC provides insurance to deposit accounts
at the Subsidiary Banks to a maximum of $100,000 for each insured depositor.
Through December 31, 1992, all FDIC-insured institutions, whether members of the
BIF or the SAIF, paid the same premium (23 cents per $100 of domestic deposits)
under a flat-rate system mandated by law. FDICIA required the FDIC to raise the
reserves of the BIF and the SAIF, implement a risk-related premium system and
adopt a long-term schedule for recapitalizing the BIF. Effective in 1993, the
FDIC amended its regulations regarding insurance premiums to provide that a bank
or thrift would pay an insurance assessment within a range of 23 cents to 31
cents per $100 of domestic deposits, depending on its risk classification.
The FDIC adopted an amendment to the BIF risk-based assessment
schedule, effective January 1, 1996, which effectively eliminated deposit
insurance assessments for most commercial banks and other depository
institutions with deposits insured by the BIF, while maintaining the assessment
rate for SAIF-insured institutions in even the lowest risk-based premium
category at 23 cents for each $100 of assessable deposits. Following the
enactment of EGRPRA and as part of the recapitalization of the SAIF, the overall
assessment rate for 1997 was revised to equal 1.29 cents and 6.44 cents per $100
of assessable deposits of BIF and SAIF members, respectively. The deposits of
BankTEXAS consist solely of BIF deposits, and the deposits of FB California
include both BIF and SAIF deposits.
Regulations Governing Capital Adequacy. The federal bank regulatory
agencies use capital adequacy guidelines in their examination and regulation of
bank holding companies and banks. If the capital falls below the minimum levels
established by these guidelines, the bank holding company or bank may be denied
approval to acquire or establish additional banks or nonbank businesses or to
open facilities.
The FRB, the FDIC and the OCC adopted risk-based capital guidelines for
banks and bank holding companies, and the OTS has adopted similar guidelines for
thrifts. The risk-based capital guidelines are designed to make regulatory
capital requirements more sensitive to differences in risk profiles among
financial institutions and holding companies, to account for off-balance-sheet
exposure and to minimize disincentives for holding liquid assets. Assets and
off-balance-sheet items are assigned to broad risk categories, each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance-sheet items. The FRB
has noted that bank holding companies contemplating significant expansion
programs should not allow expansion to diminish their capital ratios and should
maintain ratios well in excess of the minimums. Under theses guidelines, all
bank holding companies and federally regulated banks must maintain a minimum
risk-based total capital ratio equal to 8%, of which at least 4% must be Tier 1
capital.
The FRB also has implemented a leverage ratio, which is Tier 1 capital
to total assets, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank holding company may leverage its equity capital
base. The FRB requires a minimum leverage ratio of 3%. For all but the most
highly-rated bank holding companies and for bank holding companies seeking to
expand, however, the FRB expects that additional capital sufficient to increase
the ratio by at least 100 to 200 basis points will be maintained.
Management of the Company believes the risk-weighting of assets and the
risk-based capital guidelines do not have a material adverse impact on the
Company's operations or on the operations of the Subsidiary Banks. The
requirement of deducting certain intangibles in computing capital ratios
contained in the guidelines, however, could adversely affect the ability of the
Company to make acquisitions in the future in transactions that would be
accounted for using the purchase method of accounting.
Community Reinvestment Act . The Community Reinvestment Act of 1977
(the "CRA") requires that, in connection with examinations of financial
institutions within their jurisdiction, the federal banking regulators must
evaluate the record of the financial institutions in meeting the credit needs of
their local communities, including low and moderate income neighborhoods,
consistent with the safe and sound operation of those banks. These factors are
also considered in evaluating mergers, acquisitions and applications to open a
branch or facility.
Regulations Governing Extensions of Credit. The Subsidiary Banks are
subject to certain restrictions imposed by the Federal Reserve Act on extensions
of credit to FBA or its subsidiaries and affiliates, or investments in their
securities and on the use of their securities as collateral for loans to any
borrowers. These regulations and restrictions may limit the Company's ability to
obtain funds from the Subsidiary Banks for its cash needs, including funds for
acquisitions and for payment of dividends, interest and operating expenses.
Further, under the BHC Act and certain regulations of the FRB, a bank holding
company and its subsidiaries are prohibited from engaging in certain tying
arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services. For example, the Subsidiary Banks may
generally not require a customer to obtain other services from the Subsidiary
Banks or any other affiliated bank or the Company and may not require the
customer to promise not to obtain other services from a competitor, as a
condition to an extension of credit to the customer.
The Subsidiary Banks are also subject to certain restrictions imposed
by the Federal Reserve Act on extensions of credit to executive officers,
directors, principal stockholders or any related interest of such persons.
Extensions of credit (i) must be made on substantially the same terms, including
interest rates and collateral as, and following credit underwriting procedures
that are not less stringent than, those prevailing at the time for comparable
transactions with persons not covered and who are not employees; and (ii) must
not involve more than the normal risk of repayment or present other unfavorable
features. The Subsidiary Banks are also subject to certain lending limits and
restrictions on overdrafts to such persons.
Reserve Requirements. The FRB requires all depository institutions to
maintain reserves against their transaction accounts and non-personal time
deposits. Reserves of 3% must be maintained against total transaction accounts
of $49.3 million or less (subject to adjustment by the FRB) and an initial
reserve of $1,479,000 plus 10% (subject to adjustment by the FRB to a level
between 8% and 14%) must be maintained against that portion of total transaction
accounts in excess of such amount. The balances maintained to meet the reserve
requirements imposed by the FRB may be used to satisfy liquidity requirements.
Institutions are authorized to borrow from the Federal Reserve Bank
"discount window," but FRB regulations require institutions to exhaust other
reasonable alternative sources of funds, including advances from Federal Home
Loan Banks ("FHLBs"), before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. The Subsidiary Banks are members of the
Federal Home Loan Bank System ("FHLB System"), which consists of twelve regional
FHLBs, each subject to supervision and regulation by the Federal Housing Finance
Board, an independent agency created by FIRREA. The FHLBs provide a central
credit facility primarily for member institutions. The Subsidiary Banks are
required to acquire and hold shares of capital stock in an FHLB in an amount at
least equal to 1% of the aggregate principal amount of their respective unpaid
residential mortgage loans and similar obligations at the beginning of each
year, or 1/20th of advances (borrowings) from the FHLB, whichever is greater.
The Subsidiary Banks were in compliance with these regulations at December 31,
1997, with investments of $4.7 million in stock of the FHLB of Dallas held by
BankTEXAS and $473,000 in stock of the FHLB of San Francisco held by FB
California.
Restrictions on Thrift Acquisitions. FBA is prohibited from acquiring,
without prior approval of the Director of the OTS, (i) control of any savings
institution or savings and loan holding company or substantially all the assets
thereof; or (ii) more than 5% of the voting shares of a savings institution or
holding company which is not a subsidiary. Furthermore, such an acquisition
would require FBA itself to become registered as a savings and loan holding
company subject to all applicable regulations of the OTS.
Dividends. The Company's primary source of funds in the future is the
dividends, if any, paid by the Subsidiary Banks. The ability of the Subsidiary
Banks to pay dividends is limited by federal laws, by the regulations
promulgated by the bank regulatory agencies and by principles of prudent bank
management. In addition, the amount of dividends the Subsidiary Banks may pay to
the Company is limited by the provisions of First Banks' credit agreement with a
group of unaffiliated lenders, which imposes certain minimum capital
requirements. Additional information concerning limitations on the ability of
the Subsidiary Banks to pay dividends appears in Note 12 to the Consolidated
Financial Statements and is incorporated herein by reference.
Monetary Policy and Economic Control
The commercial banking business is affected not only by general
economic conditions, but also by the monetary policies of the FRB. Changes in
the discount rate on member bank borrowing, availability of borrowing at the
"discount window," open market operations, the imposition of changes in reserve
requirements against member bank deposits and assets of foreign branches, and
the imposition of and changes in reserve requirements against certain borrowings
by banks and their affiliates are some of the instruments of monetary policy
available to the FRB. These monetary policies are used in varying combinations
to influence overall growth and distributions of bank loans, investments and
deposits, and this use may affect interest rates charged on loans or paid on
deposits. The monetary policies of the FRB have had a significant effect on the
operating results of commercial banks and are expected to do so in the future.
The monetary policies of the FRB are influenced by various factors, including
inflation, unemployment, short-term and long-term changes in the international
trade balance and in the fiscal policies of the U.S. Government. Future monetary
policies and the effect of such policies on the future business and earnings of
the Company or the Subsidiary Banks cannot be predicted.
Employment
As of March 18, 1998, the Company employed 225 persons, none of whom
were covered by a collective bargaining agreement. The Company considers its
employee relations to be good.
Item 2. Properties
FBA's executive office is located at the executive office owned by
First Banks at 135 N. Meramec, Clayton, Missouri. The headquarters of the
Subsidiary Banks are (i) in the case of BankTEXAS, in a building owned by
BankTEXAS located at 8828 Westheimer, Houston, Texas; and (ii) in the case of FB
California, in a leased building located at 865 Howe Avenue, Sacramento,
California. In addition to those offices, as of March 18, 1998, the Subsidiary
Banks do business at 15 branch offices in Texas and California, of which five
are owned and 10 are leased.
FBA considers the properties at which it does business to be in good
condition, suitable for the business conducted at each location. To the extent
that its properties or those acquired in connection with the acquisition of
other entities provide space in excess of that effectively utilized in the
operations of the Subsidiary Banks, FBA seeks to lease or sub-lease any excess
space to third parties. Additional information regarding the premises and
equipment utilized by the Subsidiary Banks appears in Note 5 to the Consolidated
Financial Statements incorporated herein by reference.
Item 3. Legal Proceedings
There are various claims and pending actions against FBA and the
Subsidiary Banks in the ordinary course of business. It is the opinion of
management of FBA, in consultation with legal counsel, the ultimate liability,
if any, resulting from such claims and pending actions will have no material
adverse effect on the financial position or results of operations of FBA.
Item 4. Submission of Matters to a Vote of Security Holders
An Annual Meeting of Stockholders was held on January 23, 1998. The six
directors of the Company were reelected, with the vote totals indicated in the
following table:
Name of Director For Withheld
---------------- --- --------
Allen H. Blake 3,407,001 26,619
Charles A. Crocco, Jr. 3,407,072 26,548
James F. Dierberg 3,407,067 26,553
Edward T. Story, Jr. 3,407,067 26,553
Mark T. Turkcan 3,407,067 26,613
Donald W. Williams 3,407,067 26,553
The following matters, all of which were related to the acquisition of
FCB (which is described in detail in the 1997 Annual Report in Management's
Discussion and Analysis of Financial Condition and Results of Operations and in
Note 2 to the Consolidated Financial Statements, both of which are incorporated
herein by reference) were approved at the Annual Meeting with the votes
indicated:
For Against Abstain Broker Non-votes
--- ------- ------- ----------------
Agreement and Plan of Merger with FCB 2,922,963 14,431 4,615 491,711
Issuance of Common Stock to First Banks 2,903,910 31,557 6,442 491,711
Issuance of convertible debenture to First Banks 2,892,140 41,909 7,861 491,711
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Market Information
FBA has two classes of common stock. The Common Stock is listed on the
New York Stock Exchange ("NYSE") under the symbol "FBA." All of the Class B
Stock was issued to First Banks in 1994 in a private placement, and is not
listed or traded. See "Item 1, Business -- General." Continued listing of the
Common Stock on the NYSE is subject to various requirements, including the
financial eligibility and distribution requirements of the NYSE.
Information regarding the number of stockholders and the market prices
for Common Stock since January 1, 1996 is set forth under the caption "Investor
Information" of the 1997 Annual Report and is incorporated herein by reference.
Dividends
The Company has not paid any dividends on its Common Stock in recent
years. The ability of a bank holding company such as FBA to pay dividends is
limited by regulatory requirements and by the receipt of dividend payments from
the Subsidiary Banks, which are also subject to regulatory requirements; see
Note 12 to the Consolidated Financial Statements, incorporated herein by
reference.
Item 6. Selected Financial Data
The information required by this item is incorporated herein by
reference from page 2 of the 1997 Annual Report under the caption "Selected
Consolidated and Other Financial Data."
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by this item is incorporated herein by
reference from pages 3 through 23 of the 1997 Annual Report under the caption
"Management's Discussion and Analysis."
Item 7a. Quantitative and Qualitative Disclosure About Market Risk
The information required by this item is incorporated herein by
reference from the 1997 Annual Report under the caption "Management's Discussion
and Analysis - Interest Rate Risk Management."
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of FBA are incorporated herein by
reference from pages 25 through 47 of the 1997 Annual Report under the captions
"Consolidated Balance Sheets," "Consolidated Statements of Operations,"
"Consolidated Statements of Changes in Stockholders' Equity," "Consolidated
Statements of Cash Flows," "Notes to Consolidated Financial Statements" and
"Independent Auditors' Report."
Supplementary Financial Information regarding FBA is incorporated
herein by reference from page 24 of the 1997 Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Board of Directors
As of March 18, 1998, the Board of Directors consisted of seven
members, who are identified in the following table. Each of the directors was
elected or appointed to serve a one-year term and until his successor has been
duly qualified for office.
Director Principal Occupation During Last Five Years and
Name Age since Directorships of Public Companies
----------------------------------------------------------------------------------------------------------------
Allen H. Blake 55 1994 Vice President, Chief Financial officer and Secretary of FBA
since 1994; Director and Executive Vice President of FCB from
1995 until its merger into FBA in February 1998; Executive
Vice President of First Banks since 1996; Senior Vice
President of First Banks from 1992 until 1996; Secretary and
Director of First Banks since 1988; joined First Banks as Vice
President and Chief Financial Officer in 1984.
Charles A. Crocco, Jr.(1) 59 1988 Partner in the law firm of Crocco & De Maio, P.C., New
YorkCity since 1970; Director of The Hallwood Group Incorporated
(merchant banking).
James F. Dierberg 60 1994 Chairman of the Board of Directors, Chief Executive Officer and
President of FBA since 1995; Chairman of the Board and Chief
Executive Officer of First Banks since 1988; Director of First
Banks since 1979; President of First Banks, 1979-1992 and 1994-
present.
Albert M. Lavezzo (2) 61 1998 President and Chief Operating Officer of Favaro, Lavezzo,
Gill, Caretti & Heppell, Vallejo, California, a professional
legal corporation.
Edward T. Story, Jr. (1) 54 1987 President, Chief Executive Officer and Director of SOCO
International, plc, a corporation listed on the London Stock
Exchange, engaged in international oil and gas operations,
since 1991; from 1990 until 1991, Chairman of Thaiatex
Petroleum Company; from 1981 to 1990, Vice Chairman And Chief
Financial Officer of Conquest Exploration Company; Director of
Cairn Energy plc, Hallwood Realty Corporation, Snyder Oil
Corporation And Seaunion Holdings, Ltd.
Mark T. Turkcan 42 1994 Executive Vice President (Retail and Mortgage Banking), First
Banks, since 1996; Senior Vice President (Retail and Mortgage
Banking), First Banks, since 1994 and Vice President from 1990
until 1994; joined First Banks when Clayton Savings and Loan
Association, St. Louis, Missouri (now First Bank), for whom
Mr. Turkcan was employed in various capacities since 1985, was
acquired by FirstBanks in 1990.
Donald W. Williams 50 1995 Executive Vice President of First Banks since 1996; Senior Vice
President of First Banks from 1993 until 1996; Director of FCB
from 1995 until its merger into FBA in February 1998; Chief
Credit Officer of First Banks and executive officer of various
subsidiaries of First Banks since 1993; previously served as
Senior Vice President in charge of commercial credit approval,
commercial loan operations, international operations and the
credit department of Mercantile Bank of St. Louis, N.A. from
1989 ,until 1993. Mr. Williams currently serves as Executive
Vice President and Chief Credit Officer of First Banks and
Chairman and Chief Executive Officer of the California
subsidiaries thereof.
- -------------
(1) Member of the Audit Committee.
(2) Mr. Lavezzo was the Chairman of the Board of Directors of Surety Bank,
Vallejo, California ("Surety") prior to its acquisition by FBA in December
1997. The agreement by which Surety was acquired provided that FBA would
cause a person designated by Surety's Board of Directors to be appointed to
FBA's Board of Directors, and Mr. Lavezzo was so designated.
Executive Officers
The executive officers of the Company as of March 18, 1998 were is
follows:
Name Age FBA Office(s) held
- -------------------------------------------------------------------------------
James F. Dierberg 60 Chairman of the Board, President and Chief
Executive Officer.
Allen H. Blake 55 Vice President, Chief Financial Officer and
Secretary.
David F. Weaver 50 Executive Vice President of FBA since
1995; Chairman of the Board, Chief
Executive Officer and President of BankTEXAS
since 1994; President of BankTEXAS Houston
N.A. (predecessor of BankTEXAS) from 1988 to
1994.
The executive officers were each elected by the Board of Directors to
the office indicated. There is no family relationship between any of the
nominees for director, directors or executive officers of the Company or its
subsidiaries.
Item 11. Executive Compensation
The following table sets forth certain information regarding
compensation earned during the year ended December 31, 1997, and specified
information with respect to the two preceding years, by Mr. Weaver, who is the
only executive officer of FBA whose annual compensation in 1997 from FBA or the
Subsidiary Banks exceeded $100,000.
Neither Mr. Dierberg nor Mr. Blake receives any compensation directly
from either the Company or the Subsidiary Banks. The Company and the Subsidiary
Banks have entered into various contracts with First Banks, of which Messrs.
Dierberg and Blake are directors and executive officers, pursuant to which
services are provided to the Company and the Subsidiary Banks (see "Compensation
Committee Interlocks and Insider Participation" for additional information
regarding contracts with First Banks).
SUMMARY COMPENSATION TABLE FOR YEAR ENDED DECEMBER 31, 1997
Name and Principal Position Year Salary (1) Bonus All Other Compensation (2)
- ---------------------------------------------------------------------------------------------------------------
David F. Weaver, Executive Vice 1997 $ 103,750 $22,000 $3,144
President; Chairman of the Board, 1996 86,875 20,625 2,172
President and Chief Executive Officer 1995 107,500 0 3,225
of BankTEXAS N.A.
- ---------------------
(1) The total of all other annual compensation for each of the named
officers is less than the amount required to be reported which is the
lesser of (a) $50,000 or (b) ten percent (10%) of the total of the
annual salary and bonus paid to that person.
(2) All items reported are FBA's matching contributions to the 401(k) Plan
for the year indicated.
FBA has omitted from this report tables which would disclose
information regarding stock options granted during 1997, stock options exercised
during 1997 and long term incentive plan awards. No options were granted to or
exercised by executive officers in 1997, and FBA does not have a long term
incentive plan.
Director Compensation
Directors who are not officers of FBA or affiliated with First Banks
("Unaffiliated Directors," consisting in 1997 of Messrs. Crocco and Story) were
paid fees for their service as directors in 1997, consisting of an annual
retainer of $7,500, a fee for each meeting of the Board of Directors attended of
$3,000 and a fee of $500 for each committee meeting attended. Effective January
1, 1998, Unaffiliated Directors of FBA are to be paid a fee of $2,000 for each
meeting of the Board of Directors attended and a fee of $500 for each committee
meeting attended.
Unaffiliated Directors also participate in the 1993 Directors' Stock
Bonus Plan (the "Stock Bonus Plan"), which provides for an annual grant of 500
shares of Common Stock to each such director. Future grants would apply equally
to current directors and to any individual who becomes a director of FBA in the
future. The maximum number of shares that may be issued will not exceed 16,667
shares, and the plan will expire on July 1, 2001. Directors' compensation
expense of $13,000 was incurred in 1997 in connection with the Stock Bonus Plan.
None of the four directors of FBA who are also executive officers of
First Banks (Messrs. Dierberg, Blake, Turkcan and Williams) receive any
compensation from FBA or the Subsidiary Banks for service as a director, nor do
they participate in the Stock Bonus Plan or any other compensation plan of FBA
or the Subsidiary Banks. First Banks, of which Messrs. Dierberg, Blake, Turkcan
and Williams are executive officers and Messrs. Dierberg and Blake are
directors, provides various services to FBA and the Subsidiary Banks for which
it is compensated (see "Compensation Committee Interlocks and Insider
Participation").
Compensation Committee Interlocks and Insider Participation
Messrs. Dierberg and Blake, who are executive officers of FBA but do
not receive any compensation for their services as such, are also members of the
Board of Directors and executive officers of First Banks. Mr. Blake was also a
director and executive officer of FCB prior to its merger into FBA in February
1998. First Banks does not have a compensation committee, but its Board of
Directors performs the functions of such a committee. Except for the foregoing,
no executive officer of FBA served during 1997 as a member of the Compensation
Committee, or any other committee performing comparable functions, or as a
director, of another entity any of whose executive officers or directors served
on FBA's Compensation Committee.
First Banks provides management services to FBA and the Subsidiary
Banks. Management services are provided under a management fee agreement whereby
FBA compensates First Banks on an hourly basis for its use of personnel for
various functions including internal audit, loan review, income tax preparation
and assistance, accounting, asset/liability and investment services, loan
servicing and other management and administrative services. Fees paid under this
agreement were $931,000 and $687,000 for the years ended December 31, 1997 and
1996, respectively. The fees paid for management services are at least as
favorable as could have been obtained from an unaffiliated third party.
Because of the affiliation with First Banks and the geographic
proximity of certain of their offices, FBA shares the cost of certain personnel
and services used by FBA and First Banks. This includes the salaries and
benefits of certain loan and administrative personnel. The allocation of the
shared costs are charged and/or credited under the terms of cost sharing
agreements entered into during 1997. Because this involves distributing
essentially fixed costs over a larger asset base, it allows each bank to receive
the benefit of personnel and services at a reduced cost. Fees paid under these
agreements were $383,000 for the year ended December 31, 1997.
Effective April 1, 1997, First Services L.P., a limited partnership
indirectly owned by FBA's Chairman and his children through its general partners
and limited partners, began providing data processing and various related
services to FBA under the term of data processing agreements. Previously, these
services were provided by a subsidiary of First Banks. Fees paid under these
agreements were $643,000 and $311,000 for the years ended December 31, 1997 and
1996, respectively. The fees paid for data processing services are at least as
favorable as could have been obtained from an unaffiliated third party.
The Subsidiary Banks participate in loans with other bank affiliates of
First Banks; as of December 31, 1997, $41.9 million of purchased loan
participations and $42.7 million of sold loan participations were outstanding.
Loans are purchased and sold at prevailing interest rates and terms at the time
of such transactions and in accordance with the credit standards and policies of
the purchasing entity.
FBA borrows funds from First Banks pursuant to a promissory note
agreement. As of March 18, 1998, the balance advanced under the note was $13.1
million. See Note 13 to the Consolidated Financial Statements, incorporated
herein by reference.
Employee Benefit Plans
FBA maintains various employee benefit plans. Directors are not
eligible to participate in such plans except the 1990 Stock Option Plan and the
1993 Directors' Stock Bonus Plan unless they are also employees of FBA or one of
its subsidiaries. Although Messrs. Blake and Dierberg are executive officers,
they are not participants in any employee benefit plans of FBA.
The Employees Retirement Plan (the "Pension Plan") is a
noncontributory, defined benefit plan for all eligible officers and employees of
FBA and its subsidiaries. During 1994, the Company discontinued the accumulation
of benefits under the Pension Plan. While the Pension Plan continues in
existence and provides benefits which had then accumulated, no additional
benefits have accrued to participants since 1994, and no new participants will
become eligible for benefits thereafter.
Benefits under the Pension Plan are based upon annual base salaries and
years of service as of 1994 and are payable only upon retirement or disability
and, in some instances, at death. A participant who fulfilled the eligibility
and tenure requirements prior to the discontinuation of accumulation of benefits
will receive, upon reaching the normal retirement age of 65, monthly benefits
based upon average monthly compensation during the five consecutive calendar
years out of his or her last ten calendar years prior to 1994 that provided the
highest average compensation.
As of December 31, 1997, Mr. Weaver would be eligible to receive annual
benefits of approximately $11,000 upon retirement at age 65.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 18, 1998, certain
information with respect to the beneficial ownership of Common Stock and Class B
Stock by each person known to the Company to be the beneficial owner of more
than five percent of the outstanding shares of either class of stock, by each
director and executive officer and by all executive officers and directors as a
group:
Title of Name of Beneficial Number of Shares and Nature of Percent of
- -------------------------------------------------------------------------------------------------------------
Class Owner Beneficial Ownership Class
Class B Stock First Banks, Inc. 2,500,000 (1)(2)(3) 100.0
135 N. Meramec
Clayton, Missouri 63105
Class B Stock James F. Dierberg 2,500,000 (1)(2)(3) 100.0
Common Stock First Banks, Inc. 1,939,685 (1)(2)(3)(4) 56.5
Common Stock James F. Dierberg 1,939,685 (1)(2)(3)(4) 56.5
Common Stock Allen H. Blake 1,902 (5) *
Common Stock Charles A. Crocco, Jr. 9,272 (6) *
Common Stock Albert M. Lavezzo 20,164 (5) *
Common Stock Edward T. Story, Jr. 9,182 (6) *
Common Stock Mark T. Turkcan 200 (5) *
Common Stock David F. Weaver 8,000 (5) *
Common Stock Donald W. Williams 1,033 (5) *
All executive officers 1,989,438 shares 58.0% of Common
and directors as a Common Stock (4) Stock
group (8 persons)
2,500,000 shares 100% of Class
Class B Stock B Stock
* Less than one percent
(1) The shares shown as beneficially owned by First Banks and James F.
Dierberg comprise 100% of the outstanding s hares and percentages
reflected are Common Stock. Each share of Common Stock and Class B
Stock is entitled to one vote on matters subject to stockholder vote.
Under Rule 13d-3(d), shares not outstanding which are subject to
options, warrants, rights, or conversion privileges exercisable within
60 days are deemed outstanding for the purpose of calculating the
number and percentage owned by such person, but not deemed outstanding
for the purpose of calculating the percentage owned by each other
person listed. All of the shares of Class B Stock and Common Stock
owned by First Banks are pledged to secure a loan to First Banks from
a group of unaffiliated lenders. The related credit agreement contains
customary provisions which could ultimately result in transfer of such
shares if First Banks were to default in the repayment of the loan and
such default were not cured, or other arrangements satisfactory of the
lenders were not made, by First Banks.
(2) The controlling stockholders of First Banks are (i) the James F. Dierberg,
II, Family Trust, dated December 30, 1992; (ii) Mary W. Dierberg and
Michael James Dierberg, trustees under the living trust of Michael James
Dierberg, dated July 24, 1989; (iii) the Ellen C. Dierberg Family Trust,
dated December 30, 1992; (iv) James F. Dierberg, trustee of the James F.
Dierberg living trust, dated October 8, 1985; (v) the Michael J. Dierberg
Family Trust, dated December 30, 1992; and (vi) First Trust (Mary W.
Dierberg and First Bank, Trustees) established U/I James F. Dierberg, dated
December 12, 1992. Mr. James F. Dierberg and Mrs. Mary W. Dierberg are
husband and wife, and Messrs. James F. Dierberg, II, Michael James Dierberg
and Miss Ellen C. Dierberg are their adult children.
(3) Due to the relationships among James F. Dierberg, Mary W. Dierberg, First
Bank and the three children of James F. and Mary W. Dierberg, Mr. Dierberg
is deemed to share voting and investment power over all of the outstanding
voting stock of First Banks which in turn exercises voting and investment
power over the shares of Common Stock and Class B Stock attributed to it in
the table.
(4) Includes 673,509 shares of Common Stock which First Banks has the right to
acquire upon conversion of $6.5 million principal amount plus $1.9 million
accrued interest on a convertible debenture issued to First Banks in
connection with the acquisition by FBA of FCB. Such shares are deemed
outstanding for the purpose of calculating the percentage ownership of
First Banks, Mr. Dierberg and executive officers and directors as a group,
but are not otherwise taken into account in calculating the percentages
shown in the table.
(5) All of the shares attributed in the table to Messrs. Blake, Turkcan, Weaver
and Williams are owned by them directly; Mr. Lavezzo owns 8,710 shares
directly and 11,454 shares indirectly through a profit-sharing/pension
plan.
(6) The shares attributed to Messrs. Crocco and Story include shares subject to
vested, currently exercisable stock options granted under the Company's
1990 Stock Option Plan. Mr. Crocco has an option covering 6,666 shares; he
owns directly 2,606 shares. Mr. Story has an option covering 6,666 shares;
he owns directly 2,516 shares.
