Filed Pursuant to Rule 424(b)(4)
Registration Nos. 333-71652 and 333-71652-01
Registration Nos. 333-73028 and 333-73082-01
PROSPECTUS
1,920,000 PREFERRED SECURITIES
FIRST PREFERRED CAPITAL TRUST III
9.00% CUMULATIVE TRUST PREFERRED SECURITIES [FIRST BANK LOGO]
(LIQUIDATION AMOUNT $25 PER PREFERRED SECURITY)
FULLY, IRREVOCABLY AND UNCONDITIONALLY GUARANTEED
ON A SUBORDINATED BASIS, AS DESCRIBED IN THIS PROSPECTUS, BY
FIRST BANKS, INC.
-------------
The preferred securities represent undivided beneficial
interests in the assets of First Preferred Capital Trust III. The
trust will invest all of the proceeds of this offering of preferred
securities to purchase 9.00% subordinated debentures due 2031 of
First Banks, Inc.
For each of the preferred securities that you own, you will
receive cumulative cash distributions at an annual rate of 9.00% on
March 31, June 30, September 30 and December 31 of each year,
beginning December 31, 2001 from payments on the subordinated
debentures. We may defer payments of distributions at any time for
up to 20 consecutive quarters. The preferred securities are
effectively subordinated to all of our senior and subordinated
indebtedness and that of our subsidiaries. The subordinated
debentures mature and the preferred securities must be redeemed by
December 31, 2031. The trust may redeem the preferred securities, at
a redemption price of $25 per preferred security plus accrued and
unpaid distributions, at any time on or after December 31, 2006, or
earlier under circumstances specified in this prospectus.
The preferred securities have been designated for inclusion
in the Nasdaq National Market under the symbol "FBNKM." Trading is
expected to commence on or around delivery of the preferred
securities.
---------------------
INVESTING IN THE PREFERRED SECURITIES INVOLVES RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 10.
-------------------
The preferred securities are not savings accounts, deposits
or obligations of any bank and are not insured by the Bank Insurance
Fund of the Federal Deposit Insurance Corporation or any other
governmental agency.
PER PREFERRED
SECURITY TOTAL
---------------- --------------
Public offering price.................................... $25.00 $48,000,000
Proceeds to the trust.................................... $25.00 $48,000,000
This is a firm commitment underwriting. First Banks will pay
underwriting commissions of $0.9375 per preferred security, or a
total of $1,800,000, for arranging the investment in our
subordinated debentures. The underwriters have been granted a 30-day
option to purchase up to an additional 288,000 preferred securities
to cover over-allotments, if any.
- ------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities
or passed upon the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
- ------------------------------------------------------------------------
STIFEL, NICOLAUS & COMPANY
INCORPORATED
DAIN RAUSCHER WESSELS
FAHNESTOCK & CO. INC.
November 9, 2001
FIRST BANKS, INC. AND SUBSIDIARIES
MAP OF LOCATIONS
AS OF JUNE 30, 2001
- ---------------------------------------------------------------------------------
FIRST BANK
- ---------------------------------------------------------------------------------
[Map]
CENTRAL
AND
METRO REGIONAL SOUTHERN NORTHERN
MISSOURI MISSOURI ILLINOIS ILLINOIS
-------- -------- -------- --------
Arnold Beaufort Belleville Bartonville
Ballwin Bismarck Breese Canton
Chesterfield (2) Dutzow Carbondale Chicago
Clayton Fulton Chester (2) Galesburg (2)
Creve Coeur (3) Gerald Columbia Havana
Ellisville Hermann Fairview Heights Hillside
Florissant (3) Middletown Granite City Jacksonville
Kirkwood Montgomery City Greenville Knoxville
Lake St. Louis Morrison Johnston City Peoria (4)
Manchester Owensville Lawrenceville (2) Pittsfield
O'Fallon Park Hills (2) O'Fallon Quincy (2)
Shrewsbury Warrenton Red Bud Roodhouse
St. Charles (3) Washington Salem (2) Springfield
St. Louis City (3) Wentzville Shiloh Sterling
St. Louis County (3) Valmeyer Winchester
St. Peters Vandalia
Warson Woods Waterloo
Webster Groves West Frankfort (2)
FIRST BANK & TRUST
- ----------------------------------------------------------------
[Map]
SOUTHERN NORTHERN
CALIFORNIA CALIFORNIA TEXAS
---------- ---------- -----
Beverly Hills Campbell Dallas
Encino Concord Irving
Fountain Valley Fairfield McKinney
Fullerton Napa Houston (3)
Gardena Oakland
Huntington Beach (2) Rancho Cordova
Irvine Roseville (2)
Laguna Niguel Sacramento
Lakewood San Francisco (4)
Long Beach (3) San Jose
Los Angeles (2) San Mateo
Malibu San Pablo
Marina del Rey San Rafael
Newport Beach Vallejo
Santa Barbara Walnut Creek
Santa Maria
Solvang
Torrance
Ventura
Westlake Village
Woodland Hills
SUMMARY
This summary highlights information contained elsewhere in,
or incorporated by reference into, this prospectus. Because this is
a summary, it may not contain all of the information that is
important to you. Therefore, you should also read the more detailed
information set forth in this prospectus, our financial statements
and the other information that is incorporated by reference in this
prospectus. Unless otherwise indicated, the information in this
prospectus assumes that the underwriters will not exercise their
option to purchase additional preferred securities to cover
over-allotments.
FIRST BANKS, INC.
WHO WE ARE
First Banks, Inc. is a registered bank holding company
incorporated in Missouri and headquartered in St. Louis County,
Missouri. Through the operation of our subsidiaries, we offer a
broad array of financial services to consumer and commercial
customers. Over the years, our organization has grown significantly,
primarily as a result of our acquisition strategy, as well as
through internal growth. We currently have banking operations in
California, Illinois, Missouri and Texas. As of June 30, 2001, we
had total assets of $5.90 billion, loans, net of unearned discount,
of $4.86 billion, total deposits of $4.99 billion and total
stockholders' equity of $396.4 million.
Through our subsidiary banks, we offer a broad range of
commercial and personal deposit products, including demand, savings,
money market and time deposit accounts. In addition, we market
combined basic services for various customer groups, including
packaged accounts for more affluent customers, and sweep accounts,
lock-box deposits and cash management products for commercial
customers. We also offer both consumer and commercial loans.
Consumer lending includes residential real estate, home equity and
installment lending. Commercial lending includes commercial,
financial and agricultural loans, real estate construction and
development loans, commercial real estate loans, asset-based loans,
commercial leasing and trade financing. Other financial services
offered include mortgage banking, debit cards, brokerage services,
credit-related insurance, automated teller machines, telephone
banking, safe deposit boxes, escrow and bankruptcy deposit services,
stock option services, and trust, private banking and institutional
money management services.
We operate through two subsidiary banks, as follows:
TOTAL ASSETS
GEOGRAPHIC (NUMBER OF) LOCATIONS AT JUNE 30,
NAME AT JUNE 30, 2001 2001
- --------------------------------------------------- ---------------------------------- ---------------------
(DOLLARS EXPRESSED
IN THOUSANDS)
First Bank Missouri (44) and Illinois (42) $3,244,560
First Banks America, Inc., and its subsidiary:
First Bank & Trust California (44) and Texas (6) 2,628,378
1
Acquisitions may serve to enhance our presence in a given
market, to expand the extent of our market area or to enable us to
enter into new or noncontiguous markets. Initially, we made
acquisitions solely within Missouri and Illinois. However, in the
early 1990's, the pricing of acquisitions in these areas escalated
beyond the levels we believed were desirable, causing us to explore
acquisitions in other markets. As a result, in 1994 we acquired a
bank in Texas with total assets of $367.0 million, and between
January 1, 1995 and October 31, 2001, we completed 23 acquisitions
in California, with total assets of approximately $2.5 billion. In
addition, in February 2000, we acquired certain assets and assumed
certain liabilities of First Capital Group, Inc., a commercial
leasing company headquartered in Albuquerque, New Mexico. We
currently have two agreements to acquire two more banking companies
in Illinois, which have combined total assets of approximately
$616.4 million. We expect one of these transactions to close during
the fourth quarter of 2001 and the other transaction to close during
the first quarter of 2002.
Our subsidiary banks are wholly owned by their respective
parent companies. We owned 93.16% of First Banks America, Inc., or
FBA, at June 30, 2001.
Various trusts, which were created by and are administered by
and for the benefit of Mr. James F. Dierberg, our Chairman of the
Board and Chief Executive Officer, and his adult children, own all
of our voting stock. Mr. Dierberg and his family, therefore, control
our management and policies.
GROWTH STRATEGY
We believe significant opportunities exist for financial
organizations to grow and prosper by delivering quality products and
by providing personal service to individuals and small to mid-sized
businesses. Consequently, we emphasize continually improving the
knowledge and skills of our people, enhancing our service quality,
and making our services competitive in the marketplace and
convenient to our customers. By combining these attributes, we
believe we can realize many of the efficiencies available to larger
organizations and still provide the opportunity for customers to
receive the personalized service that they find attractive in
smaller organizations.
At the same time, we recognize that consolidation within the
banking industry and increasing competition from substantially
larger banks, as well as organizations other than banks, create
pressures on interest margins and operating costs. We believe that
to counteract these pressures we must operate efficiently and
achieve a greater long-term growth rate than can be accomplished
solely by our marketing and business development efforts. Therefore,
we supplement these growth efforts with acquisitions of other
financial services entities.
Primary responsibility for managing our subsidiary banking
units rests with the officers and directors of each unit. However,
in keeping with our policy, we centralize overall corporate
policies, procedures and administrative functions and provide
operational support functions for our subsidiaries. This practice
allows us to achieve operating efficiencies while allowing our
subsidiary banking units to focus on customer service.
2
FINANCIAL SUMMARY
To support our growth strategy, we emphasize consistent
earnings performance, as well as retaining and investing those
earnings. Consequently, we have never paid, and have no present
intention of paying, dividends on our common stock. Furthermore,
since 1999 to the present, the dividends paid on our Class A and B
preferred stock has represented less than 2.0% of our net income
before dividends. As a result, between December 31, 1996 and
December 31, 2000, our common stockholders' equity grew at a
compound annual growth rate of approximately 16.5%.
COMPOUND
GROWTH OR
AVERAGE FOR
THE FIVE
AS OF OR FOR THE YEARS
SIX MONTHS ENDED ENDED
JUNE 30, DECEMBER 31,
----------------------- ------------
2001 2000 2000(1)
---------- ---------- ------------
(DOLLARS IN THOUSANDS)
Net income....................... $ 20,251 29,259 29.1%
Loans, net of unearned
discount....................... 4,861,943 4,326,393 14.5
Total assets..................... 5,904,203 5,180,472 12.3
Common stockholders' equity...... 383,341 308,977 16.5
Total stockholders' equity....... 396,404 322,040 8.8
Return on average total
stockholders' equity(2)........ 10.78% 19.24% 13.64%
Number of locations.............. 136 137 --
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Net income....................... $ 56,107 44,178 33,510 33,027 20,218
Loans, net of unearned
discount....................... 4,752,265 3,996,324 3,580,105 3,002,200 2,767,969
Total assets..................... 5,876,691 4,867,747 4,554,810 4,165,014 3,689,154
Common stockholders' equity...... 339,783 281,842 250,300 218,474 184,439
Total stockholders' equity....... 352,846 294,905 263,363 231,537 251,389
Return on average total
stockholders' equity(2)........ 17.43% 15.79% 13.64% 12.91% 8.43%
Number of locations.............. 140 135 135 131 126
<FN>
- ----------------------
(1) For the period indicated, these figures represent compound annual growth
rates of net income, loans, net of unearned discount, total assets,
common stockholders' equity, total stockholders' equity and average
return on average total stockholders' equity.
(2) Ratios for the six-month periods are annualized.
Our address is 135 North Meramec, Clayton, Missouri 63105,
and our telephone number is (314) 854-4600.
FIRST PREFERRED CAPITAL TRUST III
We recently formed the trust as an additional financing
subsidiary. Upon issuance of the preferred securities offered by
this prospectus, the purchasers in this offering will own all of the
issued and outstanding preferred securities of the trust. In
exchange for our capital contribution to the trust, we will own all
of the common securities of the trust. The trust exists exclusively
for the following purposes:
* issuing the preferred securities to the public for cash;
* issuing the common securities to us;
* investing the proceeds from the sale of the preferred and
common securities in an equivalent amount of 9.00%
subordinated debentures due December 31, 2031, to be
issued by us; and
* engaging in activities that are incidental to those listed
above.
The trust's address is 135 North Meramec, Clayton, Missouri
63105, and its telephone number is (314) 854-4600.
3
THE OFFERING
The issuer........................... First Preferred Capital Trust III
Securities being offered............. 1,920,000 preferred securities, which represent preferred undivided
beneficial interests in the assets of the trust. Those assets will
consist solely of the subordinated debentures and payments received on
the subordinated debentures. The trust will sell the preferred securities
to the public for cash. The trust will use that cash to buy the
subordinated debentures from us.
Offering price....................... $25 per preferred security.
When we will pay distributions to
you............................... Your purchase of the preferred securities entitles you to receive
cumulative cash distributions at a 9.00% annual rate. Distributions will
accumulate from the date the trust issues the preferred securities and
will be paid quarterly on March 31, June 30, September 30 and December 31
of each year, beginning December 31, 2001. As long as the preferred
securities are represented by a global security, the record date for
distributions on the preferred securities will be the business day prior
to the distribution date. We may defer the payment of cash distributions,
as described below.
When we must redeem the preferred
securities........................ The subordinated debentures will mature and the preferred securities must
be redeemed by December 31, 2031. We have the option, however, to shorten
the maturity date to a date not earlier than December 31, 2006. We will
not shorten the maturity date unless we have received the prior approval
of the Board of Governors of the Federal Reserve System, if required.
Redemption of the preferred
securities before December 31,
2031 is possible.................. The trust must redeem the preferred securities when the subordinated
debentures are paid at maturity or upon any earlier redemption of the
subordinated debentures. We may redeem all or part of the subordinated
debentures at any time on or after December 31, 2006. In addition, we may
redeem, at any time, all of the subordinated debentures if:
* the interest we pay on the subordinated debentures is no longer
deductible by us for federal income tax purposes, the trust becomes
subject to federal income tax, or the trust becomes or will become
subject to certain other taxes or governmental charges;
* existing laws or regulations change in a manner requiring the trust
to register as an investment company; or
* the capital adequacy guidelines of the Federal Reserve change so that
the preferred securities are not eligible to be counted as Tier I
capital.
4
We may also redeem the subordinated debentures at any time, and from time
to time, in an amount equal to the liquidation amount of any preferred
securities we purchase, plus a proportionate amount of common securities
of the trust, but only in exchange for a like amount of the preferred
securities and common securities of the trust then owned by us.
Redemption of the subordinated debentures prior to maturity will be
subject to the prior approval of the Federal Reserve, if approval is then
required. If your preferred securities are redeemed by the trust, you
will receive the liquidation amount of $25 per preferred security, plus
any accrued and unpaid distributions to the date of redemption.
We have the option to
extend the interest
payment period.................... The trust will rely solely on payments made by us under the subordinated
debentures to pay distributions on the preferred securities. As long as
we are not in default under the indenture relating to the subordinated
debentures, we may, at one or more times, defer interest payments on the
subordinated debentures for up to 20 consecutive quarters, but not beyond
December 31, 2031. If we defer interest payments on the subordinated
debentures:
* the trust will also defer distributions on the preferred securities;
* the distributions you are entitled to will accumulate; and
* these accumulated distributions will earn interest at an annual
rate of 9.00%, compounded quarterly, until paid.
At the end of any deferral period, we will be obligated to pay to the
trust all accrued and unpaid interest under the subordinated debentures.
The trust will then pay all accumulated and unpaid distributions to you
to the extent that the trust has received accrued and unpaid interest
under the subordinated debentures.
You will still be taxed if
distributions on the preferred
securities are deferred........... If a deferral of distributions on the preferred securities occurs, you
must recognize the deferred amounts as interest income for United States
federal income tax purposes in advance of receiving these amounts, even
if you are a cash basis taxpayer.
Our guarantee of payment............. We guarantee the trust will use its assets to pay the distributions on
the preferred securities and the liquidation amount upon liquidation of
the trust. However, the guarantee does not apply when the trust does not
have sufficient funds to make the payments. If we do not make interest
payments on the subordinated debentures, the trust will not have
sufficient funds to make distributions on the preferred securities. In
this event, your remedy is to institute a legal proceeding directly
against us for enforcement of payments under the subordinated debentures.
5
We may distribute the subordinated
debentures directly to you........ We may, at any time, dissolve the trust and distribute the subordinated
debentures to you, subject to the prior approval of the Federal Reserve,
if required. If we distribute the subordinated debentures, we will use
our best efforts to list them on a national securities exchange or
comparable automated quotation system.
How the securities will rank in right
of payment........................ Our obligations under the preferred securities, subordinated debentures
and guarantee are unsecured and will rank as follows with regard to right
of payment:
* the preferred securities will rank equally with the common securities
of the trust. The trust will pay distributions on the preferred
securities and the common securities on a pro rata basis. However,
if we default with respect to the subordinated debentures, then no
distributions on the common securities of the trust or our common
stock will be paid until all accumulated and unpaid distributions on
the preferred securities have been paid;
* our obligations under the subordinated debentures and the guarantee
are unsecured and generally will rank: (1) junior in priority to our
existing and future senior and senior subordinated indebtedness, and
(2) equal in priority to our subordinated debentures associated with
the $143.8 million of trust preferred securities that our other two
financing subsidiaries currently have outstanding; and
* because we are a holding company, the subordinated debentures and the
guarantee will effectively be subordinated to all existing and future
liabilities of our subsidiaries with respect to the assets of each
such subsidiary. These liabilities include all depositors' claims, as
well as the subordinated debentures associated with the $46.0 million
of outstanding trust preferred securities issued by a financing
subsidiary of our subsidiary, FBA.
Voting rights of the preferred
securities........................ Except in limited circumstances, holders of the preferred securities will
have no voting rights.
Nasdaq National Market symbol ....... FBNKM
You will not receive certificates.... The preferred securities will be represented by a global security that
will be deposited with and registered in the name of The Depository Trust
Company, New York, New York, or its nominee. This means that you will not
receive a certificate for the preferred securities, and your beneficial
ownership interests will be recorded through the DTC book-entry system.
6
How the proceeds of this offering
will be used...................... The trust will invest the proceeds from the sale of the preferred
securities in the subordinated debentures. We estimate the net proceeds
to us from the sale of the subordinated debentures to the trust, after
deducting underwriting expenses and commissions, will be approximately
$45.9 million. We expect to use the net proceeds from the sale of the
subordinated debentures to reduce indebtedness currently outstanding
under our revolving credit line. In the future, we anticipate using
amounts remaining available under the revolving credit line to finance
further expansion, including pending and potential acquisitions of banks
and other financial institutions. If at the time the trust issues the
preferred securities, the net proceeds exceed the balance outstanding
under our revolving credit line, we will invest the excess proceeds in
short-term investment securities pending their use for acquisitions or to
reduce future borrowings under our revolving credit line.
Before purchasing the preferred securities being offered, you
should carefully consider the "Risk Factors" beginning on page 10.
7
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data set forth below,
insofar as they relate to the five years ended December 31, 2000,
are derived from our consolidated financial statements, which have
been audited by KPMG LLP. The summary consolidated data set forth
below for the six-month periods ended June 30, 2001 and 2000, are
derived from unaudited consolidated financial statements. In our
opinion, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of results as of and
for the six-month periods indicated have been included. This
information is qualified by reference to our consolidated financial
statements included herein, and this information should be read in
conjunction with such consolidated financial statements and related
notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Results for past periods are
not necessarily indicative of results that may be expected for
future periods and results for the six-month period ended June 30,
2001 are not necessarily indicative of results that may be expected
for the entire year ending December 31, 2001.
AS OF OR FOR THE SIX
MONTHS ENDED JUNE 30,(1)
----------------------------
2001 2000
------------- ------------
(DOLLARS EXPRESSED IN
THOUSANDS)
INCOME STATEMENT DATA:
Interest income.................................. $ 229,393 201,878
Interest expense................................. 104,912 88,058
---------- ---------
Net interest income.............................. 124,481 113,820
Provision for loan losses........................ 7,110 7,202
---------- ---------
Net interest income after provision for loan
losses.......................................... 117,371 106,618
Noninterest income............................... 35,898 21,035
Noninterest expense.............................. 116,016 79,710
---------- ---------
Income before provision for income taxes,
minority interest in income of subsidiary and
cumulative effect of change in accounting
principle....................................... 37,253 47,943
Provision for income taxes....................... 14,581 17,741
---------- ---------
Income before minority interest in income of
subsidiary and cumulative effect of change in
accounting principle............................ 22,672 30,202
Minority interest in income of subsidiary........ 1,045 943
---------- ---------
Income before cumulative effect of change in
accounting principle............................ 21,627 29,259
Cumulative effect of change in accounting
principle, net of tax........................... (1,376) --
---------- ---------
Net income....................................... $ 20,251 29,259
========== =========
DIVIDENDS:
Preferred stock.................................. $ 328 328
Common stock..................................... -- --
Ratio of total dividends declared to net
income.......................................... 1.62% 1.12%
BALANCE SHEET DATA:
Investment securities............................ $ 385,010 436,320
Loans, net of unearned discounts................. 4,861,943 4,326,393
Total assets..................................... 5,904,203 5,180,472
Total deposits................................... 4,994,119 4,456,453
Notes payable.................................... 34,500 58,500
Guaranteed preferred beneficial interests in
First Banks, Inc. and First Banks America, Inc.
subordinated debentures......................... 182,881 127,695
Common stockholders' equity...................... 383,341 308,977
Total stockholders' equity....................... 396,404 322,040
EARNINGS RATIOS:
Return on average total assets(2)................ 0.70% 1.17%
Return on average total stockholders'
equity(2)....................................... 10.78 19.24
Efficiency ratio(3).............................. 72.34 59.11
Net interest margin(2)(4)........................ 4.73 4.90
ASSET QUALITY RATIOS:
Allowance for loan losses to loans............... 1.59 1.80
Nonperforming loans to loans(5).................. 1.26 0.85
Allowance for loan losses to nonperforming
loans(5)........................................ 126.42 211.39
Nonperforming assets to loans and other real
estate(6) 1.33 0.89
Net loan charge-offs (recoveries) to average
loans(2)........................................ 0.48 (0.06)
CAPITAL RATIOS:
Average total stockholders' equity to average
total assets.................................... 6.48 6.07
Total risk-based capital ratio................... 10.60 10.26
Leverage ratio................................... 7.33 7.80
RATIO OF EARNINGS TO FIXED CHARGES:(7)
Including interest on deposits................... 1.34x 1.52x
Excluding interest on deposits................... 4.29 5.83
AS OF OR FOR THE YEAR ENDED DECEMBER 31,(1)
------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(DOLLARS EXPRESSED IN THOUSANDS)
INCOME STATEMENT DATA:
Interest income.................................. 422,826 353,082 327,860 295,101 266,021
Interest expense................................. 187,679 158,701 162,179 148,831 141,670
--------- --------- --------- --------- ---------
Net interest income.............................. 235,147 194,381 165,681 146,270 124,351
Provision for loan losses........................ 14,127 13,073 9,000 11,300 11,494
--------- --------- --------- --------- ---------
Net interest income after provision for loan
losses.......................................... 221,020 181,308 156,681 134,970 112,857
Noninterest income............................... 42,778 41,650 36,497 25,697 20,721
Noninterest expense.............................. 171,163 150,807 138,704 110,287 105,741
--------- --------- --------- --------- ---------
Income before provision for income taxes,
minority interest in income of subsidiary and
cumulative effect of change in accounting
principle....................................... 92,635 72,151 54,474 50,380 27,837
Provision for income taxes....................... 34,482 26,313 19,693 16,083 6,960
--------- --------- --------- --------- ---------
Income before minority interest in income of
subsidiary and cumulative effect of change in
accounting principle............................ 58,153 45,838 34,781 34,297 20,877
Minority interest in income of subsidiary........ 2,046 1,660 1,271 1,270 659
--------- --------- --------- --------- ---------
Income before cumulative effect of change in
accounting principle............................ 56,107 44,178 33,510 33,027 20,218
Cumulative effect of change in accounting
principle, net of tax........................... -- -- -- -- --
--------- --------- --------- --------- ---------
Net income....................................... 56,107 44,178 33,510 33,027 20,218
========= ========= ========= ========= =========
DIVIDENDS:
Preferred stock.................................. 786 786 786 5,067 5,728
Common stock..................................... -- -- -- -- --
Ratio of total dividends declared to net
income.......................................... 1.40% 1.78% 2.35% 15.34% 28.33%
BALANCE SHEET DATA:
Investment securities............................ 563,534 451,647 534,796 795,530 552,801
Loans, net of unearned discounts................. 4,752,265 3,996,324 3,580,105 3,002,200 2,767,969
Total assets..................................... 5,876,691 4,867,747 4,554,810 4,165,014 3,689,154
Total deposits................................... 5,012,415 4,251,814 3,939,985 3,684,595 3,238,567
Notes payable.................................... 83,000 64,000 50,048 55,144 76,330
Guaranteed preferred beneficial interests in
First Banks, Inc. and First Banks America, Inc.
subordinated debentures......................... 182,849 127,611 127,443 83,183 --
Common stockholders' equity...................... 339,783 281,842 250,300 218,474 184,439
Total stockholders' equity....................... 352,846 294,905 263,363 231,537 251,389
EARNINGS RATIOS:
Return on average total assets(2)................ 1.09% 0.95% 0.78% 0.87% 0.57%
Return on average total stockholders'
equity(2)....................................... 17.43 15.79 13.64 12.91 8.43
Efficiency ratio(3).............................. 61.59 63.89 68.60 64.13 72.89
Net interest margin(2)(4)........................ 4.93 4.52 4.19 4.09 3.79
ASSET QUALITY RATIOS:
Allowance for loan losses to loans............... 1.72 1.72 1.70 1.68 1.69
Nonperforming loans to loans(5).................. 1.12 0.99 1.22 0.80 1.09
Allowance for loan losses to nonperforming
loans(5)........................................ 153.47 172.66 140.04 209.88 154.55
Nonperforming assets to loans and other real
estate(6) 1.17 1.05 1.32 1.04 1.47
Net loan charge-offs (recoveries) to average
loans(2)........................................ 0.17 0.22 0.05 0.27 0.72
CAPITAL RATIOS:
Average total stockholders' equity to average
total assets.................................... 6.25 6.00 5.73 6.70 6.79
Total risk-based capital ratio................... 10.21 10.05 10.28 10.26 9.23
Leverage ratio................................... 7.45 7.14 7.77 6.80 5.99
RATIO OF EARNINGS TO FIXED CHARGES:(7)
Including interest on deposits................... 1.47x 1.43x 1.33x 1.33x 1.19x
Excluding interest on deposits................... 5.51 4.54 4.53 4.32 2.32
<FN>
- ----------------------
(1) The comparability of the selected data presented is affected by the
acquisitions of 11 banks and five purchases of branch offices during the
five-year period ended December 31, 2000, including the acquisitions of
one bank and one leasing company completed during the six-month period
ended June 30, 2000. These acquisitions were accounted for as purchases
and, accordingly, the selected data includes the financial position and
results of operations of each acquired entity only for the periods
subsequent to its respective date of acquisition.
(2) Ratios for the six-month periods are annualized.
(3) Efficiency ratio is the ratio of noninterest expense to the sum of net
interest income and noninterest income.
(4) Net interest margin is the ratio of net interest income (expressed on a
tax-equivalent basis) to average interest-earning assets.
(5) Nonperforming loans consist of nonaccrual loans and certain loans with
restructured terms.
(6) Nonperforming assets consist of nonperforming loans and other real
estate.
(7) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before taxes plus interest and rent expense.
Fixed charges consist of interest and rent expense.
8
SUMMARY OF RECENT FINANCIAL DATA
On October 23, 2001, we issued a press release reporting our
unaudited financial data as of September 30, 2001 and for the three
and nine months then ended. We reported earnings of $14.4 million,
or $587.93 per common share on a diluted basis, for the quarter
ended September 30, 2001, compared to $14.1 million, or $570.33 per
common share on a diluted basis, for the comparable period in 2000.
Net income for the nine months ended September 30, 2001 and 2000,
was $34.6 million and $43.3 million, or $1,409.98 and $1,750.62 per
common share on a diluted basis, respectively.
The consolidated financial data set forth below for the three
and nine-month periods ended September 30, 2001 and 2000, are
derived from unaudited consolidated financial statements. In our
opinion, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of results as of and
for the three and nine-month periods indicated have been included.
This information is qualified by reference to our consolidated
financial statements included herein, and this information should be
read in conjunction with such consolidated financial statements and
related notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Results for past
periods are not necessarily indicative of results that may be
expected for future periods and results for the nine-month period
ended September 30, 2001 are not necessarily indicative of results
that may be expected for the entire year ending December 31, 2001.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME -- (UNAUDITED)
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Interest income............................................. $110,724 107,582 340,117 309,460
Interest expense............................................ 46,461 48,140 151,373 136,198
-------- -------- -------- --------
Net interest income........................................ 64,263 59,442 188,744 173,262
Provision for loan losses................................... 6,800 3,865 13,910 11,067
-------- -------- -------- --------
Net interest income after provision for loan losses........ 57,463 55,577 174,834 162,195
Noninterest income.......................................... 21,846 10,750 57,744 31,785
Noninterest expense......................................... 54,812 42,776 170,828 122,486
-------- -------- -------- --------
Income before provision for income taxes, minority interest
in income of subsidiary and cumulative effect of change in
accounting principle...................................... 24,497 23,551 61,750 71,494
Provision for income taxes.................................. 9,539 8,947 24,120 26,688
-------- -------- -------- --------
Income before minority interest in income of subsidiary and
cumulative effect of change in accounting principle....... 14,958 14,604 37,630 44,806
Minority interest in income of subsidiary................... 577 546 1,622 1,489
-------- -------- -------- --------
Income before cumulative effect of change in accounting
principle................................................. 14,381 14,058 36,008 43,317
Cumulative effect of change in accounting principle, net of
tax........................................................ -- -- 1,376 --
-------- -------- -------- --------
Net income................................................. 14,381 14,058 34,632 43,317
Preferred stock dividends................................... 196 196 524 524
-------- -------- -------- --------
Net income available to common stockholders................ $ 14,185 13,862 34,108 42,793
======== ======== ======== ========
Earnings per common share:
Basic:
Income before cumulative effect of change in accounting
principle................................................ $ 599.47 585.87 1,499.67 1,808.59
Cumulative effect of change in accounting principle, net
of tax................................................... -- -- (58.16) --
-------- -------- -------- --------
Basic..................................................... $ 599.47 585.87 1,441.51 1,808.59
======== ======== ======== ========
Diluted:
Income before cumulative effect of change in accounting
principle................................................ $ 587.93 570.33 1,468.14 1,750.62
Cumulative effect of change in accounting principle, net
of tax................................................... -- -- (58.16) --
-------- -------- -------- --------
Diluted................................................... $ 587.93 570.33 1,409.98 1,750.62
======== ======== ======== ========
CONDENSED CONSOLIDATED BALANCE SHEET INFORMATION -- (UNAUDITED)
(DOLLARS EXPRESSED IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2001 2000
---------------- ---------------
Investment securities....................................... $ 533,149 563,534
Loans, net of unearned discount............................. 4,774,300 4,752,265
Total assets................................................ 5,976,773 5,876,691
Total deposits.............................................. 5,072,090 5,012,415
Notes payable............................................... 29,500 83,000
Guaranteed preferred beneficial interests in First Banks,
Inc. and First Banks America, Inc. subordinated
debentures................................................. 182,945 182,849
Common stockholders' equity................................. 425,766 339,783
Total stockholders' equity.................................. 438,829 352,846
9
RISK FACTORS
An investment in the preferred securities involves a number
of risks. We urge you to read all of the information contained in
this prospectus. In addition, we urge you to consider carefully the
following factors in evaluating an investment in the trust before
you purchase the preferred securities offered by this prospectus.
Because the trust will rely on the interest payments it
receives on the subordinated debentures to fund all distributions on
the preferred securities, and because the trust may distribute the
subordinated debentures in exchange for the preferred securities,
purchasers of the preferred securities are making an investment
decision that relates to the subordinated debentures being issued by
First Banks, Inc. as well as the preferred securities. Purchasers
should carefully review the information in this prospectus about the
preferred securities, the subordinated debentures and the guarantee.
RISKS RELATED TO FIRST BANKS, INC.
WE PURSUE ACQUISITIONS TO SUPPLEMENT INTERNAL GROWTH.
We pursue a strategy of supplementing internal growth by
acquiring other financial institutions and related entities in order
to achieve certain size objectives that we believe are necessary to
compete effectively with our larger competitors. However, there are
risks associated with this strategy, including the following:
* With the overall strength of the banking industry,
numerous potential acquirors exist for most acquisition
candidates, creating intense competition, particularly
with respect to price. In many cases this competition
involves organizations with significantly greater
resources than we have available;
* Based on our acquisition strategy, we may be exposed to
potential asset quality issues or unknown or contingent
liabilities of the banks or businesses we acquire. If
these issues or liabilities exceed our estimates, our
earnings and financial condition may be adversely
affected;
* Prices at which acquisitions can be made fluctuate with
market conditions. We have experienced times during which
acquisitions could not be made in specific markets at
prices our management considered acceptable, and expect
that we will experience this condition in the future in
one or more markets;
* Because of our ownership structure, we do not use our
common stock to make acquisitions. This can be a
disadvantage in acquisitions relative to other prospective
acquirors in those instances in which selling stockholders
require a tax-free exchange. Additionally, cash
acquisitions by their nature initially reduce our
regulatory capital ratios; and
* The acquisition of other entities generally requires
integration of systems and procedures of the acquired
entity in order to make the transaction economically
feasible. This integration process is complicated and time
consuming for us, and it can also be disruptive to the
customers of the acquired business. If the integration
process is not conducted successfully and with minimal
effect on the business and its customers, we may not
realize the anticipated economic benefits of particular
acquisitions within the expected time frame, and we may
lose higher than expected numbers of customers or
employees of the acquired business.
GEOGRAPHIC DISPERSION CREATES ADDITIONAL OPERATING REQUIREMENTS.
The geographic distance between the offices of our
subsidiaries in California, Illinois, Missouri, New Mexico and Texas
creates additional operating requirements that are not present in
other businesses that operate in contiguous markets. These operating
requirements include:
* Operation of data processing and item processing functions
at remote locations;
10
* Control of correspondent accounts, reserve balances and
wire transfers in different time zones;
* Providing administrative support, including accounting,
human resources, loan servicing, internal audit and credit
review at significant distances; and
* Establishing and monitoring compliance with our corporate
policies and procedures in different areas.
The geographic distances between our operations increase the
cost of management and make it more difficult to standardize our
business practices and procedures.
OUR BUSINESS IS SUBJECT TO CREDIT RISKS.
As a financial institution, we are subject to the risk that
customers to whom our subsidiary banks have made loans will be
unable to repay these loans according to their terms and that the
collateral securing these loans, if any, may not have a value equal
to amounts owed under the loans. In recent years, we have reduced
our levels of consumer lending and expanded our commercial lending
activities. Our expanded level of commercial lending carries with it
greater credit risk than the credit risk associated with consumer
lending. A substantial portion of the loans made by our subsidiary
banks is secured by real estate. Adverse developments affecting real
estate in one or more of our markets could increase the credit risk
associated with our loan portfolio.
IF OUR ALLOWANCE FOR LOAN LOSSES IS INSUFFICIENT TO ABSORB LOSSES IN
OUR LOAN PORTFOLIO, IT WILL ADVERSELY AFFECT OUR FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Some borrowers may not repay loans that we make to them. This
risk is inherent in the banking business. We maintain an allowance
for loan losses to absorb probable loan losses in our loan
portfolio. However, we cannot predict loan losses with certainty,
and we cannot assure you that our allowance will be sufficient,
particularly during an economic downturn. Loan losses in excess of
our allowance would have an adverse effect on our financial
condition and results of operations.
WE MAY BE ADVERSELY AFFECTED BY INTEREST RATE CHANGES.
Our earnings are derived from the operations of our
subsidiaries, and we are principally dependent on net interest
income, calculated as the difference between interest earned on
loans and investments and the interest expense paid on deposits and
other borrowings. Like other banks and financial institutions, our
interest income and interest expense are affected by general
economic conditions and by the policies of regulatory authorities,
including the monetary policies of the Federal Reserve. Changes in
the economic environment may affect loan and deposit pricing,
influence the growth rate of loans and deposits and alter the
quality of our loan portfolio. While management has taken measures,
such as employing various financial instruments, including
derivatives, when appropriate, intended to manage the risks of
operating in a changing interest rate environment, there can be no
assurance that such measures will be effective in avoiding undue
interest rate risk. There are also costs associated with these
measures and risks that counterparties may not perform these
obligations. Under our current interest rate risk position, our net
interest income could be negatively affected by a decline in
interest rates.
OUR OPERATING RESULTS MAY BE AFFECTED BY THE RESULTS OF OUR HEDGING
ACTIVITIES.
To offset the risks associated with the effects of changes in
market interest rates, we enter into transactions designed to hedge
our interest rate risk. Our management determines the nature and
quantity of our hedging transactions by using simulation techniques
to model various interest rate scenarios with respect to our assets
and liabilities. Our hedging activities are affected by our balance
sheet composition, current and projected interest rates and the
velocity of changes in rates. While we believe we are properly
hedging our interest rate risk, the accounting for such hedging
activities under accounting principles generally accepted in the
United States of America requires our hedging instruments to be
recorded at market value. The effect of certain of our hedging
strategies may result in volatility in our quarterly earnings as
interest rates go up or down. The volatility in earnings is
primarily a result of
11
marking to market certain of our hedging instruments and/or
modifying our overall hedge position. While we believe we are
properly hedging our interest rate risk, we cannot assure you that
our hedging transactions will offset our risks of losses.
OUR FUTURE SUCCESS IS DEPENDENT ON OUR ABILITY TO COMPETE
EFFECTIVELY IN THE HIGHLY COMPETITIVE BANKING INDUSTRY.
The financial services business is highly competitive, and we
encounter strong direct competition for deposits, loans and other
financial services in all of our market areas. Our principal
competitors include other commercial banks, savings banks, savings
and loan associations, mutual funds, finance companies, trust
companies, insurance companies, leasing companies, credit unions,
mortgage companies, private issuers of debt obligations and
suppliers of other investment alternatives, such as securities firms
and financial holding companies. Many of our non-bank competitors
are not subject to the same degree of regulation as that imposed on
bank holding companies, federally insured banks and national or
state chartered banks. As a result, such non-bank competitors have
advantages over us in providing certain services. We also compete
with major multi-bank holding companies which are significantly
larger than us and have greater access to capital and other
resources.
WE MAY BE ADVERSELY AFFECTED BY RECENT EVENTS.
The events of September 11, 2001 in New York City and
Washington, D.C. are likely to have a negative impact on a domestic
economy that was slowing even prior to those events. If the domestic
economy deteriorates, an increase in delinquencies in our loan
portfolio and in loan losses can be expected. The events of
September 11, 2001 may lead to reduced levels of travel, which could
adversely affect our hotel loan and commercial airlines equipment
leasing portfolios. At June 30, 2001, we had $195.1 million in hotel
loans and $28.4 million in equipment leases to commercial airlines.
We are unable to predict whether the threat of similar future events
or responses to such events will result in long-term commercial
disruptions or will have a long-term adverse effect on our business,
results of operations or financial condition.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY THE HIGHLY REGULATED
ENVIRONMENT IN WHICH WE OPERATE.
We and our subsidiaries are subject to extensive federal and
state legislation, regulation and supervision. Recently enacted,
proposed and future legislation and regulations have had and are
expected to continue to have a significant impact on the financial
services industry. Some of the legislative and regulatory changes
may benefit us and our subsidiaries; however, other changes could
increase our costs of doing business or reduce our ability to
compete in certain markets.
WE CONTINUALLY ENCOUNTER TECHNOLOGICAL CHANGE, AND WE MAY HAVE FEWER
RESOURCES THAN MANY OF OUR COMPETITORS TO CONTINUE TO INVEST IN
TECHNOLOGICAL IMPROVEMENTS.
The financial services industry is undergoing rapid
technological changes, with frequent introductions of new
technology-driven products and services. In addition to better
serving customers, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. Our
future success will depend, in part, upon our ability to address the
needs of our customers by using technology to provide products and
services that will satisfy customer demands for convenience, as well
as to create additional efficiencies in our operations. Many of our
competitors have substantially greater resources to invest in
technological improvements. We cannot assure you that we will be
able to effectively implement new technology-driven products and
services or be successful in marketing these products and services
to our customers.
ONE FAMILY MAINTAINS VOTING CONTROL OVER FIRST BANKS.
Various trusts, which were created by and are administered by
and for the benefit of Mr. James F. Dierberg, our Chairman and Chief
Executive Officer, and his adult children, own all of our voting
stock. Mr. Dierberg and his family, therefore, control our
management and policies. In the event of Mr. Dierberg's death or
disability, Mr. Dierberg's wife will control our management and
policies.
12
RISKS RELATED TO AN INVESTMENT IN THE PREFERRED SECURITIES
IF WE DO NOT MAKE INTEREST PAYMENTS UNDER THE SUBORDINATED
DEBENTURES, THE TRUST WILL BE UNABLE TO PAY DISTRIBUTIONS AND
LIQUIDATION AMOUNTS. THE GUARANTEE WILL NOT APPLY BECAUSE THE
GUARANTEE COVERS PAYMENTS ONLY IF THE TRUST HAS FUNDS AVAILABLE.
The trust will depend solely on our interest payments on the
subordinated debentures to make distributions to you on the
preferred securities. If we default on our obligation to pay the
principal or interest on the subordinated debentures, the trust will
not have sufficient funds to pay distributions or the liquidation
amount on the preferred securities. In that case, you will not be
able to rely on the guarantee for payment of these amounts because
the guarantee only applies if the trust has sufficient funds to make
distributions on or to pay the liquidation amount of the preferred
securities. Instead, you or the property trustee will have to
institute a direct action against us to enforce the property
trustee's rights under the indenture relating to the subordinated
debentures.
OUR ABILITY TO MAKE INTEREST PAYMENTS ON THE SUBORDINATED DEBENTURES
TO THE TRUST MAY BE RESTRICTED.
We are a holding company, and substantially all of our assets
are held by our subsidiaries. Our ability to make payments on the
subordinated debentures when due will depend primarily on available
cash resources at the bank holding company level and on dividends
from our subsidiaries. The ability of each banking subsidiary to pay
dividends is subject to its profitability, financial condition,
capital expenditures and other cash flow requirements. Furthermore,
the terms of the subordinated debentures associated with the $46.0
million of trust preferred securities issued by FBA's financing
subsidiary prevent FBA from making dividend payments to us under
certain circumstances. Dividend payments or extensions of credit
from our banking subsidiaries are also subject to regulatory
limitations, generally based on capital levels and current and
retained earnings, imposed by the various regulatory agencies with
authority over such subsidiaries. Based on applicable regulatory
limitations, our banking subsidiaries had the capacity to pay a
total of approximately $34.2 million in dividends as of June 30,
2001, subject to our need to maintain adequate capital ratios at
each bank. We may also be precluded from making interest payments on
the subordinated debentures by our regulators in order to address
any perceived deficiencies in liquidity or regulatory capital levels
at the holding company level. Such regulatory action would require
us to obtain consent from our regulators prior to paying dividends
on our capital stock or interest on the subordinated debentures. In
the event our regulators withheld their consent to our payment of
interest on the subordinated debentures, we would exercise our right
to defer interest payments on the subordinated debentures, and the
trust would not have funds available to make distributions on the
preferred securities during such period. The commencement of a
deferral period would likely cause the market price of the preferred
securities to decline. We cannot assure you that our subsidiaries
will be able to pay dividends in the future or that our regulators
will not attempt to preclude us from making interest payments on the
subordinated debentures.
THE SUBORDINATED DEBENTURES AND THE GUARANTEE RANK LOWER THAN MOST
OF OUR OTHER INDEBTEDNESS, AND OUR HOLDING COMPANY STRUCTURE
EFFECTIVELY SUBORDINATES ANY CLAIMS AGAINST US TO THOSE OF OUR
SUBSIDIARIES' CREDITORS.
Our obligations under the subordinated debentures and the
guarantee are unsecured and will rank junior in priority of payment
to our existing and future senior and senior subordinated
indebtedness, which totaled $66.5 million at October 31, 2001, and
will rank equally with the subordinated debentures associated with
the $143.8 million of trust preferred securities our other two
financing subsidiaries currently have outstanding. The issuance of
the subordinated debentures and the preferred securities does not
limit our ability or the ability of our subsidiaries to incur
additional indebtedness, guarantees or other liabilities.
Because we are a holding company, the creditors of our
subsidiaries, including depositors and the holders of subordinated
debentures associated with the $46.0 million of trust preferred
securities issued by a financing subsidiary of our subsidiary, FBA,
also will have priority over you in any distribution of each
subsidiary's assets in liquidation, reorganization or otherwise.
Accordingly, the subordinated debentures and the guarantee will be
effectively subordinated to all existing and future liabilities of
our
13
subsidiaries with respect to the assets of each such subsidiary, and
you should look only to our assets for payments on the preferred
securities and the subordinated debentures.
WE HAVE THE OPTION TO DEFER INTEREST PAYMENTS ON THE SUBORDINATED
DEBENTURES FOR SUBSTANTIAL PERIODS.
We may, at one or more times, defer interest payments on the
subordinated debentures for up to 20 consecutive quarters. If we
defer interest payments on the subordinated debentures, the trust
will defer distributions on the preferred securities during any
deferral period. During a deferral period, you will be required to
recognize as income for federal income tax purposes the amount
approximately equal to the interest that accrues on your
proportionate share of the subordinated debentures held by the trust
in the tax year in which that interest accrues, even though you will
not receive these amounts until a later date. You will also not
receive the cash related to any accrued and unpaid interest from the
trust if you sell the preferred securities before the end of any
deferral period. During a deferral period, accrued but unpaid
distributions will increase your tax basis in the preferred
securities. If you sell the preferred securities during a deferral
period, your increased tax basis will decrease the amount of any
capital gain or increase the amount of any capital loss that you may
have otherwise realized on the sale. A capital loss, except in
certain limited circumstances, cannot be applied to offset ordinary
income. As a result, deferral of distributions could result in
ordinary income, and a related tax liability for the holder, and a
capital loss that may only be used to offset a capital gain.
We do not currently intend to exercise our right to defer
interest payments on the subordinated debentures. However, if we
exercise our right in the future, the market price of the preferred
securities would likely be adversely affected. The preferred
securities may trade at a price that does not fully reflect the
value of accrued but unpaid interest on the subordinated debentures.
If you sell the preferred securities during a deferral period, you
may not receive the same return on investment as someone who
continues to hold the preferred securities. Due to our right to
defer interest payments, the market price of the preferred
securities may be more volatile than the market prices of other
securities without the deferral feature.
WE HAVE MADE ONLY LIMITED COVENANTS IN THE INDENTURE AND THE TRUST
AGREEMENT.
The indenture governing the subordinated debentures and the
trust agreement governing the trust do not require us to maintain
any financial ratios or specified levels of stockholders' equity,
revenues, income, cash flow or liquidity, and therefore do not
protect holders of the subordinated debentures or the preferred
securities in the event we experience significant adverse changes in
our financial condition or results of operations. The indenture
prevents us and any subsidiary from incurring, in connection with
the issuance of any trust preferred securities or any similar
securities, indebtedness that is senior in right of payment to the
subordinated debentures. The indenture also limits our ability and
the ability of any subsidiary to incur, in connection with the
issuance of any trust preferred securities or any similar
securities, indebtedness that is equal in right of payment with the
subordinated debentures. Except as described above, neither the
indenture or the trust agreement limits our ability or the ability
of any subsidiary to incur additional indebtedness that is senior in
right of payment to the subordinated debentures. Therefore, you
should not consider the provisions of these governing instruments as
a significant factor in evaluating whether we will be able to comply
with our obligations under the subordinated debentures or the
guarantee.
WE MAY REDEEM THE SUBORDINATED DEBENTURES BEFORE DECEMBER 31, 2031.
Under the following circumstances, we may redeem the
subordinated debentures before their stated maturity:
* We may redeem the subordinated debentures, in whole or in
part, at any time on or after December 31, 2006.
* We may redeem the subordinated debentures in whole, but
not in part, within 180 days after certain occurrences at
any time during the life of the trust. These occurrences
may include adverse tax, investment company or bank
regulatory developments. See "Description of the
Subordinated Debentures -- Redemption."
14
You should assume that we will exercise our redemption option
if we are able to obtain capital at a lower cost than we must pay on
the subordinated debentures or if it is otherwise in our interest to
redeem the subordinated debentures. If the subordinated debentures
are redeemed, the trust must redeem preferred securities having an
aggregate liquidation amount equal to the aggregate principal amount
of subordinated debentures redeemed, and you may not be able to earn
a return that is as high as you were earning on the preferred
securities.
WE CAN DISTRIBUTE THE DEBENTURES TO YOU, WHICH MAY HAVE ADVERSE TAX
CONSEQUENCES FOR YOU AND WHICH MAY ADVERSELY AFFECT THE MARKET PRICE
OF THE PREFERRED SECURITIES.
The trust may be dissolved at any time before maturity of the
subordinated debentures on December 31, 2031. As a result, and
subject to the terms of the trust agreement, the trustees may
distribute the subordinated debentures to you.
We cannot predict the market prices for the subordinated
debentures that may be distributed in exchange for preferred
securities upon liquidation of the trust. The preferred securities,
or the subordinated debentures that you may receive if the trust is
liquidated, may trade at a discount to the price that you paid to
purchase the preferred securities. Because you may receive
subordinated debentures, your investment decision with regard to the
preferred securities will also be an investment decision with regard
to the subordinated debentures. You should carefully review all of
the information contained in this prospectus regarding the
subordinated debentures.
Under current interpretations of United States federal income
tax laws supporting classification of the trust as a grantor trust
for tax purposes, a distribution of the subordinated debentures to
you upon the dissolution of the trust would not be a taxable event
to you. Nevertheless, if the trust is classified for United States
income tax purposes as an association taxable as a corporation at
the time it is dissolved, the distribution of the subordinated
debentures would be a taxable event to you. In addition, if there is
a change in law, a distribution of subordinated debentures upon the
dissolution of the trust could be a taxable event to you.
YOU ARE SUBJECT TO PREPAYMENT RISK BECAUSE POSSIBLE TAX LAW CHANGES
COULD RESULT IN A REDEMPTION OF THE PREFERRED SECURITIES.
Future legislation may be enacted that could adversely affect
our ability to deduct our interest payments on the subordinated
debentures for federal income tax purposes, making redemption of the
subordinated debentures likely and resulting in a redemption of the
preferred securities.
From time to time, changes to the federal income tax law have
been proposed that would, among other things, generally deny
interest deductions to a corporate issuer if the debt instrument has
a term exceeding 15 years and if the debt instrument is not
reflected as indebtedness on the issuer's consolidated balance
sheet. Other proposed tax law changes would have denied interest
deductions if the debt instrument had a term exceeding 20 years.
These proposals were not enacted into law. Although it is impossible
to predict future proposals, if a future proposal of this sort were
to become effective in a form applicable to already issued and
outstanding securities, we could be precluded from deducting
interest on the subordinated debentures. Enactment of this type of
proposal might in turn give rise to a tax event as described under
"Description of the Preferred Securities -- Redemption or Exchange
- -- Redemption upon a Tax Event, Investment Company Event or Capital
Treatment Event."
TRADING CHARACTERISTICS OF THE PREFERRED SECURITIES MAY CREATE
ADVERSE TAX CONSEQUENCES FOR YOU.
The preferred securities may trade at a price that does not
reflect the value of accrued but unpaid interest on the underlying
subordinated debentures. If you dispose of your preferred securities
between record dates for payments on the preferred securities, you
may have adverse tax consequences. Under these circumstances, you
will be required to include accrued but unpaid interest on the
subordinated debentures allocable to the preferred securities
through the date of disposition in your income as ordinary income if
you use the accrual method of accounting or if this interest
represents original issue discount.
If interest on the subordinated debentures is included in
income under the original issue discount provisions, you would add
this amount to your adjusted tax basis in your share of the
underlying
15
subordinated debentures deemed disposed. If your selling price is
less than your adjusted tax basis, which will include all accrued
but unpaid original issue discount interest included in your income,
you could recognize a capital loss which, subject to limited
exceptions, cannot be applied to offset ordinary income for federal
income tax purposes. See "Federal Income Tax Consequences" for more
information on possible adverse tax consequences to you.
THERE IS NO CURRENT PUBLIC MARKET FOR THE PREFERRED SECURITIES AND
THEIR MARKET PRICE MAY BE SUBJECT TO SIGNIFICANT FLUCTUATIONS.
There is currently no public market for the preferred
securities. The preferred securities have been designated for
inclusion in the Nasdaq National Market, and trading is expected to
commence on or around delivery of the preferred securities. However,
there is no guarantee that an active or liquid trading market will
develop for the preferred securities or that the quotation of the
preferred securities will continue in the Nasdaq National Market. If
an active trading market does not develop, the market price and
liquidity of the preferred securities will be adversely affected.
Even if an active public market does develop, there is no guarantee
that the market price for the preferred securities will equal or
exceed the price you pay for the preferred securities.
Future trading prices of the preferred securities may be
subject to significant fluctuations in response to prevailing
interest rates, our future operating results and financial
condition, the market for similar securities and general economic
and market conditions. The initial public offering price of the
preferred securities has been set at the liquidation amount of the
preferred securities and may be greater than the market price
following the offering.
The market price for the preferred securities, or the
subordinated debentures that you may receive in a distribution, is
also likely to decline during any period that we are deferring
interest payments on the subordinated debentures.
YOU MUST RELY ON THE PROPERTY TRUSTEE TO ENFORCE YOUR RIGHTS IF
THERE IS AN EVENT OF DEFAULT UNDER THE INDENTURE.
You may not be able to directly enforce your rights against
us if an event of default under the indenture occurs. If an event of
default under the indenture occurs and is continuing, this event
will also be an event of default under the trust agreement. In that
case, you must rely on the enforcement by the property trustee of
its rights as holder of the subordinated debentures. The holders of
a majority in liquidation amount of the preferred securities will
have the right to direct the property trustee to enforce its rights.
If the property trustee does not enforce its rights following an
event of default and a request by the record holders to do so, any
record holder may, to the extent permitted by applicable law, take
action directly against us to enforce the property trustee's rights.
If an event of default occurs under the trust agreement that is
attributable to our failure to pay interest or principal on the
subordinated debentures, or if we default under the guarantee, you
may proceed directly against us. You will not be able to exercise
directly any other remedies available to the holders of the
subordinated debentures unless the property trustee fails to do so.
AS A HOLDER OF PREFERRED SECURITIES YOU HAVE LIMITED VOTING RIGHTS.
Holders of preferred securities have limited voting rights.
Your voting rights pertain primarily to amendments to the trust
agreement. In general, only we can replace or remove any of the
trustees. However, if an event of default under the trust agreement
occurs and is continuing, the holders of at least a majority in
aggregate liquidation amount of the preferred securities may replace
the property trustee and the Delaware trustee.
16
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Information appearing in this report, in documents
incorporated by reference herein and in documents subsequently filed
with the Securities and Exchange Commission that are not statements
of historical fact may include forward-looking statements with
respect to our financial condition, results of operations and
business. These forward-looking statements are subject to certain
risks and uncertainties, not all of which can be predicted or
anticipated. These risks and uncertainties include all of those
risks and uncertainties identified under the heading "Risk Factors"
appearing elsewhere in this prospectus. Factors that may cause our
actual results to differ materially from those contemplated by the
forward-looking statements herein include market conditions as well
as conditions affecting the banking industry generally and factors
having a specific impact on us, including but not limited to: the
changes in interest rates; the credit risks associated with
consumers who may not repay loans; the geographic dispersion of our
offices; the impact our hedging activities may have on our operating
results; the highly regulated environment in which we operate; the
competitive conditions in the banking industry, including
competition from banking and nonbanking companies; and our ability
to respond to changes in technology. With regard to our efforts to
grow through acquisitions, factors that could affect the accuracy or
completeness of forward-looking statements contained herein include
the competition of larger acquirers with greater resources;
fluctuations in the prices at which acquisition targets may be
available for sale; the impact of making acquisitions without using
our common stock; and possible asset quality issues, unknown
liabilities or integration issues with the businesses that we have
acquired. Readers of our prospectus should therefore not place undue
reliance on forward-looking statements.