Item 13. Certain Relationships and Related Transactions
The Subsidiary Banks have had in the past, and may have in the future,
loan transactions in the ordinary course of business with directors of FBA or
their affiliates. These loan transactions have been and will be on the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with unaffiliated persons and did not and will not
involve more than the normal risk of collectibility or present other unfavorable
features. The Subsidiary Banks do not extend credit to officers of FBA or of the
Subsidiary Banks, except extensions of credit secured by mortgages on personal
residences, loans to purchase automobiles and personal credit card accounts.
Certain of the directors and officers of FBA and their respective
affiliates have deposit accounts with the Subsidiary Banks. It is the policy of
the Subsidiary Banks not to permit any officers or directors of the Subsidiary
Banks or their affiliates to overdraw their respective deposit accounts unless
that person has been previously approved for overdraft protection under a plan
whereby a credit limit has been established in accordance with the standard
credit criteria of the Subsidiary Banks.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements and Supplementary Data: The financial
statements and supplemental data filed as part of this Report are
listed under Item 8.
2. Financial Statement Schedules: These schedules are omitted for the
reason they are not required or are not applicable.
3. Exhibits: The exhibits are listed in the index of exhibits
required by Item 601 of Regulation S-K at Item (c) below and are
incorporated herein by reference.
(b) Reports on Form 8-K
FBA filed a Current Report on Form 8-K on December 17, 1997. Items
2 and 7 reported the acquisition of Surety Bank through a merger with
FB California. Included in Item 7 of the Report are the following
financial information and pro forma financial information relating to
Surety Bank:
1. Consolidated Balance Sheet as of September 30, 1997 and December
31, 1996 (Unaudited).
2. Consolidated Statements of Operations for the three and nine
months ended September 30, 1997 and 1996 (Unaudited).
3. Consolidated Statements of Changes in Stockholders' Equity for the
year ended December 31, 1996 and the nine months ended September
30, 1997 (Unaudited).
4. Consolidated Condensed Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996 (Unaudited).
5. Audited Consolidated Financial Statements as of and for the years
ended December 31, 1996 and 1995.
6. Pro Forma Combined Condensed Balance Sheet as of December 31,1996
(Unaudited).
7. Pro Forma Consolidated Condensed Statements of Operations for the
nine months ended September 30, 1997 and 1996 and for the year
ended December 31, 1996 (Unaudited).
8. Notes to Pro Forma Combined Condensed Financial Statements
(Unaudited).
(c) The index of required exhibits is included beginning on page 20 of this
Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
First Banks America, Inc.
By: /s/ James F. Dierberg
-------------------------
James F. Dierberg
Chairman of the Board,
President and Chief
Executive Officer
March 26, 1998
By: /s/ Allen H. Blake
----------------------
Allen H. Blake
Chief Financial Officer
and Principal Accounting
Officer
March 26, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the date indicated.
Signatures Title Date
---------- ----- ----
/s/ James F. Dierberg Director March 26, 1998
---------------------
James F. Dierberg
/s/ Allen H. Blake Director March 26, 1998
------------------
Allen H. Blake
/s/ Charles A. Crocco. Jr. Director March 26, 1998
--------------------------
Charles A. Crocco, Jr.
/s/ Albert M. Lavezzo Director March 26, 1998
---------------------
Albert M. Lavezzo
/s/ Edward T. Story, Jr. Director March 26, 1998
------------------------
Edward T. Story, Jr.
/s/ Mark T. Turkcan Director March 26, 1998
-------------------
Mark T. Turkcan
/s/ Donald W. Williams Director March 26, 1998
----------------------
Donald W. Williams
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
3(a) Restated Certificate of Incorporation of the Company
effective August 31, 1995 (filed as Exhibit 3(a) to
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995 and incorporated herein by
reference).
3(b) Amended and Restated Bylaws of the Company (as amended
April 21, 1995) (filed as Exhibit 3(b) to Quarterly
Report on Form 10-Q for the quarter ended March 31,
1995 and incorporated herein by reference).
4(a) Specimen Stock Certificate for Common Stock (filed as
Exhibit 1.01 to the Company's Amendment No. 1 to Form
8-A on Form 8, dated September 4, 1987, and
incorporated herein by reference).
10(a)* BancTEXAS Group Inc. 1990 Stock Option Plan (as
amended July 22, 1993) (filed as Exhibit 10(c) to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1993, and incorporated herein by
reference).
10(b)* 1993 Directors' Stock Bonus Plan (filed as Exhibit
10(k) to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1993 and
incorporated herein by reference).
10(c) Stock Purchase and Operating Agreement by and between
First Banks, Inc., a Missouri Corporation and the
Company, dated May 19, 1994 (filed as Exhibit 10(d) to
the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994 and incorporated herein
by reference).
10(d)* Management Agreement by and between First Banks, Inc.
and BankTEXAS N.A., dated November 17, 1994 (filed as
Exhibit 10(h) to the Annual Report on Form 10-K for the
year ended December 31, 1994 and incorporated herein by
reference).
10(e)* Data Processing Agreement by and between First Serv,
Inc. (a subsidiary of First Banks, Inc.) and BankTEXAS
N.A., dated December 1, 1994 (filed as Exhibit 10(i)
to the Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by
reference).
10(f)* Financial Management Policy by and between First Banks,
Inc. and the Company, dated September 15, 1994
(filed as Exhibit 10(j)) to the Annual Report on Form
10-K for the year ended December 31, 1994 and
incorporated herein by reference).
10(g)* Federal Funds Agency Agreement by and between First
Banks, Inc. and the Company, dated September 15, 1994
(filed as Exhibit 10(k) to the Annual Report on Form
10-K for the year ended December 31, 1994 and
incorporated herein by reference).
10(h)* Funds Management Policy by and between First Banks,
Inc. and BankTEXAS, N.A., dated September 15, 1994
(filed as Exhibit 10(l) to the Annual Report on Form
10-K for the year ended December 31, 1994 and
incorporated herein by reference).
10(i)* Management Services Agreement by and between First
Banks, Inc. and Sunrise Bank of California dated
December 16, 1996 (filed as Exhibit 10(j)) to the
Annual Report on Form 10-K for the year ended December
31, 1996 and incorporated herein by reference).
10(j)* Service Agreement by and between First Serv, Inc. and
Sunrise Bank of California (relating to data processing
services) dated November 21, 1996 (filed as Exhibit
10(k) to the Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated herein by
reference).
10(K)* Federal Funds Agency Agreement by and between First
Banks, Inc. and Sunrise Bank of California dated
November 19, 1996 (filed as Exhibit 10(l) to the Annual
Report on Form 10-K for the year ended December 31,
1996 and incorporated herein by reference).
10(1)* Funds Management Policy by and between First Banks,
Inc. and Sunrise Bank of California dated November 19,
1996 (filed as Exhibit 10(m) to the Annual Report on
Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference).
10(m) Agreement and Plan of Reorganization dated July 28,
1997, by and between FBA and Sure Bank (filed as
Exhibit 2 to the Current Report on Form 8-K dated
August 7, 1997 and incorporated herein by reference).
10(n) Agreement and Plan of Merger by and between FBA and
Pacific Bay Bank dated September 22, 1997 (filed as
Exhibit 2(b) to the Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997 and
incorporated herein by reference).
10(o) Agreement and Plan of Merger by and between FBA and
FCB dated October 3, 1997 (filed as Exhibit 2(c) to
the Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997 and incorporated herein by
reference).
10(p) Promissory note payable to First Banks, Inc. dated
November 4, 1997 (filed as Exhibit 10(o) to the
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 and incorporated herein by
reference).
1O(q)* Cost sharing agreement by and among First Bank & Trust,
Sunrise Bank of California, Sundowner Corporation and
First Banks America, Inc.
10(r)* Service Agreement by and between First Services, L.P.
and BankTEXAS N. A., dated April 1, 1997.
10(s)* Service Agreement by and between First Services, L.P.
and First Bank of California, dated April 1, 1997.
13 1997 Annual Report to Stockholders filed herewith.
Portions not specifically incorporated by reference
in this Report are not deemed "filed" for the purposes
of the Securities Exchange Act of 1934.
21 Subsidiaries of the Company - filed herewith.
23(a) Consent of Peat Marwick LLP-- filed herewith.
27 Financial Data Schedule.
-------------------
* Exhibits designated by an asterisk in this Index to Exhibits relate to
management contracts and/or compensatory plans or arrangements.
EXHIBIT 10(Q)
COST SHARING AGREEMENT BY AND AMONG
FIRST BANK & TRUST
SUNRISE BANK
SUNDOWNER CORPORATION AND
FIRST BANKS AMERICA
This Cost Sharing Agreement (the "Agreement") is made this 21st day of
January 1997, by and between First Bank & Trust, Irvine, California, a
California banking corporation ("First Bank") and Sunrise Bank, Roseville,
California, a California banking corporation ("Sunrise"), (each "Bank" and
collectively the "Banks") and Sundowner Corp, Inc., a Nevada corporation
("Sundowner Corp.") and First Banks America, Inc. a Delaware corporation ("First
Banks America").
WHEREAS First Bank is currently operating as a commercial and retail bank
in the State of California, with offices in Walnut Creek and San Jose,
California, as well as Orange County and Los Angeles County, California, and
desires to share with Sunrise Bank and Sundowner Corp and First Banks America
the costs, benefits and services of certain personnel and
WHEREAS Sunrise Bank is currently operating as a commercial and retail
bank in the State of California, with offices in Roseville, Citrus Heights and
San Francisco, California, and desires to share with First Bank the costs,
benefits and services of certain personnel, and purchase certain other services
from First Bank,
WHEREAS Sundowner Corp. is a registered Bank Holding Company, and First
Banks America is a registered Bank Holding Company, and desire to share with
First Bank the costs, benefits and services of certain personnel and purchase
certain other services from First Bank,
WHEREAS First Bank is a wholly-owned subsidiary of First Banks, Inc., a
Missouri corporation and a multi-bank and thrift holding company ("FB, Inc.")
and
WHEREAS FB, Inc. has acquired majority control of Sunrise Bank,
THEREFORE, in consideration of the premises and the mutual terms and
provisions set forth in the Agreement, First Bank, Sunrise Bank, Sundowner Corp.
and First Banks America hereby agree as follows:
Services to be performed:
First Bank shall undertake to perform certain services for the benefit of
Sunrise Bank, Sundowner Corp. and First Banks America, including, but not
limited to those enumerated below, as and when requested by Sunrise Bank or
Sundowner Corp. or First Banks America, as the case may be, and approved by
First Bank, these services will generally be provided by employees of First
Bank, but may include services provided by external sources such as independent
contractors or consultants retained by First Bank on behalf of itself and
Sunrise Bank and Sundowner Corp. and First Banks America, as the case may be.
First Bank will prepare a monthly statement to Sunrise Bank and Sundowner Corp.
and First Banks America, respectively, indicating the nature of the services
performed, the entity performing such services and the fees charged for such
services.
Sunrise Bank, Sundowner Corp. and First Banks America shall undertake to
perform certain services for the benefit of First Bank, including, but not
limited to those enumerated below, as and when requested by First Bank and
approved by Sunrise Bank, Sundowner Corp. and First Banks America. These
services will generally be provided by employees of Sunrise Bank, Sundowner
Corp. and First Banks America, but may include services provided by external
sources such as independent contractors or consultants retained by Sunrise Bank,
Sundowner Corp. and First Banks America on behalf of itself and First Bank.
Sunrise Bank, Sundowner Corp. and First Banks America will prepare a monthly
statement to First Bank indicating the nature of the services performed, the
entity performing such services and the fees charged for such services.
Notwithstanding anything else contained in this Agreement to the
contrary, any such services provided by First Bank to either Sunrise Bank,
Sundowner Corp or First Banks America, or by Sunrise Bank, Sundowner Corp or
First Banks America to First Bank pursuant to this Agreement shall be provided
on terms and conditions including audit standards, that are substantially the
same, or at least as favorable to First Bank, Sunrise Bank, Sundowner Corp. or
First Banks America as the case may be, as then prevailing at the time for
comparable transactions with or not involving other non-affiliated companies, or
in the absence of comparable transactions, on terms and under circumstances,
including audit standards, that in good faith would be offered to, or would
apply to, non-affiliated companies.
Services performed by employees of First Bank will be billed to Sunrise
Bank or Sundowner Corp. or First Banks America, as the case may be, and services
performed by employees of Sunrise Bank, Sundowner Corp. or First Banks America
will be billed to First Bank, on the most appropriate basis for the type of
service provided. For loan officers engaged in the development of new business
and marketing, charges will be based on the aggregate loan volume assigned to
each officer for each Bank. Generally, services provided by other employees will
be charged on the basis of hours required to perform the services using hourly
rates established for each employee. Hours billed for exempt employees will be
charged based on a maximum of eight hours per day, forty hours per week. Hours
billed for non-exempt employees will be charged based on actual hours worked,
including any overtime hours for which such employee may have been paid.
The base rates will be established by dividing each such employee's
annualized wages, excluding any overtime compensation by 1,864 hours per year.
This amount will be increased by 20% to compensate for the cost of fringe
benefits, payroll taxes and the cost of premises, equipment, supplies and other
expenses incurred by each Bank on behalf of the employee. Rates for overtime
hours of non-exempt employees will be calculated at 150% or 200% of the
employee's base rate as may be appropriate for the hours charged.
Services provided by external sources will be charged at cost. The
allocation of costs between the Banks will generally be on the basis of hours
expended for each Bank, unless another basis is determined mutually by the Banks
to be more appropriate for the particular service and charge.
Included in the services to be provided will be the following:
1. Lending:
a. Loan and business development
b. Loan administration and support
c. Loan collection and workout
d. Other lending activities
2. Human Resources:
a. Human resources administration
b. Records and compliance
c. Employee recruiting and training
d. Payroll administration and benefits
e. Other branch administration
3. Branch administration:
a. Branch operations
b. Customer service and training
c. Data capture and item processing
d. Other branch administration activities
Travel expenses incurred in connection with the performance of services
will be charged to each Bank based on the expense reports received from the
employees. Travel time, or other non-productive time, will not be charged to the
Banks.
Billing of fees:
Each Bank shall prepare and submit to the other Bank a monthly bill for
services rendered in sufficient detail to provide that Bank a basis for
evaluating the cost/benefit of items charged. It shall be the responsibility of
the Bank preparing the statement to maintain time reports, worksheets and
summaries supporting the amounts billed. Such documentation will be furnished to
the other Bank, and/or its examiners or auditors upon request.
Amounts billed will be payable to the billing Bank by either a direct
payment or offsetting it against a reciprocal bill submitted to that Bank after
approval of payment thereof by the Bank being billed. If either Bank disputes
the amounts billed, such Bank will provide to the billing Bank a written
explanation of its disagreement and a solution for resolving the dispute. If the
Banks are unable to reach an agreement with respect to the disputed items, the
disagreement will be resolved by a decision between the Presidents of the Banks.
Payments will be due by the last day of the month following the month in which
the services were performed. Cost sharing statements will be provided to the
other Bank at least five working days prior to payment.
General:
Each Bank shall make available to the other Bank all records, facilities
and personnel reasonably necessary to enable it to perform the services
required, which records and other materials shall be returned to that Bank when
the services are completed. The Bank performing the services shall furnish the
necessary forms and instructions to the other Bank's personnel.
Each Bank shall give the same care to the other Bank's work as it gives
to its own work. However, neither Bank shall warrant the work free of error, and
each Bank shall be liable only for its own gross negligence or willful
misconduct.
The services performed under this Agreement by each Bank will be subject
to the regulations and examination of the federal or state agencies having
supervisory jurisdiction over the Bank to the same extent as if such services
were being performed solely by the Bank on its own premises. The provisions of
this Agreement are subject to the approval, modification, regulation or ruling
of any governmental agency having jurisdiction over each Bank, Sunrise Bank,
First Banks or its affiliates. This Agreement shall be binding upon the parties
and their successors or assigns, and may only be amended or modified by a
writing executed by the parties hereto.
Each Bank will hold in confidence, during the term and following the
termination of this Agreement, all information relating to the other Bank's
assets, liabilities, business or affairs, or those of any of its customers,
which such Bank may receive in the course of rendering the services hereunder
and shall return all confidential information obtained during the performance of
the Agreement to the other bank upon termination of the Agreement. Each Bank
will make the same effort to safeguard such information as it does to protect
its own proprietary data.
The term of the Agreement is for one year, but it shall be automatically
renewable for additional periods of one year each unless any party hereto shall
give thirty (30) days' written notice of termination prior to the end of any
term to the other parties hereto.
IN WITNESS WHEREOF, the parties hereto have, by their duly authorized
officers executed this Agreement this 21st day of January, 1997.
FIRST BANK & TRUST
By /s/ Terrance M. McCarthy
- ---------------------------
Its Senior Vice President
- -------------------------
SUNRISE BANK
By /s/ Donald W. Williams
- -------------------------
Its President
- -------------
SUNDOWNER CORPORATION
By /s/ Allen H. Blake
- ---------------------
Its Vice President
- ------------------
FIRST BANKS AMERICA
By /s/ Allen H. Blake
- ---------------------
Its Vice President
- ------------------
EXHIBIT 10(r)
SERVICE AGREEMENT
This Service Agreement is made and entered into as of the 1st day of
April, 1997, by and between First Services, L.P., a Missouri Limited Partnership
and BankTEXAS N.A., a banking institution duly organized and existing by virtue
of the laws of the United State.
WHEREAS, BankTEXAS and FIRSTSERV, INC. entered into a Service Agreement
dated December 8, 1995, as amended; and
WHEREAS, said Service Agreement was assigned to First Services, L.P. on or
about April 1, 1997; and
WHEREAS, FIRST SERVICES, L.P. and BankTEXAS desire to amend and restate
said Service Agreement in its entirety.
NOW, THEREFORE, for and in consideration of the mutual promises and
covenants contained herein, and the sum of Ten Dollars ($l0.00) in hand paid,
each to the other, the receipt and sufficiency of which is hereby acknowledged,
the parties agree as follows:
I. TERMINATION AND REVOCATION
The Parties hereto hereby revoke, cancel and hold for naught the
Service Agreement dated December 8, 1995, as amended, and hereby substitute in
its place the Service Agreement herein contained.
II. SERVICES
(A) First Services, L.P. shall furnish BankTEXAS data processing and
item processing services selected by BankTEXAS from the Product
and Price Schedule as per Attachment 1, attached hereto and
incorporated herein by reference thereto. Additional services may
be selected upon prior written notice to First Services, L.P. at First
Services, L.P.'s then current list price by executing an amended
Summary Page.
(B) First Services, L.P. will provide conversion and training services for
the fees specified from the Product and Price Schedule
(Attachment 1). Classroom training in the use and operation of the
system for the number of BankTEXAS personnel mutually agreed upon in
the conversion planning process will be provided at a training
facility mutually agreed upon. Conversion services are those
activities designed to transfer the processing of BankTEXAS's data
from its present processing company to First Services, L.P.
(C) First Services, L.P. will also provide Network Support Service
consisting of communication line monitoring and diagnostic
equipment and support personnel to discover, diagnose, repair or
report line problems to the appropriate telephone company. The fee
for this service is also listed from the Product and Price Schedule
(Attachment 1).
(D) First Services, L.P. shall upon request act as BankTEXAS's
designated representative to arrange for the purchase, and
installation of data lines necessary to access the First Services,
L.P. system. Where requested, additional dial-up lines and
equipment to be utilized as a backup to the regular data lines may
also be ordered. First Services, L.P. shall bill BankTEXAS for the
actual charges incurred for the data lines and for the maintenance
of the modems and other interface devices.
(E) Processing priorities will be determined by mutual agreement of the
parties hereto.
III. TERM
The term of this Agreement shall be twelve (12) months commencing on
April 1, 1997. Upon expiration, the Agreement will automatically renew
for successive terms of twelve (12) months each unless either party
shall have provided written notice to the other at least one-hundred
eighty (180) days prior to the expiration of the then current term, of
its intent not to renew. In the event of termination, First Services,
L.P. shall provide reasonable time allowance to allow BankTEXAS to
convert to another system.
IV. SOFTWARE/FIRMWARE
Unmodified third party software or firmware ("Software") may be
supplied as part of the Agreement. All such Software shall be provided
subject to Software License Agreements.
V. PRICE AND PAYMENT
(A) Fees for First Services, L.P.'s services are set forth from the
Product and Price Schedule (Attachment 1), including where applicable
minimum monthly charges and payment schedules for onetime fees.
(B) Standard Fees shall be invoiced no later than the fifteenth
(15th) of each month for the then current month. Terms of payment
shall be net cash. (C) The Base Service Charge listed from the
Product and Price Schedule (Attachment 1) shall not change more than
once a year and then only upon six (6) months' prior written notice.
The fee schedule shall be reviewed annually to ensure fair market
value in pricing. Comparisons will be made with peers and other
providers of similar services.
(D) This above limitation shall not apply to pass-thru expenses. A
pass-thru expense is a charge for goods or services by First
Services, L.P. on BankTEXAS's behalf which are to be billed to
BankTEXAS without mark-up.
(E) The fees listed from the Product and Price Schedule (Attachment 1)
do not include and BankTEXAS is responsible for furnishing
transportation or transmission of information between First Services,
L.P.'s data center, BankTEXAS's site and any applicable clearing
house, regulatory agency or Federal Reserve Bank. Where BankTEXAS
has elected to have First Services, L.P. provide Telecommunication
Services, the price for the Services will be provided and billed
as a pass-thru expense.
(F) Network Support Service Fees and Local Network Fees are based upon
services rendered from First Services, L.P.'s premises. Off-premise
support will be provided upon BankTEXAS's request on an as
available basis at First Services, L.P. then current charges for
time and materials, plus reasonable travel and living expenses.
VI. CLIENT OBLIGATIONS
(A) BankTEXAS shall be solely responsible for the input, transmission
or delivery of all information and data required by First Services,
L.P. to perform the services except where BankTEXAS has retained First
Services, L.P. to handle such responsibilities on its behalf. The
data shall be provided in a format and manner approved by First
Services, L.P. BankTEXAS will provide at its own expense or procure
from First Services, L.P. all equipment, computer software,
communication lines and interface devices required to access the First
Services, L.P. System. If BankTEXAS has elected to provide such items
itself, First Services, L.P. shall provide BankTEXAS with a list of
compatible equipment and software.
(B) BankTEXAS shall designate appropriate BankTEXAS personnel for training
in the use of the First Services, L.P. System, shall allow First
Services, L.P. access to BankTEXAS's site during normal business
hours for conversion and shall cooperate with First Services, L.P.
personnel in the conversion and implementation of the services.
(C) BankTEXAS shall comply with any operating instructions on the use of
the First Services, L.P. system provided by First Services, L.P.,
shall review all reports furnished by First Services, L.P. for
accuracy and shall work with First Services, L.P. to reconcile
any out of balance conditions. BankTEXAS shall determine and be
responsible for the authenticity and accuracy of all information
and data submitted to First Services, L.P.
(D) BankTEXAS shall furnish, or if First Services, L.P. agrees to so
furnish, reimburse First Services, L.P. for courier services
applicable to the services requested.
VII. GENERAL ADMINISTRATION
First Services, L.P. is continually reviewing and modifying the First
Services, L.P. system to improve service and to comply with federal
government regulations applicable to the data utilized in providing
services to BankTEXAS. First Services, L.P. reserves the right to make
changes in the service, including, but not limited to operating procedures,
security procedures, the type of equipment resident at and the location of
First Services, L.P.'s data center. First Services, L.P. will provide
BankTEXAS at least sixty (60) days prior written notice of changes in
procedures or reporting and at least six (6) months prior written notice of
changes in service costs.
VIII. CLIENT CONFIDENTIAL INFORMATION
(A) First Services, L.P. shall treat all information and data relating
to BankTEXAS business provided to First Services, L.P. by
BankTEXAS, or information relating to BankTEXAS's customers, as
confidential and shall safeguard BankTEXAS's information with the same
degree of care used to protect First Services, L.P.'s confidential
information. First Services, L.P. and BankTEXAS agree that master and
transaction data files are owned by and constitute property of
BankTEXAS. BankTEXAS's data and records shall be subject to
regulation and examination by State and Federal supervisory agencies
to the same extent as if such information were on BankTEXAS's premises.
First Services, L.P.'s obligations under this Section VIII shall survive
the termination or expiration of this Agreement.
(B) First Services, L.P. shall maintain adequate backup procedures
including storage of duplicate record files as necessary to reproduce
BankTEXAS's records and data. In the event of a service disruption due
to reasons beyond First Services, L.P.'s control, First Services,
L.P. shall use diligent efforts to mitigate the effects of such
an occurrence.
IX. FIRST SERVICES, L.P. CONFIDENTIAL INFORMATION
(A) BankTEXAS shall not use or disclose to any third persons any
confidential information concerning First Services, L.P. First
Services, L.P. confidential information is that which relates to First
Services, L.P.'s software, research, development, trade secrets or
business affairs including, but not limited to, the terms and
conditions of this Agreement but does not include information in the
public domain through no fault of BankTEXAS. BankTEXAS's obligations
under this Section IX shall survive the termination or expiration of
this Agreement.
(B) First Services, L.P.'s system contains information and computer
software which is proprietary and confidential information of First
Services, L.P., its suppliers and licensees. BankTEXAS agrees not to
attempt to circumvent the devices employed by First Services, L.P. to
prevent unauthorized access to the First Services, L.P.'s System.
X. WARRANTIES
First Services, L.P. will accurately process BankTEXAS's work provided
that BankTEXAS supplies accurate data and follows the procedures
described in First Services, L.P.'s User Manuals, notices and advises.
First Services, L.P. personnel will exercise due care in the processing
of BankTEXAS's work. In the event of an error caused by First Services,
L.P.'s personnel, programs or equipment, First Services, L.P. shall
correct the data and/or reprocess the affected report at no additional
cost to BankTEXAS.
XI. LIMITATION OF LIABILITY
IN NO EVENT SHALL FIRST SERVICES, L.P. BE LIABLE FOR LOSS OF GOODWILL,
OR FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING
FROM BANKTEXAS'S USE OF FIRST SERVICES L.P.'S SERVICES, OR FIRST
SERVICES, L.P.'S SUPPLY OF EQUIPMENT OR SOFTWARE, UNDER THIS AGREEMENT
REGARDLESS OF WHETHER SUCH CLAIM ARISES IN TORT OR IN CONTRACT. FIRST
SERVICES, L.P.'S AGGREGATE LIABILITY FOR ANY AND ALL CAUSES OF ACTION
RELATING TO SERVICES PERFORMED HEREUNDER OR ANY DAMAGE OR LOSS INCURRED
OR SUSTAINED BY BANKTEXAS RELATING TO THIS AGREEMENT AND THE SERVICES
PERFORMED HEREUNDER SHALL BE LIMITED TO THE AMOUNT OF TOTAL FEES PAID
BY BANKTEXAS TO FIRST SERVICES, L.P. IN THE THREE (3) MONTH PERIOD
PRECEDING THE DATE THE CLAIM ACCRUED. FIRST SERVICES, L.P.'S AGGREGATE
LIABILITY FOR A DEFAULT RELATING TO EQUIPMENT OR SOFTWARE SHALL BE
LIMITED TO THE AMOUNT PAID FOR THE EQUIPMENT OR SOFTWARE.
XII. PERFORMANCE STANDARDS
(A) On-Line Availability - First Services, L.P.'s standard of performance
shall be on-line availability of the system 98% of the time that it is
scheduled to be so available over a three month period (the
"Measurement Period"). Actual on-line performance will be calculated
monthly by comparing the number of hours which the system was
scheduled to be operational on an on-line basis with the number of
hours, or a portion thereof, it was actually operational on an on-line
basis. Downtime may be caused by operator error, hardware malfunction
or failure, or environmental failures such as loss of power or air
conditioning. Downtime caused by reasons beyond First Services, L.P.'s
control should not be considered in the statistics.
(B) Report Availability - First Services, L.P.'s standard of performance
for report availability shall be that, over a three (3) month period,
ninety-five percent (95%) of all Critical Daily Reports shall be
available for remote printing on time without significant errors. A
Critical Daily Report shall mean priority group reports which First
Services, L.P. and BankTEXAS have mutually agreed in writing are
necessary to properly account for the previous day's activity and
properly notify BankTEXAS of overdraft, NSF or return items. A
significant error is one which impairs BankTEXAS's ability to properly
account for the previous days activity and/or properly account for
overdraft, NSF or return items. Actual performance will be calculated
monthly by comparing the total number of BankTEXAS reports scheduled
to be available from First Services, L.P. to the number of reports
which were available on time and without error.
(C) Exclusive Remedy - In the event that First Services, L.P.'s
performance fails to meet the standards listed above and such failure
is not the result of BankTEXAS's error or omission, BankTEXAS's sole
and exclusive remedy for such default shall be the right to terminate
this Agreement in accordance with the provisions of this paragraph. In
the event that First Services, L.P. fails to achieve any Performance
Standards, alone or in combination, for the prescribed measurement
period, BankTEXAS shall notify First Services, L.P. of its intent to
terminate this agreement if First Services, L.P. fails to restore
performance to the committed levels. First Services, L.P. shall advise
BankTEXAS promptly upon correction of the system deficiencies (in no
event shall corrective action exceed sixty (60) days from the notice
date) and shall begin an additional measurement period. Should First
Services, L.P. fail to achieve the required Performance Standards
during the remeasurement period, BankTEXAS may terminate this
Agreement and First Services, L.P. shall cooperate with BankTEXAS to
achieve an orderly transition to BankTEXAS's replacement processing
system. BankTEXAS may also terminate this Agreement if First Services,
L.P.'s performance for the same standard is below the relevant
performance standard for more than two (2) measurement periods in any
consecutive twelve (12) months or for more than five (5) measurement
periods during the term of this agreement. During the period of
transition, BankTEXAS shall pay only such charges as are incurred for
monthly fees until the date of deconversion. First Services, L.P.
shall not charge BankTEXAS for services relating to BankTEXAS's
deconversion.
(D) Audit - BankTEXAS shall have the right to perform reasonable audits,
at its cost, upon giving written notice to First Services, L.P. of its
intent to do so. First Services, L.P. shall provide, upon request,
financial information to BankTEXAS.
XIII. DISASTER RECOVERY
(A) A Disaster shall mean any unplanned interruption of the operations of
or inaccessibility to the First Services, L.P. data center which
appears in First Services, L.P.'s reasonable judgement to require
relocation of processing to an alternative site. First Services, L.P.
shall notify BankTEXAS as soon as possible after it deems a service
outage to be a Disaster. First Services, L.P. shall move the
processing of BankTEXAS's standard on-line services to an alternative
processing center as expeditiously as possible. BankTEXAS shall
maintain adequate records of all transactions during the period of
service interruption and shall have personnel available to assist
First Services L.P., Inc. in implementing the switch over to the
alternative processing site. During a disaster, optional or on-request
services shall be provided by First Services, L.P. only to the extent
that there is adequate capacity at the alternate center and only after
stabilizing the provision of base on-line services.
(B) First Services, L.P. shall work with BankTEXAS to establish a plan for
alternative data communications in the event of a disaster. BankTEXAS
shall be responsible for furnishing any additional communications
equipment and data lines required under the adopted plan.
(C) First Services, L.P. shall test its Disaster Recovery Services Plan by
conducting one annual test. BankTEXAS agrees to participate in and
assist First Services, L.P. with such testing. Test results will be
made available to BankTEXAS's regulators, internal and external
auditors, and (upon request) to BankTEXAS's insurance underwriters.
(D) BankTEXAS understands and agrees that the First Services, L.P.
Disaster Recovery Plan is designed to minimize but not eliminate risks
associated with a disaster affecting First Services, L.P.'s data
center. First Services, L.P. does not warrant that service will be
uninterrupted or error free in the event of a disaster. BankTEXAS
maintains responsibility for adopting a disaster recovery plan
relating to disasters affecting BankTEXAS's facilities and for
securing business interruption insurance or other insurance as
necessary to properly protect BankTEXAS's revenues in the event of a
disaster.
XIV. DEFAULT
(A) In the event that BankTEXAS is thirty (30) days in arrears in making
any payment required, or in the event of any other material default by
either First Services, L.P. or BankTEXAS in the performance of their
obligations, the affected party shall have the right to give written
notice to the other of the default and its intent to terminate this
Agreement stating with reasonable particularity the nature of the
claimed default. This Agreement shall terminate if the default has not
been cured within a reasonable time with a minimum being thirty (30)
days from the effective date of the notice.
(B) Upon the expiration of this Agreement, or its termination, First
Services, L.P. shall furnish to BankTEXAS such copies of BankTEXAS's
data files as BankTEXAS may request in machine readable format form
along with such other information and assistance as or is reasonable
and customary to enable BankTEXAS to deconvert from the First
Services, L.P. system. BankTEXAS shall reimburse First Services, L.P.
for the production of data records and other services at First
Services, L.P.'s current fees for such services.
XV. INSURANCE
First Services, L.P. carries Comprehensive General Liability insurance
with primary limits of two million dollars, Commercial Crime insurance
covering Employee Dishonesty in the amount of fifteen million dollars,
all-risk replacement cost coverage on all equipment used at First
Services, L.P.'s data center and Workers Compensation coverage on First
Services, L.P. employees wherever located in the United States.
BankTEXAS shall carry adequate insurance to cover liability for source
documents while in transit and in case of data loss through errors and
omissions.
XVI. GENERAL
(A) This Agreement is binding upon the parties and their respective
successors and permitted assigns. Neither party may assign this
Agreement in whole or in part without the consent of BankTEXAS and/or
First Services, L.P., provided, however, that First Services, L.P. may
subcontract any or all of the services to be performed under this
Agreement without the written consent of BankTEXAS. Any such
subcontractors shall be required to comply with all of the applicable
terms and conditions of this Agreement.
(B) The parties agree that, in connection with the performance of their
obligations hereunder, they will comply with all applicable Federal,
State, and local laws including the laws and regulations regarding
Equal Employment Opportunities.
(C) First Services, L.P. agrees that the Office of Thrift Supervision,
FDIC, or other authority will have the authority and responsibility
provided to the other regulatory agencies pursuant to the Bank Service
Corporation Act, 12 U.S.C. 1867 (C) relating to service performed by
contract or otherwise. First Services, L.P., also agrees that its
services shall be subject to oversight by the O.C.C., FDIC or state
banking departments as may be applicable under laws and regulations
pertaining to BankTEXASs's charter and shall, if applicable, provide
the O.T.S. DistrictDirector of the district in which the data
processing center is located and other state and federal agencies with
a copy of First Services, L.P.'s current audit and financial
statements and a copy of any current third party review report when a
review has been performed.
(D) Neither party shall be liable for any errors, delays or
non-performance due to events beyond its reasonable control including,
but not limited to, acts of God, failure or delay of power or
communications, changes in law or regulation or other acts of
governmental authority, strike, weather conditions or transpor-
tation.
(E) All written notices required to be given under this Agreement shall be
sent by Registered or Certified Mail, Return Receipt Requested,
postage prepaid, or by confirmed facsimile to the persons and at the
addresses listed below or to such other address or person as a party
shall have designated in writing.
First Services, L.P. BankTEXAS
#l First Missouri Center 8820 Westheimer
St. Louis, Missouri 63l4l Houston, Texas 77063
(F) The failure of either party to exercise in any respect any right
provided for herein shall not be deemed a waiver of any rights.
(G) Each party acknowledges that is has read this Agreement, understands
it, and agrees that it is the complete and exclusive statement of the
Agreement between the parties and supersedes and merges any prior or
simultaneous proposals, understandings and all other agreements with
respect to the subject matter. This Agreement may not be modified or
altered except by a written instrument duly executed by both parties.
(H) No waiver of any of the terms of this Agreement shall be effective
unless in writing and signed by the duly authorized representative of
the party charged therewith. No waiver of any provision hereof shall
extend to or affect any obligation not expressly waived, impair any
rights consequent on such obligation or imply a subsequent waiver of
that or any other provision.
(I) This Agreement shall be governed by, construed and interpreted in
accordance with the laws of the State of Missouri.
IN WITNESS WHEREOF, the parties have executed this Agreement the date
first above written.
BankTEXAS First Services, L.P.
8820 Westheimer One First Missouri Center
Houston, Texas 77063 St. Louis, Missouri 63141
BY:/s/ David W. Weaver BY:/s/ Thomas A. Bangert
---------------------- ------------------------
David Weaver Thomas A. Bangert
President President
Attachment 1
BankTEXAS - Product And Price Schedule
Effective 4/1/97
DATA PROCESSING
Accounts
DDA per account $0.50
Savings per account $0.50
Time per account $0.50
Loans per account $0.50
Transactions each $0.01
Terminal Management each $5.00
Branch Data Connection each $500.00
ATM Management each $200.00
Telephone Switch Mgmt each $750.00
Other Services per application $100.00
ITEM PROCESSING
Proof each $0.020
POD And EFT each $0.009
Inclearing and Transmission each $0.009
DDA per account $0.250
Savings per account $0.050
Time per account $0.020
Loan $0.100
DEPOSIT SERVICES
Customer Accounts per account $0.30
Included in Above:
Charge Backs CIF Management
Returns Exception Item Processing
Stops Signature Verification
Wire Transfers Corporate Analysis
ACH Incoming Cash Management Support
ACH Origination FirstLink
Official Checks Control Disbursement
Money Orders Balance Reporting
Savings Bonds Research
Funds Transfer Adjustments
B Notices 1099s "Due From" Reconciliation
Kiting "Due To" Reconciliation
Holds FRB Reconciliation's
Dormant Accounts Application Balancing
ATM Settlement Records Management
Debit Card Settlement Savings Bonds
OTHER SERVICES
Collection System (Cyber Resources) Cash Management System (FirstLink)
Recovery System (Cyber Resources) Commercial Analysis
Asset/Liability (Bankware) Charge Back System
Optical System (RVI) Teller Platform (ISC)
MCIF (OKRA) ATM Support
Loan Documentation (FTI/CFI) General Ledger
Bank Audit Fixed Asset Interface
Accounts Payable Interface Interactive Voice
Remote Laser Printing Card Management System
ACH Origination Wire Transfer (Fundtec)
Organization Profitability (IPS) NOW Reclassification
Loan Tracking (Baker Hill) Retrofit/New Releases
Credit Scoring (Fair Issac)
EXHIBIT 10(s)
SERVICE AGREEMENT
This Service Agreement is made and entered into as of the 1st day of
April, 1997, by and between First Services, L.P., a Missouri Limited Partnership
and Sunrise Bank, a banking institution duly organized and existing by virtue of
the laws of the State of California.
WHEREAS, SUNRISE BANK and FIRSTSERV, Inc. entered into a Service
Agreement dated November 21, 1996;
WHEREAS, said Service Agreement was assigned to First Services, L.P.
on or about April 1, 1997; and
WHEREAS, FIRST SERVICES, L.P. and SUNRISE BANK desire to amend and
restate said Service Agreement in its entirety.
NOW, THEREFORE, for and in consideration of the mutual promises and
covenants contained herein, and the sum of Ten Dollars ($l0.00) in hand paid,
each to the other, the receipt and sufficiency of which is hereby acknowledged,
the parties agree as follows:
I. TERMINATION AND REVOCATION
The Parties hereto hereby revoke, cancel and hold for naught the
Service Agreement dated November 21, 1996, and hereby substitute in its place
the Service Agreement herein contained.
II. SERVICES
(A) First Services, L.P. shall furnish Sunrise Bank data processing and
item processing services selected by Sunrise Bank from the Product and
Price Schedule as per Attachment 1, attached hereto and incorporated
herein by reference thereto. Additional services may be selected upon
prior written notice to First Services, L.P. at First Services, L.P.'s
then current list price by executing an amended Summary Page.
(B) First Services, L.P. will provide conversion and training services for
the fees specified from the Product and Price Schedule (Attachment 1).
Classroom training in the use and operation of the system for the
number of Sunrise Bank personnel mutually agreed upon in the
conversion planning process will be provided at a training facility
mutually agreed upon. Conversion services are those activities
designed to transfer the processing of Sunrise Bank's data from its
present processing company to First Services, L.P.
(C) First Services, L.P. will also provide Network Support Service
consisting of communication line monitoring and diagnostic equipment
and support personnel to discover, diagnose, repair or report line
problems to the appropriate telephone company. The fee for this
service is also listed from the Product and Price Schedule (Attachment
1).
(D) First Services, L.P. shall upon request act as Sunrise Bank's
designated representative to arrange for the purchase, and
installation of data lines necessary to access the First Services,
L.P. system. Where requested, additional dial-up lines and equipment
to be utilized as a backup to the regular data lines may also be
ordered. First Services, L.P. shall bill Sunrise Bank for the actual
charges incurred for the data lines and for the maintenance of the
modems and other interface devices.
(E) Processing priorities will be determined by mutual agreement of the
parties hereto.
III. TERM
The term of this Agreement shall be twelve (12) months commencing on
April 1, 1997. Upon expiration, the Agreement will automatically renew
for successive terms of twelve (12) months each unless either party
shall have provided written notice to the other at least one-hundred
eighty (180) days prior to the expiration of the then current term, of
its intent not to renew. In the event of termination, First Services,
L.P. shall provide reasonable time allowance to allow Sunrise Bank to
convert to another system.
IV. SOFTWARE/FIRMWARE
Unmodified third party software or firmware ("Software") may be
supplied as part of the Agreement. All such Software shall be provided
subject to Software License Agreements.
V. PRICE AND PAYMENT
(A) Fees for First Services, L.P.'s services are set forth from the
Product and Price Schedule (Attachment 1), including where applicable
minimum monthly charges and payment schedules for onetime fees.
(B) Standard Fees shall be invoiced no later than the fifteenth (15th) of
each month for the then current month. Terms of payment shall be net
cash.
(C) The Base Service Charge listed from the Product and Price Schedule
(Attachment 1) shall not change more than once a year and then only
upon six (6) months' prior written notice. The fee schedule shall be
reviewed annually to ensure fair market value in pricing. Comparisons
will be made with peers and other providers of similar services.
(D) This above limitation shall not apply to pass-thru expenses. A
pass-thru expense is a charge for goods or services by First Services,
L.P. on Sunrise Bank's behalf which are to be billed to Sunrise Bank
without mark-up.
(E) The fees listed from the Product and Price Schedule (Attachment 1) do
not include and Sunrise Bank is responsible for furnishing
transportation or transmission of information between First Services,
L.P.'s data center, Sunrise Bank's site and any applicable clearing
house, regulatory agency or Federal Reserve Bank. Where Sunrise Bank
has elected to have First Services, L.P. provide Telecommunication
Services, the price for the Services will be provided and billed as a
pass-thru expense.
(F) Network Support Service Fees and Local Network Fees are based upon
services rendered from First Services, L.P.'s premises. Off-premise
support will be provided upon Sunrise Bank's request on an as
available basis at First Services, L.P. then current charges for time
and materials, plus reasonable travel and living expenses.
VI. CLIENT OBLIGATIONS
(A) Sunrise Bank shall be solely responsible for the input, transmission
or delivery of all information and data required by First Services,
L.P. to perform the services except where Sunrise Bank has retained
First Services, L.P. to handle such responsibilities on its behalf.
The data shall be provided in a format and manner approved by First
Services, L.P. Sunrise Bank will provide at its own expense or procure
from First Services, L.P. all equipment, computer software,
communication lines and interface devices required to access the First
Services, L.P. System. If Sunrise Bank has elected to provide such
items itself, First Services, L.P. shall provide Sunrise Bank with a
list of compatible equipment and software.
(B) Sunrise Bank shall designate appropriate Sunrise Bank personnel for
training in the use of the First Services, L.P. System, shall allow
First Services, L.P. access to Sunrise Bank's site during normal
business hours for conversion and shall cooperate with First Services,
L.P. personnel in the conversion and implementation of the services.
(C) Sunrise Bank shall comply with any operating instructions on the use
of the First Services, L.P. system provided by First Services, L.P.,
shall review all reports furnished by First Services, L.P. for
accuracy and shall work with First Services, L.P. to reconcile any out
of balance conditions. Sunrise Bank shall determine and be responsible
for the authenticity and accuracy of all information and data
submitted to First Services, L.P.
(D) Sunrise Bank shall furnish, or if First Services, L.P. agrees to so
furnish, reimburse First Services, L.P. for courier services
applicable to the services requested.
VII. GENERAL ADMINISTRATION
First Services, L.P. is continually reviewing and modifying
the First Services, L.P. system to improve service and to comply with
federal government regulations applicable to the data utilized in
providing services to Sunrise Bank. First Services, L.P. reserves the
right to make changes in the service, including, but not limited to
operating procedures, security procedures, the type of equipment
resident at and the location of First Services, L.P.'s data center.
First Services, L.P. will provide Sunrise Bank at least sixty (60) days
prior written notice of changes in procedures or reporting and at least
six (6) months prior written notice of changes in service costs.
VIII. CLIENT CONFIDENTIAL INFORMATION
(A) First Services, L.P. shall treat all information and data relating to
Sunrise Bank business provided to First Services, L.P. by Sunrise
Bank, or information relating to Sunrise Bank's customers, as
confidential and shall safeguard Sunrise Bank's information with the
same degree of care used to protect First Services, L.P.'s
confidential information. First Services, L.P. and Sunrise Bank agree
that master and transaction data files are owned by and constitute
property of Sunrise Bank. Sunrise Bank data and records shall be
subject to regulation and examination by State and Federal supervisory
agencies to the same extent as if such information were on Sunrise
Bank's premises. First Services, L.P.'s obligations under this Section
VIII shall survive the termination or expiration of this Agreement.
(B) First Services, L.P. shall maintain adequate backup procedures
including storage of duplicate record files as necessary to reproduce
Sunrise Bank's records and data. In the event of a service disruption
due to reasons beyond First Services, L.P.'s control, First Services,
L.P. shall use diligent efforts to mitigate the effects of such an
occurrence.
IX. FIRST SERVICES, L.P. CONFIDENTIAL INFORMATION
(A) Sunrise Bank shall not use or disclose to any third persons any
confidential information concerning First Services, L.P. First
Services, L.P. confidential information is that which relates to First
Services, L.P.'s software, research, development, trade secrets or
business affairs including, but not limited to, the terms and
conditions of this Agreement but does not include information in the
public domain through no fault of Sunrise Bank. Sunrise Bank
obligations under this Section IX shall survive the termination or
expiration of this Agreement.
(B) First Services, L.P.'s system contains information and computer
software which is proprietary and confidential information of First
Services, L.P., its suppliers and licensees. Sunrise Bank agrees not
to attempt to circumvent the devices employed by First Services, L.P.
to prevent unauthorized access to the First Services, L.P.'s System.
X. WARRANTIES
First Services, L.P. will accurately process Sunrise Bank's work
provided that Sunrise Bank supplies accurate data and follows the
procedures described in First Services, L.P.'s User Manuals, notices
and L.P.'S AGGREGATE LIABILITY FOR A DEFAULT RELATING TO EQUIPMENT OR
SOFTWARE SHALL BE LIMITED TO THE AMOUNT PAID FOR THE EQUIPMENT OR
SOFTWARE. advises. First Services, L.P. personnel will exercise due
care in the processing of Sunrise Bank's work. In the event of an error
caused by First Services, L.P.'s personnel, programs or equipment,
First Services, L.P. shall correct the data and/or reprocess the
affected report at no additional cost to Sunrise Bank.
XI. LIMITATION OF LIABILITY
IN NO EVENT SHALL FIRST SERVICES, L.P. BE LIABLE FOR LOSS OF GOODWILL,
OR FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING
FROM SUNRISE BANK'S USE OF FIRST SERVICES L.P.'S SERVICES, OR FIRST
SERVICES, L.P.'S SUPPLY OF EQUIPMENT OR SOFTWARE, UNDER THIS AGREEMENT
REGARDLESS OF WHETHER SUCH CLAIM ARISES IN TORT OR IN CONTRACT. FIRST
SERVICES, L.P.'S AGGREGATE LIABILITY FOR ANY AND ALL CAUSES OF ACTION
RELATING TO SERVICES PERFORMED HEREUNDER OR ANY DAMAGE OR LOSS INCURRED
OR SUSTAINED BY SUNRISE BANK RELATING TO THIS AGREEMENT AND THE
SERVICES PERFORMED HEREUNDER SHALL BE LIMITED TO THE AMOUNT OF TOTAL
FEES PAID BY SUNRISE BANK TO FIRST SERVICES, L.P. IN THE THREE (3)
MONTH PERIOD PRECEDING THE DATE THE CLAIM ACCRUED. FIRST SERVICES,
XII. PERFORMANCE STANDARDS
(A) On-Line Availability - First Services, L.P.'s standard of performance
shall be on-line availability of the system 98% of the time that it is
scheduled to be so available over a three month period (the
"Measurement Period"). Actual on-line performance will be calculated
monthly by comparing the number of hours which the system was
scheduled to be operational on an on-line basis with the number of
hours, or a portion thereof, it was actually operational on an on-line
basis. Downtime may be caused by operator error, hardware malfunction
or failure, or environmental failures such as loss of power or air
conditioning. Downtime caused by reasons beyond First Services, L.P.'s
control should not be considered in the statistics.
(B) Report Availability - First Services, L.P.'s standard of performance
for report availability shall be that, over a three (3) month period,
ninety-five percent (95%) of all Critical Daily Reports shall be
available for remote printing on time without significant errors. A
Critical Daily Report shall mean priority group reports which First
Services, L.P. and Sunrise Bank have mutually agreed in writing are
necessary to properly account for the previous day's activity and
properly notify Sunrise Bank of overdraft, NSF or return items. A
significant error is one which impairs Sunrise Bank's ability to
properly account for the previous days activity and/or properly
account for overdraft, NSF or return items. Actual performance will be
calculated monthly by comparing the total number of Sunrise Bank
reports scheduled to be available from First Services, L.P. to the
number of reports which were available on time and without error.
(C) Exclusive Remedy - In the event that First Services, L.P.'s
performance fails to meet the standards listed above and such failure
is not the result of Sunrise Bank's error or omission, Sunrise Bank's
sole and exclusive remedy for such default shall be the right to
terminate this Agreement in accordance with the provisions of this
paragraph. In the event that First Services, L.P. fails to achieve any
Performance Standards, alone or in combination, for the prescribed
measurement period, Sunrise Bank shall notify First Services, L.P. of
its intent to terminate this agreement if First Services, L.P. fails
to restore performance to the committed levels. First Services, L.P.
shall advise Sunrise Bank promptly upon correction of the system
deficiencies (in no event shall corrective action exceed sixty (60)
days from the notice date) and shall begin an additional measurement
period. Should First Services, L.P. fail to achieve the required
Performance Standards during the remeasurement period, Sunrise Bank
may terminate this Agreement and First Services, L.P. shall cooperate
with Sunrise Bank to achieve an orderly transition to Sunrise Bank's
replacement processing system. Sunrise Bank may also terminate this
Agreement if First Services, L.P.'s performance for the same standard
is below the relevant performance standard for more than two (2)
measurement periods in any consecutive twelve (12) months or for more
than five (5) measurement periods during the term of this agreement.
During the period of transition, Sunrise Bank shall pay only such
charges as are incurred for monthly fees until the date of
deconversion. First Services, L.P. shall not charge Sunrise Bank for
services relating to Sunrise Bank's deconversion.
(D) Audit - Sunrise Bank shall have the right to perform reasonable
audits, at its cost, upon giving written notice to First Services,
L.P. of its intent to do so. First Services, L.P. shall provide, upon
request, financial information to Sunrise Bank.
XIII. DISASTER RECOVERY
(A) A Disaster shall mean any unplanned interruption of the operations of
or inaccessibility to the First Services, L.P. data center which
appears in First Services, L.P.'s reasonable judgement to require
relocation of processing to an alternative site. First Services, L.P.
shall notify Sunrise Bank as soon as possible after it deems a service
outage to be a Disaster. First Services, L.P. shall move the
processing of Sunrise Bank's standard on-line services to an
alternative processing center as expeditiously as possible. Sunrise
Bank shall maintain adequate records of all transactions during the
period of service interruption and shall have personnel available to
assist First Services L.P., Inc. in implementing the switch over to
the alternative processing site. During a disaster, optional or
on-request services shall be provided by First Services, L.P. only to
the extent that there is adequate capacity at the alternate center and
only after stabilizing the provision of base on-line services.
(B) First Services, L.P. shall work with Sunrise Bank to establish a plan
for alternative data communications in the event of a disaster.
Sunrise Bank shall be responsible for furnishing any additional
communications equipment and data lines required under the adopted
plan.
(C) First Services L.P., shall test its Disaster Recovery Services Plan by
conducting one annual test. Sunrise Bank agrees to participate in and
assist First Services, L.P. with such testing. Test results will be
made available to Sunrise Bank's regulators, internal and external
auditors, and (upon request) to Sunrise Bank's insurance underwriters.
(D) Sunrise Bank understands and agrees that the First Services, L.P.
Disaster Recovery Plan is designed to minimize but not eliminate risks
associated with a disaster affecting First Services, L.P.'s data
center. First Services, L.P. does not warrant that service will be
uninterrupted or error free in the event of a disaster. Sunrise Bank
maintains responsibility for adopting a disaster recovery plan
relating to disasters affecting Sunrise Bank's facilities and for
securing business interruption insurance or other insurance as
necessary to properly protect Sunrise Bank's revenues in the event of
a disaster.
XIV. DEFAULT
(A) In the event that Sunrise Bank is thirty (30) days in arrears in
making any payment required, or in the event of any other material
default by either First Services, L.P. or Sunrise Bank in the
performance of their obligations, the affected party shall have the
right to give written notice to the other of the default and its
intent to terminate this Agreement stating with reasonable
particularity the nature of the claimed default. This Agreement shall
terminate if the default has not been cured within a reasonable time
with a minimum being thirty (30) days from the effective date of the
notice.
(B) Upon the expiration of this Agreement, or its termination, First
Services, L.P. shall furnish to Sunrise Bank such copies of Sunrise
Bank's data files as Sunrise Bank may request in machine readable
format form along with such other information and assistance as or is
reasonable and customary to enable Sunrise Bank to deconvert from the
First Services, L.P. system. Sunrise Bank shall reimburse First
Services, L.P. for the production of data records and other services
at First Services, L.P.'s current fees for such services.
XV. INSURANCE
First Services, L.P. carries Comprehensive General Liability insurance
with primary limits of two million dollars, Commercial Crime insurance
covering Employee Dishonesty in the amount of fifteen million dollars,
all-risk replacement cost coverage on all equipment used at First
Services, L.P.'s data center and Workers Compensation coverage on First
Services, L.P. employees wherever located in the United States. Sunrise
Bank shall carry adequate insurance to cover liability for source
documents while in transit and in case of data loss through errors and
omissions.
XVI. GENERAL
(A) This Agreement is binding upon the parties and their respective
successors and permitted assigns. Neither party may assign this
Agreement in whole or in part without the consent of Sunrise Bank
and/or First Services, L.P., provided, however, that First Services,
L.P. may subcontract any or all of the services to be performed under
this Agreement without the written consent of Sunrise Bank. Any such
subcontractors shall be required to comply with all of the applicable
terms and conditions of this Agreement.
(B) The parties agree that, in connection with the performance of their
obligations hereunder, they will comply with all applicable Federal,
State, and local laws including the laws and regulations regarding
Equal Employment Opportunities.
(C) First Services, L.P. agrees that the Office of Thrift Supervision,
FDIC, or other authority will have the authority and responsibility
provided to the other regulatory agencies pursuant to the Bank Service
Corporation Act, 12 U.S.C. 1867 (C) relating to service performed by
contract or otherwise. First Services, L.P., also agrees that its
services shall be subject to oversight by the O.C.C., FDIC or state
banking departments as may be applicable under laws and regulations
pertaining to Sunrise Bank's charter and shall, if applicable, provide
the O.T.S. DistrictDirector of the district in which the data
processing center is located and other state and federal agencies with
a copy of First Services, L.P.'s current audit and financial
statements and a copy of any current third party review report when a
review has been performed.
(D) Neither party shall be liable for any errors, delays or
non-performance due to events beyond its reasonable control including,
but not limited to, acts of God, failure or delay of power or
communications, changes in law or regulation or other acts of
governmental authority, strike, weather conditions or transpor-
tation.
(E) All written notices required to be given under this Agreement shall be
sent by Registered or Certified Mail, Return Receipt Requested,
postage prepaid, or by confirmed facsimile to the persons and at the
addresses listed below or to such other address or person as a party
shall have designated in writing.
First Services, L.P. Sunrise Bank
#l First Missouri Center Five Sierragate Plaza
St. Louis, Missouri 63l4l Roseveille, California 95678
(F) The failure of either party to exercise in any respect any right
provided for herein shall not be deemed a waiver of any rights.
(G) Each party acknowledges that is has read this Agreement, understands
it, and agrees that it is the complete and exclusive statement of the
Agreement between the parties and supersedes and merges any prior or
simultaneous proposals, understandings and all other agreements with
respect to the subject matter. This Agreement may not be modified or
altered except by a written instrument duly executed by both parties.
(H) No waiver of any of the terms of this Agreement shall be effective
unless in writing and signed by the duly authorized representative of
the party charged therewith. No waiver of any provision hereof shall
extend to or affect any obligation not expressly waived, impair any
rights consequent on such obligation or imply a subsequent waiver of
that or any other provision.
(I) This Agreement shall be governed by, construed and interpreted in
accordance with the laws of the State of Missouri.
IN WITNESS WHEREOF, the parties have executed this Agreement the date
first above written.