USE OF PROCEEDS
The trust will invest all of the proceeds from the sale of
the preferred securities in the subordinated debentures. We
anticipate that the net proceeds from the sale of the subordinated
debentures will be approximately $45.9 million after deduction of
offering expenses estimated to be $275,000 and underwriting
commissions.
We expect to use the net proceeds to reduce indebtedness
currently outstanding under our revolving credit line with a group
of unaffiliated banks. At October 31, 2001, approximately $66.5
million was outstanding under the revolving credit line. We expect
our balance under the revolving credit line to increase as we
consummate pending acquisitions. If at the time the trust issues the
preferred securities, the net proceeds exceed the balance
outstanding under the revolving credit line, we will invest the
excess proceeds in short-term investment securities pending their
use for acquisitions or to reduce future borrowings under the
revolving credit line.
The revolving credit line provides for maximum borrowings of
$120.0 million. Interest is payable on outstanding principal
balances, at a floating rate equal to, at our option, either the
lender's prime rate or the Eurodollar rate plus a margin determined
by the outstanding balance and our net income. The borrowings
outstanding under the revolving credit line mature on August 22,
2002. The revolving credit line is secured by a pledge of the stock
of our banking subsidiaries and a note receivable from FBA. We
expect to keep the revolving credit line available for future
borrowings.
In the future, we anticipate using the amounts remaining
available under the credit line to finance further expansion and
potential acquisitions of banks and other financial institutions.
Currently, we are a party to agreements to acquire two Illinois
banks having aggregate assets of approximately $616.4 million. The
aggregate cash purchase price for these acquisitions is
approximately $66.3 million. We expect one of these transactions to
close during the fourth quarter of 2001 and the other transaction to
close during the first quarter of 2002. While we are currently
evaluating other possible acquisition candidates, there are no other
transactions currently pending.
17
ACCOUNTING TREATMENT
The trust will be treated, for financial reporting purposes,
as our subsidiary and, accordingly, the accounts of the trust will
be included in our consolidated statements of income as noninterest
expense. The preferred securities will be presented as a separate
line item in our consolidated balance sheet under the caption
"Guaranteed preferred beneficial interests in First Banks, Inc.
subordinated debentures," or other similar caption. In addition,
appropriate disclosures about the preferred securities, the
guarantee and the subordinated debentures will be included in the
notes to our consolidated financial statements.
Our future reports filed under the Securities Exchange Act of
1934 will include a note to the consolidated financial statements
stating that:
* the trust is wholly-owned;
* the sole assets of the trust are the subordinated
debentures, specifying the subordinated debentures'
outstanding principal amount, interest rate and maturity
date; and
* our obligations described in this prospectus, in the
aggregate, constitute a full, irrevocable and
unconditional guarantee on a subordinated basis by us of
the obligations of the trust under the preferred
securities.
We have not included separate financial statements of the
trust in this prospectus. We do not consider that separate financial
statements would be material to holders of preferred securities
because we will own all of the trust's voting securities, the trust
has no independent operations and we guarantee the payments on the
preferred securities to the extent described in this prospectus.
MARKET FOR THE PREFERRED SECURITIES
The preferred securities have been designated for inclusion
in the Nasdaq National Market under the symbol "FBNKM." Trading is
expected to commence on or around delivery of the preferred
securities. We are not sure, however, whether an active and liquid
trading market will develop, or if developed, will continue. The
public offering price and distribution rate have been determined by
negotiations among our representatives and the underwriters, and the
public offering price of the preferred securities may not be
indicative of the market price following the offering. See
"Underwriting."
18
CAPITALIZATION
The following table sets forth (i) our consolidated
capitalization at June 30, 2001 and (ii) our consolidated
capitalization giving effect to the issuance of the preferred
securities hereby offered by the trust and our receipt of the net
proceeds from the corresponding sale of the subordinated debentures
to the trust, as if the sale of the preferred securities had been
consummated on June 30, 2001, and assuming the underwriters'
over-allotment option was not exercised. This data should be read in
conjunction with our consolidated financial statements and notes
thereto.
JUNE 30, 2001
--------------------------------
ACTUAL AS ADJUSTED
------------- ----------------
LONG-TERM DEBT: (DOLLARS EXPRESSED IN THOUSANDS)
Notes payable(1)........................................ $ 34,500 $ --
-------- --------
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN FIRST BANKS,
INC. AND FIRST BANKS AMERICA, INC. SUBORDINATED
DEBENTURES:
Guaranteed preferred beneficial interests in First
Banks, Inc. subordinated debentures................... 143,750 191,750
Guaranteed preferred beneficial interests in First Banks
America, Inc. subordinated debentures................. 46,000 46,000
-------- --------
Total guaranteed preferred beneficial interests in
subordinated debentures........................... 189,750 237,750
Less unamortized expenses relating to the issuance of
the preferred securities.............................. (6,869) (8,944)
-------- --------
Total guaranteed preferred beneficial interests in
subordinated debentures, net of expenses.......... 182,881 228,806
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock:
$1.00 par value, 5,000,000 shares authorized, no
shares issued and outstanding..................... -- --
Class A convertible, adjustable rate, $20.00 par
value, 750,000 shares authorized, 641,082 shares
issued and outstanding............................ 12,822 12,822
Class B adjustable rate, $1.50 par value, 200,000
shares authorized, 160,505 shares issued and
outstanding....................................... 241 241
Common stock, $250.00 par value, 25,000 shares
authorized, 23,661 shares issued and outstanding...... 5,915 5,915
Capital surplus......................................... 2,610 2,610
Retained earnings....................................... 345,503 345,503
Accumulated other comprehensive income.................. 29,313 29,313
-------- --------
Total stockholders' equity.......................... 396,404 396,404
-------- --------
Total capitalization................................ $613,785 $625,210
======== ========
CAPITAL RATIOS:(2)(3)
Leverage ratio(4)....................................... 7.33% 7.33%
Tier I capital ratio.................................... 8.01 8.01
Total risk based capital ratio.......................... 10.60 11.50
<FN>
- --------------------
(1) The proceeds of this offering will be used primarily to temporarily
reduce the indebtedness outstanding under First Banks' revolving credit
line. See "Use of Proceeds" for a description of the revolving credit
line and the amounts outstanding thereunder as of certain dates.
(2) The capital ratios, as adjusted, are computed including the total
estimated net proceeds from the sale of the preferred securities, in a
manner consistent with Federal Reserve regulations.
(3) The preferred securities have been structured to qualify as Tier I
capital. However, in calculating the amount of Tier I qualifying capital,
the preferred securities, together with any outstanding cumulative
preferred stock of First Banks that may be outstanding in the future, may
only be included up to the amount constituting 25% of Tier I core capital
elements (including the preferred securities). Initially, none of the
preferred securities will be considered Tier I capital.
(4) The leverage ratio is Tier I capital divided by average quarterly assets,
after deducting intangible assets and net deferred tax assets in excess
of regulatory maximum limits.
19
SELECTED CONSOLIDATED AND OTHER FINANCIAL DATA
The selected consolidated financial data set forth below,
insofar as they relate to the five years ended December 31, 2000,
are derived from our consolidated financial statements, which have
been audited by KPMG LLP. The selected consolidated data set forth
below for the six-month periods ended June 30, 2001 and 2000, are
derived from unaudited consolidated financial statements. In our
opinion, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of results as of and
for the six-month periods indicated have been included. This
information is qualified by reference to our consolidated financial
statements included herein, and this information should be read in
conjunction with such consolidated financial statements and related
notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Results for past periods are
not necessarily indicative of results that may be expected for
future periods and results for the six-month period ended June 30,
2001 are not necessarily indicative of results that may be expected
for the entire year ending December 31, 2001.
AS OF OR FOR THE SIX
MONTHS ENDED JUNE 30,(1) AS OF OR FOR THE YEAR ENDED DECEMBER 31,(1)
---------------------------- ------------------------------------------
2001 2000 2000 1999 1998
------------- ------------ ------------ ------------ ------------
INCOME STATEMENT DATA: (DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income................... $ 229,393 201,878 422,826 353,082 327,860
Interest expense.................. 104,912 88,058 187,679 158,701 162,179
---------- --------- --------- --------- ---------
Net interest income............... 124,481 113,820 235,147 194,381 165,681
Provision for loan losses......... 7,110 7,202 14,127 13,073 9,000
---------- --------- --------- --------- ---------
Net interest income after
provision for loan losses........ 117,371 106,618 221,020 181,308 156,681
Noninterest income................ 35,898 21,035 42,778 41,650 36,497
Noninterest expense............... 116,016 79,710 171,163 150,807 138,704
---------- --------- --------- --------- ---------
Income before provision for income
taxes, minority interest in
income of subsidiary and
cumulative effect of change in
accounting principle............. 37,253 47,943 92,635 72,151 54,474
Provision for income taxes........ 14,581 17,741 34,482 26,313 19,693
---------- --------- --------- --------- ---------
Income before minority interest in
income of subsidiary and
cumulative effect of change in
accounting principle............. 22,672 30,202 58,153 45,838 34,781
Minority interest in income of
subsidiary....................... 1,045 943 2,046 1,660 1,271
---------- --------- --------- --------- ---------
Income before cumulative effect of
change in accounting principle... 21,627 29,259 56,107 44,178 33,510
Cumulative effect of change in
accounting principle, net of
tax.............................. (1,376) -- -- -- --
---------- --------- --------- --------- ---------
Net income........................ $ 20,251 29,259 56,107 44,178 33,510
========== ========= ========= ========= =========
DIVIDENDS:
Preferred stock................... $ 328 328 786 786 786
Common stock...................... -- -- -- -- --
Ratio of total dividends declared
to net income.................... 1.62% 1.12% 1.40% 1.78% 2.35%
PER SHARE DATA:
Earnings per common share:
Basic:
Income before cumulative
effect of change in
accounting principle......... $ 900.21 1,222.71 2,338.04 1,833.91 1,383.04
Cumulative effect of change in
accounting principle, net of
tax.......................... (58.16) -- -- -- --
---------- --------- --------- --------- ---------
$ 842.05 1,222.71 2,338.04 1,833.91 1,383.04
========== ========= ========= ========= =========
Diluted:
Income before cumulative
effect of change in
accounting principle......... $ 882.65 1,182.47 2,267.41 1,775.47 1,337.09
Cumulative effect of change in
accounting principle, net of
tax.......................... (58.16) -- -- -- --
---------- --------- --------- --------- ---------
$ 824.49 1,182.47 2,267.41 1,775.47 1,337.09
========== ========= ========= ========= =========
Weighted average common stock
outstanding...................... 23,661 23,661 23,661 23,661 23,661
BALANCE SHEET DATA:
Investment securities............. $ 385,010 436,320 563,534 451,647 534,796
Loans, net of unearned discount... 4,861,943 4,326,393 4,752,265 3,996,324 3,580,105
Total assets...................... 5,904,203 5,180,472 5,876,691 4,867,747 4,554,810
Total deposits.................... 4,994,119 4,456,453 5,012,415 4,251,814 3,939,985
Notes payable..................... 34,500 58,500 83,000 64,000 50,048
Guaranteed preferred beneficial
interests in First Banks, Inc.
and First Banks America, Inc.
subordinated debentures.......... 182,881 127,695 182,849 127,611 127,443
Common stockholders' equity....... 383,341 308,977 339,783 281,842 250,300
Total stockholders' equity........ 396,404 322,040 352,846 294,905 263,363
EARNINGS RATIOS:
Return on average total
assets(2)........................ 0.70% 1.17% 1.09% 0.95% 0.78%
Return on average total
stockholders' equity(2).......... 10.78 19.24 17.43 15.79 13.64
Efficiency ratio(3)............... 72.34 59.11 61.59 63.89 68.60
Net interest margin(2)(4)......... 4.73 4.90 4.93 4.52 4.19
ASSET QUALITY RATIOS:
Allowance for loan losses to
loans............................ 1.59 1.80 1.72 1.72 1.70
Nonperforming loans to loans(5)... 1.26 0.85 1.12 0.99 1.22
Allowance for loan losses to
nonperforming loans(5)........... 126.42 211.39 153.47 172.66 140.04
Nonperforming assets to loans and
other real estate(6)............. 1.33 0.89 1.17 1.05 1.32
Net loan charge-offs (recoveries)
to average loans(2).............. 0.48 (0.06) 0.17 0.22 0.05
CAPITAL RATIOS:
Average total stockholders' equity
to average total assets.......... 6.48 6.07 6.25 6.00 5.73
Total risk-based capital ratio.... 10.60 10.26 10.21 10.05 10.28
Leverage ratio.................... 7.33 7.80 7.45 7.14 7.77
RATIO OF EARNINGS TO FIXED
CHARGES:(7)
Including interest on deposits.... 1.34x 1.52x 1.47x 1.43x 1.33x
Excluding interest on deposits.... 4.29 5.83 5.51 4.54 4.53
AS OF OR FOR THE YEAR ENDED DECEMBER 31,(1)
---------------------------
1997 1996
------------ ------------
INCOME STATEMENT DATA: (DOLLARS EXPRESSED IN THOUSANDS,
EXCEPT PER SHARE DATA)
Interest income................... 295,101 266,021
Interest expense.................. 148,831 141,670
--------- ---------
Net interest income............... 146,270 124,351
Provision for loan losses......... 11,300 11,494
--------- ---------
Net interest income after
provision for loan losses........ 134,970 112,857
Noninterest income................ 25,697 20,721
Noninterest expense............... 110,287 105,741
--------- ---------
Income before provision for income
taxes, minority interest in
income of subsidiary and
cumulative effect of change in
accounting principle............. 50,380 27,837
Provision for income taxes........ 16,083 6,960
--------- ---------
Income before minority interest in
income of subsidiary and
cumulative effect of change in
accounting principle............. 34,297 20,877
Minority interest in income of
subsidiary....................... 1,270 659
--------- ---------
Income before cumulative effect of
change in accounting principle... 33,027 20,218
Cumulative effect of change in
accounting principle, net of
tax.............................. -- --
--------- ---------
Net income........................ 33,027 20,218
========= =========
DIVIDENDS:
Preferred stock................... 5,067 5,728
Common stock...................... -- --
Ratio of total dividends declared
to net income.................... 15.34% 28.33%
PER SHARE DATA:
Earnings per common share:
Basic:
Income before cumulative
effect of change in
accounting principle......... 1,181.69 612.46
Cumulative effect of change in
accounting principle, net of
tax.......................... -- --
--------- ---------
1,181.69 612.46
========= =========
Diluted:
Income before cumulative
effect of change in
accounting principle......... 1,134.28 596.83
Cumulative effect of change in
accounting principle, net of
tax.......................... -- --
--------- ---------
1,134.28 596.83
========= =========
Weighted average common stock
outstanding...................... 23,661 23,661
BALANCE SHEET DATA:
Investment securities............. 795,530 552,801
Loans, net of unearned discount... 3,002,200 2,767,969
Total assets...................... 4,165,014 3,689,154
Total deposits.................... 3,684,595 3,238,567
Notes payable..................... 55,144 76,330
Guaranteed preferred beneficial
interests in First Banks, Inc.
and First Banks America, Inc.
subordinated debentures.......... 83,183 --
Common stockholders' equity....... 218,474 184,439
Total stockholders' equity........ 231,537 251,389
EARNINGS RATIOS:
Return on average total
assets(2)........................ 0.87% 0.57%
Return on average total
stockholders' equity(2).......... 12.91 8.43
Efficiency ratio(3)............... 64.13 72.89
Net interest margin(2)(4)......... 4.09 3.79
ASSET QUALITY RATIOS:
Allowance for loan losses to
loans............................ 1.68 1.69
Nonperforming loans to loans(5)... 0.80 1.09
Allowance for loan losses to
nonperforming loans(5)........... 209.88 154.55
Nonperforming assets to loans and
other real estate(6)............. 1.04 1.47
Net loan charge-offs (recoveries)
to average loans(2).............. 0.27 0.72
CAPITAL RATIOS:
Average total stockholders' equity
to average total assets.......... 6.70 6.79
Total risk-based capital ratio.... 10.26 9.23
Leverage ratio.................... 6.80 5.99
RATIO OF EARNINGS TO FIXED
CHARGES:(7)
Including interest on deposits.... 1.33x 1.19x
Excluding interest on deposits.... 4.32 2.32
<FN>
- -------------------------
(1) The comparability of the selected data presented is affected by the
acquisitions of 11 banks and five purchases of branch offices during the
five-year period ended December 31, 2000, including the acquisitions of
one bank and one leasing company completed during the six-month period
ended June 30, 2000. These acquisitions were accounted for as purchases
and, accordingly, the selected data includes the financial position and
results of operations of each acquired entity only for the periods
subsequent to its respective date of acquisition.
(2) Ratios for the six-month periods are annualized.
(3) Efficiency ratio is the ratio of noninterest expense to the sum of net
interest income and noninterest income.
(4) Net interest margin is the ratio of net interest income (expressed on a
tax-equivalent basis) to average interest-earning assets.
(5) Nonperforming loans consist of nonaccrual loans and certain loans with
restructured terms.
(6) Nonperforming assets consist of nonperforming loans and other real
estate.
(7) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before taxes plus interest and rent expense.
Fixed charges consist of interest and rent expense.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following presents management's discussion and analysis
of our financial condition and results of operations as of the dates
and for the periods indicated. You should read this discussion in
conjunction with our "Selected Consolidated and Other Financial
Data," our consolidated financial statements and the related notes
thereto, and the other financial data contained elsewhere in this
prospectus.
This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ
significantly from those anticipated in these forward-looking
statements as a result of various factors, including those discussed
in "Risk Factors" contained elsewhere in this prospectus. See
"Special Note Regarding Forward-Looking Statements."
GENERAL
We are a registered bank holding company incorporated in
Missouri and headquartered in St. Louis County, Missouri. Through
the operation of our subsidiaries, we offer a broad array of
financial services to consumer and commercial customers. Over the
years, our organization has grown significantly, primarily as a
result of our acquisition strategy, as well as through internal
growth. We currently have banking operations in California,
Illinois, Missouri and Texas. As of June 30, 2001, we had total
assets of $5.90 billion, loans, net of unearned discount, of $4.86
billion, total deposits of $4.99 billion and total stockholders'
equity of $396.4 million.
Through our subsidiary banks, we offer a broad range of
commercial and personal deposit products, including demand, savings,
money market and time deposit accounts. In addition, we market
combined basic services for various customer groups, including
packaged accounts for more affluent customers, and sweep accounts,
lock-box deposits and cash management products for commercial
customers. We also offer both consumer and commercial loans.
Consumer lending includes residential real estate, home equity and
installment lending. Commercial lending includes commercial,
financial and agricultural loans, real estate construction and
development loans, commercial real estate loans, asset-based loans,
commercial leasing and trade financing. Other financial services
offered include mortgage banking, debit cards, brokerage services,
credit-related insurance, automated teller machines, telephone
banking, safe deposit boxes, escrow and bankruptcy deposit services,
stock option services, and trust, private banking and institutional
money management services.
We operate through two subsidiary banks as follows:
TOTAL ASSETS
GEOGRAPHIC (NUMBER OF) LOCATIONS AT JUNE 30,
NAME AT JUNE 30, 2001 2001
- --------------------------------------------------- ---------------------------------- ---------------------
(DOLLARS EXPRESSED
IN THOUSANDS)
First Bank Missouri (44) and Illinois (42) $3,244,560
First Banks America, Inc., and its subsidiary:
First Bank & Trust California (44) and Texas (6) 2,628,378
Our subsidiary banks are wholly owned by their respective
parent companies. We owned 93.16% of First Banks America, Inc., or
FBA, at June 30, 2001.
Various trusts, which were created by and are administered by
and for the benefit of Mr. James F. Dierberg, our Chairman of the
Board and Chief Executive Officer, and his adult children, own all
of our voting stock. Mr. Dierberg and his family, therefore, control
our management, policies and the election of our directors.
Primary responsibility for managing our subsidiary banking
units rests with the officers and directors of each unit. However,
in keeping with our policy, we centralize overall corporate
policies, procedures and administrative functions and provide
operational support functions for our subsidiaries. This practice
allows us to achieve various operating efficiencies while allowing
our subsidiary banking units to focus on customer service.
21
In the development of our banking franchise, we emphasize
acquiring other financial institutions as one means of achieving our
growth objectives. Acquisitions may serve to enhance our presence in
a given market, to expand the extent of our market area or to enable
us to enter new or noncontiguous markets. However, by using cash in
our acquisitions, the characteristics of the acquisition arena may,
at times, place us at a competitive disadvantage relative to other
acquirers offering stock transactions. This results from the market
attractiveness of other financial institutions' stock and the
related advantages of tax-free exchanges to the selling
shareholders. Our acquisition activities are somewhat sporadic
because we may consummate multiple transactions in a particular
period, followed by substantially less active acquisition periods.
Furthermore, the intangible assets recorded in conjunction with
these acquisitions create an immediate reduction in regulatory
capital. This reduction, as required by regulatory policy, provides
further financial disincentives to paying large premiums in cash
acquisitions.
Recognizing these facts, we follow certain patterns in our
acquisitions. First, we typically acquire several smaller
institutions, sometimes over an extended period of time, rather than
a single larger one. We attribute this approach to the constraints
imposed by the amount of funds required for a larger transaction, as
well as the opportunity to minimize the aggregate premium required
through smaller individual transactions. Secondly, in some
acquisitions, we may acquire institutions having significant
asset-quality problems, and we seek to address the risks of this
approach through pricing and other means. This diminishes their
attractiveness to other potential acquirers, and therefore reduces
the amount of acquisition premium required. Finally, we may pursue
our acquisition strategy in other geographic areas, or pursue
internal growth more aggressively because cash transactions are not
economically viable in extremely competitive acquisition markets.
During the five years ended December 31, 2000, we have
primarily concentrated our acquisitions in California, completing 11
acquisitions of banks and five purchases of branch offices, which
provided us with an aggregate of $1.41 billion in total assets and
32 banking locations as of the dates of acquisition. On October 16,
2001, we completed our acquisition of an additional bank in Agoura
Hills, California, which provided us with $101.5 million in total
assets and 2 banking locations. On October 31, 2001, we completed
our acquisition of an additional bank in Orange, California, which
provided us with $281.5 million in total assets and seven banking
locations. These acquisitions have allowed us to significantly
expand our presence throughout the state of California, improve
operational efficiencies, convey a more consistent image and quality
of service and more cohesively market and deliver our products and
services. In addition, in February 2000, we completed our purchase
of certain assets and liabilities of First Capital Group, Inc., or
FCG, a multi-state commercial leasing business headquartered in
Albuquerque, New Mexico. We are also expanding our Midwest banking
franchise in 2001 with the pending Illinois acquisitions. Management
continues to meld the acquired entities into our operations, systems
and culture. Some of the acquired institutions exhibited elements of
financial distress prior to their acquisitions, which contributed to
marginal earnings performance. Generally, these elements were the
result of asset quality problems and/or high noninterest expenses.
Following our acquisitions, various tasks are necessary to
effectively integrate the acquired entities into our business
systems and culture. While the activities required are specifically
dependent upon the individual circumstances surrounding each
acquisition, the majority of our efforts have been concentrated in
areas including, but not limited to:
* improving asset quality, which was primarily associated
with our acquisitions completed in 1996, 1997 and 1998;
* reducing unnecessary and/or excessive expenses including
personnel, data processing and certain other operational
related expenses;
* maintaining, repairing and, in some cases, refurbishing
bank premises necessitated by the deferral of such
projects by the acquired entities;
* renegotiating long-term leases which provide space in
excess of that necessary for banking activities and/or
rates in excess of current market rates, or subleasing
excess space to third parties;
* relocating branch offices which are not adequate,
conducive or convenient for banking operations; and
22
* managing actual or potential litigation that existed with
respect to acquired entities to minimize the overall costs
of negotiation, settlement or litigation.
The post-acquisition process also required the combining of
separate and distinct entities together to form a cohesive
organization with common objectives and focus. We invested
significant resources to reorganize staff, recruit personnel where
needed, and establish the direction and focus necessary for the
combined entity to take advantage of the opportunities available to
it. This investment contributed to the increases in noninterest
expense during the five years ended December 31, 2000 and the six
months ended June 30, 2001, and resulted in the creation of new
banking entities, which conveyed a more consistent image and quality
of service. The new banking entities provide a broad array of
banking products to their customers and compete effectively in their
marketplaces, even in the presence of other financial institutions
with much greater resources. While some of these modifications did
not contribute to reductions of noninterest expense, they
contributed to the commercial and retail business development
efforts of the banks, and ultimately to their overall profile to
improve future profitability.
In conjunction with our acquisition strategy, we were also
building the infrastructure necessary to accomplish our objectives
for internal growth. This process, which began in 1993, required
significant increases in the resources dedicated to commercial and
retail business development, financial service product line and
delivery systems, branch development and training, advertising and
marketing programs and administrative and operational support. In
addition, during 1999, we began an internal restructuring process
designed to better position us for future growth and opportunities
expected to become available as consolidation and changes continue
in the delivery of financial services. The magnitude of this project
was extensive and covered almost every area of our organization.
Although these efforts have primarily led to increased capital
expenditures and noninterest expenses in the short-term, we
anticipate they will lead to additional internal growth, more
efficient operations and improved profitability over the long term.
In February 1997, our initial financing subsidiary, First
Preferred Capital Trust, issued $86.25 million of 9.25% trust
preferred securities, and, in October 2000, our second financing
subsidiary, First Preferred Capital Trust II, issued $57.5 million
of 10.24% trust preferred securities. In addition, in July 1998,
FBA's financing subsidiary, First America Capital Trust, issued
$46.0 million of 8.50% trust preferred securities. The trust
preferred securities issued by our financing subsidiaries are
publicly held and included in the Nasdaq National Market. The trust
preferred securities issued by FBA's financing subsidiary are
publicly held and traded on the New York Stock Exchange. These trust
preferred securities have no voting rights except in certain limited
circumstances. We pay distributions on these trust preferred
securities quarterly in arrears on March 31, June 30, September 30
and December 31 of each year.
LENDING ACTIVITIES
Our enhanced business development resources assisted in the
realignment of certain acquired loan portfolios, which were skewed
toward loan types that reflected the abilities and experiences of
the management of the acquired entities. In order to achieve a more
diversified portfolio, to address asset-quality issues in our
portfolios and to achieve a higher interest yield on our loan
portfolio, we reduced a substantial portion of the loans which were
acquired during this time through payments, refinancing with other
financial institutions, charge-offs, and, in two instances, sales of
loans. As a result, our portfolio of one-to-four family residential
real estate loans, after reaching a maximum of $1.20 billion at
December 31, 1995, has decreased over the past four years from $1.06
billion at December 31, 1996 to $726.5 million at December 31, 2000,
and $706.9 million at June 30, 2001. Similarly, our portfolio of
consumer and installment loans, net of unearned discount, decreased
66.7% from $333.3 million at December 31, 1996 to $111.0 million at
June 30, 2001. For the six months ended June 30, 2001, the overall
decline in our consumer and installment portfolio also reflects the
sale of our student loan and credit card portfolios, the reduction
in new consumer and installment loan volumes and the repayment of
principal on our existing consumer and installment loan portfolio,
all of which are consistent with our objectives of de-emphasizing
consumer lending and further expanding commercial lending.
As these components of our loan portfolio decreased, we
replaced them with more diversified and higher yielding loans that
were internally generated by our business development function.
With our
23
acquisitions, we expanded our business development function into the
new market areas in which we were then operating. Consequently, in
spite of relatively large reductions in acquired portfolios, our
aggregate loan portfolio, net of unearned discount, increased from
$2.77 billion at December 31, 1996 to $3.00 billion, $3.58 billion,
$4.00 billion and $4.75 billion at December 31, 1997, 1998, 1999 and
2000, respectively, and to $4.86 billion at June 30, 2001.
Our expanded level of commercial lending carries with it
greater credit risk which, although managed through loan policies
and procedures, underwriting and credit administration, must be
recognized through adequate allowances for loan losses. We associate
the increased level of commercial lending activities with the
increase of $13.4 million in nonperforming loans to $53.2 million as
of December 31, 2000, compared to December 31, 1999. However, this
increase primarily results from a small number of credit
relationships that were placed on nonaccrual during the year ended
December 31, 2000, reflecting problems that are specific to these
relationships. For the six months ended June 30, 2001, our
nonperforming loans increased $7.8 million to $61.0 million as of
June 30, 2001, compared to December 31, 2000. This increase, while
partially attributable to the overall risk in our loan portfolio, is
reflective of cyclical trends experienced within the banking
industry as a result of economic slow down.
In addition to restructuring our loan portfolio, we also have
changed the composition of our deposit base. The majority of our
recent deposit development programs have been directed toward
increased transaction accounts, such as demand and savings accounts,
rather than time deposits, and have emphasized attracting more than
one account relationship with customers by cross-selling to them
through packaging various account types and offering incentives to
deposit customers on other deposit or non-deposit services. In
addition, commercial borrowers are encouraged to maintain their
operating deposit accounts with us. At December 31, 1996, total time
deposits were $1.81 billion, or 55.9% of total deposits. Although
time deposits have continued to increase to $2.31 billion at
December 31, 2000 and decreased slightly to $2.28 billion at June
30, 2001, they represented only 46.0% and 45.6% of total deposits at
December 31, 2000 and June 30, 2001, respectively.
Despite the significant expenses we incurred in the
amalgamation of the acquired entities into our corporate culture and
systems, and in the expansion of our organizational capabilities,
the earnings of the acquired entities and the increased net interest
income resulting from the transition in the composition of our loan
and deposit portfolios have contributed to improving net income. For
the years ended December 31, 2000 and 1999, net income was $56.1
million and $44.2 million, respectively, compared with $33.5
million, $33.0 million and $20.2 million in 1998, 1997 and 1996,
respectively. For the six months ended June 30, 2001, net income was
$20.3 million, compared to $29.3 million for the comparable period
in 2000. The primary factors that led to the decline in earnings for
the six months ended June 30, 2001 were declines in net interest
margin and higher operating expenses, including nonrecurring charges
associated with the establishment of a specific reserve relating to
a contingent liability and the settlement of certain litigation.
While net income declined for the six months ended June 30, 2001,
net interest income continued to increase primarily as a result of
increased earning assets generated through internal loan growth
along with our acquisitions completed during 2000. Although we
anticipate certain short-term adverse effects on our operating
results associated with acquisitions, we believe the long-term
benefits of our acquisition program will exceed the short-term
issues encountered with some acquisitions. As such, in addition to
concentrating on internal growth through continued efforts to
further develop our corporate infrastructure and product and service
offerings, we expect to continue to identify and pursue
opportunities for growth through acquisitions.
ACQUISITIONS
To enhance our banking franchise, we emphasize acquiring
other financial institutions as a means of accelerating our growth,
in order to significantly expand our presence in a given market, to
increase the extent of our market area or to enter new or
noncontiguous market areas. After we consummate an acquisition, we
expect to enhance the franchise of the acquired entity by
supplementing the marketing and business development efforts to
broaden the customer bases, strengthening particular segments of the
business or filling voids in the overall market coverage. We have
primarily utilized cash, borrowings, FBA's voting stock and the
issuance of additional trust preferred securities to meet our growth
objectives under our acquisition program.
24
During the three years ended December 31, 2000, we completed
nine acquisitions of banks and two branch office purchases. On
October 16, 2001, we completed our acquisition of an additional bank
in Agoura Hills, California, and on October 31, 2001, we completed
our acquisition of an additional bank in Orange, California. As
demonstrated below, our acquisitions during the three years ended
December 31, 2000 and in 2001 have primarily served to increase our
presence in markets that we originally entered during 1995.
Additionally, we currently have two pending acquisitions that will
be accounted for under the purchase method of accounting. Our
two pending acquisitions in Illinois will further augment our existing
markets. These transactions are summarized as follows:
LOANS, NUMBER
NET OF OF
TOTAL UNEARNED INVESTMENT BANKING
ENTITY CLOSING DATE ASSETS(1) DISCOUNT(1) SECURITIES(1) DEPOSITS(1) LOCATIONS
------ ------------ --------- ----------- ------------- ----------- ---------
(DOLLARS EXPRESSED IN THOUSANDS)
PENDING ACQUISITIONS
Union Financial Group, Ltd.
Swansea, Illinois -- $361,000 270,000 62,300 300,800 9
Plains Financial Corporation
Des Plaines, Illinois -- 255,400 149,700 72,700 220,300 4
-------- ------- ------- ------- --
$616,400 419,700 135,000 521,100 13
======== ======= ======= ======= ==
2001
BYL Bancorp
Orange, California October 31, 2001 $281,500 175,000 12,600 251,800 7
Charter Pacific Bank
Agoura Hills, California October 16, 2001 101,500 70,200 7,500 89,000 2
-------- ------- ------- ------- --
$383,000 245,200 20,100 340,800 9
======== ======= ======= ======= ==
2000
The San Francisco Company
San Francisco, California December 31, 2000 $183,800 115,700 38,300 137,700 1
Millennium Bank
San Francisco, California December 29, 2000 117,000 81,700 21,100 104,200 2
Commercial Bank of San
Francisco
San Francisco, California October 31, 2000 155,600 97,700 45,500 109,400 1
Bank of Ventura
Ventura, California August 31, 2000 63,800 39,400 15,500 57,300 1
First Capital Group, Inc.
Albuquerque, New Mexico February 29, 2000 64,600 64,600 -- -- 1
Lippo Bank
San Francisco, California February 29, 2000 85,300 40,900 37,400 76,400 3
-------- ------- ------- ------- --
$670,100 440,000 157,800 485,000 9
======== ======= ======= ======= ==
1999
Brentwood Bank of California
Malibu, California branch
office September 17, 1999 $ 23,600 6,300 -- 17,300 1
Century Bank
Beverly Hills, California August 31, 1999 156,000 94,800 26,100 132,000 6
Redwood Bancorp
San Francisco, California March 4, 1999 183,900 134,400 34,400 162,900 4
-------- ------- ------- ------- --
$363,500 235,500 60,500 312,200 11
======== ======= ======= ======= ==
1998
Republic Bank
Torrance, California September 15, 1998 $124,100 97,900 7,500 117,200 3
Bank of America
Solvang, California branch
office March 19, 1998 15,500 -- -- 15,500 1
Pacific Bay Bank
San Pablo, California February 2, 1998 38,300 29,700 232 35,200 1
-------- ------- ------- ------- --
$177,900 127,600 7,732 167,900 5
======== ======= ======= ======= ==
<FN>
- --------------------
(1) For pending acquisitions, these figures are as of June 30, 2001. For
closed acquisitions, these figures are as of the respective closing date.
25
We funded these acquisitions from available cash, proceeds
from the sales and maturities of available-for-sale investment
securities, borrowings under our $120.0 million revolving credit
line with a group of unaffiliated banks and the proceeds of the
issuance of trust preferred securities.
PENDING ACQUISITIONS
On July 20, 2001, we executed a definitive agreement with
Union Financial Group, Ltd., or UFG, providing for the acquisition
of UFG for a total purchase price of approximately $26.8 million.
Under the terms of the agreement, the common shareholders of UFG
will receive $11.00 per share in cash, or a total of approximately
$18.0 million, subject to a $1.60 per common share escrow to cover
certain contingent liabilities. The shareholders of Series D
preferred stock will receive the stated value of $100,000 per share.
UFG is headquartered in Swansea, Illinois, and operates nine banking
offices located in St. Clair, Madison, Jersey and Macoupin counties.
At June 30, 2001, UFG had $361.0 million in total assets, $270.0
million in loans, net of unearned discount, $62.3 million in
investment securities and $300.8 million in deposits. We expect this
transaction, which is subject to regulatory approvals, will be
completed during the fourth quarter of 2001.
On August 2, 2001, we executed a definitive agreement with
Plains Financial Corporation, or PFC, providing for the acquisition
of PFC. Under the terms of the agreement, the shareholders of PFC
will receive $293.07 per share in cash, or a total of approximately
$36.5 million. PFC is headquartered in Des Plaines, Illinois, and
has a total of three banking offices in Des Plaines, and one banking
office in Elk Grove, Illinois. At June 30, 2001, PFC had $255.4
million in total assets, $149.7 million in loans, net of unearned
discount, $72.7 million in investment securities and $220.3 million
in deposits. We expect this transaction, which is subject to
regulatory approvals, will be completed during the first quarter of
2002.
CLOSED ACQUISITIONS
On October 31, 2001, FBA completed its acquisition of BYL
Bancorp, or BYL, and its wholly owned banking subsidiary, BYL Bank
Group. Under the terms of the agreement, the shareholders of BYL
received $18.50 per share in cash, or a total of approximately $49.0
million. BYL was headquartered in Orange, California, and had six
branches located in Orange and Riverside counties. At the time of
the transaction, BYL had $281.5 million in total assets, $175.0
million in loans, net of unearned discount, $12.6 million in
investment securities and $251.8 million in deposits.
On October 16, 2001, FBA completed its acquisition of Charter
Pacific Bank, or Charter Pacific, Agoura Hills, California, in
exchange for $19.3 million in cash. Charter Pacific was
headquartered in Agoura Hills, California, and had one other branch
office in Beverly Hills, California. At the time of the transaction,
Charter Pacific had $101.5 million in total assets, $70.2 million in
loans, net of unearned discount, $7.5 million in investment
securities and $89.0 million in deposits. Charter Pacific was merged
with and into First Bank & Trust at the time of the transaction.
FINANCIAL CONDITION AND AVERAGE BALANCES
Our average total assets were $5.85 billion for the six
months ended June 30, 2001, compared to $5.04 billion for the six
months ended June 30, 2000. Our total assets were $5.90 billion and
$5.88 billion at June 30, 2001 and December 31, 2000, respectively.
The increase in total assets at June 30, 2001 is primarily
attributable to internal loan growth, bank premises and equipment,
net of depreciation and amortization, and derivative instruments
partially offset by an anticipated level of account attrition
associated with our acquisitions of Commercial Bank of San
Francisco, Millennium Bank and Bank of San Francisco, which were
completed during the fourth quarter of 2000. Loans, net of unearned
discount, increased by $109.7 million, which is further discussed
under "-- Loans and Allowance for Loan Losses." Offsetting the
increases in these asset categories was a decrease in investment
securities of $178.5 million to $385.0 million at June 30, 2001 from
$563.5 million at December 31, 2000. We attribute the decrease in
investment securities primarily to the liquidation of certain
investment securities held by FBA and a higher than normal level of
investment security calls experienced during the six months ended
June 30,
26
2001, resulting from the general decline in interest rates. The
funds generated from the reduction of investment securities were
utilized to fund loan growth, with the remaining funds being
temporarily invested in cash and cash equivalents, resulting in an
increase of $106.3 million in federal funds sold to $133.1 million
at June 30, 2001 from $26.8 million at December 31, 2000. The
increase in assets is also due to derivative instruments of $27.4
million at June 30, 2001, resulting solely from the implementation
of Statement of Financial Accounting Standards, or SFAS, No. 133,
Accounting for Derivative Instruments and Hedging Activities, as
amended by SFAS No. 137 -- Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133, an Amendment of FASB Statement No. 133, and SFAS
No. 138 -- Accounting for Derivative Instruments and Hedging
Activities, an Amendment of FASB Statement No. 133. In addition,
bank premises and equipment, net of depreciation and amortization,
increased $11.0 million to $125.8 million at June 30, 2001 from
$114.8 million at December 31, 2000. We primarily attribute this
increase to our recent acquisitions as well as the purchase and
remodeling of a new operations center and corporate administrative
building. Total deposits decreased by $20.0 million to $4.99 billion
at June 30, 2001 from $5.01 billion at December 31, 2000, which
reflects an anticipated level of account attrition associated with
our acquisitions in the fourth quarter of 2000. Short-term
borrowings increased by $60.6 million to $201.2 million at June 30,
2001 from $140.6 million at December 31, 2000. This increase
reflects a slight increase in securities sold under agreements to
repurchase and a $50.0 million Federal Home Loan Bank advance drawn
as an additional source of funds principally for the substantial
increase in loans held for sale as the general reductions in
interest rates led to substantial refinancing of single family
mortgage loans. Our note payable decreased by $48.5 million to $34.5
million at June 30, 2001 from $83.0 million at December 31, 2000,
and was primarily funded with dividends from our subsidiaries. In
addition, the merger of our former subsidiary, First Bank & Trust,
with Bank of San Francisco, effective March 29, 2001, allowed us to
further reduce our note payable through a capital reduction of $23.0
million. In conjunction with this merger, Bank of San Francisco was
renamed First Bank & Trust. In addition, accrued expenses and other
liabilities decreased by $28.6 million to $26.3 million at June 30,
2001 from $54.9 million at December 31, 2000. We attribute the
majority of this decrease to our quarterly tax payments and the
timing of certain other routine payments.
Our average total assets were $5.15 billion for the year
ended December 31, 2000, compared to $4.66 billion and $4.29 billion
for the years ended December 31, 1999 and 1998, respectively. We
attribute the increase of $491.5 million in total average assets for
2000 primarily to our acquisitions completed during 2000, which
provided total assets of $670.1 million, and internal loan growth
resulting from the continued expansion and development of our
business development staff. The acquisitions of Millennium Bank and
The San Francisco Company were completed on December 29, 2000 and
December 31, 2000, respectively, and therefore did not have a
significant impact on our average total assets for the year ended
December 31, 2000. These acquisitions alone provided $300.8 million,
or 61.2%, of the assets we acquired in 2000. Similarly, we attribute
the increase of $377.6 million in total average assets for 1999
primarily to:
* our acquisitions of Redwood Bancorp and Century Bank,
which provided total assets of $183.9 million and $156.0
million, respectively;
* our purchase of the deposit accounts of the Malibu,
California banking location of Brentwood Bank of
California;
* internal loan growth; and
* the issuance of trust preferred securities in July 1998 by
FBA's financing subsidiary.
The increase in assets for 2000 was primarily funded by an
increase in total average deposits of $412.0 million to $4.48
billion for the year ended December 31, 2000, a decrease in average
investment securities of $22.5 million to $431.9 million for the
year ended December 31, 2000, and an increase of $18.7 million in
average short-term borrowings to $106.1 million for the year ended
December 31, 2000. We utilized the majority of the funds generated
from our deposit growth to fund a portion of our loan growth, and
the remaining funds were temporarily invested in federal funds sold,
resulting in an increase
27
in average federal funds sold of $15.0 million to $64.5 million for
the year ended December 31, 2000. Similarly, we funded the increase
in assets for 1999 by an increase in total average deposits of
$283.3 million to $4.06 billion for the year ended December 31,
1999, an increase in average short-term borrowings of $26.2 million
and a decrease in average investment securities of $221.3 million
during 1999.
Loans, net of unearned discount, averaged $4.84 billion and
$4.18 billion for the six months ended June 30, 2001 and 2000,
respectively. The increase in loans is primarily attributable to an
increase of $120.7 million in our loans held for sale portfolio to
$189.8 million at June 30, 2001 from $69.1 million at December 31,
2000. We primarily attribute this increase to be the result of a
significantly higher volume of residential mortgage loans
originated, including both new fundings as well as refinancings, as
a result of declining interest rates experienced during the first
six months of 2001. This increase was partially offset by a decline
in our consumer and installment portfolio, net of unearned discount,
to $111.0 million at June 30, 2001 from $174.3 million at December
31, 2000. This decrease reflects the sale of our student loan and
credit card portfolios, reductions in new loan volumes and the
repayment of principal on our existing portfolio, and is also
consistent with our objectives of de-emphasizing consumer lending
and expanding commercial lending. In addition, the overall increase
in loans, net of unearned discount, was further offset by
anticipated attrition in the loan portfolios associated with our
acquisitions completed during the fourth quarter of 2000.
Loans, net of unearned discount, averaged $4.29 billion,
$3.81 billion and $3.25 billion for the years ended December 31,
2000, 1999 and 1998, respectively. The acquisitions we completed
during 2000 and 1999 provided loans, net of unearned discount, of
$440.0 million and $235.5 million, respectively. In addition to the
growth provided by these acquisitions, for 2000, $360.4 million of
net loan growth was provided by corporate banking business
development, consisting of increases of $192.9 million of
commercial, financial and agricultural loans and $175.9 million of
commercial real estate loans, offset by a decrease of $8.4 million
of real estate construction and land development loans. These
overall increases were partially offset by continuing reductions in
consumer and installment loans, net of unearned discount, consisting
primarily of indirect automobile loans, which decreased $64.6
million to $174.3 million at December 31, 2000. While residential
real estate loans have continued to decline throughout the past
three years, these loans increased slightly in 2000 by $20.1
million, primarily as a result of significant volume experienced
during the fourth quarter associated with refinancing activity.
These changes result from the focus we have placed on our business
development efforts and the portfolio repositioning which we began
in 1995. This repositioning provided for substantially all of our
residential mortgage loan production to be sold in the secondary
mortgage market and the origination of indirect automobile loans to
be substantially reduced.
Investment securities averaged $428.8 million and $440.4
million for the six months ended June 30, 2001 and 2000,
respectively. Investment securities averaged $431.9 million, $454.4
million and $675.7 million for the years ended December 31, 2000,
1999 and 1998, respectively, reflecting decreases of $22.5 million
and $221.3 million for the years ended December 31, 2000 and 1999,
respectively. We attribute these decreases primarily to the
liquidation of certain acquired investment securities, to a higher
than normal level of calls experienced during the first six months
of 2001 resulting from the general decline in interest rates and to
sales of investment securities available for sale necessary to
provide an additional source of funds for our loan growth. The
investment securities that we obtained in conjunction with our
acquisitions during 1999 and 2000 and that we retained in our
portfolio partially offset the decreases.
We use deposits as our primary funding source and acquire
them from a broad base of local markets, including both individual
and corporate customers. Deposits averaged $4.96 billion and $4.38
billion for the six months ended June 30, 2001 and 2000,
respectively, and $4.48 billion, $4.06 billion and $3.78 billion for
the years ended December 31, 2000, 1999 and 1998, respectively. We
credit the increases primarily to our acquisitions completed during
the respective periods and the expansion of our deposit product and
service offerings available to our customer base. The overall
increase was partially offset by the divestiture of certain branches
in 1999 and 2000, which resulted in a reduction in First Bank's
deposit base of approximately $54.8 million and $8.8 million,
respectively.
28
During July 1998, FBA's financing subsidiary issued $46.0
million of 8.50% trust preferred securities. Proceeds from this
offering, net of underwriting fees and offering expenses, were
approximately $44.0 million and were used to reduce borrowings, to
support possible repurchases of our common stock from time to time
and for general corporate purposes. We temporarily invested the
remaining proceeds in interest-bearing deposits and subsequently
used them to fund our acquisition of Redwood Bancorp completed in
March 1999. In addition, during October 2000, our second financing
subsidiary issued $57.5 million of 10.24% trust preferred
securities. Proceeds from this offering, net of underwriting fees
and offering expenses, were approximately $55.1 million and were
used to reduce borrowings and subsequently to partially fund our
acquisitions of Commercial Bank of San Francisco in October 2000 and
Millennium Bank in December 2000.
Stockholders' equity averaged $378.9 million and $305.9
million for the six months ended June 30, 2001 and 2000,
respectively, and $321.9 million, $279.8 million and $245.6 million
for the years ended December 31, 2000, 1999 and 1998, respectively.
The increase in stockholders' equity for the six months ended
June 30, 2001 is primarily attributable to net income of $20.3
million and an increase in accumulated other comprehensive income of
$23.3 million. The increase in accumulated other comprehensive
income reflects an increase of $13.8 million associated with our
derivative financial instruments as accounted for under SFAS 133, as
amended, and an increase of $9.5 million resulting from the change
in unrealized gains and losses on available-for-sale investment
securities. We associate the increase in stockholders' equity for
2000 primarily to net income of $56.1 million and a $3.7 million
increase in accumulated other comprehensive income, resulting from
the change in unrealized gains and losses on available-for-sale
investment securities. The increase was partially offset by FBA's
stock repurchases during 2000 and dividends paid on our Class A and
Class B preferred stock. We associate the increase for 1999
primarily to net income of $44.2 million and a reduction of the
deferred tax asset valuation reserve of $811,000 relating to the
utilization of tax net operating losses incurred by certain
subsidiary banks prior to completing quasi-reorganizations. The
increase was partially offset by a $9.4 million reduction in other
comprehensive income, resulting from the change in unrealized gains
and losses on available-for-sale investment securities, FBA's stock
repurchases during 1999 and dividends paid on our Class A and Class
B preferred stock.
29
The following table sets forth, on a tax-equivalent basis,
certain information relating to our average balance sheets, and
reflects the average yield earned on interest-earning assets, the
average cost of interest-bearing liabilities and the resulting net
interest income for the six months ended June 30, 2001 and 2000:
SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------------------------
2001 2000
------------------------------------ ------------------------------------
INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
---------- -------- ------ ---------- -------- ------
(DOLLARS EXPRESSED IN THOUSANDS)
ASSETS
Interest-earning assets:
Loans:(1)(2)(3)
Taxable.................................. $4,832,114 212,635 8.87% $4,171,402 185,527 8.94%
Tax-exempt(4)............................ 8,074 434 10.84 9,374 460 9.87
Investment securities:
Taxable.................................. 410,287 14,354 7.06 421,437 13,537 6.46
Tax-exempt(4)............................ 18,530 718 7.81 18,968 742 7.87
Federal funds sold and other............... 57,511 1,655 5.80 70,222 2,033 5.82
---------- ------- ---------- -------
Total interest-earning assets.......... 5,326,516 229,796 8.70 4,691,403 202,299 8.67
------- -------
Nonearning assets............................ 524,469 348,529
---------- ----------
Total assets........................... $5,850,985 $5,039,932
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand deposits......... $ 466,634 3,480 1.50% $ 422,512 2,885 1.37%
Savings deposits......................... 1,452,496 27,525 3.82 1,241,385 24,070 3.90
Time deposits(3)......................... 2,322,546 68,472 5.95 2,117,271 56,077 5.33
---------- ------- ---------- -------
Total interest-bearing deposits........ 4,241,676 99,477 4.73 3,781,168 83,032 4.42
Short-term borrowings...................... 166,720 3,662 4.43 96,109 2,515 5.26
Notes payable and other.................... 52,753 1,773 6.78 66,869 2,511 7.55
---------- ------- ---------- -------
Total interest-bearing liabilities..... 4,461,149 104,912 4.74 3,944,146 88,058 4.49
------- -------
Noninterest-bearing liabilities:
Demand deposits............................ 714,891 602,459
Other liabilities.......................... 296,085 187,437
---------- ----------
Total liabilities...................... 5,472,125 4,734,042
Stockholders' equity......................... 378,860 305,890
---------- ----------
Total liabilities and stockholders'
equity................................ $5,850,985 $5,039,932
========== ==========
Net interest income.......................... 124,884 114,241
======= =======
Interest rate spread......................... 3.96 4.18
Net interest margin.......................... 4.73% 4.90%
===== ====
<FN>
- ----------------------
(1) For purposes of these computations, nonaccrual loans are included in the
average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Interest income/expense includes the effects of interest rate exchange
agreements.
(4) Information is presented on a tax-equivalent basis assuming a tax rate of
35%. The tax-equivalent adjustments were approximately $403,000 and
$421,000 for the six months ended June 30, 2001 and 2000, respectively.
30
The following table sets forth, on a tax-equivalent basis,
certain information relating to our average balance sheet, and
reflects the average yield earned on interest-earning assets, the
average cost of interest-bearing liabilities and the resulting net
interest income for the periods indicated.
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
2000 1999
-------------------------------- --------------------------------
INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
---------- -------- ------ ---------- -------- ------
(DOLLARS EXPRESSED IN THOUSANDS)
ASSETS
Interest-earning assets:
Loans:(1)(2)(3)
Taxable................ $4,281,290 389,687 9.10% $3,805,351 322,703 8.48%
Tax-exempt(4).......... 9,668 992 10.26 7,157 775 10.83
Investment securities:
Taxable................ 412,932 27,331 6.62 435,189 26,206 6.02
Tax-exempt(4).......... 18,996 1,478 7.78 19,247 1,442 7.49
Federal funds sold and
other................... 67,498 4,202 6.23 51,342 2,732 5.32
---------- ------- ---------- -------
Total interest-
earning assets...... 4,790,384 423,690 8.84 4,318,286 353,858 8.19
------- -------
Nonearning assets.......... 364,333 344,942
---------- ----------
Total assets......... $5,154,717 $4,663,228
========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Interest-bearing
deposits:
Interest-bearing demand
deposits.............. $ 421,986 5,909 1.40% $ 391,892 5,098 1.30%
Savings deposits....... 1,279,378 51,656 4.04 1,220,425 44,101 3.61
Time deposits(3)....... 2,139,305 120,257 5.62 1,899,218 101,653 5.35
---------- ------- ---------- -------
Total interest-
bearing deposits.... 3,840,669 177,822 4.63 3,511,535 150,852 4.30
Short-term borrowings.... 106,123 5,881 5.54 87,374 4,220 4.83
Notes payable and other.. 51,897 3,976 7.66 56,376 3,629 6.44
---------- ------- ---------- -------
Total interest-
bearing liabilities. 3,998,689 187,679 4.69 3,655,285 158,701 4.34
------- -------
Noninterest-bearing
liabilities:
Demand deposits.......... 634,886 552,029
Other liabilities........ 199,215 176,102
---------- ----------
Total liabilities.... 4,832,790 4,383,416
Stockholders' equity....... 321,927 279,812
---------- ----------
Total liabilities and
stockholders'
equity.............. $5,154,717 $4,663,228
========== ==========
Net interest income........ 236,011 195,157
======= =======
Interest rate spread....... 4.15 3.85
Net interest margin........ 4.93% 4.52%
===== =====
YEARS ENDED DECEMBER 31,
--------------------------------
1998
--------------------------------
INTEREST
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
---------- -------- ------
(DOLLARS EXPRESSED IN THOUSANDS)
ASSETS
Interest-earning assets:
Loans:(1)(2)(3)
Taxable................ $3,243,183 283,661 8.75%
Tax-exempt(4).......... 7,536 794 10.54
Investment securities:
Taxable................ 657,385 39,898 6.07
Tax-exempt(4).......... 18,318 1,515 8.27
Federal funds sold and
other................... 49,362 2,800 5.67
---------- -------
Total interest-
earning assets...... 3,975,784 328,668 8.27
-------
Nonearning assets.......... 309,811
----------
Total assets......... $4,285,595
==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Interest-bearing
deposits:
Interest-bearing demand
deposits.............. $ 357,463 5,135 1.44%
Savings deposits....... 1,076,524 42,591 3.96
Time deposits(3)....... 1,882,329 108,019 5.74
---------- -------
Total interest-
bearing deposits.... 3,316,316 155,745 4.70
Short-term borrowings.... 61,178 2,959 4.84
Notes payable and other.. 50,718 3,475 6.85
---------- -------
Total interest-
bearing liabilities. 3,428,212 162,179 4.73
-------
Noninterest-bearing
liabilities:
Demand deposits.......... 463,939
Other liabilities........ 147,849
----------
Total liabilities.... 4,040,000
Stockholders' equity....... 245,595
----------
Total liabilities and
stockholders'
equity.............. $4,285,595
==========
Net interest income........ 166,489
=======
Interest rate spread....... 3.54
Net interest margin........ 4.19%
=====
<FN>
- ----------------------
(1) For purposes of these computations, nonaccrual loans are included in the
average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Interest income/expense includes the effects of interest rate exchange
agreements.
(4) Information is presented on a tax-equivalent basis assuming a tax rate of
35%. The tax-equivalent adjustments were approximately $864,000, $776,000
and $808,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
31
The following table indicates, on a tax-equivalent basis, the
changes in interest income and interest expense which are
attributable to changes in average volume and changes in average
rates, in comparison with the preceding year. The change in interest
due to the combined rate/volume variance has been allocated to rate
and volume changes in proportion to the dollar amounts of the change
in each.