Sunrise Bank First Services, L.P.
Five Sierragate Plaza One First Missouri Center
Roseville, California 95678 St. Louis, Missouri 63141
BY:/s/ Donald W. Williams BY:/s/ Thomas A. Bangert
- ------------------------- ------------------------
Donald W. Williams Thomas A. Bangert
Chairman President
Attachment 1
Sunrise Bank - Product And Price Schedule
Effective 4/1/97
DATA PROCESSING
Accounts
DDA 10,000 $0.50
Savings 10,000 $0.50
Time 10,000 $0.50
Loans 10,000 $0.50
Transactions 250,000 $0.01
Terminal Management 25 $5.00
Branch Data Connection Included
ATM Management Included
Telephone Switch Mgmt Included
Other Services Included
ITEM PROCESSING
Proof 200,000 $0.020
POD And EFT 200,000 $0.009
Inclearing and Transmission 50,000 $0.009
Statements:
DDA $0.250
Savings $0.050
Time $0.100
Loan $0.100
Lockbox $0.020
Branch Courier Route $17.00
Mail Services $200.00
DEPOSIT SERVICES
Customer Accounts 40,000 $0.30
Included in Above:
Charge Backs CIF Management
Returns Exception Item Processing
Stops Signature Verification
Wire Transfers Corporate Analysis
ACH Incoming Cash Management Support
ACH Origination FirstLink
Official Checks Control Disbursement
Money Orders Balance Reporting
Savings Bonds Research
Funds Transfer Adjustments
B Notices 1099s "Due From" Reconciliation
Kiting "Due To" Reconciliation
Holds FRB Reconciliation's
Dormant Accounts Application Balancing
ATM Settlement Records Management
Debit Card Settlement Savings Bonds
OTHER SERVICES
Collection System (Cyber Resources) Cash Management System (FirstLink)
Recovery System (Cyber Resources) Commercial Analysis
Asset/Liability (Bankware) Charge Back System
Optical System (RVI) Teller Platform (ISC)
MCIF (OKRA) ATM Support
Loan Documentation (FTI/CFI) General Ledger
Bank Audit Fixed Asset Interface
Accounts Payable Interface Interactive Voice
Remote Laser Printing Card Management System
ACH Origination Wire Transfer (Fundtec)
Organization Profitability (IPS) NOW Reclassification
Loan Tracking (Baker Hill) Retrofit/New Releases
Credit Scoring (Fair Issac)
EXHIBIT 13
FIRST BANKS AMERICA, INC.
1997 ANNUAL REPORT
FIRST BANKS AMERICA, INC.
TABLE OF CONTENTS
Page
LETTER TO SHAREHOLDERS................................................... 1
SELECTED CONSOLIDATED AND OTHER FINANCIAL DATA........................... 2
MANAGEMENT'S DISCUSSION AND ANALYSIS..................................... 3
QUARTERLY CONDENSED FINANCIAL DATA - UNAUDITED........................... 24
FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS.............................................. 25
CONSOLIDATED STATEMENTS OF OPERATIONS.................................... 27
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY............... 28
CONSOLIDATED STATEMENTS OF CASH FLOWS.................................... 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................... 30
INDEPENDENT AUDITORS' REPORT............................................. 47
DIRECTORS AND SENIOR MANAGEMENT.......................................... 48
INVESTOR INFORMATION..................................................... 49
To Our Shareholders, Customers and Friends:
We are pleased to report our accomplishments and continued progress toward
achieving First Banks America's long term objective of becoming a premier
provider of financial services. Most notable is our progress in improving
earnings, which increased by 103% to $3.18 million for 1997, from $1.57 million
for 1996. Earnings per share, on a diluted basis, increased by 118% to $0.87
from $0.40 for the years ended December 31, 1997 and 1996, respectively.
In my letter to you last year, I stated the development of our banking
franchise may place us in new or noncontigious market areas and serve as a basis
to augment our internal growth. Consistent with this strategy, First Banks
America completed its acquisition of Surety Bank, Vallejo, California on
December 1, 1997 providing total assets of $72.8 million. In addition, on
February 2, 1998, First Banks America completed its acquisitions of First
Commercial Bancorp, Inc., and its wholly owned subsidiary, First Commercial
Bank, Sacramento, California, and Pacific Bay Bank, San Pablo, California,
providing combined assets in excess of $225 million. Together with Sunrise Bank
of California, which was acquired in late 1996, First Banks America has
established a solid presence in the Sacramento - San Francisco corridor with
total assets of $415 million and 11 full service banking locations. Recognizing
the growth potential of this region, First Banks America will aggressively
support the expansion of its commercial and retail business development staff.
Underlying the improvement in earnings is the performance of BankTEXAS, a
wholly owned subsidiary. The earnings momentum reflects management's success in
repositioning the loan portfolio from predominantly indirect automobile loans to
a diversified loan portfolio, now including commercial and financial, real
estate construction and commercial and residential real estate loans. This
lending strategy, which focuses on serving and meeting the needs of local
businesses and consumers, has facilitated the development of our commercial and
retail deposit base, which remains the most stable and cost-effective source of
funds.
First Banks America's strategic objectives are few and clearly stated.
Simply said, we will strive for progressive and profitable growth through the
continued development of our existing franchise, augmented by the acquisition of
other financial institutions.
With First Banks America's consolidated assets approaching $700 million, an
increase in diluted earnings per share of 118% and a presence in several major
market areas, it is not surprising the market value of our stock has improved
dramatically, reaching $23.19 at year end, up 129%, over a year ago.
In closing, I would like to take this opportunity to welcome our new
shareholders, joining us through the acquisitions of Surety Bank and First
Commercial, and to extend our sincerest appreciation for the dedication of our
employees, the loyalty of our customers and the continued support of our
existing shareholders.
Sincerely,
James F. Dierberg
Chairman of the Board, President
and Chief Executive Officer
FIRST BANKS AMERICA, INC.
Selected Consolidated and Other Financial Data
The following table presents selected consolidated financial information
for First Banks America, Inc. and subsidiaries (FBA or the Company) for each of
the years in the five-year period ended December 31, 1997. The comparability of
the selected data presented is affected by the acquisitions of Surety Bank and
Sunrise Bank of California on December 1, 1997 and November 1, 1996,
respectively. These acquisitions were accounted for as purchases and,
accordingly, the selected data includes the financial position and results of
operations of each acquired entity only for the periods subsequent to its date
of acquisition.
Year ended December 31,
-------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(dollars expressed in thousands, except per share data)
Income statement data:
Interest income.................................. $ 28,883 21,446 22,427 22,649 21,966
Interest expense................................. 12,834 9,993 11,218 11,072 9,750
-------- -------- ------ ------ --------
Net interest income.............................. 16,049 11,453 11,209 11,577 12,216
Provision for possible loan losses............... 2,000 1,250 5,826 1,258 490
-------- -------- ------ ------ --------
Net interest income after provision for
possible loan losses........................... 14,049 10,203 5,383 10,319 11,726
Noninterest income............................... 2,564 1,848 (126) (4,511) 3,068
Noninterest expense.............................. 11,676 9,480 11,160 16,174 14,575
-------- -------- ------ ------ --------
Income (loss) before provision (benefit) for
income taxes................................... 4,937 2,571 (5,903) (10,366) 219
Provision (benefit) for income tax expense....... 1,758 1,002 (2,083) (9,461) --
-------- -------- ------ ------ --------
Net income (loss)................................ $ 3,179 1,569 (3,820) (905) 219
======== ======== ====== ====== ========
Dividends:
Common stock..................................... $ -- -- -- -- --
Ratio of total dividends declared to net income.. --% --% --% --% --%
Per share data:
Earnings (loss) per share:
Basic.......................................... $ 0.88 0.42 (0.99) (0.41) 0.17
Diluted........................................ 0.87 0.40 (0.99) (0.41) 0.14
Weighted average common stock outstanding
(in thousands).................................. 3,607 3,763 3,870 2,181 1,290
Balance sheet data (at year end):
Investment securities............................ $ 83,791 86,910 39,337 61,400 160,158
Loans, net of unearned discount.................. 313,437 241,874 192,573 203,314 167,732
Total assets..................................... 451,256 375,182 296,583 331,790 368,608
Total deposits................................... 383,942 319,806 249,263 241,570 242,897
Note payable .................................... 14,500 14,000 1,054 1,054 1,054
Stockholders' equity............................. 39,864 33,498 35,258 39,714 14,952
Earnings ratios:
Return on average total assets................... 0.84% 0.52% (1.20)% (0.25)% 0.07%
Return on average stockholders' equity........... 9.17 4.48 (10.10) (3.66) 1.49
Asset quality ratios:
Allowance for possible loan losses to loans...... 2.14 2.54 2.71 1.36 1.57
Nonperforming loans to loans (1)................. 0.77 0.87 0.29 0.14 0.37
Allowance for possible loan losses to
nonperforming loans (1)........................ 278.52 293.41 952.28 940.61 423.95
Nonperforming assets to loans and foreclosed
assets (2)..................................... 0.89 1.19 0.81 0.90 2.22
Net loan charge-offs to average loans............ 0.59 1.44 1.63 0.62 0.52
Capital ratios:
Average stockholders' equity to average
total assets.................................... 9.19 11.62 11.88 6.80 4.40
Total risk-based capital ratio................... 7.89 7.64 11.69 17.50 8.47
Leverage ratio................................... 6.11 5.31 8.38 11.97 4.27
- ----------------------
(1) Nonperforming loans consist of nonaccrual loans and loans with restructured
terms.
(2) Nonperforming assets consist of nonperforming loans and foreclosed assets.
The discussion set forth in the Letter to Shareholders and Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains certain forward looking statements with respect to the financial
condition, results of operations and business of the Company. These forward
looking statements are subject to certain risks and uncertainties, not all of
which can be predicted or anticipated. Factors that may cause actual results to
differ materially from those contemplated by the forward looking statements
herein include general market conditions as well as conditions specifically
affecting the banking industry generally and factors having a specific impact on
the Company, including but not limited to fluctuations in interest rates and in
the economy; the impact of laws and regulations applicable to the Company and
changes therein; competitive conditions in the markets in which the Company
conducts its operations; and the ability of the Company to respond to changes in
technology. With regard to the Company's efforts to grow through acquisitions,
factors that could affect the accuracy or completeness of forward-looking
statements contained herein include the potential for higher than acceptable
operating costs arising from the geographic dispersion of the offices of FBA, as
compared with competitors operating solely in contiguous markets; the
competition of larger acquirers with greater resources than FBA; fluctuations in
the prices at which acquisition targets may be available for sale and in the
market for the Company's securities; and the potential for difficulty or
unanticipated costs in realizing the benefits of particular acquisition
transactions. Readers of this Annual Report should therefore not place undue
reliance on forward-looking statements.
Company Profile
FBA is a registered bank holding company incorporated in Delaware and
headquartered in St. Louis County, Missouri. At December 31, 1997, FBA had
$451.3 million in total assets, $313.4 million in total loans, net of unearned
discount, $383.9 million in total deposits and $39.9 million in total
stockholders' equity. FBA operates through two wholly owned bank subsidiaries,
BankTEXAS N.A., headquartered in Houston, Texas (BankTEXAS), and First Bank of
California (FB California), headquartered in Roseville, California (Subsidiary
Banks). As discussed under "--Acquisitions," FB California represents a
newly-formed California state bank resulting from the merger of Sunrise Bank of
California, Roseville, California (Sunrise Bank), which was acquired by FBA in
1996, and Surety Bank, Vallejo, California, which was acquired by FBA on
December 1, 1997.
Through the Subsidiary Banks' six banking locations in Houston, Dallas,
Irving and McKinney, Texas, and four banking locations in Roseville, Rancho
Cordova, Vallejo and Fairfield, California, FBA offers a broad range of
commercial and personal banking services, including certificates of deposit,
individual retirement and other time deposit accounts, checking and other demand
deposit accounts, interest checking accounts, savings accounts and money market
accounts. Loans include commercial and industrial, commercial and residential
real estate, real estate construction and development and consumer loans. Other
financial services include automatic teller machines, telephone account access,
cash management services, credit related insurance and safe deposit boxes.
FBA centralizes overall corporate policies, procedural and administrative
functions, and operational support functions for the Subsidiary Banks. Primary
responsibility for managing the Subsidiary Banks remains with its officers and
directors.
The following table lists the Subsidiary Banks at December 31, 1997:
Loans, net of
Number of Total unearned Total
Locations assets discount deposits
--------- ------ -------- --------
(dollars expressed in thousands)
BankTEXAS.................. 6 $ 267,152 176,341 231,175
FB California.............. 4 179,999 137,096 152,825
As discussed under "--Acquisitions," at December 31, 1997, FBA had two
pending acquisitions which were consummated in February 1998: First Commercial
Bancorp, Inc. (FCB), and its wholly owned subsidiary, First Commercial Bank
(First Commercial), Sacramento, California, and Pacific Bay Bank, San Pablo,
California. Both First Commercial and Pacific Bay Bank were merged into FB
California in February 1998.
FBA is majority owned by First Banks, Inc., St. Louis, Missouri (First
Banks). As discussed under "--Capital," First Banks owns 100% of the Class B
common stock, which represented 65.9% of the outstanding voting stock of FBA at
December 31, 1997, and accordingly, has effective control over the management
and policies of FBA and the election of its directors.
General
FBA believes for a financial institution to prosper in the current
environment of rapid restructuring and consolidation in the banking industry,
and intense competition both within the industry and from non-banking entities,
FBA must achieve a size sufficient to enable it to take advantage of many of the
efficiencies available to its much larger competitors. Failure to achieve this
growth would place FBA at a competitive disadvantage relative to those larger
competitors with respect to its costs of operation which, over time, will be an
increasingly difficult obstacle to overcome. FBA also believes that internal
growth alone will not be sufficient to advance FBA to the size which is
necessary within an acceptable time frame. Therefore, FBA views a combination of
internal growth and acquisitions as the means which will be necessary to achieve
its growth objectives.
Although FBA originally viewed Texas, particularly the Dallas and Houston
areas, as its primary acquisition area, during 1995 and 1996, prices for
acquisitions escalated sharply in those areas. Acquisitions at the prices
required to successfully consummate these transactions would have caused
substantial diminution in the economic benefits which FBA envisioned would be
available in its acquisition program. This resulted in FBA evaluating California
for acquisition candidates, where acquisition pricing was considerably more
favorable. This led to FBA's identification and acquisition of Sunrise Bank in
November 1996 and Surety Bank in December 1997, as well as the acquisitions of
FCB and Pacific Bay Bank completed in February 1998.
While this acquisition strategy was in process, FBA was also building the
infra-structure necessary to accomplish its objectives for internal growth. This
included significantly expanding the commercial and financial, commercial real
estate and real estate construction business development staff, enhancing the
retail service delivery organization and systems, improving overall asset
quality and changing the composition of the loan portfolio. Prior to 1995, FBA's
lending strategy had been focused on consumer lending, particularly indirect
automobile lending. As of December 31, 1994, consumer loans, net of unearned
discount, constituted 78.5% of FBA's loan portfolio, while commercial and
financial, commercial real estate and real estate construction loans constituted
17.2% of the portfolio. However, in 1995, FBA began experiencing substantial
asset quality problems within the indirect automobile loan portfolio, resulting
in provisions for loan losses of $5.83 million in 1995 and $1.25 million in
1996. Furthermore, indirect automobile lending is an extremely competitive
market in which the interest yields available to lenders are substantially less
than other types of lending and not sufficient to compensate lenders for losses
of that magnitude. Consequently, with the expansion of its business development
staff, FBA began building its portfolio of commercial and real estate
development loans, while allowing its portfolio of indirect automobile loans to
decrease. By December 31, 1997, consumer loans, net of unearned discount, had
decreased to 21.8% of the loan portfolio, while commercial and financial,
commercial real estate and real estate construction loans had increased to 65.6%
of the portfolio.
Although significant expenses were incurred by FBA in the amalgamation of
newly acquired entities into its corporate culture and systems, and in the
expansion of its organizational capabilities, the earnings of the acquired
entities and the improved net interest income resulting from the transition in
the composition of the loan portfolio have contributed to improving net income
during 1997. For the year ended December 31, 1997, net income was $3.18 million,
compared with $1.57 million in 1996 and a net loss of $3.82 million in 1995.
Acquisitions
In enhancing its banking franchise, FBA places emphasis upon acquiring
other financial institutions as a means of accelerating its growth to
significantly expand its presence in a given market, to increase the extent of
its market area or to enter new or noncontiguous market areas. After an
acquisition is consummated, FBA will enhance the franchise of the acquired
entity by supplementing the marketing and business development efforts to
broaden the customer bases, strengthening particular segments of the business or
filling voids in the overall market coverage. In addition, the acquisition
program enables FBA to further leverage the operational support services
available to it through First Banks, and to provide the products and services
typically available only through such a larger organization. In meeting its
growth objectives under the acquisition program, FBA will utilize cash,
borrowings and the issuance of additional common stock.
On November 1, 1996, FBA completed its acquisition of Sunrise Bancorp, a
California corporation (Sunrise), and its wholly owned subsidiary, Sunrise Bank,
a California state chartered bank headquartered in Roseville, California, for
$17.5 million in cash. At the time of the transaction, Sunrise had $110.8
million in total assets, $17.7 million in investment securities, $61.1 million
in total loans, net of unearned discount, and $91.1 million in deposits. Sunrise
conducts its business through two banking locations in Roseville and Rancho
Cordova, California. Sunrise was merged into a subsidiary of FBA. On December 1,
1997, Sunrise Bank was merged into FB California.
On December 1, 1997, FBA completed its acquisition of Surety Bank, a
California state chartered bank headquartered in Vallejo, California, for $3.8
million in cash and 264,622 shares of FBA common stock. At the time of the
transaction, Surety Bank had $72.8 million in total assets, $11.8 million in
investment securities, $54.4 million in total loans, net of unearned discount,
and $67.5 million in deposits. Surety Bank conducts its banking business through
two banking locations in Vallejo and Fairfield, California. Surety Bank was
merged into FB California.
At December 31, 1997, FBA had two pending acquisitions which were
consummated in February 1998, FCB and its wholly owned subsidiary, First
Commercial, headquartered in Sacramento, California, and Pacific Bay Bank,
headquartered in San Pablo, California. FCB operates through First Commercial,
which has six banking locations located in Sacramento, Roseville (2), Concord,
Campbell and San Francisco, California. At December 31, 1997, FCB had $191.6
million in total assets, $64.4 million in investment securities, $118.0 million
in total loans, net of unearned discount, and $172.6 million in deposits.
Pacific Bay Bank has one banking location in San Pablo, California and one loan
production office in Lafayette, California. At December 31, 1997, Pacific Bay
Bank had $37.5 million in total assets, $1.9 million in total interest-bearing
deposits with other financial institutions, $29.3 million in total loans, net of
unearned discount, and $33.9 million in deposits. Both First Commercial and
Pacific Bay Bank were merged into FB California in February 1998.
FCB was majority owned by First Banks. First Banks' ownership interest in
FBA would have been 70.4% of the outstanding voting stock of FBA at December 31,
1997 had the acquisition of FCB been completed on that date.
Financial Condition and Average Balances
FBA's average total assets were $377.3 million, $301.5 million and $318.1
million for the years ended December 31, 1997, 1996 and 1995, respectively. For
1997, total average assets increased by $75.8 million primarily due to the
acquisitions of Surety Bank and Sunrise Bank on December 1, 1997 and November 1,
1996, respectively, and internal loan growth resulting from the expansion of the
business development staff. For 1996, total average assets decreased by $16.6
million reflecting the continuation of the reduction in average loans and
investment securities which began in 1995, partially offset by the assets
provided by the acquisition of Sunrise Bank.
Loans, net of unearned discount, averaged $247.0 million, $185.2 million
and $205.3 million for the years ended December 31, 1997, 1996 and 1995,
respectively. During 1995, average loans increased by $22.4 million, reflecting
FBA's prior emphasis on indirect automobile lending. As more fully discussed
under "--Net Interest Income," during the second quarter of 1995, FBA elected to
reduce the level of originations of indirect automobile loans. Accordingly,
indirect automobile loans, which initially increased from $147.7 million at
December 31, 1994 to $159.5 million at June 30, 1995, has subsequently decreased
to $61.4 million, $86.6 million and $130.3 million at December 31, 1997, 1996
and 1995, respectively. At the same time, FBA expanded its corporate banking
activities resulting in the increase of the commercial and financial, commercial
real estate and real estate construction loan portfolios to $205.7 million and
$134.7 million at December 31, 1997 and 1996, respectively, including the loans
provided by the acquisition of Surety Bank and Sunrise Bank, from $49.2 million
at December 31, 1995.
Investment securities, which had increased to an average of $141.7 million
for the year ended December 31, 1994, averaged $82.5 million, $59.9 million and
$74.7 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The increase during 1994 resulted from an investment strategy
which FBA implemented during 1992 whereby funds were borrowed, principally
through repurchase agreements and advances from the Federal Home Loan Bank
(FHLB), which were in turn used to purchase investment securities. This strategy
resulted in a corresponding increase in average short-term borrowings for these
same periods. As more fully discussed under "--Net Interest Income," this
strategy resulted in a declining net interest income and net interest margin.
Recognizing the need to improve the net interest income and net interest
margin, during 1994 FBA commenced the process of restructuring its investment
portfolio. The restructuring process consisted initially of hedging the existing
investment security portfolio in an attempt to reduce the overall interest rate
risk to a more acceptable level. At the same time, FBA began disposing of
securities which had greater interest rate risk and reducing the level of
short-term borrowings. Remaining funds generated in this process were invested
in shorter-term securities which generally have less interest rate risk. The
restructuring of the investment security portfolio was completed during 1995 and
resulted in a reduction in the average balance of investment securities of $67.0
million for the year ended December 31, 1995. For 1996, the average balance of
investment securities decreased by $14.8 million, reflecting the remaining
impact of the restructuring which was completed during 1995.
The average balance of investment securities increased for the year ended
December 31, 1997 by $22.6 million. The increase is attributable to the
securities provided by the acquisitions of Surety Bank and Sunrise Bank.
Deposits are the primary funding source for FBA and are acquired from a
broad base of local markets, including both individual and corporate customers.
For 1997, average deposits were $316.5 million, an increase of $61.9 million,
from $254.6 million for 1996. Average deposits increased $9.3 million during
1996, to $254.6 million from $245.3 million for the years ended December 31,
1996 and 1995, respectively. These increases are primarily attributable to the
acquisitions of Surety Bank and Sunrise Bank.
The average balance of promissory notes payable and short-term borrowings
decreased to $19.4 million and $7.2 million for the years ended December 31,
1997 and 1996, respectively, from $31.5 million for 1995. The decrease in the
average balance during 1996 is attributable to a strategic decision to reduce
FBA's dependence on short-term borrowings as a funding source for its investment
security portfolio. The increase in the average balance for 1997 is attributable
to borrowings under FBA's promissory note payable to facilitate its funding of
acquisitions.
Stockholders' equity averaged $34.7 million, $35.0 million and $37.8
million for the years ended December 31, 1997, 1996 and 1995, respectively. The
decreases are primarily attributable to the repurchases of common stock for
treasury, repurchases of an outstanding warrant and an option to purchase common
stock and a net loss of $3.8 million for the year ended December 31, 1995,
partially offset by net income of $3.2 million and $1.6 million for the years
ended December 31, 1997 and 1996, respectively.
In addition, effective December 31, 1994, stockholders' equity includes the
impact of implementing an accounting adjustment referred to as a
"quasi-reorganization" as approved by the Board of Directors of FBA. In
accordance with the accounting provisions applicable to a quasi-reorganization,
the assets and liabilities of FBA were adjusted to their fair value and the
accumulated deficit was eliminated. Fair value adjustments included a reduction
in the carrying value of bank premises and equipment of $4.4 million and the
elimination of the net fair value adjustment for securities available for sale
of $1.1 million. As a result of implementing the quasi-reorganization,
stockholders' equity was reduced by $3.1 million. The implementation of the
quasi-reorganization did not have a significant impact on the results of
operations of FBA.
The following table sets forth certain information relating to FBA's
average balance sheets, and reflects the average yield earned on
interest-bearing assets, the average cost of interest-bearing liabilities and
the resulting net interest income for the periods indicated.
Years ended December 31,
---------------------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------- ---------------------------
Interest Interest Interest
Average income/ Average Average income/ Average Average income/ Average
balance expense rate balance expense rate balance expense rate
------- ------- ---- ------- ------- ---- ------- ------- ----
(dollars expressed in thousands)
Earning assets:
Time deposits with banks....... $ 1,019 58 5.69% $ 19,813 1,062 5.36% $ 4,693 319 6.80%
Investment securities (2)(3)... 82,546 5,073 6.15 59,917 3,519 5.87 74,687 4,47 5.99
Federal funds sold and securities
purchased under agreements to
resell........................ 10,922 593 5.43 7,023 371 5.28 2,961 173 5.84
Loans (1) (2) ................. 247,005 3,159 9.38 185,154 6,494 8.91 205,288 17,462 8.51
-------- ------ -------- ------ ------- ------
Total earning assets 341,492 28,883 8.46 271,907 21,446 7.89 287,629 22,427 7.80
------ ------ ------
Nonearning assets................. 35,792 29,579 30,508
-------- -------- --------
Total assets................. $377,284 $301,486 $318,137
======== ======== ========
Interest-bearing liabilities:
Interest-bearing demand and
savings deposits............. $121,125 3,524 2.91 $ 81,857 2,341 2.86% $ 79,633 2,481 3.12%
Time deposits of $100 or more.. 29,614 1,631 5.51 25,294 1,409 5.57 23,305 1,300 5.58
Other time deposits............ 112,892 6,159 5.46 100,803 5,551 5.51 98,067 5,148 5.25
-------- ------ -------- ------ -------- ------
Total interest-bearing
deposits............... 263,631 11,314 4.29 207,954 9,301 4.47 201,005 8,929 4.44
Notes payable and short-term
borrowings (3).............. 19,400 1,520 7.84 7,195 692 9.62 31,491 2,289 7.27
-------- ----- ------- ------ ------- -----
Total interest-bearing
liabilities............ 283,031 12,834 4.53 215,149 9,993 4.64 232,496 11,218 4.83
------ ---- ------
Non-interest-bearing liabilities:
Demand deposits............... 52,893 46,684 44,251
Other liabilities............. 6,674 4,611 3,584
-------- -------- --------
Total liabilities........... 342,598 266,444 280,331
Stockholders' equity.......... 34,686 35,042 37,806
-------- -------- --------
Total liabilities and
stockholders' equity... $377,284 $301,486 $318,137
======== ======== ========
Net interest income......... 16,049 11,453 11,209
======= ====== ======
Interest rate spread........ 3.93% 3.25% 2.97%
Net interest margin......... 4.70 4.21 3.90
==== ==== ====
- ---------------
(1) Nonaccrual loans are included in the average loan amounts.
(2) FBA has no tax-exempt income.
(3) Includes the effect of an interest rate exchange agreement.
The following table indicates the changes in interest income and interest
expense which are attributable to changes in average volume and changes in
average rates, in comparison with the same period in the preceding year. The
change in interest due to the combined rate/volume variance has been allocated
to rate and volume changes in proportion to the dollar amounts of the change in
each.
December 31, 1997 compared December 31, 1996 compared
to December 31, 1996 to December 31, 1995
------------------------------ -------------------------
Net Net
Volume Rate Change Volume Rate Change
------ ---- ------ ------ ---- ------
(dollars expressed in thousands)
Earning assets:
Time deposits with banks............... $(1,073) 69 (1,004) 795 (52) 743
Investment securities (1) (2).......... 1,380 174 1,554 (866) (88) (954)
Federal funds sold and
securities purchased under
agreements to resell................. 211 11 222 213 (15) 198
Loans (2).............................. 5,756 909 6,665 (1,859) 891 (968)
------- ------ ------ ----- ----- ----
Total interest income............ 6,274 1,163 7,437 (1,717) 736 (981)
------- ------ ------ ----- ----- ----
Interest-bearing liabilities:
Interest-bearing demand
and savings deposits................. 1,142 41 1,183 71 (211) (140)
Time deposits of $100 or more ......... 238 (16) 222 111 (2) 109
Other time deposits.................... 657 (49) 608 145 258 403
Notes payable and short-
term borrowings (1).................. 929 (101) 828 (3,462) 1,865 (1,597)
------- ------- ------ ------ ----- ------
Total interest expense........... 2,966 (125) 2,841 (3,135) 1,910 (1,225)
------- ------- ------ ------ ----- ------
Net interest income.............. $ 3,308 1,288 4,596 1,418 (1,174) 244
======= ====== ====== ====== ====== ======
- ------------------------
(1) Includes the effect of an interest rate exchange agreement.
(2) FBA has no tax-exempt income.
Net Interest Income
The primary source of FBA's income is net interest income, which is the
difference between the interest earned on assets and the interest paid on
liabilities. Net interest income was $16.0 million, or 4.70% of average earning
assets, for the year ended December 31, 1997, compared with $11.5 million, or
4.21% of average earning assets, and $11.2 million, or 3.90% of average earning
assets, for the years ended December 31, 1996 and 1995, respectively.
FBA's loan portfolio, which represents its primary interest-earning asset
and source of net interest income, previously consisted primarily of fixed rate
indirect automobile loans. As interest rates began to increase during 1994, the
yield on this fixed rate portfolio remained relatively constant. Furthermore,
intense competition for automobile loans, particularly from nonbank entities,
caused market rates to increase more slowly than interest rates in general.
Consequently, both the amounts and rates at which new loans were originated were
less than anticipated. The combination of these factors and the continued
repayments of the older loans, caused the yield on the loan portfolio to
increase by only 20 basis points to 8.51% for the year ended December 31, 1995,
compared with 8.31% for the year ended December 31, 1994. At the same time,
FBA's cost of interest-bearing deposits, the principal source of funding for the
loan portfolio, increased by 80 basis points to 4.44% for the year ended
December 31, 1995, from 3.64% for the year December 31, 1994.
During this same time frame, FBA was following an investment strategy
whereby funds were borrowed, principally short-term borrowings, which were
invested in mortgage-backed securities. While initially generating an
incremental spread, as rates increased in 1994, this contribution to net
interest margin was substantially reduced.
The following is a comparison of the yield earned on the investment
portfolio and the cost of short-term borrowings for the years ended December 31,
1995 and 1994:
1995 1994
---- ----
Average yield on investment securities................ 5.99% 4.91%
Average cost of borrowings............................ 7.27 4.35
---- ----
Interest spread....................................... (1.28)% 0.56%
==== ====
Concerned with its interest rate risk profile and the overall impact of
further increases in interest rates, FBA began the process of restructuring its
investment securities portfolio and repositioning its loan portfolio in the
latter part of 1994. The restructuring process included sales of investment
securities of $48.9 million and $113.9 million, resulting in net losses of $3.0
million and $7.1 million for the years ended December 31, 1995 and 1994,
respectively. To reposition the loan portfolio, FBA significantly expanded its
ability to originate commercial and financial, commercial real estate and real
estate construction and development loans while maintaining a presence in the
indirect automobile lending business. The current composition of the loan
portfolio and the changes over the past five years are presented under, "--Loans
and Allowance for Possible Loan Losses."
The culmination of FBA's efforts in repositioning its loan portfolio and
the restructuring of the investment securities portfolio has resulted in an
improvement of the net interest margin to 4.70% of average interest-earning
assets for 1997, from 4.21% and 3.90% for 1996 and 1995, respectively.
Specifically, this improvement is attributable to the increase in the average
yield on the loan portfolio to 9.38% for 1997, from 8.91% for 1996. In addition,
the cost of interest-bearing liabilities decreased to 4.53% for 1997, from 4.64%
for 1996. This decrease in the cost of interest-bearing liabilities is primarily
attributable to the reduction in short-term borrowings, which has represented a
higher cost source of funds.
Comparison of Results of Operations for 1997 and 1996
Net Income. Net income for the year ended December 31, 1997 improved to
$3.18 million from $1.57 million for the same period in 1996, an increase of
103%. This improvement is primarily attributable to net interest income. As
previously discussed, net interest income increased by $4.60 million, or by
40.2%, to $16.05 million, or 4.70% of average earning assets, for 1997, from
$11.45 million, or 4.21% of average earning assets, for 1996.
Provision for Possible Loan Losses. The provision for possible loan losses
was $2.00 million and $1.25 million for the years ended December 31, 1997 and
1996, respectively. Net loan charge-offs were $1.46 million and $2.67 million
for the years ended December 31, 1997 and 1996, respectively. The allowance for
possible loan losses was $6.72 million, or 2.14% of total loans, net of unearned
discount, at December 31, 1997, compared to $6.15 million, or 2.54% of total
loans, at December 31, 1996. Loans which were either 90 days or more past due
and still accruing interest or on nonaccrual status totaled $3.57 million and
$2.68 million at December 31, 1997 and 1996, respectively, representing 1.14%
and 1.11% of total loans, net of unearned discount, at those dates. Loans which
were between 30 and 89 days past due were $6.67 million, or 2.13% of total
loans, net of unearned discount, at December 31, 1997, compared to $6.47
million, or 2.68% of total loans, net of unearned discount, at December 31,
1996.
Although asset quality has improved, FBA has continued to provide for
possible loan losses in recognition of the overall growth in the loan portfolio
as well as its changing composition. As the portfolio changes from one with
significant preponderance in indirect automobile loans, to one having
substantial portions of commercial and financial, real estate construction and
development and commercial real estate loans, the credit risk profile also
changes. Typically, a larger group of lower balance homogeneous loans, such as
the indirect automobile loan portfolio, exhibits certain past due and loan loss
experience trends which provides FBA a basis for establishing an adequate level
of allowance for possible loan losses. While these same trends are included in
FBA's evaluation of its commercial lending activities, the overall credit risk
of this type of portfolio is heightened as the possibility of a significant
unforeseen loss occurring over time is greater. See "--Loans and Allowance for
Possible Loan Losses," for a further discussion of FBA's policies and practices
of monitoring and maintaining the allowance for possible loan losses.
Noninterest Income and Expense. The following table summarizes noninterest
income and noninterest expense for the years ended December 31, 1997 and 1996.
Increase (decrease)
1997 1996 Amount Percent
---- ---- ------ -------
(dollars expressed in thousands)
Noninterest income:
Service charges on deposit accounts
and customer service fees........................ $ 1,632 1,507 125 8.29%
Loan sales and servicing income.................... 22 53 (31) (58.49)
Other income ...................................... 834 103 731 709.71
------- ------- -----
2,488 1,663 825 49.61
Gain on sales of securities, net................... 76 185 (109) (58.92)
------- ------- -----
Total noninterest income....................... $ 2,564 1,848 716 38.74
======= ======= ===== =======
Noninterest expense:
Salaries and employee benefits .................... $ 4,219 3,072 1,147 37.34%
Occupancy, net of rental income ................... 1,440 951 489 51.42
Furniture and equipment ........................... 805 613 192 31.32
Federal Deposit Insurance Corporation premiums..... 102 160 (58) (36.25)
Postage, printing and supplies..................... 346 267 79 29.59
Legal, examination and professional fees........... 2,005 1,276 729 57.13
Data processing ................................... 715 334 381 114.07
Communications..................................... 521 421 100 23.75
(Gain) loss on sale of foreclosed property,
net of expenses.................................. (303) 146 (449) (307.53)
Other.............................................. 1,826 2,240 (414) (18.48)
------- ------- -----
Total noninterest expense...................... $11,676 9,480 2,196 23.16
======= ======= ===== =======
Noninterest Income. Noninterest income was $2.56 million for the year ended
December 31, 1997, in comparison to $1.85 million for 1996, representing an
increase of $716,000, or 38.7%.
Service charges on deposit accounts and customer service fees increased by
$125,000 to $1.63 million from $1.51 million for the years ended December 31,
1997 and 1996, respectively. The increase is primarily attributable to the
acquisition of Sunrise Bank.
Loan servicing fees decreased to $22,000 from $53,000 for the years ended
December 31, 1997 and 1996, respectively. The decrease is due to a reduction in
the amount of indirect automobile loans serviced for others as FBA is no longer
selling indirect automobile loans on a servicing retained basis.
Other income increased by $731,000 to $834,000 from $103,000 for the years
ended December 31, 1997 and 1996, respectively. The increase is primarily
attributable to legal settlements received applicable to pending litigation of
the former Sunrise Bank and a net gain of $47,000 realized upon disposition of
repossessed and other assets, compared to a net loss of $178,000 for the years
ended December 31, 1997 and 1996, respectively.
Offsetting the increase in noninterest income for the year ended December
31, 1997 was a gain of $76,000 recognized upon the sale of an investment
security for the year ended December 31, 1997, in comparison to a gain of
$185,000 for 1996.
Noninterest Expense. Noninterest expense increased by $2.20 million to
$11.68 million from $9.48 million for the years ended December 31, 1997 and
1996, respectively. The increase is primarily attributable to the acquisition of
Sunrise Bank and Surety Bank and FBA's expansion of its corporate lending staff.
In particular, salaries and employee benefits increased by $1.15 million to
$4.22 million from $3.07 million for the years ended December 31, 1997 and 1996,
respectively. In addition, occupancy expense, net of rental income, and data
processing expenses increased by $489,000 and $381,000 for the year ended
December 31, 1997, respectively, in comparison to 1996.
Legal, examination and professional fees increased to $2.01 million from
$1.28 million for the years ended December 31, 1997 and 1996, respectively. The
increase is primarily attributable to the costs associated with expanding FBA's
organizational capabilities to achieve both internal and external growth as well
as its overall growth in 1997.
In the year ended December 31, 1997, FBA realized a gain on sale of
foreclosed property, net of expenses, of $303,000, compared to losses and
expenses on sale of foreclosed property of $146,000 for the same period in 1996.
The improvement for 1997 is attributable to a gain realized upon sale of a
foreclosed property and an overall decrease in the costs of maintaining a
reduced level of foreclosed properties.
Offsetting the increase in noninterest expense is a decrease in other
expense of $414,000 to $1.83 million from $2.24 million for the years ended
December 31, 1997 and 1996, respectively. The decrease is primarily attributable
to the noncredit provision for possible losses within the indirect automobile
dealer lending program of $842,000 recorded in 1996, partially offset by an
increase in fees paid to First Banks of $513,000 during 1997. See Note 13 to the
consolidated financial statements.
Income Taxes. The accompanying consolidated statement of operations
reflects a deferred income tax charge of $1.76 million for the year ended
December 31, 1997, compared to $1.00 million in 1996. At December 31, 1997 and
1996, the accompanying consolidated balance sheets include a deferred tax asset,
net of deferred tax liabilities, of $12.8 million and $14.6 million,
respectively. The deferred tax asset valuation allowance was $3.4 million at
December 31, 1997 and 1996.
Comparison of Results of Operations for 1996 and 1995
Net Income. Net income for the year ended December 31, 1996 was $1.57
million in comparison to a net loss of $3.82 for the same period in 1995. As
more fully discussed below, the operating results for 1995 reflect an after-tax
loss of $2.10 million incurred in connection with the restructuring of FBA's
investment portfolio and a sharply higher provision for possible loan losses in
comparison to 1996. As previously discussed, net interest income was $11.45
million, or 4.21% of average earning assets, for 1996, compared to $11.21
million, or 3.90% of average earning assets, for 1995.
Provision for Possible Loan Losses. The provision for possible loan losses
was $1.25 million and $5.83 million for the years ended December 31, 1996 and
1995, respectively. Net loan charge-offs were $2.67 million and $3.35 million
for the years ended December 31, 1996 and 1995, respectively. The allowance for
possible loan losses was $6.15 million, or 2.54% of total loans, net of unearned
discount, at December 31, 1996, compared to $5.23 million, or 2.71% of total
loans, at December 31, 1995. Loans which were either 90 days or more past due
and still accruing interest or on nonaccrual status totaled $2.68 million and
$1.07 million at December 31, 1996 and 1995, respectively, representing 1.11%
and .55% of total loans at those dates. Loans which were between 30 and 89 days
past due were $6.47 million, or 2.67% of total loans, net of unearned discount,
at December 31, 1996 compared to $6.65 million, or 3.45% of total loans, net of
unearned discount, at December 31, 1995.
The provision for possible loan losses for 1995 was higher than normal in
recognition of increasing loan charge-offs and delinquencies which were
experienced during 1995 within the portfolio of indirect automobile loans.
Noninterest Income and Expense. The following table summarizes noninterest
income and noninterest expense for the years ended December 31, 1996 and 1995.
Increase (decrease)
1996 1995 Amount Percent
---- ---- ------ -------
(dollars expressed in thousands)
Noninterest income (loss):
Service charges on deposit accounts
and customer service fees.............................. $ 1,507 1,458 49 3.4%
Loan sales and servicing income.......................... 53 159 (106) (66.7)
Other income............................................. 103 1,253 (1,150) (91.8)
------- ------- --------
1,663 2,870 (1,207) (42.1)
=====
Gain (loss) on sales of securities, net.................. 185 (2,996) 3,181
------- ------- -------
Total noninterest income (loss)...................... $ 1,848 (126) 1,974
======= ======= =======
Noninterest expense:
Salaries and employee benefits .......................... $ 3,072 4,029 (957) (23.8)%
Occupancy, net of rental income ......................... 951 1,274 (323) (25.4)
Furniture and equipment ................................. 613 663 (50) (7.5)
Federal Deposit Insurance Corporation premiums........... 160 313 (153) (48.9)
Postage, printing and supplies........................... 267 303 (36) (11.9)
Legal, examination and professional fees................. 1,276 1,354 (78) (5.8)
Data processing ......................................... 334 664 (330) (49.7)
Communications........................................... 421 553 (132) (23.9)
Losses and expenses on foreclosed property, net.......... 146 176 (30) (17.0)
Other ................................................... 2,240 1,831 409 22.3
------- ------- -------
Total noninterest expense............................ $ 9,480 11,160 (1,680) (15.1)
======= ======= ======= =====
Noninterest Income. Noninterest income was $1.85 million for the year ended
December 31, 1996 in comparison to a loss of $126,000 for 1995. As more fully
discussed under "-- Net Interest Income and Interest Rate Risk Management," the
loss in noninterest income for 1995 is attributable to the $3.00 million loss
realized upon sales of investment securities.
Service charges on deposit accounts increased by $50,000 to $1.51 million
from $1.46 million for the years ended December 31, 1996 and 1995, respectively.
The increase is primarily attributable to the acquisition of Sunrise Bank which
generated $38,000 of service charges on deposit accounts for the period
subsequent to the acquisition.
Loan servicing fees decreased to $53,000 from $159,000 for the years ended
December 31, 1996 and 1995, respectively. The decrease is due to a reduction in
the amount of indirect automobile loans serviced for others.
Other income decreased by $1.15 million to $103,000 from $1.25 million for
the years ended December 31, 1996 and 1995, respectively. Other income for the
year ended December 31, 1995 includes a nonrecurring benefit of $179,000 from
the termination of the Directors' Retirement Plan and an $802,000 nonrecurring
benefit from the termination of a self-insurance trust. During 1990, FBA
established a trust in lieu of purchasing officer and director liability
insurance. Since coverage is now available and in place through First Banks, the
trust was terminated and the funds were returned to FBA.
Noninterest Expense. Noninterest expense decreased by $1.68 million to
$9.48 million from $11.16 million for the years ended December 31, 1996 and
1995, respectively. The decrease, as more fully discussed below, is primarily
attributable to cost reductions achieved through the reengineering of FBA's
operations and the centralization of various functions with First Banks' systems
during 1995.
The decrease in salaries and employee benefits of $960,000 to $3.07 million
from $4.03 million for the years ended December 31, 1996 and 1995, respectively,
relates primarily to reductions in staff during 1995. FBA's staff was reduced to
67 full-time employees at December 31, 1995, from 142 and 162 full-time
employees at December 31, 1994 and 1993, respectively.
Occupancy expense, net of rental income, decreased by $323,000 to $951,000
from $1.27 million for the years ended December 31, 1996 and 1995, respectively.
The decrease is attributable to certain leased premises which were vacated
during 1995. This space previously housed various support functions, indirect
dealer lending and executive management. These departments were consolidated
into support functions of First Banks or relocated to other existing banking
facilities of FBA.
Data processing expenses decreased by $330,000 to $334,000 from $664,000
for the years ended December 31, 1996 and 1995, respectively. The decrease is
attributable to the conversion to First Banks' data processing system in 1995
which is less expensive than the former data processing service provider.
Offsetting the decrease in noninterest expense is an increase in other
expense of $409,000 to $2.24 million from $1.83 million for the years ended
December 31, 1996 and 1995, respectively. The increase is primarily attributable
to the noncredit provision for possible losses within the indirect automobile
dealer lending program of $842,000 in 1996. Also included in other expense are
fees paid to First Banks for the various services rendered. These fees totaled
$997,000 and $796,000 for the years ended December 31, 1996 and 1995,
respectively.
Income Taxes. The accompanying consolidated statement of operations
reflects a deferred income tax charge of $1.00 million for the year ended
December 31, 1996. This compares to a $2.08 million deferred income tax benefit
for the same period in 1995. At December 31, 1996 and 1995, the accompanying
consolidated balance sheets include a deferred tax asset, net of deferred tax
liabilities, of $14.6 million and $13.2 million, respectively. The deferred tax
asset valuation allowance was $3.4 million and $2.7 million at December 31, 1996
and 1995, respectively.
Investment Securities
FBA classifies the securities within its investment portfolio as held to
maturity or available for sale. FBA does not engage in the trading of investment
securities. As more fully described in Notes 1 and 3 of the consolidated
financial statements, the investment security portfolio consists solely of
securities designated as available-for-sale at December 31, 1997 and 1996.
During 1997, investment securities decreased to $83.8 million from $86.9 million
at December 31, 1997 and 1996, respectively. Funds generated from the decrease
were utilized to support internal loan growth. Offsetting the decrease was $11.8
million of investment securities provided by the acquisition of Surety Bank.
Loans and Allowance for Possible Loan Losses
Interest earned on the loan portfolio is the primary source of income for
FBA. Loans, net of unearned discount, represented 69.5% of total assets as of
December 31, 1997, compared to 64.5% as of December 31, 1996. At December 31,
1997, total loans, net of unearned discount, were $313.4 million, an increase of
$71.5 million from $241.9 million at December 31, 1996. For 1996, total loans,
net of unearned discount, increased by $49.3 million. As previously discussed
under "--Acquisitions and Financial Condition and Average Balances," the
increases are attributable to the loans provided by the acquisitions of Surety
Bank and Sunrise Bank and to expanding the commercial and financial, commercial
real estate and real estate construction and development loan portfolios,
partially offset by the decrease in indirect automobile loans.
The following table summarizes the changes in the loan portfolio for the
two year period ended December 31, 1997:
Increase (decrease)
for the years ended
December 31,
------------
1997 1996
---- ----
(dollars expressed in thousands)
Loans provided by acquisition:
Surety Bank.............................................. $54,400 --
Sunrise Bank............................................. -- 61,100
Internal loan volumes:
Commercial lending....................................... 47,100 34,900
Indirect automobile loans................................ (25,500) (43,400)
Other........................................................ (4,400) (3,300)
------- ------
Total increase (decrease) in loans................... $71,600 49,300
======= ======
Increase (decrease) in potential problem loans (1)........... $ (800) 2,100
======= ======
- ---------------------
(1) Potential problem loans include indirect automobile loans 60 days or more
past due, loans on nonaccrual status and other loans identified by
management as having potential credit problems.
FBA's lending strategy stresses quality, growth and diversification by
collateral, geography and industry. A common credit underwriting structure is in
place throughout FBA. The commercial lenders focus principally on small to
middle-market companies. Retail lenders focus principally on residential loans,
including home equity loans, automobile financing and other consumer financing
needs arising out of FBA's branch banking network.
Commercial and financial loans include loans that are made primarily based
on the borrowers' general credit strength and ability to generate repayment cash
flows from income sources even though such loans and bonds may also be secured
by real estate or other assets. Real estate construction and development loans,
primarily relating to residential properties and smaller commercial properties,
represent interim financing secured by real estate under construction. Real
estate mortgage loans consist primarily of loans secured by single-family
owner-occupied properties and various types of commercial properties on which
the income from the property is the intended source of repayment. Consumer and
installment loans are loans to individuals and consist primarily of loans
secured by automobiles. Loans held for sale are generally fixed and adjustable
rate residential loans pending sale in the secondary mortgage market in the form
of a mortgage-backed security, or to various private third-party investors.
The following table shows the composition of the loan portfolio by major
category and the percent of each category to the total portfolio as of the dates
presented:
December 31,
---------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- --------------- ----------------- --------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(dollars expressed in thousands)
Commercial and financial... $ 69,091 22.5% $48,025 19.9% $15,055 7.8% $ 14,556 7.4% $ 7,653 5.2%
Real estate construction
and development......... 66,601 21.6 44,238 18.3 26,048 13.5 13,793 7.0 9,072 6.2
Real estate mortgage....... 103,718 33.7 54,761 22.6 12,572 6.5 14,796 7.6 12,862 8.8
Consumer and installment,
net of unearned discount. 68,319 22.2 94,850 39.2 138,898 72.2 152,916 78.0 117,116 79.8
------ ---- ------ ---- ------- ---- ------- ---- ------- ----
Total loans,
excluding
loans held
for sale........ 307,729 100.0% 241,874 100.0% 192,573 100.0% 196,061 100.0% 146,703 100.0%
===== ===== ===== ===== =====
Loans held for sale........ 5,708 -- -- 7,253 21,029
-------- -------- -------- -------- --------
Total loans.......... $313,437 $241,874 $192,573 $203,314 $167,732
======== ======== ======== ======== ========
Loans at December 31, 1997 mature as follows:
Over one year
through five years Over five years
------------------ ---------------
One year Fixed Floating Fixed Floating
or less rate rate rate rate Total
------- ---- ---- ---- ---- -----
(dollars expressed in thousands)
Commercial and financial ................ $ 57,612 7,851 1,584 -- 2,044 69,091
Real estate construction
and development...................... 65,623 118 419 94 347 66,601
Real estate mortgage..................... 65,563 12,925 9,566 5,185 10,479 103,718
Consumer and installment, net of
unearned discount.................... 7,961 52,450 150 7,758 -- 68,319
Loans held for sale...................... 5,708 -- -- -- -- 5,708
--------- ------ ------ ------- ------- ---------
Total loans................... $ 202,467 73,344 11,719 13,037 12,870 313,437
========= ====== ====== ======= ======= =========
The following table is a summary of loan loss experience for the five years
ended December 31, 1997:
December 31,
------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance at beginning of year............... $ 6,147 5,228 2,756 2,637 3,044
Acquired allowances for possible
loan losses.............................. 30 2,338 ------ ------ ------
------- -------
6,177 7,566 2,756 2,637 3,044
------- ------- ------- ------ ------
Loans charged off:
Commercial and financial............... (390) (243) -- (7) (268)
Real estate construction
and development...................... (15) -- (2) -- --
Real estate mortgage................... (76) (106) (57) (375) (8)
Consumer and installment............... (2,263) (3,712) (4,010) (1,876) (1,622)
------- ------- ------- ------- -------
Total loans charged-off........... (2,744) (4,061) (4,069) (2,258) (1,898))
------- ------- ------- ------- -------
Recoveries of loans previously
charged off:
Commercial and financial............... 123 345 129 184 164
Real estate construction and
development.......................... -- -- 1 -- --
Real estate mortgage................... 105 34 35 258 154
Consumer and installment............... 1,054 1,013 550 677 683
------- ------- ------- ------ ------
Total recoveries of loans previously
charged off................... 1,282 1,392 715 1,119 1,001
------- ------- ------- ------ ------
Net loans charged-off............. (1,462) (2,669) (3,354) (1,139) (897)
------- ------- ------- ------ ------
Provision for possible loan losses......... 2,000 1,250 5,826 1,258 490
------- ------- ------- ------ ------
Balance at end of year..................... $ 6,715 6,147 5,228 2,756 2,637
======= ======= ======= ====== ======
Loans outstanding:
Average................................ $247,005 185,154 205,288 182,922 171,889
End of period.......................... 313,437 241,874 192,573 203,314 167,732
Ratio of allowance for possible
loan losses to loans outstanding:
Average........................... 2.72% 3.32% 2.55% 1.51% 1.53%
End of period..................... 2.14 2.54 2.71 1.36 1.57
Ratio of net charge-offs to average
loans outstanding.................... 0.59 1.44 1.63 0.62 0.52
======== ====== ======== ====== ======
Allocation of allowance for possible
loan losses at end of period:..........
Commercial and financial............. $ 1,531 1,453 409 197 229
Real estate construction ............
and development.................... 1,018 920 707 187 237
Real estate mortgage................. 2,774 1,833 344 201 720
Consumer and installment............. 1,392 1,941 3,768 2,171 1,451
------- ------- ------ ------ ------
Total ............................ $ 6,715 6,147 5,228 2,756 2,637
======= ======= ====== ====== ======
Percent of categories to loans, net of
unearned discount:
Commercial and financial............. 22.0% 19.9% 7.8% 7.1% 4.6%
Real estate construction and
development........................ 21.3 18.3 13.5 6.8 5.4
Real estate mortgage................. 33.1 22.6 6.5 7.3 7.7
Consumer and installment............. 21.8 39.2 72.2 75.2 69.8
Loans held for sale.................. 1.8 -- -- 3.6 12.5
------- ------ ------- ------ ------
Total............................. 100.0% 100.0% 100.0% 100.0% 100.0%
======= ====== ======= ====== ======
Nonperforming assets include nonaccrual loans and foreclosed property. The
following table presents the categories of nonperforming assets and certain
ratios for the past five years:
December 31,
------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(dollars expressed in thousands)
Nonperforming loans......................... $ 2,411 2,095 549 293 622
Foreclosed property, net.................... 381 785 1,013 1,553 3,171
---------- -------- -------- -------- --------
Total nonperforming assets............ $ 2,792 2,880 1,562 1,846 3,793
========== ======== ======== ======== ========
Loans, net of unearned discount............. $ 313,437 241,874 192,573 203,314 167,732
========== ======== ======= ======== ========
Loans past due:
Over 30 days to 90 days................. $ 6,664 6,471 6,649 1,368 1,571
Over 90 days and still accruing......... 1,158 583 517 183 803
---------- -------- -------- -------- --------
Total past-due loans................. $ 7,822 7,054 7,166 1,551 2,374
========== ======== ======== ======== ========
Allowance for possible loan losses
to loans................................ 2.14% 2.54% 2.71% 1.36% 1.57%
Nonperforming loans to loans................ 0.77 0.87 0.29 0.14 0.37
Allowance for possible loan losses
to nonperforming loans.................. 278.52 293.41 952.28 940.61 423.95
Nonperforming assets to loans
and foreclosed property................. 0.89 1.19 0.81 0.90 2.22
========== ======== ========= ====== ========
As of December 31, 1997 and 1996, $4.5 million and $9.8 million,
respectively, of loans not included in the table above were identified by
management as having potential credit problems which raised doubts as to the
ability of the borrowers to comply with the present loan repayment terms.
FBA's credit management policy and procedures focus on identifying,
measuring and controlling credit exposure. These procedures employ a
lender-initiated system of rating credits, which is ratified in the loan
approval process and subsequently tested in internal loan reviews, external
audits and regulatory bank examinations. Basically, the system requires rating
all loans at the time they are made, except for homogeneous categories of loans,
such as residential real estate mortgage loans and indirect automobile loans.
These homogeneous loans are assigned an initial rating based on FBA's experience
with each type of loan. Adjustments to these ratings are based on payment
experience subsequent to their origination.
Adversely rated credits, including loans requiring close monitoring which
would not normally be considered criticized credits by regulators, are included
on a monthly loan watch list. Loans may be added to the watch list for reasons
which are temporary and correctable, such as the absence of current financial
statements of the borrower, or a deficiency in loan documentation. Other loans
are added whenever any adverse circumstance is detected which might affect the
borrower's ability to meet the terms of the loan. This could be initiated by the
delinquency of a scheduled loan payment, a deterioration in the borrower's
financial condition identified in a review of periodic financial statements, a
decrease in the value of the collateral securing the loan, or a change in the
economic environment within which the borrower operates. Loans on the watch list
require detailed loan status reports prepared by the responsible officer every
four months, which are then discussed in formal meetings with the loan review
and credit administration staffs. Downgrades of loan risk ratings may be
initiated by the responsible loan officer at any time. However, upgrades of risk
ratings may only be made with the concurrence of the loan review and credit
administration staffs generally at the time of the formal watch list review
meetings.
Each month, credit administration provides FBA's management with detailed
lists of loans on the watch list and summaries of the entire loan portfolio of
each Subsidiary Bank by risk rating. These are coupled with analyses of changes
in the risk profiles of the portfolios, changes in past due and nonperforming
loans and changes in watch list and classified loans over time. In this manner,
the overall increases or decreases in the levels of risk in the portfolios are
monitored continually. Factors are applied to the loan portfolios for each
category of loan risk to determine acceptable levels of allowance for possible
loan losses. These factors are derived primarily from the actual loss experience
of the Subsidiary Banks and from published national surveys of norms in the
industry. The calculated allowances required for the portfolios are then
compared to the actual allowance balances to determine the provisions necessary
to maintain the allowances at appropriate levels. In addition, management
exercises judgment in its analysis of determining the overall level of the
allowance for possible losses. In its analysis, management considers the change
in the portfolio, including growth and composition, and the economic conditions
of the regions in which FBA operates.