INCREASE (DECREASE) ATTRIBUTABLE TO CHANGE IN:
------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
COMPARED TO COMPARED TO COMPARED TO
SIX MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
--------------------------- -------------------------- -----------------------------
NET NET NET
VOLUME RATE CHANGE VOLUME RATE CHANGE VOLUME RATE CHANGE
------- ------ ------ ------ ------ ------ ------- ------- -------
(DOLLARS EXPRESSED IN THOUSANDS)
Interest earned on:
Loans:(1)(2)(3)
Taxable....................... $31,396 (4,288) 27,108 42,273 24,711 66,984 48,009 (8,967) 39,042
Tax-exempt(4)................. (122) 96 (26) 260 (43) 217 (41) 22 (19)
Investment securities:
Taxable....................... (940) 1,757 817 (1,389) 2,514 1,125 (13,366) (326) (13,692)
Tax-exempt(4)................. (20) (4) (24) (19) 55 36 74 (147) (73)
Federal funds sold.............. (338) (373) (711) 881 506 1,387 161 (174) (13)
Other........................... 14 319 333 75 8 83 (59) 4 (55)
------- ------ ------ ------ ------ ------ ------- ------- -------
Total interest income....... 29,990 (2,493) 27,497 42,081 27,751 69,832 34,778 (9,588) 25,190
------- ------ ------ ------ ------ ------ ------- ------- -------
Interest paid on:
Interest-bearing demand
deposits....................... 312 283 595 405 406 811 480 (517) (37)
Savings deposits................ 4,856 (1,401) 3,455 2,180 5,375 7,555 5,445 (3,935) 1,510
Time deposits(3)................ 5,635 6,760 12,395 13,296 5,308 18,604 970 (7,336) (6,366)
Short-term borrowings........... 2,258 (1,111) 1,147 986 675 1,661 1,267 (6) 1,261
Notes payable and other......... (498) (240) (738) (304) 651 347 371 (217) 154
------- ------ ------ ------ ------ ------ ------- ------- -------
Total interest expense...... 12,563 4,291 16,854 16,563 12,415 28,978 8,533 (12,011) (3,478)
------- ------ ------ ------ ------ ------ ------- ------- -------
Net interest income......... $17,427 (6,784) 10,643 25,518 15,336 40,854 26,245 2,423 28,668
======= ====== ====== ====== ====== ====== ======= ======= =======
<FN>
- ----------------------
(1) For purposes of these computations, nonaccrual loans are included in the
average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Interest income/expense includes the effect of interest rate exchange
agreements.
(4) Information is presented on a tax-equivalent basis assuming a tax rate
of 35%.
NET INTEREST INCOME
The primary source of our income is net interest income,
which is the difference between the interest earned on our
interest-earning assets and the interest paid on our interest-
bearing liabilities. Net interest income (expressed on a tax-
equivalent basis) increased to $124.9 million, or 4.73% of
average interest-earning assets, for the six months ended June 30,
2001, from $114.2 million, or 4.90% of average interest-earning
assets, for the comparable period in 2000. We credit the increased
net interest income primarily to the net interest-earning assets
provided by our aforementioned acquisitions completed during 2000,
internal loan growth, and earnings on our interest rate swap
agreements that we entered into in conjunction with our risk
management program. The overall increase in net interest income was
partially offset by reductions in the prime lending rate that
occurred during the first six months of 2001. Net interest income
(expressed on a tax-equivalent basis) increased to $236.0 million,
or 4.93% of average interest-earning assets, for the year ended
December 31, 2000, from $195.2 million, or 4.52% of interest-
earning assets, and $166.5 million, or 4.19% of interest-earning
assets, for the years ended December 31, 1999 and 1998,
respectively. We credit the increased net interest income for 2000
primarily to the net interest-earning assets provided by our
acquisitions, internal loan growth and increases in the prime
lending rate which resulted in increased yields on interest-earning
assets. During 2000, the cost of interest-bearing liabilities
increased with prevailing interest rates. However, since this
increase was less
32
dramatic than the increase in earnings on interest-earning assets,
it contributed to an improvement in net interest margins.
Average loans, net of unearned discount, increased by $660.0
million to $4.84 billion for the six months ended June 30, 2001,
from $4.18 billion for the comparable period in 2000. The yield on
our loan portfolio decreased to 8.88% for the six months ended June
30, 2001, in comparison to 8.95% for the comparable period in 2000.
The increase in the cost of deposits, in conjunction with the
decline in the yield on our loan portfolio, was the major
contributor to the decline in our net interest rate margin of 17
basis points for the six months ended June 30, 2001, from the
comparable period in 2000. We attribute the decline in yields and
our net interest margin primarily to the continued decreases in the
prime lending rate. During the period from December 31, 2000 through
June 30, 2001, the Federal Reserve Board decreased the discount rate
several times, resulting in six decreases in the prime rate of
interest from 9.50% to 6.75%. This is reflected not only in the rate
of interest earned on loans that are indexed to the prime rate, but
also in other assets and liabilities which either have variable or
adjustable rates, or which matured or repriced during this period.
The reduced level of interest income earned on our loan portfolio as
a result of declining interest rates was partially mitigated by the
earnings associated with our interest rate swap agreements. These
agreements provided income of $5.7 million for the six months ended
June 30, 2001, in comparison to expense of $1.7 million incurred for
the comparable period in 2000.
Average total loans, net of unearned discount, increased by
$480.0 million to $4.29 billion for the year ended December 31,
2000, from $3.81 billion and $3.25 billion for the years ended
December 31, 1999 and 1998, respectively. During the period from
June 30, 1999 through December 31, 2000, the Federal Reserve Board
increased the discount rate several times, resulting in six
increases in the prime rate of interest from 7.75% to 9.50%. As a
result, the yield on our loan portfolio increased to 9.10% for the
year ended December 31, 2000, from 8.48% for the year ended December
31, 1999, principally as the result of an increase in prevailing
interest rates. However, the improved yield on our loan portfolio
was partially offset by the expense associated with our interest
rate swap agreements that we entered into in conjunction with our
risk management program. Although our net interest margin improved
over the three years ended December 31, 2000, the yield on our loan
portfolio declined to 8.48% for the year ended December 31, 1999, in
comparison to 8.75% for the year ended December 31, 1998. This
reduction primarily resulted from the overall decline in prevailing
interest rates that occurred during the fourth quarter of 1998. In
addition, increased competition within our market areas led to
reduced lending rates. The effect of the reduced yield on our loan
portfolio was partially mitigated in 1999 by the earnings impact of
our interest rate swap agreements as well as:
* the reduction of First Bank's deposit base associated with
the divested branches, which was primarily concentrated in
certificates of deposit; and
* a decrease in the cost of interest-bearing liabilities to
4.34% from 4.73% for the years ended December 31, 1999 and
1998, respectively.
The aggregate weighted average rate paid on our deposit
portfolio increased to 4.73% for the six months ended June 30, 2001,
compared to 4.42% for the comparable period in 2000. The overall
increase reflects increased rates paid to attract and retain
deposits as a result of generally increasing interest rates during
the first six months of 2000 compared to generally decreasing
interest rates during the first six months of 2001, and the high
level of competition within our market areas. For the years ended
December 31, 2000, 1999 and 1998, the aggregate weighted average
rate paid on our interest-bearing deposit portfolio was 4.63%, 4.30%
and 4.70%, respectively. The increase for 2000 reflects increased
rates that we paid to provide a funding source for continued loan
growth, whereas the decrease for 1999 primarily reflects our ongoing
realignment of the deposit portfolio and the reduction of the
deposit base of First Bank. The reduced rates paid on our deposit
portfolio in 1999 were partially offset by increased expense
associated with our interest rate swap agreements. As further
discussed under "-- Interest Rate Risk Management," for 1999 and
1998, the increased expense associated with our derivative financial
instruments resulted from the liquidation of a portion of the
underlying interest-bearing liabilities. This reduction in
interest-bearing liabilities, primarily associated with our branch
divestitures, resulted in the
33
recognition of a portion of the related deferred losses on our
previously terminated interest rate swap agreements.
The aggregate weighted average rate paid on our note payable
decreased to 6.78% for the six months ended June 30, 2001, compared
to 7.55% for the comparable period in 2000, and increased to 7.66%
for the year ended December 31, 2000, from 6.44% and 6.85% for the
years ended December 31, 1999 and 1998, respectively, reflecting
changing market interest rates during these periods. Amounts
outstanding under our $120.0 million revolving line of credit with a
group of unaffiliated banks bear interest at the lead bank's
corporate base rate or, at our option, at the Eurodollar rate plus a
margin determined by the outstanding balance and our profitability.
Thus, the revolving credit line represents a relatively high-cost
funding source, although it has been mitigated by the continued
reductions in the prime lending rate during the first six months of
2001, so that increased advances under the revolving credit line
have the effect of increasing our weighted average rate of
non-deposit liabilities. During 2000, we utilized the note payable
to fund our acquisitions of Millennium Bank and Bank of San
Francisco, thus resulting in a higher level of borrowings occurring
during the fourth quarter of 2000.
INTEREST RATE RISK MANAGEMENT
For financial institutions, the maintenance of a satisfactory
level of net interest income is a primary factor in achieving
acceptable income levels. However, the maturity and repricing
characteristics of the institution's loan and investment portfolios,
relative to those within its deposit structure, may differ
significantly. The nature of the loan and deposit markets within
which a financial institution operates, and its objectives for
business development within those markets at any point in time
influence these characteristics. In addition, the ability of
borrowers to repay loans and depositors to withdraw funds prior to
stated maturity dates introduces divergent option characteristics
which operate primarily as interest rates change. These factors
cause various elements of the institution's balance sheet to react
in different manners and at different times relative to changes in
interest rates, thereby leading to increases or decreases in net
interest income over time. Depending upon the direction and velocity
of interest rate movements and their effect on the specific
components of the institution's balance sheet, the effects on net
interest income can be substantial. Consequently, managing a
financial institution requires establishing effective control of the
exposure of the institution to changes in interest rates.
We manage our interest rate risk by:
* maintaining an Asset Liability Committee, or ALCO,
responsible to our Board of Directors, to review the
overall interest rate risk management activity and approve
actions taken to reduce risk;
* maintaining an effective simulation model to determine our
exposure to changes in interest rates;
* coordinating the lending, investing and deposit-generating
functions to control the assumption of interest rate risk;
and
* employing various financial instruments, including
derivatives, to offset inherent interest rate risk when it
becomes excessive. The objective of these procedures is to
limit the adverse impact that changes in interest rates
may have on our net interest income.
The ALCO has overall responsibility for the effective
management of interest rate risk and the approval of policy
guidelines. The ALCO includes our Chairman and Chief Executive
Officer, President and the senior executives of investments, credit,
banking support and finance, and certain other officers. The Asset
Liability Management Group, which monitors interest rate risk,
supports the ALCO, prepares analyses for review by the ALCO and
implements actions which are either specifically directed by the
ALCO or established by policy guidelines.
In managing sensitivity, we strive to reduce the adverse
impact on earnings by managing interest rate risk within internal
policy constraints. Regarding rate sensitivity, our policy is to
manage exposure to
34
potential risks associated with changing interest rates by
maintaining a balance sheet posture in which annual net interest
income is not significantly impacted by reasonably possible
near-term changes in interest rates. To measure the effect of
interest rate changes, we project our net income over two one-year
horizons on a pro forma basis. The analysis assumes various
scenarios for increases and decreases in interest rates including
both instantaneous and gradual, and parallel and non-parallel shifts
in the yield curve, in varying amounts. For purposes of arriving at
reasonably possible near-term changes in interest rates, we include
scenarios based on actual changes in interest rates, which have
occurred over a two-year period, simulating both a declining and
rising interest rate scenario. We are "asset-sensitive," and our
simulation model indicates a loss of projected net income should
interest rates decline. While a decline in interest rates of less
than 100 basis points has a relatively minimal impact on our net
interest income, a decline in interest rates of 100 basis points
indicates a projected pre-tax loss of approximately 1.5% of net
interest income, and a decline in interest rates of 200 basis points
indicates a pre-tax projected loss of approximately 7.0% of net
interest income, based on assets and liabilities at June 30, 2001.
As previously discussed, we utilize derivative financial
instruments to assist in our management of interest rate sensitivity
by modifying the repricing, maturity and option characteristics of
certain assets and liabilities. The derivative financial instruments
we hold are summarized as follows:
JUNE 30, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
------------------------ ------------------------ ----------------------
NOTIONAL CREDIT NOTIONAL CREDIT NOTIONAL CREDIT
AMOUNT EXPOSURE AMOUNT EXPOSURE AMOUNT EXPOSURE
---------- -------- ---------- -------- -------- --------
(DOLLARS EXPRESSED IN THOUSANDS)
Cash flow hedges................. $1,050,000 1,971 1,055,000 3,449 955,000 3,349
Fair value hedges................ 250,000 5,553 50,000 758 -- --
Interest rate floor agreements... 310,000 5,631 35,000 6 35,000 13
Interest rate cap agreements..... 450,000 1,976 450,000 3,753 10,000 26
Interest rate lock commitments... 22,000 -- 4,100 -- 4,600 --
Forward commitments to sell
mortgage-backed securities..... 101,000 -- 32,000 -- 33,000 --
========== ===== ========== ===== ======= =====
The notional amounts of derivative financial instruments do
not represent amounts exchanged by the parties and, therefore, are
not a measure of our credit exposure through the use of these
instruments. The credit exposure represents the accounting loss we
would incur in the event the counterparties failed completely to
perform according to the terms of the derivative financial
instruments and the collateral held to support the credit exposure
was of no value.
During the six months ended June 30, 2001, the net interest
income realized on our derivative financial instruments was $5.7
million, in comparison to net interest expense of $1.7 million for
the comparable period in 2000. During 2000, the net interest expense
realized on our derivative financial instruments was $4.7 million,
in comparison to net interest income of $430,000 in 1999.
CASH FLOW HEDGES
Previously, we utilized interest rate swap agreements to
extend the repricing characteristics of certain interest-bearing
liabilities to more closely correspond with our assets, with the
objective of stabilizing cash flow, and accordingly, net interest
income, over time. These swap agreements were terminated in July
1995, November 1996 and July 1997 due to a change in the composition
of our balance sheet, primarily driven by the significant decline in
interest rates experienced during 1995, and the resulting increase
in the principal prepayments of residential mortgage loans. The net
interest expense associated with these agreements, consisting
primarily of amortization of deferred losses, was $5.7 million for
the year ended December 31, 1999. There were no remaining
unamortized deferred losses on the terminated swap agreements at
December 31, 1999.
During 1998, we entered into $280.0 million notional amount
of interest rate swap agreements to effectively lengthen the
repricing characteristics of certain interest-earning assets to
correspond more
35
closely with their funding source with the objective of stabilizing
cash flow, and accordingly, net interest income, over time. The swap
agreements, which are designated as cash flow hedges, provide for us
to receive a fixed rate of interest and pay an adjustable rate of
interest equivalent to the daily weighted average prime lending rate
minus 2.705%. The terms of the swap agreements provide for us to pay
quarterly and receive payment semiannually. In June 2001, we
terminated $205.0 million notional amount of these swap agreements,
which would have expired in 2002, in order to appropriately modify
our overall hedge position in accordance with our risk management
program. In conjunction with the partial termination of these swap
agreements, we recorded a pre-tax gain of $2.8 million. The amount
receivable and payable by us under the remaining $75.0 million
notional amount of the swap agreements was $1.2 million and $115,000
at June 30, 2001, respectively. The amount receivable by us under
the swap agreements was $4.1 million at December 31, 2000 and 1999,
and the amounts payable by us under the swap agreements were
$744,000 and $770,000 at December 31, 2000 and 1999, respectively.
During May 1999, we entered into $500.0 million notional
amount of interest rate swap agreements with the objective of
stabilizing the net interest margin during the six-month period
surrounding the Year 2000 century date change. The swap agreements
provided for us to receive an adjustable rate of interest equivalent
to the daily weighted average 30-day London Interbank Offering Rate
and pay an adjustable rate of interest equivalent to the daily
weighted average prime lending rate minus 2.665%. In January 2000,
we determined these swap agreements were no longer necessary based
upon the results of the Year 2000 transition and terminated these
agreements resulting in a cost of $150,000.
During September 1999, we entered into $175.0 million
notional amount of interest rate swap agreements to effectively
lengthen the repricing characteristics of certain interest-earning
assets to correspond more closely with their funding source with the
objective of stabilizing cash flow, and accordingly, net interest
income, over time. The swap agreements, which had been designated as
cash flow hedges, provided for us to receive a fixed rate of
interest and pay an adjustable rate of interest equivalent to the
weighted average prime lending rate minus 2.70%. The terms of the
swap agreements provided for us to pay and receive interest on a
quarterly basis. In April 2001, we terminated these swap agreements,
which would have expired in September 2001, in order to lengthen the
period covered by the swaps. In conjunction with the termination of
these swap agreements, we recorded a pre-tax gain of $985,000. The
amount receivable by us under the swap agreements was $119,000 at
December 31, 2000 and 1999 and the amounts payable by us under the
swap agreements were $165,000 and $141,000 at December 31, 2000 and
1999, respectively.
During September 2000, March 2001 and April 2001, we entered
into $600.0 million, $200.0 million and $175.0 million notional
amount, respectively, of interest rate swap agreements to
effectively lengthen the repricing characteristics of certain
interest-earning assets to correspond more closely with their
funding source with the objective of stabilizing cash flow, and
accordingly, net interest income, over time. The swap agreements,
which have been designated as cash flow hedges, provide for us to
receive a fixed rate of interest and pay an adjustable rate of
interest equivalent to the weighted average prime lending rate minus
either 2.70% or 2.82%. The terms of the swap agreements provide for
us to pay and receive interest on a quarterly basis. The amount
receivable by us under the swap agreements was $3.9 million and $1.2
million at June 30, 2001 and December 31, 2000, respectively, and
the amount payable by us under the swap agreements was $3.0 million
and $1.2 million at June 30, 2001 and December 31, 2000,
respectively.
36
The maturity dates, notional amounts, interest rates paid and
received and fair value of our interest rate swap agreements
designated as cash flow hedges as of June 30, 2001 and December 31,
2000 were as follows:
NOTIONAL INTEREST INTEREST RATE FAIR
MATURITY DATE AMOUNT RATE PAID RECEIVED VALUE
------------- ---------- --------- ------------- -------
(DOLLARS EXPRESSED IN THOUSANDS)
June 30, 2001:
September 16, 2002............................... $ 75,000 4.05% 5.36% $ 890
September 20, 2004............................... 600,000 4.05 6.78 24,634
March 21, 2005................................... 200,000 3.93 5.24 (1,855)
April 2, 2006.................................... 175,000 3.93 5.45 (1,871)
---------- -------
$1,050,000 4.01 6.16 $21,798
========== ==== ==== =======
December 31, 2000:
September 27, 2001............................... $ 175,000 6.80% 6.14% $ 65
June 11, 2002.................................... 15,000 6.80 6.00 7
September 16, 2002............................... 195,000 6.80 5.36 (1,776)
September 18, 2002............................... 70,000 6.80 5.33 (690)
September 20, 2004............................... 600,000 6.80 6.78 16,869
---------- -------
$1,055,000 6.80 5.92 $14,475
========== ==== ==== =======
FAIR VALUE HEDGES
During September 2000, we entered into $25.0 million notional
amount of one-year interest rate swap agreements and $25.0 million
notional amount of five and one-half year interest rate swap
agreements to effectively shorten the repricing characteristics of
certain interest-bearing liabilities with the objective of
stabilizing net interest income over time. The swap agreements,
which have been designated as fair value hedges, provide for us to
receive fixed rates of interest ranging from 6.60% to 7.25% and pay
an adjustable rate of interest equivalent to the three-month London
Interbank Offering Rate minus rates ranging from 0.02% to 0.11%. The
terms of the swap agreements provide for us to pay interest on a
quarterly basis and receive interest either on a semiannual or an
annual basis. The amount receivable by us under the swap agreements
was $1.8 million and $1.0 million at June 30, 2001 and December 31,
2000, respectively, and the amount payable by us under the swap
agreements was $68,000 and $119,000 at June 30, 2001 and December
31, 2000, respectively.
During January 2001, we entered into $50.0 million notional
amount of three-year interest rate swap agreements and $150.0
million notional amount of five-year interest rate swap agreements
to effectively shorten the repricing characteristics of certain
interest-bearing liabilities with the objective of stabilizing net
interest income over time. The swap agreements, which have been
designated as fair value hedges, provide for us to receive a fixed
rate of interest and pay an adjustable rate of interest equivalent
to the three-month London Interbank Offering Rate. The terms of the
swap agreements provide for us to pay and receive interest on a
quarterly basis. The amount receivable by us under the swap
agreements was $5.2 million at June 30, 2001, and the amount payable
by us under the swap agreements was $2.2 million at June 30, 2001.
37
The maturity dates, notional amounts, interest rates paid and
received and fair value of our interest rate swap agreements
designated as fair value hedges as of June 30, 2001 and December 31,
2000 were as follows:
NOTIONAL INTEREST INTEREST RATE FAIR
MATURITY DATE AMOUNT RATE PAID RECEIVED VALUE
------------- -------- --------- ------------- -------
(DOLLARS EXPRESSED IN THOUSANDS)
June 30, 2001:
September 13, 2001................................ $ 12,500 3.89% 6.80% $ 70
September 21, 2001................................ 12,500 3.71 6.60 79
January 9, 2004................................... 50,000 4.80 5.37 (84)
January 9, 2006................................... 150,000 4.80 5.51 (2,073)
March 13, 2006.................................... 12,500 3.80 7.25 86
March 22, 2006.................................... 12,500 3.64 7.20 101
-------- -------
$250,000 4.59 5.77 $(1,821)
======== ==== ==== =======
December 31, 2000:
September 13, 2001................................ $ 12,500 6.56% 6.80% $ 42
September 21, 2001................................ 12,500 6.47 6.60 43
March 13, 2006.................................... 12,500 6.47 7.25 5
March 22, 2006.................................... 12,500 6.39 7.20 6
-------- -------
$ 50,000 6.47 6.96 $ 96
======== ==== ==== =======
INTEREST RATE FLOOR AGREEMENTS
During January 2001 and March 2001, we entered into $200.0
million and $75.0 million notional amount, respectively, of
four-year interest rate floor agreements to further stabilize net
interest income in the event of a falling rate scenario. The
interest rate floor agreements provide for us to receive a quarterly
adjustable rate of interest equivalent to the differential between
the three-month London Interbank Offering Rate and the strike prices
of 5.50% or 5.00%, respectively, should the three-month London
Interbank Offering Rate fall below the respective strike prices. At
June 30, 2001, the carrying value of the interest rate floor
agreements, which is included in derivative instruments in the
consolidated balance sheet, was $5.6 million.
INTEREST RATE CAP AGREEMENTS
In conjunction with the interest rate swap agreements that we
entered into in September 2000, we also entered into $450.0 million
notional amount of four-year interest rate cap agreements to limit
the net interest expense associated with our interest rate swap
agreements in the event of a rising rate scenario. The interest rate
cap agreements provide for us to receive a quarterly adjustable rate
of interest equivalent to the differential between the three-month
London Interbank Offering Rate and the strike price of 7.50% should
the three-month London Interbank Offering Rate exceed the strike
price. At June 30, 2001 and December 31, 2000, the carrying value of
these interest rate cap agreements, which is included in derivative
instruments in the consolidated balance sheet, was $2.0 million and
$3.8 million, respectively.
PLEDGED COLLATERAL
At June 30, 2001 and December 31, 2000, we had pledged
investment securities available for sale with a carrying value of
$2.4 million and $8.6 million, respectively, in connection with our
interest rate swap agreements. In addition, at June 30, 2001 and
December 31, 2000, we had accepted investment securities with a fair
value of $34.7 million and $19.0 million, respectively, as
collateral in connection with our interest rate swap agreements. We
are permitted by contract to sell or repledge the collateral
accepted from our counterparties, however, at June 30, 2001 and
December 31, 2000, we had not sold or repledged any of this
collateral.
38
INTEREST RATE LOCK COMMITMENTS / FORWARD COMMITMENTS TO SELL
MORTGAGE-BACKED SECURITIES
Derivative financial instruments issued by us consist of
interest rate lock commitments to originate fixed-rate loans.
Commitments to originate fixed-rate loans consist primarily of
residential real estate loans. These net loan commitments and loans
held for sale are hedged with forward contracts to sell mortgage-
backed securities.
MORTGAGE BANKING ACTIVITIES
Our mortgage banking activities consist of the origination,
purchase and servicing of residential mortgage loans. Generally, we
sell our production of residential mortgage loans in the secondary
loan markets. Servicing rights are retained with respect to
conforming fixed-rate residential mortgage loans. We sell other
loans, including adjustable-rate and nonconforming residential
mortgage loans, on a servicing released basis.
For the six months ended June 30, 2001 and 2000, we
originated and purchased loans for resale totaling $757.5 million
and $238.5 million, and sold loans totaling $587.6 million and
$185.3 million, respectively. For the three years ended December 31,
2000, 1999 and 1998, we originated and purchased loans for resale
totaling $532.2 million, $452.9 million and $628.5 million and sold
loans totaling $413.2 million, $507.1 million and $521.0 million,
respectively. The origination and purchase of residential mortgage
loans and the related sale of the loans provides us with additional
sources of income including the gain or loss realized upon sale, the
interest income earned while the loan is held awaiting sale and the
ongoing loan servicing fees from the loans sold with servicing
rights retained. Mortgage loans serviced for investors aggregated
$957.4 million at June 30, 2001, and $957.2 million, $957.1 million
and $923.0 million at December 31, 2000, 1999 and 1998,
respectively.
The gain on mortgage loans originated for resale, including
loans sold and held for sale, was $7.3 million and $3.3 million for
the six months ended June 30, 2001 and 2000, respectively, and $7.8
million, $6.9 million and $5.6 million for the years ended December
31, 2000, 1999 and 1998, respectively. We determine these gains, net
of losses, on a lower of cost or market basis. These gains are
realized at the time of sale. The cost basis reflects: (1)
adjustments of the carrying values of loans held for sale to the
lower of cost, adjusted to include the cost of hedging the loans
held for sale, or current market values; and (2) adjustments for any
gains or losses on loan commitments for which the interest rate has
been established, net of anticipated underwriting "fallout,"
adjusted for the cost of hedging these loan commitments. The overall
increase for the six months ended June 30, 2001 is primarily
attributable to a significant increase in the volume of loans
originated and sold commensurate with the continued reductions in
mortgage loan rates experienced in the first six months of 2001. We
credit the increases for 2000 and 1999 to the continued expansion of
our mortgage banking activities into the California and Texas
markets.
The interest income on loans held for sale was $5.4 million
for the six months ended June 30, 2001, compared to $1.5 million for
the comparable period in 2000. The interest income on loans held for
sale was $3.5 million for the year ended December 31, 2000, in
comparison to $4.9 million and $6.8 million for the years ended
December 31, 1999 and 1998, respectively. The amount of interest
income realized on loans held for sale is a function of the average
balance of loans held for sale, the period for which the loans are
held and the prevailing interest rates when the loans are made. The
average balance of loans held for sale was $149.1 million and $45.1
million for the six months ended June 30, 2001 and 2000,
respectively, and $47.0 million, $79.1 million and $102.7 million
for the years ended December 31, 2000, 1999 and 1998, respectively.
On an annualized basis, our yield on the portfolio of loans held for
sale was 7.23% and 6.67% for the six months ended June 30, 2001 and
2000, respectively, and 7.45%, 6.19% and 6.62% for the years ended
December 31, 2000, 1999 and 1998, respectively. This compares with
our cost of funds, as a percentage of average interest-bearing
liabilities, of 4.74% and 4.49% for the six months ended June 30,
2001 and 2000, respectively, and 4.69%, 4.34% and 4.73% for the
years ended December 31, 2000, 1999 and 1998, respectively.
39
We report mortgage loan servicing fees net of amortization of
mortgage servicing rights, interest shortfall and mortgage-backed
security guarantee fee expense. Interest shortfall equals the
difference between the interest collected from a loan-servicing
customer upon prepayment of the loan and a full month's interest
that is required to be remitted to the security owner. Loan
servicing fees, net, were $153,000 and $231,000 for the six months
ended June 30, 2001 and 2000, respectively, and $486,000, $657,000
and $1.0 million for the years ended December 31, 2000, 1999 and
1998, respectively. We attribute the decrease in loan servicing fees
for 2001, 2000 and 1999 to increased amortization of mortgage
servicing rights, reduced late charge fees and our strategy of
selling the new production of adjustable-rate and nonconforming
residential mortgage loans on a servicing released basis. In
addition, mortgage-backed security expense increased by $333,000 to
$1.2 million from $867,000 for the years ended December 31, 1999 and
1998, respectively, reflecting the increased level of serviced loans
sold into the secondary market in the form of securities.
Our interest rate risk management policy provides certain
hedging parameters to reduce the interest rate risk exposure arising
from changes in loan prices from the time of commitment until the
sale of the security or loan. To reduce this exposure, we use
forward commitments to sell fixed-rate mortgage-backed securities at
a specified date in the future. At June 30, 2001 and December 31,
2000, 1999 and 1998, we had $106.5 million, and $37.6 million, $31.5
million and $103.1 million, respectively, of loans held for sale and
related commitments, net of committed loan sales and estimated
underwriting fallout, of which $101.0 million, and $32.0 million,
$33.0 million and $95.0 million, respectively, were hedged through
the use of such forward commitments.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE
30, 2001 AND 2000
NET INCOME. Net income was $20.3 million, or $824.49 per
common share on a diluted basis, for the six months ended June 30,
2001, in comparison to $29.3 million, or $1,182.47 per common share
on a diluted basis, for the comparable period in 2000. The
implementation of SFAS 133, as amended, on January 1, 2001, resulted
in the recognition of a cumulative effect of change in accounting
principle of $1.4 million, net of tax, which reduced net income.
Excluding this item, net income was $21.6 million, or $882.65 per
common share on a diluted basis, for the six months ended June 30,
2001. The net interest rate margin was 4.73% for the six months
ended June 30, 2001, in comparison to 4.90% for the comparable
period in 2000. The primary factors that led to the decline in
earnings for the six months ended June 30, 2001 were a decrease in
the net interest rate margin and higher operating expenses,
including nonrecurring charges associated with the establishment of
a specific reserve relating to a contingent liability and the
settlement of certain litigation. Net interest income increased
primarily as a result of increased earning assets generated through
internal loan growth along with our acquisitions of Lippo Bank,
certain assets of FCG, Bank of Ventura, Commercial Bank of San
Francisco, Millennium Bank and Bank of San Francisco, completed
during 2000. However, the improvement in net interest income was
partially offset by six reductions in the prime lending rate during
the first six months of 2001. During the six months ended June 30,
2001, noninterest income improved to $35.9 million, from
$21.0 million for the comparable period in 2000 as further discussed
under "-- Noninterest Income."
The improvement in net interest income and noninterest income
was offset by increased operating expenses, which were $116.0
million for the six months ended June 30, 2001, compared to $79.7
million for the comparable period in 2000. The increased operating
expenses are primarily attributable to:
* the operating expenses of the aforementioned acquisitions
subsequent to their respective acquisition dates;
* increased salaries and employee benefit expenses;
* increased data processing fees;
* increased legal, examination and professional fees;
* increased amortization of intangibles associated with the
purchase of the aforementioned entities;
40
* a nonrecurring litigation settlement charge; and
* a charge to other expense associated with the
establishment of a specific reserve on an unfunded letter
of credit.
Additionally, guaranteed preferred debentures expense of $1.5
million on the trust preferred securities that our second financing
subsidiary issued in October 2000 further contributed to the overall
increase in operating expenses. These higher operating expenses,
exclusive of the litigation settlement and the specific reserve on
the unfunded letter of credit, are reflective of significant
investments that we have made in personnel, technology, capital
expenditures and new business lines in conjunction with our overall
strategic growth plan. The payback on these investments is expected
to occur over a longer period of time through higher and more
diversified revenue streams.
PROVISION FOR LOAN LOSSES. The provision for loan losses was
$7.1 million for the six months ended June 30, 2001, compared to
$7.2 million for the comparable period in 2000. The provisions for
loan losses reflect the level of loan charge-offs and recoveries,
the adequacy of the allowance for loan losses and the effect of
economic conditions within our markets. Loan charge-offs were $15.3
million for the six months ended June 30, 2001, in comparison to
$5.0 million for the comparable period in 2000. The increase in loan
charge-offs reflects a single loan in the amount of $4.5 million
that was charged-off due to suspected fraud on the part of the
borrower, a $1.4 million charge-off on a single shared national
credit relationship, a $675,000 charge-off with respect to a loan in
an acquired portfolio as well as the effects of the recent general
slow down in economic conditions prevalent within our markets. Loan
recoveries were $3.8 million for the six months ended June 30, 2001,
in comparison to $6.2 million for the comparable period in 2000.
Nonperforming assets and past-due loans have increased during the
six months ended June 30, 2001, and we anticipate these trends will
continue in the near future. However, we believe these trends
represent normal cyclical trends experienced within the banking
industry during times of economic slow down. Management considered
these trends in its overall assessment of the adequacy of the
allowance for loan losses.
Tables summarizing nonperforming assets, past-due loans and
charge-off and recovery experience are presented under "-- Loans and
Allowance for Loan Losses."
41
NONINTEREST INCOME AND EXPENSE. The following table
summarizes noninterest income and noninterest expense for the six
months ended June 30, 2001 and 2000:
JUNE 30, INCREASE (DECREASE)
--------------------- --------------------
2001 2000 AMOUNT %
-------- ------ ------ -------
(DOLLARS EXPRESSED IN THOUSANDS)
Noninterest income:
Service charges on deposit accounts and customer
service fees........................................ $ 10,537 9,464 1,073 11.34%
Gain on mortgage loans sold and held for sale......... 7,332 3,268 4,064 124.36
Credit card fees...................................... 221 91 130 142.86
Gain on sale of credit card portfolio, net of
expenses............................................ 2,275 -- 2,275 100.00
Loan servicing fees, net.............................. 153 231 (78) (33.77)
Net (loss) gain on sales of available-for-sale
securities.......................................... (113) 379 (492) (129.82)
Gain on sale of branch, net of expenses............... -- 1,355 (1,355) (100.00)
Gain on derivative instruments, net................... 5,486 -- 5,486 100.00
Other................................................. 10,007 6,247 3,760 60.19
-------- ------ ------
Total noninterest income.......................... $ 35,898 21,035 14,863 70.66
======== ====== ====== =======
Noninterest expense:
Salaries and employee benefits........................ $ 45,797 35,237 10,560 29.97%
Occupancy, net of rental income....................... 8,216 6,655 1,561 23.46
Furniture and equipment............................... 5,617 5,673 (56) (0.99)
Postage, printing and supplies........................ 2,258 2,183 75 3.44
Data processing fees.................................. 12,951 10,663 2,288 21.46
Legal, examination and professional fees.............. 3,424 2,003 1,421 70.94
Amortization of intangibles associated with the
purchase of subsidiaries............................ 3,712 2,373 1,339 56.43
Communications........................................ 1,513 1,233 280 22.71
Advertising and business development.................. 3,182 1,661 1,521 91.57
Guaranteed preferred debentures....................... 8,978 6,012 2,966 49.33
Other................................................. 20,368 6,017 14,351 238.51
-------- ------ ------
Total noninterest expense......................... $116,016 79,710 36,306 45.55
======== ====== ====== =======
NONINTEREST INCOME. Noninterest income was $35.9 million for
the six months ended June 30, 2001, in comparison to $21.0 million
for the comparable period in 2000. Noninterest income consists
primarily of service charges on deposit accounts and customer
service fees, mortgage-banking revenues, a gain on the sale of our
credit card portfolio, net gains on derivative instruments and other
income.
Service charges on deposit accounts and customer service fees
were $10.5 million for the six months ended June 30, 2001, in
comparison to $9.5 million for the comparable period in 2000. We
attribute the increase in service charges and customer service fees
to:
* increased deposit balances provided by internal growth;
* our acquisitions completed during 2000;
* additional products and services available and utilized by
our expanding base of retail and commercial customers;
* increased fee income resulting from revisions of customer
service charge rates, effective June 1, 2000, and enhanced
control of fee waivers; and
* increased income associated with automated teller machine
services and debit cards.
The gain on mortgage loans sold and held for sale was $7.3
million for the six months ended June 30, 2001, in comparison to
$3.3 million for the comparable period in 2000. The overall increase
is primarily attributable to a significant increase in the volume of
loans originated and sold commensurate
42
with the continued reductions in mortgage loan rates experienced in
the first six months of 2001 as well as the continued expansion of
our mortgage banking activities into new and existing markets.
During the six months ended June 30, 2001, we recorded a $2.3
million pre-tax gain on the sale of our credit card portfolio. This
gain is solely attributable to the sale of this portfolio consistent
with our strategic decision to exit this product line and enter into
an agent relationship with a larger credit card service provider.
Noninterest income for the six months ended June 30, 2001
included a net loss on the sale of available-for-sale investment
securities of $113,000, in comparison to a net gain on the sale of
available-for-sale investment securities of $379,000 for the
comparable period in 2000. The net loss for 2001 resulted primarily
from the liquidation of certain investment securities held by FBA
that resulted in a loss of $134,000, whereas the net gain in 2000
resulted primarily from sales of certain investment securities held
by acquired institutions that did not meet our overall investment
objectives.
The net gain on derivative instruments of $5.5 million for
the six months ended June 30, 2001 includes $3.8 million of gains
resulting from the termination of certain interest rate swap
agreements to adjust our interest rate hedge position consistent
with changes in the portfolio structure and mix. In addition, the
net gain reflects changes in the fair value of our interest rate cap
agreements, interest rate floor agreements and fair value hedges, in
accordance with the requirements of SFAS 133, as amended, which was
implemented on January 1, 2001.
The gain on sale of branch, net of expenses, was $1.4 million
for the six months ended June 30, 2000, and results from the
divestiture of one of our branch locations in central Illinois.
Other income was $10.0 million for the six months ended June
30, 2001, in comparison to $6.2 million for the comparable period in
2000. We attribute the primary components of the increase to:
* our acquisitions completed during 2000;
* increased portfolio management fee income of $1.6 million
associated with our Institutional Money Management
Division, which was formed in August 2000;
* increased brokerage revenue, which is primarily associated
with the stock option services acquired in conjunction
with our acquisition of Bank of San Francisco;
* increased rental income of $761,000 associated with our
commercial leasing activities that were acquired in
conjunction with our acquisition of FCG in February 2000;
and
* income of approximately $600,000 associated with equipment
leasing activities that were acquired in conjunction with
our acquisition of Bank of San Francisco in December 2000.
NONINTEREST EXPENSE. Noninterest expense was $116.0 million
for the six months ended June 30, 2001, compared to $79.7 million
for the comparable period in 2000. The increase reflects:
* the noninterest expense of our acquisitions completed
during 2000, including certain nonrecurring expenses
associated with those acquisitions;
* increased salaries and employee benefit expenses;
* increased data processing fees;
* increased legal, examination and professional fees;
* increased amortization of intangibles associated with the
purchase of subsidiaries;
* increased guaranteed preferred debentures expense; and
* increased other expense.
Salaries and employee benefits were $45.8 million for the six
months ended June 30, 2001, in comparison to $35.2 million for the
comparable period in 2000. We primarily associate the increase with
43
our 2000 acquisitions. However, the increase also reflects the
competitive environment in the employment market that has resulted
in a higher demand for limited resources, thus escalating industry
salary and employee benefit costs associated with employing and
retaining qualified personnel. In addition, the increase includes
various additions to staff throughout 2000 to enhance executive and
senior management expertise, improve technological support,
strengthen centralized operational functions and expand our product
lines.
Occupancy, net of rental income, and furniture and equipment
expense totaled $13.8 million for the six months ended June 30,
2001, in comparison to $12.3 million for the comparable period in
2000. We primarily attribute the increase to our aforementioned
acquisitions, the relocation of certain branches and operational
areas and increased depreciation expense associated with numerous
capital expenditures, including our new facility that houses various
centralized operations and certain corporate administrative
functions.
Data processing fees were $13.0 million for the six months
ended June 30, 2001, in comparison to $10.7 million for the
comparable period in 2000. First Services, L.P., a limited
partnership indirectly owned by our Chairman and his adult children,
provides data processing and various related services to our
subsidiary banks and us under the terms of data processing
agreements. We attribute the increased data processing fees to
growth and technological advancements consistent with our product
and service offerings, continued upgrades to technological
equipment, networks and communication channels, and certain
nonrecurring expenses associated with the data processing
conversions of Redwood Bank, Commercial Bank of San Francisco and
Bank of San Francisco, completed in February 2001, March 2001 and
June 2001, respectively.
Legal, examination and professional fees were $3.4 million
for the six months ended June 30, 2001, in comparison to $2.0
million for the comparable period in 2000. We primarily attribute
the increase in these fees to the ongoing professional services
utilized by certain of our acquired entities, increased professional
fees associated with our Institutional Money Management Division,
which was formed in August 2000, and increased legal fees associated
with commercial loan documentation, collection efforts and certain
defense litigation.
Amortization of intangibles associated with the purchase of
subsidiaries was $3.7 million for the six months ended June 30,
2001, in comparison to $2.4 million for the comparable period in
2000. The increase for 2001 is primarily attributable to
amortization of the cost in excess of the fair value of the net
assets acquired for the six acquisitions that we completed during
2000.
Guaranteed preferred debentures expense was $9.0 million for
the six months ended June 30, 2001, in comparison to $6.0 million
for the comparable period in 2000. The increase for 2001 is solely
attributable to the issuance of trust preferred securities in
October 2000 by our second financing subsidiary.
Other expense was $20.4 million for the six months ended June
30, 2001, in comparison to $6.0 million for the comparable period in
2000. Other expense encompasses numerous general and administrative
expenses including travel, meals and entertainment, insurance,
freight and courier services, correspondent bank charges,
advertising and business development, miscellaneous losses and
recoveries, memberships and subscriptions, transfer agent fees and
sales taxes. We attribute the majority of the increase in other
expense to:
* our acquisitions completed during 2000;
* increased advertising and business development expenses
associated with various product and service initiatives
and enhancements;
* increased travel expenses primarily associated with
business development efforts and the ongoing integration
of the recently acquired entities into our corporate
culture and systems;
* a nonrecurring litigation settlement charge in the amount
of $11.5 million associated with a lawsuit brought by an
unaffiliated bank against one of our subsidiaries and
certain individuals
44
related to allegations arising from the employment by our
subsidiary of individuals previously employed by the plaintiff
bank, as well as the conduct of those individuals while employed
by the plaintiff bank;
* the establishment of a $1.2 million specific reserve on an
unfunded letter of credit; and
* overall continued growth and expansion of our banking
franchise.
PROVISION FOR INCOME TAXES. The provision for income taxes
was $14.6 million for the six months ended June 30, 2001,
representing an effective income tax rate of 39.14%, in comparison
to $17.7 million, representing an effective income tax rate of
37.00%, for the comparable period in 2000. The increase in the
effective income tax rate is primarily attributable to:
* the increase in amortization of intangibles associated
with the purchase of subsidiaries, which is not deductible
for tax purposes; and
* a reduction of the deferred tax asset valuation reserve of
approximately $405,000 related to the utilization of net
operating losses associated with a previously acquired
entity, which was recorded in March 2000.
COMPARISON OF RESULTS OF OPERATIONS FOR 2000 AND 1999
NET INCOME. Net income was $56.1 million for the year ended
December 31, 2000, compared to $44.2 million for 1999. The earnings
progress for 2000 was primarily driven by increased net interest
income generated from our acquisitions completed throughout 1999 and
2000; the continued growth and diversification in the composition of
our loan portfolio; and increased yields on interest-earning assets.
We funded the overall loan growth primarily through deposits added
through acquisitions and internal deposit growth. Net interest
income (expressed on a tax-equivalent basis) increased to $236.0
million, or 4.93% of average interest-earning assets, from $195.2
million, or 4.52% of average interest-earning assets, for the years
ended December 31, 2000 and 1999, respectively.
The increase in net income was partially offset by an
increased provision for loan losses and an increase in operating
expenses of $20.4 million for the year ended December 31, 2000, in
comparison to 1999. The increased operating expenses reflect the
operating expenses of our 1999 and 2000 acquisitions subsequent to
their respective acquisition dates; increased salaries and employee
benefit expenses; increased data processing fees; increased
amortization of intangibles associated with the purchase of
subsidiaries and increased guaranteed preferred debentures expense.
A reduction in legal, examination and professional fees partially
offset the increase in operating expenses.
PROVISION FOR LOAN LOSSES. The provision for loan losses was
$14.1 million and $13.1 million for the years ended December 31,
2000 and 1999, respectively. We attribute the increase in the
provision for loan losses primarily to the overall growth in the
loan portfolio, both internal and through acquisitions, as well as a
general increase in risk associated with the continued changing
composition of our loan portfolio and an increase in nonperforming
assets, which is further discussed under "-- Loans and Allowance for
Loan Losses." Loan charge-offs were $17.1 million for the year ended
December 31, 2000, in comparison to $17.7 million for the year ended
December 31, 1999. Included in charge-offs for the year ended
December 31, 2000 was $1.6 million relating to a single loan. The
overall decrease in loan charge-offs, excluding the large
single-loan charge-off, was indicative of the generally strong
economic conditions prevalent in our markets, as well as
management's continued efforts to effectively monitor and manage our
loan portfolio. Loan recoveries were $9.8 million for the year ended
December 31, 2000, in comparison to $9.3 million for 1999,
reflecting continued aggressive collection efforts. Our acquisitions
during 1999 and 2000 provided $3.0 million and $6.1 million,
respectively, in additional allowance for loan losses at their
respective acquisition dates.
45
The following table represents a summary of loan loss
experience and nonperforming assets for First Bank and First Bank &
Trust as of and for the years ended December 31, 2000 and 1999:
FIRST BANK FIRST BANK & TRUST
----------------------- ----------------------
2000 1999 2000 1999
---------- --------- --------- ---------
(DOLLARS EXPRESSED IN THOUSANDS)
Total loans................................................ $2,694,005 2,527,649 2,058,628 1,469,093
Total assets............................................... 3,152,885 3,028,046 2,733,545 1,854,827
Provision for loan losses.................................. 12,250 8,890 1,877 4,183
Net loan charge-offs....................................... 7,007 6,494 201 1,946
Net loan charge-offs as a percentage of average loans...... 0.27% 0.26% 0.01% 0.15%
Nonperforming loans........................................ $ 38,161 23,493 15,005 16,244
Nonperforming assets....................................... 39,954 25,233 15,699 16,633
NONINTEREST INCOME AND EXPENSE. The following table
summarizes noninterest income and noninterest expense for the years
ended December 31, 2000 and 1999:
DECEMBER 31, INCREASE (DECREASE)
---------------------- --------------------
2000 1999 AMOUNT %
-------- ------- ------ -------
(DOLLARS EXPRESSED IN THOUSANDS)
Noninterest income:
Service charges on deposit accounts and customer
service fees..................................... $ 19,794 17,676 2,118 11.98%
Gain on mortgage loans sold and held for sale...... 7,806 6,909 897 12.98
Credit card fees................................... 236 409 (173) (42.30)
Loan servicing fees, net........................... 486 657 (171) (26.03)
Net gain on sales of available-for-sale
securities....................................... 168 791 (623) (78.76)
Net loss on trading securities..................... -- (303) 303 (100.00)
Gain on sales of branches, net of expenses......... 1,355 4,406 (3,051) (69.25)
Other.............................................. 12,933 11,105 1,828 16.46
-------- ------- ------
Total noninterest income....................... $ 42,778 41,650 1,128 2.71
======== ======= ====== =======
Noninterest expense:
Salaries and employee benefits..................... $ 73,391 61,524 11,867 19.29%
Occupancy, net of rental income.................... 14,675 12,518 2,157 17.23
Furniture and equipment............................ 11,702 8,520 3,182 37.35
Postage, printing and supplies..................... 4,431 4,244 187 4.41
Data processing fees............................... 22,359 18,567 3,792 20.42
Legal, examination and professional fees........... 4,523 9,109 (4,586) (50.35)
Amortization of intangibles associated with the
purchase of subsidiaries......................... 5,297 4,401 896 20.36
Communications..................................... 2,625 2,488 137 5.51
Advertising and business development............... 4,331 3,734 597 15.99
Guaranteed preferred debentures.................... 13,173 12,050 1,123 9.32
Other.............................................. 14,656 13,652 1,004 7.35
-------- ------- ------
Total noninterest expense...................... $171,163 150,807 20,356 13.50
======== ======= ====== =======
NONINTEREST INCOME. Noninterest income was $42.8 million for
the year ended December 31, 2000, compared to $41.7 million for
1999. Noninterest income consists primarily of service charges on
deposit accounts and customer service fees, mortgage banking
revenues and other income.
Service charges on deposit accounts and customer service fees
increased to $19.8 million for 2000, from $17.7 million for 1999. We
attribute the increase in service charges and customer service fees
to:
* increased deposit balances provided by internal growth;
* our acquisitions completed throughout 1999 and 2000;
46
* additional products and services available and utilized by
our expanding base of retail and commercial customers;
* increased fee income resulting from revisions of customer
service charge rates effective April 1, 1999 and June 30,
2000, and enhanced control of fee waivers; and
* increased interchange income associated with automatic
teller machine services and debit and credit cards.
The gain on mortgage loans sold and held for sale increased
to $7.8 million from $6.9 million for the years ended December 31,
2000 and 1999, respectively. We attribute the increase to an
increased volume of loans sold and held for sale, primarily during
the fourth quarter of 2000, including fixed rate residential
mortgage loans, which are sold on a servicing retained basis, and
adjustable-rate and non-conforming residential mortgage loans, which
are sold on a servicing released basis.
The net gain on sales of available-for-sale securities was
$168,000 and $791,000 for the years ended December 31, 2000 and
1999, respectively. These gains resulted from sales of available-for-
sale securities necessary to facilitate the funding of loan growth. The
decrease in the net gains reflects the sales, at a loss, of certain
investment securities that did not meet our overall investment objectives.
The net loss on sales of trading securities was $303,000 for
the year ended December 31, 1999 resulted from the termination of
our trading division, effective December 31, 1998, and the
liquidation of all trading securities during the first quarter of
1999.
The gain on sales of branches, net of expenses, was $1.4
million and $4.4 million for the years ended December 31, 2000 and
1999, respectively. The reduction in these gains results from a
reduced number of branch divestitures. During 2000, we divested one
of our branch locations in central Illinois, whereas in 1999, we
divested seven branch offices in central and northern Illinois.
Other income was $12.9 million and $11.1 million for the
years ended December 31, 2000 and 1999, respectively. The increase
in other income is primarily attributable to increased income earned
on our investment in bank-owned life insurance, rental income
associated with FCG's leasing activities and increased rental fees
received from First Services, L.P. for the use of data processing
and other equipment owned by us. The increase in rental fees
corresponds to the replacement of our teller system and certain
other technological upgrades, including local and wide area
network-based systems, core processors and item processing equipment
that were replaced in 1999 in preparation for the Year 2000
transition.
NONINTEREST EXPENSE. Noninterest expense was $171.2 million
for the year ended December 31, 2000, in comparison to $150.8
million for 1999. The increase reflects:
* the noninterest expense associated with our acquisitions
completed throughout 1999 and 2000 subsequent to their
respective acquisition dates, including certain
nonrecurring expenses associated with those acquisitions;
* increased salaries and employee benefit expenses;
* increased data processing fees;
* increased amortization of intangibles associated with the
purchase of subsidiaries;
* increased guaranteed preferred debentures expense; and
* increased expenses associated with our internal
restructuring process.
The overall increase in noninterest expense was partially
offset by a decrease in legal, examination and professional fees.
47
During 1999, we began an internal restructuring process
designed to better position us for future growth and opportunities
expected to become available as consolidation and changes continue
in the delivery of financial services. The magnitude of this project
was extensive and covered almost every area of our organization. The
primary objectives of the restructuring process were to:
* redesign the corporate organization to provide clearer
lines of authority which are more conducive to the
effective delivery of services to customers;
* enhance our technological strength to enable us to more
effectively and efficiently provide the products, services
and delivery channels necessary to remain competitive in
the financial services industry of the future;
* establish the infrastructure necessary to better support
our service delivery and business development efforts, and
to provide more efficient, better quality services to
customers;
* increase the depth and abilities of all levels of our
management and provide supervision to lead its efforts to
accomplish our corporate objectives; and
* improve internal monitoring systems in order to better
assess the progress of all of our areas in achieving our
corporate objectives.
Although these efforts have primarily led to increased
capital expenditures and noninterest expenses in the short term, we
anticipate they will lead to additional internal growth, more
efficient operations and improved profitability over the long term.
Salaries and employee benefits increased by $11.9 million to
$73.4 million from $61.5 million for the years ended December 31,
2000 and 1999, respectively. We primarily associate the increase
with our acquisitions completed throughout 1999 and 2000 as well as
the additional lines of business that we entered into in 2000,
including institutional money management, international banking and
fiduciary deposit management for bankruptcy trustees, receivers and
other estate administrators. However, the increase also reflects the
competitive environment in the employment market that has resulted
in a higher demand for limited resources, thus escalating industry
salary and employee benefit costs associated with employing and
retaining qualified personnel. In addition, the increase includes
various additions to our staff to enhance executive and senior
management expertise, improve technological support and strengthen
centralized operational functions.
Occupancy, net of rental income, and furniture and equipment
expense totaled $26.4 million and $21.0 million for the years ended
December 31, 2000 and 1999, respectively. The increase is primarily
attributable to our acquisitions, the relocation of certain
California and Texas branches and increased depreciation expense
associated with numerous capital expenditures made throughout 1999,
including the implementation of our new teller system. Our selective
elimination of 16 branch offices by sales, mergers or closures
during 1999 and 2000 partially offset this increase.
Data processing fees were $22.4 million and $18.6 million for
the years ended December 31, 2000 and 1999, respectively. First
Services, L.P., a limited partnership indirectly owned by our
Chairman and his adult children, provides data processing and
various related services to our subsidiary banks and us under the
terms of data processing agreements. We attribute the increased data
processing fees to growth and technological advancements consistent
with our product and service offerings and upgrades to technological
equipment, networks and communication channels.
Legal, examination and professional fees were $4.5 million
and $9.1 million for the years ended December 31, 2000 and 1999,
respectively. The decrease in these fees results from a decline in
our utilization of external consultants who provided assistance
throughout 1999 associated with the development and expansion of
selected business initiatives. The decrease also reflects the
settlement of certain litigation completed in 1999.
Amortization of intangibles associated with the purchase of
subsidiaries was $5.3 million and $4.4 million for the years ended
December 31, 2000 and 1999, respectively. The increase for 2000 is
primarily
48
attributable to amortization of the cost in excess of the fair value
of the net assets acquired of the six acquisitions that we completed
during 2000.
Guaranteed preferred debentures expense was $13.2 million and
$12.1 million for the years ended December 31, 2000 and 1999,
respectively. The increase for 2000 is solely attributable to the
issuance of trust preferred securities in October 2000.
Other expense was $14.7 million and $13.7 million for the
years ended December 31, 2000 and 1999, respectively. Other expense
encompasses numerous general and administrative expenses including
but not limited to travel, meals and entertainment, insurance,
freight and courier services, correspondent bank charges,
miscellaneous losses and recoveries, and sales taxes. The overall
increase in these expenses primarily reflects:
* continued growth and expansion of our banking franchise;
* a $700,000 provision for an estimated loss on equipment
underlying leases associated with a previously acquired
entity; and
* a $200,000 provision for estimated losses associated with
certain pending litigation.
Offsetting the overall increase in other expenses in 2000
were recoveries of $1.8 million from loans of acquired entities that
had been fully charged off prior to the acquisition dates.
COMPARISON OF RESULTS OF OPERATIONS FOR 1999 AND 1998
NET INCOME. Net income was $44.2 million for the year ended
December 31, 1999, compared to $33.5 million for 1998. We associate
the improved operating results for 1999 with our efforts to realign
the composition of our loan portfolio through further
diversification and growth; the improvement in the composition of
the interest-earning assets and interest-bearing liabilities; the
results of our acquisitions of Century Bank and Redwood Bancorp; and
the divestiture of certain branch facilities. Net interest income
(expressed on a tax-equivalent basis) increased to $195.2 million,
or 4.52% of average interest-earning assets, from $166.5 million, or
4.19% of average interest-earning assets, for 1999 and 1998,
respectively.
An increased provision for loan losses and an increase in
operating expenses partially offset the improvement in net income.
The increase in operating expense reflects the additional cost of
the trust preferred securities issued by FBA in July 1998; the
continuing expansion of commercial and retail banking activities;
the acquisitions of Century Bank and Redwood Bancorp; increased
legal, examination and professional fees; and increased data
processing fees primarily associated with Year 2000 activities.