Based on this quantitative and qualitative analysis, the allowance for
possible loan losses is adjusted. Such adjustments are reflected in the
consolidated statements of operations.
FBA does not engage in lending in foreign countries or based on activities
in foreign countries. Additionally, FBA does not have any concentrations of
loans exceeding 10% of total loans which are not otherwise disclosed in the loan
portfolio composition table and Note 5 to the accompanying consolidated
financial statements. FBA does not have any amount of interest-bearing assets
which would have been included in nonaccrual, past due or restructured loans if
such assets were loans.
Deposits
Deposits are the primary source of funds for FBA. FBA's deposits consist
principally of core deposits from its local market areas. FBA does not accept
brokered deposits. The following table sets forth the distribution of FBA's
average deposit accounts at the dates indicated and the weighted average
interest rates by category of deposit:
Years ended December 31,
----------------------------------------------------------------------
1997 1996 1995
-------------- ----------------- -----------------
Balance Rate Balance Rate Balance Rate
(dollars expressed in thousands)
Non-interest-bearing demand........... $ 52,893 --% $46,684 --% $ 44,251 --%
Interest-bearing demand .............. 50,743 2.31 25,244 1.93 22,718 2.00
Savings............................... 70,382 3.34 56,613 3.27 56,915 3.56
Time deposits of $100 or more......... 29,614 5.46 25,294 5.57 23,305 5.58
Other time............................ 112,892 4.29 100,803 5.51 98,067 5.25
--------- ==== --------- ==== --------- ====
Total average deposits.......... $ 316,524 $ 254,638 $ 245,256
========= ========= =========
Capital
On August 31, 1994, FBA issued and sold for $30 million in a private
placement 2,500,000 shares of Class B common stock to First Banks. The Class B
common stock is generally equivalent to FBA's common stock, except that it is
not registered or transferable by First Banks, other than to an affiliated
entity, and has dividend rights which are junior to those of FBA's common stock.
First Banks owned 65.9% of the total outstanding voting stock of FBA at December
31, 1997.
On October 1, 1996, FBA purchased an outstanding warrant to acquire 131,336
shares of FBA common stock at $0.75 per share from the FDIC for an aggregate
amount of $1.28 million. The purchase of the warrant was applied as a reduction
of capital surplus.
FBA issued 264,622 shares of common stock in connection with its
acquisition of Surety Bank, resulting in an increase to stockholders' equity of
$4.8 million. The increase represents the fair value of the net assets exchanged
for FBA common stock, as determined by the market value of FBA common stock at
the date of exchange.
On February 2, 1998, FBA completed its acquisition of FCB. As described
under "--Acquisitions" and in Note 2 of the accompanying consolidated financial
statements, in connection with the acquisition, FBA issued approximately
1,555,728 shares of common stock, of which 1,266,176 were issued to First Banks.
The Board of Directors has authorized the purchase of up to 555,488 shares
of common stock for treasury. Aggregate shares purchased totaled 386,458 and
280,430, at an aggregate cost of $4.35 million and $2.84 million as of December
31, 1997 and 1996, respectively.
Interest Rate Risk Management
For financial institutions, the maintenance of a satisfactory level of net
interest income is a primary factor in achieving acceptable income levels.
However, the maturity and repricing characteristics of the institution's loan
and investment portfolios, relative to those within its deposit structure, may
differ significantly. This is influenced by the characteristics of the loan and
deposit markets within which FBA operates, as well as its objectives for
business development within those markets at any point in time. In addition, the
ability of borrowers to repay loans and depositors to withdraw funds prior to
stated maturity dates introduces divergent option characteristics which operate
primarily as interest rates change. These factors cause various elements of the
institution's balance sheet to react in different manners and at different times
relative to changes in interest rates, thereby leading to increases or decreases
in net interest income over time. Depending upon the nature and velocity of
interest rate movements and their effect on the specific components of the
institution's balance sheet, the effects on net interest income can be
substantial. Consequently, a fundamental requirement in managing a financial
institution is establishing effective control of the exposure of the institution
to changes in interest rates.
FBA manages its interest rate risk by: (1) maintaining an Asset Liability
Committee (ALCO) responsible to FBA's Board of Directors to review the overall
interest rate risk management activity and approve actions taken to reduce risk;
(2) maintaining an effective simulation model to determine FBA's exposure to
changes in interest rates; (3) coordinating the lending, investing and
deposit-generating functions to control the assumption of interest rate risk;
and (4) employing various off-balance-sheet financial instruments to offset
inherent interest rate risk when it becomes excessive. The objective of these
procedures is to limit the adverse impact which changes in interest rates may
have on net interest income.
The ALCO has overall responsibility for the effective management of
interest rate risk and the approval of policy guidelines. The ALCO includes the
Chairman and Chief Executive Officer, the senior executives of investments,
credit, retail banking, commercial banking and finance, and certain other
officers. The ALCO is supported by the Asset Liability Management Group which
monitors interest rate risk, prepares analyses for review by the ALCO and
implements actions which are either specifically directed by the ALCO or
established by policy guidelines.
The objective and primary focus of interest sensitivity management is to
optimize earnings results, while managing, within internal policy constraints,
interest rate risk. FBA's policy on rate sensitivity is to manage exposure to
potential risks associated with changing interest rates by maintaining a balance
sheet posture in which annual net interest income is not significantly impacted
by reasonably possible near-term changes in interest rates. To measure the
effect of interest rate changes, FBA recalculates its net income over two
one-year horizons on a pro forma basis. The analysis assumes various scenarios
for increases and decreases in interest rates including both instantaneous and
gradual, parallel and non-parallel shifts in the yield curve, in varying
amounts. For purposes of arriving at reasonably possible near-term changes in
interest rates, FBA includes a forecast based on actual changes in interest
rates which have occurred over a two year period, simulating both a declining
and rising interest rate scenario. Consistent with the table presented below,
which indicates FBA is "asset-sensitive," FBA's simulation model indicates a
loss of projected net income should interest rates decline. While a decline in
interest rates of less than 10% has a diminutive effect on the earnings of FBA,
a significant decline in interest rates, resembling the actual decline which
occurred over a two-year period commencing in March 1991, indicates a loss of
net income equivalent to approximately 7% of net interest income for the year
ended December 31, 1997.
FBA utilizes off-balance-sheet derivative financial instruments to assist
in the management of interest rate sensitivity and to modify the repricing,
maturity and option characteristics of on-balance-sheet assets and liabilities.
Derivative financial instruments held by FBA at December 31, 1997 and 1996
consist of an interest rate cap agreement with a notional amount of $10 million
and credit exposure of $222,000 and $335,000, respectively. The notional amount
of the interest rate cap agreement does not represent amounts exchanged by the
parties and, therefore, is not a measure of FBA's credit exposure through its
use of derivative financial instruments. The amounts actually exchanged are
determined by reference to the notional amounts and the other terms of the
agreement.
FBA's interest rate cap agreement limits the interest expense associated
with certain of its interest-bearing liabilities. In exchange for an initial
fee, the interest rate cap agreement entitles FBA to receive interest payments
when a specified index rate exceeds a predetermined rate. The agreement
outstanding at December 31, 1997 and 1996 effectively limits the interest rate
to 5.0% on $10 million of interest-bearing liabilities from October 15, 1997 to
May 15, 2000.
Previously, FBA sold interest rate futures contracts and purchased options
on interest rate futures contracts to hedge the interest rate risk of its
available-for-sale securities portfolio. Interest rate futures contracts are
commitments to either purchase or sell designated financial instruments at a
future date for a specified price and may be settled in cash or through delivery
of such financial instruments. Options on interest rate futures contracts confer
the right to purchase or sell financial futures contracts at a specified price
and are settled in cash. There were no outstanding interest rate futures
contracts or options on interest rate futures contracts at December 31, 1995 and
no activity for the years ended December 31, 1997 and 1996.
During 1995, as interest rates declined, FBA incurred losses on the
interest rate futures contracts of $5.95 million, of which $806,000 was
amortized to income as a yield adjustment to the investment security portfolio
and $5.14 million was included in the cost basis in determining the gain or loss
upon the sale of the securities. The losses incurred on the interest rate
futures contracts were partially offset by gains in the available-for-sale
securities portfolio. The overall net loss in net market value of these
positions was attributable to an increase in the projected prepayments of
principal underlying the available-for-sale securities portfolio. These
increased prepayment projections disproportionately shortened the expected lives
of the available-for-sale securities portfolio in comparison to the effective
maturity created with the hedge position. As a result, beginning in the second
quarter of 1995, FBA began to reduce its hedge position to coincide with the
current expected life of the available-for-sale securities portfolio by
decreasing the number of outstanding interest rate futures contracts. FBA
continued to reduce its hedge position during the third and fourth quarters of
1995 as a result of the further declines in interest rates. In addition, on
November 3, 1995, upon sales of $48.9 million of securities, which marked the
completion of the restructuring of the available-for-sale securities portfolio,
the remaining outstanding interest rate futures contracts were closed.
In addition to the simulation model employed by FBA, a more traditional
interest rate sensitivity position is prepared and reviewed in conjunction with
the results of the simulation model. The following table presents the projected
maturities and periods to repricing of FBA's rate sensitive assets and
liabilities as of December 31, 1997, adjusted to account for anticipated
prepayments:
Over three Over six
Three through through Over one Over
months six twelve through five
or less months months five years years Total
------- ------ ------ ---------- ----- -----
(dollars expressed in thousands)
Interest-earning assets:
Loans (1)..................................... $ 211,151 16,939 28,830 54,453 2,064 313,437
Investment securities......................... 22,883 1,605 3,451 51,791 4,061 83,791
Federal funds sold............................ 2,215 -- -- -- -- 2,215
Interest-bearing deposits with
other financial institutions................ 690 -- -- -- -- 690
--------- ------- ------- ------- ------- --------
Total interest-earning assets............... 236,939 18,544 32,281 106,244 6,125 400,133
--------- ------- ------- ------- ------- --------
Interest-bearing liabilities:
Interest-bearing demand accounts.............. 21,095 13,112 8,552 6,271 7,981 57,011
Money market demand accounts.................. 51,345 -- -- -- -- 51,345
Savings accounts.............................. 6,703 5,520 4,731 6,703 15,771 39,428
Time deposits................................. 40,294 34,349 41,261 53,858 -- 169,762
Notes payable and other borrowed funds........ 16,723 584 -- -- -- 17,307
--------- ------- ------- ------- ------- --------
Total interest-bearing liabilities.......... 136,160 53,565 54,544 66,832 23,752 334,853
--------- ------- ------- ------- ------- --------
Interest-sensitivity gap:
Periodic...................................... $ 100,779 (35,021) (22,263) 39,412 (17,627) 65,280
========
Cumulative.................................... 100,779 65,758 43,495 82,907 65,280
========= ======== ======= ======= =======
Ratio of interest-sensitive assets to
interest-sensitive liabilities:
Periodic.................................... 1.74 .35 .59 1.59 .26 1.19
=======
Cumulative.................................. 1.74 1.35 1.18 1.27 1.19
======== ====== ====== ====== ======
- ----------------------
(1) Loans presented net of unearned discount
Management made certain assumptions in preparing the table above. These
assumptions included: Loans will repay at historic repayment speeds;
mortgage-backed securities, included in investment securities, will repay at
projected repayment speeds; interest-bearing demand accounts and savings
accounts are interest-sensitive at a rate of 37% and 17%, respectively, of the
remaining balance for each period presented; and fixed maturity deposits will
not be withdrawn prior to maturity.
At December 31, 1997 and 1996, FBA's asset-sensitive position on a
cumulative basis through the twelve-month time horizon increased by $29.8
million, or 6.60% of total assets, to $43.5 million, or 9.64% of total assets,
from $13.7 million, or 3.65% of total assets, respectively. The increase is
attributable to the composition and growth of the loan portfolio.
The interest-sensitivity position is one of several measurements of the
impact of interest rate changes on net interest income. Its usefulness in
assessing the effect of potential changes in net interest income varies with the
constant change in the composition of FBA's assets and liabilities. For this
reason, FBA places greater emphasis on a simulation model for monitoring its
interest rate risk exposure.
Liquidity
The liquidity of FBA and the Subsidiary Banks is the ability to maintain a
cash flow which is adequate to fund operations and meet obligations and other
commitments on a timely basis. The Subsidiary Banks receive funds for liquidity
from customer deposits, loan payments, maturities of loans and investments,
sales of investments and earnings. In addition, the Subsidiary Banks may avail
themselves of more volatile sources of funds through the issuance of
certificates of deposit in denominations of $100,000 or more, federal funds
borrowed, securities sold under agreements to repurchase and borrowings from the
FHLB. The aggregate funds acquired from these more volatile sources were $41.2
million and $33.8 million at December 31, 1997 and 1996, respectively.
The following table presents the maturity structure of volatile funds,
which consists of certificates of deposit of $100,000 or more and other
short-term borrowings, at December 31, 1997:
December 31, 1997
-----------------
(dollars expressed in thousands)
3 months or less................. $ 15,404
Over 3 through 6 months.......... 8,338
Over 6 through 12 months ........ 8,447
Over 12 months................... 8,995
--------
Total................... $ 41,184
========
In addition to these more volatile sources of funds, FBA borrowed $14.5
million and $14.0 million at December 31, 1997 and 1996, respectively, from
First Banks under a $20.0 million promissory note payable (Note Payable) to
facilitate the funding of its acquisitions. The borrowings under the Note
Payable bear interest at an annual rate of one-quarter percent less than the
"Prime Rate" as reported in the Wall Street Journal. The principal and accrued
interest under the Note Payable are due and payable on October 31, 2001.
Management believes the available liquidity and operating results of the
Subsidiary Banks will be sufficient to provide funds for growth and to meet
FBA's operating and debt service requirements both on a short-term and long-term
basis, including the Note Payable with First Banks.
Year 2000 Compatibility
FBA has significant dependence on various computer equipment and software
for its daily operations. Most software systems were originally designed to
operate using date fields which contain two digits to correspond to the last two
digits of the Year. With the approaching change to the Year 2000, this
limitation in these systems could cause the computers to misinterpret years
beginning with "20" as instead being years beginning with "19". If not
corrected, this could cause miscalculation of data for financial purposes, and
operating failure of equipment which is date dependent. While the most obvious
location of this problem is the mainframe computer system, there are many other
potential ramifications. These can be categorized as: (1) the ancillary software
systems which are used for various other purposes throughout FBA on secondary
mainframe computers, personal computers or intelligent terminals; (2) other
types of equipment which are not related to or connected to computer equipment,
such as vault time locks, elevators, security equipment and heating/air
conditioning systems, which are used in bank branches for various purposes; and
(3) the effects which the transition to the Year 2000 may have on external
suppliers and servicers, as well as the loan and deposit customers of FBA.
Recognizing this, FBA has established an operating committee, which
includes representatives of First Banks, to identify all of the various Year
2000 problems which may arise and work with the various departments within FBA
to address these issues. Since most of the software used by FBA is purchased
from outside vendors, FBA has been working with these vendors to ensure the
issues are being corrected. In a few instances, there are particular systems or
equipment which the vendors do not intend to convert to Year 2000 compatibility.
However, generally these are items which are at the end of their economic lives
and scheduled for replacement. Consequently, FBA believes its cost of Year 2000
compliance will not be material to its financial position or results of
operation. These costs are expensed as incurred.
FBA and its Subsidiary Banks are subject to risks associated with the Year
2000 software problem, a term which refers to uncertainties about the ability of
various software systems to interpret dates correctly after the beginning of the
Year 2000. FBA's process of evaluating potential effects of Year 2000 issues on
customers of the Subsidiary Banks is in its early stages, and it is therefore
impossible to quantify the potential adverse effects of incompatible software
systems on loan customers of FBA's Subsidiary Banks. The failure of a commercial
bank customer to prepare adequately for Year 2000 compatibility could have a
significant adverse effect on such customer operations and profitability, in
turn inhibiting its ability to repay loans in accordance with their terms. Until
sufficient information is accumulated from customers of the Subsidiary Banks to
enable FBA to assess the degree to which customers' operations are susceptible
to potential problems, FBA will be unable to quantify the potential for losses
from loans to commercial customers.
Effect of New Accounting Standards
During 1997, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 130 - Reporting
Comprehensive Income. The statement establishes standards for reporting and
displaying income and its components (revenues, gains, and losses) in a full set
of general purpose financial statements. The statement requires all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Although the statement is
effective for fiscal years beginning after December 15, 1997, FBA does not
believe the SFAS will have a material impact to the Company's financial
statements.
In addition, the FASB issued SFAS No. 131 - Disclosures about Segments of
an Enterprise and Related Information. The statement establishes standards for
the way public business enterprises report information about operating segments
in annual financial statements and requires those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. Additionally, the statement establishes standards for related
disclosures about products and services, geographic areas, and major customers
superseding SFAS No. 14 - Financial Reporting for Segments of a Business
Enterprise. FBA is currently evaluating information required in the statement
and believes expanded disclosure information will be required to be included in
FBA's financial statements beginning in 1998.
Effects of Inflation
Financial institutions are less affected by inflation than other types of
companies. Financial institutions make relatively few significant asset
acquisitions which are directly affected by changing prices. Instead, the assets
and liabilities are primarily monetary in nature. Consequently, interest rates
are more significant to the performance of financial institutions than the
effect of general inflation levels. While a relationship exists between the
inflation rate and interest rates, FBA believes this is generally manageable
through its asset/liability management program.
FIRST BANKS AMERICA, INC.
QUARTERLY CONDENSED FINANCIAL DATA
(Unaudited)
1997
----
4th 3rd 2nd 1st
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(dollars in thousands, except per share data)
Interest income......................................... $7,802 7,495 6,949 6,637
Interest expense......................................... 3,418 3,210 3,109 3,097
------ ------ ----- -----
Net interest income......................... 4,384 4,285 3,840 3,540
Provision for possible loan losses....................... 250 465 735 550
------ ------ ----- -----
Net interest income after provision
for possible loan losses.................. 4,134 3,820 3,105 2,990
------ ------ ----- -----
Noninterest income:
Gains on sales of securities.......................... 76 -- -- --
Other................................................. 510 500 823 655
------ ------ ----- ------
Total noninterest income.................... 586 500 823 655
------ ------ ----- -----
Noninterest expense...................................... 3,155 2,821 2,669 3,031
------ ------ ----- -----
Income before income tax expense............ 1,565 1,499 1,259 614
Income tax expense....................................... 492 566 463 237
------ ------ ----- -----
Net income.................................. $1,073 933 796 377
====== ====== ===== ======
Earnings per common share:
Basic................................................. $ 0.30 0.26 0.22 0.10
Diluted............................................... 0.29 0.26 0.22 0.10
====== ====== ====== ======
1996
----
4th 3rd 2nd 1st
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(dollars in thousands, except per share data)
Interest income......................................... $6,157 5,299 4,982 5,008
Interest expense......................................... 2,834 2,233 2,452 2,474
------ ----- ----- ------
Net interest income......................... 3,323 3,066 2,530 2,534
Provision for possible loan losses....................... 650 250 250 100
------ ----- ----- ------
Net interest income after provision
for possible loan losses.................. 2,673 2,816 2,280 2,434
------ ----- ----- ------
Noninterest income:
Gains on sales of securities.......................... 110 -- -- 75
Other................................................. 435 429 436 363
------ ----- ----- ------
Total noninterest income.................... 545 429 436 438
------ ----- ----- ------
Noninterest expense...................................... 2,858 2,535 1,994 2,093
------ ----- ----- ------
Income before income tax expense............ 360 710 722 779
Income tax expense....................................... 147 253 284 318
------ ----- ----- ------
Net income.................................. $ 213 457 438 461
====== ===== ===== ======
Earnings per common share:
Basic................................................. $ 0.06 0.12 0.12 0.12
Diluted............................................... 0.06 0.12 0.11 0.12
====== ===== ===== ======
FIRST BANKS AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(dollars expressed in thousands, except per share data)
December 31,
------------
1997 1997 1996
---- ---- ----
pro forma
(unaudited)
Assets
------
Cash and cash equivalents:
Cash and due from banks................................................ $ 34,399 23,537 12,343
Interest-bearing deposits with other financial
institutions with maturities of three months or less................ 2,607 690 146
Federal funds sold..................................................... 4,915 2,215 9,475
--------- --------- ---------
Total cash and cash equivalents................................... 41,921 26,442 21,964
--------- --------- ---------
Investment securities available for sale, at fair value.................... 148,181 83,791 86,910
Loans:
Commercial and financial............................................... 113,807 69,091 48,025
Real estate construction and development............................... 94,587 66,601 44,238
Real estate mortgage................................................... 171,842 103,718 54,761
Consumer and installment............................................... 77,390 69,923 96,096
Loans held for sale.................................................... 5,708 5,708 --
--------- --------- --------
Total loans....................................................... 463,334 315,041 243,120
Unearned discount...................................................... (2,588) (1,604) (1,246)
Allowance for possible loan losses..................................... (12,313) (6,715) (6,147)
--------- --------- ---------
Net loans......................................................... 448,433 306,722 235,727
--------- --------- ---------
Bank premises and equipment, net of
accumulated depreciation............................................... 10,852 8,679 6,369
Intangibles associated with the purchase of subsidiaries................... 12,000 6,424 3,127
Accrued interest receivable................................................ 5,029 2,963 2,348
Foreclosed property, net................................................... 842 381 785
Deferred tax assets........................................................ 14,498 13,812 15,519
Other assets............................................................... 3,851 2,042 2,433
--------- --------- ---------
Total assets...................................................... $ 685,607 451,256 375,182
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
FIRST BANKS AMERICA, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
(dollars expressed in thousands, except per share data)
December 31,
------------
1997 1997 1996
---- ---- ----
pro forma
(unaudited)
Liabilities
-----------
Deposits:
Demand:
Non-interest-bearing ................................................ $ 101,039 66,396 56,161
Interest-bearing..................................................... 74,965 57,011 53,310
Savings................................................................ 158,080 90,773 66,523
Time deposits:
Time deposits of $100 or more........................................ 56,373 38,377 31,679
Other time deposits.................................................. 199,945 131,385 112,133
---------- --------- ---------
Total deposits.................................................... 590,402 383,942 319,806
Short-term borrowings...................................................... 3,687 2,807 2,092
Promissory note payable.................................................... 9,100 14,500 14,000
Accrued interest payable................................................... 4,242 2,246 904
Deferred tax liabilities................................................... 1,273 983 909
Payable to former shareholders of Surety Bank.............................. 3,829 3,829 --
Accrued expenses and other liabilities..................................... 5,167 3,085 3,973
12% convertible debentures................................................. 6,500 -- --
---------- ---------- ----------
Total liabilities................................................. 624,200 411,392 341,684
---------- --------- ---------
Stockholders' Equity
--------------------
Common stock:
Common stock, $0.15 par value; 6,666,666 shares
authorized at December 31, 1997 and 1996; 3,238,417
pro forma shares, 1,682,689 shares and 1,412,900 shares
issued at December 31, 1997 and 1996, respectively................... 486 252 212
Class B common stock, $.15 par value; 4,000,000
shares authorized; 2,500,000 shares issued and
outstanding at December 31, 1997 and 1996............................ 375 375 375
Capital surplus............................................................ 63,636 42,497 38,036
Retained earnings (deficit), since elimination of accumulated
deficit of $259,117 effective December 31, 1994........................ 928 928 (2,251)
Common treasury stock, at cost; 386,458 shares and 280,430
shares at December 31, 1997 and 1996, respectively..................... (4,350) (4,350) (2,838)
Net fair value adjustment for securities available for sale................ 332 162 (36)
---------- --------- ---------
Total stockholders' equity........................................ 61,407 39,864 33,498
---------- --------- ---------
Total liabilities and stockholders' equity........................ $ 685,607 451,256 375,182
========== ========= =========
FIRST BANKS AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars expressed in thousands, except per share data)
Years ended December 31,
------------------------
1997 1997 1996 1995
---- ---- ---- ----
pro forma
(unaudited)
Interest income:
Interest and fees on loans........................................ $ 29,451 23,159 16,494 17,462
Investment securities............................................. 6,793 5,073 3,519 4,473
Federal funds sold and other...................................... 1,021 651 1,433 492
-------- ------- ------- -------
Total interest income........................................ 37,265 28,883 21,446 22,427
-------- ------- ------- -------
Interest expense:
Deposits:
Interest-bearing demand......................................... 1,312 1,174 487 455
Savings......................................................... 3,209 2,350 1,854 2,026
Time deposits of $100 or more................................... 1,946 1,631 1,409 1,300
Other time deposits............................................. 8,168 6,159 5,551 5,148
Promissory note payable and other borrowings...................... 2,085 1,520 692 2,289
-------- ------- ------- -------
Total interest expense....................................... 16,720 12,834 9,993 11,218
-------- ------- ------- -------
Net interest income.......................................... 20,545 16,049 11,453 11,209
Provision for possible loan losses.................................... 2,000 2,000 1,250 5,826
-------- ------- ------- -------
Net interest income after provision
for possible loan losses................................... 18,545 14,049 10,203 5,383
-------- ------- ------- -------
Noninterest income (loss):
Service charges on deposit accounts............................... 2,005 1,632 1,507 1,458
Loan sales and servicing income................................... 33 22 53 159
Other income...................................................... 894 834 103 1,253
Gain (loss) on sales of securities, net........................... 76 76 185 (2,996)
-------- ------- ------- -------
Total noninterest income (loss).............................. 3,008 2,564 1,848 (126)
-------- ------- ------- -------
Noninterest expense:
Salaries and employee benefits.................................... 5,453 4,219 3,072 4,029
Occupancy, net of rental income................................... 1,886 1,440 951 1,274
Furniture and equipment........................................... 1,016 805 613 663
Federal Deposit Insurance Corporation premiums.................... 112 102 160 313
Postage, printing and supplies.................................... 438 346 267 303
Legal, examination and professional fees.......................... 2,765 2,005 1,276 1,354
Data processing................................................... 942 715 334 664
Communications.................................................... 614 521 421 553
(Gain) loss on sale of foreclosed property, net of expenses....... (332) (303) 146 176
Other............................................................. 2,399 1,826 2,240 1,831
-------- ------- ------- -------
Total noninterest expense.................................... 15,293 11,676 9,480 11,160
-------- ------- ------- -------
Income (loss) before provision for
income tax expense (benefit)............................ 6,260 4,937 2,571 (5,903)
Provision for income tax expense (benefit)............................ 2,611 1,758 1,002 (2,083)
-------- ------- ------- -------
Net income (loss)............................................ $ 3,649 3,179 1,569 (3,820)
======== ======= ======= =======
Earnings (loss) per common share:
Basic............................................................. $ 0.90 0.88 0.42 (0.99)
Diluted........................................................... 0.89 0.87 0.40 (0.99)
======== ======= ======= =======
Weighted average common stock outstanding (in thousands).............. 4,069 3,607 3,763 3,870
======== ======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
FIRST BANKS AMERICA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Three years ended December 31, 1997
(dollars expressed in thousands, except per share data)
Net fair
value
adjustment Total
Class B Retained Common for securities stock-
Common common Capital earnings treasury available holders'
stock stock surplus (deficit) stock for sale equity
----- ----- ------- --------- ----- -------- ------
Consolidated balances,
January 1, 1995.................$ 206 375 39,133 -- -- -- 39,714
Year ended December 31, 1995:
Consolidated net loss........... -- -- -- (3,820) -- -- (3,820)
Exercise of stock options....... 4 -- 111 -- -- -- 115
Compensation paid in stock...... -- -- 27 -- -- -- 27
Repurchases of common stock..... -- -- -- -- (828) -- (828)
Net fair value adjustment for
securities available for sale. -- -- -- -- -- 50 50
---- ---- ------ ----- ----- ---- ------
Consolidated balances,
December 31, 1995............... 210 375 39,271 (3,820) (828) 50 35,258
Year ended December 31, 1996:
Consolidated net income......... -- -- -- 1,569 -- -- 1,569
Exercise of stock options....... 2 -- 36 -- -- -- 38
Compensation paid in stock...... -- -- 10 -- -- -- 10
Repurchase of outstanding
warrants...................... -- -- (1,281) -- -- -- (1,281)
Repurchases of common stock..... -- -- -- -- (2,010) -- (2,010)
Net fair value adjustment for
securities available for sale. -- -- -- -- -- (86) (86)
---- ---- ----- ----- ----- ---- ------
Consolidated balances,
December 31, 1996............... 212 375 38,036 (2,251) (2,838) (36) 33,498
Year ended December 31, 1997:
Consolidated net income......... -- -- -- 3,179 -- -- 3,179
Issuance of common stock
for purchase accounting
acquisition................... 40 -- 4,723 -- -- -- 4,763
Exercise of stock options....... -- -- 15 -- -- -- 15
Redemption of stock options.... -- -- (290) -- -- -- (290)
Compensation paid in stock...... -- -- 13 -- -- -- 13
Repurchases of common stock..... -- -- -- -- (1,512) -- (1,512)
Net fair value adjustment for
securities available for sale. -- -- -- -- -- 198 198
---- ---- ----- ----- ------ ---- ------
Consolidated balances,
December 31, 1997............... $252 375 42,497 928 (4,350) 162 39,864
==== ==== ====== ===== ====== ==== ======
The accompanying notes are an integral part of the consolidated financial
statements.
FIRST BANKS AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars expressed in thousands)
Years ended December 31,
------------------------
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income (loss)...................................................... 3,179 1,569 (3,820)
Adjustments to reconcile net income (loss) to cash provided
by operating activities:
Depreciation, amortization and accretion, net...................... 694 (172) 337
Provision for possible loan losses................................. 2,000 1,250 5,826
Provision (benefit) for income taxes............................... 1,758 1,002 (2,083)
Payments of income taxes........................................... (213) -- --
(Gain) loss on sales of securities, net............................ (76) (185) 2,996
(Increase) decrease in accrued interest receivable................. (615) (1,084) 481
Interest accrued on liabilities.................................... 12,834 9,993 11,218
Payments of interest on liabilities................................ (11,492) (9,984) (11,142)
Other operating activities, net.................................... (66) (1,836) (860)
-------- ------- --------
Net cash provided by operating activities.................... 8,003 553 2,953
-------- ------- --------
Cash flows from investing activities:
Cash paid for acquired entities, net of cash and cash
equivalents received................................................. 3,072 10,715 --
Sales of investment securities......................................... 11,073 20,564 70,995
Maturities of investment securities.................................... 54,805 161,223 54,380
Purchases of investment securities..................................... (50,126) (205,661) (104,753)
Net (increase) decrease in loans....................................... (20,031) 7,481 6,469
Recoveries of loans previously charged-off............................. 1,281 1,392 715
Purchases of bank premises and equipment............................... (487) (191) (489)
Proceeds from sales of other real estate............................... 1,020 508 743
Other investing activities............................................. (258) -- (6,414)
-------- -------- --------
Net cash provided by (used in) investing activities.......... 349 (3,969) 21,646
-------- ------- --------
Cash flows from financing activities: Other increases (decreases) in deposits:
Demand and savings deposits.......................................... 1,664 (7,444) (454)
Time deposits........................................................ (4,978) (13,159) 8,147
Decrease in federal funds purchased and other
short-term borrowings................................................ -- (352) (5,257)
Decrease in Federal Home Loan Bank advances............................ (1,122) (3,957) (13,749)
Increase (decrease) in securities sold under agreements to repurchase.. 1,836 (324) (18,722)
Increase in promissory note payable.................................... 500 12,946 --
Repurchase of common stock for treasury and warrant.................... (1,512) (3,290) (828)
Repurchase of stock option............................................. (290) -- --
Proceeds from exercise of stock options................................ 28 38 115
-------- ------- --------
Net cash used in financing activities........................ (3,874) (15,542) (30,748)
--------- ------- --------
Net increase (decrease) in cash and cash equivalents......... 4,478 (18,958) (6,149)
Cash and cash equivalents, beginning of year............................... 21,964 40,922 47,071
-------- ------- --------
Cash and cash equivalents, end of year..................................... $ 26,442 21,964 40,922
======== ======= ========
Noncash investing and financing activities:
Loans transferred to foreclosed real estate............................ $ 176 286 203
Issuance of common stock in purchase accounting acquisition............ 4,763 -- --
Loans transferred from loans held for sale............................. -- -- 7,253
Receivable from sale of investment securities.......................... $ -- -- 4,915
========= ======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
(1) Summary of Significant Accounting Policies
The accompanying consolidated financial statements of First Banks America,
Inc. and subsidiaries (FBA or the Company), have been prepared in accordance
with generally accepted accounting principles and conform to practices prevalent
among financial institutions. The following is a summary of the more significant
policies followed by FBA:
Basis of Presentation. The consolidated financial statements of FBA have
been prepared in accordance with generally accepted accounting principles and
conform to predominant practices within the banking industry. Management of FBA
has made a number of estimates and assumptions relating to the reporting of
assets and liabilities and the disclosure of contingent assets and liabilities
to prepare the consolidated financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates. Certain 1996 and 1995 amounts have been reclassified to conform with
the 1997 presentation.
As more fully discussed in Note 2, the unaudited pro forma balance sheet as
of December 31, 1997 and unaudited pro forma statement of operations for the
year ended December 31, 1997 have been prepared to reflect the effects on the
historical results of FBA of the acquisitions of First Commercial Bancorp, Inc.
(FCB) and its wholly owned subsidiary, First Commercial Bank (First Commercial),
and Pacific Bay Bank. The unaudited pro forma balance sheet and unaudited pro
forma statement of operations have been prepared as if the acquisitions occurred
on December 31, 1997. In addition, the historical results of First Banks, Inc.'s
interest in FCB is presented as if FBA had acquired First Banks, Inc.'s interest
in FCB on August 25, 1995. The pro forma financial information is not
necessarily indicative of the results that will occur in the future.
The Board of Directors of FBA elected to implement an accounting adjustment
referred to as a "quasi-reorganization," effective December 31, 1994. In
accordance with accounting provisions applicable to a quasi-reorganization, the
assets and liabilities of FBA were adjusted to their fair value and the
accumulated deficit was eliminated as of December 31, 1994.
Principles of Consolidation. The consolidated financial statements include
the accounts of the parent company and its subsidiaries, all of which are wholly
owned. All significant intercompany accounts and transactions have been
eliminated.
FBA operates through two banking subsidiaries, BankTEXAS N.A.,
headquartered in Houston, Texas (BankTEXAS) and First Bank of California,
headquartered in Roseville, California (FB California), collectively referred to
as Subsidiary Banks.
Cash and Cash Equivalents. Cash, due from banks, federal funds sold, and
interest-bearing deposits with original maturities of three months or less are
considered to be cash and cash equivalents for purposes of the consolidated
statements of cash flows.
The Subsidiary Banks are required to maintain certain daily reserve
balances in accordance with regulatory requirements. These reserve balances were
$3.6 million and $2.6 million at December 31, 1997 and 1996, respectively.
Investment Securities. The classification of investment securities as
available for sale or held to maturity is determined at the date of purchase.
FBA does not engage in the trading of investment securities.
Investment securities classified as available for sale are those debt and
equity securities for which FBA has no immediate plan to sell, but which may be
sold in the future if circumstances warrant. Available-for-sale securities are
stated at current fair value. Realized gains and losses are included in
noninterest income upon commitment to sell, based on the amortized cost of the
individual security sold. Unrealized gains and losses are recorded, net of
related income tax effects, in a separate component of stockholders' equity. All
previous fair value adjustments included in stockholders' equity are reversed
upon sale.
Investment securities designated as held to maturity are those debt
securities which FBA has the positive intent and ability to hold until maturity.
Held-to-maturity securities are stated at amortized cost, in which the
amortization of premiums and accretion of discounts are recognized over the
contractual maturities or estimated lives of the individual securities, adjusted
for anticipated prepayments, using the level yield method.
At December 31, 1997 and 1996, all investment securities were classified as
available for sale.
Loans. Loans held for portfolio are carried at cost, adjusted for
amortization of premiums and accretion of discounts using a method which
approximates the level yield method. Interest and fees on loans are recognized
as income using the interest method. Loans held for portfolio are stated at cost
as FBA has the ability and it is management's intention to hold them to
maturity.
The accrual of interest on loans is discontinued when it appears that
interest or principal may not be paid in a timely manner in the normal course of
business. Generally, payments received on nonaccrual and impaired loans are
recorded as principal reductions. Interest income is recognized after all
principal has been repaid or an improvement in the condition of the loan has
occurred which would warrant resumption of interest accruals.
A loan is considered impaired when it is probable a creditor will be unable
to collect all amounts due, both principal and interest, according to the
contractual terms of the loan agreement. When measuring impairment, the expected
future cash flows of an impaired loan are discounted at the loan's effective
interest rate. Alternatively, impairment is measured by reference to an
observable market price, if one exists, or the fair value of the collateral for
a collateral-dependent loan. Regardless of the historical measurement method
used, FBA measures impairment based on the fair value of the collateral when the
creditor determines foreclosure is probable. Additionally, impairment of a
restructured loan is measured by discounting the total expected future cash
flows at the loan's effective rate of interest as stated in the original loan
agreement. FBA continues to use its existing nonaccrual methods for recognizing
interest income on impaired loans.
Loans Held for Sale. Mortgage loans held for sale are carried at the lower
of cost or market value which is determined on an individual loan basis. Gains
or losses on the sale of loans held for sale are determined on a specific
identification method.
Allowance for Possible Loan Losses. The allowance for possible loan losses
is maintained at a level considered adequate to provide for potential losses.
The provision for possible loan losses is based on a periodic analysis of the
loans by management, considering, among other factors, current economic
conditions, loan portfolio composition, past loan loss experience, independent
appraisals, loan collateral and payment experience. In addition to the allowance
for estimated losses on impaired loans, an overall unallocated allowance is
established to provide for unidentified credit losses which are inherent in the
portfolio. As adjustments become necessary, they are reflected in the results of
operations in the periods in which they become known.
Bank Premises and Equipment. Bank premises and equipment are stated at cost
less accumulated depreciation and amortization. Depreciation is computed
primarily using the straight-line method over the estimated useful lives of the
related assets. Amortization of leasehold improvements is calculated using the
straight-line method over the shorter of the useful life of the improvement or
term of the lease. Bank premises and improvements are depreciated over 15 to 29
years and equipment over two to ten years.
Intangibles Associated With the Purchase of Subsidiaries. The excess of
cost over net assets acquired of purchased subsidiaries are amortized using the
straight-line method over the estimated periods to be benefited, which has been
estimated at 15 years.
Foreclosed Property. Foreclosed property, consisting of real estate
acquired through foreclosure or deed in lieu of foreclosure, is stated at the
lower of fair value less applicable selling costs or cost at the time the
property is acquired. The excess of cost over fair value of the property at the
date of acquisition is charged to the allowance for possible loan losses.
Income Taxes. FBA and its subsidiaries join in filing consolidated federal
income tax returns. Each subsidiary pays its allocation of federal income taxes
to FBA, or receives payment from FBA to the extent that tax benefits are
realized. Separate state franchise tax returns are filed in Texas, Delaware and
Nevada for the appropriate entities. FBA and its subsidiaries join in filing
Illinois and California unitary income tax returns with First Banks.
Financial Instruments. A financial instrument is defined as cash, evidence
of an ownership interest in an entity, or a contract that conveys or imposes on
an entity the contractual right or obligation to either receive or deliver cash
or another financial instrument.
Financial Instruments With Off-Balance-Sheet Risk. FBA uses financial
instruments to reduce the interest rate risk arising from its financial assets
and liabilities. These instruments involve, in varying degrees, elements of
interest rate risk and credit risk in excess of the amount recognized in the
consolidated balance sheets. "Interest rate risk" is defined as the possibility
that interest rates may move unfavorably from the perspective of FBA. The risk
that a counterparty to an agreement entered into by FBA may default is defined
as "credit risk." These financial instruments include one interest rate cap
agreement.
FBA is party to commitments to extend credit and commercial and standby
letters of credit in the normal course of business to meet the financing needs
of its customers. These commitments involve, in varying degrees, elements of
interest rate risk and credit risk in excess of the amount recognized in the
consolidated balance sheets.
Interest Rate Futures Contracts. Prior to 1996, interest rate futures
contracts were utilized to manage the interest rate risk of the
available-for-sale securities portfolio. Gains and losses on interest rate
futures contracts, which qualified as hedges, were deferred. Amortization of the
net deferred gains or losses was applied to the interest income of the
available-for-sale securities portfolio using the straight-line method. The net
deferred gains and losses were applied to the carrying value of the
available-for-sale securities portfolio as part of the mark to market valuation.
When the hedged assets were sold, the related gain or loss on the interest rate
futures contract was immediately recognized in the consolidated statements of
operations.
Interest Rate Cap Agreements. Interest rate cap agreements are accounted
for on an accrual basis with the net interest differential being recognized as
an adjustment to interest expense of the related liability. Premiums and fees
paid upon the purchase of interest rate cap agreements are amortized to interest
expense over the life of the agreements using the interest method. In the event
of early termination of an interest rate cap agreement, the net proceeds
received or paid are deferred and amortized over the shorter of the remaining
contract life or the maturity of the related liability. If, however, the amount
of the underlying hedged liability is repaid, then the gain or loss on the
agreement is recognized immediately in the consolidated statements of
operations. The unamortized premiums and fees paid are included in other assets
in the accompanying consolidated balance sheets.
Earnings (Loss) Per Common Share. FBA adopted the provisions of SFAS 128,
Earnings Per Share (SFAS 128), on a retroactive basis effective December 31,
1997. Accordingly, earnings (loss) per common share (EPS) data has been restated
to conform with the provisions of SFAS 128.
SFAS 128 provides for the calculation of a "Basic" and "Diluted" EPS. Basic
EPS is computed by dividing the income (loss) available to common stockholders
(the numerator) by the weighted average number of common shares
outstanding (the denominator) during the year. The computation of dilutive EPS
is similar except the denominator is increased to include the number of
additional common shares that would have been outstanding if the dilutive
potential shares had been issued. In addition, in computing the dilutive effect
of convertible securities, the numerator is adjusted to add back (a) any
convertible preferred dividends and (b) the after-tax amount of interest
recognized in the period associated with any convertible debt. The
implementation of SFAS 128 did not have a material impact on the calculation of
EPS.
(2) Acquisitions
On November 1, 1996, FBA completed its acquisition of Sunrise Bancorp, a
California corporation (Sunrise), and its wholly owned subsidiary, Sunrise Bank,
in exchange for $17.5 million in cash. At the time of the transaction, Sunrise
had $110.8 million in total assets, $45.5 million in cash and cash equivalents
and investment securities, $61.1 million in total loans, net of unearned
discount, and $91.1 million in total deposits. The acquisition was funded from
available cash and borrowings of $14.0 million under a promissory note payable
(Note Payable) with First Banks, Inc., St. Louis, Missouri (First Banks). First
Banks owns a majority of the outstanding voting stock of FBA, representing 65.9%
and 68.8% at December 31, 1997 and 1996, respectively.
On December 1, 1997, FBA completed its acquisition of Surety Bank in
exchange for 264,622 shares of FBA common stock and cash of $3.8 million. The
cash portion of this transaction, which was paid to the former shareholders of
Surety Bank in January 1998, was funded by an advance under the Note Payable. At
the time of the transaction, Surety had $72.8 million in total assets, $14.9
million in cash and cash equivalents and investment securities, $54.4 million in
total loans, net of unearned discount, and $67.5 million in total deposits.
Sunrise was merged into a wholly owned subsidiary of FBA. Sunrise Bank and
Surety Bank were merged into FB California, a newly-formed commercial bank
charter of FBA. The acquisitions of Sunrise and Surety Bank were accounted for
under the purchase method of accounting and, accordingly, the consolidated
financial statements include the financial position and results of operations
for the period subsequent to the acquisition dates, and the assets acquired and
liabilities assumed were recorded at fair value at the acquisition date. The
excess of the cost over the fair value of the net assets acquired was $3.2
million and $3.3 million for Sunrise and Surety Bank, respectively, and is being
amortized over 15 years.
On February 2, 1998, FBA and FCB were merged. Under the terms of the
Agreement and Plan of Merger (Agreement), FCB was merged into FBA, and FCB's
wholly owned subsidiary, First Commercial Bank, was merged into FB California,
an indirect subsidiary bank of FBA. The FCB shareholders received .8888 shares
of FBA common stock for each share of FCB common stock that they held. In total,
FCB shareholders received approximately 751,728 shares of FBA common stock. The
transaction also provided for First Banks to receive 804,000 shares of FBA
common stock in exchange for $10.0 million of the Note Payable. In addition,
FCB's convertible debentures of $6.5 million, which are owned by First Banks,
were exchanged for comparable debentures in FBA.
FCB had six banking offices located in Sacramento, Roseville (2), San
Francisco, Concord and Campbell, California. At December 31, 1997, FCB had total
assets of $191.6 million and net income of $764,000 for the year then ended.
First Banks owned a majority interest in both FBA and FCB. Consistent with
the accounting treatment for companies under common control, the merger was
accounted for by FBA as follows:
First Banks' interest in FCB was accounted for by FBA at First
Banks' historical cost. First Banks' historical cost basis in FCB
was determined under the purchase method of accounting, effective
upon First Banks' acquisition of First Commercial on August 23,
1995. Accordingly, the consolidated financial statements of First
Banks will include the financial position and results of
operations for the periods subsequent to the acquisition date, and
the assets acquired and liabilities assumed were recorded at fair
value at the acquisition date.
Effective with the merger, because the two entities were under the
common control of First Banks, the consolidated financial
statements of FBA will be restated in 1998 to reflect First Banks'
interest in the financial condition and results of operations of
FCB for the periods subsequent to August 23, 1995.
The amount attributable to the interests of the minority
shareholders in the fair value of the net assets of FCB was
accounted for by FBA under the purchase method of accounting.
Accordingly, such amount was reflected by FBA at fair value, as
determined by the market value of FBA common stock exchanged for
the minority interest pursuant to the Agreement.
The following information presents unaudited pro forma condensed results of
operations of FBA, combined with the acquisition of Surety Bank, as if FBA had
completed the transaction on January 1, 1996. In addition, the historical
results of First Banks' interest in FCB is presented as if FBA had acquired
First Banks' interest in FCB on August 25, 1995:
December 31,
------------
1997 1996 1995
---- ---- ----
(dollars expressed in thousands, except per share data)
Net interest income........................... $ 23,811 19,015 13,274
Provision for possible loan losses........... 2,255 2,469 6,376
Net income (loss)............................ 3,589 352 (4,736)
======== ======= =======
Weighted average shares of common
stock outstanding (in thousands)......... 5,138 5,294 4,332
======== ======= =======
Earnings (loss) per common share:
Basic.................................... $ 0.70 0.07 (1.09)
Diluted.................................. 0.69 0.06 (1.09)
======== ======= =======
The unaudited pro forma condensed results of operations reflect the
application of the purchase method of accounting for Surety Bank and certain
other assumptions. Purchase accounting adjustments have been applied to
investment securities, bank premises and equipment, deferred tax assets and
liabilities and excess cost required to reflect the assets acquired and
liabilities assumed at fair value. The resulting premiums and discounts are
amortized or accreted to income consistent with the accounting policies of FBA.
The results of operations of Sunrise are not included in the pro forma
combined condensed statements of operations for the year ended December 31, 1996
as the historical results of operations for the period are not representative of
normal operating results subsequent to its acquisition by FBA.
On February 2, 1998, FBA completed its acquisition of Pacific Bay Bank in
exchange for cash of $4.2 million. This transaction was funded by an advance
under the Note Payable. At the time of the transaction, Pacific Bay Bank had
$38.3 million in total assets; $7.4 million in cash and cash equivalents; $29.7
million in total loans, net of unearned discount; and, $35.2 million in total
deposits.
(3) Investments in Debt and Equity Securities
The amortized cost, contractual maturity, unrealized gains and losses and
fair value of investment securities available for sale at December 31, 1997 and
1996 were as follows:
Maturity Total
After amor- Gross
1 Year 1-5 5-10 10 tized unrealized Weighted
------- Fair average
or less years years years cost Gains Losses value yield
------- ----- ----- ----- ---- ----- ------ ----- ------
(dollars expressed in thousands)
December 31, 1997:
Carrying value:
U.S. Treasury.................. $ 11,000 27,070 -- -- 38,070 240 (1) 38,309 6.00%
U.S. government agencies and
corporations:
Mortgage-backed......... -- 13,449 47 6,755 20,251 38 (20) 20,269 6.06
Other................... 6,483 12,701 -- -- 19,184 6 (15) 19,175 6.14
Federal Home Loan Bank and
Federal Reserve Bank stock
(no stated maturity)........ 6,038 -- -- -- 6,038 -- -- 6,038 5.87
-------- ------ --- ----- ------- --- ---- ------- ----
Total.............. $ 23,521 53,220 47 6,755 83,543 284 (36) 83,791 6.03
======== ====== === ===== ======= === ==== ======= ====
Market value:
Debt securities................ $ 17,490 53,423 47 6,793
Equity securities.............. 6,038 -- -- --
-------- ------- --- -----
Total.............. $ 23,528 53,423 47 6,793
======== ====== === =====
Weighted average yield............ 5.84% 5.98% 6.56% 7.23%
==== ==== ==== ====
December 31, 1996:
Carrying value:
U.S. Treasury.................. $ 20,016 6,072 -- -- 26,088 81 -- 26,169 5.38%
U.S. government agencies and
corporations:
Mortgage-backed......... -- 23,668 -- 8,857 32,525 29 (153) 32,401 6.05
Other................... 18,087 4,969 -- -- 23,056 14 (26) 23,044 5.31
Federal Home Loan Bank an
Federal Reserve Bank stock
(no stated maturity)........ 5,296 -- -- -- 5,296 -- -- 5,296 5.87
-------- ------ --- ---- ------- --- ---- ------- ----
Total.............. $ 43,399 34,709 -- 8,857 86,965 124 (179) 86,910 5.64
======== ====== === ===== ======= === ==== ======= ====
Market value:
Debt securities................ $ 38,122 34,632 -- 8,860
Equity securities.............. 5,296 -- -- --
-------- ------ ---- -----
Total.............. $ 43,418 34,632 -- 8,860
======== ====== ==== =====
Weighted average yield............ 5.34% 5.63% --% 7.17%
========= ====== ==== =====
Proceeds from sales of securities were $11.1 million, $20.6 million and
$76.0 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Gross gains of $76,000, $185,000 and $2.2 million were realized on
those sales for the years ended December 31, 1997, 1996 and 1995, respectively.
No losses were realized on those sales for the years ended December 31, 1997,
1996 and 1995. For 1995, the net gains on sales of securities were offset by the
recognition of $5.1 million of hedging losses.
The Subsidiary Banks maintain investments in the Federal Home Loan Bank
(FHLB) and the Federal Reserve Bank (FRB). These investments are recorded at
cost, which represents redemption value. The investment in FHLB stock is
maintained at a minimum amount equal to the greater of 1% of the aggregate
outstanding balance of loans secured by residential real estate, or 5% of
advances from the FHLB. The investment in the FRB stock is maintained at a
minimum of 6% of the Subsidiary Banks' capital stock and capital surplus.
Investment securities with a carrying value of approximately $13.9 million
and $8.4 million at December 31, 1997 and 1996, respectively, were pledged in
connection with deposits of public and trust funds, securities sold under
agreements to repurchase and for other purposes as required by law.
(4) Loans and Allowance for Possible Loan Losses
Changes in the allowance for possible loan losses for the years ended
December 31 were as follows:
1997 1996 1995
---- ---- ----
(dollars expressed in thousands)
Balance, January 1............................................ $ 6,147 5,228 2,756
Acquired allowance for possible loan losses................... 30 2,338 --
------- ------- -------
6,177 7,566 2,756
------- ------- -------
Loans charged-off............................................. (2,744) (4,061) (4,069)
Recoveries of loans previously charged-off.................... 1,282 1,392 715
------- ------- -------
Net loans charged-off............................. (1,462) (2,669) (3,354)
-------- ------- -------
Provision charged to operations............................... 2,000 1,250 5,826
------- ------- -------
Balance, December 31.......................................... $ 6,715 6,147 5,228
======= ======= =======
At December 31, 1997 and 1996, FBA had $2.4 million and $2.1 million,
respectively, of loans on nonaccrual status. Interest on nonaccrual loans which
would have been recorded under the original terms of the loans was $298,000,
$161,000 and $93,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. Of these amounts, $259,000, $72,000 and $70,000 was actually
recorded as interest income on such loans in 1997, 1996 and 1995, respectively.
At December 31, 1997 and 1996, FBA had $2.9 million and $3.7 million of
impaired loans, which is represented by loans on nonaccrual status and consumer
installment loans 60 days or more past due. The impaired loans had no specific
reserves at December 31, 1997 and 1996. The average recorded investment in
impaired loans was $2.9 million and $2.2 million for the years ended December
31, 1997 and 1996, respectively.
FBA's primary market areas are Houston, Dallas, Irving and McKinney, Texas
and Roseville, Citrus Heights, Vallejo and Fairfield, California. At December
31, 1997, approximately 58% of the total loan portfolio and 56% of the
commercial, financial and agricultural loan portfolio were to borrowers within
this region.
In general, FBA is a secured lender. At December 31, 1997, approximately
97.6% of the loan portfolio was secured. Collateral is required in accordance
with the normal credit evaluation process based upon the creditworthiness of the
customer and the credit risk associated with the particular transaction.
(5) Bank Premises and Equipment
Bank premises and equipment were comprised of the following at December 31:
1997 1996
---- ----
(dollars expressed in thousands)
Land................................................... $ 3,224 2,424
Buildings and improvements............................. 4,995 3,234
Furniture, fixtures and equipment...................... 4,039 2,619
Construction in progress............................... 86 41
-------- ------
Total......................................... 12,344 8,318
Less accumulated depreciation ......................... 3,665 1,949
-------- ------
Bank premises and equipment, net.............. $ 8,679 6,369
======== ======
Depreciation expense for the years ended December 31, 1997, 1996 and 1995
totaled $640,000, $553,000 and $544,000, respectively.
FBA leases land, office properties and some items of equipment under
operating leases. Certain of the leases contain renewal options and escalation
clauses. Total rent expense was $667,000, $350,000 and $537,000 for the years
ended December 31, 1997, 1996 and 1995, respectively. Future minimum lease
payments under noncancellable operating leases extend through 2019 as follows:
(dollars expressed in thousands)
Year ending December 31:
1998............................................... $ 1,013
1999............................................... 531
2000............................................... 222
2001............................................... 195
2002............................................... 184
Thereafter......................................... 2,495
-------
Total minimum lease payments............. $ 4,640
=======
FBA leases to unrelated parties a portion of its owned banking facilities.
Total rental income was $740,000, $419,000 and $284,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
(6) Promissory Note Payable
FBA borrowed $14.5 million and $14.0 million at December 31, 1997 and 1996,
respectively, from First Banks under a $20.0 million Note Payable. The
borrowings under the Note Payable bear interest at an annual rate of one-quarter
percent less than the "Prime Rate" as reported in the Wall Street Journal. The
principal and accrued interest under the Note Payable are due and payable on
October 31, 2001. The interest expense under the Note Payable was $1.18 million
and $194,000 for the years ended December 31, 1997 and 1996, respectively. The
accrued and unpaid interest under the Note Payable was $1.37 million and
$194,000 at December 31, 1997 and 1996, respectively. There were no balances
outstanding during 1995.
(7) Earnings Per Common Share
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations for the periods indicated:
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ------
(dollars expressed in thousands, except per share data)
Year ended December 31, 1997:
Basic EPS - income available to common stockholders.... $ 3,179 3,607 $ 0.88
=======
Effect of dilutive securities-stock options............ -- 27
------- ------
Diluted EPS - income available to common stockholders.. $ 3,179 3,634 $ 0.87
======= ====== =======
Year ended December 31, 1996:
Basic EPS - income available to common stockholders.... $ 1,569 3,763 $ 0.42
=======
Effect of dilutive securities:
Stock options....................................... -- 61
Warrants............................................ -- 91
------- ------
Diluted EPS - income available to common stockholders.. $ 1,569 3,915 $ 0.40
======= ====== =======
As a result of the net loss incurred in 1995, the effects of stock options
and warrants were anti-dilutive for the year then ended.
(8) Income Taxes
Total income tax expense of $1.8 million, $1.0 million, and a tax benefit
of $2.1 million for the years ended December 31, 1997, 1996 and 1995,
respectively, were attributable to income from continuing operations.