PROVISION FOR LOAN LOSSES. The provision for loan losses was
$13.1 million and $9.0 million for the years ended December 31, 1999
and 1998, respectively. We primarily attribute the increase in the
provision for loan losses for 1999 to the continued growth and
changing composition of our loan portfolio combined with an increase
in loans charged-off. Net loan charge-offs were $8.4 million for the
year ended December 31, 1999, compared to $1.7 million for 1998. The
increase in net loan charge-offs reflects overall growth in our loan
portfolio and increased risk associated with the continued change in
the composition of our loan portfolio. In addition, nonperforming
assets have, in general, increased at December 31, 1999 and 1998, in
comparison to previous periods. The allowances for loan losses of
Century Bank and Redwood Bancorp at their dates of acquisition added
approximately $3.0 million to our consolidated allowance for loan
losses.
49
The following table represents a summary of loan loss
experience and nonperforming assets for First Bank and First Bank &
Trust as of and for the years ended December 31, 1999 and 1998:
FIRST BANK FIRST BANK & TRUST
----------------------- ----------------------
1999 1998 1999 1998
---------- --------- --------- ---------
(DOLLARS EXPRESSED IN THOUSANDS)
Total loans................................................ $2,527,649 2,490,556 1,469,093 1,089,966
Total assets............................................... 3,028,046 3,024,600 1,854,827 1,504,311
Provision for loan losses.................................. 8,890 7,250 4,183 1,750
Net loan charge-offs....................................... 6,494 1,150 1,946 589
Net loan charge-offs as a percentage of average loans...... 0.26% 0.05% 0.15% 0.06%
Nonperforming loans........................................ $ 23,493 18,494 16,244 25,044
Nonperforming assets....................................... 25,233 21,268 16,633 25,979
NONINTEREST INCOME AND EXPENSE. The following table
summarizes noninterest income and noninterest expense for the years
ended December 31, 1999 and 1998:
DECEMBER 31, INCREASE (DECREASE)
---------------------- --------------------
1999 1998 AMOUNT %
-------- ------- ------ -------
(DOLLARS EXPRESSED IN THOUSANDS)
Noninterest income:
Service charges on deposit accounts and customer
service fees..................................... $ 17,676 14,876 2,800 18.82%
Gain on mortgage loans sold and held for sale...... 6,909 5,563 1,346 24.20
Credit card fees................................... 409 2,999 (2,590) (86.36)
Loan servicing fees, net........................... 657 1,017 (360) (35.40)
Net gain on sales of available-for-sale
securities....................................... 791 1,466 (675) (46.04)
Net (loss) gain on trading securities.............. (303) 607 (910) (149.92)
Gain on sales of branches, net of expenses......... 4,406 -- 4,406 --
Other.............................................. 11,105 9,969 1,136 11.40
-------- ------- ------
Total noninterest income....................... $ 41,650 36,497 5,153 14.12
======== ======= ====== =======
Noninterest expense:
Salaries and employee benefits..................... $ 61,524 55,907 5,617 10.05%
Occupancy, net of rental income.................... 12,518 11,037 1,481 13.42
Furniture and equipment............................ 8,520 8,122 398 4.90
Postage, printing and supplies..................... 4,244 5,230 (986) (18.85)
Data processing fees............................... 18,567 13,917 4,650 33.41
Legal, examination and professional fees........... 9,109 5,326 3,783 71.03
Credit card........................................ 667 3,396 (2,729) (80.36)
Amortization of intangibles associated with the
purchase of subsidiaries......................... 4,401 3,184 1,217 38.22
Communications..................................... 2,488 2,874 (386) (13.43)
Advertising and business development............... 3,734 4,668 (934) (20.01)
Guaranteed preferred debentures.................... 12,050 9,842 2,208 22.43
Other.............................................. 12,985 15,201 (2,216) (14.58)
-------- ------- ------
Total noninterest expense...................... $150,807 138,704 12,103 8.73
======== ======= ====== =======
NONINTEREST INCOME. Noninterest income was $41.7 million for
the year ended December 31, 1999, compared to $36.5 million for
1998. Noninterest income consists primarily of service charges on
deposit accounts and customer service fees, mortgage banking
revenues and other income.
Service charges on deposit accounts and customer service fees
increased to $17.7 million for 1999, from $14.9 million for 1998.
The increase in service charges and customer service fees is
attributable to:
* increased deposit balances provided by internal growth;
* our acquisitions completed throughout 1998 and 1999;
50
* additional products and services available and utilized by
our expanding base of retail and commercial customers;
* increased fee income resulting from revisions of customer
service charge rates effective April 1, 1999, and enhanced
control of fee waivers; and
* increased interchange income associated with automatic
teller machine services and debit and credit cards.
As described below, this increase was partially offset by the
foregone revenue associated with the divestiture of certain branches
in 1999, which resulted in a reduction in First Bank's deposit base
of approximately $54.8 million.
Credit card fees declined to $409,000 for 1999, from $3.0
million for 1998. The reduction in credit card fees primarily
results from the liquidation of our merchant credit card processing
operation effective December 31, 1998.
Our mortgage banking revenues consist primarily of loan
servicing fees, net, and gain on mortgage loans sold and held for
sale. Loan servicing fees, net, decreased to $657,000 from $1.0
million for the years ended December 31, 1999 and 1998,
respectively. We attribute the decrease in loan servicing fees to
aggregate increases of $698,000 in additional amortization of
mortgage servicing rights, interest shortfall and mortgage-backed
security expense. This decrease in loan servicing fees was partially
offset by an increase in loan servicing fees resulting from the
increase in the portfolio of loans serviced for others. The gain on
mortgage loans sold and held for sale increased to $6.9 million from
$5.6 million for 1999 and 1998, respectively. This increase
regarding mortgage loans is attributable to an increased volume of
loans sold and held for sale, including fixed rate residential
mortgage loans, which are sold on a servicing retained basis, and
adjustable-rate and non-conforming residential mortgage loans, which
are sold on a servicing released basis.
The net gain on sales of available-for-sale securities was
$791,000 and $1.5 million for the years ended December 31, 1999 and
1998, respectively. These gains resulted from sales of available-for-
sale securities necessary to facilitate the funding of loan growth.
Net loss on sales of trading securities was $303,000 for the
year ended December 31, 1999, in comparison to a net gain of
$607,000 for 1998. The loss for 1999 resulted from the termination
of our trading division, effective December 31, 1998, and the
subsequent liquidation of all trading portfolio securities during
the first quarter of 1999.
The gain on sales of branches, net of expenses, of $4.4
million resulted from the divestiture of seven branches in the
central and northern Illinois market areas.
Other income was $11.1 million and $10.0 million for the
years ended December 31, 1999 and 1998, respectively. The primary
components of the increase are attributable to increased income
earned on our investment in bank-owned life insurance and expanded
brokerage and private banking and trust services. The bank-owned
life insurance income increased to $3.9 million for 1999, in
comparison to $3.1 million for 1998. This increase results from
twelve months of earnings on FBA's investment in bank-owned life
insurance in 1999, in comparison to nine months of earnings in 1998.
In addition, trust services income increased to $1.8 million for
1999 from $1.4 million for 1998 due to the continued expansion of
these services, primarily in California.
NONINTEREST EXPENSE. Noninterest expense increased to $150.8
million for the year ended December 31, 1999 from $138.7 million for
1998. The increase reflects:
* our acquisitions completed throughout 1998 and 1999;
* increased data processing fees primarily associated with
our Year 2000 Program;
* increased legal, examination and professional fees; and
* FBA's issuance of trust preferred securities in July 1998.
51
The overall increase in noninterest expense was partially
offset by a decline in credit card expenses and a reduction in
advertising and business development expenses, postage, printing and
supplies expenses and communications expenses. This is consistent
with management's efforts to more effectively manage these
expenditures.
Specifically, salaries and employee benefits increased by
$5.6 million to $61.5 million from $55.9 million for the years ended
December 31, 1999 and 1998, respectively. We associate the increase
with the newly-acquired banks and our continued commitment to
expanding our commercial, mortgage banking and retail business
development capabilities associated with the expansion and delivery
of our products and services. The overall increase also reflects the
competitive environment in the employment market that has resulted
in a higher demand for limited resources, thus escalating industry
salary and employee benefit costs.
Data processing fees were $18.6 million and $13.9 million for
1999 and 1998, respectively. First Services, L.P., a limited
partnership indirectly owned by our Chairman and his adult children,
provides data processing and various related services to our
subsidiary banks and us under the terms of data processing
agreements. We attribute the increase in data processing fees to
growth and technological advancements consistent with our product
and service offerings, increased expenses attributable to
communication data lines related to the expansion of the branch
network infrastructure and expenses associated with our Year 2000
Program.
Legal, examination and professional fees increased by $3.8
million to $9.1 million in 1999, from $5.3 million in 1998. We
attribute the increase in these fees to our expanded utilization of
external consultants in conjunction with the development and
expansion of selected business initiatives. Increased legal
expenditures associated with the settlement of certain litigation
further contributed to the overall increase.
Credit card expenses declined by $2.7 million to $667,000
from $3.4 million for the years ended December 31, 1999 and 1998,
respectively. As previously discussed, this decline primarily
results from the liquidation of our merchant credit card processing
operation, effective December 31, 1998.
Amortization of intangibles associated with the purchase of
subsidiaries was $4.4 million and $3.2 million for the years ended
December 31, 1999 and 1998, respectively. The increase for 1999 is
primarily attributable to amortization of the cost in excess of the
fair value of the net assets acquired of the acquisitions that we
completed during 1999.
Guaranteed preferred debentures increased by $2.2 million to
$12.1 million from $9.8 million for the years ended December 31,
1999 and 1998, respectively. We associate the increase for 1999 with
the issuance by FBA's financing subsidiary of its trust preferred
securities in July 1998.
BALANCE SHEET
INVESTMENT SECURITIES
We classify the securities within our investment portfolio as
held to maturity or available for sale. We no longer engage in the
trading of investment securities. Our investment security portfolio
consists primarily of securities designated as available for sale.
The investment security portfolio was $385.0 million and $563.5
million at June 30, 2001 and December 31, 2000, respectively,
compared to $451.6 million and $534.8 million at December 31, 1999
and 1998, respectively. We attribute the decrease in investment
securities during the six months ended June 30, 2001 to the
liquidation of certain investment securities held by FBA and a
higher than normal level of investment security calls resulting from
the general decline in interest rates.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Interest earned on our loan portfolio represents the
principal source of income for our subsidiary banks. Interest and
fees on loans were 92.8% and 92.0% of total interest income for the
six months ended
52
June 30, 2001 and 2000, respectively, and 92.3%, 91.5% and 86.7% of
total interest income for the years ended December 31, 2000, 1999
and 1998, respectively. Loans, net of unearned discount, represented
82.3% and 80.9% of total assets as of June 30, 2001 and December 31,
2000, respectively, compared to 82.1% and 78.6% of total assets at
December 31, 1999 and 1998, respectively. Total loans, net of
unearned discount, increased $109.7 million to $4.86 billion for the
six months ended June 30, 2001, $750.0 million to $4.75 billion for
the year ended December 31, 2000, and $420.0 million to $4.00
billion for the year ended December 31, 1999. We view the quality,
yield and growth of our loan portfolio to be instrumental elements
in determining our profitability.
During the five years ended December 31, 2000, total loans,
net of unearned discount, increased 71.5% from $2.77 billion at
December 31, 1996 to $4.75 billion at December 31, 2000. At June 30,
2001, total loans, net of unearned discount, were $4.86 billion.
Throughout this period, we have substantially enhanced our
capabilities for achieving and managing internal growth. A key
element of this process has been the expansion of our corporate
business development staff, which is responsible for the internal
development of both loan and deposit relationships with commercial
customers. While this process was occurring, in order to achieve
more diversification, a higher level of interest yield and a
reduction in interest rate risk within our loan portfolio, we also
focused on repositioning our portfolio. As the corporate business
development effort continued to originate a substantial volume of
new loans, substantially all of our residential mortgage loan
production has been sold in the secondary mortgage market. We have
also substantially reduced our origination of indirect automobile
loans. This allowed us to fund part of the growth in corporate
lending through reductions in residential real estate and indirect
automobile lending.
In addition, our acquisitions added substantial portfolios of
new loans. Some of these portfolios, particularly those from
acquisitions completed in 1995, contained significant loan problems,
which we anticipated and considered in our acquisition pricing. As
we resolved the asset quality issues, the portfolios of the acquired
entities tended to decline because many of the resources which would
otherwise be directed toward generating new loans were concentrated
on improving or eliminating existing relationships.
This table summarizes the effects of these factors on our
loan portfolio for the six months ended June 30, 2001 and five years
ended December 31, 2000:
INCREASE (DECREASE) FOR THE
INCREASE (DECREASE) YEAR ENDED DECEMBER 31,
FOR THE SIX MONTHS ---------------------------------------------------------------
ENDED JUNE 30, 2001 2000 1999 1998 1997 1996
------------------- ------- -------- -------- -------- --------
(DOLLARS EXPRESSED IN THOUSANDS)
Internal loan volume increase
(decrease):
Commercial lending......... $ 71,918 360,410 363,486 633,660 378,882 209,251
Residential real estate
lending(1)............... 101,078 20,137 (126,418) (152,849) (144,707) (164,400)
Consumer lending, net of
unearned discount........ (63,318) (64,606) (56,349) (30,506) (54,305) (82,231)
Loans provided by
acquisitions................. -- 440,000 235,500 127,600 54,361 61,130
-------- ------- -------- -------- -------- --------
Total increase in loans,
net of unearned
discount................. $109,678 755,941 416,219 577,905 234,231 23,750
======== ======= ======== ======== ======== ========
<FN>
- --------------------
(1) Includes loans held for sale, which increased $120.7 million for the six
months ended June 30, 2001.
Our lending strategy stresses quality, growth and
diversification. Throughout our organization, we employ a common
credit underwriting policy. Our commercial lenders focus principally
on small to middle-market companies. Consumer lenders focus
principally on residential loans, including home equity loans,
automobile financing and other consumer financing opportunities
arising out of our branch banking network.
53
Commercial, financial and agricultural loans include loans
that are made primarily based on the borrowers' general credit
strength and ability to generate cash flows for repayment from
income sources even though such loans and bonds may also be secured
by real estate or other assets. Real estate construction and
development loans, primarily relating to residential properties and
commercial properties, represent financing secured by real estate
under construction. Real estate mortgage loans consist primarily of
loans secured by single-family, owner-occupied properties and
various types of commercial properties on which the income from the
property is the intended source of repayment. Consumer and
installment loans are loans to individuals and consist primarily of
loans secured by automobiles. Loans held for sale are primarily
fixed and adjustable rate residential loans pending sale in the
secondary mortgage market in the form of a mortgage-backed security,
or to various private third-party investors.
The following table summarizes the composition of our loan
portfolio by major category and the percent of each category to the
total portfolio as of the dates presented:
DECEMBER 31,
---------------------------------------------------------------
JUNE 30, 2001 2000 1999 1998
------------------- ------------------- ------------------- -------------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
---------- ------ ---------- ------ ---------- ------ ---------- ------
(DOLLARS EXPRESSED IN THOUSANDS)
Commercial, financial and
agricultural.................. $1,559,990 33.4% $1,496,284 32.0% $1,086,919 27.4% $ 920,007 26.7%
Real estate construction and
development................... 813,574 17.4 809,682 17.3 795,081 20.1 720,910 20.9
Real estate mortgage:
One-to-four-family
residential loans.......... 706,869 15.1 726,474 15.5 720,630 18.2 739,442 21.5
Other real estate loans...... 1,480,703 31.7 1,476,383 31.5 1,130,939 28.6 789,735 22.9
Consumer and installment, net
of unearned discount.......... 111,019 2.4 174,337 3.7 225,343 5.7 274,392 8.0
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total loans, excluding
loans held for sale....... 4,672,155 100.0% 4,683,160 100.0% 3,958,912 100.0% 3,444,486 100.0%
===== ===== ===== =====
Loans held for sale............ 189,788 69,105 37,412 135,619
---------- ---------- ---------- ----------
Total loans................ $4,861,943 $4,752,265 $3,996,324 $3,580,105
========== ========== ========== ==========
DECEMBER 31,
-----------------------------------------
1997 1996
------------------- -------------------
AMOUNT % AMOUNT %
---------- ------ ---------- ------
(DOLLARS EXPRESSED IN THOUSANDS)
Commercial, financial and
agricultural.................. $ 621,618 21.1% $ 457,186 16.7%
Real estate construction and
development................... 413,107 14.0 289,378 10.5
Real estate mortgage:
One-to-four-family
residential loans.......... 915,205 31.1 1,059,770 38.7
Other real estate loans...... 713,910 24.3 600,810 21.9
Consumer and installment, net
of unearned discount.......... 279,279 9.5 333,340 12.2
---------- ----- ---------- -----
Total loans, excluding
loans held for sale....... 2,943,119 100.0% 2,740,484 100.0%
===== =====
Loans held for sale............ 59,081 27,485
---------- ----------
Total loans................ $3,002,200 $2,767,969
========== ==========
Loans at December 31, 2000 mature as follows:
OVER ONE YEAR
THROUGH FIVE YEARS OVER FIVE YEARS
ONE YEAR ----------------------------- -----------------------------
OR LESS FIXED RATE FLOATING RATE FIXED RATE FLOATING RATE TOTAL
---------- ---------- ------------- ---------- ------------- ---------
(DOLLARS EXPRESSED IN THOUSANDS)
Commercial, financial and
agricultural............ $1,253,183 159,905 54,266 18,524 10,406 1,496,284
Real estate construction
and development......... 775,615 27,314 4,231 206 2,316 809,682
Real estate mortgage...... 1,130,611 466,735 317,581 174,650 113,280 2,202,857
Consumer and installment,
net of unearned
discount................ 45,751 104,364 1,207 21,308 1,707 174,337
Loans held for sale....... 69,105 -- -- -- -- 69,105
---------- ------- ------- ------- ------- ---------
Total loans........... $3,274,265 758,318 377,285 214,688 127,709 4,752,265
========== ======= ======= ======= ======= =========
54
The following table is a summary of loan loss experience for
the six months ended June 30, 2001 and 2000, and for the five years
ended December 31, 2000:
AS OF OR FOR THE SIX
MONTHS ENDED JUNE 30, AS OF OR FOR THE YEARS ENDED DECEMBER 31,
---------------------- ---------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
---------- --------- --------- --------- --------- --------- ---------
(DOLLARS EXPRESSED IN THOUSANDS)
Allowance for loan losses, beginning
of period............................. $ 81,592 68,611 68,611 60,970 50,509 46,781 52,665
Acquired allowances for loan losses.... -- 799 6,062 3,008 3,200 30 2,338
---------- --------- --------- --------- --------- --------- ---------
81,592 69,410 74,673 63,978 53,709 46,811 55,003
---------- --------- --------- --------- --------- --------- ---------
Loans charged-off:
Commercial, financial and
agricultural........................ (14,126) (2,949) (9,768) (10,855) (3,908) (2,308) (8,918)
Real estate construction and
development......................... (65) (1) (2,229) (577) (185) (2,242) (1,241)
Real estate mortgage................. (375) (378) (2,213) (2,561) (2,389) (6,250) (10,308)
Consumer and installment............. (770) (1,642) (2,840) (3,728) (3,701) (6,032) (8,549)
---------- --------- --------- --------- --------- --------- ---------
Total.............................. (15,336) (4,970) (17,050) (17,721) (10,183) (16,832) (29,016)
---------- --------- --------- --------- --------- --------- ---------
Recoveries of loans previously
charged-off:
Commercial, financial and
agricultural........................ 1,884 3,684 5,621 3,602 3,417 2,146 2,642
Real estate construction and
development......................... 239 244 319 849 342 269 495
Real estate mortgage................. 846 1,149 1,937 2,357 2,029 3,666 3,255
Consumer and installment............. 806 1,103 1,965 2,473 2,656 3,149 2,908
---------- --------- --------- --------- --------- --------- ---------
Total.............................. 3,775 6,180 9,842 9,281 8,444 9,230 9,300
---------- --------- --------- --------- --------- --------- ---------
Net loan (charge-offs)
recoveries........................ (11,561) 1,210 (7,208) (8,440) (1,739) (7,602) (19,716)
---------- --------- --------- --------- --------- --------- ---------
Provision for loan losses.............. 7,110 7,202 14,127 13,073 9,000 11,300 11,494
---------- --------- --------- --------- --------- --------- ---------
Allowance for loan losses, end of
period................................ $ 77,141 77,822 81,592 68,611 60,970 50,509 46,781
========== ========= ========= ========= ========= ========= =========
Loans outstanding, net of unearned
discount:
Average.............................. $4,840,188 4,180,776 4,290,958 3,812,508 3,250,719 2,846,157 2,726,297
End of period........................ 4,861,943 4,326,393 4,752,265 3,996,324 3,580,105 3,002,200 2,767,969
End of period, excluding loans held
for sale............................ 4,672,155 4,286,326 4,683,160 3,958,912 3,444,486 2,943,119 2,740,484
========== ========= ========= ========= ========= ========= =========
Ratio of allowance for loan losses to
loans outstanding:
Average.............................. 1.59% 1.86% 1.90% 1.80% 1.88% 1.77% 1.72%
End of period........................ 1.59 1.80 1.72 1.72 1.70 1.68 1.69
End of period, excluding loans held
for sale............................ 1.65 1.82 1.74 1.73 1.77 1.72 1.71
Ratio of net charge-offs (recoveries)
to average loans outstanding(1)....... 0.48 (0.06) 0.17 0.22 0.05 0.27 0.72
Ratio of current period recoveries
to preceding period's total
charge-offs........................... 75.96 82.09 55.54 91.14 50.17 31.81 59.54
========== ========= ========= ========= ========= ========= =========
<FN>
- ----------------------
(1) Ratios for the six month period are annualized.
The following table is a summary of the allocation of the
allowance for loan losses for the five years ended December 31,
2000:
AS OF OR FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
2000 1999 1998 1997 1996
------- ------ ------ ------ ------
(DOLLARS EXPRESSED IN THOUSANDS)
Commercial, financial and agricultural...................... $32,352 24,898 19,239 14,879 13,579
Real estate construction and development.................... 14,667 13,264 15,073 7,148 4,584
Real estate mortgage........................................ 24,691 20,750 18,774 18,317 14,081
Consumer and installment.................................... 3,142 4,390 5,180 5,089 10,296
Unallocated................................................. 6,740 5,309 2,704 5,076 4,241
------- ------ ------ ------ ------
Total................................................... $81,592 68,611 60,970 50,509 46,781
======= ====== ====== ====== ======
55
Nonperforming assets include nonaccrual loans, restructured
loans and other real estate. The following table presents the
categories of nonperforming assets and certain ratios as of the
dates indicated:
JUNE 30, DECEMBER 31,
---------------------- ---------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
---------- --------- --------- --------- --------- --------- ---------
(DOLLARS EXPRESSED IN THOUSANDS)
Commercial, financial and agricultural:
Nonaccrual........................... $ 26,887 14,824 22,437 18,397 15,385 4,017 4,113
Restructured terms................... -- 22 22 29 -- -- 130
Real estate construction and
development:
Nonaccrual........................... 13,316 2,392 11,068 1,886 3,858 4,097 817
Real estate mortgage:
Nonaccrual........................... 17,820 16,398 16,524 16,414 18,858 10,402 24,486
Restructured terms................... 2,930 2,971 2,952 2,979 5,221 5,456 278
Consumer and installment:
Nonaccrual........................... 58 208 155 32 216 94 440
Restructured terms................... 7 -- 8 -- -- -- 5
---------- --------- --------- --------- --------- --------- ---------
Total nonperforming loans.......... 61,018 36,815 53,166 39,737 43,538 24,066 30,269
Other real estate...................... 3,690 1,903 2,487 2,129 3,709 7,324 10,607
---------- --------- --------- --------- --------- --------- ---------
Total nonperforming assets......... $ 64,708 38,718 55,653 41,866 47,247 31,390 40,876
========== ========= ========= ========= ========= ========= =========
Loans, net of unearned discount........ $4,861,943 4,326,393 4,752,265 3,996,324 3,580,105 3,002,200 2,767,969
========== ========= ========= ========= ========= ========= =========
Loans past due 90 days or more and
still accruing........................ $ 7,550 3,477 3,009 5,844 4,674 2,725 3,779
========== ========= ========= ========= ========= ========= =========
Ratio of:
Allowance for loan losses to loans... 1.59% 1.80% 1.72% 1.72% 1.70% 1.68% 1.69%
Nonperforming loans to loans......... 1.26 0.85 1.12 0.99 1.22 0.80 1.09
Allowance for loan losses to
nonperforming loans................. 126.42 211.39 153.47 172.66 140.04 209.88 154.55
Nonperforming assets to loans and
other real estate................... 1.33 0.89 1.17 1.05 1.32 1.04 1.47
========== ========= ========= ========= ========= ========= =========
Nonperforming loans, consisting of loans on nonaccrual status
and certain restructured loans, were $61.0 million at June 30,
2001 and $53.2 million at December 31, 2000, in comparison to
$39.7 million and $43.5 million at December 31, 1999 and 1998,
respectively. Included in nonaccrual real estate construction and
development loans at June 30, 2001 and December 31, 2000 is a single
borrowing relationship of $12.7 million and $10.9 million,
respectively, relating to a residential and recreational development
project that has had significant financial difficulties. This project
experienced inadequate project financing at inception, project
delays and weak project management. Financing for this project
has since been recast, and is presently meeting development
expectations. We attribute the increase in nonperforming and past
due loans for the six months ended June 30, 2001 to be reflective of
cyclical trends experienced within the banking industry as a result
of economic slow down. Consistent with the recent general economic
slow down experienced within our primary markets, we anticipate this
trend will continue in the upcoming months. The increase in
nonperforming and past due loans in 2000 primarily resulted from a
small number of credit relationships that were placed on nonaccrual
during the year ended December 31, 2000. These nonperforming loans
are symptomatic of circumstances that are specific to these
relationships, and are not indicative of distress across the broad
spectrum of our loan portfolio. As previously discussed, certain
acquired loan portfolios, particularly those acquired during 1995,
exhibited varying degrees of distress prior to their acquisition.
While these problems had been identified and considered in our
acquisition pricing, the acquisitions led to an increase in
nonperforming assets and problem loans (as defined below) to $95.0
million at December 31, 1995. Nonperforming assets and problem loans
were reduced to $59.3 million at December 31, 1997. At December 31,
1998, nonperforming assets and problem loans increased to
$68.5 million. We associate the increase for 1998 to two commercial
loans totaling $6.0 million, net of charge-offs; our acquisitions of
Republic Bank and Pacific Bay Bank; and the overall growth of our
loan portfolio, principally commercial, financial and agricultural,
real estate construction and development and commercial real estate
loans.
56
As of June 30, 2001, December 31, 2000 and December 31, 1999,
$55.7 million, $50.2 million and $36.3 million, respectively, of
loans not included in the table above were identified by management
as having potential credit problems (problem loans). We attribute
the increase primarily to the gradual slow down and uncertainties
that have recently occurred in the economy surrounding the markets
in which we operate. As of December 31, 1998, 1997 and 1996, problem
loans totaled $21.3 million, $27.9 million and $31.5 million,
respectively.
Our credit management policies and procedures focus on
identifying, measuring and controlling credit exposure. These
procedures employ a lender-initiated system of rating credits, which
is ratified in the loan approval process and subsequently tested in
internal loan reviews, external audits and regulatory bank
examinations. The system requires rating all loans at the time they
are originated, except for homogeneous categories of loans, such as
residential real estate mortgage loans, indirect automobile loans
and credit card loans. These homogeneous loans are assigned an
initial rating based on our experience with each type of loan. We
adjust these ratings based on payment experience subsequent to their
origination.
We include adversely rated credits, including loans requiring
close monitoring which would not normally be considered criticized
credits by regulators, on a monthly loan watch list. Loans may be
added to our watch list for reasons that are temporary and
correctable, such as the absence of current financial statements of
the borrower or a deficiency in loan documentation. Other loans are
added whenever any adverse circumstance is detected which might
affect the borrower's ability to meet the terms of the loan. The
delinquency of a scheduled loan payment, a deterioration in the
borrower's financial condition identified in a review of periodic
financial statements, a decrease in the value of the collateral
securing the loan, or a change in the economic environment within
which the borrower operates could initiate the addition of a loan to
the list. Loans on the watch list require periodic detailed loan
status reports prepared by the responsible officer, which are
discussed in formal meetings with loan review and credit
administration staff members. Downgrades of loan risk ratings may be
initiated by the responsible loan officer at any time. However,
upgrades of risk ratings may only be made with the concurrence of
selected loan review and credit administration staff members
generally at the time of the formal watch list review meetings.
Each month, the credit administration department provides
management with detailed lists of loans on the watch list and
summaries of the entire loan portfolio of each subsidiary bank by
risk rating. These are coupled with analyses of changes in the risk
profiles of the portfolios, changes in past-due and nonperforming
loans and changes in watch list and classified loans over time. In
this manner, we continually monitor the overall increases or
decreases in the levels of risk in the portfolios. Factors are
applied to the loan portfolios for each category of loan risk to
determine acceptable levels of allowance for loan losses. We derive
these factors from the actual loss experience of our subsidiary
banks and from published national surveys of norms in the industry.
The calculated allowances required for the portfolios are then
compared to the actual allowance balances to determine the
provisions necessary to maintain the allowances at appropriate
levels. In addition, management exercises a certain degree of
judgment in its analysis of the overall adequacy of the allowance
for losses. In its analysis, management considers the change in the
portfolio, including growth, composition and the ratio of net loans
to total assets, and the economic conditions of the regions in which
we operate. Based on this quantitative and qualitative analysis,
provisions are made to the allowance for loan losses. Such
provisions are reflected in our consolidated statements of income.
We do not engage in lending to foreign countries or
activities based in foreign countries. Additionally, we do not have
any concentrations of loans exceeding 10% of total loans that are
not otherwise disclosed in the loan portfolio composition table. We
do not have a material amount of interest-earning assets that would
have been included in nonaccrual, past due or restructured loans if
such assets were loans.
57
DEPOSITS
Deposits are the primary source of funds for our subsidiary
banks. Our deposits consist principally of core deposits from each
bank's local market areas, including individual and corporate
customers. The following table sets forth the distribution of our
average deposit accounts at the dates indicated and the weighted
average interest rates on each category of deposits:
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED ------------------------------------------------------------
JUNE 30, 2001 2000 1999
----------------------------- ----------------------------- ----------------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
---------- -------- ----- ---------- -------- ----- ---------- -------- -----
(DOLLARS EXPRESSED IN THOUSANDS)
Noninterest-bearing demand.... $ 714,891 14.42% --% $ 634,886 14.18% --% $ 552,029 13.59% --%
Interest-bearing demand....... 466,634 9.41 1.50 421,986 9.43 1.40 391,892 9.65 1.30
Savings....................... 1,452,496 29.31 3.82 1,279,378 28.59 4.04 1,220,425 30.03 3.61
Time deposits................. 2,322,546 46.86 5.95 2,139,305 47.80 5.62 1,899,218 46.73 5.35
---------- ------ ==== ---------- ------ ==== ---------- ------ ====
Total average deposits........ $4,956,567 100.00% $4,475,555 100.00% $4,063,564 100.00%
========== ====== ========== ====== ========== ======
YEAR ENDED DECEMBER 31,
-----------------------------
1998
-----------------------------
PERCENT
OF
AMOUNT DEPOSITS RATE
---------- -------- -----
(DOLLARS EXPRESSED IN THOUSANDS)
Noninterest-bearing demand.... $ 463,939 12.27% --%
Interest-bearing demand....... 357,463 9.45 1.44
Savings....................... 1,076,524 28.48 3.96
Time deposits................. 1,882,329 49.80 5.74
---------- ------ ====
Total average deposits........ $3,780,255 100.00%
========== ======
CAPITAL AND DIVIDENDS
Historically, we have accumulated capital to support our
acquisitions by retaining most of our earnings. We pay relatively
small dividends on our Class A convertible, adjustable rate
preferred stock and our Class B adjustable rate preferred stock,
totaling $786,000 for the years ended December 31, 2000, 1999 and
1998. We have never paid, and have no present intention to pay,
dividends on our common stock.
Management believes as of June 30, 2001, December 31, 2000
and 1999, our subsidiary banks and we were "well capitalized" as
defined by the Federal Deposit Insurance Corporation Improvement Act
of 1991.
In December 1996, we formed our initial financing subsidiary
for the purpose of issuing $86.25 million of trust preferred
securities, and in October 2000, we formed our second financing
subsidiary for the purpose of issuing $57.5 million of trust
preferred securities. In June 1998, FBA formed its financing
subsidiary for the purpose of issuing $46.0 million of trust
preferred securities. For regulatory reporting purposes, these
preferred securities are eligible for inclusion, subject to certain
limitations, in our Tier 1 capital. Because of these limitations, as
of June 30, 2001, $62.4 million of these preferred securities were
not includable in Tier 1 capital, although all of this amount was
included in total risk-based capital.
LIQUIDITY
Our liquidity and the liquidity of our subsidiary banks is
the ability to maintain a cash flow which is adequate to fund
operations, service debt obligations and meet obligations and other
commitments on a timely basis. Our subsidiary banks receive funds
for liquidity from customer deposits, loan payments, maturities of
loans and investments, sales of investments and earnings. In
addition, we may avail ourselves of other sources of funds by
issuing certificates of deposit in denominations of $100,000 or
more, borrowing federal funds, selling securities sold under
agreements to repurchase and utilizing borrowings from the Federal
Home Loan Banks and other borrowings, including our revolving credit
line. The aggregate funds acquired from these sources were $755.8
million, $723.5 million and $476.8 million at June 30, 2001,
December 31, 2000 and 1999, respectively.
58
The following table presents the maturity structure of these
other sources of funds, which consists of certificates of deposit of
$100,000 or more, short-term borrowings and our revolving note
payable, at June 30, 2001:
JUNE 30, 2001
-------------
(DOLLARS EXPRESSED
IN THOUSANDS)
Three months or less..................... $ 349,432
Over three months through six months..... 94,028
Over six months through twelve months.... 126,966
Over twelve months....................... 185,358
---------
Total................................ $ 755,784
=========
In addition to these sources of funds, our subsidiary banks
have established borrowing relationships with the Federal Reserve
Banks in their respective districts. These borrowing relationships,
which are secured by commercial loans, provide an additional
liquidity facility that may be utilized for contingency purposes. At
June 30, 2001 and December 31, 2000, the borrowing capacity of our
subsidiary banks under these agreements was approximately $1.27
billion and $1.24 billion, respectively. In addition, our subsidiary
banks' borrowing capacity through their relationships with the
Federal Home Loan Banks was approximately $213.6 million and $262.1
million at June 30, 2001 and December 31, 2000, respectively.
Management believes the available liquidity and operating
results of our subsidiary banks will be sufficient to provide funds
for growth and to permit the distribution of dividends to us
sufficient to meet our operating and debt service requirements, both
on a short-term and long-term basis, and to pay the dividends on the
trust preferred securities issued by our financing subsidiaries and
FBA's financing subsidiary.
EFFECTS OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board, or
FASB, issued SFAS No. 133 -- Accounting for Derivative Instruments
and Hedging Activities. In June 1999 and June 2000, the FASB issued
SFAS No. 137 -- Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement
No. 133, an Amendment of FASB Statement No. 133, and SFAS No. 138 --
Accounting for Derivative Instruments and Hedging Activities, an
Amendment of FASB Statement No. 133, respectively. SFAS 133, as
amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS 133,
as amended, requires an entity to recognize all derivatives as
either assets or liabilities in the statement of financial position
and measure those instruments at fair value. If certain conditions
are met, a derivative may be specifically designated as a hedge in
one of three categories. The accounting for changes in the fair
value of a derivative (that is, gains and losses) depends on the
intended use of the derivative and the resulting designation. Under
SFAS 133, as amended, an entity that elects to apply hedge
accounting is required to establish, at the inception of the hedge,
the method it will use for assessing the effectiveness of the
hedging derivative and the measurement approach for determining the
ineffective aspect of the hedge. Those methods must be consistent
with the entity's approach to managing risk.
We utilize derivative instruments and hedging activities to
assist in the management of interest rate sensitivity and to modify
the repricing, maturity and option characteristics of certain assets
and liabilities. We use such derivative instruments solely to reduce
our interest rate exposure. The following is a summary of our
accounting policies for derivative instruments and hedging
activities under SFAS 133, as amended.
INTEREST RATE SWAP AGREEMENTS -- CASH FLOW HEDGES. Interest
rate swap agreements designated as cash flow hedges are accounted
for at fair value. The effective portion of the change in the cash
flow
59
hedge's gain or loss is initially reported as a component of
other comprehensive income and subsequently reclassified into
noninterest income when the underlying transaction affects earnings.
The ineffective portion of the change in the cash flow hedge's gain
or loss is recorded in earnings on each monthly measurement date.
The swap agreements are accounted for on an accrual basis with the
net interest differential being recognized as an adjustment to
interest income or interest expense of the related asset or
liability.
INTEREST RATE SWAP AGREEMENTS -- FAIR VALUE HEDGES. Interest
rate swap agreements designated as fair value hedges are accounted
for at fair value. Changes in the fair value of the swap agreements
are recognized currently in noninterest income. The change in the
fair value on the underlying hedged item attributable to the hedged
risk adjusts the carrying amount of the underlying hedged item and
is also recognized currently in noninterest income. All changes in
fair value are measured on a monthly basis. The swap agreements are
accounted for on an accrual basis with the net interest differential
being recognized as an adjustment to interest income or interest
expense of the related asset or liability.
INTEREST RATE CAP AND FLOOR AGREEMENTS. Interest rate cap and
floor agreements are accounted for at fair value. Changes in the
fair value of interest rate cap and floor agreements are recognized
in earnings on each monthly measurement date.
INTEREST RATE LOCK COMMITMENTS. Commitments to originate
loans, or interest rate lock commitments, which primarily consist of
commitments to originate fixed rate residential mortgage loans, are
recorded at fair value. Changes in the fair value are recognized in
noninterest income on a monthly basis.
FORWARD CONTRACTS TO SELL MORTGAGE-BACKED SECURITIES. Forward
contracts to sell mortgage-backed securities are recorded at fair
value. Changes in the fair value of forward contracts to sell
mortgage-backed securities are recognized in noninterest income on a
monthly basis.
On January 1, 2001, we implemented SFAS 133, as amended. The
implementation of SFAS 133, as amended, resulted in an increase in
derivative instruments of $12.5 million, an increase in deferred tax
liabilities of $5.1 million and an increase in other comprehensive
income of $9.1 million. In addition, we recorded a cumulative effect
of change in accounting principle of $1.4 million, net of taxes of
$741,000, as a reduction of net income. The effect of future
derivative transactions as well as further guidance from the
Derivative Implementation Group may result in modifications of our
current assessment of SFAS 133, as amended, and its overall impact
on our consolidated financial statements.
In September 2000, the FASB issued SFAS No. 140 -- Accounting
for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, a replacement of FASB Statement 125. SFAS No. 140
revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain
disclosures. SFAS No. 140 provides accounting and reporting
standards for transfers and servicing of financial assets and
extinguishments of liabilities which are based on the consistent
application of a financial-components approach. SFAS No. 140 is
effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001, and
is effective for recognition and reclassification of collateral and
for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2001. On
December 31, 2000, we implemented the disclosure requirements of
SFAS No. 140, and on March 31, 2001, we implemented the SFAS No. 140
requirements pertaining to transfers and servicing of financial
assets and extinguishments of liabilities. The implementation of
these requirements did not have a material effect on our
consolidated financial statements. In addition, we have evaluated
the additional requirements of SFAS No. 140, which will become
effective for fiscal years ending after December 15, 2001, to
determine their potential impact on our consolidated financial
statements. Based upon our analysis, we do not believe they will
have a material effect on our consolidated financial statements.
In July 2001, the FASB issued SFAS No. 141 -- Business
Combinations, and SFAS No. 142 -- Goodwill and Other Intangible
Assets. SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001
as well as all purchase method business
60
combinations completed after June 30, 2001. SFAS No. 141 also
specifies criteria intangible assets acquired in a purchase method
business combination must meet to be recognized and reported apart
from goodwill. SFAS No. 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with
the provisions of SFAS No. 142. SFAS No. 142 also requires that
intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual
values, and reviewed for impairment in accordance with SFAS
No. 121 -- Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. The amortization of
goodwill ceases upon adoption of SFAS No. 142, which for calendar
year-end companies, will be January 1, 2002.
As of January 1, 2002, the date of adoption, we expect to
have unamortized goodwill, exclusive of our pending acquisitions, of
approximately $79.9 million, all of which will be subject to the
transition provisions of SFAS No. 141 and SFAS No. 142. Amortization
of intangibles associated with the purchase of subsidiaries was $3.7
million for the six months ended June 30, 2001, and $5.3 million,
$4.4 million and $3.2 million for the years ended December 31, 2000,
1999 and 1998, respectively. We are currently evaluating the
additional requirements of SFAS No. 141 and SFAS No. 142 to
determine their potential impact on our consolidated financial
statements.
EFFECTS OF INFLATION
Inflation affects financial institutions less than other
types of companies. Financial institutions make relatively few
significant asset acquisitions that are directly affected by
changing prices. Instead, the assets and liabilities are primarily
monetary in nature. Consequently, interest rates are more
significant to the performance of financial institutions than the
effect of general inflation levels. While a relationship exists
between the inflation rate and interest rates, we believe this is
generally manageable through our asset-liability management program.
61
BUSINESS
WHO WE ARE
We are a registered bank holding company incorporated in
Missouri and headquartered in St. Louis County, Missouri. Through
the operation of our subsidiaries, we offer a broad array of
financial services to consumer and commercial customers. Over the
years, our organization has grown significantly, primarily as a
result of our acquisition strategy, as well as through internal
growth. We currently have banking operations in California,
Illinois, Missouri and Texas. As of June 30, 2001, we had total
assets of $5.90 billion, loans, net of unearned discount, of $4.86
billion, total deposits of $4.99 billion and total stockholders'
equity of $396.4 million.
Through our subsidiary banks, we offer a broad range of
commercial and personal deposit products, including demand, savings,
money market and time deposit accounts. In addition, we market
combined basic services for various customer groups, including
packaged accounts for more affluent customers, and sweep accounts,
lock-box deposits and cash management products for commercial
customers. We also offer both consumer and commercial loans.
Consumer lending includes residential real estate, home equity and
installment lending. Commercial lending includes commercial,
financial and agricultural loans, real estate construction and
development loans, commercial real estate loans, asset-based loans,
commercial leasing and trade financing. Other financial services
offered include mortgage banking, debit cards, brokerage services,
credit-related insurance, automated teller machines, telephone
banking, safe deposit boxes, escrow and bankruptcy deposit services,
stock option services, and trust, private banking and institutional
money management services.
We operate through two subsidiary banks, as follows:
TOTAL ASSETS
GEOGRAPHIC (NUMBER OF) LOCATIONS AT JUNE 30,
NAME AT JUNE 30, 2001 2001
- --------------------------------------------------- ------------------------------------- ---------------------
(DOLLARS EXPRESSED
IN THOUSANDS)
First Bank Missouri (44) and Illinois (42) $3,244,560
First Banks America, Inc., and its subsidiary:
First Bank & Trust California (44) and Texas (6) 2,628,378
Our subsidiary banks are wholly owned by their respective
parent companies. We owned 93.16% of First Banks America, Inc., or
FBA, at June 30, 2001.
Various trusts, which were created by and are administered by
and for the benefit of Mr. James F. Dierberg, our Chairman of the
Board and Chief Executive Officer, and his adult children, own all
of our voting stock. Mr. Dierberg and his family, therefore, control
our management, policies and the election of our directors.
ACQUISITIONS
Prior to 1994, we concentrated our acquisitions within the
market areas of eastern Missouri and central and southern Illinois.
The premiums required to successfully pursue acquisitions escalated
sharply in 1993, reducing the economic viability of many potential
acquisitions in that area. Recognizing this, we began to expand the
geographic area in which we approached acquisition candidates. While
we were successful in making acquisitions in Chicago and northern
Illinois, we noted that acquisition pricing in Chicago and other
areas being considered was similar to that in our eastern Missouri
and central and southern Illinois acquisition areas. As a result,
while we continued to pursue acquisitions within these areas, we
turned much of our attention to institutions that could be acquired
at more attractive prices that were within major metropolitan areas
outside of these market areas. This led to the acquisition of
BancTEXAS Group Inc. in 1994, which had offices in Dallas and
Houston, Texas, and numerous acquisitions of financial institutions
that had offices in Los Angeles, Orange County, Santa Barbara, San
62
Francisco, San Jose, Ventura and Sacramento, California during the
five years ended December 31, 2000. For the three years ended
December 31, 2000, we completed nine acquisitions of banks and two
branch office purchases. On October 16, 2001, we acquired an
additional bank in Agoura Hills, California, and on October 31,
2001, we acquired an additional bank in Orange, California. These
transactions provided total assets of $1.53 billion and 33 banking
locations.
PENDING ACQUISITIONS
On July 20, 2001, we executed a definitive agreement with
Union Financial Group, Ltd., or UFG, providing for the acquisition
of UFG for a total purchase price of approximately $26.8 million.
Under the terms of the agreement, the common shareholders of UFG
will receive $11.00 per share in cash, or a total of approximately
$18.0 million, subject to a $1.60 per common share escrow to cover
certain contingent liabilities. The shareholders of Series D
preferred stock will receive the stated value of $100,000 per share.
UFG is headquartered in Swansea, Illinois, and operates nine banking
offices located in St. Clair, Madison, Jersey and Macoupin counties.
At June 30, 2001, UFG had $361.0 million in total assets, $270.0
million in loans, net of unearned discount, $62.3 million in
investment securities and $300.8 million in deposits. We expect this
transaction, which is subject to regulatory approvals, will be
completed during the fourth quarter of 2001.
On August 2, 2001, we executed a definitive agreement with
Plains Financial Corporation, or PFC, providing for the acquisition
of PFC. Under the terms of the agreement, the shareholders of PFC
will receive $293.07 per share in cash, or a total of approximately
$36.5 million. PFC is headquartered in Des Plaines, Illinois, and
has a total of three banking offices in Des Plaines, and one banking
office in Elk Grove, Illinois. At June 30, 2001, PFC had $255.4
million in total assets, $149.7 million in loans, net of unearned
discount, $72.7 million in investment securities and $220.3 million
in deposits. We expect this transaction, which is subject to
regulatory approvals, will be completed during the first quarter of
2002.
CLOSED ACQUISITIONS
On October 31, 2001, FBA completed its acquisition of BYL
Bancorp, or BYL, and its wholly owned banking subsidiary, BYL Bank
Group. Under the terms of the agreement, the shareholders of BYL
received $18.50 per share in cash, or a total of approximately $49.0
million. BYL was headquartered in Orange, California, and had six
branches located in Orange and Riverside counties. At the time of
the transaction, BYL had $281.5 million in total assets, $175.0
million in loans, net of unearned discount, $12.6 million in
investment securities and $251.8 million in deposits.
On October 16, 2001, FBA completed its acquisition of Charter
Pacific Bank, or Charter Pacific, Agoura Hills, California, in
exchange for $19.3 million in cash. Charter Pacific was
headquartered in Agoura Hills, California, and had one other branch
office in Beverly Hills, California. At the time of the transaction,
Charter Pacific had $101.5 million in total assets, $70.2 million in
loans, net of unearned discount, $7.5 million in investment
securities and $89.0 million in deposits. Charter Pacific was merged
with and into First Bank & Trust at the time of the transaction.
MARKET AREA
As of June 30, 2001, our subsidiary banks' 136 banking
facilities were located throughout eastern Missouri and in Illinois,
Texas and California. We service the St. Louis, Missouri
metropolitan area as our primary market area. Our second and third
largest market areas are central and southern Illinois and southern
and northern California, respectively. We also have locations in the
Houston, Dallas, Irving and McKinney, Texas metropolitan areas,
rural eastern Missouri and the greater Chicago, Illinois
metropolitan area.
COMPETITION AND BRANCH BANKING
Our subsidiary banks engage in highly competitive activities.
Those activities and the geographic markets served primarily involve
competition with other banks, some of which are affiliated with
large
63
regional or national holding companies. Financial institutions
compete based upon interest rates offered on deposit accounts,
interest rates charged on loans and other credit and service
charges, the quality of services rendered, the convenience of
banking facilities and, in the case of loans to large commercial
borrowers, relative lending limits.
Our principal competitors include other commercial banks,
savings banks, savings and loan associations, mutual funds, finance
companies, trust companies, insurance companies, leasing companies,
credit unions, mortgage companies, private issuers of debt
obligations and suppliers of other investment alternatives, such as
securities firms and financial holding companies. Many of our
non-bank competitors are not subject to the same degree of
regulation as that imposed on bank holding companies, federally
insured banks and national or state chartered banks. As a result,
such non-bank competitors have advantages over us in providing
certain services. We also compete with major multi-bank holding
companies, which are significantly larger than us and have greater
access to capital and other resources.
We believe we will continue to face competition in the
acquisition of independent banks and savings banks from bank and
financial holding companies. We often compete with larger financial
institutions that have substantially greater resources available for
making acquisitions.
Subject to regulatory approval, commercial banks situated in
California, Illinois, Missouri and Texas are permitted to establish
branches throughout their respective states, thereby creating the
potential for additional competition in our service areas.
EMPLOYEES
As of September 30, 2001, we employed approximately 1,977
employees. None of the employees are subject to a collective
bargaining agreement. We consider our relationships with our
employees to be good.
LEGAL PROCEEDINGS
In the ordinary course of business, we and our subsidiaries
become involved in legal proceedings. Our management, in
consultation with legal counsel, believes that the ultimate
resolution of these proceedings will not have a material adverse
effect on our business, financial condition or results of
operations.
SUPERVISION AND REGULATION
GENERAL. Federal and state laws extensively regulate First
Banks and our subsidiary banks primarily to protect depositors and
customers of our subsidiary banks. To the extent this discussion
refers to statutory or regulatory provisions, it is not intended to
summarize all of such provisions and is qualified in its entirety by
reference to the relevant statutory and regulatory provisions.
Changes in applicable laws, regulations or regulatory policies may
have a material effect on our business and prospects. We are unable
to predict the nature or extent of the effects on our business and
earnings that new federal and state legislation or regulation may
have. The enactment of the legislation described below has
significantly affected the banking industry generally and is likely
to have ongoing effects on us and our subsidiary banks in the
future.
We are a registered bank holding company under the Bank
Holding Company Act of 1956 and, as such, the Board of Governors of
the Federal Reserve System regulates, supervises and examines us. We
file annual reports with the Federal Reserve and provide to the
Federal Reserve additional information as it may require.
Since First Bank is an institution chartered by the State of
Missouri, the State of Missouri Division of Finance supervises,
regulates and examines First Bank. First Bank & Trust is chartered
by the State of California and is subject to supervision, regulation
and examination by the California Department of Financial
Institutions. Our subsidiary banks are also regulated by the Federal
Deposit Insurance Corporation, which provides deposit insurance of
up to $100,000 for each insured depositor.
64
BANK HOLDING COMPANY REGULATION. First Banks' activities and
those of our subsidiary banks have in the past been limited to the
business of banking and activities "closely related" or "incidental"
to banking. Under the Gramm-Leach-Bliley Act, which was enacted in
November 1999 and discussed below, bank holding companies now have
the opportunity to seek broadened authority, subject to limitations
on investment, to engage in activities that are "financial in
nature" if all of its subsidiary depository institutions are well
capitalized, well managed and have at least a satisfactory rating
under the Community Reinvestment Act (discussed briefly below).
We are also subject to capital requirements applied on a
consolidated basis which are substantially similar to those required
of our subsidiary banks (briefly summarized below). The Bank Holding
Company Act also requires a bank holding company to obtain approval
from the Federal Reserve before:
* acquiring, directly or indirectly, ownership or control of
any voting shares of another bank or bank holding company
if, after such acquisition, it would own or control more
than 5% of such shares (unless it already owns or controls
a majority of such shares);
* acquiring all or substantially all of the assets of
another bank or bank holding company; or
* merging or consolidating with another bank holding
company.
The Federal Reserve will not approve any acquisition, merger
or consolidation that would have a substantially anti-competitive
result, unless the anti-competitive effects of the proposed
transaction are clearly outweighed by a greater public interest in
meeting the convenience and needs of the community to be served. The
Federal Reserve also considers capital adequacy and other financial
and managerial factors in reviewing acquisitions and mergers.
SAFETY AND SOUNDNESS AND SIMILAR REGULATIONS. First Banks is
subject to various regulations and regulatory policies directed at
the financial soundness of our subsidiary banks. These include, but
are not limited to, the Federal Reserve's source of strength policy,
which obligates a bank holding company such as First Banks to
provide financial and managerial strength to its subsidiary banks;
restrictions on the nature and size of certain affiliate
transactions between a bank holding company and its subsidiary
depository institutions; and restrictions on extensions of credit by
our subsidiary banks to executive officers, directors, principal
stockholders and the related interests of such persons.
REGULATORY CAPITAL STANDARDS. The federal bank regulatory
agencies have adopted substantially similar risk-based and leverage
capital guidelines for banking organizations. Risk-based capital
ratios are determined by classifying assets and specified
off-balance-sheet financial instruments into weighted categories,
with higher levels of capital being required for categories deemed
to represent greater risk. Federal Reserve policy also provides that
banking organizations generally, and in particular those that are
experiencing internal growth or actively making acquisitions, are
expected to maintain capital positions that are substantially above
the minimum supervisory levels, without significant reliance on
intangible assets.
Under the risk-based capital standard, the minimum
consolidated ratio of total capital to risk-adjusted assets required
for bank holding companies is 8%. At least one-half of the total
capital must be composed of common equity, retained earnings,
qualifying noncumulative perpetual preferred stock, a limited amount
of qualifying cumulative perpetual preferred stock and minority
interests in the equity accounts of consolidated subsidiaries, less
certain items such as goodwill and certain other intangible assets,
which amount is referred to in the industry as Tier I capital. The
remainder may consist of qualifying hybrid capital instruments,
perpetual debt, mandatory convertible debt securities, a limited
amount of subordinated debt, preferred stock that does not qualify
as Tier I capital and a limited amount of loan and lease loss
reserves, which amount is referred to in the industry as Tier II
capital.
In addition to the risk-based standard, we are subject to
minimum requirements with respect to the ratio of our Tier I capital
to our average assets less goodwill and certain other intangible
assets, or the Leverage Ratio. Applicable requirements provide for a
minimum Leverage Ratio of 3% for bank holding
65
companies that have the best supervisory rating, while all other
bank holding companies must maintain a minimum Leverage Ratio of at
least 4% to 5%. The OCC and the FDIC have established capital
requirements for banks under their respective jurisdictions that are
consistent with those imposed by the Federal Reserve on bank holding
companies.
The following table sets forth our required and actual
capital ratios, as well as those of our subsidiary banks at June 30,
2001 and December 31, 2000:
ACTUAL TO BE WELL
-------------------------- FOR CAPITAL CAPITALIZED UNDER
JUNE 30, DECEMBER 31, ADEQUACY PROMPT CORRECTIVE
2001 2000 PURPOSES ACTION PROVISIONS
-------- ------------ ----------- -----------------
Total capital (to risk-weighted assets):
First Banks........................... 10.60% 10.21% 8.0% 10.0%
First Bank............................ 10.45 10.71 8.0 10.0
First Bank & Trust.................... 10.70 10.58 8.0 10.0
Bank of San Francisco(1).............. -- 22.38 8.0 10.0
Tier I capital (to risk-weighted assets):
First Banks........................... 8.01 7.56 4.0 6.0
First Bank............................ 9.20 9.46 4.0 6.0
First Bank & Trust.................... 9.45 9.32 4.0 6.0
Bank of San Francisco(1).............. -- 21.42 4.0 6.0
Tier I capital (to average assets):
First Banks........................... 7.33 7.45 3.0 5.0
First Bank............................ 8.10 8.49 3.0 5.0
First Bank & Trust.................... 8.73 9.27 3.0 5.0
Bank of San Francisco(1).............. -- 22.00 3.0 5.0
<FN>
- --------------------
(1) Bank of San Francisco was acquired by FBA on December 31, 2000. First
Bank & Trust merged with Bank of San Francisco on March 29, 2001, and
Bank of San Francisco was renamed First Bank & Trust.
PROMPT CORRECTIVE ACTION. The FDIC Improvement Act requires
the federal bank regulatory agencies to take prompt corrective
action in respect to depository institutions that do not meet
minimum capital requirements. A depository institution's status
under the prompt corrective action provisions depends upon how its
capital levels compare to various relevant capital measures and
other factors as established by regulation.
The federal regulatory agencies have adopted regulations
establishing relevant capital measures and relevant capital levels.
Under the regulations, a bank will be:
* "well capitalized" if it has a total capital ratio of 10%
or greater, a Tier I capital ratio of 6% or greater and a
Leverage Ratio of 5% or greater and is not subject to any
order or written directive by any such regulatory
authority to meet and maintain a specific capital level
for any capital measure;
* "adequately capitalized" if it has a total capital ratio
of 8% or greater, a Tier I capital ratio of 4% or greater
and a Leverage Ratio of 4% or greater (3% in certain
circumstances);
* "undercapitalized" if it has a total capital ratio of less
than 8%, a Tier I capital ratio of less than 4% or a
Leverage Ratio of less than 4% (3% in certain
circumstances);
* "significantly undercapitalized" if it has a total capital
ratio of less than 6%, a Tier I capital ratio of less than
3% or a Leverage Ratio of less than 3%; and
* "critically undercapitalized" if its tangible equity is
equal to or less than 2% of average quarterly tangible
assets.
Under certain circumstances, a depository institution's
primary federal regulatory agency may use its authority to lower the
institution's capital category. The banking agencies are permitted
to establish individualized minimum capital requirements exceeding
the general requirements described above.
66
Generally, failing to maintain the status of "well capitalized" or
"adequately capitalized" subjects a bank to restrictions and
limitations on its business that are progressively more severe.
A bank is prohibited from making any capital distribution
(including payment of a dividend) or paying any management fee to
its holding company if the bank would thereafter be
"undercapitalized." Limitations exist for "undercapitalized"
depository institutions, regarding, among other things, asset
growth, acquisitions, branching, new lines of business, acceptance
of brokered deposits and borrowings from the Federal Reserve System.
These institutions are also required to submit a capital restoration
plan that includes a guarantee from the institution's holding
company. "Significantly undercapitalized" depository institutions
may be subject to a number of requirements and restrictions,
including orders to sell sufficient voting stock to become
"adequately capitalized," requirements to reduce total assets and
cessation of receipt of deposits from correspondent banks. The
appointment of a receiver or conservator may be required for
"critically undercapitalized" institutions.
DIVIDENDS. First Banks' primary source of funds in the future
is the dividends, if any, paid by our subsidiary banks. The ability
of our subsidiary banks to pay dividends is limited by federal laws,
by regulations promulgated by the bank regulatory agencies and by
principles of prudent bank management. The terms of the subordinated
debentures associated with $47.4 million of trust preferred
securities issued by FBA's financing subsidiary prevent FBA's
payment of dividends to us under certain circumstances, including
the deferral by FBA of interest payments on those subordinated
debentures.
CUSTOMER PROTECTION. Our subsidiary banks are also subject to
consumer laws and regulations intended to protect consumers in
transactions with depository institutions, as well as other laws or
regulations affecting customers of financial institutions generally.
These laws and regulations mandate various disclosure requirements
and substantively regulate the manner in which financial
institutions must deal with their customers. Our subsidiary banks
must comply with numerous regulations in this regard and are subject
to periodic examinations with respect to their compliance with the
requirements.
COMMUNITY REINVESTMENT ACT. The Community Reinvestment Act of
1977 requires that, in connection with examinations of financial
institutions within their jurisdiction, the federal banking
regulators must evaluate the record of the financial institutions in
meeting the credit needs of their local communities, including low
and moderate income neighborhoods, consistent with the safe and
sound operation of those banks. These factors are also considered in
evaluating mergers, acquisitions and other applications to expand.
THE GRAMM-LEACH-BLILEY ACT. The Gramm-Leach-Bliley Act, or
GLB Act, enacted in 1999, amended and repealed portions of the
Glass-Steagall Act and other federal laws restricting the ability of
bank holding companies, securities firms and insurance companies to
affiliate with each other and to enter new lines of business. The
GLB Act established a comprehensive framework to permit financial
companies to expand their activities, including through such
affiliations, and to modify the federal regulatory structure
governing some financial services activities. This authority of
financial firms to broaden the types of financial services offered
to customers and to affiliates with other types of financial
services companies may lead to further consolidation in the
financial services industry and is likely to lead to additional
competition in the markets in which we operate and the growth of
larger competitors.
The GLB Act also adopted consumer privacy safeguards
requiring financial services providers to disclose their policies
regarding the privacy of customer information to their customers
and, subject to some exceptions, allowing customers to "opt out" of
policies permitting such companies to disclose confidential
financial information to non-affiliated third parties. Final
regulations implementing the new privacy standards became effective
in 2001. We believe we have devoted sufficient resources to comply
with the new requirements, and we do not expect the privacy
requirements will materially or adversely affect our operations or
prospects.
RESERVE REQUIREMENTS; FEDERAL RESERVE SYSTEM AND FEDERAL HOME
LOAN BANK SYSTEM. The Federal Reserve requires all depository
institutions to maintain reserves against their transaction accounts
and non-personal time deposits. The balances maintained to meet the
reserve requirements imposed by
67
the Federal Reserve may be used to satisfy liquidity requirements.
Institutions are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve regulations require
institutions to exhaust other reasonable alternative sources of
funds, including advances from Federal Home Loan Banks, before
borrowing from the Federal Reserve Bank.
Our subsidiary banks are either members of the Federal
Reserve System (First Bank) and/or the Federal Home Loan Bank System
(First Bank and First Bank & Trust) and are required to hold
investments in regional banks within those systems. Our subsidiary
banks were in compliance with these requirements at June 30, 2001,
with investments of $10.3 million in stock of the Federal Home Loan
Bank of Des Moines held by First Bank, $2.8 million in stock of the
Federal Home Loan Bank of San Francisco held by First Bank & Trust,
and $4.9 million in stock of the Federal Reserve Bank of St. Louis
held by First Bank.
MONETARY POLICY AND ECONOMIC CONTROL. The commercial banking
business is affected by legislation, regulatory policies and general
economic conditions as well as the monetary policies of the Federal
Reserve. The following instruments of monetary policy are available
to the Federal Reserve:
* changes in the discount rate on member bank borrowings;
* the availability of credit at the "discount window;"
* open market operations;
* the imposition of changes in reserve requirements against
deposits and assets of foreign branches; and
* the imposition of and changes in reserve requirements
against certain borrowings by banks and their affiliates.
These monetary policies are used in varying combinations to
influence overall growth and distributions of bank loans,
investments and deposits, and this use may affect interest rates
charged on loans or paid on liabilities. The monetary policies of
the Federal Reserve have had a significant effect on the operating
results of commercial banks and are expected to do so in the future.
Such policies are influenced by various factors, including
inflation, unemployment, and short-term and long-term changes in the
international trade balance and in the fiscal policies of the U.S.
Government. We cannot predict the effect that future changes in
monetary policy or in the discount rate on member bank borrowings
will have on our future business and earnings or those of our
subsidiary banks.
68
MANAGEMENT
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
The members of our Board of Directors and our executive
officers 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.
NAME AGE POSITION
---- --- --------
DIRECTORS:
James F. Dierberg 64 Chairman of the Board of Directors and Chief Executive
Officer
Allen H. Blake 58 Director and President, Chief Operating Officer, Chief
Financial Officer and Secretary
Michael J. Dierberg 30 Director
Gordon A. Gundaker(1) 67 Director
David L. Steward(1) 50 Director
Hal J. Upbin(1) 62 Director
Douglas H. Yaeger(1) 52 Director
Donald W. Williams 54 Director and Senior Executive Vice President and Chief
Credit Officer
EXECUTIVE OFFICERS NOT
SERVING AS DIRECTORS:
Michael F. Hickey 44 Executive Vice President and Chief Information Officer
Terrance M. McCarthy 47 Executive Vice President
Michael F. McWhortor 50 Executive Vice President -- Banking Support
Mark T. Turkcan 45 Executive Vice President -- Mortgage Banking
<FN>
- --------------------
(1) Member of the Audit Committee.
JAMES F. DIERBERG has served as our Chairman of the Board of
Directors and Chief Executive Officer since 1988. He served as our
President from 1979 to 1992 and from 1994 to October 1999. Mr.
Dierberg has been the Chairman of the Board of Directors, President
and Chief Executive Officer of FBA since 1994 and a trustee of our
other financing subsidiaries since 1997 and 2000, respectively, and
FBA's financing subsidiary since 1998.
ALLEN H. BLAKE has served as our President since October
1999. He has served as our Chief Operating Officer since 1998, our
Chief Financial Officer since May 2001 and our Secretary since 1988.
Mr. Blake was our Senior Vice President and Chief Financial Officer
from 1992 to 1996 and Executive Vice President and Chief Financial
Officer from 1996 to September 1999. Mr. Blake has served as a
trustee of our other financing subsidiaries since 1997 and 2000,
respectively, and FBA's financing subsidiary since 1998.
MICHAEL J. DIERBERG serves as a Director. Mr. Dierberg is
also Senior Vice President -- Northern California of First Bank &
Trust. Prior to joining First Banks in July 2001, Mr. Dierberg
served as an attorney for the Office of the Comptroller of the
Currency in Washington, D.C.
GORDON A. GUNDAKER serves as a Director. Mr. Gundaker is
President and Chief Executive Officer of Coldwell Banker Gundaker in
St. Louis, Missouri.
DAVID L. STEWARD serves as a Director. Mr. Steward is
Chairman of the Board of Directors, President and Chief Executive
Officer of World Wide Technology, Inc. and Chairman of the Board of
Directors of Telcobuy.com (an affiliate of World Wide Technology,
Inc.) in St. Louis, Missouri.
HAL J. UPBIN serves as a Director. Mr. Upbin is Chairman of
the Board of Directors, President and Chief Executive Officer of
Kellwood Company in St. Louis, Missouri.
DOUGLAS H. YAEGER serves as a Director. Mr. Yaeger is
Chairman of the Board of Directors, President and Chief Executive
Officer of Laclede Gas Company in St. Louis, Missouri.
69
DONALD W. WILLIAMS is our Senior Executive Vice President and
Chief Credit Officer, and has served in various executive capacities
with us since 1993. Mr. Williams is also Director, Executive Vice
President and Chief Credit Officer of FBA and Chairman of the Board,
President and Chief Executive Officer of First Bank. He also serves
as Chairman of the Board of Directors of First Capital Group, Inc.
MICHAEL F. HICKEY has served as our Executive Vice President
and Chief Information Officer since November 1999. Mr. Hickey has
also served as a Director of First Bank and as the President of
First Services, L.P. since November of 1999. From 1996 to November
1999, Mr. Hickey was Vice President -- Senior Group Manager of
Information Systems for Mercantile Bank. Prior to that, from 1992 to
1996, Mr. Hickey was a Group Manager of Information Systems for
Mercantile Bank.
TERRANCE M. MCCARTHY has served in various executive
capacities with us since 1995. Mr. McCarthy is Executive Vice
President of First Banks and FBA, and Chairman of the Board of
Directors, President and Chief Executive Officer of First Bank &
Trust.
MICHAEL F. MCWHORTOR has served as our Executive Vice
President of Banking Support since March 2000. Mr. McWhortor was
Senior Vice President and Manager of the Business Intelligence Group
of Firstar Bank, N.A. in St. Louis, Missouri from September 1999 to
March 2000, Senior Vice President and Manager of Retail Banking and
Consumer Products of Mercantile Bancorporation, Inc. in St. Louis,
Missouri from 1998 to 1999; Vice President and Manager of Customer
Information Management of Mercantile Bancorporation, Inc. from 1997
to 1998; Vice President and Regional Manager of the Western Region
Credit Card Division of Bank One Corp. in Phoenix, Arizona from 1996
to 1997; and Chief Financial Officer of the Western Region Credit
Card Division of Bank One Corp in Phoenix, Arizona from 1995 to
1996.
MARK T. TURKCAN serves as our Executive Vice President of
Mortgage Banking, and has been employed in various executive
capacities with us since 1990. Mr. Turkcan is also a Director and
Executive Vice President of First Bank.
70
DESCRIPTION OF THE TRUST
The trust is a statutory business trust formed pursuant to
the Delaware Business Trust Act under a trust agreement executed by
us, as sponsor for the trust, and the trustees, and a certificate of
trust filed with the Delaware Secretary of State. The trust
agreement will be amended and restated in its entirety in the form
filed as an exhibit to the registration statement of which this
prospectus is a part, as of the date the preferred securities are
initially issued. The trust agreement will be qualified under the
Trust Indenture Act of 1939.
The holders of the preferred securities issued pursuant to
the offering described in this prospectus will own all of the issued
and outstanding preferred securities of the trust which have certain
prior rights over the other securities of the trust. We will not
initially own any of the preferred securities. We will acquire
common securities in an amount equal to at least 3% of the total
capital of the trust and will initially own, directly or indirectly,
all of the issued and outstanding common securities. The common
securities, together with the preferred securities, are called the
trust securities.
The trust exists exclusively for the purposes of:
* issuing the preferred securities to the public for cash;
* issuing its common securities to us in exchange for our
capitalization of the trust;
* investing the proceeds from the sale of the trust
securities in an equivalent amount of subordinated
debentures; and
* engaging in other activities that are incidental to those
listed above.
The rights of the holders of the trust securities are as set
forth in the trust agreement, the Delaware Business Trust Act and
the Trust Indenture Act. The trust agreement does not permit the
trust to borrow money or make any investment other than in the
subordinated debentures. Other than with respect to the trust
securities, we have agreed to pay for all debts and obligations and
all costs and expenses of the trust, including the fees and expenses
of the trustees and any income taxes, duties and other governmental
charges, and all costs and expenses related to these charges, to
which the trust may become subject, except for United States
withholding taxes that are properly withheld.
The number of trustees of the trust will, pursuant to the
Trust Agreement, initially be five. Three of the trustees, or the
Administrative Trustees, will be persons who are employees or
officers of or who are affiliated with us. These individuals include
James F. Dierberg, Allen H. Blake and Lisa K. Vansickle. The fourth
trustee will be an entity that maintains its principal place of
business in the State of Delaware. It is the Delaware trustee.
Initially, Wilmington Trust Company, a Delaware banking corporation,
will act as Delaware trustee. The fifth trustee, called the property
trustee, will initially be State Street Bank and Trust Company of
Connecticut, National Association. The property trustee is the
institutional trustee under the trust agreement and acts as the
indenture trustee called for under the applicable provisions of the
Trust Indenture Act. Also for purposes of compliance with the Trust
Indenture Act, State Street Bank and Trust Company of Connecticut,
National Association will act as guarantee trustee and indenture
trustee under the guarantee agreement and the indenture. See
"Description of the Subordinated Debentures" and "Description of the
Guarantee." We, as holder of all of the common securities, will have
the right to appoint or remove any trustee unless an event of
default under the indenture has occurred and is continuing, in which
case only the holders of the preferred securities may remove the
Delaware trustee or the property trustee. The trust has a term of
approximately 30 years but may terminate earlier as provided in the
trust agreement.
The property trustee will hold the subordinated debentures
for the benefit of the holders of the trust securities and will have
the power to exercise all rights, powers and privileges under the
indenture as the holder of the subordinated debentures. In addition,
the property trustee will maintain exclusive control of a segregated
non-interest bearing "payment account" established with State Street
Bank and Trust Company of Connecticut, National Association, to hold
all payments made on the subordinated debentures for the benefit of
the holders of the trust securities. The property trustee will make
payments
71
of distributions and payments on liquidation, redemption and
otherwise to the holders of the trust securities out of funds from
the payment account. The guarantee trustee will hold the guarantee
for the benefit of the holders of the preferred securities. We will
pay all fees and expenses related to the trust and the offering of
the preferred securities, including the fees and expenses of the
trustees.
DESCRIPTION OF THE PREFERRED SECURITIES
The preferred securities will be issued pursuant to the trust
agreement. For more information about the trust agreement, see
"Description of the Trust" beginning on page 71. State Street Bank
and Trust Company of Connecticut, National Association will act as
property trustee for the preferred securities under the trust
agreement for purposes of complying with the provisions of the Trust
Indenture Act. The terms of the preferred securities will include
those stated in the trust agreement and those made part of the trust
agreement by the Trust Indenture Act.
GENERAL
The trust agreement authorizes the administrative trustees,
on behalf of the trust, to issue the trust securities, which are
comprised of the preferred securities to be sold to the public and
the common securities. We will own all of the common securities
issued by the trust. The trust is not permitted to issue any
securities other than the trust securities or to incur any other
indebtedness.
The preferred securities will represent preferred undivided
beneficial interests in the assets of the trust, and the holders
of the preferred securities will be entitled to a preference over
the common securities upon an event of default with respect to
distributions and amounts payable on redemption or liquidation.
The preferred securities will rank equally, and payments on the
preferred securities will be made proportionally, with the common
securities, except as described under "-- Subordination of Common
Securities" below.
The property trustee will hold legal title to the
subordinated debentures in trust for the benefit of the holders of
the trust securities. We will guarantee the payment of distributions
out of money held by the trust, and payments upon redemption of the
preferred securities or liquidation of the trust, to the extent
described under "Description of the Guarantee." The guarantee does
not cover the payment of any distribution or the liquidation amount
when the trust does not have sufficient funds available to make
these payments.
DISTRIBUTIONS
SOURCE OF DISTRIBUTIONS. The funds of the trust available for
distribution to holders of the preferred securities will be limited
to payments made under the subordinated debentures, which the trust
will purchase with the proceeds from the sale of the trust
securities. Distributions will be paid through the property trustee,
which will hold the amounts received from our interest payments on
the subordinated debentures in the payment account for the benefit
of the holders of the trust securities. If we do not make interest
payments on the subordinated debentures, the property trustee will
not have funds available to pay distributions on the preferred
securities.
PAYMENT OF DISTRIBUTIONS. Distributions on the preferred
securities will be payable at the annual rate of 9.00% of the $25
stated liquidation amount, payable quarterly on March 31, June 30,
September 30 and December 31 of each year, to the holders of the
preferred securities on the relevant record dates. So long as the
preferred securities are represented by a global security, as
described below, the record date will be the business day
immediately preceding the relevant distribution date. The first
distribution date for the preferred securities will be December 31,
2001.
Distributions will accumulate from the date of issuance, will
be cumulative and will be computed on the basis of a 360-day year of
twelve 30-day months. If the distribution date is not a business
day, then payment of the distributions will be made on the next day
that is a business day, without any additional
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interest or other payment for the delay. When we use the term
"business day," we mean any day other than a Saturday, a Sunday, a
day on which banking institutions in New York, New York are
authorized or required by law, regulation or executive order to
remain closed or a day on which the corporate trust office of the
property trustee or the indenture trustee is closed for business.
EXTENSION PERIOD. As long as no event of default under the
indenture has occurred and is continuing, we have the right to defer
the payment of interest on the subordinated debentures at any time
for a period not exceeding 20 consecutive quarters. We refer to this
period of deferral as an "extension period." No extension period may
extend beyond December 31, 2031 or end on a date other than an
interest payment date, which dates are the same as the distribution
dates. If we defer the payment of interest, quarterly distributions
on the preferred securities will also be deferred during any such
extension period. Any deferred distributions under the preferred
securities will accumulate additional amounts at the annual rate of
9.00%, compounded quarterly from the relevant distribution date. The
term "distributions" as used in this prospectus includes those
accumulated amounts.
During an extension period, neither we nor any of our
subsidiaries may:
* declare or pay any dividends or distributions on, or
redeem, purchase, acquire or make a liquidation payment
with respect to, any of our capital stock (other than
stock dividends, noncash dividends in connection with the
implementation of a stockholder rights plan, purchases of
common stock in connection with employee benefit plans or
in connection with the reclassification of any class of
our capital stock into another class of capital stock) or
allow any of our subsidiaries to do the same with respect
to their capital stock (other than the payment of
dividends or distributions to us or to one of our
subsidiaries or a distribution with respect to the
preferred securities issued by FBA's financing subsidiary
in July 1998);
* make any payment of principal, interest or premium on or
repay, repurchase or redeem any debt securities that rank
equally with (including the subordinated debentures issued
to our two other financing subsidiaries), or junior to,
the subordinated debentures or allow any of our
subsidiaries to do the same;
* make any guarantee payments with respect to any other
guarantee by us of any other debt securities of any of our
subsidiaries if the guarantee ranks equally with or junior
to the subordinated debentures (other than payments under
the guarantee); or
* redeem, purchase or acquire less than all of the
subordinated debentures or any of the preferred
securities.
AFTER THE TERMINATION OF ANY EXTENSION PERIOD AND THE PAYMENT OF ALL
AMOUNTS DUE, WE MAY ELECT TO BEGIN A NEW EXTENSION PERIOD, SUBJECT
TO THE ABOVE REQUIREMENTS.
We do not currently intend to exercise our right to defer
distributions on the preferred securities by deferring the payment
of interest on the subordinated debentures.
REDEMPTION OR EXCHANGE
GENERAL. Subject to the prior approval of the Federal
Reserve, if required, we will have the right to redeem the
subordinated debentures:
* in whole at any time, or in part from time to time, on or
after December 31, 2006; or
* at any time, in whole, within 180 days following the
occurrence of a Tax Event, an Investment Company Event or
a Capital Treatment Event, which terms we define below.
* at any time, to the extent of any preferred securities we
purchase plus a proportionate amount of the common
securities we hold.
MANDATORY REDEMPTION. Upon our repayment or redemption, in
whole or in part, of any subordinated debentures, whether on
December 31, 2031 or earlier, the property trustee will apply the
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proceeds to redeem the same amount of the trust securities, upon not
less than 30 days' nor more than 60 days' notice, at the redemption
price. The redemption price will equal 100% of the aggregate
liquidation amount of the trust securities plus accumulated but
unpaid distributions to the date of redemption. If less than all of
the subordinated debentures are to be repaid or redeemed on a date
of redemption, then the proceeds from such repayment or redemption
will be allocated to redemption of preferred securities and common
securities proportionately.
DISTRIBUTION OF SUBORDINATED DEBENTURES IN EXCHANGE FOR
PREFERRED SECURITIES. Upon prior approval of the Federal Reserve, if
required, we will have the right at any time to dissolve, wind-up or
terminate the trust and, after satisfaction of the liabilities of
creditors of the trust as provided by applicable law, including,
without limitation, amounts due and owing the trustees of the trust,
cause the subordinated debentures to be distributed directly to the
holders of trust securities in liquidation of the trust. See "--
Liquidation Distribution Upon Termination."
After the liquidation date fixed for any distribution of
subordinated debentures in exchange for preferred securities:
* those trust securities will no longer be deemed to be
outstanding;
* certificates representing subordinated debentures in a
principal amount equal to the liquidation amount of those
preferred securities will be issued in exchange for the
preferred securities certificates;
* we will use our best efforts to list the subordinated
debentures on the Nasdaq National Market or a national
exchange;
* any certificates representing trust securities that are
not surrendered for exchange will be deemed to represent
subordinated debentures with a principal amount equal to
the liquidation amount of those preferred securities,
unpaid interest in an amount equal to the accumulated and
unpaid distributions on the preferred securities and
accruing interest at the rate provided for in the
subordinated debentures from the last distribution date on
the preferred securities; and
* all rights of the trust security holders other than the
right to receive subordinated debentures upon surrender of
a certificate representing trust securities will
terminate.
We cannot assure you that the market prices for the preferred
securities or the subordinated debentures that may be distributed if
a dissolution and liquidation of the trust were to occur would be
favorable. The preferred securities that an investor may purchase,
or the subordinated debentures that an investor may receive on
dissolution and liquidation of the trust, may trade at a discount to
the price that the investor paid to purchase the preferred
securities.
REDEMPTION UPON A TAX EVENT, INVESTMENT COMPANY EVENT OR
CAPITAL TREATMENT EVENT. If a Tax Event, an Investment Company Event
or a Capital Treatment Event occurs, we will have the right to
redeem the subordinated debentures in whole, but not in part, and
thereby cause a mandatory redemption of the trust securities in
whole at the redemption price. If one of these events occurs and we
do not elect to redeem the subordinated debentures, or to dissolve
the trust and cause the subordinated debentures to be distributed to
holders of the trust securities, then the preferred securities will
remain outstanding and additional interest may be payable on the
subordinated debentures. See "Description of the Subordinated
Debentures -- Redemption."
"Tax Event" means the receipt by the trust and us of an
opinion of counsel experienced in such matters stating that there is
more than an insubstantial risk that:
* interest payable by us on the subordinated debentures is
not, or within 90 days of the date of the opinion will not
be, deductible by us, in whole or in part, for federal
income tax purposes;
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* the trust is, or will be within 90 days after the date of
the opinion, subject to federal income tax with respect to
income received or accrued on the subordinated debentures;
or
* the trust is, or will be within 90 days after the date of
opinion, subject to more than an immaterial amount of
other taxes, duties, assessments or other governmental
charges.
"Investment Company Event" means the receipt by the trust and
us of an opinion of counsel experienced in such matters to the
effect that the trust is or will be considered an "investment
company" that is required to be registered under the Investment
Company Act, as a result of a change in law or regulation or a
change in interpretation or application of law or regulation.
"Capital Treatment Event" means the receipt by the trust and
us of an opinion of counsel experienced in such matters to the
effect that there is more than an insubstantial risk of impairment
of our ability to treat the preferred securities as Tier I capital
for purposes of the current capital adequacy guidelines of the
Federal Reserve, as a result of any amendment to any laws or any
regulations.
For all of the events described above, we and the trust must
request and receive an opinion of counsel with regard to the event
within a reasonable period of time after we become aware of the
possible occurrence of an event of this kind.
REDEMPTION OF SUBORDINATED DEBENTURES IN EXCHANGE FOR
PREFERRED SECURITIES WE PURCHASE. Upon prior approval of the Federal
Reserve, if required, we will also have the right at any time, and
from time to time, to redeem subordinated debentures in exchange for
any preferred securities we may have purchased in the market. If we
elect to surrender any preferred securities beneficially owned by us
in exchange for redemption of a like amount of subordinated
debentures, we will also surrender a proportionate amount of common
securities in exchange for subordinated debentures. Preferred
securities owned by other holders will not be called for redemption
at any time when we elect to exchange trust securities we own to
redeem subordinated debentures.
The common securities we surrender will be in the same
proportion to the preferred securities we surrender as are the
common securities then remaining outstanding to the preferred
securities then remaining outstanding. In exchange for the trust
securities surrendered by us, the trustee will cause to be
distributed to us subordinated debentures with a principal amount
equal to the liquidation amount of the trust securities, plus any
accumulated but unpaid distributions, if any, then held by the
trustee allocable to those trust securities. After the date of
redemption involving an exchange by us, the trust securities we
surrender and the subordinated debentures distributed to us in
exchange will no longer be deemed outstanding.
REDEMPTION PROCEDURES
Preferred securities will be redeemed at the redemption price
with the applicable proceeds from our contemporaneous redemption of
the subordinated debentures. Redemptions of the preferred securities
will be made, and the redemption price will be payable, on each
redemption date only to the extent that the trust has funds
available for the payment of the redemption price.
Notice of any redemption will be mailed at least 30 days but
not more than 60 days before the date of redemption to each holder
of trust securities to be redeemed at its registered address. Unless
we default in payment of the redemption price on the subordinated
debentures, interest will cease to accumulate on the subordinated
debentures called for redemption on and after the date of
redemption.
If the trust gives notice of redemption of its trust
securities, then the property trustee, to the extent funds are
available, will irrevocably deposit with the depositary for the
trust securities funds sufficient to pay the aggregate redemption
price and will give the depositary for the trust securities
irrevocable instructions and authority to pay the redemption price
to the holders of the trust securities. See "Book-Entry Issuance."
If the preferred securities are no longer in book-entry only form,
the property trustee, to the extent funds are available, will
deposit with the designated paying agent for such preferred
securities funds sufficient to pay the aggregate redemption price
and will give the paying agent
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irrevocable instructions and authority to pay the redemption price
to the holders upon surrender of their certificates evidencing the
preferred securities. Notwithstanding the foregoing, distributions
payable on or prior to the date of redemption for any trust
securities called for redemption will be payable to the holders of
the trust securities on the relevant record dates for the related
distribution dates.
If notice of redemption has been given and we have deposited
funds as required, then on the date of the deposit all rights of the
holders of the trust securities called for redemption will cease,
except the right to receive the redemption price, but without
interest on such redemption price after the date of redemption. The
trust securities will also cease to be outstanding on the date of
the deposit. If any date fixed for redemption of trust securities is
not a business day, then payment of the redemption price payable on
that date will be made on the next day that is a business day
without any additional interest or other payment in respect of the
delay.
If payment of the redemption price in respect of trust
securities called for redemption is improperly withheld or refused
and not paid by the trust, or by us pursuant to the guarantee,
distributions on the trust securities will continue to accumulate at
the applicable rate from the date of redemption originally
established by the trust for the trust securities to the date the
redemption price is actually paid. In this case, the actual payment
date will be considered the date fixed for redemption for purposes
of calculating the redemption price. See "Description of the
Guarantee."
Payment of the redemption price on the preferred securities
and any distribution of subordinated debentures to holders of
preferred securities will be made to the applicable recordholders as
they appear on the register for the preferred securities on the
relevant record date. As long as the preferred securities are
represented by a global security, the record date will be the
business day immediately preceding the date of redemption or
liquidation date, as applicable.
If less than all of the trust securities are to be redeemed,
then the aggregate liquidation amount of the trust securities to be
redeemed will be allocated proportionately to those trust securities
based upon the relative liquidation amounts. The particular
preferred securities to be redeemed will be selected by the property
trustee from the outstanding preferred securities not previously
called for redemption by lot. This method may provide for the
redemption of portions equal to $25 or an integral multiple of $25
of the liquidation amount of the preferred securities. The property
trustee will promptly notify the registrar for the preferred
securities in writing of the preferred securities selected for
redemption and, in the case of any preferred securities selected for
partial redemption, the liquidation amount to be redeemed. If the
redemption relates only to preferred securities purchased by us and
being exchanged for a like amount of debentures, then our preferred
securities will be the ones selected for redemption.
Subject to applicable law, and if we are not exercising our
right to defer interest payments on the subordinated debentures, we
may, at any time, purchase outstanding preferred securities.
SUBORDINATION OF COMMON SECURITIES
Payment of distributions on, and the redemption price of, the
preferred securities and common securities will be made based on the
liquidation amount of these securities. However, if an event of
default under the indenture has occurred and is continuing, no
distributions on or redemption of the common securities may be made
unless payment in full in cash of all accumulated and unpaid
distributions on all of the outstanding preferred securities for all
distribution periods terminating on or before that time, or in the
case of payment of the redemption price, payment of the full amount
of the redemption price on all of the outstanding preferred
securities then called for redemption, has been made or provided
for. All funds available to the property trustee will first be
applied to the payment in full in cash of all distributions on, or
the redemption price of, the preferred securities then due and
payable.
In the case of the occurrence and continuance of any event of
default under the trust agreement resulting from an event of default
under the indenture, we, as holder of the common securities, will be
deemed to have waived any right to act with respect to that event of
default under the trust agreement until the effect of the event of
default has been cured, waived or otherwise eliminated. Until the
event of
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default under the trust agreement has been so cured, waived or
otherwise eliminated, the property trustee will act solely on behalf
of the holders of the preferred securities and not on our behalf,
and only the holders of the preferred securities will have the right
to direct the property trustee to act on their behalf.
LIQUIDATION DISTRIBUTION UPON TERMINATION
We will have the right at any time to dissolve, wind-up or
terminate the trust and cause the subordinated debentures to be
distributed to the holders of the preferred securities. This right
is subject, however, to us receiving approval of the Federal
Reserve, if required.
In addition, the trust will automatically terminate upon
expiration of its term and will terminate earlier on the first to
occur of:
* our bankruptcy, dissolution or liquidation;
* the distribution of a like amount of the subordinated
debentures to the holders of trust securities, if we have
given written direction to the property trustee to
terminate the trust;
* redemption of all of the preferred securities as described
on page 73 under "-- Redemption or Exchange -- Mandatory
Redemption;" or
* the entry of a court order for the dissolution of the
trust.
With the exception of a redemption as described on page 73
under "-- Redemption or Exchange -- Mandatory Redemption," if an
early termination of the trust occurs, the trust will be liquidated
by the administrative trustees as expeditiously as they determine to
be possible. After satisfaction of liabilities to creditors of the
trust as provided by applicable law, the trustees will distribute to
the holders of trust securities subordinated debentures:
* in an aggregate stated principal amount equal to the
aggregate stated liquidation amount of the trust
securities;
* with an interest rate identical to the distribution rate
on the trust securities; and
* with accrued and unpaid interest equal to accumulated and
unpaid distributions on the trust securities.
However, if the property trustee determines that the
distribution is not practical, then the holders of trust securities
will be entitled to receive, instead of subordinated debentures, a
proportionate amount of the liquidation distribution. The
liquidation distribution will be the amount equal to the aggregate
of the liquidation amount plus accumulated and unpaid distributions
to the date of payment. If the liquidation distribution can be paid
only in part because the trust has insufficient assets available to
pay in full the aggregate liquidation distribution, then the amounts
payable directly by the trust on the trust securities will be paid
on a proportional basis, based on liquidation amounts, to us, as the
holder of the common securities, and to the holders of the preferred
securities. However, if an event of default under the indenture has
occurred and is continuing, the preferred securities will have a
priority over the common securities. See "-- Subordination of Common
Securities."
Under current United States federal income tax law and
interpretations and assuming that the trust is treated as a grantor
trust, as is expected, a distribution of the subordinated debentures
should not be a taxable event to holders of the preferred
securities. Should there be a change in law, a change in legal
interpretation, a Tax Event or another circumstance, however, the
distribution could be a taxable event to holders of the preferred
securities. See "Federal Income Tax Consequences -- United States
Holders -- Receipt of Subordinated Debentures or Cash Upon
Liquidation of First Preferred Capital Trust III." If we do not
elect to redeem the subordinated debentures prior to maturity or to
liquidate the trust and distribute the subordinated debentures to
holders of the preferred securities, the preferred securities will
remain outstanding until the repayment of the subordinated
debentures.
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If we elect to dissolve the trust and thus cause the
subordinated debentures to be distributed to holders of the
preferred securities in liquidation of the trust, we will continue
to have the right to shorten the maturity of the subordinated
debentures. See "Description of the Subordinated Debentures --
General."
LIQUIDATION VALUE
The amount of the liquidation distribution payable on the
preferred securities in the event of any liquidation of the trust is
$25 per preferred security plus accumulated and unpaid distributions
to the date of payment, which may be in the form of a distribution
of subordinated debentures having a liquidation value and accrued
interest of an equal amount. See "-- Liquidation Distribution Upon
Termination."
EVENTS OF DEFAULT; NOTICE
Any one of the following events constitutes an event of
default under the trust agreement with respect to the preferred
securities:
* the occurrence of an event of default under the indenture
(see "Description of the Subordinated Debentures --
Subordinated Debenture Events of Default");
* a default by the trust in the payment of any distribution
when it becomes due and payable, and continuation of the
default for a period of 30 days;
* a default by the trust in the payment of the redemption
price of any of the trust securities when it becomes due
and payable;
* a default in the performance, or breach, in any material
respect, of any covenant or warranty of the trustees in
the trust agreement, other than those defaults covered in
the previous two points, and continuation of the default
or breach for a period of 60 days after there has been
given, by registered or certified mail, to the trustee(s)
by the holders of at least 25% in aggregate liquidation
amount of the outstanding preferred securities, a written
notice specifying the default or breach and requiring it
to be remedied and stating that the notice is a "Notice of
Default" under the trust agreement; or
* the occurrence of events of bankruptcy or insolvency with
respect to the property trustee and our failure to appoint
a successor property trustee within 60 days.
Within five business days after the occurrence of any event
of default actually known to the property trustee, the property
trustee will transmit notice of the event of default to the holders
of the preferred securities, the administrative trustees and to us,
unless the event of default has been cured or waived. The
administrative trustees and we are required to file annually with
the property trustee a certificate as to whether or not they and we
are in compliance with all the applicable conditions and covenants
under the trust agreement.
If an event of default under the indenture has occurred and
is continuing, the preferred securities will have preference over
the common securities upon termination of the trust. See "--
Subordination of Common Securities" and "Liquidation Distribution
Upon Termination." The existence of an event of default under the
trust agreement does not entitle the holders of preferred securities
to accelerate the maturity thereof, unless the event of default is
caused by the occurrence of an event of default under the indenture
and both the indenture trustee and holders of at least 25% in
principal amount of the subordinated debentures fail to accelerate
the maturity thereof.
REMOVAL OF THE TRUSTEES
Unless an event of default under the indenture has occurred
and is continuing, we may remove any trustee at any time. If an
event of default under the indenture has occurred and is continuing,
only the holders of a majority in liquidation amount of the
outstanding preferred securities may remove the property trustee or
the Delaware trustee. The holders of the preferred securities have
no right to vote to
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appoint, remove or replace the administrative trustees. These rights
are vested exclusively with us as the holder of the common
securities. No resignation or removal of a trustee and no
appointment of a successor trustee will be effective until the
successor trustee accepts the appointment in accordance with the
trust agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an event of default under the indenture has occurred
and is continuing, for the purpose of meeting the legal requirements
of the Trust Indenture Act or of any jurisdiction in which any part
of the trust property may at the time be located, we will have the
power to appoint at any time or times, and upon written request the
property trustee will appoint, one or more persons or entities
either (1) to act as a co-trustee, jointly with the property
trustee, of all or any part of the trust property, or (2) to act as
separate trustee of any trust property. In either case, these
trustees will have the powers that may be provided in the instrument
of appointment, and will have vested in them any property, title,
right or power deemed necessary or desirable, subject to the
provisions of the trust agreement. In case an event of default under
the indenture has occurred and is continuing, the property trustee
alone will have power to make the appointment.
MERGER OR CONSOLIDATION OF TRUSTEES
Generally, any person or successor to any of the trustees may
be a successor trustee to any of the trustees, including a successor
resulting from a merger or consolidation. However, any successor
trustee must meet all of the qualifications and eligibility
standards to act as a trustee.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST
The trust may not merge with or into, consolidate,
amalgamate, or be replaced by, or convey, transfer or lease its
properties and assets substantially as an entirety to any
corporation or other person, except as described below. For these
purposes, if we consolidate or merge with another entity, or
transfer or sell substantially all of our assets to another entity,
in some cases that transaction may be considered to involve a
replacement of the trust, and the conditions set forth below would
apply to such transaction. The trust may, at our request, with the
consent of the administrative trustees and without the consent of
the holders of the preferred securities, the property trustee or the
Delaware trustee, undertake a transaction listed above if the
following conditions are met:
* the successor entity either (a) expressly assumes all of
the obligations of the trust with respect to the preferred
securities, or (b) substitutes for the preferred
securities other securities having substantially the same
terms as the preferred securities (referred to as
"successor securities") so long as the successor
securities rank the same in priority as the preferred
securities with respect to distributions and payments upon
liquidation, redemption and otherwise;
* we appoint a trustee of the successor entity possessing
substantially the same powers and duties as the property
trustee in its capacity as the holder of the subordinated
debentures;
* the successor securities are listed or traded or will be
listed or traded on any national securities exchange or
other organization on which the preferred securities are
then listed, if any;
* the merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect
the rights, preferences and privileges of the holders of
the preferred securities (including any successor
securities) in any material respect;
* the successor entity has a purpose substantially identical
to that of the trust;
* prior to the merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, we have
received an opinion from independent counsel that (a) any
transaction of this kind
79
does not adversely affect the rights, preferences and
privileges of the holders of the preferred securities
(including any successor securities) in any material
respect, and (b) following the transaction, neither the
trust nor the successor entity will be required to
register as an "investment company" under the Investment
Company Act; and
* we own all of the common securities of the successor
entity and guarantee the obligations of the successor
entity under the successor securities at least to the
extent provided by the guarantee, the subordinated
debentures, the trust agreement and the expense agreement.
Notwithstanding the foregoing, the trust may not, except with
the consent of every holder of the preferred securities, enter into
any transaction of this kind if the transaction would cause the
trust or the successor entity not to be classified as a grantor
trust for United States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF TRUST AGREEMENT
Except as described below and under "Description of the
Guarantee -- Amendments and Assignment" and as otherwise required by
the Trust Indenture Act and the trust agreement, the holders of the
preferred securities will have no voting rights.
The trust agreement may be amended from time to time by us
and the trustees, without the consent of the holders of the
preferred securities, in the following circumstances:
* with respect to acceptance of appointment by a successor
trustee;
* to cure any ambiguity, correct or supplement any
provisions in the trust agreement that may be inconsistent
with any other provision, or to make any other provisions
with respect to matters or questions arising under the
trust agreement, as long as the amendment is not
inconsistent with the other provisions of the trust
agreement and does not have a material adverse effect on
the interests of any holder of trust securities; or
* to modify, eliminate or add to any provisions of the trust
agreement if necessary to ensure that the trust will be
classified for federal income tax purposes as a grantor
trust at all times that any trust securities are
outstanding or to ensure that the trust will not be
required to register as an "investment company" under the
Investment Company Act.
With the consent of the holders of a majority of the
aggregate liquidation amount of the outstanding trust securities, we
and the trustees may amend the trust agreement if the trustees
receive an opinion of counsel to the effect that the amendment or
the exercise of any power granted to the trustees in accordance with
the amendment will not affect the trust's status as a grantor trust
for federal income tax purposes or the trust's exemption from status
as an "investment company" under the Investment Company Act.
However, without the consent of each holder of trust securities, the
trust agreement may not be amended to (a) change the amount or
timing of any distribution on the trust securities or otherwise
adversely affect the amount of any distribution required to be made
in respect of the trust securities as of a specified date, or (b)
restrict the right of a holder of trust securities to institute suit
for the enforcement of the payment on or after that date.
As long as the property trustee holds any subordinated
debentures, the trustees will not, without obtaining the prior
approval of the holders of a majority in aggregate liquidation
amount of all outstanding preferred securities:
* direct the time, method and place of conducting any
proceeding for any remedy available to the indenture
trustee, or executing any trust or power conferred on the
property trustee with respect to the subordinated
debentures;
* waive any past default that is waivable under the
indenture;
* exercise any right to rescind or annul a declaration that
the principal of all the subordinated debentures will be
due and payable; or
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* consent to any amendment or termination of the indenture
or the subordinated debentures, where the property
trustee's consent is required. However, where a consent
under the indenture requires the consent of each holder of
the affected subordinated debentures, no consent will be
given by the property trustee without the prior consent of
each holder of the preferred securities.
The trustees may not revoke any action previously authorized
or approved by a vote of the holders of the preferred securities
except by subsequent vote of the holders of the preferred
securities. The property trustee will notify each holder of
preferred securities of any notice of default with respect to the
subordinated debentures. In addition to obtaining the foregoing
approvals of the holders of the preferred securities, prior to
taking any of the foregoing actions, the trustees must obtain an
opinion of counsel experienced in these matters to the effect that
the trust will not be classified as an association taxable as a
corporation for federal income tax purposes on account of the
action.
Any required approval of holders of trust securities may be
given at a meeting or by written consent. The property trustee will
cause a notice of any meeting at which holders of the trust
securities are entitled to vote, or of any matter upon which action
by written consent of the holders is to be taken, to be given to
each holder of record of trust securities.
No vote or consent of the holders of preferred securities
will be required for the trust to redeem and cancel its preferred
securities in accordance with the trust agreement.
Notwithstanding the fact that holders of preferred securities
are entitled to vote or consent under any of the circumstances
described above, any of the preferred securities that are owned by
us, the trustees or any affiliate of ours or of any trustee, will,
for purposes of the vote or consent, be treated as if they were not
outstanding.
GLOBAL PREFERRED SECURITIES
The preferred securities will be represented by one or more
global preferred securities registered in the name of The Depository
Trust Company, New York, New York, or its nominee. A global
preferred security is a security representing interests of more than
one beneficial holder. Ownership of beneficial interests in the
global preferred securities will be reflected in DTC participant
account records through DTC's book-entry transfer and registration
system. Participants are brokers, dealers, or others having accounts
with DTC. Indirect beneficial interests of other persons investing
in the preferred securities will be shown on, and transfers will be
effected only through, records maintained by DTC participants.
Except as described below, preferred securities in definitive form
will not be issued in exchange for the global preferred securities.
See "Book-Entry Issuance."
No global preferred security may be exchanged for preferred
securities registered in the names of persons other than DTC or its
nominee unless:
* DTC notifies the indenture trustee that it is unwilling or
unable to continue as a depositary for the global
preferred security and we are unable to locate a qualified
successor depositary;
* we execute and deliver to the indenture trustee a written
order stating that we elect to terminate the book-entry
system through DTC; or
* there shall have occurred and be continuing an event of
default under the indenture.
Any global preferred security that is exchangeable pursuant
to the preceding sentence shall be exchangeable for definitive
certificates registered in the names as DTC shall direct. It is
expected that the instructions will be based upon directions
received by DTC with respect to ownership of beneficial interests in
the global preferred security. If preferred securities are issued in
definitive form, the preferred securities will be in denominations
of $25 and integral multiples of $25 and may be transferred or
exchanged at the offices described below.
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Unless and until it is exchanged in whole or in part for the
individual preferred securities represented thereby, a global
preferred security may not be transferred except as a whole by DTC
to a nominee of DTC, by a nominee of DTC to DTC or another nominee
of DTC or by DTC or any nominee to a successor depositary or any
nominee of the successor.
Payments on global preferred securities will be made to DTC,
as the depositary for the global preferred securities. If the
preferred securities are issued in definitive form, distributions
will be payable by check mailed to the address of record of the
persons entitled to the distribution, and the transfer of the
preferred securities will be registrable, and preferred securities
will be exchangeable for preferred securities of other denominations
of a like aggregate liquidation amount, at the corporate office of
the property trustee, or at the offices of any paying agent or
transfer agent appointed by the administrative trustees. In
addition, if the preferred securities are issued in definitive form,
the record dates for payment of distributions will be the 15th day
of the month in which the relevant distribution date occurs. For a
description of the terms of DTC arrangements relating to payments,
transfers, voting rights, redemptions and other notices and other
matters, see "Book-Entry Issuance."
Upon the issuance of one or more global preferred securities,
and the deposit of the global preferred security with or on behalf
of DTC or its nominee, DTC or its nominee will credit, on its book-
entry registration and transfer system, the respective aggregate
liquidation amounts of the individual preferred securities
represented by the global preferred security to the designated
accounts of persons that participate in the DTC system. These
participant accounts will be designated by the dealers, underwriters
or agents selling the preferred securities. Ownership of beneficial
interests in a global preferred security will be limited to persons
or entities having an account with DTC or who may hold interests
through participants. With respect to interests of any person or
entity that is a DTC participant, ownership of beneficial interests
in a global preferred security will be shown on, and the transfer of
that ownership will be effected only through, records maintained by
DTC or its nominee. With respect to persons or entities who hold
interests in a global preferred security through a participant, the
interest and any transfer of the interest will be shown only on the
participant's records. The laws of some states require that certain
purchasers of securities take physical delivery of securities in
definitive form. These laws may impair the ability to transfer
beneficial interests in a global preferred security.
So long as DTC or another depositary, or its nominee, is the
registered owner of the global preferred security, the depositary or
the nominee, as the case may be, will be considered the sole owner
or holder of the preferred securities represented by the global
preferred security for all purposes under the trust agreement.
Except as described in this prospectus, owners of beneficial
interests in a global preferred security will not be entitled to
have any of the individual preferred securities represented by the
global preferred security registered in their names, will not
receive or be entitled to receive physical delivery of any of the
preferred securities in definitive form and will not be considered
the owners or holders of the preferred securities under the trust
agreement.
None of us, the property trustee, any paying agent or the
securities registrar for the preferred securities will have any
responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests of
the global preferred security representing the preferred securities
or for maintaining, supervising or reviewing any records relating to
the beneficial ownership interests.
We expect that DTC or its nominee, upon receipt of any
payment of the liquidation amount or distributions in respect of a
global preferred security, immediately will credit participants'
accounts with payments in amounts proportionate to their respective
beneficial interest in the aggregate liquidation amount of the
global preferred security as shown on the records of DTC or its
nominee. We also expect that payments by participants to owners of
beneficial interests in the global preferred security held through
the participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the
accounts of customers in bearer form or registered in "street name."
The payments will be the responsibility of the participants. See
"Book-Entry Issuance."
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PAYMENT AND PAYING AGENCY
Payments in respect of the preferred securities will be made
to DTC, which will credit the relevant accounts of participants on
the applicable distribution dates, or, if any of the preferred
securities are not held by DTC, the payments will be made by check
mailed to the address of the holder as listed on the register of
holders of the preferred securities. The paying agent for the
preferred securities will initially be the property trustee and any
co-paying agent chosen by the property trustee and acceptable to us
and the administrative trustees. The paying agent for the preferred
securities may resign as paying agent upon 30 days' written notice
to the administrative trustees, the property trustee and us. If the
property trustee no longer is the paying agent for the preferred
securities, the administrative trustees will appoint a successor to
act as paying agent. The successor must be a bank or trust company
acceptable to us and the property trustee.
REGISTRAR AND TRANSFER AGENT
The property trustee will act as the registrar and the
transfer agent for the preferred securities. Registration of
transfers of preferred securities will be effected without charge by
or on behalf of the trust, but upon payment of any tax or other
governmental charges that may be imposed in connection with any
transfer or exchange. The trust and its registrar and transfer agent
will not be required to register or cause to be registered the
transfer of preferred securities after they have been called for
redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The property trustee undertakes to perform only the duties
set forth in the trust agreement. After the occurrence of an event
of default that is continuing, the property trustee must exercise
the same degree of care and skill as a prudent person exercises or
uses in the conduct of its own affairs. The property trustee is
under no obligation to exercise any of the powers vested in it by
the trust agreement at the request of any holder of preferred
securities unless it is offered reasonable indemnity against the
costs, expenses and liabilities that might be incurred. If no event
of default under the trust agreement has occurred and is continuing
and the property trustee is required to decide between alternative
causes of action, construe ambiguous or inconsistent provisions in
the trust agreement or is unsure of the application of any provision
of the trust agreement, and the matter is not one on which holders
of preferred securities are entitled to vote upon, then the property
trustee will take the action directed in writing by us. If the
property trustee is not so directed, then it will take the action it
deems advisable and in the best interests of the holders of the
trust securities and will have no liability except for its own bad
faith, negligence or willful misconduct.
MISCELLANEOUS
The administrative trustees are authorized and directed to
conduct the affairs of and to operate the trust in such a way that:
* the trust will not be deemed to be an "investment company"
required to be registered under the Investment Company
Act;
* the trust will not be classified as an association taxable
as a corporation for federal income tax purposes; and
* the subordinated debentures will be treated by us as
indebtedness for federal income tax purposes.
In this regard, we and the administrative trustees are
authorized to take any action not inconsistent with applicable law,
the certificate of trust or the trust agreement, that we and the
administrative trustees determine to be necessary or desirable for
these purposes. The administrative trustees may assist in including
or listing the preferred securities in the Nasdaq National Market or
on a national securities exchange.
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Holders of the preferred securities have no preemptive or
similar rights. The trust agreement and the trust securities will be
governed by Delaware law.
DESCRIPTION OF THE SUBORDINATED DEBENTURES
Concurrently with the issuance of the preferred securities,
the trust will invest the proceeds from the sale of the trust
securities in the subordinated debentures issued by us. The
subordinated debentures will be issued as unsecured debt under the
indenture between us and State Street Bank and Trust Company of
Connecticut, National Association, as indenture trustee. The
indenture will be qualified under the Trust Indenture Act.
The following discussion is subject to, and is qualified in
its entirety by reference to, the indenture and to the Trust
Indenture Act. We urge prospective investors to read the form of the
indenture, which is filed as an exhibit to the registration
statement of which this prospectus forms a part.
GENERAL
The subordinated debentures will be limited in aggregate
principal amount to $49,484,550 or $56,907,250 if the Underwriters'
over-allotment option is exercised in full. This amount represents
the sum of the aggregate stated liquidation amounts of the trust
securities. The subordinated debentures will bear interest at the
annual rate of 9.00% of the principal amount. The interest will be
payable quarterly on March 31, June 30, September 30 and December 31
of each year, beginning December 31, 2001, to the person in whose
name each subordinated debenture is registered at the close of
business on the 15th day of the last month of the calendar quarter.
It is anticipated that, until the liquidation, if any, of the trust,
the subordinated debentures will be held in the name of the property
trustee in trust for the benefit of the holders of the trust
securities.
The amount of interest payable for any period will be
computed on the basis of a 360-day year of twelve 30-day months. If
any date on which interest is payable on the subordinated debentures
is not a business day, then payment of interest will be made on the
next day that is a business day without any additional interest or
other payment in respect of the delay. Accrued interest that is not
paid on the applicable interest payment date will bear additional
interest on the amount due at the annual rate of 9.00%, compounded
quarterly.
The subordinated debentures will mature on December 31, 2031,
the stated maturity date. We may shorten this date once at any time
to any date not earlier than December 31, 2006, subject to the prior
approval of the Federal Reserve, if required.
We will give notice to the indenture trustee and the holders
of the subordinated debentures, no more than 180 days and no less
than 30 days prior to the effectiveness of any change in the stated
maturity date. We will not have the right to redeem the subordinated
debentures from the trust until after December 31, 2006, except if
(a) a Tax Event, an Investment Company Event or a Capital Treatment
Event, which terms are defined on page 74, has occurred, or (b) we
repurchase preferred securities in the market, in which case we can
elect to redeem subordinated debentures specifically in exchange for
a like amount of preferred securities owned by us plus a
proportionate amount of common securities.
The subordinated debentures will be unsecured and will rank
junior to all of our senior and subordinated debt, including
indebtedness we may incur in the future. Because we are a holding
company, our right to participate in any distribution of assets of
any of our subsidiaries, upon any subsidiary's liquidation or
reorganization or otherwise, and thus the ability of holders of the
subordinated debentures to benefit indirectly from any distribution
by a subsidiary, is subject to the prior claim of creditors of the
subsidiary, except to the extent that we may be recognized as a
creditor of the subsidiary. The subordinated debentures will,
therefore, be effectively subordinated to all existing and future
liabilities of our subsidiaries, and holders of subordinated
debentures should look only to our assets for
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payment. The indenture does not limit our ability to incur or issue
secured or unsecured senior and junior debt. See "-- Subordination."
The indenture does not contain provisions that afford holders
of the subordinated debentures protection in the event of a highly
leveraged transaction or other similar transaction involving us, nor
does it require us to maintain or achieve any financial performance
levels or to obtain or maintain any credit rating on the
subordinated debentures.
INTEREST PAYMENT PERIOD
As long as no event of default under the indenture has
occurred and is continuing, we have the right under the indenture to
defer the payment of interest on the subordinated debentures at any
time for a period not exceeding 20 consecutive quarters. However, no
extension period may extend beyond the stated maturity of the
subordinated debentures or end on a date other than a date interest
is normally due. At the end of an extension period, we must pay all
interest then accrued and unpaid, together with interest thereon at
the annual rate of 9.00%, compounded quarterly. During an extension
period, interest will continue to accrue and holders of subordinated
debentures, or the holders of preferred securities if they are then
outstanding, will be required to accrue and recognize as income for
federal income tax purposes the accrued but unpaid interest amounts
in the year in which such amounts accrued. See "Federal Income Tax
Consequences."
During an extension period, neither we nor any of our
subsidiaries may:
* declare or pay any dividends or distributions on, or
redeem, purchase, acquire or make a liquidation payment
with respect to, any of our capital stock (other than
stock dividends, noncash dividends in connection with the
implementation of a stockholder rights plan, purchases of
common stock in connection with employee benefit plans or
in connection with the reclassifications of any class of
our capital stock into another class of capital stock)
with respect to their capital stock (other than payment of
dividends or distributions to us or to one of our
subsidiaries or a distribution with respect to the
preferred securities issued by FBA's financing subsidiary
in July 1998);
* make any payment of principal, interest or premium on, or
repay, repurchase or redeem any debt securities that rank
equally with (including the subordinated debentures issued
to our two other financing subsidiaries), or junior to the
subordinated debentures;
* make any guarantee payments with respect to any other
guarantee by us of any other debt securities of any of our
subsidiaries if the guarantee ranks equally with or junior
to the subordinated debentures (other than payments under
the guarantee); or
* redeem, purchase or acquire less than all of the
subordinated debentures or any of the preferred
securities.