Income tax expense (benefit) for the years ended December 31 consists of:
1997 1996 1995
---- ---- ----
(dollars expressed in thousands)
Current income tax expense:
Federal..................................................... $ -- -- --
State....................................................... -- -- --
------- ------ ------
....................................................... -- -- --
------- ------ ------
Deferred income tax expense (benefit):
Federal..................................................... 1,703 1,005 (2,083)
State....................................................... 55 (3) --
------- ------ ------
....................................................... 1,758 1,002 (2,083)
------- ------ -----
Total..................................................... $ 1,758 1,002 (2,083)
======= ====== ======
The effective rates of federal income taxes for the years ended December 31
differ from statutory rates of taxation as follows:
1997 1996 1995
------------------- -------------------- ----------------
Amount Percent Amount Percent Amount Percent
(dollars expressed in thousands)
Income (loss) before provision
for income tax expense (benefit). $ 4,937 $2,571 $ (5,903)
======= ====== ========
Tax expense (benefit) at federal
income tax rate.................. $ 1,728 35.0% 900 35.0% $ (2,066) (35.0)%
Effects of differences
in tax reporting................. 30 0.6 102 4.0 (17) (.3)
------- ----- ------ ---- ------- ----
Income tax expense (benefit)
at effective rate.............. $ 1,758 35.6% $1,002 39.0% $ (2,083) (35.3)%
======= ===== ====== ===== ======== =====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows:
December 31,
------------
1997 1996
---- ----
(dollars expressed in thousands)
Deferred tax assets:
Allowance for possible loan losses......................... $ 2,202 1,754
Foreclosed property........................................ 633 1,856
Alternative minimum tax credit............................. 288 279
Postretirement medical plan................................ 247 353
Quasi-reorganization adjustment of bank premises........... 1,377 1,427
Other...................................................... 426 728
Net operating loss carryforwards........................... 12,086 12,512
--------- ------
Gross deferred tax assets............................ 17,259 18,909
Valuation allowance........................................ (3,447) (3,390)
--------- -------
Net deferred tax assets.............................. 13,812 15,519
--------- -------
Deferred tax liabilities:
FHLB stock dividends....................................... 409 230
Bank premises and equipment................................ 533 466
Other ..................................................... 41 213
--------- -------
Gross deferred tax liabilities....................... 983 909
--------- -------
Net deferred tax assets.............................. $ 12,829 14,610
========= =======
Changes to the deferred tax asset valuation allowance for the years ended
December 31 were as follows:
1997 1996 1995
---- ---- ----
(dollars expressed in thousands)
Balance, January 1......................................... $3,390 2,731 2,731
Current year deferred provision, change in
deferred tax valuation allowance........................ -- -- --
Purchase acquisitions...................................... 57 659 --
------ ----- ------
Balance, December 31....................................... $3,447 3,390 2,731
====== ===== ======
Subsequently recognized tax benefits relating to $2.7 million of the
valuation allowance for deferred tax assets will be credited directly to capital
surplus under the terms of the quasi-reorganization, implemented on December 31,
1994, and the provisions of SFAS 109. The remaining $747,000 will be credited to
intangibles associated with the purchase of subsidiaries.
At December 31, 1997, FBA has separate limitation year (SRLY) net operating
loss carryforwards (NOLs) of $22.5 million and alternative minimum tax credits
of $288,000. Their utilization is subject to annual limitations. Additionally,
FBA has non-SRLY NOLs of $11.8 million.
The NOLs for FBA at December 31, 1997 expire as follows:
(dollars expressed in thousands)
Year ending December 31:
1998...................................... $ 4,140
1999...................................... 2,641
2000...................................... 103
2001 through 2010......................... 27,417
-------
Total......................... $34,301
=======
For California income tax purposes, FBA has NOLs of approximately $3.0
million. These NOLs expire as follows:
(dollars expressed in thousands)
Year ending December 31:
1998........................................ 1,089
1999........................................ 1,089
2000........................................ 635
2001........................................ 139
------
Total........................................ $2,952
======
The net deferred tax assets were evaluated to determine whether it is more
likely than not the deferred tax assets will be recognized in the future. It has
been determined the net deferred tax assets of FBA should not be fully valued
until FBA can provide an earnings history sufficient to support the respective
net deferred tax asset. A valuation reserve was determined by taking all
positive and negative criteria into consideration. It was determined the
valuation allowance established should be $3.4 million.
(9) Employee Benefit Plans
401(k) Plan. FBA has a savings and incentive plan covering substantially
all employees. Under the plan, employer matching contributions are determined
annually by FBA's Board of Directors. Employee contributions are limited to 15%
of an employee's compensation not to exceed $9,500 for 1997. Total employer
contributions under the plan were $43,000, $23,000 and $41,000 for the years
ended December 31, 1997, 1996 and 1995, respectively. The plan assets are held
and managed under a trust agreement with the trust department of an affiliated
bank.
Pension Plan. FBA has a noncontributory defined benefit pension plan
covering substantially all officers and employees. The accumulation of benefits
under the plan were discontinued during 1994. During 1997, 1996 and 1995, no
contributions were made to the pension plan and FBA did not incur any
expenditures associated with the pension plan. FBA is in the process of
terminating this plan and does not expect to incur a significant gain or loss.
Postretirement Benefits Other Than Pensions. Prior to August 31, 1994, FBA
made certain health care and life insurance benefits available for substantially
all of its retired employees, a portion of the cost of which was paid by FBA.
The estimated cost of such postretirement benefits was accrued as an expense
during the period of an employee's active service to FBA. During 1994, FBA
reevaluated the cost of this plan and changed it to provide contributions for
coverage only to those individuals receiving benefits on August 31, 1994. In
conjunction with the plan restructuring, FBA fully recognized the estimated cost
of the future benefits payable under the plan. Employees retiring after that
date are allowed to purchase coverage, but must pay the entire cost associated
with such coverage.
(10) Directors' Stock Bonus Plan
The 1993 Directors' Stock Bonus Plan provides for annual grants of FBA
common stock to the nonemployee directors of FBA. Directors' compensation of
$13,000, $10,000 and $27,000 was recorded relating to this plan for the years
ended December 31, 1997, 1996 and 1995, respectively. These amounts represented
the market values of the 1,000 shares granted for the years ended December 31,
1997, 1996 and 1995, respectively.
The plan is self-operative, and the timing, amounts, recipients and terms
of individual grants are determined automatically. On July 1 of each year, each
nonemployee director automatically receives a grant of 500 shares of common
stock. The maximum number of plan shares that may be issued shall not exceed
16,667 shares and 9,667 shares remain to be issued at December 31, 1997. The
plan will expire on July 1, 2001.
(11) Commitments and Contingencies
FBA is a party to commitments to extend credit and commercial and standby
letters of credit in the normal course of business to meet the financing needs
of its customers. These instruments involve, to varying degrees, elements of
credit risk and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The interest rate risk associated with these credit
commitments relates primarily to the commitments to originate fixed-rate loans.
The credit risk amounts are equal to the contractual amounts, assuming the
amounts are fully advanced and the collateral or other security is of no value.
FBA uses the same credit policies in granting commitments and conditional
obligations as it does for on-balance-sheet items.
Commitments to extend credit at December 31 are as follows:
1997 1996
---- ----
(dollars expressed in
thousands)
Credit card commitments....................... $ 1,978 3,140
Other loan commitments........................ 138,844 92,454
Standby letters of credit..................... 1,923 177
======= ======
Credit card and other loan commitments are agreements to lend to a customer
as long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Each customer's creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained, if deemed
necessary upon extension of credit, is based on credit evaluation of the
customer. Collateral held varies but may include accounts receivable, inventory,
property, plant, equipment, income-producing commercial properties and single
family residential properties. Collateral is generally required except for
consumer credit card commitments.
Standby letters of credit are conditional commitments issued to guarantee
the performance of a customer to a third party. The letters of credit are
primarily issued to support private borrowing arrangements and commercial
transactions. Most letters of credit extend for less than one year. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Upon issuance of the
commitments, FBA holds marketable securities, certificates of deposit, inventory
or other assets as collateral supporting those commitments for which collateral
is deemed necessary.
(12) Stockholders' Equity
Stock Options. On April 19, 1990, the Board of Directors of FBA adopted the
1990 Stock Option Plan (1990 Plan). The 1990 Plan currently provides that no
more than 200,000 shares of common stock will be available for stock options.
One-fourth of each stock option becomes exercisable at the date of the grant and
at each anniversary date of the grant. The options expire ten years from the
date of the grant. There were no options granted under this plan during the
three years ended December 31, 1997.
At December 31, 1997, there were 36,833 shares available for future stock
options and 13,334 shares of common stock reserved for the exercise of
outstanding options. Transactions relating to the 1990 Plan for the years ended
December 31 are as follows:
1997 1996 1995
------------------ ------------------- ------------------
Average Average Average
option option option
Amount price Amount price Amount price
------ ----- ------ ----- ------ -----
Outstanding options, January 1....... 57,500 $ 3.75 67,500 $ 3.75 98,133 $ 3.75
Options exercised and redeemed....... (44,166) 3.75 (10,000) 3.75 (30,633) 3.75
--------- ------ -------
Outstanding options, December 31..... 13,334 3.75 57,500 3.75 67,500 3.75
========= ======= ====== ======= ====== =======
Options exercisable, December 31..... 13,334 57,500 67,500
========= ====== ======
Warrants. In connection with a previous restructuring of FBA, a warrant to
purchase common stock was granted to the Federal Deposit Insurance Corporation
(FDIC). On October 1, 1996, FBA purchased the outstanding warrant to acquire
131,336 shares of FBA common stock at $0.75 per share from the FDIC for an
aggregate amount of $1.28 million. The purchase of the warrant was applied as a
reduction of capital surplus.
Distribution of Earnings of the Subsidiary Banks. The Subsidiary Banks are
restricted by various state and federal regulations as to the amount of
dividends which are available for payment of dividends to FBA. Under the most
restrictive of these requirements, the future payment of dividends from the
Subsidiary Banks is limited to approximately $1.0 million at December 31, 1997,
unless prior permission of the regulatory authorities is obtained.
(13) Transactions With Related Parties
FBA purchases certain services and supplies from or through First Banks.
FBA's financial position and operating results could significantly differ from
those that would be obtained if FBA's relationship with First Banks did not
exist.
First Banks provides management services to FBA and its Subsidiary Banks.
Management services are provided under a management fee agreement whereby FBA
compensates First Banks on an hourly basis for its use of personnel for various
functions including internal audit, loan review, income tax preparation and
assistance, accounting, asset/liability and investment services, loan servicing
and other management and administrative services. Fees paid under this agreement
were $931,000, $687,000 and $422,000 for the years ended December 31, 1997, 1996
and 1995 respectively. The fees paid for management services are at least as
favorable as could have been obtained from an unaffiliated third party.
Because of the affiliation with First Banks and the geographic proximity of
certain of their offices, FBA shares the cost of certain personnel and services
used by FBA and First Banks. This includes the salaries and benefits of certain
loan and administrative personnel. The allocation of the shared costs are
charged and/or credited under the terms of cost sharing agreements entered into
during 1997. Because this involves distributing essentially fixed costs over a
larger asset base, it allows each bank to receive the benefit of personnel and
services at a reduced cost. Fees paid under these agreements were $383,000 for
the year ended December 31, 1997.
Effective April 1, 1997, First Services L.P., a limited partnership
indirectly owned by First Banks' Chairman and his children through its general
partners and limited partners, began providing data processing and various
related services to FBA under the terms of data processing agreements.
Previously, these services were provided by a subsidiary of First Banks. Fees
paid under these agreements were $643,000, $311,000 and $374,000 for the years
ended December 31, 1997, 1996 and 1995, respectively. The fees paid for data
processing services are at least as favorable as could have been obtained from
an unaffiliated third party.
FBA's Subsidiary Banks had $41.9 million and $21.4 million in whole loans
and loan participations outstanding at December 31, 1997 and 1996, respectively,
that were purchased from banks affiliated with First Banks. In addition, FBA's
Subsidiary Banks had sold $42.7 million and $26.7 million in whole loans and
loan participations to affiliates of First Banks at December 31, 1997 and 1996,
respectively. These loans and loan participations were acquired and sold at
interest rates and terms prevailing at the dates of their purchase or sale and
under standards and policies followed by FBA's Subsidiary Banks.
FBA has borrowed $14.5 million and $14.0 million at December 31, 1997 and
1996, respectively, from First Banks under a $20 million Note Payable, dated
November 4, 1997. This Note Payable replaces a $15 million note payable under
similar terms to First Banks. The borrowings under the Note Payable bear
interest at an annual rate of one-quarter percent less than the "Prime Rate" as
reported in the Wall Street Journal. The interest expense was $1.18 million and
$194,000 for the years ended December 31, 1997 and 1996, respectively. The
principal and accrued interest under the Note Payable are due and payable on
October 31, 2001. The accrued and unpaid interest under the Note Payable was
$1.37 million and $194,000 at December 31, 1997 and 1996, respectively.
Outside of normal customer relationships, no directors, executive officers
or stockholders holding over 5% of FBA's voting stock, and no corporations or
firms with which such persons or entities are associated, currently maintain or
have maintained, any significant business or personal relationships with FBA or
its subsidiaries, other than that which arises by virtue of such position or
ownership interest in FBA, except as described above.
(14) Interest Rate Risk Management and Derivative Financial Instruments
With Off-Balance-Sheet Risk
Derivative financial instruments held by FBA at December 31, 1997 and 1996
consist of an interest rate cap agreement with a notional amount of $10.0
million and credit exposure of $222,000 and $335,000, respectively.
FBA's interest rate cap agreement limits the interest expense associated
with certain of its interest-bearing liabilities. In exchange for an initial
fee, the interest rate cap agreement entitles FBA to receive interest payments
when a specified index rate exceeds a predetermined rate. The agreement
outstanding at December 31, 1997 and 1996 effectively limits the interest rate
to 5.0% on $10 million of interest-bearing liabilities from October 15, 1997 to
May 15, 2000. At December 31, 1997 and 1996, the unamortized costs were $242,000
and $353,000, respectively, and were included in other assets. The amount
receivable under the agreement was $8,000 at December 31, 1997. There were no
amounts receivable under the agreement at December 31, 1996.
Previously, FBA sold interest rate futures contracts and purchased options
on interest rate futures contracts to hedge the interest rate risk of its
available-for-sale securities portfolio. There were no outstanding positions of
interest rate futures for the years ended December 31, 1997 and 1996. For the
year ended December 31, 1995, FBA incurred a net loss on interest rate futures
contracts of $5.95 million, of which $806,000 was amortized to income as a yield
adjustment to the investment security portfolio and $5.14 million was included
in the cost basis in determining the gain or loss upon the sale of the
securities. There were no gains or losses from interest rate futures contracts
for the years ended December 31, 1997 and 1996.
(15) Fair Value of Financial Instruments
Fair values of financial instruments are management's estimate of the
values at which the instruments could be exchanged in a transaction between
willing parties. These estimates are subjective and may vary significantly from
amounts that would be realized in actual transactions. In addition, other
significant assets are not considered financial assets including deferred tax
assets and bank premises and equipment. Further, the tax ramifications related
to the realization of the unrealized gains and losses can have a significant
effect on the fair value estimates and have not been considered in any of the
estimates.
The estimated fair value of FBA's financial instruments at December 31 were
as follows:
December 31, 1997 December 31, 1996
-------------------- --------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------ ---------- ------ ----------
(dollars expressed in thousands)
Assets:
Cash and cash equivalents............... $ 26,442 26,442 21,964 21,964
Investment securities................... 83,791 83,791 86,910 86,910
Net loans............................... 306,722 307,911 235,727 238,266
Accrued interest receivable............. 2,963 2,963 2,348 2,348
Liabilities:
Demand and savings deposits............. 214,180 214,180 175,994 175,994
Time deposits........................... 169,762 170,437 143,812 144,179
Accrued interest payable................ 2,246 2,246 710 710
Borrowings.............................. 17,307 17,307 16,092 16,092
Off-balance-sheet:
Interest rate cap agreement............. 242 222 353 335
Unfunded loan commitments............... --- --- --- ---
The following methods and assumptions were used in estimating the fair
value of financial instruments:
Financial Assets:
Cash and cash equivalents and accrued interest receivable: The carrying
values reported in the consolidated balance sheets approximate fair value.
Investment securities: Fair value for securities available for sale were
the amounts reported in the consolidated balance sheets. If quoted market prices
were not available, fair values were based upon quoted market prices of
comparable instruments.
Net loans: The fair value for most loans was estimated utilizing discounted
cash flow calculations that applied interest rates currently being offered for
similar loans to borrowers with similar risk profiles. The carrying values for
loans are net of the allowance for possible loan losses and unearned discount.
Financial Liabilities:
Deposits: The fair value disclosed for deposits generally payable on demand
(i.e., non-interest-bearing and interest-bearing demand, savings and money
market accounts) were considered equal to their respective carrying amounts as
reported in the consolidated balance sheets. The fair value disclosed for demand
deposits does not include the benefit that results from the low-cost funding
provided by deposit liabilities compared to the cost of borrowing funds in the
market. The fair value for certificates of deposit was estimated utilizing a
discounted cash flow calculation that applied interest rates currently being
offered on similar certificates to a schedule of aggregated monthly maturities
of time deposits.
Borrowings and accrued interest payable: The carrying values reported in
the consolidated balance sheets approximate fair value.
Off-Balance-Sheet:
Interest rate cap agreement: The fair value of the interest rate cap
agreement is estimated by comparison to market rates quoted on new agreements
with similar creditworthiness.
Unfunded loan commitments: The majority of the commitments to extend credit
and commercial and standby letters of credit contain variable interest rates and
credit deterioration clauses and, therefore, the carrying value of these credit
commitments approximates fair value.
(16) Regulatory Capital
The Subsidiary Banks are subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Subsidiary Banks' financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Subsidiary Banks must meet specific capital guidelines that involve
quantitative measures of the Subsidiary Banks' assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Subsidiary Banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weighting and
other factors.
Quantitative measures established by regulations to ensure capital adequacy
require the Subsidiary Banks to maintain certain minimum capital ratios. The
Subsidiary Banks are required to maintain a minimum risk-based capital to
risk-weighted assets ratio of 8.0%, with at least 4.0% being "Tier 1" capital
(as defined in the regulations). In addition, a minimum leverage ratio (Tier 1
capital to total assets) of 3.0% plus an additional cushion of 100 to 200 basis
points is expected. In order to be considered well capitalized under Prompt
Corrective Action provisions, a bank is required to maintain a risk weighted
asset ratio of at least 10%, a Tier 1 to risk weighted assets ratio of at least
6%, and a leverage ratio of at least 5%. As of December 31, 1996, the date of
the most recent notification from FBA's primary regulator, BankTEXAS was
categorized as well capitalized under the regulatory framework for Prompt
Corrective Action. Management believes, as of December 31, 1997, each of the
Subsidiary Banks was well capitalized as defined by the FDIC Improvement Act.
At December 31, 1997 and 1996, FBA's and the Subsidiary Banks' capital
ratios were as follows:
Risk-Based Capital Ratios
-------------------------
Total Tier 1 Leverage Ratio
----------------- ---------------- ---------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
FBA........................ 7.89% 7.64% 6.63% 6.38% 6.11% 5.31%
BankTEXAS.................. 12.26 10.29 11.00 9.04 8.90 7.53
FB California.............. 13.03 -- 11.77 -- 13.80 --
Sunrise Bank (1)........... -- 17.67 -- 16.39 -- 10.88
- ----------------
(1) Sunrise Bank was merged into FB California on December 1, 1997.
(17) Contingent Liabilities
In the ordinary course of business, there are various legal proceedings
pending against FBA and/or the Subsidiary Banks. Management, in consultation
with legal counsel, is of the opinion the ultimate resolution of these
proceedings will have no material effect on the financial condition or results
of operations of FBA or the Subsidiary Banks.
(18) Parent Company Only Financial Information
Condensed Balance Sheets
December 31,
------------
1997 1996
---- ----
(dollars expressed in thousands)
Assets:
Cash.................................................................... $ 922 439
Investment in subsidiary................................................ 55,182 43,958
Deferred tax assets..................................................... 3,307 3,297
Other assets............................................................ 157 143
---------- -------
Total assets.......................................................... $ 59,568 47,837
========== =======
Liabilities and stockholders' equity:
Promissory note payable................................................. $ 14,500 14,000
Accrued and other liabilities........................................... 5,204 339
---------- -------
Total liabilities..................................................... 19,704 14,339
Stockholders' equity...................................................... 39,864 33,498
---------- ------
Total liabilities and stockholders' equity............................ $ 59,568 47,837
========== ======
Condensed Statements of Operations
Years ended December 31,
1997 1996 1995
(dollars expressed in thousands)
Income (loss):
Dividends from subsidiary...................................... $ 1,425 -- --
Other.......................................................... 16 211 315
------- ------
Total income................................................ 1,441 211 315
------- ------ -------
Expense:
Interest....................................................... 1,176 246 140
Other.......................................................... 496 338 32
------- ------ -------
Total expense............................................... 1,672 584 172
------- ------ -------
Income (loss) before income tax (benefit) expense........... (231) (373) 143
Income tax (benefit) expense..................................... (688) (126) 68
------- ------ -------
Income (loss) before equity in undistributed
income (loss) of subsidiary............................... 457 (247) 75
Equity in undistributed income (loss) of subsidiary.............. 2,722 1,816 (3,895)
------- ------ -----
Net income (loss)........................................... $ 3,179 1,569 (3,820)
======= ===== =====
Condensed Statements of Cash Flows
Years ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(dollars expressed in thousands)
Operating activities:
Net income (loss)............................................. $ 3,179 1,569 (3,820)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Credit for deferred income taxes........................... 688 126 --
Equity in undistributed (income) loss of subsidiary........ (2,722) (1,816) 3,895
Dividends from subsidiary.................................. 1,425 -- --
Other, net................................................. (1,090) (1,987) (552)
----------- -------- -------
Net cash provided by (used in) operating activities.. 1,480 (2,108) (477)
---------- -------- -------
Investing activities:
Purchase of investment securities............................. -- (12,618) (21,191)
Proceeds from maturity of investment securities............... -- 7,152 8,345
Proceeds from sales of investment securities.................. -- 4,496 25,752
Capital contributions to subsidiary........................... -- (17,052) (3,750)
---------- ------- -------
Net cash provided by (used in) investing activities.. -- (18,022) 9,156
---------- ------- -------
Financing activities:
Increase in promissory note payable........................... 500 14,000 --
Exercise of stock options..................................... 15 38 115
Repurchase of common stock for treasury....................... (1,512) (2,010) (828)
---------- --------- -------
Net cash provided by (used in) financing activities.. (997) 12,028 (713)
----------- ------- -------
Net increase (decrease) in cash and cash equivalents. 483 (8,102) 7,966
Cash and cash equivalents at beginning of year.................. 439 8,541 575
---------- --------- -------
Cash and cash equivalents at end of year........................ $ 922 439 8,541
========== ========= =======
Noncash investing and financing activities:
Issuance of common stock in purchase accounting acquisition... $ 4,763 -- --
Cash paid for interest........................................ -- 475 110
=========== ========= =======
(19) Subsequent Events
As described in Note 2 to the consolidated financial statements and
presented in the pro forma information on the consolidated balance sheets and
consolidated statements of operations, FBA completed the acquisitions of FCB and
Pacific Bay Bank on February 2, 1998 in exchange for 751,728 shares of FBA
common stock and cash of $4.2 million, respectively. The total assets of FCB and
Pacific Bay Bank were $192.5 million and $38.3 million, respectively, at the
date of the transaction.
The accounting treatment for the acquisition of FCB is summarized in Note 2
to the consolidated financial statements. The acquisition of Pacific Bay Bank
was accounted for under the purchase method of accounting and was funded through
an advance under the Note Payable. The excess of the cost over the fair value of
the net assets acquired was $4.08 million and $1.43 million for FCB and Pacific
Bay Bank, respectively, and is being amortized over 15 years.
The accompanying pro forma consolidated balance sheet and pro forma
consolidated statement of operations reflect the acquisitions of FCB and Pacific
Bay Bank as if they had been completed on December 31, 1997.
[LETTERHEAD OF KPMG Peat Marwick LLP]
The Board of Directors and Stockholders
First Banks America, Inc.:
We have audited the accompanying consolidated balance sheets of First Banks
America, Inc. and subsidiaries (the Company) as of December 31, 1997 and 1996,
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the years in the three year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Banks America,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/KPMG Peat Marwick LLP
------------------------
St. Louis, Missouri
March 6, 1998
Directors of First Banks America, Inc.
James F. Dierberg Chairman of the Board, President and Chief
Executive Officer of First Banks America,
Inc., St. Louis, Missouri; Chairman of
the Board, President and Chief Executive
Officer, First Banks, Inc., St. Louis,
Missouri.
Allen H. Blake Vice President, Chief Financial Officer
and Secretary, First Banks America, Inc.,
St. Louis, Missouri; Executive Vice
President, Chief Financial Officer and
Secretary, First Banks, Inc., St. Louis,
Missouri.
Charles A. Crocco, Jr. Partner in the law firm of Crocco & De Maio,
P. C., New York, New York.
Albert M. Lavezzo Partner in the law firm of Favaro, Lavezzo,
Gill, Caretti & Neppell, Vallejo,
California.
Edward T. Story, Jr. President and Chief Executive Officer of
SOCO International, Inc., Comfort, Texas.
Mark T. Turkcan Executive Vice President, Retail Banking,
First Banks, Inc., St. Louis, Missouri.
Donald W. Williams Executive Vice President, Chief Credit
Officer, First Banks, Inc., St. Louis,
Missouri.
Executive Officers of First Banks America, Inc.
James F. Dierberg Chairman of the Board, President and Chief
Executive Officer
Allen H. Blake Vice President, Chief Financial Officer and
Secretary
David F. Weaver Executive Vice President
Directors and Senior Officers of BankTEXAS N.A.
David F. Weaver Chairman of the Board, President and Chief
Executive Officer
Donald W. Williams Director
Alan M. Meyer Director
Joseph Milcoun, Jr. Director, Vice President, Retail Banking
Arved E. White Director, Senior Vice President and Chief
Lending Officer
Monica J. Rinehart Assistant Secretary, Vice President and
Controller
Directors and Senior Officers of First Bank of California
Donald W. Williams Chairman of the Board, President and Chief
Executive Officer
Jerry Brannigan Director
James E. Culleton Director, President, Chief Operating Officer
and Secretary
Fred L. Harris Director
Albert M. Lavezzo Director
Terrance M. McCarthy Director, Senior Vice President and Chief
Credit Officer
Arleen R. Scavone Director, Vice President, Retail Banking
Fred K. Sibley Director
Kathryn L. Perrine Vice President and Chief Financial Officer
Joseph H. Plant Senior Vice President, Commercial Lending
Ralph J. Sabin Senior Vice President, Commercial Lending
Gary M. Sanders Senior Vice President, Commercial Lending
INVESTOR INFORMATION
FBA's Annual Report on Form 10-K, as filed with the Securities and Exchange
Commission, is available without charge to any stockholder upon request.
Requests should be directed to Allen H. Blake, First Banks America, Inc., 11901
Olive Boulevard, St. Louis, Missouri 63141.
The common stock of FBA is traded on the New York Stock Exchange with the
ticker symbol "FBA" and is frequently reported in newspapers of general
circulation with the symbol "FBKSAM" and in the Wall Street Journal with the
symbol "FBA." As of March 6, 1998, there were approximately 1,725 record holders
of common stock.
Common stock price range:
1997 1996
------------------ ----------------
High Low High Low
First quarter $12.75 10.13 12.75 9.63
Second quarter 13.38 12.38 10.50 9.25
Third quarter 18.00 12.81 10.38 9.38
Fourth quarter 24.06 17.13 10.38 9.75
For information concerning the Company please contact:
David F. Weaver Allen H. Blake Transfer Agent
Executive Vice President Vice President, Chief Financial ChaseMellon Shareholders
P. O. Box 630369 Officer and Secretary Services L.L.C.
Houston, Texas 77263-0369 11901 Olive Boulevard 85 Challenger Road
Telephone: 713/954-2400 St. Louis, Missouri 63141 Overpeck Centre
Telephone: 314/995-8700 Ridgefield Park, NJ 07660
Telephone: 888/213-0965
www.chasemellon.com
EXHIBIT 21
First Banks America, Inc.
Significant Subsidiaries
The following is a list of all subsidiaries of the Company and the
jurisdiction of incorporation or organization. BankTEXAS National Association
and First Bank of California are wholly-owned by Sundowner Corporation, and
Sundowner Corporation is wholly owned by First Banks America, Inc.
Jurisdiction of Incorporation
Name of Subsidiary or Organization
------------------ ------------------------------
Sundowner Corporation Nevada
BankTEXAS National Association United States
First Bank of California California
EXHIBIT 23(a)
Independent Auditors' Consent
The Board of Directors
First Banks America, Inc.
We consent to incorporation by reference in the registration statement (No.
33-42607) on Form S-8 of First Banks America, Inc. and subsidiaries of our
report dated March 6, 1998, relating to the consolidated balance sheets of First
Banks America, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, which
report appears in the December 31, 1997 annual report on Form 10-K of First
Banks America, Inc.
/s/KPMG Peat Marwick LLP
------------------------
St. Louis, Missouri
March 26, 1998