Prior to the termination of any extension period, so long as
no event of default under the indenture is continuing, we may
further defer the payment of interest subject to the above stated
requirements. Upon the termination of any extension period and the
payment of all amounts then due, we may elect to begin a new
extension period at any time. We do not currently intend to exercise
our right to defer payments of interest on the subordinated
debentures.
We must give the property trustee, the administrative
trustees and the indenture trustee notice of our election of an
extension period at least two business days prior to the earlier of
(a) the next date on which distributions on the trust securities
would have been payable except for the election to begin an
extension period, or (b) the date we are required to give notice of
the record date, or the date the distributions are payable, to the
Nasdaq National Market, or other applicable self-regulatory
organization, or to holders of the preferred securities, but in any
event at least one business day prior to the record date. If the
property trustee is not the only registered holder of the
debentures, then this notice must also be given to the holders of
the debentures.
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Other than as described above, there is no limitation on the
number of times that we may elect to begin an extension period.
ADDITIONAL SUMS TO BE PAID AS A RESULT OF ADDITIONAL TAXES
If the trust or the property trustee is required to pay any
additional taxes, duties, assessments or other governmental charges
as a result of the occurrence of a Tax Event, we will pay as
additional interest on the subordinated debentures any amounts which
may be required so that the net amounts received and retained by the
trust after paying any additional taxes, duties, assessments or
other governmental charges will not be less than the amounts the
trust and the property trustee would have received had the
additional taxes, duties, assessments or other governmental charges
not been imposed.
REDEMPTION
Subject to prior approval of the Federal Reserve, if
required, we may redeem the subordinated debentures prior to
maturity:
* in whole at any time, or in part from time to time, on or
after December 31, 2006; or
* at any time, in whole, within 180 days following the
occurrence of a Tax Event, an Investment Company Event or
a Capital Treatment Event.
In each case we will pay a redemption price equal to the
accrued and unpaid interest on the subordinated debentures so
redeemed to the date fixed for redemption, plus 100% of the
principal amount of the redeemed subordinated debentures.
We may also redeem the debentures prior to maturity at any
time, and from time to time, to the extent of any preferred
securities we purchase, plus a proportionate amount of the common
securities we hold.
Notice of any redemption will be mailed at least 30 days but
not more than 60 days before the redemption date to each holder of
subordinated debentures to be redeemed at its registered address.
Redemption of less than all outstanding subordinated debentures must
be effected by lot. Unless we default in payment of the redemption
price for the subordinated debentures, on and after the redemption
date interest will no longer accrue on the subordinated debentures
or the portions of the subordinated debentures called for
redemption.
The subordinated debentures will not be subject to any
sinking fund.
DISTRIBUTION UPON LIQUIDATION
As described under "Description of the Preferred Securities
- -- Liquidation Distribution Upon Termination," under certain
circumstances and with the Federal Reserve's approval, the
subordinated debentures may be distributed to the holders of the
preferred securities in liquidation of the trust after satisfaction
of liabilities to creditors of the trust. If this occurs, we will
use our best efforts to include the subordinated debentures in the
Nasdaq National Market or list them on a national securities
exchange or national quotation system on which the preferred
securities are then listed, if any. There can be no assurance as to
the market price of any subordinated debentures that may be
distributed to the holders of preferred securities.
RESTRICTIONS ON PAYMENTS
We are restricted from making certain payments (as described
below) if we have chosen to defer payment of interest on the
subordinated debentures, if an event of default has occurred and is
continuing under the indenture, or if we are in default with respect
to our obligations under the guarantee.
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If any of these events occur, neither we nor any of our
subsidiaries will:
* declare or pay any dividends or distributions on, or
redeem, purchase, acquire, or make a liquidation payment
with respect to, any of our capital stock (other than
stock dividends, noncash dividends in connection with the
implementation of a stockholder rights plan, purchases of
common stock in connection with employee benefit plans or
in connection with the reclassification of any class of
our capital stock into another class of capital stock), or
allow any of our subsidiaries to do the same with respect
to their capital stock (other than payment of dividends or
distributions to us or to one of our subsidiaries or a
distribution with respect to the preferred securities
issued by FBA's financing subsidiary in July 1998);
* make any payment of principal, interest or premium on, or
repay or repurchase or redeem any debt securities that
rank equally with (including the subordinated debentures
issued to our two other financing subsidiaries), or junior
to the subordinated debentures;
* make any guarantee payments with respect to any guarantee
by us of the debt securities of any of our subsidiaries if
the guarantee ranks equally with or junior to the
subordinated debentures (other than payments under the
guarantee); or
* redeem, purchase or acquire less than all of the
subordinated debentures or any of the preferred
securities.
SUBORDINATION
The subordinated debentures are subordinated and junior in
right of payment to all of our senior and subordinated debt, as
defined below. Upon any payment or distribution of assets to
creditors upon any liquidation, dissolution, winding up or
reorganization of First Banks, whether voluntary or involuntary in
bankruptcy, insolvency, receivership or other proceedings in
connection with any insolvency or bankruptcy proceedings, the
holders of our senior and subordinated debt will first be entitled
to receive payment in full of principal and interest before the
holders of subordinated debentures will be entitled to receive or
retain any payment in respect of the subordinated debentures.
If the maturity of any subordinated debentures is accelerated
and our senior and subordinated debt is also accelerated, the
holders of all of our senior and subordinated debt outstanding at
the time of the acceleration will also be entitled to first receive
payment in full of all amounts due to them, including any amounts
due upon acceleration, before the holders of the subordinated
debentures will be entitled to receive or retain any principal or
interest payments on the subordinated debentures.
No payments of principal or interest on the subordinated
debentures may be made if there has occurred and is continuing a
default in any payment with respect to any of our senior or
subordinated debt or an event of default with respect to any of our
senior or subordinated debt resulting in the acceleration of the
maturity of the senior or subordinated debt, or if any judicial
proceeding is pending with respect to any default.
The term "debt" means, with respect to any person, whether
recourse is to all or a portion of the assets of the person and
whether or not contingent:
* every obligation of the person for money borrowed;
* every obligation of the person evidenced by bonds,
debentures, notes or other similar instruments, including
obligations incurred in connection with the acquisition of
property, assets or businesses;
* every reimbursement obligation of the person with respect
to letters of credit, bankers' acceptances or similar
facilities issued for the account of the person;
* every obligation of the person issued or assumed as the
deferred purchase price of property or services, excluding
trade accounts payable or accrued liabilities arising in
the ordinary course of business;
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* every capital lease obligation of the person; and
* every obligation of the type referred to in the first five
points of another person and all dividends of another
person the payment of which, in either case, the first
person has guaranteed or is responsible or liable,
directly or indirectly, as obligor or otherwise.
The term "senior debt" means the principal of, and premium
and interest, including interest accruing on or after the filing of
any petition in bankruptcy or for reorganization relating to us, on,
debt, whether incurred on or prior to the date of the indenture or
incurred after the date. However, senior debt will not be deemed to
include:
* any debt where it is provided in the instrument creating
the debt that the obligations are not superior in right of
payment to the subordinated debentures or to other debt
which is equal with, or subordinated to, the subordinated
debentures, including our 9.25% subordinated debentures
due 2027 and our 10.24% subordinated debentures due 2030,
issued to our two other financing subsidiaries;
* any of our debt that when incurred and without regard to
any election under the federal bankruptcy laws, was
without recourse to us;
* any debt to any of our employees;
* any debt that by its terms is subordinated to trade
accounts payable or accrued liabilities arising in the
ordinary course of business to the extent that payments
made to the holders of the debt by the holders of the
subordinated debentures as a result of the subordination
provisions of the indenture would be greater than they
otherwise would have been as a result of any obligation of
the holders to pay amounts over to the obligees on the
trade accounts payable or accrued liabilities arising in
the ordinary course of business as a result of
subordination provisions to which the debt is subject; and
* debt which constitutes subordinated debt.
The term "subordinated debt" means the principal of, and
premium and interest, including interest accruing on or after the
filing of any petition in bankruptcy or for reorganization relating
to us, on, debt. Subordinated debt includes debt incurred on or
prior to the date of the indenture or thereafter incurred, which is
by its terms expressly provided to be junior and subordinate to
other debt of ours, other than the subordinated debentures. However,
subordinated debt will not be deemed to include:
* any of our debt which when incurred and without regard to
any election under the federal bankruptcy laws was without
recourse to us;
* any debt of ours to any of our subsidiaries;
* any debt to any of our employees;
* any debt which by its terms is subordinated to trade
accounts payable or accrued liabilities arising in the
ordinary course of business to the extent that payments
made to the holders of the debt by the holders of the
subordinated debentures as a result of the subordination
provisions of the indenture would be greater than they
otherwise would have been as a result of any obligation of
the holders to pay amounts over to the obligees on the
trade accounts payable or accrued liabilities arising in
the ordinary course of business as a result of
subordination provisions to which the debt is subject;
* debt which constitutes senior debt; and
* any debt of ours under debt securities (and guarantees in
respect of these debt securities) initially issued to any
trust, or a trustee of a trust, partnership or other
entity affiliated with us that is, directly or indirectly,
our financing subsidiary in connection with the issuance
by that entity of preferred securities or other securities
which are intended to qualify for "Tier I" capital
treatment, (such as the approximately $88.9 million of
9.25% subordinated
88
debentures due 2027 that we issued to one of our other
financing subsidiaries in 1997, the approximately $59.3
million of 10.24% subordinated debentures due 2030 that we
issued to one of our other financing subsidiaries in 2000
and the approximately $47.4 million of 8.50% subordinated
debentures due 2028 that FBA issued to its financing
subsidiary in 1998).
We expect from time to time to incur additional indebtedness,
and, except in certain circumstances, there is no limitation under
the indenture on the amount we may incur. We had consolidated senior
and senior subordinated debt of $66.5 million outstanding principal
amount at October 31, 2001. Although a portion of these amounts is
expected to be repaid with a portion of the proceeds from the sale
of the subordinated debentures, we expect to incur additional senior
or subordinated debt in the future.
PAYMENT AND PAYING AGENTS
Generally, payment of principal of and interest on the
subordinated debentures will be made at the office of the indenture
trustee in Hartford, Connecticut. However, we have the option to
make payment of any interest by (a) check mailed to the address of
the person entitled to payment at the address listed in the register
of holders of the subordinated debentures, or (b) wire transfer to
an account maintained by the person entitled thereto as specified in
the register of holders of the subordinated debentures, provided
that proper transfer instructions have been received by the
applicable record date. Payment of any interest on subordinated
debentures will be made to the person in whose name the subordinated
debenture is registered at the close of business on the regular
record date for the interest payment, except in the case of
defaulted interest.
Any moneys deposited with the indenture trustee or any paying
agent for the subordinated debentures, or then held by us in trust,
for the payment of the principal of or interest on the subordinated
debentures and remaining unclaimed for two years after the principal
or interest has become due and payable, will be repaid to us on June
30 of each year. If we hold any of this money in trust, then it will
be discharged from the trust to us and the holder of the
subordinated debenture will thereafter look, as a general unsecured
creditor, only to us for payment.
REGISTRAR AND TRANSFER AGENT
The indenture trustee will act as the registrar and the
transfer agent for the subordinated debentures. Subordinated
debentures may be presented for registration of transfer, with the
form of transfer endorsed thereon, or a satisfactory written
instrument of transfer, duly executed, at the office of the
registrar. Provided that we maintain a transfer agent in Wilmington,
Delaware, we may rescind the designation of any transfer agent or
approve a change in the location through which any transfer agent
acts. We may at any time designate additional transfer agents with
respect to the subordinated debentures.
If we redeem any of the subordinated debentures, neither we
nor the indenture trustee will be required to (a) issue, register
the transfer of or exchange any subordinated debentures during a
period beginning at the opening of business 15 days before the day
of the mailing of and ending at the close of business on the day of
the mailing of the relevant notice of redemption, or (b) transfer or
exchange any subordinated debentures so selected for redemption,
except, in the case of any subordinated debentures being redeemed in
part, any portion not to be redeemed.
MODIFICATION OF INDENTURE
We and the indenture trustee may, from time to time without
the consent of the holders of the subordinated debentures, amend,
waive our rights under or supplement the indenture for purposes
which do not materially adversely affect the rights of the holders
of the subordinated debentures. Other changes may be made by us and
the indenture trustee with the consent of the holders of a majority
in principal
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amount of the outstanding subordinated debentures. However, without
the consent of the holder of each outstanding subordinated debenture
affected by the proposed modification, no modification may:
* extend the maturity date of the subordinated debentures;
or
* reduce the principal amount or the rate or extend the time
of payment of interest; or
* reduce the percentage of principal amount of subordinated
debentures required to amend the indenture.
As long as any of the preferred securities remain
outstanding, no modification of the indenture may be made that
requires the consent of the holders of the subordinated debentures,
no termination of the indenture may occur, and no waiver of any
event of default under the indenture may be effective, without the
prior consent of the holders of a majority of the aggregate
liquidation amount of the preferred securities.
SUBORDINATED DEBENTURE EVENTS OF DEFAULT
The indenture provides that any one or more of the following
events with respect to the subordinated debentures that has occurred
and is continuing constitutes an event of default under the
indenture:
* our failure to pay any interest on the subordinated
debentures for 30 days after the due date, except where we
have properly deferred the interest payment;
* our failure to pay any principal on the subordinated
debentures when due whether at maturity, upon redemption
or otherwise;
* our failure to observe or perform in any material respect
any other covenants or agreements contained in the
indenture for 90 days after written notice to us from the
indenture trustee or the holders of at least 25% in
aggregate outstanding principal amount of the subordinated
debentures; or
* our bankruptcy, insolvency or similar reorganizations in
bankruptcy or dissolution of the trust.
The holders of a majority of the aggregate outstanding
principal amount of the subordinated debentures have the right to
direct the time, method and place of conducting any proceeding for
any remedy available to the indenture trustee. The indenture
trustee, or the holders of at least 25% in aggregate outstanding
principal amount of the subordinated debentures, may declare the
principal due and payable immediately upon an event of default under
the indenture. The holders of a majority of the outstanding
principal amount of the subordinated debentures may rescind and
annul the declaration and waive the default if the default has been
cured and a sum sufficient to pay all matured installments of
interest and principal due otherwise than by acceleration, has been
deposited with the indenture trustee as long as the holders of a
majority in liquidation amount of the trust securities have
consented to the waiver of default. The holders may not annul the
declaration and waive a default if the default is the non-payment of
the principal of the subordinated debentures which has become due
solely by the acceleration.
So long as the property trustee is the holder of the
debentures, if an event of default under the indenture has occurred
and is continuing, the property trustee will have the right to
declare the principal of and the interest on the subordinated
debentures, and any other amounts payable under the indenture, to be
immediately due and payable and to enforce its other rights as a
creditor with respect to the subordinated debentures.
We are required to file annually with the indenture trustee a
certificate as to whether or not we are in compliance with all of
the conditions and covenants applicable to us under the indenture.
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ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF THE PREFERRED SECURITIES
If an event of default under the indenture has occurred and
is continuing and the event is attributable to the failure by us to
pay interest on or principal of the subordinated debentures on the
date on which the payment is due and payable, then a holder of
preferred securities may institute a direct action against us to
compel us to make the payment. We may not amend the indenture to
remove the foregoing right to bring a direct action without the
prior written consent of all of the holders of the preferred
securities. If the right to bring a direct action is removed, the
trust may become subject to the reporting obligations under the
Securities Exchange Act of 1934.
The holders of the preferred securities will not be able to
exercise directly any remedies, other than those set forth in the
preceding paragraph, available to the holders of the subordinated
debentures unless there has been an event of default under the trust
agreement. See "Description of the Preferred Securities -- Events of
Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
We may not consolidate with or merge into any other entity or
convey or transfer our properties and assets substantially as an
entirety to any entity, and no entity may be consolidated with or
merged into us or sell, convey, transfer or otherwise dispose of its
properties and assets substantially as an entirety to us, unless:
* if we consolidate with or merge into another person or
convey or transfer our properties and assets substantially
as an entirety to any person, the successor person is
organized under the laws of the United States or any state
or the District of Columbia, and the successor person
expressly assumes by supplemental indenture our
obligations on the subordinated debentures;
* immediately after the transaction, no event of default
under the indenture, and no event which, after notice or
lapse of time, or both, would become an event of default
under the indenture, has occurred and is continuing; and
* other conditions as prescribed in the indenture are met.
Under certain circumstances, if we consolidate or merge with
another entity, or transfer or sell substantially all of our assets
to another entity, such transaction may be considered to involve a
replacement of the trust, and the provisions of the trust agreement
relating to a replacement of the trust would apply to such
transaction. See "Description of the Preferred Securities --
Mergers, Consolidations, Amalgamations or Replacements of the
Trust."
SATISFACTION AND DISCHARGE
The indenture will cease to be of further effect and we will
be deemed to have satisfied and discharged our obligations under the
indenture when all subordinated debentures not previously delivered
to the indenture trustee for cancellation:
* have become due and payable; or
* will become due and payable at their stated maturity
within one year or are to be called for redemption within
one year, and we deposit or cause to be deposited with the
indenture trustee funds, in trust, for the purpose and in
an amount sufficient to pay and discharge the entire
indebtedness on the subordinated debentures not previously
delivered to the indenture trustee for cancellation, for
the principal and interest due to the date of the deposit
or to the stated maturity or redemption date, as the case
may be.
We may still be required to provide officers' certificates
and opinions of counsel and pay fees and expenses due after these
events occur.
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GOVERNING LAW
The indenture and the subordinated debentures will be
governed by and construed in accordance with Missouri law.
INFORMATION CONCERNING THE INDENTURE TRUSTEE
The indenture trustee is subject to all the duties and
responsibilities specified with respect to an indenture trustee
under the Trust Indenture Act. Subject to these provisions, the
indenture trustee is under no obligation to exercise any of the
powers vested in it by the indenture at the request of any holder of
subordinated debentures, unless offered reasonable security or
indemnity by the holder against the costs, expenses and liabilities
which might be incurred. The indenture trustee is not required to
expend or risk its own funds or otherwise incur personal financial
liability in the performance of its duties if the indenture trustee
reasonably believes that repayment or adequate indemnity is not
reasonably assured to it.
MISCELLANEOUS
We have agreed, pursuant to the indenture, for so long as
preferred securities remain outstanding:
* to maintain directly or indirectly 100% ownership of the
common securities of the trust, except that certain
successors that are permitted pursuant to the indenture
may succeed to our ownership of the common securities;
* not to voluntarily terminate, wind up or liquidate the
trust without prior approval of the Federal Reserve, if
required;
* to use our reasonable efforts to cause the trust (a) to
remain a business trust (and to avoid involuntary
termination, winding up or liquidation), except in
connection with a distribution of subordinated debentures,
the redemption of all of the trust securities of the trust
or mergers, consolidations or amalgamations, each as
permitted by the trust agreement; and (b) to otherwise
continue not to be treated as an association taxable as a
corporation or partnership for federal income tax
purposes;
* to use our reasonable efforts to cause each holder of
trust securities to be treated as owning an individual
beneficial interest in the subordinated debentures;
* to use our best efforts to maintain the eligibility of the
preferred securities for inclusion, quotation or listing
in the Nasdaq National Market or on any national
securities exchange or other organization for as long as
the preferred securities are outstanding;
* not to issue or incur, directly or indirectly, additional
trust preferred securities that are senior in right of
payment to the preferred securities;
* not to issue or incur, directly or indirectly, any
additional indebtedness in connection with the issuance of
additional trust preferred securities or similar
securities that are equal in right of payment to the
subordinated debentures unless:
-- the pro forma sum of all outstanding debt issued by us or
any of our subsidiaries in connection with any trust
preferred securities issued by any of our financing
subsidiaries, including the subordinated debentures and
the maximum liquidation amount of the additional trust
preferred or similar securities that we or our financing
subsidiaries are then issuing, plus our total long-term
debt, excluding any long term debt which, by its terms, is
expressly stated to be junior and subordinate to the
subordinated debentures
is less than 65% of
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the sum of our equity, excluding any amount of accumulated
other comprehensive income or loss plus any long-term debt
which, by its terms, is expressly stated to be junior and
subordinate to the subordinated debentures, in each case on
a consolidated basis at the time of issuance; and
* not to pay dividends on, purchase, redeem, retire or make
any distributions with respect to our common stock if
after doing so the quotient referred to in the immediately
preceding point would exceed 60%.
BOOK-ENTRY ISSUANCE
GENERAL
DTC will act as securities depositary for the preferred
securities and may act as securities depositary for all of the
subordinated debentures in the event of the distribution of the
subordinated debentures to the holders of preferred securities.
Except as described below, the preferred securities will be issued
only as registered securities in the name of DTC's nominee, Cede &
Co. One or more global preferred securities will be issued for the
preferred securities and will be deposited with DTC.
DTC is a limited purpose trust company organized under New
York banking law, a "banking organization" within the meaning of the
New York banking law, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform
Commercial Code, and a "clearing agency" registered pursuant to
Section 17A of the Securities Exchange Act of 1934. DTC holds
securities that its participants deposit with DTC. DTC also
facilitates the settlement among participants of securities
transactions, such as transfers and pledges, in deposited securities
through electronic computerized book-entry changes in participants'
accounts, thereby eliminating the need for physical movement of
securities certificates. Direct participants include securities
brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. DTC is owned by a number of its
direct participants and by the New York Stock Exchange, the American
Stock Exchange and the National Association of Securities Dealers,
Inc. Access to the DTC system is also available to indirect
participants, such as securities brokers and dealers, banks and
trust companies that clear through or maintain custodial
relationships with direct participants, either directly or
indirectly. The rules applicable to DTC and its participants are on
file with the SEC.
Purchases of preferred securities within the DTC system must
be made by or through direct participants, which will receive a
credit for the preferred securities on DTC's records. The ownership
interest of each actual purchaser of each preferred security is in
turn to be recorded on the direct and indirect participants'
records. Beneficial owners will not receive written confirmation
from DTC of their purchases, but beneficial owners are expected to
receive written confirmations providing details of the transactions,
as well as periodic statements of their holdings, from the direct or
indirect participants through which the beneficial owners purchased
preferred securities. Transfers of ownership interests in the
preferred securities are to be accomplished by entries made on the
books of participants acting on behalf of beneficial owners.
Beneficial owners will not receive certificates representing their
ownership interest in preferred securities, except if use of the
book-entry-only system for the preferred securities is discontinued.
DTC will have no knowledge of the actual beneficial owners of
the preferred securities; DTC's records reflect only the identity of
the direct participants to whose accounts the preferred securities
are credited, which may or may not be the beneficial owners. The
participants will remain responsible for keeping account of their
holdings on behalf of their customers.
The information in this section concerning DTC and DTC's
book-entry system has been obtained from sources that we believe to
be accurate, but we and the trust assume no responsibility for the
accuracy thereof. Neither we nor the trust have any responsibility
for the performance by DTC or its
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participants of their respective obligations as described in this
prospectus or under the rules and procedures governing their
respective operations.
NOTICES AND VOTING
Conveyance of notices and other communications by DTC to
direct participants, by direct participants to indirect
participants, and by direct and indirect participants to beneficial
owners will be governed by arrangements among them, subject to any
statutory or regulatory requirements as may be in effect from time
to time.
Redemption notices will be sent to Cede & Co. as the
registered holder of the preferred securities. If less than all of
the preferred securities are being redeemed, the amount to be
redeemed will be determined in accordance with the trust agreement.
Although voting with respect to the preferred securities is
limited to the holders of record of the preferred securities, in
those instances in which a vote is required, neither DTC nor Cede &
Co. will itself consent or vote with respect to preferred
securities. Under its usual procedures, DTC would mail an omnibus
proxy to the property trustee as soon as possible after the record
date. The omnibus proxy assigns Cede & Co.'s consenting or voting
rights to those direct participants to whose accounts the preferred
securities are credited on the record date.
DISTRIBUTION OF FUNDS
The property trustee will make distribution payments on the
preferred securities to DTC. DTC's practice is to credit direct
participants' accounts on the relevant payment date in accordance
with their respective holdings shown on DTC's records unless DTC has
reason to believe that it will not receive payments on the payment
date. Payments by participants to beneficial owners will be governed
by standing instructions and customary practices and will be the
responsibility of the participant and not of DTC, the property
trustee, the trust or us, subject to any statutory or regulatory
requirements as may be in effect from time to time. Payment of
distributions to DTC is the responsibility of the property trustee,
disbursement of the payments to direct participants is the
responsibility of DTC, and disbursements of the payments to the
beneficial owners is the responsibility of direct and indirect
participants.
SUCCESSOR DEPOSITARIES AND TERMINATION OF BOOK-ENTRY SYSTEM
DTC may discontinue providing its services with respect to
any of the preferred securities at any time by giving reasonable
notice to the property trustee or us. If no successor securities
depositary is obtained, definitive certificates representing the
preferred securities are required to be printed and delivered. We
also have the option to discontinue use of the system of book-entry
transfers through DTC, or a successor depositary. After an event of
default under the indenture, the holders of a majority in
liquidation amount of preferred securities may determine to
discontinue the system of book-entry transfers through DTC. In these
events, definitive certificates for the preferred securities will be
printed and delivered.
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DESCRIPTION OF THE GUARANTEE
The preferred securities guarantee agreement will be executed
and delivered by us concurrently with the issuance of the preferred
securities for the benefit of the holders of the preferred
securities. The guarantee agreement will be qualified as an
indenture under the Trust Indenture Act. State Street Bank and Trust
Company of Connecticut, National Association, the guarantee trustee,
will act as trustee for purposes of complying with the provisions of
the Trust Indenture Act, and will also hold the guarantee for the
benefit of the holders of the preferred securities. Prospective
investors are urged to read the form of the guarantee agreement,
which has been filed as an exhibit to the registration statement of
which this prospectus forms a part.
GENERAL
We agree to pay in full on a subordinated basis, to the
extent described in the guarantee agreement, the guarantee payments
(as defined below) to the holders of the preferred securities, as
and when due, regardless of any defense, right of set-off or
counterclaim that the trust may have or assert other than the
defense of payment.
The following payments with respect to the preferred
securities are called the "guarantee payments" and, to the extent
not paid or made by the trust and to the extent that the trust has
funds available for those distributions, will be subject to the
guarantee:
* any accumulated and unpaid distributions required to be
paid on the preferred securities;
* with respect to any preferred securities called for
redemption, the redemption price; and
* upon a voluntary or involuntary dissolution, winding up or
termination of the trust (other than in connection with
the distribution of subordinated debentures to the holders
of preferred securities in exchange for preferred
securities), the lesser of:
(a) the amount of the liquidation distribution; and
(b) the amount of assets of the trust remaining
available for distribution to holders of
preferred securities in liquidation of the trust.
We may satisfy our obligations to make a guarantee payment by
making a direct payment of the required amounts to the holders of
the preferred securities or by causing the trust to pay the amounts
to the holders.
The guarantee agreement is a guarantee, on a subordinated
basis, of the guarantee payments, but the guarantee only applies to
the extent the trust has funds available for those distributions. If
we do not make interest payments on the subordinated debentures
purchased by the trust, the trust will not have funds available to
make the distributions and will not pay distributions on the
preferred securities.
STATUS OF THE GUARANTEE
The guarantee constitutes our unsecured obligation that ranks
subordinate and junior in right of payment to all of our senior and
subordinated debt in the same manner as the subordinated debentures
and senior to our capital stock. We expect to incur additional
indebtedness in the future, although we have no specific plans in
this regard presently, and neither the indenture nor the trust
agreement limits the amounts of the obligations that we may incur.
The guarantee constitutes a guarantee of payment and not of
collection. If we fail to make guarantee payments when required,
holders of preferred securities may institute a legal proceeding
directly against us to enforce their rights under the guarantee
without first instituting a legal proceeding against any other
person or entity.
The guarantee will not be discharged except by payment of the
guarantee payments in full to the extent not paid by the trust or
upon distribution of the subordinated debentures to the holders of
the
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preferred securities. Because we are a bank holding company, our
right to participate in any distribution of assets of any subsidiary
upon the subsidiary's liquidation or reorganization or otherwise is
subject to the prior claims of creditors of that subsidiary, except
to the extent we may be recognized as a creditor of that subsidiary.
Our obligations under the guarantee, therefore, will be effectively
subordinated to all existing and future liabilities of our
subsidiaries, and claimants should look only to our assets for
payments under the guarantee.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially
adversely affect the rights of holders of the preferred securities,
in which case no vote will be required, the guarantee may be amended
only with the prior approval of the holders of a majority of the
aggregate liquidation amount of the outstanding preferred
securities. See "Description of the Preferred Securities -- Voting
Rights; Amendment of Trust Agreement."
EVENTS OF DEFAULT; REMEDIES
An event of default under the guarantee agreement will occur
upon our failure to make any required guarantee payments or to
perform any other obligations under the guarantee. If the guarantee
trustee obtains actual knowledge that an event of default has
occurred and is continuing, the guarantee trustee must enforce the
guarantees for the benefit of the holders of the preferred
securities. The holders of a majority in aggregate liquidation
amount of the preferred securities will have the right to direct the
time, method and place of conducting any proceeding for any remedy
available to the guarantee trustee in respect of the guarantee and
may direct the exercise of any power conferred upon the guarantee
trustee under the guarantee agreement.
Any holder of preferred securities may institute and
prosecute a legal proceeding directly against us to enforce its
rights under the guarantee without first instituting a legal
proceeding against the trust, the guarantee trustee or any other
person or entity.
We are required to provide to the guarantee trustee annually
a certificate as to whether or not we are in compliance with all of
the conditions and covenants applicable to us under the guarantee
agreement.
TERMINATION OF THE GUARANTEE
The guarantee will terminate and be of no further force and
effect upon:
* full payment of the redemption price of the preferred
securities;
* full payment of the amounts payable upon liquidation of
the trust; or
* distribution of the subordinated debentures to the holders
of the preferred securities.
If at any time any holder of the preferred securities must
restore payment of any sums paid under the preferred securities or
the guarantee, the guarantee will continue to be effective or will
be reinstated with respect to such amounts.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The guarantee trustee, other than during the occurrence and
continuance of our default in performance of the guarantee,
undertakes to perform only those duties as are specifically set
forth in the guarantee. When an event of default has occurred and is
continuing, the guarantee trustee must exercise the same degree of
care and skill as a prudent person would exercise or use in the
conduct of his or her own affairs. The guarantee trustee is under no
obligation to exercise any of the powers vested in it by the
guarantee at the request of any holder of any preferred securities
unless it is offered reasonable security and indemnity against the
costs, expenses and liabilities that might be incurred thereby; but
this does not
96
relieve the guarantee trustee of its obligations to exercise the
rights and powers under the guarantee in the event of a default.
EXPENSE AGREEMENT
We will, pursuant to the agreement as to expenses and
liabilities entered into by us and the trust under the trust
agreement, irrevocably and unconditionally guarantee to each person
or entity to whom the trust becomes indebted or liable, the full
payment of any costs, expenses or liabilities of the trust, other
than obligations of the trust to pay to the holders of the preferred
securities or other similar interests in the trust of the amounts
due to the holders pursuant to the terms of the preferred securities
or other similar interests, as the case may be. Third party
creditors of the trust may proceed directly against us under the
expense agreement, regardless of whether they had notice of the
expense agreement.
GOVERNING LAW
The guarantee will be governed by Missouri law.
RELATIONSHIP AMONG THE PREFERRED SECURITIES,
THE SUBORDINATED DEBENTURES AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
We irrevocably guarantee, as and to the extent described in
this prospectus, payments of distributions and other amounts due on
the preferred securities, to the extent the trust has funds
available for the payment of these amounts. We and the trust believe
that, taken together, our obligations under the subordinated
debentures, the indenture, the trust agreement, the expense
agreement and the guarantee agreement provide, in the aggregate, a
full, irrevocable and unconditional guarantee, on a subordinated
basis, of payment of distributions and other amounts due on the
preferred securities. No single document standing alone or operating
in conjunction with fewer than all of the other documents
constitutes a guarantee. It is only the combined operation of these
documents that has the effect of providing a full, irrevocable and
unconditional guarantee of the obligations of the trust under the
preferred securities.
If and to the extent that we do not make payments on the
subordinated debentures, the trust will not pay distributions or
other amounts due on the preferred securities. The guarantee does
not cover payment of distributions when the trust does not have
sufficient funds to pay the distributions. In this event, the remedy
of a holder of preferred securities is to institute a legal
proceeding directly against us for enforcement of payment of the
distributions to the holder. Our obligations under the guarantee are
subordinated and junior in right of payment to all of our other
indebtedness.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made
when due on the subordinated debentures, these payments will be
sufficient to cover distributions and other payments due on the
preferred securities, primarily because:
* the aggregate principal amount of the subordinated
debentures will be equal to the sum of the aggregate
stated liquidation amount of the trust securities;
* the interest rate and interest and other payment dates on
the subordinated debentures will match the distribution
rate and distribution and other payment dates for the
preferred securities;
* we will pay for any and all costs, expenses and
liabilities of the trust, except the obligations of the
trust to pay to holders of the preferred securities the
amounts due to the holders pursuant to the terms of the
preferred securities; and
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* the trust will not engage in any activity that is not
consistent with the limited purposes of the trust.
ENFORCEMENT RIGHTS OF HOLDERS OF PREFERRED SECURITIES
A holder of any preferred security may institute a legal
proceeding directly against us to enforce its rights under the
guarantee without first instituting a legal proceeding against the
guarantee trustee, the trust or any other person. A default or event
of default under any of our senior or subordinated debt would not
constitute a default or event of default under the trust agreement.
In the event, however, of payment defaults under, or acceleration
of, our senior or subordinated debt, the subordination provisions of
the indenture provide that no payments may be made in respect of the
subordinated debentures until the obligations have been paid in full
or any payment default has been cured or waived. Failure to make
required payments on the subordinated debentures would constitute an
event of default under the trust agreement.
LIMITED PURPOSE OF THE TRUST
The preferred securities evidence preferred undivided
beneficial interests in the assets of the trust. The trust exists
for the exclusive purposes of issuing the trust securities,
investing the proceeds thereof in subordinated debentures and
engaging in only those other activities necessary, advisable or
incidental thereto. A principal difference between the rights of a
holder of a preferred security and the rights of a holder of a
subordinated debenture is that a holder of a subordinated debenture
is entitled to receive from us the principal amount of and interest
accrued on subordinated debentures held, while a holder of preferred
securities is entitled to receive distributions from the trust (or
from us under the guarantee) if and to the extent the trust has
funds available for the payment of the distributions.
RIGHTS UPON TERMINATION
Upon any voluntary or involuntary termination, winding-up or
liquidation of the trust involving the liquidation of the
subordinated debentures, the holders of the preferred securities
will be entitled to receive, out of assets held by the trust, the
liquidation distribution in cash. See "Description of the Preferred
Securities -- Liquidation Distribution Upon Termination."
Upon our voluntary or involuntary liquidation or bankruptcy,
the property trustee, as holder of the subordinated debentures,
would be a subordinated creditor of ours. Therefore, the property
trustee would be subordinated in right of payment to all of our
senior and subordinated debt, but is entitled to receive payment in
full of principal and interest before any of our stockholders
receive payments or distributions. Since we are the guarantor under
the guarantee and have agreed to pay for all costs, expenses and
liabilities of the trust other than the obligations of the trust to
pay to holders of the preferred securities the amounts due to the
holders pursuant to the terms of the preferred securities, the
positions of a holder of the preferred securities and a holder of
the subordinated debentures relative to our other creditors and to
our stockholders in the event of liquidation or bankruptcy are
expected to be substantially the same.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion is the opinion of Jackson Walker
L.L.P., Dallas, Texas, as First Banks' counsel ("Tax Counsel"),
concerning the material United States federal income tax consequences
of the purchase, ownership and disposition of preferred securities.
The opinion of Tax Counsel is based on the representations, facts and
assumptions set forth in this prospectus, on certain factual
certifications of First Banks' management and the administrative
trustees of First Preferred Capital Trust III, and on certain
assumptions and qualifications set forth in its opinion.
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The following discussion is general and may not apply to your
particular circumstances for any of the following, or other,
reasons:
* This discussion is based on United States federal income
tax laws, including the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury regulations promulgated
thereunder and administrative and judicial interpretations
of these authorities, in effect as of the date of this
prospectus. Changes to any of these laws, possibly on a
retroactive basis, after this date may affect the tax
consequences described below.
* This discussion addresses only preferred securities
acquired at original issuance at the original offering
price and held as capital assets, within the meaning of
United States federal income tax law. It does not discuss
all of the tax consequences that may be relevant to
purchasers of preferred securities who are subject to
special rules, such as banks, savings institutions and
certain other financial institutions, real estate
investment trusts, regulated investment companies,
insurance companies, brokers and dealers in securities or
currencies, certain securities traders, tax-exempt
investors, individual retirement accounts, certain tax-
deferred accounts and foreign investors. This discussion
also does not address tax consequences that may be
relevant to a purchaser in light of the purchaser's
particular circumstances, such as a purchaser holding a
trust preferred security as a position in a straddle,
hedge, conversion or other integrated investment.
* This discussion does not address:
(a) The income tax consequences to stockholders in,
or partners or beneficiaries of, a purchaser of
preferred securities;
(b) the United States alternative minimum tax
consequences or other collateral tax consequences
of purchasing, owning and disposing of preferred
securities; or
(c) any state, local or foreign tax consequences of
purchasing, owning and disposing of preferred
securities.
The authorities on which this discussion is based are subject
to various interpretations, and the opinions of Tax Counsel are not
binding on the Internal Revenue Service (the "IRS") or the courts,
either of which could take a contrary position. Moreover, no rulings
have been or will be sought from the IRS with respect to the
transactions described herein. Accordingly, no assurance can be
given to prospective investors that the IRS will not challenge the
opinions expressed herein or that a court would not sustain such a
challenge.
WE ADVISE YOU TO CONSULT YOUR OWN TAX ADVISORS REGARDING THE TAX
CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF THE PREFERRED
SECURITIES BASED ON YOUR PARTICULAR CIRCUMSTANCES AND THE RELEVANT
TAXING JURISDICTION.
UNITED STATES HOLDERS
IN GENERAL. For purposes of the following discussion, a
United States Holder (a "Holder") means:
* a citizen or individual resident of the United States;
* a corporation or partnership created or organized in or
under the laws of the United States or any political
subdivision;
* an estate the income of which is includible in its gross
income for United States federal income tax purposes
without regard to its source; or
* a trust if a court within the United States is able to
exercise primary supervision over its administration and
at least one United States person has the authority to
control all substantial decisions of the trust.
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CHARACTERIZATION OF FIRST PREFERRED CAPITAL TRUST III. Tax
Counsel is of the opinion that First Preferred Capital Trust III
will be characterized for United States federal income tax purposes
as a grantor trust. Accordingly, for United States federal income
tax purposes, a Holder of a trust preferred security will be
considered the beneficial owner of an undivided interest in the
subordinated debentures owned by First Preferred Capital Trust III,
and will be required to include on its United States federal income
tax return all income or gain recognized for United States federal
income tax purposes with respect to its share of the subordinated
debentures in accordance with its method of accounting. As discussed
below, if the subordinated debentures were determined to be subject
to the original issue discount ("OID") rules, a Holder would instead
be required to include in gross income any OID accrued on a daily
basis with respect to its allocable share of the subordinated
debentures whether or not cash was actually distributed to the
Holder.
CHARACTERIZATION OF THE SUBORDINATED DEBENTURES. Tax Counsel
is of the opinion that the subordinated debentures are debt of First
Banks for United States federal income tax purposes. By acceptance
of a beneficial interest in a trust preferred security, a Holder
agrees to treat the subordinated debentures as First Banks' debt and
the preferred securities as evidence of a beneficial ownership
interest in the subordinated debentures. The remainder of this
discussion assumes that the subordinated debentures will be
classified as debt for United States federal income tax purposes.
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT. Under the terms
of the subordinated debentures, we have the ability to defer
payments of interest from time to time by extending the interest
payment period for a period not exceeding 20 consecutive quarterly
periods, but not beyond the stated maturity of the subordinated
debentures. Treasury regulations provide that debt instruments like
the subordinated debentures, assuming they will be issued at face
value, will not be considered issued with OID, even if their issuer
can defer payments of interest, if the likelihood of any deferral is
"remote."
Based on our factual representations to Tax Counsel, Tax
Counsel is of the opinion, and this discussion assumes, that, as of
the date of this prospectus, the likelihood of us deferring payments
of interest is "remote" within the meaning of the applicable
Treasury regulations. This conclusion is based in part on the fact
that exercising that option would (1) prevent us from declaring
dividends on our common stock and from making any payments with
respect to debt securities that rank equally with or junior to the
subordinated debentures, and (2) adversely effect our subsequent
cost of and ability to raise capital. Therefore, Tax Counsel is of
the opinion, and we believe and will take the position, that the
subordinated debentures will not be treated as issued with OID by
reason of the deferral option alone. Rather, Holders will be taxed
on stated interest on the subordinated debentures when it is paid or
accrued in accordance with each Holder's method of accounting for
United States federal income tax purposes. This issue has not been
interpreted by any court decisions or addressed in any published
rulings or interpretations issued by the IRS, and it is possible
that the IRS could take a position contrary to the conclusions
herein.
If we exercise our option to defer payments of interest, the
subordinated debentures would be treated as redeemed and reissued
for OID purposes. The sum of the remaining interest payments, and
any de minimis OID, on the subordinated debentures would thereafter
be treated as OID. The OID would accrue, and be includible in a
Holder's taxable income, on a daily economic accrual basis,
regardless of a Holder's method of accounting for income tax
purposes, over the remaining term of the subordinated debentures,
including any period of interest deferral, without regard to the
timing of payments under the subordinated debentures. The amount of
OID that would accrue in any period would approximately equal the
amount of interest that accrued on the subordinated debentures in
that period at the stated interest rate. Consequently, during any
period of interest deferral, a Holder will include OID in gross
income in advance of the receipt of cash, and if a Holder disposes
of a trust preferred security prior to the record date for payment
of distributions on the subordinated debentures following that
deferral period, a Holder will be subject to income tax on OID
accrued through the date of disposition and not previously included
in income, but will not receive cash from First Preferred Capital
Trust III with respect to the OID.
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The Treasury regulations referred to above have not been
interpreted by any court decisions or addressed in any ruling or
other pronouncements of the IRS, and it is possible that the IRS
could take a position contrary to the conclusions herein. If the
possibility that we would exercise our option to defer payments of
interest is determined not to be remote, the subordinated debentures
would be treated as initially issued with OID in an amount equal to
the aggregate stated interest, plus any de minimis OID, over the
term of the subordinated debentures. A Holder would include that OID
in its taxable income, over the term of the subordinated debentures,
on a daily economic accrual basis.
CHARACTERIZATION OF INCOME. Because for United States federal
income tax purposes the income underlying the preferred securities
will, in the opinion of Tax Counsel, be characterized as interest,
and not as dividends, a corporate Holder of preferred securities
will not be entitled to a dividends-received deduction for any
income it recognizes with respect to the preferred securities.
RECEIPT OF SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION
OF FIRST PREFERRED CAPITAL TRUST III. Under the circumstances
described above under "Description of the Preferred Securities,"
First Preferred Capital Trust III may distribute a pro-rata share of
the subordinated debentures to Holders in exchange for their
preferred securities and in liquidation of First Preferred Capital
Trust III. Except as discussed below, that type of a distribution
would not be a taxable event for United States federal income tax
purposes, and consequently a Holder would have an aggregate adjusted
basis in the subordinated debentures received equal to the Holder's
aggregate adjusted basis in the Holder's preferred securities. A
Holder's adjusted tax basis in the preferred securities generally
will be its initial purchase price, increased by OID, if any,
previously includible in a Holder's gross income to the date of
disposition and decreased by payments, if any, received on the
preferred securities in respect of OID to the date of disposition. A
Holder would have a holding period in the subordinated debentures
received in the liquidation that includes the period during which
the Holder held the preferred securities. After a distribution of
subordinated debentures to Holders, a Holder would recognize
interest income in respect of the subordinated debentures received
in the manner described above under "-- Interest Income and Original
Issue Discount."
Under circumstances described above under "Description of the
Preferred Securities -- Redemption," First Banks may redeem
subordinated debentures for cash, the proceeds of which would be
distributed to Holders in redemption of their preferred securities.
The redemption, to the extent that it constitutes a complete
redemption, would be taxable for United States federal income tax
purposes, and a Holder would recognize gain or loss as if it had
sold the preferred securities for cash. Such gain or loss would
amount to the difference between the cash received upon redemption
and the Holder's adjusted tax basis in the preferred securities. See
"-- Sales of Preferred Securities" below.
SALES OF PREFERRED SECURITIES. Upon the sale or other taxable
disposition, including a redemption for cash, of the preferred
securities, a Holder will recognize gain or loss in an amount equal
to the difference between its adjusted tax basis in the preferred
securities, as defined above, and the amount realized in the sale,
except to the extent of any amount received in respect of accrued
but unpaid interest or OID not previously included in income. The
gain or loss generally will be a capital gain or loss, and will be a
long-term capital gain or loss if the Holder has held the preferred
securities for more than one year prior to the date of disposition.
The preferred securities may trade at a price that does not
accurately reflect the value of accrued but unpaid interest, or OID,
with respect to the underlying subordinated debentures. A Holder who
disposes of its preferred securities between record dates for
payments of distributions thereon will be required to include in its
taxable income for United States federal income tax purposes (1) any
portion of the amount realized that is attributable to the accrued
but unpaid interest to the extent not previously included in income
or (2) any amount of OID, in either case, that has accrued on its
pro rata share of the underlying subordinated debentures during the
taxable year of sale through the date of disposition. Any income
inclusion will increase a Holder's adjusted tax basis in the
preferred securities of which it disposes. To the extent that the
amount realized in the sale is less than a Holder's adjusted tax
basis, a Holder will recognize a capital loss. Subject to certain
limited exceptions applicable to non-corporate
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taxpayers, capital losses cannot be applied to offset ordinary
income for United States federal income tax purposes.
EFFECT OF POSSIBLE CHANGES IN TAX LAWS
In a case filed in the U.S. Tax Court, Enron Corp. v.
Commissioner, Tax Court Docket No. 6149-98, the IRS challenged the
deductibility for federal income tax purposes of interest paid on
securities which are similar, but not identical, to the subordinated
debentures. The parties filed a stipulation of settled issues, a
portion of which stipulated that there shall be no adjustment for
the interest deducted by the taxpayer with respect to the
securities. It is nevertheless possible that the IRS could still
challenge the deductibility of interest paid on the subordinated
debentures, which, if such challenge were litigated resulting in the
IRS's position being sustained, would trigger a Tax Event and
possibly a redemption of the subordinated debentures.
In addition, Congress and previous administrations have
considered certain proposed tax law changes in the past which, if
enacted, could have adversely affected the ability of First Banks to
deduct interest paid on the subordinated debentures. These proposals
were not enacted. Nevertheless, there can be no assurance that
legislation enacted after the date of this prospectus will not
adversely affect the ability of First Banks to deduct the interest
payable on the subordinated debentures or cause First Preferred
Capital Trust III to become subject to tax. Such legislation, as
well as changes in law of similar import that result from future
administrative pronouncements or judicial decisions, may cause a Tax
Event. The occurrence of a Tax Event would give us the right to
redeem the subordinated debentures. See "Description of the
Subordinated Debentures -- Redemption" and "Description of Preferred
Securities -- Redemption or Exchange."
See "-- Sales of Preferred Securities" above for the United
States federal income tax consequences of a redemption to a Holder.
NON-UNITED STATES HOLDERS
The following discussion applies to you if you are not a
"Holder" as described above.
Payments of interest, including OID, to a non-United States
Holder on a trust preferred security will generally not be subject
to withholding of income tax, provided that:
* the non-United States Holder did not, directly or
indirectly, actually or constructively, own 10% or more of
the total combined voting power of all classes of our
stock entitled to vote;
* the non-United States Holder is not a controlled foreign
corporation that is related to us through stock ownership;
* the interest does not constitute contingent interest as
described in Section 871 (h) (4) of the Code;
* the non-United States Holder is not a bank receiving
interest described in Section 881 (c) (3) (A) of the Code;
and
* either (1) the non-United States Holder certifies to First
Preferred Capital Trust III or its agent, under penalties
of perjury, that the non-U. S. Holder is not a United
States person and provides its name and permanent
residential address, (2) a securities clearing
organization, bank or other financial institution that
holds customers' securities in the ordinary course of its
trade or business (a "Financial Institution"), and holds
the trust preferred security in that capacity, certifies
to First Preferred Capital Trust III or its agent, under
penalties of perjury and in accordance with applicable
Treasury regulations, that it requires and has received
the required statement from the non-United States Holder
or another Financial Institution between it and the Holder
in the chain of ownership, and furnishes First Preferred
Capital Trust III or its agent with a copy, (3) a foreign
financial institution or foreign clearing organization
(other than a U.S. branch or U.S. office of the
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institution or organization), a foreign branch or office
of a U.S. financial institution or a U.S. clearing
organization, or any other person the IRS accepts who
enters into a withholding agreement with the IRS (each a
"Foreign Intermediary") certifies to First Preferred
Capital Trust III or its agent, under penalties of perjury
and in accordance with applicable Treasury regulations,
that (i) it is a qualified intermediary that is not acting
for its own account, (ii) it has provided, or will
provide, a withholding statement, as required, and (iii)
if applicable, it has assumed primary withholding
responsibility and/or primary Form 1099 reporting and
backup withholding responsibility, or (4) a Foreign
Intermediary that is not a qualified intermediary
certifies to First Preferred Capital Trust III or its
agent, under penalties of perjury and in accordance with
applicable Treasury regulations, that (i) it is not a
qualified intermediary and is not acting for its own
account, (ii) it has provided, or will provide, a
withholding statement, as required, and (iii) it has
provided copies of the required statement from the
non-United States Holder or another Financial Institution
between it and the Holder in the chain of ownership.
Special rules apply to U.S. branches of foreign banks and
insurance companies, foreign partnerships and certain foreign
trusts.
As discussed above, it is possible that changes in the law
affecting the income tax consequences of the subordinated debentures
could adversely affect our ability to deduct interest payable on the
subordinated debentures. These changes could also cause the
subordinated debentures to be classified as equity rather than debt
for United States federal income tax purposes. This might cause the
income derived from the subordinated debentures to be characterized
as dividends, generally subject to a 30% withholding tax (or lower
rate under an applicable income tax treaty) when paid to you if you
are not a United States Holder, rather than as interest which, as
discussed above, generally is exempt from withholding tax in the
hands of a foreign corporation or nonresident alien who is not a
United States Holder.
If a non-United States Holder holds the preferred securities
in connection with the active conduct of a United States trade or
business, the non-United States Holder will be subject to income tax
on all income and gains recognized with respect to its proportionate
share of the subordinated debentures.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to
payments made on, or, if applicable, accrued on, and proceeds from
the sale of, the preferred securities held by a noncorporate Holder
within the United States. In addition, payments made on, and
payments of the proceeds from the sale of, the preferred securities
to or through the United States office of a broker are subject to
information reporting unless the Holder certifies as to its
non-United States Holder status or otherwise establish as an
exemption from information reporting and backup withholding. Taxable
income on the preferred securities for a calendar year is required
to be reported to United States Holders on the appropriate forms by
the following January 31st.
Payments made on, and proceeds from the sale of, the
preferred securities may be subject to a "backup" withholding tax of
(currently 30.5%) unless a Holder complies with various
identification or exemption requirements. Any amounts so withheld
will be allowed as a credit against a Holder's income tax liability,
or refunded, provided the required information is timely provided to
the IRS.
In addition, a non-United States Holder will generally not be
subject to withholding of income tax on any gain realized upon the
sale or other disposition of a trust preferred security.
THE PRECEDING DISCUSSION IS ONLY A SUMMARY AND DOES NOT
ADDRESS THE CONSEQUENCES TO PARTICULAR PERSONS OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF THE PREFERRED SECURITIES. POTENTIAL
PURCHASERS OF THE PREFERRED SECURITIES ARE URGED TO CONTACT THEIR
OWN TAX ADVISORS TO DETERMINE THEIR PARTICULAR TAX CONSEQUENCES.
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ERISA CONSIDERATIONS
Employee benefit plans that are subject to the Employee
Retirement Income Security Act of 1974, or Section 4975 of the
Internal Revenue Code, generally may purchase preferred securities,
subject to the investing fiduciary's determination that the
investment in preferred securities satisfies ERISA's fiduciary
standards and other requirements applicable to investments by the
plan.
In any case, we or any of our affiliates may be considered a
"party in interest" (within the meaning of ERISA) or a "disqualified
person" (within the meaning of Section 4975 of the Internal Revenue
Code) with respect to certain plans. These plans generally include
plans maintained or sponsored by, or contributed to by, any such
persons with respect to which we or any of our affiliates are a
fiduciary or plans for which we or any of our affiliates provide
services. The acquisition and ownership of preferred securities by a
plan (or by an individual retirement arrangement or other plans
described in Section 4975(e)(1) of the Internal Revenue Code) with
respect to which we or any of our affiliates are considered a party
in interest or a disqualified person may constitute or result in a
prohibited transaction under ERISA or Section 4975 of the Internal
Revenue Code, unless the preferred securities are acquired pursuant
to and in accordance with an applicable exemption.
As a result, plans with respect to which we or any of our
affiliates or any affiliate of the plan are a party in interest or a
disqualified person should not acquire preferred securities unless
the preferred securities are acquired pursuant to and in accordance
with an applicable exemption. Any other plans or other entities
whose assets include plan assets subject to ERISA or Section 4975 of
the Internal Revenue Code proposing to acquire preferred securities
should consult with their own counsel.
UNDERWRITING
Subject to the terms and conditions of the underwriting
agreement among First Banks, the trust and the underwriters named
below, for whom Stifel, Nicolaus & Company, Incorporated, RBC Dain
Rauscher Inc. and Fahnestock & Co. Inc. are acting as
representatives (the "Representatives"), the underwriters have
severally agreed to purchase from the trust, and the trust has
agreed to sell to them, an aggregate of 1,920,000 preferred
securities in the amounts set forth below opposite their respective
names.
NUMBER OF
UNDERWRITERS PREFERRED SECURITIES
- ------------ --------------------
Stifel, Nicolaus & Company, Incorporated............. 561,668
RBC Dain Rauscher Inc................................ 561,666
Fahnestock & Co. Inc................................. 561,666
Friedman, Billings, Ramsey & Co., Inc................ 40,000
Prudential Securities................................ 40,000
Advest, Inc.......................................... 20,000
D.A. Davidson & Co................................... 20,000
Ferris, Baker Watts, Inc............................. 20,000
First Southwest Company.............................. 20,000
Howe Barnes Investments, Inc......................... 20,000
Keefe, Bruyette & Woods, Inc......................... 20,000
Ryan, Beck & Co., Inc................................ 20,000
Redwine & Company, Inc............................... 5,000
Smith, Moore & Co.................................... 5,000
Wunderlich Securities, Inc........................... 5,000
---------
Total............................................ 1,920,000
=========
Under the terms and conditions of the underwriting agreement,
the underwriters are committed to accept and pay for all of the
preferred securities, if any are taken. If an underwriter defaults,
the underwriting agreement provides that the purchase commitments of
the non-defaulting underwriters may be increased or, in certain
cases, the underwriting agreement may be terminated. In the
underwriting
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agreement, the obligations of the underwriters are subject to approval of
certain legal matters by their counsel, including the authorization and the
validity of the preferred securities, and to other conditions contained in
the underwriting agreement, such as receipt by the underwriters of officers'
certificates and legal opinions.
The underwriters propose to offer the preferred securities directly
to the public at the public offering price set forth on the cover page of
this prospectus, and to certain securities dealers (who may include the
underwriters) at this price, less a concession not in excess of $0.50 per
preferred security. The underwriters may allow, and the selected dealers may
reallow, a concession not in excess of $0.45 per preferred security to
certain brokers and dealers. After the preferred securities are released for
sale to the public, the offering price and other selling terms may from time
to time be changed by the underwriters.
The trust has granted to the underwriters an option,
exercisable within 30 days after the date of this prospectus, to
purchase up to 288,000 additional preferred securities at the same
price per preferred security to be paid by the underwriters for the
other preferred securities being offered. If the underwriters
purchase any of the additional preferred securities under this
option, each underwriter will be committed to purchase the
additional shares in approximately the same proportion allocated to
them in the table above. The underwriters may exercise the option
only for the purpose of covering over-allotments, if any, made in
connection with the distribution of the preferred securities being
offered.
If the underwriters exercise their option to purchase
additional preferred securities, the trust will issue and sell to us
additional common securities and we will issue and sell subordinated
debentures to the trust in an aggregate principal amount equal to
the total aggregate liquidation amount of the additional preferred
securities being purchased under the option and the additional
common securities sold to First Banks.
The table below shows the price and proceeds on a per
preferred security and aggregate basis. The proceeds to be received
by the trust as shown in the table below do not reflect estimated
expenses of $275,000 payable by First Banks.
PER PREFERRED
SECURITY TOTAL
------------- -----------
Public Offering Price.............................. $25.00 $48,000,000
Proceeds to First Preferred Capital Trust III...... $25.00 $48,000,000
First Banks has agreed to pay the underwriters $0.9375 per
preferred security, or a total of $1,800,000 as compensation for
arranging the investment in the subordinated debentures. Should the
underwriters exercise the over-allotment option, an aggregate of
$2,070,000 will be paid to the underwriters for arranging the
investment in the subordinated debentures.
The offering of the preferred securities is made for delivery
when, as and if accepted by the underwriters and subject to prior
sale and to withdrawal, cancellation or modification of the offering
without notice. The underwriters reserve the right to reject any
order for the purchase of the preferred securities.
First Banks and the trust have agreed to indemnify the
several underwriters against several liabilities, including
liabilities under the Securities Act of 1933.
The preferred securities have been designated for inclusion in
the Nasdaq National Market. The Representatives have advised the trust
that they presently intend to make a market in the preferred securities
after the commencement of trading on Nasdaq, but no assurances can be
made as to the liquidity of the preferred securities or that an active
and liquid market will develop or, if developed, that the market will
continue. The offering price and distribution rate have been determined by
negotiations among representatives of First Banks and the underwriters, and
the offering price of the preferred securities may not be indicative of the
market price following the offering. The Representatives will have
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no obligation to make a market in the preferred securities, however, and may
cease market-making activities, if commenced, at any time.
In connection with the offering, the underwriters may engage
in transactions that are intended to stabilize, maintain or
otherwise affect the price of the preferred securities during and
after the offering, such as the following:
* the underwriters may over-allot or otherwise create a
short position in the preferred securities for their own
account by selling more preferred securities than have
been sold to them;
* the underwriters may elect to cover any short position by
purchasing preferred securities in the open market or by
exercising the over-allotment option;
* the underwriters may stabilize or maintain the price of
the preferred securities by bidding;
* the underwriters may engage in passive market making
transactions; and
* the underwriters may impose penalty bids, under which
selling concessions allowed to syndicate members or other
broker-dealers participating in this offering are
reclaimed if preferred securities previously distributed
in the offering are repurchased in connection with
stabilization transactions or otherwise.
The effect of these transactions may be to stabilize or
maintain the market price at a level above that which might
otherwise prevail in the open market. The imposition of a penalty
bid may also affect the price of the preferred securities to the
extent that it discourages resales. No representation is made as to
the magnitude or effect of any such stabilization or other
transactions. Such transactions may be effected in the Nasdaq
National Market or otherwise and, if commenced, may be discontinued
at any time.
Because the National Association of Securities Dealers, Inc.
may view the preferred securities as interests in a direct
participation program, the offer and sale of the preferred
securities is being made in compliance with the provisions of Rule
2810 under the NASD Conduct Rules.
Some of the underwriters have previously performed other
investment banking services for First Banks and its subsidiaries.
Additionally, Stifel, Nicolaus & Company, Incorporated is providing
financial advisory services to the board of directors of Union
Financial Group, Ltd., in connection with First Banks' acquisition
of Union Financial Group, Ltd. and will receive customary fees for
its services.
LEGAL MATTERS
Legal matters, including matters relating to federal income
tax considerations, for First Banks and the trust will be passed
upon by Jackson Walker L.L.P., Dallas, Texas, counsel to First Banks
and the trust. Certain legal matters will be passed upon for the
underwriters by Bryan Cave LLP, St. Louis, Missouri. Jackson
Walker L.L.P. and Bryan Cave LLP will rely on the opinion of
Richards, Layton & Finger, Wilmington, Delaware, as to matters of
Delaware law.
WHERE YOU CAN FIND INFORMATION
This prospectus is a part of a Registration Statement on Form
S-2 filed by us and the trust with the SEC under the Securities Act,
with respect to the preferred securities, the subordinated
debentures and the guarantee. This prospectus does not contain all
the information set forth in the registration statement, certain
parts of which are omitted in accordance with the rules and
regulations of the SEC. For further information with respect to us
and the securities offered by this prospectus, reference is made to
the registration statement, including the exhibits to the
registration statement and documents incorporated by reference.
Statements contained in this prospectus concerning the provisions of
such documents are necessarily summaries of such documents and each
such statement is qualified in its entirety by reference to the copy
of the applicable document filed with the SEC.
106
We file periodic reports and other information with the SEC.
Our filings are available to the public over the Internet at the
SEC's web site at http://www.sec.gov. You may also inspect and copy
these materials at the public reference facilities of the SEC at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Copies of
such material can be obtained at prescribed rates from the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information.
The trust is not currently subject to the information
reporting requirements of the Securities Exchange Act of 1934 and
although the trust will become subject to such requirements upon the
effectiveness of the registration statement, it is not expected that
the trust will be required to file separate reports under the
Securities Exchange Act.
Each holder of the trust securities will receive a copy of
our annual report at the same time as we furnish the annual report
to the holders of our common stock.
EXPERTS
The consolidated financial statements of First Banks, Inc. as
of December 31, 2000 and 1999, and for each of the years in the
three-year period ended December 31, 2000, have been included herein
and in the registration statement in reliance upon the report of
KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
DOCUMENTS INCORPORATED BY REFERENCE
We "incorporate by reference" into this prospectus the
information in documents we file with the SEC, which means that we
can disclose important information to you through those documents.
The information incorporated by reference is an important part of
this prospectus. Some information contained in this prospectus
updates the information incorporated by reference and some
information that we file subsequently with the SEC will
automatically update this prospectus. We incorporate by reference
the documents listed below:
(a) our Annual Report on Form 10-K for the year ended
December 31, 2000, filed with the SEC on March 28, 2001;
(b) our Quarterly Report on Form 10-Q for the quarter ended
March 31, 2001, filed with the SEC on May 14, 2001;
(c) our Current Report on Form 8-K filed with the SEC on
July 27, 2001; and
(d) our Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001, filed with the SEC on August 15, 2001.
We also incorporate by reference any filings we make with the
SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 after the initial filing of the registration
statement that contains this prospectus and before the time that all
of the securities offered in this prospectus are sold.
You may request, and we will provide, a copy of these filings
at no cost by contacting Allen H. Blake, our President, Chief
Operating Officer, Chief Financial Officer and Secretary, at the
following address and phone number:
First Banks, Inc.
600 James S. McDonnell Blvd.
Hazelwood, Missouri 63042
(314) 592-5000
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST BANKS, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report............................................. F-1
Consolidated Balance Sheets as of June 30, 2001 (unaudited)
and December 31, 2000 and 1999......................................... F-2
Consolidated Statements of Income for the six months ended
June 30, 2001 and 2000 (unaudited) and for the years ended
December 31, 2000, 1999 and 1998....................................... F-4
Consolidated Statements of Changes in Stockholders' Equity
and Comprehensive Income for the six months ended June 30,
2001 (unaudited) and for the years ended December 31,
2000, 1999 and 1998.................................................... F-5
Consolidated Statements of Cash Flows for the six months
ended June 30, 2001 and 2000 (unaudited) and for the years
ended December 31, 2000, 1999 and 1998................................. F-6
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FIRST BANKS, INC.
INDEPENDENT AUDITORS' REPORT
KPMG LLP [Logo]
The Board of Directors and Stockholders
First Banks, Inc.:
We have audited the accompanying consolidated balance sheets of First
Banks, Inc. and subsidiaries (the Company) as of December 31, 2000 and
1999, and the related consolidated statements of income, changes in
stockholders' equity and comprehensive income and cash flows for each
of the years in the three-year period ended December 31, 2000. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above, present fairly, in all material respects, the financial
position of First Banks, Inc. and subsidiaries as of December 31, 2000
and 1999, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United
States of America.
/s/ KPMG LLP
St. Louis, Missouri
March 16, 2001
F-1
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
JUNE 30, ------------------------
2001 2000 1999
----------- --------- ---------
(UNAUDITED)
ASSETS
Cash and cash equivalents:
Cash and due from banks.............................. $ 130,964 167,474 126,720
Interest-bearing deposits with other financial
institutions with maturities of three months or
less............................................... 3,196 4,005 1,674
Federal funds sold................................... 133,100 26,800 42,500
---------- --------- ---------
Total cash and cash equivalents.................. 267,260 198,279 170,894
---------- --------- ---------
Investment securities:
Available for sale, at fair value.................... 362,515 539,386 430,093
Held to maturity, at amortized cost (fair value of
$23,165 at June 30, 2001, $24,507 and $21,476 at
December 31, 2000 and 1999, respectively).......... 22,495 24,148 21,554
---------- --------- ---------
Total investment securities...................... 385,010 563,534 451,647
---------- --------- ---------
Loans:
Commercial, financial and agricultural............... 1,559,990 1,496,284 1,086,919
Real estate construction and development............. 813,574 809,682 795,081
Real estate mortgage................................. 2,187,572 2,202,857 1,851,569
Consumer and installment............................. 119,160 181,602 233,374
Loans held for sale.................................. 189,788 69,105 37,412
---------- --------- ---------
Total loans...................................... 4,870,084 4,759,530 4,004,355
Unearned discount.................................... (8,141) (7,265) (8,031)
Allowance for loan losses............................ (77,141) (81,592) (68,611)
---------- --------- ---------
Net loans........................................ 4,784,802 4,670,673 3,927,713
---------- --------- ---------
Derivative instruments................................... 27,417 3,759 39
Bank premises and equipment, net of accumulated
depreciation and amortization.......................... 125,820 114,771 75,647
Intangibles associated with the purchase of
subsidiaries........................................... 83,574 85,021 46,085
Mortgage servicing rights, net of amortization........... 8,629 7,048 8,665
Accrued interest receivable.............................. 42,277 45,226 33,491
Deferred income taxes.................................... 71,878 75,699 51,972
Other assets............................................. 107,536 112,681 101,594
---------- --------- ---------
Total assets..................................... $5,904,203 5,876,691 4,867,747
========== ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
F-2
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
JUNE 30, ------------------------
2001 2000 1999
----------- --------- ---------
(UNAUDITED)
LIABILITIES
Deposits:
Demand:
Non-interest-bearing............................. $ 734,398 808,251 606,064
Interest-bearing................................. 490,019 448,146 415,113
Savings.............................................. 1,491,761 1,447,898 1,198,314
Time:
Time deposits of $100 or more.................... 520,107 499,956 339,214
Other time deposits.............................. 1,757,834 1,808,164 1,693,109
---------- --------- ---------
Total deposits............................... 4,994,119 5,012,415 4,251,814
Short-term borrowings.................................... 201,177 140,569 73,554
Note payable............................................. 34,500 83,000 64,000
Accrued interest payable................................. 27,170 23,227 11,607
Deferred income taxes.................................... 26,618 12,774 6,582
Accrued expenses and other liabilities................... 26,316 54,944 25,616
Minority interest in subsidiary.......................... 15,018 14,067 12,058
---------- --------- ---------
Total liabilities............................ 5,324,918 5,340,996 4,445,231
---------- --------- ---------
Guaranteed preferred beneficial interests in:
First Banks, Inc. subordinated debentures............ 138,570 138,569 83,394
First Banks America, Inc. subordinated debentures.... 44,311 44,280 44,217
---------- --------- ---------
Total guaranteed preferred beneficial
interests in subordinated debentures....... 182,881 182,849 127,611
---------- --------- ---------
STOCKHOLDERS' EQUITY
Preferred stock:
$1.00 par value, 5,000,000 shares authorized, no
shares issued and outstanding at June 30, 2001,
December 31, 2000 and 1999......................... -- -- --
Class A convertible, adjustable rate, $20.00 par
value, 750,000 shares authorized, 641,082 shares
issued and outstanding............................. 12,822 12,822 12,822
Class B adjustable rate, $1.50 par value, 200,000
shares authorized, 160,505 shares issued and
outstanding........................................ 241 241 241
Common stock, $250.00 par value, 25,000 shares
authorized, 23,661 shares issued and outstanding....... 5,915 5,915 5,915
Capital surplus.......................................... 2,610 2,267 3,318
Retained earnings........................................ 345,503 325,580 270,259
Accumulated other comprehensive income................... 29,313 6,021 2,350
---------- --------- ---------
Total stockholders' equity................... 396,404 352,846 294,905
---------- --------- ---------
Total liabilities and stockholders' equity... $5,904,203 5,876,691 4,867,747
========== ========= =========
F-3
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
---------------------------- --------------------------------
2001 2000 2000 1999 1998
----------- ----------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
Interest income:
Interest and fees on loans............................... $212,917 185,826 390,332 323,207 284,177
Investment securities:
Taxable................................................ 14,355 13,537 27,331 26,206 39,898
Nontaxable............................................. 466 482 961 937 985
Federal funds sold and other............................. 1,655 2,033 4,202 2,732 2,800
-------- -------- -------- -------- --------
Total interest income................................ 229,393 201,878 422,826 353,082 327,860
-------- -------- -------- -------- --------
Interest expense:
Deposits:
Interest-bearing demand................................ 3,480 2,885 5,909 5,098 5,135
Savings................................................ 27,525 24,070 51,656 44,101 42,591
Time deposits of $100 or more.......................... 15,329 5,855 20,654 11,854 12,024
Other time deposits.................................... 53,143 50,222 99,603 84,639 92,305
Interest rate exchange agreements, net................... -- -- -- 5,397 3,810
Short-term borrowings.................................... 3,662 2,515 5,881 3,983 2,903
Note payable............................................. 1,773 2,511 3,976 3,629 3,411
-------- -------- -------- -------- --------
Total interest expense............................... 104,912 88,058 187,679 158,701 162,179
-------- -------- -------- -------- --------
Net interest income.................................. 124,481 113,820 235,147 194,381 165,681
Provision for loan losses.................................. 7,110 7,202 14,127 13,073 9,000
-------- -------- -------- -------- --------
Net interest income after provision for loan
losses.............................................. 117,371 106,618 221,020 181,308 156,681
-------- -------- -------- -------- --------
Noninterest income:
Service charges on deposit accounts and customer service
fees.................................................... 10,537 9,464 19,794 17,676 14,876
Gain on mortgage loans sold and held for sale............ 7,332 3,268 7,806 6,909 5,563
Credit card fees......................................... 221 91 236 409 2,999
Gain on sale of credit card portfolio, net of expenses... 2,275 -- -- -- --
Loan servicing fees, net................................. 153 231 486 657 1,017
Net gain on sales of available-for-sale securities....... (113) 379 168 791 1,466
Net (loss) gain on trading securities.................... -- -- -- (303) 607
Gain on sales of branches, net of expenses............... -- 1,355 1,355 4,406 --
Gain on derivative instruments, net...................... 5,486 -- -- -- --
Other.................................................... 10,007 6,247 12,933 11,105 9,969
-------- -------- -------- -------- --------
Total noninterest income............................. 35,898 21,035 42,778 41,650 36,497
-------- -------- -------- -------- --------
Noninterest expense:
Salaries and employee benefits........................... 45,797 35,237 73,391 61,524 55,907
Occupancy, net of rental income.......................... 8,216 6,655 14,675 12,518 11,037
Furniture and equipment.................................. 5,617 5,673 11,702 8,520 8,122
Postage, printing and supplies........................... 2,258 2,183 4,431 4,244 5,230
Data processing fees..................................... 12,951 10,663 22,359 18,567 13,917
Legal, examination and professional fees................. 3,424 2,003 4,523 9,109 5,326
Amortization of intangibles associated with the purchase
of subsidiaries......................................... 3,712 2,373 5,297 4,401 3,184
Communications........................................... 1,513 1,233 2,625 2,488 2,874
Advertising and business development..................... 3,182 1,661 4,331 3,734 4,668
Guaranteed preferred debentures.......................... 8,978 6,012 13,173 12,050 9,842
Other.................................................... 20,368 6,017 14,656 13,652 18,597
-------- -------- -------- -------- --------
Total noninterest expense............................ 116,016 79,710 171,163 150,807 138,704
-------- -------- -------- -------- --------
Income before provision for income taxes, minority
interest in income of subsidiary and cumulative
effect of change in accounting principle............ 37,253 47,943 92,635 72,151 54,474
Provision for income taxes................................. 14,581 17,741 34,482 26,313 19,693
-------- -------- -------- -------- --------
Income before minority interest in income of
subsidiary and cumulative effect of change in
accounting principle................................ 22,672 30,202 58,153 45,838 34,781
Minority interest in income of subsidiary.................. 1,045 943 2,046 1,660 1,271
-------- -------- -------- -------- --------
Income before cumulative effect of change in
accounting principle................................ 21,627 29,259 56,107 44,178 33,510
Cumulative effect of change in accounting principle, net of
tax....................................................... (1,376) -- -- -- --
-------- -------- -------- -------- --------
Net income........................................... 20,251 29,259 56,107 44,178 33,510
Preferred stock dividends.................................. 328 328 786 786 786
-------- -------- -------- -------- --------
Net income available to common stockholders.......... $ 19,923 28,931 55,321 43,392 32,724
======== ======== ======== ======== ========
Earnings per common share:
Basic:
Income before cumulative effect of change in
accounting principle................................ $ 900.21 1,222.71 2,338.04 1,833.91 1,383.04
Cumulative effect of change in accounting principle,
net of tax.......................................... (58.16) -- -- -- --
-------- -------- -------- -------- --------
Basic................................................ $ 842.05 1,221.71 2,338.04 1,833.91 1,383.04
======== ======== ======== ======== ========
Diluted:
Income before cumulative effect of change in
accounting principle................................ $ 882.65 1,182.47 2,267.41 1,775.47 1,337.09
Cumulative effect of change in accounting principle,
net of tax.......................................... (58.16) -- -- -- --
-------- -------- -------- -------- --------
Diluted.............................................. $ 824.49 1,182.47 2,267.41 1,775.47 1,337.09
======== ======== ======== ======== ========
Weighted average shares of common stock outstanding........ 23,661 23,661 23,661 23,661 23,661
======== ======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
F-4
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 2001 AND THREE YEARS ENDED DECEMBER 31, 2000
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
ADJUSTABLE RATE ACCU-
PREFERRED STOCK MULATED
------------------ OTHER TOTAL
CLASS A COMPRE- COMPRE- STOCK-
CONVERT- COMMON CAPITAL HENSIVE RETAINED HENSIVE HOLDERS'
IBLE CLASS B STOCK SURPLUS INCOME EARNINGS INCOME EQUITY
-------- ------- ------ -------- ------- -------- ------- --------
Consolidated balances, January 1, 1998....... $12,822 241 5,915 3,978 199,143 9,438 231,537
Year ended December 31, 1998:
Comprehensive income:
Net income............................... -- -- -- -- $33,510 33,510 -- 33,510
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment(1)........ -- -- -- -- 2,300 -- 2,300 2,300
-------
Comprehensive income..................... $35,810
=======
Class A preferred stock dividends, $1.20
per share................................. -- -- -- -- (769) -- (769)
Class B preferred stock dividends, $0.11
per share................................. -- -- -- -- (17) -- (17)
Effect of capital stock transactions of
majority-owned subsidiary................. -- -- -- (3,198) -- -- (3,198)
------- --- ----- ------ ------- ------ -------
Consolidated balances, December 31, 1998..... 12,822 241 5,915 780 231,867 11,738 263,363
Year ended December 31, 1999:
Comprehensive income:
Net income............................... -- -- -- -- 44,178 44,178 -- 44,178
Other comprehensive income, net of tax
Unrealized losses on securities, net of
reclassification adjustment(1)........ -- -- -- -- (9,388) -- (9,388) (9,388)
-------
Comprehensive income..................... 34,790
=======
Class A preferred stock dividends, $1.20
per share................................. -- -- -- -- (769) -- (769)
Class B preferred stock dividends, $0.11
per share................................. -- -- -- -- (17) -- (17)
Effect of capital stock transactions of
majority-owned subsidiary................. -- -- -- (3,273) -- -- (3,273)
Reclassification of retained earnings...... -- -- -- 5,000 (5,000) -- --
Reduction of deferred tax asset valuation
allowance................................. -- -- -- 811 -- -- 811
------- --- ----- ------ ------- ------ -------
Consolidated balances, December 31, 1999..... 12,822 241 5,915 3,318 270,259 2,350 294,905
Year ended December 31, 2000:
Comprehensive income:
Net income............................... -- -- -- -- 56,107 56,107 -- 56,107
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment(1)........ -- -- -- -- 3,671 -- 3,671 3,671
-------
Comprehensive income..................... 59,778
=======
Class A preferred stock dividends, $1.20
per share................................. -- -- -- -- (769) -- (769)
Class B preferred stock dividends, $0.11
per share................................. -- -- -- -- (17) -- (17)
Effect of capital stock transactions of
majority-owned subsidiary................. -- -- -- (1,051) -- -- (1,051)
------- --- ----- ------ ------- ------ -------
Consolidated balances, December 31, 2000..... 12,822 241 5,915 2,267 325,580 6,021 352,846
Six months ended June 30, 2001 (unaudited):
Comprehensive income:
Net income............................... -- -- -- -- 20,251 20,251 -- 20,251
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment(1)........ -- -- -- -- 9,529 -- 9,529 9,529
Derivative instruments:
Cumulative effect of change in
accounting principle, net........... -- -- -- -- 9,069 -- 9,069 9,069
Current period transactions.......... -- -- -- -- 7,621 -- 7,621 7,621
Reclassification to earnings......... -- -- -- -- (2,927) -- (2,927) (2,927)
-------
Comprehensive income..................... 43,543
=======
Class A preferred stock dividends, $0.50
per share................................. -- -- -- -- (321) -- (321)
Class B preferred stock dividends, $0.04
per share................................. -- -- -- -- (7) -- (7)
Effect of capital stock transactions of
majority-owned subsidiary................. -- -- -- 343 -- -- 343
------- --- ----- ------ ------- ------ -------
Consolidated balances, June 30, 2001
(unaudited)................................. $12,822 241 5,915 2,610 345,503 29,313 396,404
======= === ===== ====== ======= ====== =======
<FN>
- ----------------------
(1) Disclosure of reclassification adjustment:
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------- ----------------------------
2001 2000 2000 1999 1998
------ ------ ----- ------ -----
Unrealized gains (losses) on investment securities arising during
this period...................................................... $9,456 (1,221) 3,780 (8,874) 3,253
Less reclassification adjustment for gains (losses) included in
net income....................................................... (73) 246 109 514 953
------ ------ ----- ------ -----
Unrealized gains (losses) on investment securities................. $9,529 (1,467) 3,671 (9,388) 2,300
====== ====== ===== ====== =====
The accompanying notes are an integral part of the consolidated financial statements.
F-5
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS EXPRESSED IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
---------------------------- ------------------------------------
2001 2000 2000 1999 1998
----------- ----------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income....................................... $ 20,251 29,259 56,107 44,178 33,510
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Cumulative effect of change in accounting
principle, net of tax......................... 1,376 -- -- -- --
Depreciation and amortization of bank premises
and equipment................................. 5,734 4,578 9,536 7,609 5,293
Amortization, net of accretion................. 4,090 3,801 8,370 12,632 10,494
Originations and purchases of loans held for
sale.......................................... (757,526) (238,508) (532,178) (452,941) (628,544)
Proceeds from sales of loans held for sale..... 587,612 185,316 413,247 507,077 520,994
Provision for loan losses...................... 7,110 7,202 14,127 13,073 9,000
Provision for income taxes..................... 14,581 17,741 34,482 26,313 19,693
Payments of income taxes....................... (21,288) (5,382) (10,525) (23,904) (16,091)
Decrease (increase) in accrued interest
receivable.................................... 2,949 (3,295) (7,338) (3,164) 256
Net decrease (increase) in trading
securities.................................... -- -- -- 3,425 (315)
Interest accrued on liabilities................ 104,912 88,058 187,679 158,701 162,368
Payments of interest on liabilities............ (100,969) (87,088) (177,764) (154,056) (167,090)
Gain on sales of branch facilities............. -- (1,355) (1,355) (4,406) --
Gain on sale of credit card portfolio, net of
expenses...................................... (2,275) -- -- -- --
Net loss (gain) on sales of available-for-sale
investment securities......................... 113 (379) -- -- --
Other operating activities, net................ (21,392) (12,080) (11,952) (2,795) (9,122)
Minority interest in income of subsidiary...... 1,045 943 2,046 1,660 1,271
--------- -------- -------- -------- --------
Net cash (used in) provided by operating
activities.................................. (153,677) (11,189) (15,518) 133,402 (58,283)
--------- -------- -------- -------- --------
Cash flows from investing activities:
Cash (paid) received for acquired entities, net
of cash and cash equivalents received (paid).... -- (2,709) (86,106) (15,961) 29,339
Proceeds from sales of investment securities..... 71,023 8,148 46,279 63,938 136,042
Maturities of investment securities available for
sale............................................ 194,642 191,276 347,642 350,940 395,961
Maturities of investment securities held to
maturity........................................ 1,887 679 1,169 2,708 2,314
Purchases of investment securities available for
sale............................................ (57,421) (149,971) (289,875) (288,023) (167,082)
Purchases of investment securities held to
maturity........................................ (240) (489) (3,806) (2,627) (4,910)
Net decrease (increase) in loans................. 27,258 (254,431) (339,575) (268,238) (443,741)
Recoveries of loans previously charged-off....... 3,775 6,180 9,842 9,281 8,444
Purchases of bank premises and equipment......... (20,403) (10,039) (30,856) (17,099) (14,851)
Other investing activities....................... 6,494 2,183 5,052 (10) (13,919)
--------- -------- -------- -------- --------
Net cash provided by (used in) investing
activities.................................. 227,015 (209,173) (340,234) (165,091) (72,403)
--------- -------- -------- -------- --------
Cash flows from financing activities:
Increase (decrease) in demand and savings
deposits........................................ 11,883 55,340 155,058 (72,895) 258,757
(Decrease) increase in time deposits............. (27,926) 81,595 129,008 144,499 (171,207)
Increase (decrease) in Federal Home Loan Bank
advances........................................ 50,000 -- -- (50,000) 48,485
Increase (decrease) in federal funds purchased... -- 36,100 (27,100) -- --
Increase in securities sold under agreements to
repurchase...................................... 10,608 41,158 52,015 2,223 18,692
Advances drawn on note payable................... 5,000 10,000 137,000 32,000 41,000
Repayments of note payable....................... (53,500) (15,500) (118,000) (18,048) (62,097)
Proceeds from issuance of guaranteed preferred
subordinated debentures......................... -- -- 55,050 -- 44,124
Sales of branch deposits......................... -- 892 892 (49,172) --
Payment of preferred stock dividends............. (328) (328) (786) (786) (786)
Other financing activities, net.................. (94) -- -- -- --
--------- -------- -------- -------- --------
Net cash (used in) provided by financing
activities.................................. (4,357) 209,257 383,137 (12,179) 176,968
--------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................. 68,981 (11,105) 27,385 (43,868) 46,282
Cash and cash equivalents, beginning of period..... 198,279 170,894 170,894 214,762 168,480
--------- -------- -------- -------- --------
Cash and cash equivalents, end of period........... $ 267,260 159,789 198,279 170,894 214,762
========= ======== ======== ======== ========
Noncash investing and financing activities:
Reduction of deferred tax asset valuation
reserve......................................... $ 565 1,267 1,267 -- --
Loans transferred to other real estate........... 1,312 1,081 1,761 4,039 3,067
Loans exchanged for and transferred to
available-for-sale investment securities........ -- -- 37,634 -- 65,361
Loans held for sale exchanged for and transferred
to available-for-sale investment securities..... 15,139 7,186 19,805 3,985 23,898
Loans held for sale transferred to loans......... 28,351 46,153 72,847 32,982 --
========= ======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
F-6
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the more significant accounting
policies followed by First Banks, Inc. and subsidiaries (First Banks
or the Company):
BASIS OF PRESENTATION. The accompanying consolidated
financial statements of First Banks have been prepared in accordance
with accounting principles generally accepted in the United States
of America and conform to predominant practices within the banking
industry. Management of First Banks has made a number of estimates
and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare
the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America.
Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION. The consolidated financial
statements include the accounts of the parent company and its
subsidiaries, net of minority interest, as more fully described
below. All significant intercompany accounts and transactions have
been eliminated. Certain reclassifications of 1999 and 1998 amounts
have been made to conform with the 2000 presentation.
First Banks operates through its subsidiary bank holding
companies and subsidiary financial institutions (collectively
referred to as the Subsidiary Banks) as follows:
First Bank, headquartered in St. Louis County, Missouri
(First Bank);
First Capital Group, Inc., headquartered in Albuquerque,
New Mexico (FCG);
First Banks America, Inc., headquartered in St. Louis
County, Missouri (FBA) and its wholly owned subsidiaries:
First Bank & Trust, headquartered in San Francisco,
California (FB&T); and
The San Francisco Company, headquartered in San Francisco,
California (SFC), and its wholly owned subsidiary:
Bank of San Francisco, headquartered in San Francisco,
California.
The Subsidiary Banks are wholly owned by their respective
parent companies except FBA, which was 83.37% owned by First Banks
at December 31, 1999. On October 31, 2000, FBA issued 6,530,769
shares of its common stock to First Banks in conjunction with FBA's
acquisition of First Bank & Trust, a wholly owned subsidiary of
First Banks. This transaction increased First Banks' ownership
interest in FBA to approximately 92.82%. First Banks owned 92.86% of
FBA at December 31, 2000.
CASH AND CASH EQUIVALENTS. Cash, due from banks, federal
funds sold, and interest-bearing deposits with original maturities
of three months or less are considered to be cash and cash
equivalents for purposes of the consolidated statements of cash
flows.
The Subsidiary Banks are required to maintain certain daily
reserve balances on hand in accordance with regulatory requirements.
These reserve balances maintained in accordance with such
requirements were $22.3 million and $10.8 million at December 31,
2000 and 1999, respectively.
INVESTMENT SECURITIES. The classification of investment
securities available for sale or held to maturity is determined at
the date of purchase. First Banks no longer engages in the trading
of investment securities.
F-7
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Investment securities designated as available for sale, which
include any security that First Banks has no immediate plan to sell
but which may be sold in the future under different circumstances,
are stated at fair value. Realized gains and losses are included in
noninterest income upon commitment to sell, based on the amortized
cost of the individual security sold. Unrealized gains and losses
are recorded, net of related income tax effects, in accumulated
other comprehensive income. All previous fair value adjustments
included in the separate component of accumulated other
comprehensive income are reversed upon sale.
Investment securities designated as held to maturity, which
include any security that First Banks has the positive intent and
ability to hold to maturity, are stated at cost, net of amortization
of premiums and accretion of discounts computed on the level-yield
method taking into consideration the level of current and
anticipated prepayments.
LOANS HELD FOR PORTFOLIO. Loans held for portfolio are
carried at cost, adjusted for amortization of premiums and accretion
of discounts using the interest method. Interest and fees on loans
are recognized as income using the interest method. Loan origination
fees are deferred and accreted over the estimated life of the loans
using the interest method. Loans held for portfolio are stated at
cost as First Banks has the ability and it is management's intention
to hold them to maturity.
The accrual of interest on loans is discontinued when it
appears that interest or principal may not be paid in a timely
manner in the normal course of business. Generally, payments
received on nonaccrual and impaired loans are recorded as principal
reductions. Interest income is recognized after all principal has
been repaid or an improvement in the condition of the loan has
occurred which would warrant resumption of interest accruals.
A loan is considered impaired when it is probable that First
Banks will be unable to collect all amounts due, both principal and
interest, according to the contractual terms of the loan agreement.
When measuring impairment, the expected future cash flows of an
impaired loan are discounted at the loan's effective interest rate.
Alternatively, impairment is measured by reference to an observable
market price, if one exists, or the fair value of the collateral for
a collateral-dependent loan. Regardless of the historical
measurement method used, First Banks measures impairment based on
the fair value of the collateral when foreclosure is probable.
Additionally, impairment of a restructured loan is measured by
discounting the total expected future cash flows at the loan's
effective rate of interest as stated in the original loan agreement.
First Banks uses its existing nonaccrual methods for recognizing
interest income on impaired loans.
LOANS HELD FOR SALE. Loans held for sale are carried at the
lower of cost or market value, which is determined on an individual
loan basis. Gains or losses on the sale of loans held for sale are
determined on a specific identification method.
LOAN SERVICING INCOME. Loan servicing income represents fees
earned for servicing real estate mortgage loans owned by investors,
net of federal agency guarantee fees, interest shortfall and
amortization of mortgage servicing rights. Such fees are generally
calculated on the outstanding principal balance of the loans
serviced and are recorded as income when earned.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is
maintained at a level considered adequate to provide for probable
losses. The provision for loan losses is based on a periodic
analysis of the loans held for portfolio and held for sale,
considering, among other factors, current economic conditions, loan
portfolio composition, past loan loss experience, independent
appraisals, loan collateral,
F-8
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
payment experience and selected key financial ratios. As adjustments
become necessary, they are reflected in the results of operations in
the periods in which they become known.
BANK PREMISES AND EQUIPMENT. Bank premises and equipment are
stated at cost less accumulated depreciation and amortization.
Depreciation is computed primarily using the straight-line method
over the estimated useful lives of the related assets. Amortization
of leasehold improvements is calculated using the straight-line
method over the shorter of the useful life of the improvement or
term of the lease. Bank premises and improvements are depreciated
over five to 40 years and equipment over three to seven years.
INTANGIBLES ASSOCIATED WITH THE PURCHASE OF SUBSIDIARIES.
Intangibles associated with the purchase of subsidiaries consist of
excess of cost over net assets acquired. The excess of cost over net
assets acquired of purchased subsidiaries is amortized using the
straight-line method over the estimated periods to be benefited,
which range from approximately 10 to 15 years. First Banks reviews
intangible assets for impairment whenever events or changes in
circumstances indicate the carrying value of an underlying asset may
not be recoverable. First Banks measures recoverability based upon
the future cash flows expected to result from the use of the
underlying asset and its eventual disposition. If the sum of the
expected future cash flows (undiscounted and without interest
charges) is less than the carrying value of the underlying asset,
First Banks recognizes an impairment loss. The impairment loss
recognized represents the amount by which the carrying value of the
underlying asset exceeds the fair value of the underlying asset. As
such adjustments become necessary, they are reflected in the results
of operations in the periods in which they become known.
MORTGAGE SERVICING RIGHTS. Mortgage servicing rights are
amortized in proportion to the related estimated net servicing
income on a disaggregated, discounted basis over the estimated lives
of the related mortgages considering the level of current and
anticipated repayments, which range from five to 12 years.
OTHER REAL ESTATE. Other real estate, consisting of real
estate acquired through foreclosure or deed in lieu of foreclosure,
is stated at the lower of cost or fair value less applicable selling
costs. The excess of cost over fair value of the property at the
date of acquisition is charged to the allowance for loan losses.
Subsequent reductions in carrying value, to reflect current fair
value or costs incurred in maintaining the properties, are charged
to expense as incurred.
INCOME TAXES. Deferred tax assets and liabilities are
reflected at currently enacted income tax rates applicable to the
period in which the deferred tax assets or liabilities are expected
to be realized or settled. As changes in the tax laws or rates are
enacted, deferred tax assets and liabilities are adjusted through
the provision for income tax expense.
First Banks, Inc. and its eligible subsidiaries file a
consolidated federal income tax return and unitary or consolidated
state income tax returns in all applicable states.
FINANCIAL INSTRUMENTS. A financial instrument is defined as
cash, evidence of an ownership interest in an entity, or a contract
that conveys or imposes on an entity the contractual right or
obligation to either receive or deliver cash or another financial
instrument.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK. First
Banks utilizes financial instruments to reduce the interest rate
risk arising from its financial assets and liabilities. These
instruments involve, in varying degrees, elements of interest rate
risk and credit risk in excess of the amount recognized in the
consolidated balance sheets. "Interest rate risk" is defined as the
possibility that interest rates may move
F-9
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
unfavorably from the perspective of First Banks. The risk that a
counterparty to an agreement entered into by First Banks may default
is defined as "credit risk."
First Banks is party to commitments to extend credit and
commercial and standby letters of credit in the normal course of
business to meet the financing needs of its customers. These
commitments involve, in varying degrees, elements of interest rate
risk and credit risk in excess of the amount recognized in the
consolidated balance sheets.
INTEREST RATE SWAP, FLOOR AND CAP AGREEMENTS. Interest rate
swap, floor and cap agreements are accounted for on an accrual basis
with the net interest differential being recognized as an adjustment
to interest income or interest expense of the related asset or
liability. Premiums and fees paid upon the purchase of interest rate
swap, floor and cap agreements are amortized over the life of the
agreements using the interest method. In the event of early
termination of these derivative financial instruments, the net
proceeds received or paid are deferred and amortized over the
shorter of the remaining contract life of the derivative financial
instrument or the maturity of the related asset or liability. If,
however, the amount of the underlying hedged asset or liability is
repaid, then the gains or losses on the agreements are recognized
immediately in the consolidated statements of income. The
unamortized premiums, fees paid and deferred losses on early
terminations are included in other assets in the accompanying
consolidated balance sheets.
FORWARD CONTRACTS TO SELL MORTGAGE-BACKED SECURITIES. Gains
and losses on forward contracts to sell mortgage-backed securities,
which qualify as hedges, are deferred. The net unamortized balance
of such deferred gains and losses is applied to the carrying value
of the loans held for sale as part of the lower of cost or market
valuation.
EARNINGS PER COMMON SHARE. Basic earnings per shares (EPS)
are computed by dividing the income available to common stockholders
(the numerator) by the weighted average number of common shares
outstanding (the denominator) during the year. The computation of
dilutive EPS is similar except the denominator is increased to
include the number of additional common shares that would have been
outstanding if the dilutive potential shares had been issued. In
addition, in computing the dilutive effect of convertible
securities, the numerator is adjusted to add back: (a) any
convertible preferred dividends and (b) the after-tax amount of
interest recognized in the period associated with any convertible
debt.
F-10
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) ACQUISITIONS AND DIVESTITURES
During the three years ended December 31, 2000, First Banks
completed 10 acquisitions as follows:
TOTAL PURCHASE
ENTITY DATE ASSETS PRICE INTANGIBLES
------ ---- -------- -------- -----------
(DOLLARS EXPRESSED IN THOUSANDS)
2000
The San Francisco Company
San Francisco, California December 31, 2000 $183,800 62,200 16,300
Millennium Bank
San Francisco, California December 29, 2000 117,000 20,700 8,700
Commercial Bank of San Francisco
San Francisco, California October 31, 2000 155,600 26,400 9,300
Bank of Ventura
Ventura, California August 31, 2000 63,800 14,200 7,200
First Capital Group, Inc.
Albuquerque, New Mexico February 29, 2000 64,600 66,100 1,500
Lippo Bank
San Francisco, California February 29, 2000 85,300 17,200 4,800
-------- ------- --------
$670,100 206,800 47,800
======== ======= ========
1999
Century Bank
Beverly Hills, California August 31, 1999 $156,000 31,500 4,500
Redwood Bancorp
San Francisco, California March 4, 1999 183,900 26,000 9,500
-------- ------- --------
$339,900 57,500 14,000
======== ======= ========
1998
Republic Bank
Torrance, California September 15, 1998 $124,100 19,300 10,200
Pacific Bay Bank
San Pablo, California February 2, 1998 38,300 4,200 1,500
-------- ------- --------
$162,400 23,500 11,700
======== ======= ========
In addition to the acquisitions included in the table above,
during the three years ended December 31, 2000, First Banks also
completed two branch office purchases.
On September 17, 1999, FB&T completed its assumption of the
deposits and certain liabilities and the purchase of selected assets
of the Malibu, California branch office of Brentwood Bank of
California. The transaction resulted in the acquisition of
approximately $6.3 million in loans, $17.3 million of deposits and
one branch office. The excess of the cost over the fair value of the
net assets acquired was $325,000 and is being amortized over 15
years.
F-11
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On March 19, 1998, First Banks completed its assumption of
the deposits and purchase of selected assets of the Solvang,
California banking location of Bank of America. The transaction
resulted in the acquisition of approximately $15.5 million in
deposits and one office. The excess of the cost over the fair value
of the net assets acquired was $1.8 million and is being amortized
over 15 years.
In April 2000, First Bank completed its divestiture of one
branch office in central Illinois. In March and April 1999, First
Bank completed its divestiture of seven branches in the northern and
central Illinois market areas. For the years ended December 31, 2000
and 1999, these branch divestitures resulted in a reduction of the
deposit base of approximately $8.8 million and $54.8 million,
resulting in pre-tax gains of $1.4 million and $4.4 million,
respectively.
The aforementioned acquisition transactions were accounted
for using the purchase method of accounting and, accordingly, the
consolidated financial statements include the financial position and
results of operations for the periods subsequent to the respective
acquisition dates, and the assets acquired and liabilities assumed
were recorded at fair value at the acquisition dates. These
acquisitions were funded from available cash reserves, proceeds from
sales and maturities of available-for-sale investment securities,
borrowings under First Banks' $120.0 million revolving credit
agreement and the proceeds from the issuance of trust preferred
securities. Due to the immaterial effect on previously reported
financial information, pro forma disclosures have not been prepared
for the aforementioned transactions.
F-12
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) INVESTMENTS IN DEBT AND EQUITY SECURITIES
SECURITIES AVAILABLE FOR SALE. The amortized cost,
contractual maturity, gross unrealized gains and losses and fair
value of investment securities available for sale at December 31,
2000 and 1999 were as follows:
MATURITY
-------------------------------------- GROSS
TOTAL UNREALIZED WEIGHTED
1 YEAR 1-5 5-10 AFTER 10 AMORTIZED --------------- FAIR AVERAGE
OR LESS YEARS YEARS YEARS COST GAINS LOSSES VALUE YIELD
-------- ------- ------ -------- --------- ------ ------ ------- --------
(DOLLARS EXPRESSED IN THOUSANDS)
December 31, 2000:
Carrying value:
U.S. Treasury.................. $ 89,229 801 -- -- 90,030 30 (37) 90,023 5.85%
U.S. Government agencies and
corporations:
Mortgage-backed.............. 1,078 29,625 12,472 159,143 202,318 826 (160) 202,984 7.02
Other........................ 22,059 151,242 10,131 20,256 203,688 2,028 (1,521) 204,195 6.70
Corporate debt securities...... 912 1,961 -- 500 3,373 -- (20) 3,353 7.65
Equity investments in other
financial institutions........ 11,299 -- -- -- 11,299 8,121 (369) 19,051 7.98
Federal Home Loan Bank and
Federal Reserve Bank stock (no
stated maturity).............. 19,780 -- -- -- 19,780 -- -- 19,780 6.69
-------- ------- ------ ------- ------- ------ ------ -------
Total...................... $144,357 183,629 22,603 179,899 530,488 11,005 (2,107) 539,386 6.60
======== ======= ====== ======= ======= ====== ====== ======= ====
Fair value:
Debt securities................ $113,277 184,942 22,798 179,538
Equity securities.............. 38,831 -- -- --
-------- ------- ------ -------
Total...................... $152,108 184,942 22,798 179,538
======== ======= ====== =======
Weighted average yield........... 6.19% 6.73% 6.89% 7.09%
======== ======= ====== =======
December 31, 1999:
Carrying value:
U.S. Treasury.................. $ 21,036 29,240 -- -- 50,276 58 (45) 50,289 6.10%
U.S. Government agencies and
corporations:
Mortgage-backed.............. 12,489 2,274 20,946 98,935 134,644 20 (1,540) 133,124 6.64
Other........................ 144,185 26,073 13,170 24,256 207,684 4 (3,607) 204,081 6.02
Foreign debt securities........ 2,995 -- -- -- 2,995 286 -- 3,281 9.42
Equity investments in other
financial institutions........ 9,605 -- -- -- 9,605 8,492 (434) 17,663 8.53
Federal Home Loan Bank and
Federal Reserve Bank stock (no
stated maturity).............. 21,655 -- -- -- 21,655 -- -- 21,655 6.07
-------- ------- ------ ------- ------- ------ ------ -------
Total...................... $211,965 57,587 34,116 123,191 426,859 8,860 (5,626) 430,093 6.26
======== ======= ====== ======= ======= ====== ====== ======= ====
Fair value:
Debt securities................ $177,426 57,448 32,998 119,621
Equity securities.............. 42,600 -- -- --
-------- ------- ------ -------
Total...................... $220,026 57,448 32,998 119,621
======== ======= ====== =======
Weighted average yield........... 6.00% 6.44% 6.26% 6.79%
======== ======= ====== =======
F-13
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SECURITIES HELD TO MATURITY. The amortized cost, contractual
maturity, gross unrealized gains and losses and fair value of
investment securities held to maturity at December 31, 2000 and 1999
were as follows:
MATURITY
-------------------------------------- GROSS
TOTAL UNREALIZED WEIGHTED
1 YEAR 1-5 5-10 AFTER 10 AMORTIZED --------------- FAIR AVERAGE
OR LESS YEARS YEARS YEARS COST GAINS LOSSES VALUE YIELD
------- ------ ----- -------- --------- ----- ------ ------ --------
(DOLLARS EXPRESSED IN THOUSANDS)
December 31, 2000:
Carrying value:
U.S. Government agencies
and corporations:
Mortgage-backed.......... $ -- -- -- 5,130 5,130 3 (63) 5,070 6.72%
State and political
subdivisions.............. 950 11,692 5,896 270 18,808 419 -- 19,227 5.03
Other...................... 210 -- -- -- 210 -- -- 210 6.90
------ ------ ----- ----- ------ --- ---- ------
Total.................. $1,160 11,692 5,896 5,400 24,148 422 (63) 24,507 5.33
====== ====== ===== ===== ====== === ==== ====== ====
Fair value:
Debt securities............ $1,167 11,854 6,124 5,362
====== ====== ===== =====
Weighted average yield....... 4.64% 4.98% 5.16% 6.74%
====== ====== ===== =====
December 31, 1999:
Carrying value:
U.S. Government agencies
and corporations:
Mortgage-backed.......... $ -- -- -- 2,355 2,355 -- (155) 2,200 6.28%
State and political
subdivisions.............. 506 11,196 5,322 1,965 18,989 275 (198) 19,066 5.05
Other...................... -- 210 -- -- 210 -- -- 210 6.92
------ ------ ----- ----- ------ --- ---- ------
Total.................. $ 506 11,406 5,322 4,320 21,554 275 (353) 21,476 5.22
====== ====== ===== ===== ====== === ==== ====== ====
Fair value:
Debt securities............ $ 512 11,505 5,125 4,334
====== ====== ===== =====
Weighted average yield....... 5.09% 4.97% 4.55% 6.62%
====== ====== ===== =====
Proceeds from sales of available-for-sale investment
securities were $46.3 million, $63.9 million and $136.0 million for
the years ended December 31, 2000, 1999 and 1998, respectively.
Gross gains of $565,000, $791,000 and $1.5 million were realized on
these sales during the years ended December 31, 2000, 1999 and 1998,
respectively. Gross losses of $396,000 were realized on these sales
during the year ended December 31, 2000. There were no losses
realized on these sales in 1999 and 1998.
Proceeds from calls of investment securities were $111,000
and $20,000 for the years ended December 31, 2000 and 1999,
respectively. Gross gains of $300 were realized on these called
securities during the year ended December 31, 2000. There were no
gross gains on called securities in 1999. Gross losses of $1,800 and
$1,200 were realized on these called securities during the years
ended December 31, 2000 and 1999, respectively.
Proceeds from sales of trading investment securities were
$2.9 million and $311 million for the years ended December 31, 1999
and 1998, respectively. There were no gross gains realized on these
sales for the year ended December 31, 1999. Gross gains of $879,000
were realized on these sales for the year ended December 31, 1998.
Gross losses of $303,000 and $234,000 were realized on these sales
for the years ended December 31, 1999 and 1998, respectively.
F-14
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Certain of the Subsidiary Banks maintain investments in the
Federal Home Loan Bank (FHLB) and/or the Federal Reserve Bank (FRB).
These investments are recorded at cost, which represents redemption
value. The investment in FHLB stock is maintained at a minimum
amount equal to the greater of 1% of the aggregate outstanding
balance of the applicable Subsidiary Bank's loans secured by
residential real estate, or 5% of advances from the FHLB to each
Subsidiary Bank. First Bank, FB&T, and BSF are members of the FHLB
system. The investment in FRB stock is maintained at a minimum of 6%
of the applicable Subsidiary Bank's capital stock and capital
surplus. First Bank and FB&T are members of the FRB system.
Investment securities with a carrying value of approximately
$180.5 million and $222.3 million at December 31, 2000 and 1999,
respectively, were pledged in connection with deposits of public and
trust funds, securities sold under agreements to repurchase and for
other purposes as required by law.
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended
December 31 were as follows:
2000 1999 1998
-------- ------- -------
(DOLLARS EXPRESSED IN THOUSANDS)
Balance, beginning of year........................... $ 68,611 60,970 50,509
Acquired allowances for loan losses.................. 6,062 3,008 3,200
-------- ------- -------
74,673 63,978 53,709
-------- ------- -------
Loans charged-off.................................... (17,050) (17,721) (10,183)
Recoveries of loans previously charged-off........... 9,842 9,281 8,444
-------- ------- -------
Net loans charged-off................................ (7,208) (8,440) (1,739)
-------- ------- -------
Provision charged to operations...................... 14,127 13,073 9,000
-------- ------- -------
Balance, end of year................................. $ 81,592 68,611 60,970
======== ======= =======
At December 31, 2000 and 1999, First Banks had $50.2 million
and $36.7 million, respectively, of loans on nonaccrual status.
Interest on nonaccrual loans, which would have been recorded under
the original terms of the loans, was $5.8 million, $5.8 million and
$4.5 million for the years ended December 31, 2000, 1999 and 1998,
respectively. Of these amounts, $1.9 million, $2.7 million and $1.9
million were actually recorded as interest income on such loans in
2000, 1999 and 1998, respectively.
At December 31, 2000 and 1999, First Banks had $53.2 million
and $39.7 million of impaired loans, including $50.2 million and
$36.7 million of loans on nonaccrual status, respectively. At
December 31, 2000 and 1999, impaired loans also include $3.0 million
of restructured loans. The allowance for loan losses includes an
allocation for each impaired loan. The aggregate allocation of the
allowance for loan losses related to impaired loans was
approximately $10.3 million and $8.2 million at December 31, 2000
and 1999, respectively. The average recorded investment in impaired
loans was $45.1 million, $46.0 million and $35.2 million for the
years ended December 31, 2000, 1999 and 1998, respectively. The
amount of interest income recognized using a cash basis method of
accounting during the time these loans were impaired was $2.2
million, $2.8 million and $2.3 million in 2000, 1999 and 1998,
respectively.
First Banks' primary market areas are the states of Missouri,
Illinois, Texas and California. At December 31, 2000 and 1999,
approximately 91% and 90% of the total loan portfolio and 83% and
88% of the commercial and financial loan portfolio, respectively,
were to borrowers within these regions.
F-15
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Real estate lending constituted the only significant
concentration of credit risk. Real estate loans comprised
approximately 65% and 67% of the loan portfolio at December 31, 2000
and 1999, of which 26% and 28%, respectively, were consumer related
in the form of residential real estate mortgages and home equity
lines of credit.
First Banks is, in general, a secured lender. At December 31,
2000 and 1999, 96% and 97%, respectively, of the loan portfolio was
secured. Collateral is required in accordance with the normal credit
evaluation process based upon the creditworthiness of the customer
and the credit risk associated with the particular transaction.
(5) MORTGAGE BANKING ACTIVITIES
At December 31, 2000 and 1999, First Banks serviced loans for
others amounting to $957.2 million and $957.1 million, respectively.
Borrowers' escrow balances held by First Banks on such loans were
$653,000 and $1.0 million at December 31, 2000 and 1999,
respectively.
Changes in mortgage servicing rights, net of amortization,
for the years ended December 31 were as follows:
2000 1999
------- ------
(DOLLARS EXPRESSED
IN THOUSANDS)
Balance, beginning of year......................... $ 8,665 9,825
Originated mortgage servicing rights............... 1,455 1,670
Amortization....................................... (3,072) (2,830)
------- ------
Balance, end of year............................... $ 7,048 8,665
======= ======
(6) BANK PREMISES AND EQUIPMENT
Bank premises and equipment were comprised of the following
at December 31:
2000 1999
-------- -------
(DOLLARS EXPRESSED
IN THOUSANDS)
Land............................................. $ 18,266 17,582
Buildings and improvements....................... 66,474 52,491
Furniture, fixtures and equipment................ 66,460 55,344
Leasehold improvements........................... 23,794 11,635
Construction in progress......................... 15,655 2,896
-------- -------
Total........................................ 190,649 139,948
Less accumulated depreciation and amortization... 75,878 64,301
-------- -------
Bank premises and equipment, net............. $114,771 75,647
======== =======
Depreciation and amortization expense for the years ended
December 31, 2000, 1999 and 1998 totaled $9.5 million, $7.6 million
and $5.3 million, respectively.
F-16
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
First Banks leases land, office properties and some items of
equipment under operating leases. Certain of the leases contain
renewal options and escalation clauses. Total rent expense was $10.7
million, $7.4 million and $5.3 million for the years ended December
31, 2000, 1999 and 1998, respectively. Future minimum lease payments
under noncancellable operating leases extend through 2084 as
follows:
(DOLLARS EXPRESSED
IN THOUSANDS)
Year ending December 31:
2001............................................. $ 7,420
2002............................................. 6,101
2003............................................. 5,321
2004............................................. 3,941
2005............................................. 3,198
Thereafter....................................... 21,578
-------
Total future minimum lease payments.......... $47,559
=======
First Banks leases to unrelated parties a portion of its
banking facilities. Total rental income was $2.6 million, $2.6
million and $2.5 million for the years ended December 31, 2000, 1999
and 1998, respectively.
(7) SHORT-TERM BORROWINGS
Short-term borrowings were comprised of the following at
December 31:
2000 1999
-------- ------
(DOLLARS EXPRESSED
IN THOUSANDS)
Securities sold under agreements to repurchase.... $125,025 73,010
FHLB borrowings................................... 15,544 544
-------- ------
Short-term borrowings......................... $140,569 73,554
======== ======
The average balance of short-term borrowings was $106.1
million and $87.4 million, respectively, and the maximum month-end
balance of short-term borrowings was $158.4 million and $176.4
million, respectively, for the years ended December 31, 2000 and
1999. The average rates paid on short-term borrowings during the
years ended December 31, 2000, 1999 and 1998 were 5.54%, 4.83% and
4.84%, respectively. The assets underlying the short-term borrowings
are under First Banks' control.
(8) NOTE PAYABLE
First Banks has a $120.0 million revolving line of credit
with a group of unaffiliated banks (Credit Agreement). The Credit
Agreement, dated August 24, 2000, replaced a similar revolving
credit agreement dated August 25, 1999. Interest under the Credit
Agreement is payable on a monthly basis at the lead bank's corporate
base rate or, at the option of First Banks, is payable at the
Eurodollar Rate plus a margin based upon the outstanding loans and
First Banks' profitability. The interest rate for borrowings under
the Credit Agreement was 7.65% at December 31, 2000, and was based
on the applicable Eurodollar Rate plus a margin of 1.00%. Amounts
may be borrowed under the Credit Agreement until August 23, 2001, at
which time the principal and accrued interest is due and payable.
F-17
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Loans under the Credit Agreement are secured by all of the
stock of the Subsidiary Banks, which is owned by First Banks. Under
the Credit Agreement, there were outstanding borrowings of $83.0
million at December 31, 2000. There were outstanding borrowings of
$64.0 million under the previous credit agreement at December 31,
1999.
The Credit Agreement requires maintenance of certain minimum
capital ratios for each of the Subsidiary Banks. In addition, it
prohibits the payment of dividends on First Banks' common stock. At
December 31, 2000 and 1999, First Banks and the Subsidiary Banks
were in compliance with all restrictions and requirements of the
respective credit agreements.
The average balance and maximum month-end balance outstanding
of advances under the Credit Agreement during the years ended
December 31 were as follows:
2000 1999
------- ------
(DOLLARS EXPRESSED
IN THOUSANDS)
Average balance.................................... $51,897 56,376
Maximum month-end balance.......................... 83,000 75,000
======= ======
The average rates paid on the outstanding advances during the
years ended December 31, 2000, 1999 and 1998 were 7.66%, 6.44% and
6.85%, respectively.
(9) GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED
DEBENTURES
In February 1997, First Preferred Capital Trust (First
Preferred I), a newly formed Delaware business trust subsidiary of
First Banks, issued 3.45 million shares of 9.25% cumulative trust
preferred securities at $25 per share in an underwritten public
offering, and issued 106,702 shares of common securities to First
Banks at $25 per share. First Banks owns all of First Preferred I's
common securities. The gross proceeds of the offering were used by
First Preferred I to purchase $88.9 million of 9.25% subordinated
debentures from First Banks, maturing on March 31, 2027. The
maturity date may be shortened to a date not earlier than March 31,
2002 or extended to a date not later than March 31, 2046 if certain
conditions are met. The subordinated debentures are the sole asset
of First Preferred I. In connection with the issuance of the
preferred securities, First Banks made certain guarantees and
commitments that, in the aggregate, constitute a full and
unconditional guarantee by First Banks of the obligations of First
Preferred I under the First Preferred I preferred securities. First
Banks' proceeds from the issuance of the subordinated debentures to
First Preferred I, net of underwriting fees and offering expenses,
were $83.1 million. Distributions on First Preferred I's preferred
securities, which are payable quarterly in arrears, were $8.0
million for the years ended December 31, 2000, 1999 and 1998, and
are included in noninterest expense in the consolidated financial
statements.
In July 1998, First America Capital Trust (FACT), a newly
formed Delaware business trust subsidiary of FBA, issued 1.84
million shares of 8.50% cumulative trust preferred securities at $25
per share in an underwritten public offering, and issued 56,908
shares of common securities to FBA at $25 per share. FBA owns all of
FACT's common securities. The gross proceeds of the offering were
used by FACT to purchase $47.4 million of 8.50% subordinated
debentures from FBA, maturing on June 30, 2028. The maturity date
may be shortened to a date not earlier than June 30, 2003 or
extended to a date not later than June 30, 2037 if certain
conditions are met. The subordinated debentures are the sole asset
of FACT. In connection with the issuance of the FACT preferred
securities, FBA made certain guarantees
F-18
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and commitments that, in the aggregate, constitute a full and
unconditional guarantee by FBA of the obligations of FACT under the
FACT preferred securities. FBA's proceeds from the issuance of the
subordinated debentures to FACT, net of underwriting fees and
offering expenses, were $44.0 million. Distributions payable on the
FACT preferred securities, which are payable quarterly in arrears,
were $3.9 million, $4.0 million and $1.8 million for the years ended
December 31, 2000, 1999 and 1998, respectively, and are included in
noninterest expense in the consolidated financial statements.
On October 19, 2000, First Preferred Capital Trust II (First
Preferred II), a newly formed Delaware business trust subsidiary of
First Banks, issued 2.3 million shares of 10.24% cumulative trust
preferred securities at $25 per share in an underwritten public
offering, and issued 71,135 shares of common securities to First
Banks at $25 per share. First Banks owns all of First Preferred II's
common securities. The gross proceeds of the offering were used by
First Preferred II to purchase $59.3 million of 10.24% subordinated
debentures from First Banks, maturing on September 30, 2030. The
maturity date may be shortened to a date not earlier than September
30, 2005, if certain conditions are met. The subordinated debentures
are the sole asset of First Preferred II. In connection with the
issuance of the preferred securities, First Banks made certain
guarantees and commitments that, in the aggregate, constitute a full
and unconditional guarantee by First Banks of the obligations of
First Preferred II under the First Preferred II preferred
securities. First Banks' proceeds from the issuance of the
subordinated debentures to First Preferred II, net of underwriting
fees and offering expenses, were $55.1 million. Distributions on
First Preferred II's preferred securities, which are payable
quarterly in arrears, were $1.2 million for the year ended December
31, 2000, and are included in noninterest expense in the
consolidated financial statements.
(10) INCOME TAXES
Income tax expense attributable to income from continuing
operations for the years ended December 31 consists of:
YEARS ENDED DECEMBER 31,
-------------------------------------
2000 1999 1998
------- ------ ------
(DOLLARS EXPRESSED IN THOUSANDS)
Current income tax expense:
Federal................................................. $28,215 19,731 16,801
State................................................... 2,731 2,247 1,292
------- ------ ------
30,946 21,978 18,093
------- ------ ------
Deferred income tax expense:
Federal................................................. 4,001 5,056 1,895
State................................................... (60) 14 273
------- ------ ------
3,941 5,070 2,168
------- ------ ------
Reduction in deferred valuation allowance................... (405) (735) (568)
------- ------ ------
Total........................................... $34,482 26,313 19,693
======= ====== ======
F-19
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The effective rates of federal income taxes for the years
ended December 31 differ from statutory rates of taxation as
follows:
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
2000 1999 1998
-------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- -------
(DOLLARS EXPRESSED IN THOUSANDS)
Income before provision for income taxes and
minority interest in income of subsidiary..... $92,635 $72,151 $54,474
======= ======= =======
Provision for income taxes calculated at federal
statutory income tax rates.................... $32,422 35.0% $25,253 35.0% $19,066 35.0%
Effects of differences in tax reporting:
Tax-exempt interest income, net of tax
preference adjustment..................... (587) (0.6) (439) (0.6) (461) (0.9)
State income taxes.......................... 1,736 1.8 1,470 2.0 1,018 1.9
Amortization of intangibles associated with
the purchase of subsidiaries.............. 1,567 1.7 1,261 1.8 864 1.6
Reduction in deferred valuation allowance... (405) (0.4) (735) (1.0) (568) (1.0)
Other, net.................................. (251) (0.3) (497) (0.7) (226) (0.4)
------- ---- ------- ---- ------- ----
Provision for income taxes.............. $34,482 37.2% $26,313 36.5% $19,693 36.2%
======= ==== ======= ==== ======= ====
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are as follows:
DECEMBER 31,
----------------------
2000 1999
-------- -------
(DOLLARS EXPRESSED
IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards............... $ 47,043 30,792
Allowance for loan losses...................... 29,965 27,071
Alternative minimum tax credits................ 3,319 2,841
Disallowed losses on investment securities..... 3,197 2,443
Other real estate.............................. 65 15
Other.......................................... 5,185 3,556
-------- -------
Gross deferred tax assets.................. 88,774 66,718
Valuation allowance............................ (13,075) (14,746)
-------- -------
Deferred tax assets, net of valuation
allowance.................................. 75,699 51,972
-------- -------
Deferred tax liabilities:
Depreciation on bank premises and equipment.... 6,151 3,332
Net fair value adjustment for securities
available for sale........................... 3,258 1,132
Operating leases............................... 1,313 --
FHLB stock dividends........................... 890 1,094
State taxes.................................... 568 591
Other.......................................... 594 433
-------- -------
Deferred tax liabilities................... 12,774 6,582
-------- -------
Net deferred tax assets.................... $ 62,925 45,390
======== =======
F-20
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The realization of First Banks' net deferred tax assets is
based on the availability of carrybacks to prior taxable periods,
the expectation of future taxable income and the utilization of tax
planning strategies. Based on these factors, management believes it
is more likely than not that First Banks will realize the recognized
net deferred tax asset of $62.9 million. The net change in the
valuation allowance, related to deferred tax assets, was a decrease
of $1.7 million for the year ended December 31, 2000. The decrease
related to the recognition of deferred tax assets for certain loans
and other real estate, and the reversal of valuation reserves
resulting from the utilization of net operating loss carryforwards.
Changes to the deferred tax asset valuation allowance for the
years ended December 31 were as follows:
2000 1999 1998
------- ------ ------
(DOLLARS EXPRESSED IN THOUSANDS)
Balance, beginning of year.................................. $14,746 17,179 17,747
Current year deferred provision, change in deferred tax
valuation allowance....................................... (405) (735) (568)
Reduction attributable to utilization of deferred tax
assets:
Adjustment to capital surplus........................... -- (811) --
Adjustment to intangibles associated with the purchase
of subsidiaries....................................... (1,266) (887) --
------- ------ ------
Balance, end of year........................................ $13,075 14,746 17,179
======= ====== ======
The valuation allowance for deferred tax assets at December
31, 1999 included $1.3 million that was recognized in 2000 and
credited to intangibles associated with the purchase of
subsidiaries. In addition, the valuation allowance for deferred tax
assets at December 31, 2000 and 1999 includes $5.0 million which
when recognized, will be credited to capital surplus under the terms
of the quasi-reorganizations implemented for FBA and First
Commercial Bancorp, Inc. as of December 31, 1994 and 1996,
respectively.
At December 31, 2000 and 1999, the accumulation of prior
years' earnings representing tax bad debt deductions were
approximately $30.8 million. If these tax bad debt reserves were
charged for losses other than bad debt losses, First Bank and FB&T
would be required to recognize taxable income in the amount of the
charge. It is not contemplated that such tax-restricted retained
earnings will be used in a manner that would create federal income
tax liabilities.
At December 31, 2000 and 1999, for federal income taxes
purposes, First Banks had net operating loss carryforwards of
approximately $134.4 million and $88.0 million, respectively.
F-21
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The net operating loss carryforwards for First Banks expire
as follows:
(DOLLARS EXPRESSED
IN THOUSANDS)
Year ending December 31:
2001................................. $ 561
2002................................. 4,562
2003................................. 4,611
2004................................. 4,148
2005................................. 21,052
2006 - 2020.......................... 99,475
--------
Total............................ $134,409
========
(11) EARNINGS PER COMMON SHARE
The following is a reconciliation of the numerators and
denominators of the basic and diluted EPS computations for the
periods indicated:
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ -------------- ----------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Year ended December 31, 2000:
Basic EPS -- income available to common stockholders..... $55,321 23,661 $2,338.04
=========
Effect of dilutive securities:
Class A convertible preferred stock.................. 769 1,076
------- ------
Diluted EPS -- income available to common stockholders... $56,090 24,737 $2,267.41
======= ====== =========
Year ended December 31, 1999:
Basic EPS -- income available to common stockholders..... $43,392 23,661 $1,833.91
=========
Effect of dilutive securities:
Class A convertible preferred stock.................. 769 1,212
------- ------
Diluted EPS -- income available to common stockholders... $44,161 24,873 $1,775.47
======= ====== =========
Year ended December 31, 1998:
Basic EPS -- income available to common stockholders..... $32,724 23,661 $1,383.04
=========
Effect of dilutive securities:
Class A convertible preferred stock.................. 769 1,389
------- ------
Diluted EPS -- income available to common stockholders... $33,493 25,050 $1,337.09
======= ====== =========
F-22
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) INTEREST RATE RISK MANAGEMENT / DERIVATIVE FINANCIAL INSTRUMENTS
First Banks utilizes off-balance-sheet derivative financial
instruments to assist in the management of interest rate sensitivity
and to modify the repricing, maturity and option characteristics of
on-balance-sheet assets and liabilities. The use of such derivative
financial instruments is strictly limited to reducing First Banks'
interest rate risk exposure.
Derivative financial instruments held by First Banks for
purposes of managing interest rate risk are summarized as follows:
DECEMBER 31,
-------------------------------------------------------
2000 1999
------------------------- -----------------------
NOTIONAL CREDIT NOTIONAL CREDIT
AMOUNT EXPOSURE AMOUNT EXPOSURE
---------- -------- -------- --------
(DOLLARS EXPRESSED IN THOUSANDS)
Interest rate swap agreements -- pay
adjustable rate, receive fixed rate........ $1,105,000 4,207 455,000 3,349
Interest rate swap agreements -- pay
adjustable rate, receive adjustable rate... -- -- 500,000 --
Interest rate floor agreements............... 35,000 6 35,000 13
Interest rate cap agreements................. 450,000 3,753 10,000 26
Forward commitments to sell mortgage-backed
securities................................. 32,000 -- 33,000 --
========== ===== ======= =====
The notional amounts of derivative financial instruments do
not represent amounts exchanged by the parties and, therefore, are
not a measure of our credit exposure through the use of these
instruments. The credit exposure represents the accounting loss we
would incur in the event the counterparties failed completely to
perform according to the terms of the derivative financial
instruments and the collateral held to support the credit exposure
was of no value.
Previously, First Banks utilized interest rate swap
agreements to extend the repricing characteristics of certain
interest-bearing liabilities to more closely correspond with its
assets, with the objective of stabilizing cash flow, and
accordingly, net interest income, over time. These swap agreements
were terminated due to a change in the composition of the balance
sheet. The change in the composition of the balance sheet was
primarily driven by the significant decline in interest rates
experienced during 1995, which caused an increase in the principal
prepayments of residential mortgage loans. The net interest expense
associated with these agreements, consisting primarily of
amortization of deferred losses, was $5.7 million and $3.7 million
for the years ended December 31, 1999 and 1998, respectively. The
deferred losses on terminated swap agreements were amortized over
the remaining lives of the agreements, unless the underlying
liabilities were repaid, in which case the deferred losses were
immediately charged to operations. There were no remaining
unamortized deferred losses on the terminated swap agreements at
December 31, 1999.
During 1998, First Banks entered into $280.0 million notional
amount of interest rate swap agreements. The swap agreements
effectively lengthen the repricing characteristics of certain
interest-earning assets to correspond more closely with their
funding source with the objective of stabilizing cash flow, and
accordingly, net interest income, over time. The swap agreements
initially provided for First Banks to receive a fixed rate of
interest and pay an adjustable rate equivalent to the 90-day London
F-23
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Interbank Offering Rate. In March 2000, the terms of the swap
agreements were modified such that First Banks currently pay an
adjustable rate of interest equivalent to the daily weighted average
prime lending rate minus 2.705%. The terms of the swap agreements
provide for First Banks to pay quarterly and receive payment
semiannually. The amount receivable by First Banks under the swap
agreements was $4.1 million at December 31, 2000 and 1999,
respectively, and the amount payable by First Banks under the swap
agreements was $744,000 and $770,000 at December 31, 2000 and 1999,
respectively.
During May 1999, First Banks entered into $500.0 million
notional amount of interest rate swap agreements with the objective
of stabilizing the net interest margin during the six-month period
surrounding the Year 2000 century date change. The swap agreements
provided for First Banks to receive an adjustable rate of interest
equivalent to the daily weighted average 30-day London Interbank
Offering Rate and pay an adjustable rate of interest equivalent to
the daily weighted average prime lending rate minus 2.665%. The
terms of the swap agreements, which had an effective date of October
1, 1999 and a maturity date of March 31, 2000, provided for First
Banks to pay and receive interest on a monthly basis. In January
2000, First Banks determined these swap agreements were no longer
necessary based upon the results of the Year 2000 transition and
terminated these agreements resulting in a cost of $150,000.
During September 1999, First Banks entered into $175.0
million notional amount of interest rate swap agreements to
effectively lengthen the repricing characteristics of certain
interest-earning assets to correspond more closely with their
funding source with the objective of stabilizing cash flow, and
accordingly, net interest income, over time. The swap agreements
provide for First Banks to receive a fixed rate of interest and pay
an adjustable rate equivalent to the weighted average prime lending
rate minus 2.70%. The terms of the swap agreements provide for First
Banks to pay and receive interest on a quarterly basis. The amount
receivable by First Banks under the swap agreements was $119,000 at
December 31, 2000 and 1999 and the amount payable by First Banks
under the swap agreements was $165,000 and $141,000 at December 31,
2000 and 1999, respectively.
During September 2000, First Banks entered into $600.0
million notional amount of interest rate swap agreements to
effectively lengthen the repricing characteristics of certain
interest-earning assets to correspond more closely with their
funding source with the objective of stabilizing cash flow, and
accordingly, net interest income, over time. The swap agreements
provide for First Banks to receive a fixed rate of interest and pay
an adjustable rate equivalent to the weighted average prime lending
rate minus 2.70%. The terms of the swap agreements provide for First
Banks to pay and receive interest on a quarterly basis. The amount
receivable and payable by First Banks under the swap agreements was
$1.2 million at December 31, 2000. In conjunction with these
interest rate swap agreements, First Banks also entered into $450.0
million notional amount of interest rate cap agreements to limit the
net interest expense associated with the interest rate swap
agreements. The interest rate cap agreements provide for First Banks
to receive a quarterly adjustable rate of interest equivalent to the
three-month London Interbank Offering Rate, should such rate exceed
the predetermined interest rate of 7.50%. At December 31, 2000, the
unamortized costs associated with the interest rate cap agreements
were $3.8 million, and were included in other assets, and the fair
value of the interest rate cap agreements was $1.6 million.
During September 2000, First Banks entered into $25.0 million
notional amount of one-year interest rate swap agreements and $25.0
million of five and one-half year interest rate swap agreements to
effectively shorten the repricing characteristics of certain
interest-bearing liabilities with the objective of stabilizing cash
flow, and accordingly, net interest income, over time. The swap
agreements provide for First Banks to receive fixed rates of
interest ranging from 6.6% to 7.25% and pay an adjustable rate
equivalent to the three-month London Interbank Offering Rate minus
rates ranging from 0.02% to 0.11%. The terms of the swap agreements
provide for First Banks to pay interest on a quarterly basis and
F-24
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
receive interest on either a semiannual basis or an annual basis.
The amount receivable by First Banks under the swap agreements was
$1.0 million at December 31, 2000 and the amount payable by First
Banks under the swap agreements was $119,000 at December 31, 2000.
At December 31, 2000, First Banks had pledged investment
securities available for sale with a carrying value of $8.6 million
in connection with the interest rate swap agreements. In addition,
at December 31, 2000, First Banks had accepted investment securities
with a fair value of $19.0 million as collateral in connection with
the interest rate swap agreements. First Banks is permitted by
contract to sell or repledge the collateral accepted from its
counterparties, however, at December 31, 2000, First Banks had not
sold or repledged any of this collateral.
The maturity dates, notional amounts, interest rates paid and
received, and fair values of interest rate swap agreements
outstanding as of December 31, 2000 and 1999 were as follows:
NOTIONAL INTEREST INTEREST RATE
MATURITY DATE AMOUNT RATE PAID RECEIVED FAIR VALUE
------------- ---------- --------- ------------- ----------
(DOLLARS EXPRESSED IN THOUSANDS)
December 31, 2000:
September 27, 2001.................. $ 175,000 6.80% 6.14% $ 65
June 11, 2002....................... 15,000 6.80 6.00 7
September 13, 2001.................. 12,500 6.56 6.80 42
September 21, 2001.................. 12,500 6.47 6.60 43
September 16, 2002.................. 195,000 6.80 5.36 (1,776)
September 18, 2002.................. 70,000 6.80 5.33 (690)
September 20, 2004.................. 600,000 6.80 6.78 16,869
March 13, 2006...................... 12,500 6.47 7.25 5
March 22, 2006...................... 12,500 6.39 7.20 6
---------- --------
$1,105,000 6.70 6.43 $ 14,571
========== ==== ==== ========
December 31, 1999:
March 31, 2000...................... $ 500,000 5.84% 6.45% $ 124
September 27, 2001.................. 175,000 5.80 6.14 (1,598)
June 11, 2002....................... 15,000 6.12 6.00 (291)
September 16, 2002.................. 195,000 6.12 5.36 (7,325)
September 18, 2002.................. 70,000 6.14 5.33 (2,700)
---------- --------
$ 955,000 5.91 6.08 $(11,790)
========== ==== ==== ========
First Banks also utilizes interest rate cap and floor
agreements to limit the interest expense associated with certain
interest-bearing liabilities and the net interest expense of certain
interest rate swap agreements, respectively. At December 31, 2000
and 1999, the unamortized costs of these agreements were $6,000 and
$32,000, respectively, and were included in other assets.
During 2000 and 1998, the net interest expense realized on
the derivative financial instruments was $4.7 million and $4.0
million, respectively, in comparison to net interest income of
$430,000 realized on the derivative financial instruments in 1999.
Derivative financial instruments issued by First Banks
consist of commitments to originate fixed-rate loans. Commitments to
originate fixed-rate loans consist primarily of residential real
estate loans.
F-25
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
These loan commitments, net of estimated underwriting fallout, and
loans held for sale were $37.6 million and $31.5 million at December
31, 2000 and 1999, respectively. These net loan commitments and
loans held for sale are hedged with forward contracts to sell
mortgage-backed securities of $32.0 million and $33.0 million at
December 31, 2000 and 1999, respectively. Gains and losses from
forward contracts are deferred and included in the cost basis of
loans held for sale. At December 31, 2000, the net unamortized
losses were $165,000, in comparison to net unamortized gains of
$838,000 at December 31, 1999. Such gains and losses were applied to
the carrying value of the loans held for sale as part of the lower
of cost or market valuation.
(13) CREDIT COMMITMENTS
First Banks is a party to commitments to extend credit and
commercial and standby letters of credit in the normal course of
business to meet the financing needs of its customers. These
instruments involve, to varying degrees, elements of credit risk and
interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The interest rate risk associated with
these credit commitments relates primarily to the commitments to
originate fixed-rate loans. As more fully discussed in Note 12 to
the accompanying consolidated financial statements, the interest
rate risk of the commitments to originate fixed-rate loans has been
hedged with forward contracts to sell mortgage-backed securities.
The credit risk amounts are equal to the contractual amounts,
assuming the amounts are fully advanced and the collateral or other
security is of no value. First Banks uses the same credit policies
in granting commitments and conditional obligations as it does for
on-balance-sheet items.
Commitments to extend credit at December 31 were as follows:
DECEMBER 31,
----------------------------
2000 1999
---------- ---------
(DOLLARS EXPRESSED
IN THOUSANDS)
Commitments to extend credit.................. $1,484,278 1,310,249
Commercial and standby letters of credit...... 94,802 64,455
---------- ---------
$1,579,080 1,374,704
========== =========
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Each customer's
creditworthiness is evaluated on a case-by-case basis. The amount of
collateral obtained, if deemed necessary upon extension of credit,
is based on management's credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable,
inventory, property, plant, equipment, income-producing commercial
properties or single family residential properties. Collateral is
generally required except for consumer credit card commitments.
Commercial and standby letters of credit are conditional
commitments issued to guarantee the performance of a customer to a
third party. The letters of credit are primarily issued to support
public and private borrowing arrangements, including commercial
paper, bond financing and similar transactions. Most letters of
credit extend for less than one year. The credit risk involved in
issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. Upon issuance of the
F-26
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
commitments, First Banks holds marketable securities, certificates
of deposit, inventory, real property or other assets as collateral
supporting those commitments for which collateral is deemed
necessary.
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is management's
estimate of the values at which the instruments could be exchanged
in a transaction between willing parties. These estimates are
subjective and may vary significantly from amounts that would be
realized in actual transactions. In addition, other significant
assets are not considered financial assets including the mortgage
banking operation, deferred tax assets, bank premises and equipment
and intangibles associated with the purchase of subsidiaries.
Further, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on the
fair value estimates and have not been considered in any of the
estimates.
The estimated fair value of First Banks' financial
instruments at December 31 were as follows:
2000 1999
-------------------------- -------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- --------- ----------
Financial assets:
Cash and cash equivalents............... $ 198,279 198,279 170,894 170,894
Investment securities:
Available for sale.................. 539,386 539,386 430,093 430,093
Held to maturity.................... 24,148 24,509 21,554 21,476
Net loans............................... 4,670,673 4,694,594 3,927,713 3,908,065
Accrued interest receivable............. 45,226 45,226 33,491 33,491
========== ========= ========= =========
Financial liabilities:
Deposits:
Demand:
Non-interest-bearing............ $ 808,251 808,251 606,064 606,064
Interest-bearing................ 448,146 448,146 415,113 415,113
Savings and money market............ 1,447,898 1,447,898 1,198,314 1,198,314
Time deposits....................... 2,308,120 2,351,418 2,032,323 2,032,323
Short-term borrowings................... 140,569 140,569 73,554 73,554
Note payable............................ 83,000 83,000 64,000 64,000
Accrued interest payable................ 23,227 23,227 11,607 11,607
Guaranteed preferred beneficial
interests in subordinated
debentures............................ 182,849 185,608 127,611 127,391
========== ========= ========= =========
Off-balance-sheet:
Interest rate swap, cap and floor
agreements............................ $ 7,966 16,208 3,388 (11,742)
Forward contracts to sell
mortgage-backed securities............ -- 32,393 -- 32,207
Credit commitments...................... -- 4,183 -- 4,517
========== ========= ========= =========
F-27
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following methods and assumptions were used in estimating
the fair value of financial instruments:
FINANCIAL ASSETS:
CASH AND CASH EQUIVALENTS AND ACCRUED INTEREST RECEIVABLE:
The carrying values reported in the consolidated balance sheets
approximate fair value.
INVESTMENT SECURITIES: The fair value of investment
securities available for sale is the amount reported in the
consolidated balance sheets. The fair value of investment securities
held to maturity is based on quoted market prices where available.
If quoted market prices were not available, the fair value was based
upon quoted market prices of comparable instruments.
NET LOANS: The fair value of most loans held for portfolio
was estimated utilizing discounted cash flow calculations that
applied interest rates currently being offered for similar loans to
borrowers with similar risk profiles. The fair value of loans held
for sale, which is the amount reported in the consolidated balance
sheets, is based on quoted market prices where available. If quoted
market prices are not available, the fair value is based upon quoted
market prices of comparable instruments. The carrying value of loans
is net of the allowance for loan losses and unearned discount.
FINANCIAL LIABILITIES:
DEPOSITS: The fair value disclosed for deposits generally
payable on demand (i.e., non-interest-bearing and interest-bearing
demand, savings and money market accounts) is considered equal to
their respective carrying amounts as reported in the consolidated
balance sheets. The fair value disclosed for demand deposits does
not include the benefit that results from the low-cost funding
provided by deposit liabilities compared to the cost of borrowing
funds in the market. The fair value disclosed for certificates of
deposit was estimated utilizing a discounted cash flow calculation
that applied interest rates currently being offered on similar
certificates to a schedule of aggregated monthly maturities of time
deposits.
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED
DEBENTURES: The fair value is based on quoted market prices.
SHORT-TERM BORROWINGS, NOTE PAYABLE AND ACCRUED INTEREST
PAYABLE: The carrying value reported in the consolidated balance
sheets approximates fair value.
OFF-BALANCE-SHEET:
INTEREST RATE SWAP, CAP AND FLOOR AGREEMENTS: The fair value
of the interest rate swap, cap and floor agreements is estimated by
comparison to market rates quoted on new agreements with similar
terms and creditworthiness.
FORWARD CONTRACTS TO SELL MORTGAGE-BACKED SECURITIES: The
fair value of forward contracts to sell mortgage-backed securities
is based upon quoted market prices. The fair value of these
contracts has been reflected in the consolidated balance sheets in
the carrying value of the loans held for sale portfolio as part of
the lower of cost or market valuation.
CREDIT COMMITMENTS: The fair value of the commitments to
extend credit associated with loans held for sale in which First
Banks has interest rate risk exposure are based on quoted market
prices of
F-28
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
comparable mortgage-backed securities less estimated fallout. The
majority of the other commitments to extend credit and commercial
and standby letters of credit contain variable interest rates and
credit deterioration clauses and, therefore, the carrying value of
these credit commitments reported in the consolidated balance sheets
approximates fair value.
(15) EMPLOYEE BENEFITS
First Banks' 401(k) plan is a self-administered savings and
incentive plan covering substantially all employees. Under the plan,
employer-matching contributions are determined annually by First
Banks' Board of Directors. Employee contributions are limited to 15%
of the employee's annual compensation, not to exceed $10,500 for
2000. Total employer contributions under the plan were $1.1 million,
$863,000 and $648,000 for the years ended December 31, 2000, 1999
and 1998, respectively. The plan assets are held and managed under a
trust agreement with First Bank's trust department.
(16) PREFERRED STOCK
First Banks has two classes of preferred stock outstanding.
The Class A preferred stock is convertible into shares of common
stock at a rate based on the ratio of the par value of the preferred
stock to the current market value of the common stock at the date of
conversion, to be determined by independent appraisal at the time of
conversion. Shares of Class A preferred stock may be redeemed by
First Banks at any time at 105.0% of par value. The Class B
preferred stock may not be redeemed or converted. The redemption of
any issue of preferred stock requires the prior approval of the
Federal Reserve Board.
The holders of the Class A and Class B preferred stock have
full voting rights. Dividends on the Class A and Class B preferred
stock are adjustable quarterly based on the highest of the Treasury
Bill Rate or the Ten Year Constant Maturity Rate for the two-week
period immediately preceding the beginning of the quarter. This rate
shall not be less than 6.0% nor more than 12.0% on the Class A
preferred stock, or less than 7.0% nor more than 15.0% on the Class
B preferred stock. The annual dividend rates for the Class A and
Class B preferred stock were 6.0% and 7.0%, respectively, for the
years ended December 31, 2000, 1999 and 1998.
In addition to the Class A and Class B preferred stock, First
Banks has two issues of trust preferred securities outstanding and
FBA has one issue of trust preferred securities outstanding. The
structure of the trust preferred securities, as further described in
Note 9, satisfies the regulatory requirements for inclusion, subject
to certain limitation, in First Banks' capital base.
(17) TRANSACTIONS WITH RELATED PARTIES
Outside of normal customer relationships, no directors or
officers of First Banks, no stockholders holding over 5% of First
Banks' voting securities and no corporations or firms with which
such persons or entities are associated currently maintain or have
maintained, since the beginning of the last full fiscal year, any
significant business or personal relationships with First Banks or
its subsidiaries, other than such as arises by virtue of such
position or ownership interest in First Banks or its subsidiaries,
except as described in the following paragraphs.
During 2000, 1999 and 1998, Tidal Insurance Limited (Tidal),
a corporation owned indirectly by First Banks' Chairman and his
adult children, received approximately $212,000, $316,000 and
$280,000, respectively, in insurance premiums for accident, health
and life insurance policies purchased by loan
F-29
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
customers of First Banks. The insurance policies are issued by an
unaffiliated company and subsequently ceded to Tidal. First Banks
believes the premiums paid by the loan customers of First Banks are
comparable to those that such loan customers would have paid if the
premiums were subsequently ceded to an unaffiliated third-party
insurer.
During 2000, 1999 and 1998, First Securities America, Inc.
(FSA), a corporation established and administered by and for the
benefit of First Banks' Chairman and members of his immediate
family, received approximately $235,000, $194,000 and $265,000,
respectively, in commissions and insurance premiums for policies
purchased by First Banks or customers of the Subsidiary Banks from
unaffiliated, third-party insurors. The insurance premiums on which
the aforementioned commissions were earned were competitively bid,
and First Banks deems the commissions FSA earned from unaffiliated
third-party companies to be comparable to those that would have been
earned by an unaffiliated third-party agent.
First Brokerage America, L.L.C., a limited liability
corporation which is indirectly owned by First Banks' Chairman and
members of his immediate family, received approximately $2.1
million, $2.3 million and $1.8 million for the years ended December
31, 2000, 1999 and 1998, respectively, in commissions paid by
unaffiliated third-party companies. The commissions received were
primarily in connection with the sales of annuities, securities and
other insurance products to customers of the Subsidiary Banks.
First Services, L.P., a limited partnership indirectly owned
by First Banks' Chairman and his adult children, provides data
processing services and operational support for First Banks, Inc.
and its Subsidiary Banks. Fees paid under agreements with First
Services L.P. were $19.3 million, $16.4 million and $12.2 million
for the years ended December 31, 2000, 1999 and 1998, respectively.
During 2000, 1999 and 1998, First Services, L.P. paid First Banks
$1.8 million, $1.2 million and $799,000, respectively, in rental
fees for the use of data processing and other equipment owned by
First Banks. The fees paid by First Banks for data processing
services are at least as favorable as could have been obtained from
unaffiliated third parties.
(18) CAPITAL STOCK OF FIRST BANKS AMERICA, INC.
First Banks owned 2,500,000 shares of FBA's Class B common
stock and 8,741,350 shares of FBA's common stock at December 31,
2000, representing 92.86% of FBA's outstanding voting stock. In
comparison, First Banks owned 2,500,000 shares of FBA's Class B
common stock and 2,210,581 shares of FBA's common stock at December
31, 1999, representing 83.37% of FBA's outstanding voting stock. The
increase for 2000 is attributable to FBA's issuance of 6,530,769
shares of its common stock to First Banks in conjunction with its
purchase of First Bank & Trust, a wholly owned subsidiary of First
Banks. This transaction, which occurred on October 31, 2000,
increased First Banks' ownership interest in FBA from 84.42% to
approximately 92.82%. FBA's common stock is publicly traded on the
New York Stock Exchange.
(19) REGULATORY CAPITAL
First Banks and the Subsidiary Banks are subject to various
regulatory capital requirements administered by the federal and
state banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct
material effect on First Banks' financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt
corrective action, First Banks and the Subsidiary Banks must meet
specific capital guidelines that involve quantitative measures of
assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. Capital
F-30
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure
capital adequacy require First Banks and the Subsidiary Banks to
maintain minimum amounts and ratios of total and Tier 1 capital (as
defined in the regulations) to risk-weighted assets, and of Tier 1
capital to average assets. Management believes, as of December 31,
2000, First Banks and the Subsidiary Banks were each well
capitalized.
As of December 31, 2000, the most recent notification from
First Banks' primary regulator categorized First Banks and the
Subsidiary Banks as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized,
First Banks and the Subsidiary Banks must maintain minimum total
risk-based, Tier 1 risk-based and Tier 2 leverage ratios as set
forth in the table below.
At December 31, 2000 and 1999, First Banks' and the
Subsidiary Banks' required and actual capital ratios were as
follows:
TO BE WELL
ACTUAL FOR CAPITAL CAPITALIZED UNDER
--------------------- ADEQUACY PROMPT CORRECTIVE
2000 1999 PURPOSES ACTION PROVISIONS
----- ----- ----------- -----------------
Total capital (to risk-weighted assets):
First Banks.............................. 10.21% 10.05% 8.0% 10.0%
First Bank............................... 10.71 10.60 8.0 10.0
FB&T..................................... 10.58 11.17 8.0 10.0
BSF(1)................................... 22.38 -- 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks.............................. 7.56 8.00 4.0 6.0
First Bank............................... 9.46 9.35 4.0 6.0
FB&T..................................... 9.32 9.94 4.0 6.0
BSF(1)................................... 21.42 -- 4.0 6.0
Tier 1 capital (to average assets):
First Banks.............................. 7.45 7.14 3.0 5.0
First Bank............................... 8.49 8.10 3.0 5.0
FB&T..................................... 9.27 9.15 3.0 5.0
BSF(1)................................... 22.00 -- 3.0 5.0
<FN>
- --------------------
(1) BSF was acquired by FBA on December 31, 2000.
(20) DISTRIBUTION OF EARNINGS OF THE SUBSIDIARY BANKS
The Subsidiary Banks are restricted by various state and
federal regulations, as well as by the terms of the Credit Agreement
described in Note 8, as to the amount of dividends which are
available for payment to First Banks, Inc. Under the most
restrictive of these requirements, the future payment of dividends
from the Subsidiary Banks is limited to approximately $45.2 million
at December 31, 2000, unless prior permission of the regulatory
authorities and/or the lending banks is obtained.
F-31
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(21) BUSINESS SEGMENT RESULTS
First Banks' business segments are its Subsidiary Banks. The
reportable business segments are consistent with the management
structure of First Banks, the Subsidiary Banks and the internal
reporting system that monitors performance.
Through the respective branch networks, the Subsidiary Banks
provide similar products and services in their defined geographic
areas. The products and services offered include a broad range of
commercial and personal deposit products, including demand, savings,
money market and time deposit accounts. In addition, the Subsidiary
Banks market combined basic services for various customer groups,
including packaged accounts for more affluent customers, and sweep
accounts, lock-box deposits and cash management products for
commercial customers. The Subsidiary Banks also offer both consumer
and commercial loans. Consumer lending includes residential real
estate, home equity and installment lending. Commercial lending
includes commercial, financial and agricultural loans, real estate
construction and development loans, commercial real estate loans,
asset-based loans, commercial leasing and trade financing.
FIRST BANK FB&T(1)
------------------------------------ -----------------------------------
2000 1999 1998 2000 1999 1998
---------- --------- --------- --------- --------- ---------
(DOLLARS EXPRESSED IN THOUSANDS)
BALANCE SHEET INFORMATION:
Investment securities.................. $ 214,005 241,624 264,364 330,478 192,357 247,566
Loans, net of unearned discount........ 2,694,005 2,527,649 2,490,556 2,058,628 1,469,093 1,089,965
Total assets........................... 3,152,885 3,028,046 3,024,600 2,733,545 1,854,827 1,504,311
Deposits............................... 2,729,489 2,689,671 2,659,030 2,306,469 1,590,490 1,329,253
Stockholders' equity................... 273,848 263,466 243,673 333,186 204,617 148,239
========== ========= ========= ========= ========= =========
INCOME STATEMENT INFORMATION:
Interest income........................ $ 247,290 221,195 219,609 176,902 132,407 108,662
Interest expense....................... 115,421 105,231 111,656 71,167 51,544 48,320
---------- --------- --------- --------- --------- ---------
Net interest income................ 131,869 115,964 107,953 105,735 80,863 60,342
Provision for possible loan losses..... 12,250 8,890 7,250 1,877 4,183 1,750
---------- --------- --------- --------- --------- ---------
Net interest income after provision
for possible loan losses......... 119,619 107,074 100,703 103,858 76,680 58,592
Noninterest income..................... 32,152 32,260 29,582 12,343 10,774 8,322
Noninterest expense.................... 90,746 77,786 79,748 65,567 54,992 47,105
---------- --------- --------- --------- --------- ---------
Income (loss) before provision
(benefit) for income taxes and
minority interest in income of
subsidiary....................... 61,025 61,548 50,537 50,634 32,462 19,809
Provision (benefit) for income taxes... 20,889 20,811 17,238 20,064 12,353 8,163
---------- --------- --------- --------- --------- ---------
Income (loss) before minority
interest in income of
subsidiary....................... 40,136 40,737 33,299 30,570 20,109 11,646
Minority interest in income of
subsidiary........................... -- -- -- -- -- --
---------- --------- --------- --------- --------- ---------
Net income......................... $ 40,136 40,737 33,299 30,570 20,109 11,646
========== ========= ========= ========= ========= =========
<FN>
- --------------------
(1) Includes BSF, which was acquired by FBA on December 31, 2000.
(2) Corporate and other includes $8.6 million, $7.9 million and $6.4 million
of guaranteed preferred debentures expense, after applicable income tax
benefit of $4.6 million, $4.2 million and $3.4 million for the years
ended December 31, 2000, 1999 and 1998, respectively.
F-32
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other financial services include mortgage banking, credit and
debit cards, brokerage services, credit-related insurance, automated
teller machines, telephone banking, safe deposit boxes and trust,
private banking and institutional money management services. The
revenues generated by each business segment consist primarily of
interest income, generated from the loan and investment security
portfolios, and service charges and fees, generated from the deposit
products and services. The geographic areas include Missouri,
Illinois, southern and northern California and Houston, Dallas,
Irving and McKinney Texas. The products and services are offered to
customers primarily within their respective geographic areas, with
the exception of loan participations executed between the Subsidiary
Banks.
The business segment results are consistent with First Banks'
internal reporting system and, in all material respects, with
generally accepted accounting principles and practices predominant
in the banking industry. Such principles and practices are
summarized in Note 1 to the consolidated financial statements.
CORPORATE, OTHER AND
INTERCOMPANY RECLASSIFICATION(2) CONSOLIDATED TOTALS
------------------------------------- -------------------------------------
2000 1999 1998 2000 1999 1998
--------- --------- --------- --------- --------- ---------
(DOLLARS EXPRESSED IN THOUSANDS)
BALANCE SHEET INFORMATION:
Investment securities.................. 19,051 17,666 22,866 563,534 451,647 534,796
Loans, net of unearned discount........ (368) (418) (416) 4,752,265 3,996,324 3,580,105
Total assets........................... (9,739) (15,126) 25,899 5,876,691 4,867,747 4,554,810
Deposits............................... (23,543) (28,347) (48,298) 5,012,415 4,251,814 3,939,985
Stockholders' equity................... (254,188) (173,178) (128,549) 352,846 294,905 263,363
======== ======== ======== ========= ========= =========
INCOME STATEMENT INFORMATION:
Interest income........................ (1,366) (520) (411) 422,826 353,082 327,860
Interest expense....................... 1,091 1,926 2,203 187,679 158,701 162,179
-------- -------- -------- --------- --------- ---------
Net interest income................ (2,457) (2,446) (2,614) 235,147 194,381 165,681
Provision for possible loan losses..... -- -- -- 14,127 13,073 9,000
-------- -------- -------- --------- --------- ---------
Net interest income after provision
for possible loan losses......... (2,457) (2,446) (2,614) 221,020 181,308 156,681
Noninterest income..................... (1,717) (1,384) (1,407) 42,778 41,650 36,497
Noninterest expense.................... 14,850 18,029 11,851 171,163 150,807 138,704
-------- -------- -------- --------- --------- ---------
Income (loss) before provision
(benefit) for income taxes and
minority interest in income of
subsidiary....................... (19,024) (21,859) (15,872) 92,635 72,151 54,474
Provision (benefit) for income taxes... (6,471) (6,851) (5,708) 34,482 26,313 19,693
-------- -------- -------- --------- --------- ---------
Income (loss) before minority
interest in income of
subsidiary....................... (12,553) (15,008) (10,164) 58,153 45,838 34,781
Minority interest in income of
subsidiary........................... 2,046 1,660 1,271 2,046 1,660 1,271
-------- -------- -------- --------- --------- ---------
Net income......................... (14,599) (16,668) (11,435) 56,107 44,178 33,510
======== ======== ======== ========= ========= =========
F-33
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(22) PARENT COMPANY ONLY FINANCIAL INFORMATION
Following are condensed balance sheets of First Banks, Inc.
as of December 31, 2000 and 1999, and condensed statements of income
and cash flows for the years ended December 31, 2000, 1999 and 1998:
CONDENSED BALANCE SHEETS
DECEMBER 31,
----------------------
2000 1999
-------- -------
(DOLLARS EXPRESSED
IN THOUSANDS)
ASSETS
Cash deposited in subsidiary banks.......................... $ 8,079 4,347
Investment securities....................................... 14,309 13,848
Investment in subsidiaries.................................. 461,753 429,255
Advances to FBA............................................. 98,000 --
Other assets................................................ 15,333 12,278
-------- -------
Total assets............................................ $597,474 459,728
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable................................................ $ 83,000 64,000
Subordinated debentures..................................... 148,196 88,918
Accrued expenses and other liabilities...................... 13,432 11,905
-------- -------
Total liabilities....................................... 244,628 164,823
Stockholders' equity........................................ 352,846 294,905
-------- -------
Total liabilities and stockholders' equity.............. $597,474 459,728
======== =======
F-34
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
------- ------ ------
(DOLLARS EXPRESSED
IN THOUSANDS)
Income:
Dividends from subsidiaries............................. $43,000 25,250 23,000
Management fees from subsidiaries....................... 17,325 12,977 10,154
Other................................................... 1,956 1,313 2,796
------- ------ ------
Total income........................................ 62,281 39,540 35,950
------- ------ ------
Expense:
Interest................................................ 3,964 3,628 3,411
Salaries and employee benefits.......................... 12,180 8,999 7,307
Legal, examination and professional fees................ 2,031 7,006 1,988
Other................................................... 13,969 12,947 12,639
------- ------ ------
Total expense....................................... 32,144 32,580 25,345
------- ------ ------
Income before benefit for income taxes and equity in
undistributed earnings of subsidiaries............ 30,137 6,960 10,605
Benefit for income taxes.................................... (3,922) (5,649) (3,999)
------- ------ ------
Income before equity in undistributed earnings of
subsidiaries...................................... 34,059 12,609 14,604
Equity in undistributed earnings of subsidiaries............ 22,048 31,569 18,906
------- ------ ------
Net income.......................................... $56,107 44,178 33,510
======= ====== ======
F-35
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------------
2000 1999 1998
--------- ------- -------
(DOLLARS EXPRESSED IN THOUSANDS)
Cash flows from operating activities:
Net income.............................................. $ 56,107 44,178 33,510
Adjustments to reconcile net income to net cash provided
by operating activities:
Net income of subsidiaries.......................... (64,937) (56,676) (42,107)
Dividends from subsidiaries......................... 43,000 25,250 23,000
Other, net.......................................... 272 1,900 4,963
--------- ------- -------
Net cash provided by operating activities....... 34,442 14,652 19,366
--------- ------- -------
Cash flows from investing activities:
(Increase) decrease in investment securities............ (860) (100) 3,000
Investment in common securities of First Preferred II... (1,778) -- --
Acquisitions of subsidiaries............................ -- (31,500) (31,586)
Capital contributions to subsidiaries................... (6,100) (3,000) --
Return of subsidiary capital............................ -- 10,000 --
(Increase) decrease in advances to subsidiaries......... (98,000) -- 14,900
Other, net.............................................. (1,464) (3,646) (3,350)
--------- ------- -------
Net cash used in investing activities........... (108,202) (28,246) (17,036)
--------- ------- -------
Cash flows from financing activities:
Increase (decrease) in note payable..................... 19,000 13,952 (5,096)
Proceeds from issuance of First Preferred II
subordinated debentures............................... 59,278 -- --
Payment of preferred stock dividends.................... (786) (786) (786)
--------- ------- -------
Net cash provided by (used in) financing
activities.................................... 77,492 13,166 (5,882)
--------- ------- -------
Net increase (decrease) in cash and cash
equivalents................................... 3,732 (428) (3,552)
Cash deposited in subsidiary banks, beginning of year....... 4,347 4,775 8,327
--------- ------- -------
Cash deposited in subsidiary banks, end of year............. $ 8,079 4,347 4,775
========= ======= =======
Noncash investing activities:
Cash paid for interest.................................. $ 4,117 3,420 3,747
Reduction of deferred tax valuation reserve............. -- 811 --
========= ======= =======
(23) CONTINGENT LIABILITIES
In the ordinary course of business, there are various legal
proceedings pending against First Banks and/or its subsidiaries.
Management, in consultation with legal counsel, is of the opinion
the ultimate resolution of these proceedings will have no material
effect on the financial condition or results of operations of First
Banks or its subsidiaries.
F-36
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(24) INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION. The unaudited interim consolidated
financial statements include the accounts of First Banks and its
subsidiaries after elimination of material intercompany
transactions. These unaudited interim consolidated financial
statements, in the opinion of management, include all adjustments
necessary for the fair presentation thereof. All adjustments made
were of a normal and recurring nature. Operating results for the six
months ended June 30, 2001 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2001.
IMPLEMENTATION OF NEW ACCOUNTING STANDARD. In June 1998, the
Financial Accounting Standards Board, or FASB, issued Statement of
Financial Accounting Standards, or SFAS, No. 133 -- Accounting for
Derivative Instruments and Hedging Activities, or SFAS 133. In June
1999 and June 2000, the FASB issued SFAS No. 137 -- Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133, an Amendment of FASB
Statement No. 133, and SFAS No. 138 --Accounting for Derivative
Instruments and Hedging Activities, an Amendment of FASB Statement
No. 133, respectively. SFAS 133, as amended, establishes accounting
and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS 133, as amended, requires an entity to
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at
fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge in one of three categories. The
accounting for changes in the fair value of a derivative (that is,
gains and losses) depends on the intended use of the derivative and
the resulting designation. Under SFAS 133, as amended, an entity
that elects to apply hedge accounting is required to establish, at
the inception of the hedge, the method it will use for assessing the
effectiveness of the hedging derivative and the measurement approach
for determining the ineffective aspect of the hedge. Those methods
must be consistent with the entity's approach to managing risk.
We utilize derivative instruments and hedging activities to
assist in the management of interest rate sensitivity and to modify
the repricing, maturity and option characteristics of certain assets
and liabilities. We use such derivative instruments solely to reduce
our interest rate exposure. The following is a summary of our
accounting policies for derivative instruments and hedging
activities under SFAS 133, as amended.
INTEREST RATE SWAP AGREEMENTS -- CASH FLOW HEDGES. Interest
rate swap agreements designated as cash flow hedges are accounted
for at fair value. The effective portion of the change in the cash
flow hedge's gain or loss is initially reported as a component of
other comprehensive income and subsequently reclassified into
noninterest income when the underlying transaction affects earnings.
The ineffective portion of the change in the cash flow hedge's gain
or loss is recorded in earnings on each monthly measurement date.
The swap agreements are accounted for on an accrual basis with the
net interest differential being recognized as an adjustment to
interest income or interest expense of the related asset or
liability.
INTEREST RATE SWAP AGREEMENTS -- FAIR VALUE HEDGES. Interest
rate swap agreements designated as fair value hedges are accounted
for at fair value. Changes in the fair value of the swap agreements
are recognized currently in noninterest income. The change in the
fair value on the underlying hedged item attributable to the hedged
risk adjusts the carrying amount of the underlying hedged item and
is also recognized currently in noninterest income. All changes in
fair value are measured on a monthly basis. The swap agreements are
accounted for on an accrual basis with the net interest differential
being recognized as an adjustment to interest income or interest
expense of the related asset or liability.
F-37
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INTEREST RATE CAP AND FLOOR AGREEMENTS. Interest rate cap and
floor agreements are accounted for at fair value. Changes in the
fair value of interest rate cap and floor agreements are recognized
in earnings on each monthly measurement date.
INTEREST RATE LOCK COMMITMENTS. Commitments to originate
loans, or interest rate lock commitments, which primarily consist of
commitments to originate fixed rate residential mortgage loans, are
recorded at fair value. Changes in the fair value are recognized in
noninterest income on a monthly basis.
FORWARD CONTRACTS TO SELL MORTGAGE-BACKED SECURITIES. Forward
contracts to sell mortgage-backed securities are recorded at fair
value. Changes in the fair value of forward contracts to sell
mortgage-backed securities are recognized in noninterest income on a
monthly basis.
On January 1, 2001, we implemented SFAS 133, as amended. The
implementation of SFAS 133, as amended, resulted in an increase in
derivative instruments of $12.5 million, an increase in deferred tax
liabilities of $5.1 million and an increase in other comprehensive
income of $9.1 million. In addition, we recorded a cumulative effect
of change in accounting principle of $1.4 million, net of taxes of
$741,000, as a reduction of net income. The effect of future
derivative transactions as well as further guidance from the
Derivative Implementation Group may result in modifications of our
current assessment of SFAS 133, as amended, and its overall impact
on our consolidated financial statements.
F-38
FIRST BANKS, INC.
INVESTOR INFORMATION
First Banks' Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission, is available without charge to
any stockholder upon request. Requests should be directed, in
writing, to Allen H. Blake, First Banks, Inc., 600 James S.
McDonnell Boulevard, Hazelwood, Missouri 63042.
FIRST BANKS, INC. PREFERRED SECURITIES
The preferred securities of First Banks are traded on the
Nasdaq National Market System with the ticker symbols "FBNKO" and
"FBNKN." As of March 20, 2001, there were approximately 484 record
holders of First Preferred Capital Trust. This number does not
include any persons or entities that hold their preferred securities
in nominee or "street" name through various brokerage firms. The
preferred securities of First Preferred Capital Trust II are
represented by a global security that has been deposited with and
registered in the name of The Depository Trust Company, New York,
New York (DTC). The beneficial ownership interests of these
preferred securities are recorded through the DTC book-entry system.
The high and low preferred securities prices and the dividends
declared for the periods presented are summarized as follows:
FIRST PREFERRED CAPITAL TRUST -- FBNKO
2001 2000 1999
------------------ ----------------- ----------------- DIVIDEND
HIGH LOW HIGH LOW HIGH LOW DECLARED
------ ----- ----- ----- ----- ----- ---------
First quarter............... $26.25 24.38 25.25 23.13 27.25 25.13 $0.578125
Second quarter.............. 27.35 25.00 26.00 23.50 27.00 25.25 0.578125
Third quarter............... 27.25 25.00 25.13 23.50 26.63 24.94 0.578125
Fourth quarter.............. 25.00 23.38 26.00 23.88 0.578125
FIRST PREFERRED CAPITAL TRUST II -- FBNKN
2001 2000
------------------ ----------------- DIVIDEND
HIGH LOW HIGH LOW DECLARED
------ ----- ----- ----- ---------
First quarter................................ $27.75 26.38 -- -- $0.640000
Second quarter............................... 27.40 26.25 -- -- 0.640000
Third quarter................................ 28.50 26.95 -- -- 0.640000
Fourth quarter............................... 27.00 25.13 0.504888
F-39
FIRST BANKS, INC.
INVESTOR INFORMATION (CONTINUED)
FIRST BANKS AMERICA, INC. PREFERRED SECURITIES
The preferred securities of FBA are traded on the New York
Stock Exchange with the ticker symbol "FBAPrt." As of March 20,
2001, there were approximately 235 record holders of preferred
securities. This number does not include any persons or entities
that hold their preferred securities in nominee or "street" name
through various brokerage firms. The high and low preferred
securities prices and the dividends declared for the periods
presented are summarized as follows:
FIRST AMERICA CAPITAL TRUST -- FBAPRT
2001 2000 1999
------------------ ----------------- ----------------- DIVIDEND
HIGH LOW HIGH LOW HIGH LOW DECLARED
------ ----- ----- ----- ----- ----- --------
First quarter............... $25.00 21.63 23.00 19.50 26.25 24.75 $0.53125
Second quarter.............. 25.05 23.95 23.88 20.69 26.25 24.31 0.53125
Third quarter............... 25.80 24.80 23.75 21.13 25.25 22.50 0.53125
Fourth quarter.............. 22.63 20.75 24.50 21.94 0.53125
FOR INFORMATION CONCERNING FIRST BANKS, PLEASE CONTACT:
Allen H. Blake
President and Chief Operating Officer
600 James S. McDonnell Boulevard
Hazelwood, Missouri 63042
Telephone -- (314) 592-6601
TRANSFER AGENT:
State Street Bank and Trust Company
Corporate Trust Department
P.O. Box 778
Boston, Massachusetts 02102-0778
Telephone -- (800) 531-0368
www.statestreet.com
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TABLE OF CONTENTS
PAGE
----
Summary ............................... 1
Risk Factors .......................... 10
Special Note Regarding Forward-Looking
Statements ......................... 17
Use of Proceeds ....................... 17
Accounting Treatment .................. 18
Market For the Trust Preferred
Securities ......................... 18
Capitalization ........................ 19
Selected Consolidated and Other
Financial Data ..................... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ......................... 21
Business .............................. 62
Management ............................ 69
Description of the Trust .............. 71
Description of the Preferred
Securities ......................... 72
Description of the Subordinated
Debentures ......................... 84
Book-Entry Issuance ................... 93
Description of the Guarantee .......... 95
Relationship Among the Preferred
Securities, the Subordinated
Debentures and the Guarantee ....... 97
Federal Income Tax Consequences ....... 98
ERISA Considerations .................. 104
Underwriting .......................... 104
Legal Matters ......................... 106
Where You Can Find Information ........ 106
Experts ............................... 107
Documents Incorporated by Reference ... 107
Index to Consolidated Financial
Statements ......................... 108
* YOU SHOULD ONLY RELY ON THE INFORMATION
CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS. WE HAVE NOT, AND OUR UNDERWRITERS
HAVE NOT, AUTHORIZED ANY PERSON TO PROVIDE YOU
WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES
YOU WITH DIFFERENT OR INCONSISTENT INFORMATION,
YOU SHOULD NOT RELY ON IT.
* WE ARE NOT, AND OUR UNDERWRITERS ARE NOT, MAKING
AN OFFER TO SELL THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED.
* YOU SHOULD ASSUME THAT THE INFORMATION APPEARING
IN THIS PROSPECTUS IS ACCURATE AS OF THE DATE ON
THE FRONT COVER OF THIS PROSPECTUS ONLY.
* THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR THE SOLICITATION OF AN OFFER TO BUY,
ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES.
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1,920,000 PREFERRED SECURITIES
FIRST PREFERRED
CAPITAL TRUST III
9.00% CUMULATIVE TRUST PREFERRED
SECURITIES
(LIQUIDATION AMOUNT $25 PER
PREFERRED SECURITY)
FULLY, IRREVOCABLY AND UNCONDITIONALLY
GUARANTEED ON A SUBORDINATED BASIS, AS
DESCRIBED IN THIS PROSPECTUS, BY
FIRST BANKS, INC.
------------
[First Banks, Inc. Logo]
$48,000,000
9.00% Subordinated Debentures
of
FIRST BANKS, INC.
----------------
PROSPECTUS
NOVEMBER 9, 2001
----------------
STIFEL, NICOLAUS & COMPANY
INCORPORATED
DAIN RAUSCHER WESSELS
FAHNESTOCK & CO. INC.
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